Homeowners Insurance Basics

What Is Hazard Insurance?

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Hazard insurance is the part of your homeowners insurance policy that covers the structure of your home from common perils, such as fire, vandalism and theft. If one of these perils causes damage to your house, you'll be covered, up to certain limits, for repairs to your home. However, not all policies are equal. Several types of homeowners insurance policies are available to protect your home, each covering a different range of hazards.

Hazard Insurance vs Homeowners Insurance

People often confuse hazard insurance with homeowners insurance. In fact, your hazard coverage is only one subsection of your homeowners policy. There are also other subsections, covering a range of perils that may befall you, your home or others who are in the building. Further, as we cover in the next section, various types of policies combine hazard coverage and the other policy components in different ways, depending on your needs.

Is Hazard Insurance the Same as Homeowners Insurance?

Also known as dwelling coverage, hazard insurance guards you against loss if your house is damaged or destroyed by a covered peril. Where homeowners insurance as a whole insures multiple risks, hazard insurance specifically covers the structure of your home, such as its walls, flooring and roof. It also covers the home's built-in appliances, such as its plumbing and water heater. Finally, it covers additional structures that are considered a part of the home, such as a garage.

To put this component of insurance into a broader context, typical homeowners insurance policies include the following areas of coverage:

  • Hazard insurance: to insure the structure of your home against covered perils
  • Personal property insurance: to insure your personal belongings, such as clothing and TVs, against covered perils
  • Liability insurance: to insure you against lawsuits that may be filed against you if someone is injured on your property
  • Additional living expenses (ALE) coverage: to reimburse you for the costs of temporary rehousing if a covered peril damages your home

However, the categories of insurance you have—and the perils covered within them—depend on the type of policy you carry.

Despite only being one part of most home insurance policies, hazard coverage is the most important component, and most home insurance claims fall under the hazard section of the policy. Because of this, your home insurance premiums and limits will be driven largely by the amount of hazard coverage your home requires. Your hazard insurance policy will be subject to one of three limits, which provide a varying amount of coverage if your home is damaged by a covered peril.

  • Actual Cash Value (ACV):The ACV of your home is the market value of your house, minus any depreciation. For example, if you spent $8,000 to install new flooring in your home 10 years ago, those floors are probably no longer worth that amount. Rather, they have depreciated in value due to enduring 10 years of wear and tear, and that reduced amount is the maximum amount that ACV coverage would provide. Because of that, if you filed a claim under your hazard insurance after your flooring is destroyed by a covered peril, the ACV likely wouldn't cover the entire cost of replacing the floor with new materials. Instead, you'd be responsible for the cost difference. If your entire home is destroyed, that sum could be considerable. The ACV is the lowest limit you can carry on your hazard insurance policy, and the one with the smallest premiums.
  • Replacement Cost Value (RCV):The RCV is the amount it will cost to rebuild your house at the current prices for labor and materials, which are almost invariably higher than when the home was built. A hazard insurance policy that covers your home's RCV will have higher premiums than one that covers only the ACV, but RCV coverage could provide a substantial amount of additional reimbursement if you need to replace all or part of your home. Because of this, we recommend opting for RCV coverage, if you can afford the additional expense.
  • Guaranteed Replacement Cost/Extended Replacement Cost (GRC/ERC): The GRC/ERC also covers your home's replacement cost, but with a guarantee that the insurance company will, when needed, pay a certain percentage beyond your hazard policy's limits to rebuild your home. This additional coverage is especially relevant when conditions have caused a spike in the demand and cost of repairs where you live, as when a regional disaster temporarily drives up the cost of labor and building materials. This coverage is the most inclusive, and expensive, option and is best considered only by those who live in an area where such disasters are more common.

How Much Does Hazard Insurance Cost?

You won't pay for your hazard insurance as a separate policy. Instead, it will be incorporated into the premium for your broader homeowners insurance policy. How much the hazard coverage increases the premiums for that policy will vary based on a number of factors, including:

  • The age and value of your home
  • The materials your home is made of
  • The type of policy limit you choose
  • The policy deductibles you choose
  • Whether your home has certain security features

Our research found that the average cost of homeowners insurance policies was $1,083. However, your area and home will determine your costs. For example, owners of older homes are likely to pay higher rates, in part because they may be more heavily damaged by many hazards, and so cost more to repair. However, a house made of brick or stone may receive an insurance discount compared to one built out of wood, especially if the wooden house is located in a dry area that’s prone to wildfires. Also, you may receive a discount on your premium by installing certain security features, such as an alarm system.

Types of Homeowners Insurance

There are eight types of homeowners insurance policies, each offering an varying range of coverage. All the policy types include hazard insurance in their base coverage. Which type you should carry will depend on the type of home you own, the types of hazards associated with your area, and the type of coverage your mortgage lender requires.

