What it is:
Hazard insurance doesn't just protect the homeowner; it protects the bank that lends to the homeowner. The price of hazard insurance varies depending on what state the house is in, how it is built and other. For instance, homes in Florida are much more exposed to the risk of hurricane damage than are homes in New Mexico.
How it works (Example):
Let's say John Doe borrows $100,000 to buy a house. Company XYZ lends him the money and requires him to pledge the house as collateral. In turn, the bank requires him to buy hazard insurance for the house, which protects the bank's collateral in the event of a fire or other situation that destroys or diminishes the value of the house.
Why it Matters:
Hazard insurance covers property that secures a loan.