Hazard Insurance

Updated on January 5, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Hazard Insurance?

Hazard insurance is a kind of property insurance that gives protection to property owners from damage to property caused by natural calamities like fire, flood, cyclones, storms, and other natural events. According to this policy, the property owner will get compensation to cover the cost of damage due to natural calamities. The premium for this policy depends upon the cost of the property and the risk covered.

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One cannot take a hazard policy without home insurance. But in areas of certain risks such as floods or landslides, homeowners often opt to take out separate insurance to cover specific contingencies. Claim in case of hazard insurance will be settled if a natural calamity occurs and it damages the structure of the home, and the claim will be the amount of cost of damage.

Hazard Insurance Explained

Hazard Insurance

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Annual hazard insurance is the type of insurance that covers the protection of risk occurring to property due to natural calamities like floods, landslides, etc. It covers the structure of the home. Hazard policy generally is an extension of homeowners’ policy. In homeowners’ policy, internal risks and liabilities related to the home are covered. In hazard policy, external risk related to the property and its structure is covered. Sometimes, in the case of a mortgage, the lender will ask to get a hazard policy to cover the entire risk related to the property.

One should approach the insurance company to get best hazard insurance policy. The insurance company then comes and visits the property and gets the valuation of the property depending on the current market value. Then will decide the premium to be paid by the policyholder depending upon the property’s value, location, and the risk of a loss occurring to the property due to natural calamities.

Then, after deciding on a premium for annual hazard insurance, the policyholder pays and gets the risk coverage per the policy terms. This policy can only be for one year and can be renewed.

Now, suppose natural calamities occur and loss to property structure like the collapse of walls, etc. In that case, the property owner will approach the insurance company for the claim. Then the insurance company surveys the property and determines the value of loss and re-establishment. It then pays the cost to recover the damage as a policy claim.

Sometimes in the case of a property mortgage, the lender might also be required to get the property hazard insurance on home loan as the lender wants full insurance coverage and then the hazard policy to be taken by property owners.

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Types

Let us understand the different types of hazard insurance on home loan or for any other purpose that are available in the financial market.

Hazard insurance provides coverage for the structure of a home or property against certain risks as covered in the policy. The policy will also specify which calamity or risk excludes from the policy.

Usually, the followings include in the coverage of this policy: There are mainly two types of such insurance.

1 – Named Peril Insurance

There are some specific causes of damage provided in the insurance policy that will be covered under this section. Named peril policies cover the structure of the property and personal belongings. They are as given below:

  • Fire or smoke
  • Lightning
  • Explosion
  • Hail
  • Snowstorm, rainstorm, windstorm
  • Theft and vandalism
  • Falling objects
  • Damage due to car or aircraft
  • Volcanic eruption

2 – Open Peril Insurance

Open peril insurance, as the name suggests, will include all reasons for damage apart from the ones give in the Named Peril Insurance list.

Open peril policies cover every danger except those excluded by insurers. However, some exceptions will be as follows:

  • Neglect
  • Earthquake
  • Water Damage
  • Nuclear Event
  • Rodents and Insects
  • Vandalism on a home that is vacant for a long time.

The best hazard insurance covers property protection policies from natural calamities, i.e., an act of god. It is sometimes necessary as a standard home insurance policy does not cover every type of natural calamity and risk. The premiums for this insurance are costly compared to a standard home insurance policy as it covers more risk than the normal home insurance policy. Generally, it covers the structure of the home only and not the property inside it, i.e., if damage occurred due to the structure of the home or property, then the property owner gets the compensation according to hazard policy. Still, suppose damage occurs inside the property. In that case, the property owner won’t get compensation as per the hazard policy, but it can take coverage of damage to personal belongings due to natural calamities.

Example

The hazard insurance policy protects property owners against damage caused by natural calamities. It is an extension of homeowners’ policy. For example, suppose the property owner wants to cover the risk of damage to property structure caused by natural calamities, which include damage due to earthquakes, floods, landslides, storms, etc. In that case, a hazard insurance policy is taken to cover the risk. In addition, the policyholder can also get coverage of personal belongings through this policy.

Hazard Insurance Policy

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Who Should Take Out Hazard Insurance?

Sometimes in the case of the mortgage, the lender will ask to take the hazard insurance for mortgage as the lender wants to cover internal and external risks related to the property. Also, it is suitable for those who live in risky areas where the occurrence of natural calamities or risk of natural calamities is more. It is also useful for those who want full risk coverage, internal and external risk for them, as this assures owners that full risk related to property is covered.

How To Get?

When a property owner will decide to get such an insurance policy for their home, a representative who is an expert in this form of insurance will visit the property on behalf of the  insurance company and make valuation of the home. The current or the market value will be determined in this manner.

The market value is the basis on which the premium of the policy will be determined. Premium is the amount the policy holder will pay the issuer.

Hazard Insurance Vs Home Insurance

Both the above are two types of insurance policies that typically homeowners take to protect themselves against and risk. However, there are some points of differences between them as follows.

  • The hazard insurance policy covers the risk of damage to the property or home structure due to natural calamities. In contrast, the home insurance policy covers the risk of theft, legal liability, and medical bills if anyone gets injured due to home. In addition, it includes additional living expenses.
  • Home insurance covers the internal risk attached to the property or home. At the same time, hazard insurance only covers external risks like damage to the structure.
  • A hazard insurance premium will be on the value of the property or home and the area in which it is located. In contrast, the home insurance premium will be on the material used during the home’s construction. It focuses on quality.
  • Usually, the hazard insurance for mortgage is an important requirement for mortgage lenders because they need to be sure that an insurance policy protects the property against which they are extending a loan. But the latter is just for the safety of the homeowners.
  • For the former, the coverage limit depends on the replacement cost of the home structure, which can change depending on the type of policy or coverage options. But the latter provides a protection that is comprehensive in nature.

Thus, the above points identify the various differences between the two type of insurance policies.

Recommended Articles

This article has been a guide to what is Hazard Insurance. We explain its differences with home insurance, types, example, how to get & who should take it. You can learn more about it from the following articles: –

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