Mortgage 101

What Is Hazard Insurance and What Does It Cover?

Published on: May 9, 2022

what is hazard insurance

Hazard insurance protects a homeowner against damage to their dwelling or building caused by certain disasters, severe weather, or crime. Covered perils include fires, hail, snowstorms, lightning, or falling trees. The coverage also includes human-caused financial losses, such as robberies, vandalism, or a car crashing into your house.

Mortgage lenders typically require you to have hazard insurance before they will approve a loan. Understanding what hazard insurance is, why it’s needed, and what it does (and doesn’t) cover is key to helping you shop for this essential protection.

What is hazard insurance?

Hazard insurance is not a standalone insurance policy. It’s actually one of the main components of a homeowners insurance policy. Specifically, hazard insurance is the portion of the policy that covers the physical structure of the building against damage. This financial protection is very important not just for you, the homeowner, but for anyone else that has a financial interest in the home — such as your bank or mortgage lender.

When you apply for a mortgage to buy a house, the lender typically requires homeowners insurance — specifically, it is concerned about the coverage you get from hazard insurance. While the overall homeowners coverage protects your financial interests in case something damages or destroys your home, the hazard insurance specifically protects the mortgage lender’s interest also. 

Since the house acts as collateral for the mortgage, the lender won’t approve the loan unless it has some assurances that the building is properly covered in case of a disaster or accident. If not, and the home was destroyed by a fire or storm, the bank would have no security on the money that you still owe on the mortgage. That’s why you typically must have homeowners insurance — including hazard insurance — in place before the bank or lender will close on your mortgage. 

If you’re in the process of buying a home, your mortgage lender will likely ask you to provide proof of hazard insurance as part of the closing process. To get the required hazard insurance for a mortgage, you simply need to purchase a homeowners insurance policy.

Is hazard insurance the same as homeowners insurance?

Hazard insurance for a home is just one part of homeowners insurance. Although they are not exactly the same, don’t be confused if the two terms are sometimes used interchangeably by your real estate agent during the homebuying process. The coverage of the structure itself is what’s most relevant to the mortgage lender. 

Hazard insurance provides coverage against damage to the physical structure of your home due to fires, storms, hail, and other severe weather events. It also covers risks like theft, vandalism, or explosions. All of these perils could endanger the collateral on your mortgage, mainly your house, which is why hazard insurance is a requirement. Property damage from such hazards accounts for more than 97% of homeowners insurance claims.

Mortgage lenders aren’t concerned about the other parts of standard homeowners insurance, such as coverage for your personal belongings, liability protection against bodily injury lawsuits, property damage caused by pets, or additional living expenses coverage. Those portions of homeowners insurance are there to protect your financial interests as the homeowner, though claims of these types account for less than 3% of homeowners insurance payouts, according to data from the Insurance Information Institute.

What does hazard insurance cover?

Hazard insurance covers the cost of repairing or replacing damage to your home from perils such as the following:

  • Fire 
  • Hail
  • Hurricane
  • Wind
  • Damage from the weight of snow, sleet, or ice
  • Water damage caused by a burst pipe or household appliance
  • Lightning
  • Theft
  • Vandalism
  • Fallen trees
  • Vehicle hitting the home
  • Explosions
  • Civil unrest or riots

Mortgage lenders may have specific requirements for hazard insurance coverage that you’ll have to meet. For example, Fannie Mae, one of the largest holders of home mortgages in the U.S., specifies that hazard insurance for its mortgages must include coverage of wind, hurricanes, civil commotion including riots, smoke, hail, and damage caused by aircraft, vehicles, or explosions. Some of its requirements are location-specific — properties in Guam, for instance, must also have coverage against damage from typhoons.

What hazard insurance for a home does not cover

Hazard insurance doesn’t cover every kind of damage that might keep a homeowner up at night. For example, hazard insurance typically doesn’t include financial protection from:

  • Floods
  • Earthquakes
  • Sinkholes (coverage offered in states like Florida and Tennessee)
  • Personal belongings in the home
  • Liability lawsuits 
  • Living expenses while a home is repaired

If you’re stressed about becoming a homeowner and concerned about such perils, you can choose to purchase separate insurance coverage for most types of risks that aren’t covered by standard hazard insurance. 

In some cases, this extra coverage could be a requirement to get a home loan. For example, if you live in a designated flood area, where damage from flooding is a significant risk, you might need to purchase an optional flood insurance policy. Likewise, earthquake coverage is available as a separate policy or endorsement. In Florida and Tennessee, two of the top states for home damage from sinkholes, homeowners insurance companies are required to offer sinkhole coverage.

What's the cost of hazard insurance?

The price of hazard insurance is included in the premium for homeowners insurance. The average annual premium for homeowners insurance is $1,272, according to the most recent data compiled by the National Association of Insurance Commissioners. For homebuyers who need to get hazard insurance as a condition of mortgage approval, you buy the coverage as part of an overall homeowners insurance package. 

As with other expenses related to homebuying, your homeowners insurance premium quote may vary significantly. Premiums are determined by a combination of many factors, including your home value, the amount of coverage, the type of property, and the limits and deductibles you choose — as well as any discounts you get. 

Geographic location also plays a large part in determining rates for hazard insurance and homeowners insurance. The most expensive state for homeowners insurance was Louisiana — where the average annual expenditure was $2,037 — followed closely by Oklahoma ($2,000) and Florida ($1,988). At the other end of the price spectrum, the least expensive states for coverage were Oregon ($727), Utah ($743), and Wisconsin ($750).

Need help understanding hazard insurance requirements for certain loan programs? Contact a local Finance of America Mortgage Advisor for guidance.

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