Homeowners Insurance vs. Hazard Insurance: How They’re Different, And The Best Option For You

Fortune Recommends April 24, 2023

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Homeowners Insurance vs. Hazard Insurance: How They’re Different, And The Best Option For You

When purchasing a home or shopping for a lower insurance premium, your mortgage lender may require you to maintain a minimum level of homeowners and hazard insurance, which are two common types of coverage offered by home insurance companies. 

Understanding how they are related and what they cover can help you make a more informed decision about what coverage you need to fully protect your home.

 
Homeowners vs. hazard insurance 

Homeowners insurance is a type of insurance that’s designed to provide financial protection against damages to your home or belongings. But it also helps pay for medical bills following an accident that occurred on your property, or for additional living expenses if your home is completely destroyed in a covered incident. 

Then there’s hazard insurance, which is included in your standard homeowner's insurance policy. It is intended to help you cover the costs of damages to your home caused by a natural or man-made disaster, like a house fire or hail storm. 

Let’s take a deeper look at what homeowners and hazard insurance coverage have in common—and also what they don’t.

 
What is homeowners insurance? 

Homeowners insurance is designed to help you pay for damages to your property or belongings that occur as a result of a covered peril. A peril is an insurance term for an event that caused damage, and a covered peril is damage specifically included in your policy’s coverage terms. 

“If you have questions on what is and isn’t included in your policy, connect with your insurance agent to confirm what supplemental coverage you might need to ensure your home is fully protected,” says Steve Wilson, director of technical underwriting at Hippo Insurance. 

 
How homeowners insurance works 

In exchange for a premium, your insurance company will provide you with six different types of coverage, which make up your homeowner's insurance policy: 

  1. Dwelling protection (similar to hazard coverage). Protects your home and attached structures against common damages, like storms or fires. It may also include built-in appliances, flooring, and heating or cooling systems that are attached to your home. 
  1. Other structures. Includes protection for buildings that are not attached to your home, such as detached garages, pools, or fences. 
  1. Personal property. Provides financial protection against damages to items in your home, including clothing, furniture, and tools. If you own a rental property, this would not include your tenant’s property. 
  1. Loss of use. If you are displaced following a total loss of your home, your insurance policy may provide you with financial support to cover the increased cost of living while you are not in your home, such as additional food or commuting expenses.
  1. Personal liability. Assists you in paying legal fees, medical expenses, or property damages incurred in an accident that you are deemed responsible for. 
  1. Medical payments. If a guest is harmed on your property by you, a member of your household, or your pet, your medical payment coverage will help you cover any medical costs for the guest. 

The goal of your standard homeowner's insurance policy is to provide you with sufficient coverage to protect yourself financially in case of an accident, or depending on the cost, to rebuild your home and replace any damaged belongings. 

“When determining how much homeowners insurance coverage you need, it’s best, to begin with assessing the value of your home and your belongings by taking inventory of what you own,” says Wilson. Depending on the value of your home, this may mean a minimum of $300,000–$500,000 of coverage, according to the Insurance Information Institute (III). 

 

Pros and cons of homeowners insurance 

A typical home insurance policy covers a collection of costs associated with being a homeowner ranging from replacing a damaged window to assisting with medical bills for a guest injured on your property. This coverage can help you avoid paying out of pocket for unexpected expenses. 
Depending on the value of your home and personal belongings, most homeowners can expect to pay less than $2,000 a year for property insurance. But, your cost of coverage may also increase depending on where you live since certain locations are at an increased risk of natural disasters.

Pros
  • Protects your home and personal belongings from common perils
  • Insurance funds can be used to rebuild your home in the event of a total loss
  • Provides legal protection for injuries or damages sustained on your property
Cons
  • Potentially high premiums
  • May need to purchase additional coverage to meet your insurance needs
  • May be required by your lender

 

What is hazard insurance? 

Hazard insurance is one component of your standard homeowner's insurance coverage. Often referred to as dwelling coverage, hazard insurance can help you pay for damages to your home caused by covered perils, such as a fire or storm. Without this coverage, you would be financially responsible for repairing damages to your home’s structure—which includes your home’s siding, roofing, windows, and doorways. 

For instance, let’s say your roof sustained major damage during a sleet storm and you need to replace your roof as soon as possible to avoid extensive water damage. Rather than paying out of pocket to cover the cost of the repair, your hazard insurance would help you cover the cost of replacing the faulty roof.  

 

How hazard insurance works 

Hazard protection focuses on the structure of your home, which includes your home’s foundation, walls, ceiling, roofing, and siding. And it also includes items attached to your home, like your flooring or heating and cooling system. When selecting your hazard insurance coverage, you can opt for a named or open peril policy. 

Common perils covered by a named policy can include:

  • Weather storms—including wind, hail, lightning, snow, and ice
  • Weather damage to heating and cooling systems
  • Vandalism
  • Theft
  • Electrical damages
  • Explosions
  • Fire and smoke
  • Volcanic eruptions
  • Overflow of water (not caused by a flood)
  • Riots
  • Aircraft or vehicle damage

An open peril policy includes additional perils beyond those listed in a named policy. But, certain natural disasters, such as earthquakes and floods, won’t be covered under hazard protection and will require additional coverage, such as catastrophe insurance, says Wilson. 

Common exclusions: 

  • Flood
  • Earthquake
  • Earth movement
  • Termites, insects, rats, and mice
  • Water damage caused by leaks
  • Losses to a house that is vacant for 60 or more days
  • Mold
  • General upkeep and maintenance
  • War
  • Insurrection
  • Nuclear hazard
 
Pros and cons of hazard insurance 

Hazard insurance is included with your standard homeowner's insurance policy. As a result, most homeowners do not pay an additional cost for this coverage. 

One of the most important things for homeowners to understand is what is and isn’t covered by your hazard insurance. If you live in a zone with a higher risk of flooding or earthquakes, your hazard insurance will not be able to provide you with protection against these natural disasters.

Pros
  • Included in your standard homeowner's insurance policy
  • Protects your home’s structure against damages like weather storms or fires
  • This may include detached structures, like garages or sheds
Cons
  • Does not cover damage caused by floods or earthquakes
  • Does not cover damage to your personal property
  • Open peril policies provide additional coverage but may be more expensive

 

How to choose between the two 

When deciding what coverage you need to fully protect your home, it’s important to keep in mind that hazard insurance is included in your homeowner's insurance policy. 

The goal of your standard policy is to protect you financially against a variety of damages to your home. Within this protection is your hazard coverage, which protects you from natural and environmental disasters that can destroy your home, such as fires, theft, and pipe bursts. 

“If a lender specifies that you need hazard or dwelling coverage, rest assured that purchasing a standard homeowners insurance policy will meet their needs,” says Wilson.


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