Hazard insurance goes beyond the basic homeowner’s policy, and is essential for those living in areas prone to natural disasters. Be sure you understand what your policy covers and what it doesn’t.
Hazard insurance is often confused with homeowner’s insurance. The scope of the coverage between the two types of polices is different. However, both types of coverage can be crucial to your financial security.
What Is Hazard Insurance?
Hazard insurance will generally be required by your mortgage lender when you purchase a home. Hazard insurance protects your home against structural damage from a natural disaster. Hazard insurance is often a component of a homeowner’s policy, but the types of perils covered are different than the standard homeowner’s policy.
The coverage provided by hazard insurance goes beyond what your basic homeowner’s insurance covers.
What Are the Types of Hazard Insurance?
There are three types of hazard insurance:
•Actual cash value (ACV) policies reimburse you for the actual cost of any damage incurred less any depreciation on the structure. For example, if you installed new wood floors 10 years ago at a cost of $20,000 and they are damaged by a natural disaster, the coverage would consider 10 years of depreciation in value in calculating the amount covered.
•Replacement cost value (RCV) reimburses you for damage at the actual cost of repairing the damage, no depreciation applies. This type of coverage will have a higher cost component than ACV.
•Extended replacement cost (ERC) covers the repairs at current replacement cost, with an added guarantee that the insurance company will cover any added costs to the cost to repair the damage. This is the most expensive of the three types of coverage.
The type of coverage you choose will depend on your situation, where you live and the other factors.
What Does Hazard Insurance Cover?
Hazard insurance covers damage to the home from natural disasters such as:
•Hurricanes
•Tornadoes
•Hail storms
•Floods (note in some areas this may not be covered and you might have to apply for federal flood insurance)
Damage to the home from these and other covered natural events will be covered by this portion of the policy at the level of coverage you’ve elected (ACV, RCV, or ERC).
The damage done by natural disasters can be extensive and total. Pay attention to what your hazard insurance covers and what it doesn’t, especially if you live in an area prone to these types of disasters.
Where you live can impact exactly what’s covered. For example, if you live in an area prone to tornadoes your lender will undoubtedly insist that your hazard coverage includes damage from tornadoes.
How Much Does Hazard Insurance Cost?
You typically won’t pay a separate premium for hazard insurance, rather it will be included in the total premium for your homeowner’s policy.
The cost of the hazard insurance component of your homeowner’s policy will depend on a number of factors such as:
•The age and value of your home.
•The construction of your home, materials, style, etc.
•The type of policy you choose in terms of replacement value.
•Your policy deductibles.
•Your home’s security features, if any.
Hazard Insurance vs. Homeowner’s Insurance
Hazard insurance is generally a subsection of your overall homeowner’s policy. It very specifically covers hazards and damage from natural disasters as discussed above. It does not offer broad coverage for things like liability if someone is injured on your property, loss-of-use or any medical payments to other who might be injured on your property. All are standard areas of coverage on your broader homeowner’s insurance policy.
Generally, your homeowner’s policy covers losses from fire, weather and theft.
•Damage to your home is insured against everything except occurrences specifically excluded in your policy.
•Damage to the belongings in your home is insured against all things that are listed in your policy.
•Homeowner’s covers not only your residence, but also other structures on your property, liability exposure for events that might occur on your property as well as additional living expenses that you incur if you are forced to leave your property due to covered damages.
•Many natural disasters, like floods and earthquakes, would be covered by the hazard insurance portion of your homeowner’s policy or other coverage as applicable.
Homeowners insurance coverage usually includes:
•Fire
•Smoke
•Windstorm
•Lightning strikes
•Hail
•Explosions
•Vandalism
•Theft
•Vehicle collision
Homeowner’s insurance coverage comes in a number of varieties and coverage will vary based on the type of policy, who your insurer is and the state in which you reside among other factors.
While hazard insurance is generally part of your homeowner’s policy, this coverage should not be taken for granted. The right hazard policy can be a financial lifesaver if your home is damaged by a natural disaster.