PolicyWho It's Meant ForSub-PoliciesWhat's Covered?
HO-1—Basic formHomeownersHazardDamage to the structure of your home caused by 10 named perils
HO-2—Broad formHomeownersHazard + Personal PropertyDamage to the structure of your home and personal property caused by 16 named perils
HO-3—Special formHomeownersHazard + Personal Property + Liability + ALEDamage to the structure of your home and personal property caused by open perils, lawsuits filed against you, and the costs of temporary relocation
HO-4—Tenant's formRentersPersonal Property + Liability + ALEDamage to your personal belongings caused by 16 named perils, protection against liability lawsuits, and the costs of temporary relocation
HO-5—Comprehensive formHomeownersHazard + Personal Property + Liability + ALEDamage to the structure of your home and personal property caused by open perils, protection against liability lawsuits, and the costs of of temporary relocation
HO-6—Condo formCondo/Co-Op ownersHazard + Personal Property + Liability + ALEDamage to certain parts of your of your home and personal property caused by 16 named perils, lawsuits filed against you, and the costs of temporary relocation
HO-7—Mobile home formMobile home ownersHazard + Personal Property + Liability + ALEDamage to the structure of your mobile home and personal property caused by 16 named perils, lawsuits filed against you, and the costs of temporary relocation
HO-8—Older home formOwners of old or historic/landmark homesHazard + Personal Property + Liability + ALEDamage to the structure of your home and personal property caused by 16 named perils, lawsuits filed against you, and the costs of temporary relocation

Which Home Insurance Policy Is Right for Me?

While hazard insurance is arguably the most important type of coverage within your homeowners insurance policy, other forms of coverage, such as liability insurance, are also important. Because of this, HO-1 policies, the most basic type, are no longer offered in a number of states. They don't provide any coverage apart from hazard insurance, and even then the perils they cover are limited. Some HO-2 policies offer liability protection, but not all. Because of this, HO-2 policies are far less common than HO-3s. HO-3s are by far the most common form of homeowners insurance. Unless you are a renter or an owner of a condo, mobile home, or significantly older house, an HO-3 is probably the policy you should purchase.

When shopping for homeowners insurance, you may or may not have a choice of which type of policy to choose. For example, if you're borrowing money from a mortgage lender, they may dictate the type of policy you must purchase—usually an HO-3 policy. In these situations, the policy your lender requires is likely the fairly comprehensive in terms of hazard coverage.

What Hazards are Covered by My Homeowners Insurance?

Home insurance policies cover a broad range of perils common to homeowners. Most insurance companies exclude damage that results from your own lack of maintenance, or from normal wear and tear. However, sudden and unexpected damage is usually covered, unless it's a specifically excluded hazard, such as earthquakes. To obtain coverage for these excluded perils, you'll need to add an optional endorsement to your homeowners insurance policy.

Which policies are covered by your specific policy will depend on which type of policy you have. Some policies, such as an HO-2, only cover "named perils"—those that are specifically stated in the policy. Other policy types, such as an HO-3, cover "open perils." This means that the policy provides coverage for all perils except for those that are specifically excluded on the declaration page.

Named Perils vs Open Perils

Named perils are the specific hazards listed on the declaration page of your homeowners insurance policy. If your policy only covers named perils, you won't receive any reimbursement for damage due to any hazard that isn’t named in your policy. Here are the named perils included by an HO-1 policy:

  • Fire and smoke (including wildfires)
  • Explosions
  • Lightning
  • Hail and windstorms
  • Vandalism
  • Theft
  • Damage from vehicles
  • Damage from aircraft
  • Damage from riots
  • Volcanic eruption

In addition to these 10 perils, HO-2 policies cover the following six perils:

  • Falling objects
  • Excess weight due to snow, ice or sleet
  • Freezing of household amenities, such as the AC or heating system
  • Sudden and accidental breaking, cracking or bursting of pipes and other household systems
  • Damage due to the sudden and accidental discharge of water or steam
  • Sudden and accidental damage due to an electrical surge

Open perils include any hazard not specifically excluded on your policy. Both HO-3 and HO-5 policies cover open perils. However, HO-5s tend to offer broader coverage, for an additional cost. The hazards excluded from your policy will vary based on the risks of your region. It's important to note that while some broad and common categories of damage, such as water damage, are excluded from your policy, you might still be covered if the damage was sudden and accidental. Exclusions such as this are meant to protect insurance companies from damage that results from a lack of maintenance on the part of the homeowner. If you've suffered damage due to an excluded hazard, you should still contact your insurance agent to see if you're covered. Here are some common perils that policies exclude:

  • Earthquakes, landslides and mudslides
  • Floods
  • Water damage
  • Mold and fungus
  • Damage due to an infestation of animals or insects
  • Negligence and general wear and tear
  • Settling, cracking, or warping of your house's foundation
  • Damage caused by your pets
  • War or government action
  • Smog and corrosion

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