If you’ve been through the Central New York homebuying market, you’ve probably heard the term “hazard insurance” used to describe a necessary policy component. Some mistake hazard insurance as a separate and distinct policy from homeowners insurance, but it’s not.
The Horan agency has worked with many homebuyers who had this coverage portion built into their homeowners policy. In this article, we’ll clear up the confusion and leave you with a better understanding of what hazard insurance is and why lenders require borrowers to purchase it.
The Mortgage Loan Hazard Insurance Requirement
If you walk into a bank and attempt to secure a mortgage loan for a house, the loan officer—per established banking rules—will require you to purchase homeowners insurance. They’ll sometimes specify by calling it “hazard insurance,” which refers to protecting the structure of a home from certain hazards or (more commonly) perils.
You’ll see hazard insurance listed on your policy as dwelling coverage, and lenders require it because it protects their investment against the perils covered by your homeowners policy.
Much like renters insurance, hazard insurance usually covers perils such as:
- Lightning strikes
Beware that some of the covered perils are less cut and dry than they seem. Hazard insurance won’t protect from all explosions, just those specified by the policy, such as a propane tank erupting. And not all insurers cover damage to your home caused by windstorms.
Before purchasing any policy, review the specifically covered perils listed and verify with your agent what those perils are to eliminate any guesswork or misconception. We go into greater detail in our overview of homeowners insurance, so don’t neglect to read that.
While the hazard insurance portion of a homeowners policy is only concerned with the main dwelling structure, other portions of your policy extend protection to other possessions, such as personal property and other structures coverage. But the bank’s concern is the house, from the roof cap to the basement subfloor.
The bank needs you to have hazard insurance in place so you can rebuild the home or repair any damages after one of the destructive covered perils. What amount of hazard insurance they’ll require you to purchase will depend on home replacement costs should you suffer a total loss.
There may be a stark difference between the figure they arrive at and the actual market value of your home.
Should I Keep Hazard Insurance After It’s No Longer Required?
After the lending period, full home ownership places you in a unique position: homeowners insurance becomes optional. Some might celebrate that reality and look forward to dropping their homeowners policy to save money annually. We at the Horan agency strongly advise against that decision.
After paying a vast sum of money annually to obtain an asset, the last thing you want is to see that investment destroyed by a severe weather event. The out-of-pocket costs to rebuild or repair your home is astronomical compared to adequate coverage that comes with affordable annual premiums.
And know that obtaining hazard insurance to satisfy the lender requirement is as simple as purchasing a standard New York homeowners policy since the hazard coverage portion is already built in.
Now that you know more about hazard insurance, learn what’s not covered by hazard insurance or your overall homeowners policy. Also, see what purchasing homeowners insurance is like for first-time homeowners.
If you’re trying to acquire a homeowners policy and need guidance, we’re happy to help. One of our insurance specialists can advise you. Call (315) 635-2095 or contact us using our handy form.