What is hazard insurance on a mortgage?

Hazard insurance is included in your homeowner’ insurance policy and covers any physical damage to your home. If your house is damaged or destroyed due to a fire, storm, or any other disaster, this helps pay for the repairs. You can’t buy hazard insurance separately. Lenders require you to have a certain amount of hazard insurance to protect their investment before approving the mortgage. 

Damages covered under hazard insurance include those caused due to a fire, heavy snow, or burst pipes. Most policies cover your home structure on an “all risks” basis which means every cause of damage that is not specifically excluded. Some causes of damage that are excluded are:

• Flooding from external sources
• Earthquakes
• Regular wear and tear
• Sewer blockage
• War
• Intentional damage by the owner

You can buy additional insurance to cover some of these causes like flooding or sewer blockage depending on where you live, as your lender might need it.

How to file a hazard insurance claim: 

If you think any damage to your home should be covered under your policy, file a claim with your insurance company either by phone or online, including images or video footage of the damage. You’ll need to provide as much detail as possible about the damage caused. The insurer will then inspect and approve your claim. 

The amount of funds approved depends on the cost of repair, your coverage limit, and your deductible amount (how much you are required to pay apart from the insurance coverage). For example, if your deductible is $2,000, in case of fire damage, and the total cost is $6,000, the insurance company will pay $4,000 and you will pay the rest of the $2,000. There may be multiple deductibles based on the cause of damage or certain named perils like a windstorm or hurricane.  

Hazard insurance limits:

There is a limit to how much hazard insurance can cover. If you want a higher coverage, you pay a higher premium. If you want to cover the cost of rebuilding your home in case of destruction, you’ll need a higher limit. This cost — known as the replacement cost — includes the total labor and material cost to bring your house back to its original state before the disaster. This is not the same as the home value (the cost at which you purchased the home). 

There are two types of replacement coverage: extended replacement cost and guaranteed replacement cost. 

The extended replacement cost coverage protects you against an increase in local construction costs due to high demand after a hurricane or wildfire. You can choose an extended coverage ranging from 10% to 50% over the coverage limit. 

The guaranteed replacement cost pays as much as is needed to cover the costs of rebuilding your home.