What Is Hazard Insurance and How Does It Work?

What is Hazard Insurance?

Hazard insurance is a term sometimes used to describe the coverages that homeowners insurance provides for certain risks, according to the Consumer Financial Protection Bureau (CFPB).

If you hear someone mention hazard insurance, they are likely referring to a homeowners’ insurance policy. Some common examples of hazards (also referred to as perils) that are typically covered by homeowners’ insurance include fire, theft, and vandalism, among others.

Hazard insurance is the part of a homeowners policy that protects your home from damage caused by a “hazard” or natural disaster, also commonly called “dwelling coverage.”

It generally covers damage or loss to the structure of your house, the other structures on your house, and the other structures on your property — such as a detached garage, fence, or in-ground swimming pool.

Non-structural items, such as furniture, electronics, and clothing, are covered under a separate section of homeowners insurance policies, often referred to as “personal property insurance.”

If you have a mortgage, lenders usually require proof that you have a homeowners insurance policy to help pay to repair damage caused by those hazards, says the CFPB.

To qualify for a mortgage for a home, you’ll need hazard insurance, which is part of a homeowners insurance policy. Hazard insurance covers the structure of the house. It’s important to keep in mind that this insurance, also called dwelling coverage, is a subsection of your homeowner’s insurance, and not a separate policy.

Key takeaways

  • Hazard insurance is the part of a homeowners policy that covers the structure of your house.
  • Your lender will likely require you to have hazard insurance to get a mortgage.
  • Hazard insurance generally covers disasters such as fire, wind and hail.

Imagine that you’ve had an offer accepted on the house of your dreams and you think you’re ready to close. Suddenly, your lender demands to see proof that you have hazard insurance.

What do you do? You knew you’d have to get homeowners insurance as part of the mortgage closing process, but hazard insurance too?

Don’t worry. Chances are, you’re already covered.

Is hazard insurance the same as homeowners insurance?

Not exactly. Hazard insurance is another name for dwelling coverage, which is one part of a homeowner’s policy. Standard home insurance also covers other things, such as your personal belongings and additional living expenses if you need to move out of your home during covered repairs.

Though the two types of coverage aren’t identical, purchasing a homeowners policy will usually satisfy your lender’s hazard insurance requirement.

What does hazard insurance cover?

Hazard insurance pays for damage to your home from certain causes, such as fire, burst pipes, and heavy snow. Most homeowner’s policies cover the structure of your home on an “open peril” or “all-risk” basis. That means every cause of damage is covered unless it’s specifically excluded in your policy.

For example, a standard homeowners policy usually won’t cover:

  • Flood.
  • Earthquake.
  • Normal wear and tear.
  • Sewer backup.
  • War or nuclear action.
  • Intentional damage by the homeowner.

You may be able to add coverage for some of these perils. For example, you can buy flood insurance through the federal government or other private providers. (Depending on where you live, your lender might require it.) And many companies let you add coverage for sewer and drain backup for an extra cost.

Some homeowners have a more limited type of hazard insurance that covers their house on a “named perils” basis. With these policies, your home’s structure is covered for the perils that are listed in the policy only. These perils may include:

  • Fire or lightning.
  • Windstorm or hail.
  • Vandalism.
  • Theft.
  • Smoke.
  • Explosions.
  • Riots.
  • Damage from aircraft.
  • Damage caused by vehicles.
  • Volcanic eruptions.
  • Falling objects.
  • Weight of ice, snow or sleet.
  • Water overflow or discharge from household systems like plumbing, air conditioning and appliances.
  • Freezing of those same household systems.
  • Sudden damage from a power surge.
  • Sudden tearing, cracking or bulging of a hot water system, steam system, air conditioning or fire-protective system.

How hazard insurance works

If your home suffers damage you think hazard insurance should cover, your first step is to file a claim with your insurance company. Include photos or video of the damage if you can, plus as much detail as possible about what was destroyed.

Once your claim is approved, your payout depends on how much the damage will cost to repair, how high the dwelling coverage limit is, and the amount of your deductible.

