Owning a home is a big responsibility and one of the ways that people protect themselves is by purchasing homeowners insurance. Your lender will require you to show proof of homeowners insurance at your closing. They do so to make sure that the home (and the money you have borrowed to purchase the home) is protected.
Addition Financial members sometimes come to us with questions about their insurance. One of the questions we are asked frequently has to do with the differences between homeowners insurance and hazard insurance. Here’s what you need to know about hazard insurance.
What is Hazard Insurance and Why Do I Need It?
Home hazard insurance is part of a standard homeowners policy that covers damage to the structure of your home. The things covered by hazard insurance also happen to be some of the most costly things that could happen to your house, including damage caused by natural disasters and events. Hazard insurance may also be referred to as dwelling coverage.
The main difference between homeowners insurance and hazard insurance is that homeowners insurance covers a broad spectrum of occurrences, including protecting you against the theft of valuable personal property. Hazard insurance is included under the umbrella of homeowners insurance and covers specific types of structural damage.
You need hazard insurance because mortgage lenders require it. You will need to obtain homeowners insurance, including hazard insurance, before you close on your house. Many lenders require homeowners insurance premiums to be held in escrow.
What Does Hazard Insurance Cover?
As we mentioned in the previous section, hazard insurance coverage is designed to protect homeowners against specific types of damage that impact the structure of their homes. Damages covered include the following:
- Damage caused by fires
- Damage caused by severe storms
- Damage caused by severe weather and other natural events
We should note that not all damage caused by natural events is covered under a typical homeowners policy. For example, earthquake insurance must be purchased separately and the same is true of flood insurance.
The types of damage that are covered will be listed in the hazard section of your general homeowners insurance policy. Anything that is not listed there will require a separate insurance policy if you feel you need coverage. For example, many homeowners in Florida purchase flood insurance to protect them, particularly if they live near the coast.
Why Do Mortgage Companies Require Hazard Insurance?
We already mentioned that mortgage lenders, including Addition Financial, require proof of homeowners insurance before closing on a mortgage. The reason they require it is to protect their investment. As a home buyer, you are using the lender’s money to purchase the home in question. If the structure is damaged, the insurance company will pay for it, thus protecting the lender’s investment.
The requirements for hazard insurance coverage may vary from lender to lender. You should check with your lender to learn what they require. For example, your lender might require certain types of hazards to be covered or have specifications for the amount of coverage you should carry or what your deductible should be.
If a home were to be severely damaged by a natural event and the homeowner did not have hazard coverage, the likelihood of a default would increase. Few people would be able to afford the expenses of repairing or rebuilding significant damage without insurance.
When Should You Increase Your Hazard Insurance Limits?
Any homeowners insurance policy you buy will include some coverage for hazard insurance. You will need to read the hazard section to be sure you understand what types of damage are covered and at what limits.
Depending on where you live and your financial situation, you may want to purchase increased hazard insurance limits to minimize your risk. Hazard insurance is not available as a separate policy, so any increases to your policy limits will fall under your homeowners insurance.
How Much Hazard Insurance Do You Need?
Now, let’s talk about how much hazard insurance you need. Since hazard insurance pays for damage to the structure of your home, it is essential to consider the types of damage that might occur and how much it might cost to repair your home.
In many cases, the cost to rebuild your home if it were to be rendered unlivable by a hazard would be more than the value of your home. It’s important to keep that in mind, particularly if you have purchased an older home or condo.
According to the Insurance Information Institute, here are some of the considerations to factor in when you are determining how much hazard insurance you need:
- Local construction costs. If you live in a high-cost area, then you’ll need to consider the cost of supplies and labor.
- Square footage. For obvious reasons, it is more expensive to rebuild or repair a home with high square footage than it is to repair a small home.
- Style of structure. The construction costs will vary depending on whether your home is colonial, modern or a ranch.
- Exterior walls. Your home may have frame walls, masonry or veneers and each comes with a different price point.
- Special features. If your home has special features, such as fireplaces, arched windows or crown molding, it will be more costly to replace it than it would with standard features.
- Construction materials. A home that is built with high-cost materials will cost more to replace than one with low-cost materials.
- Number of bathrooms. Bathrooms are one of the most expensive rooms to rebuild because of the plumbing involved, so if your home has more than one bathroom, you will need a high hazard limit.
- Other structures. If your home has other structures, such as a shed, barn or fencing, you will need a hazard limit that’s high enough to cover repairs or rebuilding.
- Home improvements. If you’ve been a homeowner for a while and have made improvements that add to the value of your home, they will have also added to its replacement value and you should adjust your hazard insurance limit accordingly.
- Building codes. If you purchase an older home, it’s possible that things like the wiring and plumbing might no longer be up to code. If you need to rebuild, you will need to take the costs associated with bringing things up to code into consideration.
It is likely that your insurance carrier will have a recommendation of how much hazard insurance you need but it may not be enough to cover rebuilding your house.
You should look at all these things to determine whether your carrier’s recommended coverage amount is sufficient to pay all the costs associated with rebuilding your home in the event it should be destroyed. Your insurance premium will be higher if you increase your coverage, but you will have the peace of mind of knowing you can rebuild if it’s necessary to do so.
What is Not Covered by Hazard Insurance?
We’ve told you what is covered by hazard insurance, but let’s take a moment to review the things that are not covered. Some are covered by other sections of your homeowners policy while others may require you to purchase separate coverage.
Items covered by your homeowners insurance include the following:
- Your personal possessions up to a specified limit. You should take inventory and decide whether you want the actual cash value of the items or the replacement cost. The replacement cost is typically higher than the cash value and will increase your premium.
- Your high-value items. These may be covered if you list them on a separate schedule and pay an additional premium. Examples of high-value items that would not be covered without a rider include expensive artwork and jewelry.
- Personal liability. Your liability coverage is included in your homeowners policy and covers you if someone’s person or property is damaged on your property.
- Additional living expenses. In the event that your home becomes unlivable, your homeowners policy provides coverage for you to stay in a rental or hotel until repairs or rebuilding can be completed. Coverage is typically 20% of the replacement cost of your home.
Some of the things that are not covered in a homeowner’s policy include the following:
- Flood damage. Flood insurance must be purchased through the National Flood Insurance Program.
- Earthquake damage. Earthquakes are unlikely for Addition Financial members because they are rare in the area we service, but people who own a second home in an earthquake-prone area may want to buy an earthquake policy.
Many homeowners in Florida purchase flood insurance and we recommend it if you live in a coastal or low-lying area where flooding may be likely. The damage from a flood can be catastrophic and few homeowners can afford to shoulder those expenses out of pocket.
Hazard insurance is included in your homeowners policy. As a homeowner, it is your responsibility to read the fine print and determine whether the limits recommended by your insurance carrier are sufficient to cover the cost of repairing or rebuilding your home in the event that it is extensively damaged by a covered event. We suggest speaking to your insurance agent or carrier and reviewing the potential costs of rebuilding to set the correct policy limit.
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