If you’re mortgaging a house or planning to mortgage one, a requirement your lender will have is that you insure your house against hazards. The term "hazard," increasingly used in the investment sphere, has become popular over the years. This has created the misconception that hazard insurance is separate from a homeowners insurance policy.
Your home is usually your biggest investment and lenders need to make sure that you have this asset protected. To accomplish this, lenders will ask you to insure your home against hazards through home insurance. It’s important to distinguish how the term ‘hazard’ is used in the investment and insurance spheres. When referring to hazards in home insurance policies, the term is interchangeable with homeowners insurance. In investment, it refers to insuring against the following perils: fire, theft, and vandalism.
A lender will require you to purchase insurance that protects against selected perils to ensure you have protected the investment (the house). Hazard insurance is just a subcategory of your policy. Insuring your home with a product that satisfies the mortgage lender’s requirements for hazard insurance protects both the lender’s money and your investment.
It is important to remember that mortgage lenders have popularized the term "hazard insurance" because of the requirement to insure against certain perils before you're approved for a mortgage. The misconception that hazard insurance is a separate type of home insurance comes from the mortgage lender’s phrasing of 'hazard' when referring to the dwelling coverage in home insurance.
USSA states that the reason for the lender specifying the term 'hazard' in home insurance claims is to make sure that when choosing your homeowners insurance, you choose one that covers fire, theft, and vandalism.
To clear up any confusion, hazard and homeowners insurance are generally the same. The only time when it's important to know the difference is when you take out a mortgage and need to make sure that your home insurance covers the perils that the lender requires.
The easiest way to illustrate the concept is to think of hazard insurance as a subcategory for the umbrella term known as homeowner's insurance.
Note that hazard/home insurance does not cover flooding and that, if needed, a separate policy should be purchased for flooding.
The policies and coverages for each policy will differ between insurance companies, and therefore it’s important to check what coverages are available for each. An example of the different policies is whether they cover roof leaks or water damage. The best thing to check is if the policy you intend to purchase covers the hazards required by your mortgage lender.
The average homeowners insurance policy consists of the following coverages:
Home: the physical structure of the home, including other parts such as the garage and backyard.
Personal property: this includes furniture
Additional living expenses: if the home becomes unlivable, the policy will cover hotel accommodation fees
Personal Liability: covers the medical fees for personal and family injuries
Medical payments: covers the medical fees for injuries of people injured on your property, excluding yourself and your family
When choosing the right home insurance policy for you, ensure that you look at both what the policy covers and what it does not. Checking to ensure the home insurance policy covers the perils required to fulfill the requirements needed by your mortgage lender helps to protect your home investment claim.
For a general guideline, most homeowners insurance policies do not cover the following:
Earthquakes, Volcano Eruption, Landslide
Many natural disasters are not covered under certain homeowners insurance claims and may require a separate insurance policy. Note that mortgage lenders will have different requirements for home insurances, check to ensure that you have purchased the ones that align with the lender's claim.
To reiterate, homeowners insurance and hazard insurance are used interchangeably. This coverage generally does not include damage caused by certain natural disasters and may require an additional insurance policy to ensure that you have complete coverage to protect your investment.
When searching for the right homeowners insurance you might be faced with the terms 'perils' and ‘hazards,' which are not interchangeable terms. Perils are defined as “an event or circumstance that results in property damage [. . .] a ‘hazard’ increases the chances of a peril occurring.” The factor that causes the destruction is called a peril, and the damage caused by the peril is known as a hazard.
Drudge from snow/ice
Water damage (from household appliances/burst pipe)
Some commonly covered hazards in a homeowners insurance policy are:
Walls and flooring
Built-in appliances, including water heaters
If a peril occurs and causes damage to your home, the cost of reconstruction to the structure that was damaged from the peril is covered under the hazard/dwelling insurance in your overall homeowner's insurance. In your home insurance, there will be a section for dwelling coverages which will refer to the damage caused by hazards, usually referring to a claim for physical reconstruction of the house after perils.
A better way to grasp homeowners/hazard insurance is to take a closer look at the named and open perils in both HO-3 and HO-5 home insurance policies.
The standard homeowners insurance that most people purchase is HO-3 home insurance, but there is also the option of HO-5 home insurance. HO-3 has more named perils, whereas an HO-5 will have more room for open perils. On an HO-3 home policy, the open peril includes personal property, whereas the house itself is left as a named peril. If this is a concern for you, purchasing HO-5 insurance may allow you to have more open perils in your policy.
Both HO-3 and HO-5 policies will have both named and open perils. A named peril as a basic policy where the perils are listed, but when the damage occurs it falls on you to convince the insurance company of the validity of your claim. Whereas an open peril is a broader option, unlike a named peril where you must prove that it is covered, an open peril is where “the insurance company must prove to you it is not covered.” For an easier contrast of the two, named peril will list what they include in the policy whereas an open peril will list what they have excluded from the policy.
For an in-depth look at the HO system click here.
Overall, hazards are covered in your home insurance policies under the name of "dwelling coverages," which cover claims for damages that occur because of perils.
If you're looking for more open perils in your home insurance policy look into purchasing HO-5 insurance, if open and named perils are not your concern then opt for the standard HO-3 which offers more named perils. Certain perils are not covered under homeowners’ insurance policies and will require additional coverages, or a separate insurance plan.
Don’t let the word "hazard" confuse you when choosing the right homeowners insurance policy for your home investment. Navigating the realm of insurance policies isn't difficult once you're aware of the meanings behind the terms. If a mortgage lender requires hazard insurance on your home, then purchasing homeowners insurance with the necessary perils covered will fulfill that requirement.
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