How Does Hazard Insurance Differ from Homeowners Insurance?

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  • What Is Hazard Insurance?
  • Do I Need Hazard Insurance if I’m Mortgage-Free?
You’ve applied for a mortgage and been approved. As always, there are conditions you have to meet. One of those conditions is a minimum amount of hazard insurance on the property named as collateral on the mortgage. But what is hazard insurance, and how does it differ from homeowners insurance? Here’s what you need to know.

What Is Hazard Insurance?

If you have coverage that protects your home against losses, that’s considered hazard insurance. That can be natural disasters like wildfires, tornadoes, volcanic eruptions, blizzards, or lightning, or it could be manmade disasters like vandalism or a plane crash.
The catch is that only the structure itself is covered by hazard insurance. Your physical dwelling is insured against loss including attached structures such as a garage, but your personal belongings are not a part of hazard insurance.

Why Is Hazard Insurance Required?

When a financial institution lends you money to buy or refinance your home, they want a relatively low-risk guarantee that they’ll get their money back one way or another. The preferred way is for you to make your mortgage payments on time so they collect the interest along with the principal amount.
But if your home is wrecked before it’s paid off, they want the guarantee that an insurance policy can reimburse them for the loss. Otherwise, you would be on the hook for costs whether you caused the damage or not. Hazard insurance ensures that the lender gets their money back, one way or another.

How Does Hazard Insurance Differ from Homeowners Insurance?

You might ask, “Doesn’t homeowners insurance have the same coverage against perils as hazard insurance?” You would be correct, and that’s because they aren’t separate policies.
An insurance company may specify on the mortgage requirements that you must have hazard insurance, but your homeowners insurance policy contains the coverage you need to satisfy their rules. Hazard insurance is a major component of homeowners insurance.

Do I Need Hazard Insurance if I’m Mortgage-Free?

If you’re one of the lucky ones that has paid off your mortgage already, you may be wondering if it’s necessary to carry hazard insurance. While it’s not mandatory to insure your home if you aren’t required by your lender, it’s always a good idea to carry homeowners insurance that contains hazard insurance.
It’s particularly important to have hazard insurance coverage if you live in a state that’s at high risk of a natural disaster. For example, hurricanes are common in Florida, Texas, Louisiana, North Carolina, and even New Jersey. Tornado Alley includes Kansas, Nebraska, and Oklahoma. If your home is damaged or destroyed in a natural disaster and you don’t have any coverage, you’re on your own for any losses.
Keep in mind that losses aren’t always restricted to just your home, though. If a tornado takes your roof off and slams it into a neighbor’s home, you could be liable for their damages too. To that end, hazard insurance can be seen as an indispensable part of a homeowners policy.

Are All Losses Covered in Hazard Insurance?

What’s covered by hazard insurance through your carrier? That’s a question you should always ask in advance. When you buy homeowners insurance, there are often exclusions listed, meaning items that aren’t covered by the policy as written. In many cases, earthquake and flood damage are excluded.
If you’re in an earthquake-prone or a flood-prone area, consider adding coverage for excluded perils that could affect you. It could be as an added coverage through your current insurer or you may have to find coverage through a private insurance provider.

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