The difference between homeowners insurance and hazard insurance
Most homeowners only think about their homeowners insurance at the time of purchasing the home or right after experiencing a damaging loss. This is not always ideal because it can be difficult to understand your policy even under optimal conditions, let alone when you are stressed or under pressure. It is usually during the latter scenario — a damaging loss — that a common question arises: is hazard insurance the same as homeowners insurance? If this question has ever been on your mind, the good news is that the distinction is fairly simple.
Is homeowners insurance the same as hazard insurance?
Yes and no; your ‘hazard insurance’ is actually a part of your homeowners insurance policy. Because it represents one aspect of your policy, the two terms cannot be used interchangeably. For this reason, it is also not a separate policy you have to purchase.
If you have homeowners insurance, you already have hazard insurance. The short-story reason it became common for people to speak of homeowners insurance and hazard insurance as the same thing is largely due to how lenders communicate during the homebuying process.
The purpose of homeowners insurance is to help you repair or replace your home if it is damaged by a covered peril. “Hazard insurance,” as it is commonly referred to, is the list of perils your homeowners insurance policy protects against. These typically include:
- Fallen trees
- Fire damage
If your home is affected by something listed in your policy, you may choose based on the extent of loss to file a claim and work with your insurance provider to either repair or replace whatever item was damaged, up to policy limits.
Should you choose to file a claim, the type of policy you have will determine how much money you receive in a payout, among other factors. You have two options at the outset of your policy that will contribute to payout outcomes: replacement cash value and actual cash value.
An actual cash value policy (or ACV policy) is when your insurance provider takes into account an item’s depreciation when calculating a payout. For example, if your roof is damaged in a windstorm, the roof’s age and remaining life will be used in combination with replacement costs to determine how much money you will receive. Because depreciation is taken into account, this type of policy is less expensive than a replacement cash value policy. To file a claim with an ACV policy, the item will need to be damaged by a peril covered in your policy. If the peril is listed, you will be expected to pay the difference between what your provider gives you and what it costs to repair or replace the item.
A replacement cash value policy (or RCV policy) is when the actual cost to replace an item is calculated to determine a payout. An RCV policy is more expensive than an ACV because it does not account for depreciation. For RCV policies, the replacement cost minus your deductible will determine the amount you receive for a claim, provided the cause of loss was a peril listed in your hazard insurance (or not explicitly excluded, in the case of an open peril policy).
Common coverages that are included in standard homeowners insurance policies are:
- Dwelling coverage: Dwelling coverage protects your actual home— meaning its foundation, roof, walls, windows — effectively, whatever does not fall out if your house was turned upside down.
- Loss of use coverage: If you are forced to live somewhere else after a covered peril, loss of use coverage will cover your additional living expenses up to a certain limit.
- Other structures coverage: Have detached structures on your property? The other structures portion of your policy protects unattached things like a shed, greenhouse or fence.
- Medical payments coverage: If a guest is injured at your home, this coverage will pay their medical expenses, up to predetermined limits.
- Personal liability coverage: If you are sued because someone is injured at your home, personal liability coverage covers your court expenses, up to limits.
- Personal property coverage: Covers lost, damaged, or stolen personal property you have in your home if the cause of loss is a covered peril.
Hazard insurance is not a separate policy from your homeowners insurance. It is simply the perils your homeowners insurance protects against. When it comes to this aspect of your policy, there are two types you have to choose from: named perils and open perils.
A named perils policy protects your home against 16 specific perils. Those perils are:
- Electrical current
- Falling aircraft/objects
- Freezing of A/C or heating systems
- Overflow of water or steam
- Volcano eruptions
- Weight of ice or snow
Any peril not listed above is not covered in a standard named peril policy. However, this is a pretty extensive list and works for many homeowners.
An open peril policy protects against every peril you can think of, except for these common exclusions:
- Collapse of internal structures
- Discharge of pollutants
- Earth movement
- Government intervention/ action
- Intentional damage by owner or inhabitants
- Mechanical breakdown
- Mold, wet rot, or fungus
- Normal wear and tear
- Nuclear fallout
- Ordinance of law
- Power failure
- Some types of water damage
- Smog, corrosion, or rust
- Smoke from nearby industries
- Theft during construction
- Vandalism while vacant
- Wildlife/ vermin
Though it may seem like an open perils policy has more exclusions than inclusions, it actually protects against far more items than a named policy. It is for this reason that an open perils policy typically costs more.
There are eight categories of homeowners insurance policies offered by most providers to choose from, and each either has a named perils approach or an open perils approach.
HO-1 (though it only protects against 10 named perils), HO-2, HO-4, HO-6, HO-7, and HO-8 all adopt the named perils approach to hazard insurance, while HO-3 and HO-5 are the only ones that use open perils.
The most common type of homeowners insurance sold in the United States is an HO-3 policy. It covers your home, medical payments, personal property, liability, as well as additional living expenses.
Difference between hazard insurance and homeowners insurance
- Hazard insurance is not a separate policy from homeowners insurance
- Homeowners insurance protects against common perils (aka hazards)
- Your policy is either an open perils policy or a named perils policy
- Your policy is either an RCV policy (replacement cash value) or an ACV policy (actual cash value)
- Most homeowners have an HO-3 policy, which is an open perils policy