Solved! Is Hazard Insurance the Same as Homeowners Insurance?
Hazard insurance is often a component of homeowners insurance, but the titles are not interchangeable.
Q: Our closing documents state that we need to acquire something called hazard insurance before the closing date. We knew we would need homeowners insurance, but we aren’t sure what hazard insurance is, even though the documents make it sound similar. Is hazard insurance the same as homeowners insurance? How do they compare?
A: Mortgage and closing paperwork can be confusing on a good day, and terms that are similar or interchangeable don’t help! As you’ve read, most mortgage companies list homeowners insurance as a requirement for disbursing the loan. But what is hazard insurance, then? Hazard insurance is one component of insuring your home that falls under the larger umbrella term of homeowners insurance, so comparing hazard insurance vs. home insurance doesn’t really work. Homeowners insurance is a larger policy that includes coverage of the building, outbuildings, property, and liability risk, and sometimes includes flood or hurricane coverage as well. Hazard insurance specifically covers the main building of the home from natural or man-made disasters. Your mortgage company chose to be more specific: As long as the structure of the home is covered, which is their collateral for the loan, they aren’t concerned with whether or not your liability is covered. This is why they’ve only specified that you must purchase hazard insurance.
Hazard insurance is considered a part of homeowners insurance and typically covers the structure of the home.
Homeowners insurance policies are diverse: There is basic coverage of the structures, land, and personal property against storms, fire, theft, and other damage-causing elements. Policyholders can add on specific riders for additional coverage of jewelry, antiques, artwork, or musical instruments, and they can add liability coverage that protects them from legal action in the case of an injury on their property. It is wide-ranging coverage. Hazard insurance is the specific part of the homeowners policy that covers the structure of your home and attached or close buildings, such as garages. It is not generally available for separate purchase, so if you already have homeowners insurance, you have hazard insurance.
Hazard insurance covers your expenses against the structural damage caused by “hazards”—examples include fire damage, hail, and more.
Included in the hazard insurance definition are damages caused by fire and smoke, explosions, lightning, hail and windstorms, vandalism, theft, and volcanic eruption, along with damages that result from vehicles, aircraft, or riots. Many hazard policies will also include water damage that results from burst plumbing and damage caused by excess snow weight, freezing, and falling objects. Your coverage will be subject to the deductible named in your contract, and thereafter the expenses will be covered by the policy up to any limitations.
Very specifically, hazard insurance does not cover personal property, damage to the yard, or personal liability, nor does it cover your living expenses if you need to be out of the home during repairs. So if someone breaks into your home, steals things, smashes up your property, and spray paints the walls, hazard insurance will cover the damage at the break-in point, the spray paint, and any other structural elements that were broken or damaged, but the broken couch, ruined rug, and stolen goods are up to you—unless your homeowners policy covers those. Accidents on your backyard trampoline, whether your own or a neighbor’s, won’t be covered either.
In addition, hazard insurance usually excludes damage caused by maintenance failures on the part of the homeowner. Your policy will specify what is not covered; most hazard policies cover everything except the listed exclusions, so study those carefully before you select a policy so you’ll know if you need to shop around for a different policy option.
Hazard insurance does not cover damage caused by flooding. Some other events may not be covered, depending on the home’s location.
Flood insurance is a separate line of coverage in almost every homeowners policy, and it’s also separate from hazard insurance. Because flooding is localized and causes such terribly extensive (and expensive!) damage, it is not usually included in hazard or homeowners insurance policies unless it is added as a separate policy rider (and not all companies offer it). Flood insurance costs vary depending on whether or not your home is in a flood plain and whether it floods frequently, so the cost of the policies is too variable to include in a standard policy. This problem exists for other natural disasters as well: earthquakes, landslides, and mudslides are also often excluded from hazard policies where they are more likely to occur, the explanation being that if you expect that one of these disasters might occur, it’s likely enough that it will be expensive and therefore will require separate coverage. Pest infestations and mold damage are also frequent exclusions from hazard insurance policies.
A mortgage lender typically determines if you need hazard insurance.
Your lender needs your house to stay in good shape, because the sale of that house is what will recoup their investment should you default on your payments. Requiring proof of hazard insurance on a mortgage closing document is standard, regardless of whether the document says hazard or homeowners, because then the lender knows the property is protected from financial devaluation in case of a disaster. Depending on the location of your home, your lender may require that you check to see what is excluded from the hazard policy, and they may require additional insurance (such as flood or earthquake protection) in addition to the basic hazard policy.
Hazard insurance is a layer of protection homeowners rarely regret having.
Mortgage hazard insurance is a must, partly because your lender will most likely require it, but also because it protects your investment. While it may seem like an extra expense at a time when there are many expenses, it’s best to get the most protective policy you can. You’re putting a lot on the line financially when you purchase a home, and an unanticipated storm, fire, or break-in can cost thousands and thousands of dollars in repairs. The exclusions can sometimes seem unfair or frustrating if your home is damaged in an excluded event, but in general, the safety net that hazard insurance provides is a welcome one, and new homeowners can rest more easily knowing that their financial future isn’t threatened by every winter storm.