We insurance nerds deal in perils and hazards on a daily basis. But to the average consumer, perils and hazards may be foreign or abstract terms. What are they referring too? Well, a “peril” is an event or circumstance that results in property damage. Your homeowners insurance, condo or renters policy contain a list of perils that are covered, such as fire, lightning and vandalism. If it’s listed, then is means there is coverage to repair, replace, or rebuild your home or property if one of these covered peril is the cause of the claim. Alternatively, a “hazard” is a circumstance that increases the chances of a peril happening.
It’s easiest if you think of it simply, a peril is the thing that causes a loss and a hazard is a thing that increases a peril’s chances of happening. When discussing homeowners insurance, it is very common for perils and hazards to mistakenly get interchanged. It’s important to understand that these terms are not synonymous.
The term “hazard insurance,” popularized by mortgage lenders, is likely the source of much of the confusion about hazard insurance. In fact, it’s common for an insurance agent to receive a call requesting hazard insurance when a person is getting insurance on their first home, or going through a refinance.
Perils and hazards are different. Think of it this way, a water pipe bursts damaging hardwood floors in your home, the peril was accidental “water” and the hazard was “old pipes”.
The term “hazard insurance” is an outdated reference referring to the portion of insurance that covers the actual structure or dwelling. In the modern homeowners insurance policy, it is the first part of the home policy or Part-A. Frequently referred to as Coverage-A or Dwelling Coverage. The Dwelling Coverage portion of your home policy protects your home’s structure from various perils.
When you get a mortgage to purchase your home, your lender has an interest in protecting the asset used to secure the funds. This is the physical structure or the “dwelling.” Lenders use the term “hazard insurance” to underscore the minimum home insurance requirement needed to approve or fund your mortgage loan.
When properly viewed as the dwelling coverage in the standard home insurance policy, hazard insurance protects you against damage to your home from covered perils that may harm or destroy home’s structure, including:
Since hazard insurance is just a reference to dwelling coverage, it’s only a single part of the broader home insurance policy. Hazard insurance, if you could buy it, would cover your home’s structure – nothing more. Therefore, hazard insurance would not be considered a replacement for a homeowners policy. Homeowners insurance provides coverage for structures that are not attached to your homes primary structure, personal liability, your personal belongings, additional living expenses, medical payments, and many other optional coverage – like identity theft. There is no real comparison.
Since perils are the events that happen to create damage to your home, it’s unattached structures or your personal belongings, it is defined in the policy. There are different ways the home policy will define perils. Below are the 16 covered perils known as the “named perils” you can find listed on the basic home insurance policy:
Fire or lightning
Windstorms and hail
Vandalism or malicious mischief
Weight of ice, snow, and sleet
Riots or civil commotion
Damage from aircraft
Damage from vehicles
Accidental water/steam overflow discharge
Sudden and accidental tearing apart, cracking, burning, or bulging of an appliance*
Sudden and accidental damage from artificially generated electrical current
*This peril includes the hot water heating systems, HVAC or fire sprinkler systems, and other water heating appliances
Even on the most broadly defined policies, there are perils that are generally NOT covered by the homeowners insurance policy. These perils are: earthquakes, landslides and mudflows, floods, termites, mold, and acts of war. If you want protection for these perils, you may be able to purchase coverage as an endorsement on your policy. However, they are more commonly sold as a stand-alone specialized policy from the government or a private insurer.
When you buy home insurance, the policy will define the perils it will cover. There are two common ways perils are defined in the modern homeowners policy, “named perils” or “open perils”.
If the home policy is a “named perils coverage” it means you are covered for the specific perils listed in your policy. Alternatively, when the the policy is written as “open perils coverage” it means the policy will cover all perils unless the peril is specifically excluded in the policy. The most common perils excluded in an “open perils” policy are earthquake and flooding. When a policy is written as “open perils,” the insurance carrier is accepting more risk, and they policy could be marginally more expensive. However, most of your better insurance carriers offer ” open perils” policies – make sure you ask you agent before you agree to buy what perils are covered.
If you require a renters policy, they are more commonly sold as named perils.
It’s easy to look at a policy declarations page and see the limits and think you have purchased the right coverage. However, the difference between “named perils” and “open perils” is a clear example of how the actual policy contract broadens or limits coverage. When you buy home insurance, you should ask a lot of questions to make sure that the limits of coverage or liability you’ve purchased, is offered as broadly as possible by the policy contract.
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