TLTR: This blog explores hazard insurance, its importance, coverages, and why it’s mandatory for mortgage. While it primarily applies to homeowners, it can also be relevant for business owners.
Your home is an important investment that safeguards you and your family. Ideally, it’s your haven. A place that keeps you feeling safe and secure from the uncertainties of the outside world. While your home may be your castle, it likely isn’t nearly as fortified as one. It’s vulnerable to dangerous phenomena such as fires, hail, thunderstorms, or other natural events that could cause it a lot of damage.
In such cases, having well-equipped homeowners insurance is an absolute necessity. And within this policy comes the essential component of hazard insurance.
What is Hazard Insurance?
Hazard insurance, also known as dwelling coverage, isn’t a stand-alone insurance policy. You only get it as a part of standard homeowner’s insurance coverage. It protects your property against damage from certain events and large-scale natural disasters. The policy will cover costs associated with repairs to the property if it was damaged by a covered peril.
This insurance applies to the coverage of your home’s roof, structure, and foundations. In some cases, depending on your insurance provider, this policy can extend to your personal belongings as well.
Sometimes, it is included in commercial property insurance, umbrella insurance or car insurance.
Many people will confuse hazard insurance with catastrophe insurance. While they both do provide coverage against natural disasters, catastrophe insurance is a standalone policy that can be purchased separately, while hazard insurance is not. Hazard insurance, as a portion of an existing homeowner’s policy, cannot be purchased separately.
When it comes to hazard insurance, some regions (such as California) also require a Natural Hazard Report (NHD Report). This shows whether or not your property is in an area considered a high-risk zone. The report considers fires, hail, severe storms, and other natural disasters as potential risks. You can get this report from a real estate agent or from a third-party company. The report costs $50 to $150 depending on its contents and length.
When buying a home, an NHD report is very beneficial for you. It gives you the opportunity to understand the risks of homeownership in the area you’re interested in. It will also provide you with an estimate of the price of your insurance.
NOTE: Once you get your NHD report, you have 3 days to review it and decide whether you want to proceed with your purchase.
Does Your Mortgage Require Hazard Insurance?
Yes. It’s common for a mortgage lender to require you to have homeowner’s insurance when taking out a mortgage. And you’re specifically required to have home hazard insurance. Why? Because it’s directly related to the dwelling itself.
Mortgage companies and lenders require you to have hazard insurance because they want to make sure that their investment—the home itself—is protected. They may also specify that you have a specific type of hazard coverage. The policy will go into detail concerning which hazards are covered, which are not covered, the minimum amount of coverage on the home, as well as any specific deductibles you’re required to pay.
Any standard homeowner’s policy will often be enough to fulfill a mortgage company’s requirements. But you keep in mind that the level of protection you’re getting will depend on the laws of your state and county as well as any other unique circumstances. For example, if you have an expensive property in a high-risk area, then the mortgage lender might require you to have additional coverage.
Coverage Provided by Hazard Insurance?
A standard home insurance policy covers the property, detached structures, medical expenses in case of injury within your home, and cases of liability. Hazard insurance primarily covers named perils that are within a policy. That means it will pay for damages or the cost to rebuild your home, as long as it’s due to the specified, named perils.
A standard hazard insurance policy within a homeowners policy covers:
- Fire or lightning
- Water damage
- Power surges
- Theft & vandalism
- Volcanic eruptions
- Riots and civil unrest
- Damage caused by vehicles
- Damage caused by aircraft
- Accidental overflow of water from household appliances, plumbing, air conditioning systems, or sprinkler systems
- Sudden accidental damage from artificially generated electrical currents
- Unexpected damage or burning of water heating systems, air conditioning systems, or automatic fire-sprinkler systems
As per the National Fire Protection Association (NFPA), there were 1,291,500 fires in 2019 that caused around $14.8 billion in property damage. This fact really brings home, so to speak, the need for hazard insurance for any property owner.
Exclusions for Hazard Insurance
As with all policies, hazard insurance contains certain exclusions. Depending on the geographical location, some weather-relevant events are excluded from home hazard insurance. Insurers usually do this because of how susceptible an area is to these events. Thus, it’s expensive to add these into a standard policy. For example, properties in close proximity to the ocean are susceptible to hurricanes and tropical storms.
