Hazard Insurance: Is Your Home Protected?
Hazard insurance offers basic coverage for your home. It may satisfy your mortgage lender's insurance requirements, but it doesn't offer the same coverage as a comprehensive policy.
So, you’ve picked out your dream house, you were approved for your mortgage, and finally, you’ve made it to the last steps of buying a home. You’re so close to getting your hands on the keys to your new place!
Then, your mortgage broker says, “I just need you to show proof of basic hazard insurance for the house, and it’s yours.”
You’ve probably heard of home insurance, but what is hazard insurance? And why do you need it?
What is Hazard Insurance?
Hazard Insurance is coverage for the structure of the house itself. Hazard Insurance only covers the specified hazard listed in the policy agreement. It may also be called “Basic,” “Fire,” or “Catastrophe” insurance.
Read: 5 Important Measures to Minimize the Effects of House Fires
Mortgage lenders will often require you to purchase basic or hazard home insurance at a minimum to satisfy your mortgage contract. This coverage will put the mortgage broker at ease, knowing that if something catastrophic happened to the house itself, your mortgage will get paid off by the insurance company and the bank won’t take a financial loss.
What does Hazard Insurance Cover?
The most important thing to remember with hazard insurance policies is that they only cover events that are specifically listed on policies. or "named perils." These coverages are for catastrophic events only—some companies may call it catastrophe insurance.
Hazard Insurance will not cover common damages that are more likely to occur, but could still cause major financial loss such as flood damage (overland water or sewer backup). This coverage is usually added on as an endorsement to your policy and will cost you extra.
Commonly listed events on hazard policies include:
Vehicles that run into your home.
What it does not cover:
Overland water (flood).
Free-standing structures such as garages, sheds, gazebos.
Your contents (everything you move into the house).
Home Insurance Or Hazard Insurance?
Hazard Insurance is the minimum coverage you need to protect the primary structure of your house against catastrophe. However, most home insurance providers will encourage you to purchase an all-risk policy that covers many common events (with some exclusions).
In fact, many home insurance providers will not even offer basic Hazard Insurance if it is your primary dwelling because it doesn’t offer enough protection to prevent you from financial loss.Read: How Much Home Insurance Do I Need?
Home Insurance policies include coverage for more than catastrophic events and they cover more than just the primary dwelling structure. A comprehensive home insurance policy is broken down into the following sections, each with their own specified coverage limits:
Coverage A – Dwelling Building.
Coverage B – Detached Private Structures.
Coverage C – Personal Property.
Coverage D – Additional Living Expenses.
Coverage E – Personal Liability.
A hazard insurance policy would only cover the section “Coverage A” and only for the catastrophic events specified in the policy declaration pages.
Benefits of Having Hazard Insurance
While hazard insurance isn’t a comprehensive policy, it will provide you with the necessary coverage to satisfy the mortgage. Because it covers less than a comprehensive policy, the cost may be cheaper. However, the price of your home insurance depends on many factors.
Read: How Insurance Companies Value Your Home for Your Home Insurance
In many cases, insurance companies will only sell hazard or basic insurance for dwellings that are high risk, such as vacation dwellings far away from fire halls, secondary homes that are out of your home state or province, or homes that have not been updated (plumbing, electrical, roof). Although the base cost of a Hazard Insurance policy may be cheaper, the insurance company may add on surcharges for higher-risk properties, ultimately making the hazard insurance policy more expensive than an all-risk policy.
For example, a company may provide hazard insurance for a home on a coastline that includes fire, theft, explosion, earthquake, or lighting. However, they may add a surcharge for earthquake coverage because they are common in that area. As a result, the total cost of the policy with the surcharge may be higher than an all-risk, more comprehensive policy, but for far less coverage. Not to mention it wouldn’t include flood coverage, which would be an event worth looking to cover in a coastal area.
Do You Need Hazard Insurance?
The short answer: Yes.
You will need it to satisfy the mortgage for any property, but remember, it's not designed to protect you fully. If you are in the financial position to replace or repair your belongings, property not attached to the primary dwelling, or can afford any legal liability suits against yourself, then you may consider purchasing hazard insurance only.
However, the best way to protect yourself, your property, and your financial future is to purchase a home insurance policy that will cover more. We will always recommend you better protect your assets by buying a policy that is more all-encompassing. Think about all the things you’ll be moving into your home in that moving truck—you would be devastated if after suffering a major loss like a fire, you would also have to pay to replace all your belongings.
You’ve worked hard to purchase this home, not to mention all your other property. The best way to make sure you’re fully protected is to speak to your broker or agent—they’ll set you up with a policy that’s right for you!
Written by Kaitlyn Kokoska
Kaitlyn Kokoska is a content writer and ex-Personal Insurance Broker from Edmonton, AB. After dipping her toes in the insurance industry, she realized that client education is the key to financial empowerment. She’s now on a mission to make insurance a more accessible topic. You can find more information about Kaitlyn on her website.