Securing adequate insurance coverage is an important part of being approved for a mortgage loan on a house. Mortgage lenders require home buyers to get insurance to protect their investments when they lend you money to purchase your home. In other words, if something happens to the home before you pay off the mortgage, insurance will allow your lender to recoup the value of the loan.
While many people expect to purchase homeowner’s insurance, hazard insurance may be something you’ve never heard of until you enter the home-buying process. As such, it can be confusing to try and find the right coverage type. Hazard insurance isn’t actually a type of insurance policy that stands alone. It’s a part of a homeowner’s insurance policy. To determine how to meet your lender’s requirements, it helps to learn more about hazard insurance and how it relates to your complete homeowner’s insurance policy.
What Is Hazard Insurance?
When you’re in the process of securing a home mortgage loan, your lender will likely require you to have a minimum amount of hazard insurance coverage. Hazard insurance is not a separate policy from your homeowner’s insurance. It’s the part of your homeowner’s insurance that protects the actual structure of your home. Named for what it protects against, hazard insurance describes the events covered under your homeowner’s policy.
Depending on the type of home insurance you have, the hazard portion of your policy will be described as a named perils policy or open perils policy. Like it sounds, a named perils policy covers damage caused by the events (perils) listed in your policy. An open perils policy covers all causes of damage except the specific perils listed in your policy.
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What’s Covered by Hazard Insurance?
Hazard insurance covers a variety of damages. These include natural disasters and damages caused to the structure of your home. Most insurance policies cover these events.
- Fire and smoke damage
- Hail
- Theft
- Vandalism
- Lightning
- Explosion
- Damage from vehicles or aircraft
- Riots
- Volcanic eruption
Some policies may also cover additional named perils. If your policy doesn’t have adequate coverage for your home, you can typically purchase an add-on or rider to extend your coverage to match the risks of your location.
What’s Not Covered?
Certain events are typically excluded from a traditional homeowner’s policy. Your hazard insurance also doesn’t include the parts of your homeowner’s insurance that extend beyond the structure of your home. An open perils policy lists the events that your policy excludes. Common exclusions include:
- Earthquakes, landslides, and mudslides
- Negligence and general wear and tear
- Floods
- Mold and fungus
- Water damage
- Damage from an infestation of animals or insects
- Pet damage
- War
- Settling, cracking, or warping in your home’s foundation
The hazard portion of your homeowner’s insurance also doesn’t include liability coverage for accidents that occur in your home, damage to your personal property, or additional living expenses to reimburse you for temporary housing while your home is being repaired.
What Is Homeowner’s Insurance?
Hazard insurance is only one part of your homeowner’s policy. Homeowner’s insurance is a policy that provides coverage for your home and possessions in the event of loss or damage caused by specific perils. A typical homeowner’s insurance policy includes dwelling coverage, personal property coverage, liability coverage, and loss of use coverage. Depending on your coverage level, your homeowner’s insurance may also include structures not attached to your home.
Homeowner’s insurance either pays for the actual cash value or the replacement value of your home or personal belongings if damaged or lost due to a covered peril. Replacement cost coverage is generally recommended because cash value is subject to depreciation.
Your lender may require you to secure a specific amount of dwelling or hazard coverage when securing a loan. If you live in an area prone to floods or earthquakes, your lender may require you to get specific add-ons like flood insurance or umbrella insurance.
How Can I Be Sure I Have the Right Coverage?
Mortgage lenders often use the term hazard insurance. When you finance your home, your lender assumes the risk that you’ll pay off the loan. However, if the home undergoes damage or destruction, you default on the loan. To protect their investment, the lender requires you to purchase adequate insurance coverage to pay back the loan. Since the other elements of your coverage have no impact on your mortgage, your lender isn’t likely to set requirements beyond those related to the hazard section of your homeowner’s insurance.
Still, it’s crucial to note that the importance of homeowner’s insurance isn’t restricted to your mortgage requirements. Homeowner’s insurance reimburses you for damages to your home and/or possessions in the event of damage or destruction. It also provides coverage to pay for medical costs related to injuries that occur on your property.
Unless you have the financial security to rebuild your home and replace all of your possessions out of pocket, homeowner’s insurance is a critical form of risk protection. The amount of coverage you purchase for your home and possessions should cover the cost of replacing these items in the event of destruction.
If you’ve never purchased homeowner’s insurance in the past, determining the amount of coverage you need can be challenging. You’ll need to know the value of your home and the value of your possessions. Additional factors will help you determine if you need riders to protect against perils excluded from your policy. Your mortgage lender is unlikely to be in the position to provide advice about the amount of homeowner’s coverage you need beyond hazard insurance.
Conclusion
If you’re in the process of purchasing a new home in Massachusetts or unsure whether you have adequate homeowner’s insurance coverage, it’s important to take action. To learn more about the value of homeowner’s insurance or the amount of coverage that will meet your needs and lifestyle, talk to an independent agent at LoPriore Insurance Agency.
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