What is Hazard Insurance for Homeowners?

If your mortgage lender requires you to carry hazard insurance, don’t panic. Hazard insurance isn’t a separate policy you need to buy. It’s a portion of a standard homeowners insurance policy that covers the physical structure of your house against certain perils, like fires, vandalism, and hailstorms. If you already have homeowners insurance, you have hazard insurance.

Hazard Insurance vs. Homeowners Insurance: What’s the Difference?

Homeowners insurance is a bundle of coverages that protect the structure of your home, personal belongings, and liability. Hazard insurance is one component of a homeowners insurance policy, and it’s more commonly referred to as dwelling coverage, or Coverage A.

What Hazards Are Covered by Standard Insurance?

Standard HO-3 homeowners insurance typically covers 16 named perils (disasters), which are listed in your policy. If the structure of your home gets damaged or destroyed by a covered hazard, your home insurance company will cover it.

The 16 named perils for hazard insurance include:

1. Fire and lightning
2. Smoke
3. Hail and windstorms
4. Theft
5. Vandalism
6. Falling objects
7. Explosions
8. Volcanic eruptions
9. Riots and civil disturbances
10. Damage from planes
11. Damage from vehicles
12. Damage from the weight of ice, snow, or sleet
13. Freezing
14. Accidental discharge of water or steam
15. Sudden and accidental tearing, cracking, burning, or bulging
16. Sudden and accidental damage from power surges

When is Hazard Insurance Actually a Separate Policy? (The Exceptions)

Hazard insurance can be a separate policy if you want coverage for excluded perils, like flooding or earthquakes.

Standard HO-3 home insurance policies almost always exclude flood and earthquake damage. If you live in an area that’s prone to these disasters, you might benefit from purchasing separate hazard insurance policies, like flood insurance or earthquake insurance.

Why Do Mortgage Lenders Require Hazard Insurance?

Mortgage lenders require homeowners insurance because they have an insurable interest in the home. When you take out a mortgage, the house is used as collateral, which means if you stop making payments, the lender can seize the home, repair it, and sell it to recoup their money.

Here's how it works in practice:

• If your home is damaged or destroyed: Hazard insurance covers the cost of repairs or rebuilding, so neither you nor the lender loses their investment. For example, if your home burns down in a wildfire and you walk away from the mortgage, the insurance payout protects the lender.
• The mortgagee clause: Most home insurance policies include this provision, which guarantees the lender is covered for the unpaid loan balance if the home is damaged or destroyed, protecting their financial interest regardless of what happens to you.

How Much Does Hazard Insurance Cost?

Because hazard insurance is included with homeowners insurance, you don’t pay a separate premium. The only exception is if you need a standalone hazard insurance policy, like flood insurance or windstorm insurance.

The national average cost of homeowners insurance is $1,559, according to 2022 data from the National Association of Insurance Commissioners (NAIC).

Conclusion

If you come across “hazard insurance" as a requirement of your mortgage, that doesn’t mean you need to purchase another insurance policy. As long as you have a standard HO-3 home insurance policy, you have hazard insurance, which will satisfy your lender’s requirements.

However, hazard insurance doesn’t cover every peril that could damage your home. If you want coverage for excluded perils, you’ll need to supplement with standalone hazard insurance policies, like flood insurance.

While standard home insurance will meet your lender’s mortgage hazard insurance requirements, not all policies are created equal. You can use BestMoney's home insurance comparison tools to find a policy that satisfies your lender’s requirements, provides the best coverage for your personal needs, and fits your budget.

Frequently Asked Questions

Can I buy hazard insurance by itself?

No, you can’t usually purchase hazard insurance by itself. Standard home insurance policies automatically include hazard insurance (also called dwelling insurance). You can also purchase standalone catastrophe insurance policies, like flood insurance or earthquake insurance.

Is hazard insurance paid through escrow?

Yes, hazard insurance is usually paid through escrow. Your mortgage lender will likely roll your hazard insurance (homeowners insurance) premium into your monthly mortgage payments. Then, the lender will pay the premium out of the escrow account.