What Is Hazard Insurance on Mortgage?

This Page Was Last Updated: October 13, 2022
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What You Should Know

  • Hazard insurance is an optional part of homeowners insurance, and it covers the cost of damages caused by natural disasters.
  • Hazard insurance usually covers damages caused by fire, storms, lightning, and snow, but it does not cover damage caused by earthquakes and floods.
  • Lenders may require hazard insurance for a mortgage on properties located in areas prone to natural disasters.

What Is Hazard Insurance?

Hazard Insurance

Hazard insurance is an optional part of homeowners insurance, and this part protects the property against natural disasters and similar hazards. Even though hazard insurance is not as well known as homeowners insurance or mortgage insurance, hazard insurance may be required by a lender to get a mortgage for a house that is in an area with a high risk of natural disasters. The hazards and natural disasters covered by hazard insurance usually include forest fires, storms and hurricanes, hails, and other extreme natural events.

If a homeowner has an active hazard insurance policy and their property is damaged by an extreme natural event covered by the insurance, the insurance company may cover the cost of the damage in full or partially depending on the policy. It is important to note that the insurance may have a limit on how much it covers in damage costs, so the borrower should always understand what exactly their insurance policy covers before paying for it. A homeowner should be aware of the natural disasters that could happen in their area and purchase insurance accordingly. It might be useful to have protection against extreme weather conditions even in an area that is not considered high risk for natural disasters.

Mortgage & Hazard Insurance

Hazard insurance is often optional because many areas do not expect to have natural disasters. On the other hand, some areas reasonably expect natural disasters such as forest fires, hurricanes, or floods. In these areas, the lenders may require additional hazard insurance on mortgage to protect the property value in case a natural disaster occurs. The lender will make sure to let the borrower know that they are required to get hazard insurance before approving a mortgage request.

Some areas in the United States require homeowners to provide a natural hazard report at the time of a home sale. For example, the state of California requires home sellers to get a Natural Hazard Disclosure before selling their house as a part of California's 1998 Natural Hazard Disclosure Act. The Natural Hazard Disclosure can help identify what natural disasters are prone to occur in the area and what kind of insurance is required to protect the property in the area.

What Does Hazard Insurance Cover?

It is important to understand what hazard insurance covers before paying for it because if the insurance does not cover a natural disaster, then the homeowner may not be compensated if the natural disaster occurs. The coverage may also be confusing and include a lot of exceptions that make it difficult for a homeowner to understand what exactly is covered by the policy. It is important to consult with the insurance provider and a lender to understand if the insurance covers the most likely cases of potential natural disaster damage. Every mortgage insurance differs from other similar policy types, so it is important to read closely what a specific insurance policy offers. On the other hand, there are some common events that are covered and not covered by most hazard insurance policies.

Hazard Insurance Coverage
Damage Covered*Damage Not Covered
To Home StructureTo Personal Property
By Fire & SmokeBy Flood
By Hail & WindBy Earthquakes
By LightningBy Landslides & Mudslides
By Snow & IceBy Infestation
By Vehicles (e.g. Aircraft)By Mold
By Fallen TreesBy Preventable Events
* The damage covered may vary based on the location and risk area. If the area is at high risk for a particular natural disaster, common hazard insurance may not cover the high-risk event.

The damage covered by hazard insurance usually applies to home structures, which may include the main house, garage, sheds, fences, or additional housing units. On the other hand, it does not cover any personal property such as a car, appliances, clothes, and other property not related to the structural integrity of the building. It also does not cover the events that may be caused by the negligence including pest infestation and mold. It is important to note that insurance against earthquakes and floods is often not included in common hazard insurance coverage, but it may be purchased separately.

Cost of Hazard Insurance

The premium paid on hazard insurance depends on many different factors. Some of the most important factors that affect the cost of hazard insurance include the natural disaster risk profile of the property and the price of the property. It is difficult to estimate the cost of hazard insurance alone because it comes together with homeowners insurance that includes many other insured events. For reference, an average homeowners insurance costs around $1250, but it may vary depending on many different factors. Common factors that affect hazard insurance are listed in the following table.

