Banks often request hazard insurance for property their customers’ use as collateral. For those who’ve never taken out a loan before, this term may seem confusing. What is hazard insurance? Where do you get it? How is it different from regular insurance?
Hazard Insurance Explained
Hazard insurance is the term lenders use for physical property damage for objects used as loan collateral. In other words, they want insurance in case something happens to the thing the loan is paying for. This includes buildings, building contents, specific equipment, or anything one can use a loan to purchase.
Generally, these hazard insurance requests don’t specify the causes of loss they want covered. “Causes of loss” refers to the kinds of damage the policy will cover. Lightning strikes, fire damage, and vandalism are some examples. HO3 insurance—the broadest form of homeowner’s insurance—covers almost all these causes of loss for a home, while commercial properties usually get a form of special coverage.
It’s important to note that flood insurance is usually a special case. Most insurance policies won’t cover flood insurance as part of general insurance, so banks will specify if they want an additional flood insurance policy.
How to Get a Quote for Hazard Insurance
In order to obtain a quote for hazard insurance, one must first figure out the property’s value. being insured. With buildings, this is the total cost to rebuild the building should it get completely destroyed. For the contents, this is the total cost to replace every item on the property.
It’s important to note that the value of the loan does not affect the value of the property. The owner only needs to take out coverage equal to the property’s value, even if the bank wants you to cover the full amount of the loan.
Additionally, the building’s age, the materials it’s made of, and the date of the most recent renovations all have an impact on the property’s value. Even if you’re insuring contents and not the building, this information comes into play.
Many insurance providers also won’t protect against theft unless there’s an active central-station alarm.
Remember: not all policies are created equal, banks have different requirements. If all this seems confusing, then talk to a trusted insurance provider. If you don’t have a trusted insurance provider or would like a second opinion, feel free to reach out to D&A insurance.