The Difference Between Hazard Insurance and Homeowners Insurance

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What is Insurance?

The term insurance refers to a contract (policy) between two parties wherein the insuring company agrees to provide financial protection or insurance against loss to the individual or entity (the insured or policy holder) incurring the loss. In return the policy holder pays a pre-determined monetary compensation known as a premium. The amount of premium paid in each instalment determines the amount of cash the insurance company will reimburse.

Different companies offer different insurance packages. Their policies also differ with regard to period of time taken to settle a claim, the deductible amounts and the extent of replacement coverage.

Insurance companies pool the premiums of its clients to cover a re-imbursement. Therefore coverage is usually not provided for a risk that has the potential to affect many clients in the same area. For example in California, which is earthquake prone, insurance companies do not have comprehensive packages that cover damage by earthquakes. An individual policy needs to be taken out if the client so wishes.

Different insurance companies offer different insurance packages. Based on the risks they mitigate, these packages can be divided into four broad categories. They are life, health and travel, motor and home, rural, commercial and business insurance policies. Regulatory bodies like the Insurance Regulatory Authority in India oversee the ethical functioning of insurance companies.

Some insurance policies are compulsory such as motor insurance. All motorised vehicles must have insurance before getting on to the roads. Home insurance is necessary if the home owner is taking a loan to purchase the property or if a mortgage is required.

Hazard Insurance:

In insurance terms a hazard is a potential cause of loss which can be insured against in exchange of a premium paid. Hazard insurance falls within the Home Owners Insurance category. It is the basic package of a home owner’s insurance policy. Hazard insurance protects the insurer against damage to the property or contents of the property insured by a named peril such as water damage, burglary, fire, earthquakes, vandalism, floods, hurricanes etc. A hazard insurance policy protects against at least one physical peril. A comprehensive package will cover more than one peril and an individual hazard insurance policy cover threats that are exempted by the comprehensive package due to susceptibility of the geographical location to a particular hazard e.g. tsunami on islands in the Indian Ocean.

Hazard Insurance also protects the contents of the house from 16 named perils. The contents include furniture, books, clothes and appliances.

Home Owners Insurance:

A Home Owners Insurance Policy combines hazard insurance with liability coverage. Liability Coverage provides protection for damages liable for injury occurring to an individual on the home owner’s property. It also covers legal fees in case of legal action taken. For example if a tree falls on someone in your garden, the policy will cover the damages you are liable to pay as well as the legal fees needed to settle the case. The liability coverage extends to damage the policy holder may cause even when out of the house such as damage to a hotel room or hurting someone when riding a bicycle.

In case the Home Owner is purchasing the property with a loan, liability coverage is necessary to complete the real estate deal. Also when taking out a mortgage a Home Owners Insurance Policy is mandatory as the policy covers financial losses that prevent repayment of Home Loans or mortgage payments.

Additional coverage like the Loss of Use Coverage pays for relocation expenses during the period of repairs after a covered loss. A Home Owners Policy also covers the financial losses caused by identity theft.

Conclusion:

Though essentially the same, the fine difference between a Hazard Insurance and a Home Owners Insurance is that the latter encompasses the former with the addition of the Liability Coverage.

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