It’s probably safe to say that your dreams of owning a home do not include coping with the aftermath of a house fire or a flooded bathroom. So, you hope for the best and—because you’re savvy—plan for the worst. Hazard insurance has your back in the event of certain damage.
What is hazard insurance?
When you take out a mortgage to buy a home, your lender typically requires you to carry hazard insurance to protect your investment (and theirs). Hazard coverage is part of your homeowners insurance, not a separate policy. It kicks in if your home gets damaged by certain hazards, such as a severe storm or an act of vandalism.
What does hazard insurance cover?
Hazard insurance generally covers damage to:
- A home’s structure, including its walls, floors, and roof.
- Other structures, such as a fence or a shed.
- Built-in appliances, such as the plumbing and the water heater.
Hazard insurance coverage can be basic or comprehensive:
- A named peril policy (basic) covers damage caused by a dozen or so perils—wind, lightning, a burst pipe—that are specifically named in your policy. Although your coverage is limited to those specific hazards, the good news is that named peril policies tend to cover the most common and costly types of hazards. They’re also the least expensive option.
- An open peril policy (comprehensive) covers damage caused by any peril that isn’t explicitly excluded by the policy. Keep in mind that if your home is at high risk from a specific peril, your policy may not cover it. For example, if you live in earthquake country, your standard hazard coverage probably won’t cover earthquake damage. You’ll need to purchase separate earthquake insurance.
How will I be reimbursed when I submit a claim?
Hazard insurance payouts depend on the type of policy you purchase.
- An actual cash value policy pays the depreciated value of your home or personal property at the time it was damaged or destroyed.
- A replacement cost value policy reimburses you the amount that the damaged property would cost if you bought it new today. This type of policy is pricier, but if your property gets damaged, you won’t have to shell out your own money to replace it.