How Much Dwelling Coverage Do I Need?

Learn how to make sure you have enough dwelling insurance

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If something were to happen to your home tomorrow, could you afford to rebuild or repair it? A big part of avoiding out-of-pocket costs depends on the dwelling coverage part of your homeowners insurance policy. Learn more about what dwelling insurance covers, what it doesn’t, and how to make sure you have enough coverage to protect what may be your most expensive asset.

Key Takeaways

  • Dwelling insurance covers your home’s primary structure and any attached structures, such as a garage.
  • Replacement cost coverage pays the costs to rebuild a home of the same kind and quality at current prices.
  • A local building contractor can produce a detailed replacement cost estimate to ensure you have enough coverage.

What Is a Dwelling in Insurance?

A dwelling, in the context of homeowners insurance, refers to the structure of your house and any other structure attached to it, such as a garage, chimney, or deck. A dwelling includes permanently installed fixtures such as heating and air conditioning systems, electrical wiring, flooring, countertops, ceilings, cabinets, vanities, and plumbing.

What Does Dwelling Insurance Cover?

Dwelling insurance covers all parts of the dwelling in case they’re damaged due to a covered peril or cause. It’s the main component of homeowners insurance policies and helps you rebuild or repair your house and any attached structures like decks. Insurers typically cover damage from:

  • Hail
  • Fire
  • Lightning
  • Explosions
  • Aircrafts
  • Vehicles
  • Smoke
  • Vandalism
  • Falling objects
  • The weight of ice or snow
  • Freezing pipes
  • Theft
  • Accidental overflow of water from HVAC system or plumbing

For example, if your home is damaged by a wildfire, you’d call your insurance company to file a dwelling coverage claim. Upon being approved, you would pay your deductible, then receive funds to repair or replace the damaged parts of your house along with any attached structures that were also affected.

Limits of Dwelling Coverage

While many causes are covered under dwelling insurance, some common exceptions include floods, earthquakes, sewer backup, and damage caused by a lack of maintenance. You may be able to buy a policy endorsement or a separate additional policy to cover flood, earthquake, and sewer backup damage.

Dwelling coverage alone is often not enough to fully recover after a total loss. If your property includes other structures, such as a barn, shed, or guest house, you’ll need additional structures coverage to be compensated for any damage to them.

Since dwelling coverage does not include the items inside the home, you’ll need a personal property policy to cover belongings such as furniture, clothes, and jewelry. And as a homeowner, you will likely want a personal liability policy to ensure your home isn’t at risk if you’re held liable for damages to someone else or their property.

Most basic homeowners insurance policies bundle all these coverage types together. When you request a quote, the agent will ask you questions to determine your coverage needs.

How Much Dwelling Coverage Do I Need?

Homeowners insurance, including dwelling coverage, isn’t mandated by state law. However, if you have a mortgage on your home, your lender will require you to carry a minimum amount of homeowners coverage. In many cases, it must be at least equal to the amount of your mortgage. However, that’s often not enough to protect your interests.

When considering the amount of dwelling coverage you need, it’s helpful to have enough to cover the costs of the labor and materials needed to rebuild your home. If you lose your house, this coverage would allow you to build a replacement of the same kind and quality at current prices without paying out of pocket. Some lenders will require you to carry dwelling coverage equal to 80% of your home’s replacement cost, while others mandate 100% coverage.

How To Figure Out How Much Dwelling Coverage You Need

The main factors that affect your rebuilding costs are the local construction costs in your area and the square footage of your structure. You can contact a local real estate agent or builders association for approximate construction costs in your area and run the numbers.

However, other factors also influence the cost to repair or replace your home, including:

  • House style
  • Special features
  • Custom design
  • Materials
  • Type of roof
  • Type of exterior walls
  • Number of floors, bedrooms, and bathrooms
  • New building codes or bylaws
  • Hard-to-replace features
  • Inflation

If you want a custom quote specific to your home, consider hiring a building contractor to produce a detailed replacement cost estimate. While most insurance companies use tools to generate estimates for you, getting an educated second opinion can help to ensure you have the coverage you need in case the worst happens.

