Homeowners (Hazard)

Hazard (Homeowners) Insurance Requirements for Homebuyers

 

Hazard insurance, more commonly known as homeowners insurance coverage, is actually a package that normally provides protections against both property damage and liability claims.

Home purchasers and homeowners are required to provide proof of insurance, usually pre-paid for one full year, before they can close on the mortgage loan.

Liability Coverage

Insurance liability coverage protects the property owner against claims from other parties for injuries or damages caused by the owner’s property or the owner’s negligence.  For example, if a homeowner’s large tree is toppled during a storm and wrecks a neighbor’s garage or injures the neighbor, that homeowner would be subject to liability claims.

Mortgage lenders typically set a minimum liability coverage amount required of homeowners and homebuyers… usually at $100,000. Depending on the value of your home and personal assets, you may want to increase this coverage.

Property Coverage

For most property owners, the most important element of a hazard insurance policy is its property damage protection.  The two most common types of property coverage are the following:

  • Standard Settlement (also called Actual Cash Value). The most affordable type of coverage assures the property owner only the actual cash value, or depreciated value of the property.  This approach begins with the original cost but then subtracts depreciation, so the property owner often may not receive enough settlement funds to rebuild or replace the lost or damaged property.
  • Full Replacement Coverage. This more expensive option guarantees that the insurance company will pay all expenses to replace the damaged property, with no depreciation adjustments.  [Note that a common feature in most insurance policies today is the co-insurance clause—which can force the property owner to absorb some of the  damage costs, even with full replacement coverage.  Make sure you discuss this with your insurance agent so that you know what to expect.]

All lenders require that the property have sufficient insurance to at least cover the cost to rebuild the home if ever destroyed.  However, some lenders set their minimum coverage requirement at the loan amount.

Hazard insurance coverage is very important for the mortgage lender, as it protects the lender’s security, or mortgaged property.  For example, if a lender provides a $95,000 loan on a $100,000 property, it knows that there is relatively sufficient security for their loan.  However, if that same property burns down with no hazard insurance coverage, the property securing the loan is only worth the approximately $20,000 lot on which the rubble remains.

Once the loan is approved, the lender will instruct you to obtain hazard insurance coverage.  This is a simple task unless the property needs major improvements.  With deteriorating or damaged properties, finding homeowner’s insurance coverage will be difficult and expensive.

The following are recommendations and instructions to remember when shopping for insurance:

  • Full year’s payment. You must purchase a full year’s insurance coverage when purchasing a home.  At the closing, you must bring a valid receipt and original insurance policy cover page to show that you have adequate coverage.
  • Mortgagee clause. Your selected insurance agent will ask for a “mortgagee clause” for the insurance policy.  The mortgagee clause is the lender’s servicing name and address.  This is required because hazard insurance indicates your mortgage lenders as co-beneficiaries.  If your home is ever destroyed, the disbursement check is usually made out to both the lender and the homeowner.  The funds often will first pay off your mortgage liens before giving you any cash back.
  • Lower premiums. The quickest way to obtain the lowest premiums is to increase your deductible.  A higher deductible will mean that you will have to pay more in each case of hazard damage but pay less premium each month.
  • Combination discount. Check with your automobile insurance agent about a combination policy.  You may find that your auto insurance agent will offer you a discount for covering both your home and auto.

As if the preceding information wasn’t enough, the following list from an insurance industry group called the Insurance Services Office describes the most common types of hazard insurance policies:

  • HO-1. This provides the most basic protection, covering 11 perils or risks.
  • HO-2. A broad coverage, protecting against 18 perils.
  • HO-3. A special broad coverage that combines HO-5 protection for the dwelling, but HO-2 coverage for personal properties.
  • HO-4. Similar to the covered perils of HO-2, the HO-4 policy is designed for renters and apartment dwellers to cover their personal property in the premises.  The real estate property is covered by the landlord’s insurance.  However, this HO-4 policy may cover property the renter’s liability in case the renter’s actions or negligence causes damage to the property.
  • HO-5. Often called comprehensive or all-risks coverage, this policy covers all perils, except for those specifically excluded in the policy.
  • HO-6. This policy is primarily for condominium and cooperative owners and mimics much of the same coverage as the renter’s HO-4 policy.
  • HO-8. An actual cash value policy for older homes, since the cost of duplicating older homes normally exceeds the market value of those properties.

 

 

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