Common Factors That Affect Hazard Insurance Cost
Location BasedProperty BasedHomeowner BasedInsurance Based
Risk AreaHome PriceCredit ScoreDeductible Amount
Natural DisastersTypes of StructureInsurance HistoryCoverage Limit

The factors that affect the price of hazard insurance can be split into four distinct types. The following list provides an overview of each type that affects the price of hazard insurance.

  • Location-Based Factors
  • The price of hazard insurance greatly depends on the location of the property. If the property is located in an area that is considered a high risk for natural disasters, it is likely that the hazard insurance will be expensive. The price of hazard insurance largely depends on the probability of the insured event, so the higher the probability that the insurance will have to be paid out, the higher the price for the insurance will be.
  • Property-Based Factors
  • The condition and the price of the insured property is also an important factor in the premium charged for the insurance. If the house is built with expensive materials that may be expensive to replace, then the insurance may be quite expensive. In addition to that, if the materials can be damaged easily, then the price may also increase because there would be a higher likelihood of damage.
  • Homeowner-Based Factors
  • Some insurance providers may also look at the homeowner including their credit score and insurance claims history. If the homeowner has made claims for the insurance, they may increase the premium. Similarly, if the homeowner has a low credit score, it may also raise concerns for the insurance provider.
  • Insurance-Based Factors
  • Lastly, the terms and conditions of the insurance affect its final price. The two main factors that affect the premium are the deductible amount and the insured limit. The larger the deductible amount, the lower the price. On the other hand, the larger the insured limit, the higher the price of the insurance.

How Much Hazard Insurance to Buy?

The amount of hazard insurance needed greatly depends on the homeowner and their tolerance to the risk. If the homeowner is not willing to take chances on rebuilding the property if it is destroyed, they may want to cover the house in full. On the other hand, if a homeowner does not worry about natural disasters affecting their house, they can opt-out of it fully as long as they are not required to have it. If the homeowner has debt, and their lender requires them to have hazard insurance, then the homeowner may need to pay for the coverage as long as the lender’s requirement is valid.

It is important to note that the insured amount is based on the cost of the materials and labor to rebuild the property and not on the price of the house. If a damaged property requires a larger amount to be rebuilt than the insurance limit, the homeowner may have to pay out of pocket. There are a couple of options available to the homeowner that could help them cover the cost of property damage even if it is over the hazard insurance limit:

  • Extended Replacement Cost Coverage
  • When a natural disaster hits a certain area, usually multiple houses are damaged by it, which drives demand for the supplies and leads to an increase in prices of the supplies. The homeowner may end up not having enough insurance coverage to pay for the costs of the damage if the prices increase. Extended Replacement Cost Coverage protects the homeowner against the case where Hazard Insurance cannot fully cover the cost of the damages of a natural disaster.
  • Guaranteed Replacement Cost Coverage
  • If a homeowner wants complete peace of mind, they can get this type of coverage that guarantees to cover the full cost of damage regardless of the amount. This coverage virtually eliminates the limit set by Hazard Insurance.

Is Hazard Insurance the Same as Homeowners Insurance?

Hazard insurance is a subsection of homeowners insurance. Hazard insurance is an optional part of homeowners insurance that is usually overlooked by many people in areas that are not prone to natural disasters. On the other hand, most homeowners may request hazard insurance when they are getting their homeowners insurance.

Hazard insurance is not different from homeowners insurance, but it is also not the same because homeowners insurance encompasses a larger scope of insured events. Even though hazard insurance is a part of homeowners insurance, lenders often make a distinction between the two because some areas are more prone to natural disasters. In the areas where natural disasters are expected, the lenders want to make sure that the borrower has homeowners insurance with the hazard insurance policy included. If the hazard policy is not included in these areas, the lender and the borrower have a large exposure to risks related to natural disasters.

Any calculators or content on this page is provided for general information purposes only. Casaplorer does not guarantee the accuracy of information shown and is not responsible for any consequences of its use.