Hazard insurance refers to the portion of a home insurance policy that covers the structure of the home against designated perils. On some policies, hazard coverage is called dwelling coverage, and those two terms can be used interchangeably when comparing insurance quotes. 

Mortgage lenders will require proof of a certain amount of hazard insurance before issuing a loan. Though a complete homeowners insurance policy is important, the lender is really only concerned with hazard insurance—the portion of the policy that covers the home itself. 

Hazard insurance is included as only one part of a comprehensive homeowners policy. While hazard insurance covers the dwelling, additional line items should cover things like personal property, medical liability, and other structures, such as a detached garage. 

How does hazard insurance work?

Hazard insurance is a part of the overall homeowners insurance policy that allows the homeowner to receive funds in the case of a loss caused by certain disasters. Hazard insurance can function practically in a few different ways, depending upon the policy.

Homeowners should take care to understand the details in their individual policy prior to purchase.

Actual cash value

Actual cash value (ACV) is an as-is kind of payout policy. When a claim is filed, policies written with dwelling coverage based on ACV will allow the homeowner to be reimbursed based on the pre-damage value of the home (or portion of the home)—also known as the depreciated value. 

This type of coverage is usually cheaper in terms of premiums, but the payout settlements are much smaller because the insurance company will account for depreciation. For example, if a tree falls on a 10-year-old roof with ACV hazard insurance, the insurance company will not pay for a completely new roof; they will pay the value of a roof depreciated by ten years. Often insurance companies will offer only ACV policies for those looking to insure older homes.  

Replacement cost value

Replacement cost value (RCV) is an as-new kind of payout policy. When a claim is filed, policies written with RCV hazard coverage ensure that the homeowner will receive reimbursement based on what it will cost to rebuild or replace the damage and make it like new. RCV coverage is more expensive but also more comprehensive. To use the same example, if a tree falls on a roof with RCV hazard insurance, the homeowner can expect the insurance company to pay for a whole new roof.  

Extended replacement cost 

Extended replacement cost is a kind of booster package to hazard insurance. Usually an insurance company will offer extended replacement cost coverage between 125% and 150% of the replacement cash value limit. Extended replacement cost coverage is intended to account for surges in labor and supply costs after a widespread disaster. For instance, a house that can be rebuilt normally for $200,000 might cost $300,000 after a tornado due to high demand and low supply. Without extended replacement cost coverage, the homeowner would be on the hook for that additional $100,000, assuming their RCV coverage limit was $200,000. 

Extended replacement cost coverage is relatively inexpensive. Many homeowners can beef up their coverage for $25 or $50, though there may be an additional charge for those in areas prone to more natural disasters.    

What does hazard insurance cover?

Hazard insurance coverage differs by the policy, so it’s important for homeowners to look over the language carefully to make sure their property is well-insured. Policies are typically written in one of two ways—named perils or open perils—when referring to the hazards that are covered. 

Named perils

Named perils policies offer coverage only for a certain list of disasters, many of which are natural events, like severe storms. If your home experiences damage and it was caused by something on the list, you’re covered; if it’s not on the list, you’re not covered. Simple as that! 

Except, sometimes it’s not that simple. Disputes arise because named perils can sometimes be a bit vague. For example, if your home is destroyed by an asteroid, does that qualify as a “falling object” on the named perils list? Coverage disputes can be mitigated by an attorney who specializes in real estate insurance cases.  

Common named perils include:

  • Fire or smoke
  • Lightning strikes
  • Hail or wind
  • Theft
  • Vandalism
  • Falling objects
  • Damage from vehicles
  • Damage from aircraft
  • Explosions
  • Riots and civil disturbances
  • Volcanic eruption
  • Landslides or mudslides
  • Accidental water damage from plumbing, heating, or A/C
  • Freezing of household systems
  • Accidental damage from an electrical current
  • Weight of ice, snow, or sleet

Open perils

Open perils policies operate in the opposite way. The homeowner is covered for every type of hazard except for those listed. If your home experiences damage and you see it on the list, you’re not covered; if you don’t see it on the list, you are covered. Simple as that!

Except, once again, it’s not always so easily determined. For one thing, open perils lists can be quite extensive. Homeowners with open perils policies should take extra time to go over each non-covered hazard to assess their personal risk. Plus, some language can still be quite vague. Nonspecific statements in open perils policies are especially dangerous when it comes to claims, but an attorney can also help in this situation.

Some hazards that might be seen on an non-covered, open perils coverage list include:

  • Power failure
  • Mechanical breakdown
  • War or nuclear activity
  • Intentional loss or neglect
  • Wear and tear
  • Collapse of structures
  • Theft to your house if it's under construction
  • Vandalism if your house is vacant for an extended time
  • Mold, fungus, or wet rot
  • Some types of water damage
  • Earthquakes
  • Smog, rust, and corrosion
  • Pollutants
  • Bird, vermin, rodent, and insect damage
  • Damage from animals that you own  

Additional circumstances

There are obvious limits to both named peril and open peril policies, some of which can be remedied by purchasing additional hazard insurance. For example, floods may not be covered under your regular hazard insurance, but additional flood insurance can be purchased.

Sometimes, if a certain hazard presents a larger risk due to a local propensity for natural disasters, a separate deductible will apply. For instance, those in coastal areas may see a separate, higher deductible for damage directly caused by a hurricane, even though their hazard coverage regularly includes damage from wind from common storms.  

How much does hazard insurance cost? 

Overall, homeowners policies in the United States cost an average of around $1,600, but prices vary widely based on home value and location. Since hazard insurance is included in the overall homeowners insurance premiums, it’s usually not possible to determine an average cost for that single line item.

However, raising or lowering the limits of hazard insurance coverage can affect the bottom line cost of a homeowners insurance policy. Property owners who are looking to save money on their homeowners insurance should speak to their insurance agent about their coverage limits to make sure they’re not over-insured when it comes to dwelling coverage. At the same time, homeowners should check with their mortgage lenders regarding acceptable minimums for hazard insurance coverage, in order to ensure the requirements are met.

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