What is Hazard Insurance?

Posted on Nov 30, 2020
What is Hazard Insurance?

When it’s time to purchase or refinance your home, you could have a lot to learn. You’ll come across various concepts and terms that might not be familiar to you, and in many cases, certain words will mean the same thing.

A good example is the term “hazard insurance.” Because most people finance their purchase, you’ll see mortgage lenders use that term.

What exactly is the lender requiring you to have in place when it uses the term hazard insurance?

What Is Hazard Insurance on My Mortgage?

As you may know, homeowners insurance is a policy you take out on your home that offers you, among other things, financial protection (coverage) in the event of physical damage to your home. When you purchase a homeowner’s policy, you are purchasing coverage for certain hazards or perils that may befall the structure, the contents, and other structures on the property, like a fence or shed.

What’s Covered Under Hazard Insurance?

Hazard insurance might cover different hazards like:

  • Lightning
  • Fire damage
  • Theft
  • Hail
  • Explosions
  • Vandalism
  • Damage
  • Vehicles that crash into your house
  • Fallen trees

In addition to coverage for physical damage, your homeowners’ policy contains other coverages for accidents that do not damage the structure. Hazard insurance in the context of mortgage lending doesn’t usually mean coverage that will protect you against suits for injuries your guests or invitees incur due to an accident, which is covered by liability coverage on your homeowners’ policy.

What Doesn’t Hazard Insurance Cover?

You’ll want to do some shopping around. Compare the different types of hazards for which insurance companies offer coverage. Typically, hazard insurance covers your property’s structure and your personal belongings in it if there should be a natural disaster.

However, most hazard insurance policies will not cover earthquakes or floods. Therefore, if there is a mild earthquake, and it causes a pipe to burst in your home that causes minor flooding, your hazard insurance policy won’t cover it.

How Does Hazard Insurance Work?

As mentioned, hazard insurance is generally a subsection of your homeowners’ policy that offers you protection for the primary dwelling and other structures on the property. You’ll want to ensure your insurance policy package covers specific common hazards, so you’re prepared for every contingency.

How much hazard insurance you might be required to have will depend on the cost of replacing your home if there’s a total loss. The dollar amount might be significantly different from the property value in the present real estate market. You want to make sure that you insure to the amount required to rebuild your home, not just the amount your mortgage lender requires, which may be significantly less.

Most policies are generally renewable and are written for one year. One thing to note, to keep up with inflation, insurance rates regularly increase to cover the repair costs of your home. You might see a rate increase:

  • After an insurance inspection that might show your house requires upgrades
  • If climate change-related fires and storms have impacted your neighborhood
  • If your lender requires adequate protection against things like windstorms, fire, and hail
  • If you have several claims not caused by catastrophic events such as hurricanes and severe snow or windstorms

As climate change-related severe weather events are becoming more common in the U.S., a review of your home’s coverage limits for property damage becomes a necessity for many homeowners.

What Is Hazard Escrow?

Escrow is a term used to refer to an account your lender maintains that is used for paying homeowners insurance and real estate taxes. In addition to principal and interest, your mortgage premium also includes those escrow funds in each installment.

The escrow amount is calculated on an annual basis based on the amount of your insurance premium and your property taxes. Because the premiums and taxes can change each year, the amount needs to be recalculated annually by your lender.

Note that insurance for specific property items like jewelry, furs, fine arts or musical instruments, and other valuable personal property may not be included in your homeowner’s premium and may be in a rider or endorsement to that policy or might even be a stand-alone policy known as an inland marine policy. Since your mortgage lender has no financial interest in such property, it will not require you to purchase it nor will it escrow for it. That you will have to do on your own.

Contact Otterstedt Insurance Agency for your Hazard Insurance Quote

At Otterstedt Insurance Agency, we feel it’s about the people – not the policies.  We’re not just looking to sell you a policy. We realize your insurance needs will differ from other people.

Insurance needs come in various sizes and shapes. We’re here to work closely with you to provide you with the insurance coverage you require for your situation and needs.

Contact us today to receive your hazard insurance quote.

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