Q: Please explain the concept of "hazard insurance." Our mortgage lender is requiring this kind of insurance, and we are confused as to what is necessary. Are there different types of policies? Which is best for the homeowner?
A: If you treat the hazard insurance policy as "homeowners insurance" it will help you understand this kind of insurance.
One can certainly appreciate the confusion a homeowner faces when dealing with various kinds of insurance, which include title insurance, mortgage insurance, hazard insurance and mortgage life insurance.
Every lender will require some form of coverage, so that in the unlikely event lenderhs proceeds will be protected.
Obviously you as a homeowner should be equally concerned with protecting the loan, since if a fire does destroy your house, in the absence of insurance coverage you still would owe the mortgage lender the entire proceeds.But beyond the lenderhs coverage, you have equity in the house, which is growing day by day. You should make sure that your equity is also adequately protected.
What does the insurance cover? Homeowners coverage falls into three basic areas: protection for your house, protection for the possessions in your home, and protection against liability claims because of property damage of bodily injury.
There are several different forms of coverage: The basic form (HO-1), the board form (HO-2), or the comprehensive form (HO-5). The basic form covers you against such perils as fire, windstorm, civil commotion, smoke, vandalism and malicious mischief and theft, for a total of 11 types of perils. The board form adds a number of other perils to your coverage, including collapse of buildings, accidental discharge of water, freezing of plumbing, heating and air conditiong systems and falling objects.
The comprehensive form protects you against these same perils and is referred to by the industry as "an all risks" policy. It is important to note, however, that many of the small-print exceptions in the policy reduce the actual coverage.
One is well advised to read these exceptions carefully, and ask you insurance agent to explain anything that is not clear.
Insurance agent or company should be most happy to discuss the various types of policies. Here are some questions to ask:
It there an automatic escalator, so that coverage of the policy is increased yearly as property values go up?
Does the policy cover the full replacement value or only the actual cash value? Actual cash value means the replacement cost of the damaged property less depreciation due to age and use. You may want to pay a small additional premium for the replacement value content to be covered.
Are personal items with any significaant value covered? You may want to purchase a "floater" policy, which will conclude such items as cameras, stamp collections, jewelry, and furs.
Is the liability coverage adequate? Remember, if someone slips on your front stairs because you didn't shovel the snow, you can be sued for a lot of money. Additional liability is relatively inexpensive, especially in terms of the additional piece of mind it provides.
You should also keep in mind that you need not purchase your insurance policy from your mortgage lender. Many lenders would like you to purchase insurance coverage from them. While there is nothing inherently wrong with this, you should shop around for the best price and for the best possible coverage. Ask your mortgage lender for a breakdown of the coverage, and the cost.
The question is always raised: What dollar coverage should I have on my house?
There is no easy answer to this qestion. Generally speaking, land has value - indeed sometimes it is worth more than the house itself - and fire and other hazards will not normally destroy the value of the land. Thus, it is not important to insure the house for the total purchase price.
However, you should ask your insurance agent to assist you so that you will not be involved in a "co-insurance" problem. This is a highly complex concept, based on the statistic that very few fires cause total destruction of property.
Because property owners know this, they could save themselves a lot of money in insurance premiums by taking out coverage for half the value of the property, or even less. To stop this, most insurance policies generally require a property owner to take out insurance equal to at least 80 percent of the value of the property.
If this 80 percent mark is met, the property owner collects the full amount of loss, (less any deductible) but if the coverage is less than 80 percent of the value, a co-insurance clause is added, and collection will be considerably reduced.
Benny L. Kass is a Washington attorney. Write him in care of the real estate section, The Washington Post, 1150 15th St. NW, Washington 20071.