Updated: November 1, 2024
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Dwelling coverage in your homeowners insurance policy is the coverage that will pay to replace the actual structure of your home. How much dwelling coverage you need is determined by how much it will cost to rebuild your home and any attached structures, such as a garage, front porch or back deck, according to current construction and materials costs.
Dwelling coverage should be enough to cover the cost of rebuilding your home.
You should periodically reevaluate your dwelling coverage limit to reflect the current value to rebuild your home.
Dwelling coverage refers only to the amount needed to rebuild your home, not personal property like electronics, clothing and other belongings.
Most likely the highest coverage limit in your homeowners insurance policy, dwelling coverage pays to rebuild your home if it burns down, is destroyed by a tornado, is crushed by falling trees or otherwise damaged by covered hazards. The dwelling limit is the maximum amount your homeowners insurance company will pay to rebuild your home using current construction, materials and labor costs.
If you suspect your homeowners insurance replacement value is too high, it might be worth reviewing your dwelling coverage to ensure you're not over-insured and paying more than necessary for your policy.
Dwelling coverage protects all structural elements, plus any structure considered to be “attached” to the home. For instance, home insurance covers HVAC systems and plumbing systems.
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Although they may be covered under other elements in your homeowners insurance policy, such as personal property coverage, dwelling coverage does not cover the following items:
When people think of damage to their homes, they often think of fire or storm damage, such as a tornado or hurricane. However, these are just some of the many hazards or perils covered by dwelling coverage. Dwelling coverage actually covers damage from the following perils:
Some homeowners insurance policies limit the hazards they will cover. Known as an HO-2 policy, this dwelling coverage covers what it refers to as “named perils,” meaning it must be one of the specific hazards listed on the policy to qualify for coverage. These named perils include the items listed above, as well as volcanic eruptions, freezing of household systems, damage from sudden power surges and the sudden or accidental cracking, burning or bulging of specific household systems.
An HO-3 policy, the most common homeowners policy sold in the U.S., expands dwelling coverage to cover damage due to hazards beyond those found in an HO-2 policy. Offering coverage for what is known as “open perils,” an HO-3 policy covers any damage to your home except for those items specifically excluded on your homeowners policy.
Even with the best homeowners insurance policies, there are always hazards excluded by your dwelling coverage. These often include:
However, it often is possible to purchase separate insurance policies that cover these particular hazards.
To determine how much dwelling coverage you should purchase, you need to find out how much it would cost to rebuild your home. This is not the same amount as your mortgage or home appraisal. Instead, you need to find out the current costs for construction, materials and labor.
Most home insurers and agents have a tool that can quickly calculate the replacement cost of your property. Contacting them lets you determine what dwelling coverage is best suited for your policy. But even with the best estimate, your dwelling coverage limit may still fall short if you file a claim to rebuild your home. To protect you in this instance, consider adding extended replacement cost coverage or an inflation endorsement that will pay you an additional amount — usually 25% or 50% of your dwelling limit — toward rebuilding costs.
Most homeowners insurance policies also allow you to choose between replacement cost value and actual cash value policies. With a replacement cost value policy, your dwelling coverage is for the full replacement amount without any depreciation. Actual cash value coverage looks at the cost to rebuild your home and then reduces the amount based on depreciation according to the home’s age and wear and tear. While the premium for an actual cash value policy is typically about 10% less than replacement cost coverage, you may be left with a hefty balance to pay after your home is rebuilt.
If you prefer not to worry about having enough coverage to rebuild your home, you can purchase guaranteed replacement cost coverage, which will pay to rebuild your home regardless of the cost. Of course, this coverage comes with a much higher premium than most standard dwelling coverage policies.
Many specific factors could affect the cost of rebuilding your home, including the materials found in your home, such as:
Also, ask about current building codes that could increase the cost to rebuild your home from its original construction. In addition, if you have an older or custom home with special features that could be difficult to replace or replicate, this will increase the amount of dwelling coverage you will need.
A recent analysis from the Insurance Information Institute indicated property replacement costs increased a cumulative 30.4% between 2018 and 2022, substantially higher than the rate of inflation. That makes evaluating how much dwelling coverage you need very important to ensure you have enough. An insurance agent (or insurer) should be your first choice for this as they have a tool to calculate replacement costs. — Mark Friedlander, Director, Corporate Communications, Insurance Information Institute
If you live in a condominium, you may not need traditional homeowners insurance, but you do need enough coverage to replace your property based on the current replacement value if it is destroyed by a covered peril and you need to purchase a new condo elsewhere. For example, if your unit is valued at $500,000, you need enough coverage to fully replace it in the current market, which may mean a higher amount than $500K.
Your homeowners association (HOA) should have one of two types of dwelling coverage.
With a “bare walls in” policy, your HOA provides coverage for the building that houses your condo, meaning it will rebuild or repair the framework of your unit in the event of damage. You should have dwelling coverage known as an HO-6 policy that pays to rebuild or repair the condo’s interior — including floors, walls, cabinetry and bathroom fixtures, such as a tub or shower — as well as your personal property.
With an “all in” policy, your HOA covers all aspects of your condo structure, including the interior and attached fixtures like cabinets and bathroom sinks. In this instance, you would need insurance for your personal property, such as clothing, furnishings, dishes and electronics.
The variable with the above HOA policies is how much coverage will the master condo policy provide you in the event of a destroyed building because, in addition to what an HO-6 policy covers and personal property coverage, you need coverage to completely replace your condo unit if the building is destroyed. The common recommendation is to have an insurance agent review the master condo policy to determine how much coverage you need to purchase to replace your unit.
Because most homeowners insurance companies will not cover a loss if you have rented out your home to someone else, it’s important to obtain dwelling coverage specifically for landlords. Unlike regular homeowners insurance, this coverage will not protect your renters’ belongings. For that, they will need to get their own renters insurance policy.
When shopping for dwelling coverage for landlords, look for policies with the following:
Be prepared to pay higher premiums for landlord policies; these generally run about 25% more expensive than regular homeowners policies. Shop with at least three different insurance companies and compare insurance quotes to find the best rates.
About Mark Fitzpatrick
Mark Fitzpatrick is a Licensed Property and Casualty Insurance Producer and MoneyGeek's Head of Insurance. He has analyzed the insurance market for over five years, conducting original research and creating personalized content for every kind of buyer. He has been quoted in several insurance-related publications, including CNBC, NBC News and Mashable.
Fitzpatrick earned a master’s degree in economics and international relations from Johns Hopkins University and a bachelor’s degree from Boston College. He is passionate about using his knowledge of economics and insurance to bring transparency around financial topics and help others feel confident in their money moves.