Actual Cash Value vs. Replacement Cost Value

Another factor to consider is how your settlement will be calculated. Replacement cost value covers the costs to rebuild your home at current prices, without factoring in depreciation. However, if your coverage is calculated according to the home’s actual cash value, the insurer would factor depreciation into your settlement amount. This type of coverage could leave you with less than you need for an equivalent rebuild, so many experts recommend opting for replacement cost value.

Fair Market Value vs. Replacement Cost Value

It’s also important your home’s fair market value is not used to determine your coverage amount. Market value shows what a buyer would pay for your land, home, and attached structures in the current conditions. It also fluctuates based on factors such as the local market, school district, and distance to restaurants and retail stores. That means the fair market value is often different than the rebuild costs. It will often be too high, which could mean you’re overpaying for your coverage, but could also wind up being too little to rebuild.

Don’t Set It and Forget It

Replacement costs change over time so it’s important to review your policy each year to ensure your coverage still meets your needs. This is especially necessary if you complete any home improvement projects, as the changes could increase your replacement cost.

Some policies include an inflation clause that automatically adjusts your coverage to account for increasing construction costs.

Dwelling Coverage for Condos

Condo insurance works a bit differently. It’s regulated by a homeowners association (HOA), so the first step in ensuring your condo is protected is checking with your HOA. It will carry one of three types of policies:

  • Bare walls coverage: The minimum amount of coverage an HOA can opt for is “bare walls,” which only covers the bare structure, fixtures, and property of collectively owned areas. The individual units are the responsibility of the condo owners, so you would need to buy dwelling coverage for your condo.
  • All-inclusive coverage: An all-inclusive policy covers the walls, floors, and ceilings, as well as the interiors of the condo units, including appliances, cabinets, and flooring. It also covers any improvements you make to your unit. With this type of policy in place, you would not need to buy your own dwelling coverage, although you’d still want other coverage, such as for your personal belongings.
  • Single entity coverage: Single entity covers all real property in a condominium complex, including the fixtures in individual condos. However, it doesn’t cover upgrades or personal property, so you would likely want additional coverage for both.

The Bottom Line

Dwelling coverage helps protect the structure of your home against devastating damage. To best prepare for an incident, ensure you have a policy that calculates your settlement using your home’s replacement cost. As the years go by, keep tabs on the cost to rebuild your home and ensure you have enough coverage based on inflation and any renovations you complete. Your insurance company will calculate an estimate, but you can confirm it by getting a second opinion from a local building contractor.

Frequently Asked Questions (FAQs)

How much dwelling coverage do I need for a multifamily home?

The amount of dwelling coverage you’ll need for a multifamily home depends on the master policy chosen by your HOA. Check to find out how much coverage is in place, then you can get the additional coverage you need to fill any gaps. In some cases, you may not need your own dwelling coverage, while in others, you will need full or partial coverage.

What is extended dwelling coverage?

Extended dwelling coverage is an additional amount of dwelling insurance you can purchase to cover a total loss that exceeds your standard dwelling coverage. This can come in handy in situations where rebuild costs are unusually high, such as when a widespread wildfire affects numerous homes and drives up the costs of labor and construction materials. Any costs over your primary coverage, up to your policy limit, would be covered by your extended dwelling coverage.

How much does dwelling coverage cost?

According to the latest available data from the National Association of Insurance Commissioners, a basic homeowners insurance policy (HO-3) costs an average of $1,249. However, that includes dwelling coverage as well as coverage for other structures, personal property, loss of use, temporary living expenses, and personal liability. Dwelling coverage alone will cost a percentage of the total amount and will depend on the amount of coverage you want and need to protect the structure of your home.

Article Sources

  1. Texas Department of Insurance. "Homeowners Insurance Guide." See "Policies Pay Only Up to Their Dollar Limits."

  2. National Association of Insurance Commissioners. "Dwelling Fire, Homeowners Owner Occupied, and Homeowners Tenant and Condominium/Cooperative Unit Owner’s Insurance Report."