What Is Hazard Insurance When Buying a Home?

Hazard insurance is a fundamental type of property coverage that protects the physical structure of a home from damage caused by specific events. It safeguards a significant financial asset, ensuring the dwelling can be repaired or rebuilt after an unexpected incident. This coverage focuses on the structural integrity of the house.

Understanding Core Coverages

Hazard insurance covers common perils that damage a home’s physical structure. Covered events include fire and smoke. Lightning strikes, whether directly hitting the home or causing related damage like a fire, are also included.

Coverage extends to windstorms and hail, which impact roofs, siding, and windows. Explosions, vandalism, and theft are standard perils, addressing both accidental and intentional damage. Falling objects, such as trees, and the weight of snow, sleet, or ice are included. While hazard insurance addresses many risks to the physical structure, it does not cover floods or earthquakes, which require separate policies.

Hazard Insurance Versus Homeowners Insurance

While “hazard insurance” is often used, especially by mortgage lenders, it refers to the dwelling coverage component of a homeowners insurance policy. This part of the policy, often called Coverage A, protects the physical structure of the home. Hazard insurance is not a standalone policy but rather an integral section within a broader insurance package.

A standard homeowners insurance policy provides more extensive protection than just dwelling coverage. In addition to the home’s structure, it covers personal property, protecting belongings from specified perils. Homeowners policies also offer liability protection, covering legal expenses and medical payments if someone is injured on the property and the homeowner is responsible. These policies include coverage for additional living expenses, such as temporary housing and meals, if the home becomes uninhabitable due to a covered loss.

Lender Requirements During Home Purchase

When securing a mortgage, lenders require borrowers to have hazard insurance. This requirement stems from the lender’s need to protect their financial investment in the property, which serves as collateral for the loan. Without this coverage, the lender faces significant risk if the home is damaged or destroyed before the loan is fully repaid.

Proof of adequate hazard coverage, as part of a homeowners insurance policy, is a prerequisite for mortgage approval and must be confirmed before closing. Lenders require coverage limits sufficient to cover the replacement cost of the home. To facilitate payment, premiums for hazard insurance are collected by the lender and held in an escrow account. This means a portion of the monthly mortgage payment is allocated to the escrow account, from which the lender pays the insurance premiums when they are due.