Understanding dwelling coverage

“Dwelling coverage is coverage A in the homeowners policy,” says Dr. Etti Baranoff, Professor Emeritus of Insurance and Finance at Virginia Commonwealth University.

It’s the most important piece of your home insurance because it protects the actual structure of your home and pays out claims to rebuild after a disastrous event like a fire or a storm.

Dwelling coverage covers the foundation, roof, siding, walls inside and out and attached structures like built-in cabinets and garages. It covers damage to these structures if you have a fire, sustain damage from a tornado or someone drives a car into your house and knocks down an entire wall, among other perils.

Be aware that there are exclusions such as flooding and earthquakes. It also does not cover regular wear and tear, sewer backups or pest infestations. Check your policy for exclusions.

Dwelling coverage does not cover detached sheds, garages and 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?

Dwelling coverage is not the same as your home’s market value, which is how much you could sell it for.

When you determine your dwelling coverage limits, you need to use the actual replacement cost of your home. Your insurance company will have a reconstruction calculator to determine this amount.

This cost depends on the size of your home, the type of building materials used and labor cost. Inflation will affect the replacement cost of your home as well, so it’s important to review it regularly. 

“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,” says Gerard O’Sullivan, Consumer Affairs Director at the Connecticut Insurance Department. 

You can purchase extended or increased dwelling coverage to protect yourself in these situations. This endorsement increases your dwelling coverage by 10-50% to account for rising costs.

Dr. Baranoff also recommends looking into inflation guard insurance. This can be in the form of an endorsement that automatically increases the dwelling portion of your insurance to keep up with the times.

How to determine dwelling coverage

To calculate your dwelling coverage limits, it’s important to use the right approach to the value of your home.

Make sure you use replacement cost value, not the fair market value (what your house would sell for) when determining coverage limits.

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

The land is not covered by home insurance, which is part of the reason the dwelling coverage is less than what the home’s sale price would be in most cases.

Your insurance carrier can help calculate replacement cost. Someone from the company may visit your house, but in most cases, the representative will ask you a series of questions about your home to find out what it would cost to rebuild. A reconstruction calculator will use this information to estimate your replacement costs accurately.

You should review coverage yearly, especially if you have made any changes to your property.

“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 says.

Should dwelling coverage be the same as purchase price?

Dwelling coverage should not be based on purchase or sale price. There are a number of ways to calculate the value of a home. The fair market value (FMV) of any item is what an item could be sold for in the current market. Whether it’s a car a house or a piece of jewelry, the FMV is usually very different from the cost of replacing that item or making it from scratch.

You need to make sure you have enough coverage to rebuild your home from scratch, taking into consideration rising costs due to inflation. The replacement cost is often lower than the FMV, which can concern some homeowners, but that's okay. Remember, replacement cost is not the same as market value and doesn’t include the land.