What Is Hazard Insurance?

Hazard insurance is a component of your homeowners insurance policy that protects your home's structure from common perils such as fire, vandalism, and theft.

If one of these perils causes damage to your home, you'll be covered for repairs up to the policy limits you choose. There are numerous types of homeowners insurance available, each covering a unique set of risks.

What is hazard insurance?

Hazard coverage is a section of your homeowners insurance policy that protects you against loss or damage to your home caused by a covered peril. People frequently mix up hazard insurance and homeowners insurance. Other sections cover a variety of dangers - also known as hazards - that may befall you, your home, or others in the building. As we will see in the following section, different types of policies combine hazard coverage and the other policy components in various ways, depending on your needs.

Is Hazard Insurance the Same as Homeowners Insurance?

Hazard insurance, also known as dwelling coverage, protects you against financial loss if your home is damaged or destroyed as a result of a covered peril. Whereas homeowners insurance covers a variety of risks, hazard insurance covers the structure of your home, including its walls, flooring, and roof. It also includes built-in appliances like plumbing and a water heater. Finally, it includes structures that are not part of the home, such as a garage.

In general, typical homeowners insurance policies cover the following areas of coverage:

• Hazard insurance: protects the structure of your home from covered perils.
• Personal property insurance: protects your personal belongings, such as clothing and televisions, from covered perils.
• Liability insurance: to insure you against lawsuits that may be filed against you if someone is injured on your property
• Additional living expenses (ALE) coverage: pays for temporary housing if your home is damaged by a covered peril.

Types of Hazard Insurance Policies

However, the types of insurance you have and the perils covered by them are determined by the type of policy you have.

Despite being only one component of most home insurance policies, hazard coverage is the most important. The majority of home insurance claims fall under the policy's hazard section. As a result, the amount of hazard coverage required by your home will determine your home insurance premiums and limits.

If your home is damaged by a covered peril, your hazard insurance policy will be subject to one of three limits, which provide varying amounts of coverage. These are some examples:

ACTUAL CASH VALUE (ACV)

• The ACV is equal to the market value of your home less depreciation. For example, if you spent $8,000 to install new flooring in your home ten years ago, those floors are now worthless. Rather, they have depreciated as a result of wear and tear, and the reduced amount is the maximum that ACV coverage would provide.
• If you filed a hazard insurance claim after your flooring was destroyed by a covered peril, the ACV would not cover the full cost of replacing the floor with new materials. Instead, you'd be on the hook for the difference. If your entire house is destroyed, the cost could be substantial. The ACV is the smallest limit that can be carried on your hazard insurance policy, as well as the one with the lowest premiums.

REPLACEMENT COST VALUE (RCV)

• The RCV is the cost of rebuilding your house at current labor and material prices, which are almost always higher than when the house was built. A hazard insurance policy that covers your home's RCV will cost more than one that only covers the ACV, but RCV coverage may provide significant additional reimbursement if you need to replace all or part of your home. As a result, if you can afford it, we recommend that you purchase RCV coverage.

GUARANTEED REPLACEMENT COST/EXTENDED REPLACEMENT COST (GRC/ERC)

• The GRC/ERC also covers your home's replacement cost, but with the assurance that the insurance company will pay a certain percentage above your hazard policy's limits to rebuild your home if necessary. This is especially important when conditions cause a spike in demand and repair costs, such as when a regional disaster temporarily raises construction costs. This is the most comprehensive and expensive coverage and should be considered by those who live in a disaster-prone area.

How Much Does Hazard Insurance Cost?

Hazard insurance is not purchased as a separate policy. It is instead included in the premium for your broader homeowners insurance policy. The amount by which hazard coverage raises policy premiums depends on a variety of factors, including:

• The age and value of your home
• The materials your home is made of
• The type of policy limit you choose
• The policy deductibles you choose
• Whether your home has certain security features

Homeowners insurance costs an average of $1,083. However, your costs will be determined by your location and home. Owners of older homes are more likely to pay higher rates, in part because they are more likely to be heavily damaged by many hazards and thus more expensive to repair.