These exclusions are not part of the policy from the get-go but you can add them as per your need and still have the relevant coverage. The exclusions are:
- Natural wear and tear
- Mold and fungus
- Nuclear hazard
- Intentional loss
- Government actions
- Rodent, vermin, and insect infestation
- Acts of War
- Power failure
- Mechanical Breakdown
Sinkholes are another common exclusion in hazard and home insurance. According to the U.S. Geological Survey, Florida, Texas, Missouri, Kentucky, Alabama, Tennessee, and Pennsylvania are susceptible to damage from sinkholes. Although they are relatively rare, sinkholes can occur suddenly and cause extensive damage to the surrounding area.
These exclusions can change based on your area and insurance provider. It’s always best to check with an agent.
NOTE: Hazard insurance does not pay for the damage or loss of your personal property, nor does it cover any injuries due to the action of any guests in your home.
How Much Does Hazard Insurance Cost?
According to Statista, the average premium for homeowners insurance in the United States is $1,249. But many factors need to be considered when it comes to putting a price on your hazard insurance policy.
Every insurance company has its own list of criteria for deciding on a policy rate. These lists are different, and they may or may not consider every possible factor. For example, the market cost for a home in California is different from that in Virginia. And based on the cost, the policy rate can change for two similar types of homes in different states. Insurers will consider such parameters given the state they operate in.
When you’re looking to purchase hazard insurance as part of your existing homeowner’s policy, your insurance provider will need to know the following:
- Age of the home
- Location of the property
- Square footage of the home
- Safety features installed (alarms, smoke detectors, security systems)
- Type of construction material used (brick, wood, concrete)
- Type of roof (slate, metal, composite shingle)
- Your credit history
- Past homeowner’s insurance claims history
- Any insurance gaps
Hazard insurance helps you to be prepared for any sudden risks to your property. The amount of coverage you require depends on the cost it will take to replace the entire house or property in case of a total loss. This amount can vary due to the property’s current value on the real estate market. Such polices are written for a year and are renewable.
These rates and policy details can change depending on who you contact and your current situation. It’s best to consult with your agent to get the full lowdown.
Do You Need Hazard Insurance for A Small Business?
The hazards that a normal homeowner faces can also be faced by a small business owner. So, an appropriate hazard insurance coverage is highly recommended. Business hazard insurance, in this case, protects the owned or rented building that your business utilizes. This coverage is also known as business property insurance.
Having business hazard insurance along with your business owners policy can be very beneficial to protect you against potential threats. Along with the coverage that is provided by home hazard insurance, it also covers the following:
- Personal property
- Business Inventory
- Equipment and tools
- Valuable business documents
- Accounts receivable
Having business hazard insurance is also a good idea if you run a business from your home. Given the COVID-19 pandemic, this is a scenario that has become increasingly popular. According to a study by Grow Think, during the pandemic, the third quarter of 2020 saw a 49% increase in the number of new businesses started in the United States. These new business owners were people who found themselves unemployed earlier in 2020.
And with a new business begun from home come associated risks, as well. In such cases, you might have a dilemma choosing between homeowners and business hazard insurance. A homeowners policy will definitely cover the property and other structures of the house. But you will likely need business hazard insurance if you wish to protect your company’s assets.
To Sum Up
Hazard Insurance is not a standalone policy. It secures your home and even businesses in some form or another. It protects a property owner against financial loss caused due to fire, storms, and dangerous natural disasters.
This policy will benefit you if you live in areas that are susceptible to a variety of covered perils. What you need from the coverage depends on your location, situation, and what your insurance company provides. Make sure to compare quotes from multiple insurance providers and take your needs into consideration.
Did you find this blog helpful? Feel free to leave a comment below and let us know.
If you’re looking for a reliable insurance carrier for your hazard insurance, please feel free to reach out to us.
Frequently Asked Questions
Is hazard insurance tax deductible?
Homeowners insurance, which comprises hazard insurance, is considered a personal expense. It’s therefore not tax-deductible.
Do I need hazard insurance if I own a home?
There are no laws that require you to purchase a hazard coverage. But if your home is financed, then your mortgage lender will certainly require you to purchase a policy in order to protect their investment.
Why do hazard insurance rates go up?
Insurance rates tend to increase regularly in order to cover the cost of repairing the damages to your home, which will rise over time due to inflation. Also, your rates may go up due to changes in government policies and climate-driven phenomena such as intense storms, hurricanes, and looming natural disasters. These factors can drive up the cost of repair.
January 24th, 2023 · 12 mins read
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