When it comes to buying your first home, there’s a lot to learn — and fast.
Among the different things to figure out is a heap of new terms and concepts. What makes your life harder is the fact that some of these terms mean basically the same thing.
This is what could be happening with your home insurance.
When arranging a mortgage the question of insurance will come up as a condition your lender will require. In some cases this could be referred to as ‘hazard insurance’
The thing is, this could be something you might be already taking care of, by arranging your homeowners insurance.
So what, then, is hazard insurance, and how do you know if you already have it?
Homeowners insurance vs hazard insurance
Hazard insurance isn’t really a standalone, specific type of insurance. The best way to think about the term if you come across it is as a part of a homeowners insurance policy.
When you purchase homeowners insurance, your policy will include protection against certain perils – ie hazards – to the structure of your home. This is one of the big differences with homeowners insurance vs renters insurance – your policy covers physical structures as well your possessions.
Therefore in this sense ‘hazard insurance’ would simply be the portion of your homeowners policy that applies to damage to the structure of your home.
What hazards are included?
A homeowners policy will provide details on which hazards are covered. While policies vary, they generally insure against hazards such as fire, hail, theft, windstorms, vandalism and vehicle damage.
Differences in coverage
There are differences in how homeowners insurance policies operate. The HO-2 form includes coverage against 16 named perils:
- Lightning or Fire
- Hail or Windstorm
- Damage caused by an aircraft
- Riots or civil disturbances
- Smoke damage
- Damage caused by vehicles
- Falling objects
- Volcanic eruption
- Pipe freezing
- Damage from the weight of snow and ice
- Water damage from plumbing, heating, or air conditioning
- Water heater cracking, tearing, and burning
- Damage from electrical current
The HO-3 form of homeowners insurance is more inclusive, and instead covers perlis except those specifically excluded.
What isn’t included?
You won’t find earthquake or flood protection as a hazard within your homeowners policy. Your options will vary depending on where you live, but you can look at adding this to your existing insurance, or purchasing a separate policy.
When you need hazard insurance
Having homeowners insurance to cover you against hazards is not a legal requirement. However, this doesn’t mean you are completely free to decide whether you want to buy it or not.
For example, if like most people you take out a mortgage to buy a home your lender will require you to have a certain level of hazard insurance. The mortgage is secured against the value of the property. Damage from something like a fire would reduce that value, so lenders insist on insurance against these kinds of hazards.
The result is that lenders will often want the first year of premiums paid up in advance. In addition if your lender maintains an escrow account on your behalf, you may be required to pay additional months’ premiums into the account.
Why does hazard insurance matter?
Damage from perils represents some of the largest and most frequent homeowners insurance claims.
According to data from the Insurance Information Institute, fire and lightning damage account for the largest claims on average.
Meanwhile wind and hail account for the most frequently occurring claims.
This highlights how crucial protection against hazards is for your homeowners policy. The costs involved in repairing damage to your home can add up fast.
Amounts of coverage
Because the costs can mount up, deciding on the value of your coverage is crucial.
Actual Cash Value will reimburse you for the replacement cost minus any depreciation. Because the cost can vary so much over time when it comes to property, this kind of policy could mean the limit on your coverage ends up coming in significantly below the cost to repair or even rebuild your home.
For this reason, Replacement Cost Value, or Extended Replacement Cost Value are better choices to cover damage to your home.
Replacement cost will cover the cost of the repair or replacement of damaged property with materials of similar kind and quality – ie depreciation will not be deducted.
Extended replacement cost provides extra protection – usually a set percentage above your policy’s limits to rebuild your home. This would guard against sudden increases in costs to repairs.
Other home coverage
There are more types of coverage in a homeowners policy than just those covering damage to your home from these perils.
Your homeowners policy may also have coverage in the following areas:
Liability – This insures you against legal or medical costs if someone not living with you is injured while on your property.
Personal Property – While hazard insurance covers you in case of damage to the structure of your home, homeowners will also cover your for your possessions.
Additional Living Expenses – This will provides cover against costs you incur if you are unable to live in your home due to damage.