A deductible is the amount of a claim you’re responsible for paying. Say you’ve chosen a $1,000 deductible. If a thunderstorm causes $5,000 of damage to your roof, your insurance company would pay $4,000 and you’d cover the rest.

Your homeowner’s policy may have multiple deductibles—one for most claims and one that applies to certain perils, such as windstorms or named hurricanes. Check the declarations page of your policy for details.

How much hazard insurance do you need?

You’ll generally want to buy enough hazard insurance to cover the full cost of rebuilding your home if it’s destroyed.

Keep in mind that this figure, known as the “replacement cost” of your home, isn’t necessarily the same as the property’s purchase price. Instead, it’s based on the estimated cost of materials and labor needed to rebuild the house to its pre-disaster condition. Your insurer can help you estimate the correct amount.

For a little extra peace of mind, consider one of these optional types of coverage:

  • extended replacement cost. If a hurricane or wildfire causes widespread damage in a certain region, local construction costs often go up due to higher demand, which means your replacement cost coverage might not be enough. Extended replacement cost coverage offers a buffer against such shortfalls. You may be able to select an amount anywhere from 10% to 50% above your coverage limit in case costs are higher than expected.
  • Guaranteed replacement cost. Going a step further, guaranteed replacement cost coverage pays as much as necessary above the dwelling coverage limit to rebuild your home.

How much does hazard insurance cost?

Because it’s part of your homeowner’s insurance coverage, hazard insurance doesn’t cost extra if you already have a standard policy. According to NerdWallet’s rate analysis, the average cost of homeowners’ insurance is $1,585 per year.

Your own cost may differ depending on where you live, the size of your home, and how much coverage you need. Adding coverage for perils not typically included in a homeowners policy — such as flooding or earthquakes — will cost extra.

How to get hazard insurance

Standard homeowners’ policies, which include hazard insurance, are available from most major insurers. You can look for home insurance quotes online or ask an independent insurance agent to shop around on your behalf. To get the best price, it’s smart to compare quotes from at least three insurers.

Not sure where to start? Consider NerdWallet’s list of the best home insurance companies.

Types of Homeowners Insurance Beyond Hazard Insurance

Along with hazard insurance, these coverage types comprise a typical homeowners policy:

  • Personal property coverage pays for stolen or damaged personal items such as clothes, housewares and electronics.
  • Liability coverage will pay for lawsuits and judgments against you, such as a guest who sues you after falling down the stairs or being bitten by your dog. It also pays for your legal defense.
  • Medical payments coverage is similar to liability coverage but is intended for minor injuries. It pays out regardless of fault and is for much smaller amounts, typically up to $5,000.
  • Other structures coverage pays for damage to property not attached to the house, such as fences and sheds.
  • Additional living expenses coverage pays for the extra costs if you are unable to live at home because of damage covered by the policy, such as tornado damage. Hotel bills and restaurant bills are examples of extra costs.

Companies that offer hazard insurance

Hazard insurance is included in any homeowner’s policy offered by a property insurer. National and regional insurance businesses such as Nationwide, Allstate, State Farm, Hartford, Liberty Mutual, and others fall into this category.

Look around to see which companies serve your state or region, and then move from there. Your local agent can assist you in obtaining numerous quotations in order to compare coverage and premium prices. When it comes to buying insurance, you can also use online quote tools.

Frequently asked questions

What is hazard insurance on my mortgage?

If you see that part of your mortgage payment is going to hazard insurance, it typically means that you’re paying your homeowner’s insurance premium through an escrow account. That means your lender is collecting what you owe for your insurance and paying it on your behalf.

Is hazard insurance tax deductible?

Assuming the home you’re covering is your primary residence, hazard insurance generally isn’t tax-deductible. However, if you’ve purchased hazard insurance for a rental property, you may be able to deduct those premiums from your taxes.

Is hazard insurance required?

In most cases, if you have a mortgage, your lender will require you to have hazard insurance. Buying a standard homeowners insurance policy will usually meet this requirement. However, you may also have to purchase flood insurance if you’re in a high-risk area.

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