However, a house built of brick or stone may receive a lower insurance premium than a house built of wood, especially if the wooden house is located in a dry area prone to wildfires. In addition, installing certain security features, such as an alarm system, may result in a premium reduction.

Types of Homeowners Insurance

There are eight different types of homeowners insurance policies, each with a different level of coverage. Hazard insurance is included in the base coverage of all policy types. Which type you should carry is determined by the type of home you own, the types of hazards in your area, and the type of coverage required by your mortgage lender.

Which Home Insurance Policy Is Right for Me?

Unless you are a renter or the owner of a condo, mobile home, or significantly older house, a HO-3 policy is most likely what you should get.

While hazard insurance is arguably the most important type of coverage included in your homeowners insurance policy, other types of coverage, such as liability insurance, are also essential. As a result, HO-1 policies, the most basic type, are no longer available in a number of states. They offer no coverage other than hazard insurance, and even then, the perils they cover are limited. Some HO-2 policies include liability coverage, but not all. As a result, HO-2 policies are far less common than HO-3 policies. By far the most common type of homeowners insurance is HO-3s.

When looking for homeowners insurance, you may or may not have a choice in terms of policy type. If you borrow money from a mortgage lender, for example, they may specify the type of policy you must purchase—typically a HO-3 policy. In these cases, the policy required by your lender is likely to be fairly comprehensive in terms of hazard coverage.

What Hazards are Covered by My Homeowners Insurance?

Home insurance policies provide coverage for a wide range of common perils. Most insurance companies exclude damage caused by neglect or normal wear and tear. However, unless it is a specifically excluded hazard, such as earthquakes, sudden and unexpected damage is usually covered. You'll need to add an optional endorsement to your homeowners insurance policy to get coverage for excluded perils.

The policies covered by your specific policy are determined by the type of policy you have. Some policies, such as a HO-2, only cover "named perils"—those specified in the policy. Other types of policies, such as a HO-3, cover "open perils." This means that the policy covers all perils except those expressly excluded on the declaration page.

Named Perils vs. Open Perils

Named perils are specific hazards listed on your homeowner's insurance policy's declaration page. If your policy only covers named perils, you will not be reimbursed for damage caused by unnamed hazards. An HO-1 policy covers the following named perils:

• Smoke and fire (including wildfires)
• Explosions
• Lightning
• Windstorms and hail
• Vandalism
• Theft
• Damage from vehicles
• Damage from aircraft
• Damage from riots
• Volcanic eruption

HO-2 policies also cover the following six perils in addition to these ten:

• Falling objects
• Excess weight due to snow, ice or sleet
• Freezing of household amenities, such as the AC or heating system
• Sudden and accidental breaking, cracking or bursting of pipes and other household systems
• Damage due to the sudden and accidental discharge of water or steam
• Sudden and accidental damage due to an electrical surge

Open perils include any hazard not specifically excluded in your policy. Open perils are covered by both HO-3 and HO-5 policies. HO-5s, on the other hand, tend to provide more coverage at a higher cost. The hazards excluded from your policy will differ depending on the risks in your area. While some broad and common types of damage, such as water damage, are excluded from your policy, you may still be covered if the damage was unexpected and unintentional.

Exclusions are designed to protect insurance companies from damage caused by a homeowner's lack of maintenance. If you have suffered damage as a result of an excluded hazard, you should still contact your insurance agent to determine whether you are covered. Here are some examples of common risks that policies do not cover:

• Earthquakes, mudslides, and landslides
• Floods
• Water damage
• Mold and fungus
• Damage due to an infestation of animals or insects
• Negligence and general wear and tear
• Settling, cracking, or warping of your house's foundation
• Damage caused by your pets
• War or government action
• Smog and corrosion