Hazard and Flood Insurance: What, Who and Why

Mortgage lenders require borrowers to buy hazard insurance to protect the residential property securing their mortgages. You need to cover the lesser of:

  • The insurable value of the improvements (not the land)
  • The mortgage balance plus a replacement endorsement to cover damage

Homeowners insurance is a form of hazard insurance that generally covers damage and losses caused by fires, plumbing failures, break-ins, and some natural disasters including wind and wildfire damage. Homeowners insurance may also cover life's smaller disasters. Whether your daughter smashes a home-run through a window or your better half sets the kitchen ablaze, your homeowners insurance would cover the damage subject to deductibles, any special conditions and policy exclusions.

Discuss your coverage needs with insurance professionals to determine the coverage you'll need. Compare quotes but keep in mind that cheapest isn't necessarily best. You'll want to know exactly what your hazard insurance covers and buy additional coverage for items including jewelry, antiques or other valuables not covered by a basic homeowners policy.

Another important type of insurance is flood insurance. Don't assume that you have all of your ducks in a row only to find them floating past you in three feet of water in your living room. Hazard insurance does not cover flood damage!

Natural Disaster = Financial Disaster

You've seen the heart-rending media coverage of homeowners picking through the ruins of their tornado-tossed homes or tsunami-trashed beach cottages, but things can get worse if these homeowners learn that they didn't have enough or the right kind of insurance needed to protect them from the ravages of earth, wind, water and fire.

If a natural or man-made disaster causes flooding of your property, you could be "in over your head" unless you have flood insurance. Flood insurance is well worth its cost if you live in a flood-prone area. Flood insurance is issued by the federal National Flood Insurance Program (NFIP) and is required if you live in a designated high-risk area and your home is mortgaged by a government regulated or insured mortgage lender. This means that most mortgaged homes located in high-risk flood zones must have flood insurance.

The NFIP estimates that an "average" flood insurance policy costs about $650 a year.

Water damage caused by a household flooding problem may be covered by homeowners insurance, but a home ravaged by a catastrophic flood can easily be totaled and require demolition and rebuilding. The NFIP reports that although flood insurance is optional in low-to-moderate risk areas, about 20 percent of flood claims occur in these areas.

After you've purchased insurance coverage, review your policy renewals each year for changes to your coverage and contact your insurance agent with any questions. Reading through your homeowners insurance policy may not be as exciting as reading a best-selling mystery, but it can help prevent problems if you need to make an insurance claim.

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