How much dwelling coverage do I need?

What is dwelling coverage and what does it cover?

Dwelling coverage, or coverage A in your policy, is the basis of a home insurance policy, covering the structure itself, including the foundation, roof, siding, walls inside and out and attached structures like built-in cabinets and garages. It is calculated as the replacement cost of your home, which is the amount required to rebuild the home at today's prices. Your dwelling coverage needs are not the same as the market value of your home, which is the amount you could sell it for and includes land value and other factors.

What doesn't dwelling coverage cover?

Dwelling coverage does not cover anything excluded from your policy, such as flooding and earthquakes, regular wear and tear, sewer backups or pest infestations.

It doesn't cover anything that is not attached to the main structure, including sheds, detached garages, fences and any other buildings or structures that aren’t attached to the house. The other structures portion of your home insurance, or coverage B, covers these. That coverage is usually calculated as 10% of your dwelling limit.

How much dwelling coverage do I need?

You need enough dwelling coverage to rebuild your home from the ground up at today's construction costs, and enough to meet your mortgage requirements; these are usually the same amount. Your insurance company will have a reconstruction calculator to determine your home's replacement cost and will require you to insure it for at least 80% of that cost. However, you should insure at 100% of replacement cost to fully protect your home, and review your dwelling coverage annually.

Extended and guaranteed replacement cost endorsements are available to provide extra coverage in the event that your calculated replacement cost is insufficient due to inflation or other unexpected changes in construction costs, such as those occurring after a catastrophic event, as Gerard O’Sullivan, Consumer Affairs Director at the Connecticut Insurance Department, noted.

“There are homeowners insurance replacement cost options or certain percentages over the dwelling limits which gives room for increased labor and material costs that can occur after a catastrophe strikes,” O'Sullivan said.

Dr. Etti Baranoff, Professor Emeritus of Insurance and Finance at Virginia Commonwealth University, recommended considering inflation-guard insurance. This can take the form of an endorsement that automatically increases the dwelling coverage portion of your insurance to keep up with increasing costs over time.

How is dwelling coverage calculated?

Dwelling coverage is calculated based on the replacement cost of your home using its age, size and construction type, along with special features like fireplaces or high-end finishes. While replacement cost can be estimated using a calculation of the average cost of construction per square foot (in your area) multiplied by the square footage of the home, this is not accurate enough for home insurance. Instead, use the insurance company's calculator or have the home appraised by a professional.

To get an accurate dwelling coverage calculation from an insurance company:

Collect basic information about the home. You'll need the square footage, year of construction, type of construction and number of bedrooms and baths.
List interior and exterior materials. This includes siding, roof, flooring, cabinets, countertops and fixtures.
List special features of the home. Fireplaces, skylights, central vacuum systems, jetted tubs and wet bars are all special features.
Provide all of this information to your insurance company. It will be entered into a replacement cost calculator, which will provide a total for your dwelling coverage.

Dwelling coverage should be at least 80% of the home's value to ensure a claim will be paid in full, and doesn't include land value. Insurance companies can reduce the payment on a partial-loss claim if the home is insured for less than 80% of its replacement cost.

“You should determine the value of your home (less the land) and insure for at least 80% of the value,” Baranoff said.

Review your dwelling coverage limit every year and after any renovation, addition or upgrade that increases your home's rebuild cost. O'Sullivan specifically named additions and remodels as changes that require coverage updates.

“Consumers [should] make sure they have the coverages they need on a yearly basis. That includes properly insuring any upgrades such as an addition or a remodel,” O’Sullivan said.

Should dwelling coverage be the same as purchase price?

No, dwelling coverage should not be based on purchase or sale price. This price includes the value of the land and is influenced by market factors unrelated to the home's rebuild cost. In some markets, home prices are inflated well above the house's replacement cost, and you would be overinsuring the home and overpaying for that coverage if you used the purchase price for your dwelling coverage.

When choosing your dwelling coverage, use only a replacement cost calculation based on as much detail as possible about the home to ensure accuracy, and don't rely on estimates or other methods of valuing the home.