Hazard Insurance

Whether you’re seeking a traditional mortgage or a hard money loan, you’ll likely need hazard insurance. While hazard insurance may be included in your homeowner or commercial property insurance, it’s important to verify that yours is sufficient for your lender.

Read on to learn all about hazard insurance, how it works, and why it matters.

What Is Hazard Insurance?

Hazard insurance is a type of property insurance that protects against damage from specific hazardous natural and human events, including:

Fires
Storms
Hail
Water damage
Vandalism

Hazard insurance covers the property itself, but it doesn’t protect any personal items inside.

Hazard insurance is a standard part of property insurance policies and is included in both residential and commercial property insurance. In some cases, insurers offer hazard insurance as a standalone policy, too.

How Does Hazard Insurance Relate to Hard Money Loans?

Most hard money lenders require hazard insurance on properties used as loan collateral. Hazard insurance doesn’t only protect the borrower, but it protects the lender’s investment, too. If a borrower defaults on their loan, their hard money lender can take over ownership of their property, so it’s in the lender’s best interest to protect the property.

How Hazard Insurance Works

Just like any other type of insurance, hazard insurance protects your property in the event of damage. In the event of damage, expect to follow these steps:

Step 1: File a claim

Depending on your insurance provider, you may be able to file a claim online or in person. Provide as much information as you can, including photos and videos.

Step 2: Get approved

Once your claim is approved, your insurer will give you funds to fix the damage. The exact amount you’ll receive depends on your deductible, coverage limits, and other factors.

Step 3: Repair the damage

You can then use those funds to repair your property.

Real‑World Scenarios

Hazard insurance protects both the borrower and the lender in these real-world scenarios.

Commercial Property Vandalism

A commercial real estate investor takes out a commercial hard money loan using an unoccupied office building as collateral. Several months later, the unoccupied property is vandalized. Vandals smash windows, spray paint the outside, and do a collective $10k in damage.

The investor files a claim with their property insurance, which includes hazard insurance. The insurer pays $8k for the repairs minus the investor’s deductible. The investor uses these funds to repair the building.

Owner-Occupied Foreclosure

A homeowner takes out a hard money loan on their owner-occupied property to perform renovations. During this time, a house fire breaks out and does $20k in damage. The owner files a claim with their homeowner’s insurance, which includes hazard insurance. Repairs are completed.

Later, the homeowner defaults on their hard money loan and goes into foreclosure. The lender takes over ownership of the property, which has retained its original value thanks to hazard insurance.

Hazard Insurance FAQs

Is hazard insurance the same as homeowners’ insurance?

Hazard insurance may be included in your homeowners’ insurance policy, but the two are not interchangeable. Hazard insurance only covers damage from a specific list of hazards. Homeowners’ insurance, on the other hand, is a comprehensive insurance that protects homeowners from a variety of different types of damage.

Is hazard insurance required for a hard money loan?

Yes, hazard insurance is always required for a hard money loan. When a lender accepts your property as collateral, they are essentially investing in your property. Hazard insurance is a way for your lender to protect their investment.

What does hazard insurance cover?

Hazard insurance covers a very specific list of damage. While coverage can vary from provider to provider, it typically protects against damage from:

Fire and smoke
Hail
Wind
Lightning
Snow, ice, and sleet
Explosions
Damage from vehicles or aircrafts
Vandalism

What type of hazard insurance do I need?

Speak with your hard money lender to determine the exact type of hazard insurance they require. In most cases, the standard hazard insurance included in your property insurance is sufficient, but you may need other types of hazard insurance in different circumstances:

Vacant property insurance: Protects unoccupied properties which may be at a greater risk of vandalism and other types of damage
Builder’s risk insurance: Designed to protect against specific hazards that come with buildings in development

Is hazard insurance tax-deductible?

If your property is used for business or is an investment property like a rental or flip, your hazard insurance may be tax deductible.

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