Does a Mortgage Require Hazard Insurance?
Whether a mortgage requires hazard insurance depends on the dangers of the local area. The Federal Reserve mortgage settlement website states that in some locations, lenders may not legally make a mortgage loan unless the home buyer purchases additional hazard insurance. The lender may not know whether hazard insurance is necessary for a specific house, and may charge the home buyer an additional fee to determine if the house is in a hazard zone.
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Homeowner's Insurance
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Hazard insurance is a type of homeowner's insurance. The Federal Reserve website states that the lender requires the homeowner to purchase homeowner's insurance, which protects the lender from common sources of damage which occur in all locations, such as fire damage, burglary, and vandalism. When a lender requires hazard insurance, it covers damage that a standard homeowner's insurance policy does not cover, so the home buyer must purchase both a standard policy and hazard insurance.
Community Rating System
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When an area is in a hazard zone, local city and county organizations can set up a community rating system to reduce the damage a disaster can cause. For example, the government of King County, Washington has a community rating system which issues additional regulations to property developers who build houses in a flood hazard zone. The county also makes flood insurance information widely available to its residents. These actions reduce the cost of a hazard insurance premium in the area, but a homeowner must still purchase hazard insurance since flood risks are still present.
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Severe Hazards
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When a hazard is especially dangerous, insurance companies may refuse to issue hazard insurance in the area. Volcanoes in Hawaii frequently erupt and spew out lava and ash, so many insurers no longer issue policies in volcano hazard zones. If a lender requires hazard insurance and no insurer sells the hazard insurance, a prospective home buyer can not buy the house. The Texas Windstorm Insurance Association, a state pool which all insurers who sell Texas property insurance policies must join, offers wind and hurricane hazard insurance to Texas coastal residents when no private insurer will offer this coverage.
Hazard Insurance Market
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An insurer may decide it no longer wants to renew a hazard insurance policy for a current customer. One insurance company in Alaska stopped writing earthquake insurance policies after Hurricane Katrina caused huge amounts of damage to the Gulf coast states. If one hazard insurer leaves the market, the other insurance companies may not have an obligation to offer hazard insurance, or may offer hazard coverage at a higher premium rate.
Specific Hazards
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A hazard insurance policy is very specific, so it does not cover other types of damage which the standard homeowner's insurance policy covers. A homeowner may need to purchase more than one hazard insurance policy or rider if multiple types of disasters, such as floods and earthquakes, frequently affect an area. The hazard insurance policy usually covers other damage that the disaster causes, so if an earthquake breaks gas lines and starts a fire, the earthquake insurance policy will reimburse this fire damage.
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References
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- Photo Credit flood sign image by Andrew Breeden from Fotolia.com
