What is hazard insurance, and how does it work?

Hazard insurance is the main component of a homeowners insurance policy. It’s the portion that covers damage to the dwelling, or the physical structure of your home. If your home is damaged by a covered event, also known as a peril, you can file a hazard insurance claim to help you pay for repairs or rebuilding. 

When you buy a house, your mortgage lender will likely require proof of hazard insurance. This protects the lender’s investment in the home until you pay off the loan in full.

What is hazard insurance for homeowners?

Most commonly, hazard insurance refers to the part of a home insurance policy that covers the structure of your home, including built-in systems like plumbing and electrical and permanently installed items like cabinetry. 

However, technically speaking, you can’t purchase a product called “hazard insurance.” Instead, you can buy a homeowners insurance policy, which automatically comes with Coverage A, also known as dwelling coverage. If your home’s physical structure is damaged by hazards such as a fire, storm, theft, or vandalism, Coverage A would cover the loss, up to your policy limit and minus your deductible.

Learn more: What does dwelling insurance cover? 

Hazard insurance vs. homeowners insurance

Hazard insurance, or dwelling coverage, is one component of homeowners insurance — and the most important part of the policy to your mortgage lender. But standard home insurance offers far more comprehensive coverage.

Home policies also include: 

• Other structures coverage (Coverage B): Helps pay to repair, rebuild, or replace detached structures on your policy, such as detached garages, sheds, and gazebos

• Personal property coverage (Coverage C): Also known as contents insurance, coverage for your personal belongings 

• Additional living expenses coverage (Coverage D): Helps cover hotel stays, dining out, and more if the home was damaged and is unlivable while being repaired (also called loss of use)

• Personal liability coverage (Coverage E):  Helps pay for others’ medical bills and property damage — and even legal costs, including settlements and judgments from related lawsuits — if you or a household member is responsible

• Medical payments coverage (Coverage F): Helps cover medical bills if a guest is injured on your property, regardless of fault

Essentially, hazard insurance is just one component — a crucial one — of several parts that make up a home insurance policy.

What does hazard insurance cover?

The specifics of what hazard insurance covers can vary by policy, insurer, and state. But generally, hazard insurance covers damage caused by:

• Fire and smoke 

• Wind and hail 

• Sudden, unexpected water damage

• Lightning strikes and power surges

• Explosions, such as from a gas leak

• Falling objects like tree branches

• Vehicles or aircraft that crash into your home

• Vandalism or civil unrest

• Weight of ice, sleet, or snow

• Theft

What is not covered by hazard insurance?

Hazard insurance has some common exclusions, though these can also vary by insurer, policy, and state. Here are some common hazard insurance exclusions:

• Flooding

• Earthquakes

• Pest, insect, or animal damage

• Mold, rot, and rust

• Sinkholes and landslides

• Wildfires

• Intentional damage by a household member

• General wear and tear

• Neglect

If you live in an area prone to natural disasters, you’ll likely need to purchase a separate policy or insurance endorsement to fill critical gaps in coverage. Examples include flood insurance and earthquake insurance.

Hazard insurance vs. mortgage insurance

Mortgage lenders popularized the term “hazard insurance” because they typically require it when you take out a loan to buy a house.

But hazard insurance isn’t the only type of insurance your lender may require you to carry. If you took out a conventional mortgage to purchase your home and put less than 20% down, the lender may require you to carry private mortgage insurance (PMI).

In some cases, you’ll continue to pay PMI as part of your overall mortgage payment until your principal balance is 80% of the home’s value at the time of purchase, meaning you have at least 20% equity in your home. However, PMI discharge rules can vary by lender and loan type. For instance, some loan agreements may stipulate that PMI must remain for the life of the loan unless it is refinanced. 

If your mortgage includes PMI, always consult your lender for discharge specifics. 

It’s important to understand that private mortgage insurance is not for you; it’s for your lender. If you default on your loan, it protects the lender against losses. Even so, you as the homeowner must pay the premium — so it’s in your best interest to remove PMI as soon as you can.

Why do lenders require hazard insurance?

Lenders require hazard insurance to safeguard their investment. If you default on your mortgage, the lender can foreclose on your home and sell it to recoup their initial investment.

However, if the house is destroyed in a fire or storm, and you stop making payments, the mortgage servicer will not be able to sell the home without significant repairs. Your insurance policy is what keeps that from happening.

Expert tip: Paying off your mortgage doesn’t mean you should drop your hazard insurance. According to insurance experts, you should still carry dwelling coverage to protect the investment you’ve made in your home since it’s typically one of the most expensive purchases people ever make.

How much does hazard insurance cost?

On average, homeowners insurance costs $3,303 a year. Standard home policies include hazard insurance, as well as other coverages. Rates reflect the risk profile of the home and homeowner, and rates will vary by company. However, in general, how much you pay for coverage will depend on factors including:

• Your home’s replacement cost

• Where you live (cost of living, crime rate, chance of weather events and natural disasters, etc.)

• The types of coverages you carry

• The deductibles and coverage limits you choose

• The age, value, construction type, and size of your home

• Your claims history

• Your insurance-based credit score, in most states

You might be able to reduce the cost of your insurance if you qualify for home insurance discounts. Discount opportunities and eligibility criteria differ depending on the insurer you choose. Common discounts include savings for bundling insurance products (like home and auto), having home security features, remaining a loyal customer, and avoiding claims. Ask an agent if you qualify for any discounts that are available.

How to get hazard insurance

Generally, you can get hazard insurance from any insurance company licensed to sell home insurance in your state. Follow these steps to secure coverage:

1. Estimate your home’s replacement cost: You should have enough dwelling insurance to cover the cost to rebuild your home based on the cost of labor and materials in your area. You can determine your replacement cost by multiplying the square footage of your home by building costs in your area, though you can also typically get estimated coverage requirements during the online quote process or by contacting an insurer directly. 

2. Determine your coverage needs: If you have a mortgage on your home, your lender will likely require specific amounts and types of coverage. You may also want to consider risks associated with your location, like weather-related hazards.

3. Research companies: Explore several companies online. Ask friends, family, and especially your neighbors for recommendations. Compare available coverage types, discounts, and endorsements, and read customer reviews to find the best company for your situation.

4. Get quotes.:At a minimum, get at least three quotes to compare. Make sure the policy details (coverage types and limits) match across all quotes for an accurate comparison.

5. Choose a company, and purchase the policy: You may be able to begin the process online, or you might have to contact an agent by phone.