New homeowners always end up encountering some terms that are unfamiliar and quite confusing. Additionally, there are some concepts that have different names, though they refer to the same thing.
If you try to take out a mortgage on your home, for example, you are required to take out hazard insurance. What is hazard insurance? Is it the same thing as homeowner’s insurance? Well, the two are related, but not in the way that you think.
First, you are correct in linking hazard insurance to homeowner’s insurance. Hazard insurance is not an independent type of insurance that you can take out in the same manner that you would get auto insurance. In fact, hazard insurance is a type of coverage that you can take out under your homeowners’ policy.
Remember that a mortgage is a loan, and any lending agency needs to have the greatest amount of security possible when they lend. The best way to secure a home is to have as wide a level of insurance coverage as possible. The requirement for you to have hazard insurance feeds into the lending agency’s need to protect its investment.
What is Hazard Insurance?
While hazard insurance is not independent of your traditional homeowner’s insurance, it has its own purpose that you don’t get with the typical policy. The idea is that you get coverage for the structural integrity of your home.
Of course, it only comes into play when certain hazards disrupt or destroy this structural integrity. Such hazards include fires, vandalism, theft, and hail. Any other kind of damage is usually covered under other areas of the parent policy.
These policies are typically quite detailed, so there is no mystery surrounding what kind of events you are covered for. Be that as it may, ensure that you collect the necessary information to help you best understand when you can make a claim under this policy.
Once an event meets the conditions that are set out, the homeowner makes a claim and receives the necessary compensation. This compensation tends to cover the cost of any damages.
Though your exact situation depends on the lender and the policy, many property owners are required to pay the equivalent of premiums for the year when the policy is purchased.
Do not make the mistake of confusing hazard insurance with catastrophe insurance. Both policy types cover disastrous events, but they are not the same. There are overlapping coverage areas, but catastrophe insurance includes other disaster types, which include man-made ones. Additionally, while hazard insurance is a sub-policy under homeowner’s insurance, catastrophe insurance is its own policy.
Hazard insurance tends to come in two forms: open peril and named peril policies. Named peril policies provide you with a breakdown of the disasters that are covered. Anything that is not included on that list is out of the purview of the insurance policy, and additional coverage would be required. Open peril policies cover everything except the disasters listed in the policy.
Coverage Areas of Hazard Insurance
Any hazard insurance policy has several provisions. Each of these provisions has a purpose that extends to a specific area of coverage in the event of a disaster. Here are six of the typical coverage provisions:
- Medical payments: If a guest is injured in your home, you become liable for that person’s medical expenses. This coverage area includes the medical expenses of your guests if they are injured during a hazard.
- Personal liability: This one is related to the previous point, but it takes effect if the injured person chooses to sue you. In this case, the expenses you incur during the proceedings are covered.
- Loss-of-use: Many of the disasters covered have the potential to make your home uninhabitable. An earthquake, for example, can level a home. This means that you may need to find somewhere else to live. The associated expenses are covered here.
- Personal property: Any personal belongings you may have in and around the home are covered here.
- Main Structure: This covers the foundation, building, and roof of your home. You could consider this the main provision of hazard insurance.
- Other buildings – Any additional structures on your property are covered under this umbrella.
The Workflow of Hazard Insurance
So how does hazard insurance work? As stated before, your policy assures you protection from disaster damage in the sense that you are eligible for reimbursement. The disasters covered include rainstorms, snow, wind, hail, lightning, fires, etc. The point is that these are typically natural events that are unpredictable and can compromise the structure of your home.
The structure of your home refers to the foundation, the building, and the roof. There is no protection for contents. This applies even if these contents are fixtures, such as your furniture. You should note, however, that there are some providers that are willing to ensure such fixtures, and they may even throw your belongings into the mix too.
If you review your policy, you may notice that both the main dwelling and neighboring structures are covered. This doesn’t refer to homes belonging to your neighbors. This simply means that other buildings on your property, such as your dog’s kennel or your garage, are protected under the policy.
Hazard insurance coverage and premiums are determined based on your unique situation. The figure tends to boil down to the answer to one simple question. If there were some disaster that destroyed everything, how much would it cost to replace it all? You may think that this would simply reflect the home’s market value, but the amount may be drastically different.
Policies are not created for a lifetime. Insurance companies write these policies for a year. When that year ends, you may elect to renew the policy for another year if you so desire. This process repeats for as long as you keep the policy.
If you want, you can elect to upgrade to a more comprehensive policy with additional coverage. This allows you to have your home and medical expenses covered.
Once your policy is active and your premiums are being paid, there’s nothing more to it unless you ever need to make a claim. When you do, the idea is typically to file for losses and damages that are covered under your policy. In this instance, there is a settlement that is based on the agreement that you signed initially.
The first step is your deductible. A deductible refers to the amount that you are required to pay upfront for the damages and losses. The insurer does not cover any amount of the claim until that deductible is paid.
Additional Hazard Insurance
Hazard insurance doesn’t cover all disasters. More importantly though, there are some disasters that are covered in some areas, while they are not covered in others. These exclusions usually take place because a location is prone to a certain disaster. This would result in a heightened cost of operation for the insurance company.
An example of this is insurance for homes that lie along the coast of Florida. Every year, June to November is known as the hurricane season. Weak and powerful hurricanes tend to travel across the Caribbean basin and end up in Florida. This is a common and predictable occurrence in a sense. Since the area is prone to such disasters, coverage for them tends to be excluded from the policy.
This does not mean that you can’t get hazard insurance at all. It simply means that you need to purchase additional coverage to get the protection that you need. Insurance companies do offer these additional policies to homeowners who are based in high-risk areas.
The Mortgage Requirement
While hazard insurance has merit, it doesn’t get much focus apart from being a mortgage requirement. As stated before, lenders want to protect their investments, so hazard insurance is non-negotiable.
You should also understand by now that hazard insurance is a policy that you can get under a general homeowner’s policy. What you may not have realized is that hazard insurance is typically included as a part of that policy. The only reason why focus is placed on the term is that mortgage lenders focus on it as a requirement.
These lenders are simply concerned with the structure of the home, so they require that you have insurance to protect the home’s structure. Simply getting a homeowner’s insurance policy tends to satisfy this requirement.
Depending on the laws, area, and certain factors, the possibility does exist that you may need to get additional coverage. One such instance is the situation described above in which an area is prone to a specific hazard, which leads to a lack of coverage for that hazard. In that case, you may be required to take out a separate policy to include protection for the high-risk hazard.
When you submit your claim and pay your deductible, the insurer reimburses you for an amount that is dependent on the two provision types. Each policy only has one, and you can review them both below.
Replacement Cost Value
A replacement cost value (RCV) policy is the more expensive of the two. This is because the consideration for coverage is not made based on the value of the home. If it were, then depreciation would be a huge factor, and you’d end up paying a larger amount out of pocket to get past the losses and damages. An RCV settlement only factors in the cost of items for replacement in their new state. Therefore, you can acquire new replacements regardless of how worn your existing ones were.
Actual Cost Value
An Actual Cost Value (ACV) policy is the opposite of an RCV policy. These policies are cheaper because there is no consideration for new purchases. If you’re in an older home, this policy type is typically required. The consideration with an ACV policy is the value that your home had when the damage or loss occurred. The settlement is completed based on that value, which means you get a lesser reimbursement than you would with an RCV policy.
Though hazard insurance is a mortgage requirement, remember that you need to do what feels right for you. Shopping around is very important, as you can compare various offerings to understand which is best for you.