Home insurance includes several types of protections, but none more important than dwelling coverage. If your home sustains damage in a covered loss, dwelling coverage can help repair, rebuild, or replace it. This valuable type of coverage protects your home from foundation to roof, safeguarding your other assets when calamity strikes.
Dwelling coverage protects against many common perils, but it’s subject to limits and deductibles. It’s designed to completely rebuild or replace your home, but coverages can vary by location. And where dwelling coverage falls short, insurers offer a selection of optional coverages to round out your home’s protection.
Definition and Examples of Dwelling Coverage
The dwelling coverage of a home insurance policy helps pay to rebuild or replace a home following a covered loss. It also covers attached structures, such as a carport or garage, as well as home fixtures, such as permanently installed air-conditioning and heating units, electrical wiring, and plumbing.
Dwelling coverage only covers your home’s structure and doesn’t cover personal property such as clothing and furniture, or detached structures such as a pool house or shed. It is subject to deductibles and limits and may exclude losses caused by certain types of perils.
Insurance companies determine dwelling coverage levels based on several factors, which can include a home’s market value or purchase price. Generally, dwelling coverage is designed to cover your home’s replacement costs, without applying depreciation for wear and tear.
- Alternate names: Coverage A or dwelling insurance
For example, if a windstorm topples a tree onto your house and causes $8,000 in damages, you could file a claim against your dwelling coverage. You will pay the deductible, then your insurer will pay the remaining to cover the full cost of damages. Any damage to, say, your furniture or television, which are considered personal property, would be covered under other sections of your home insurance policy.
How Does Dwelling Coverage Work?
Dwelling coverage isn’t difficult to understand, but knowing how it works can ensure you have adequate protection.
Here’s a quick look at how dwelling coverage works. If a tornado flattens your home, you can file a claim against your dwelling coverage to pay the rebuild costs. The coverage will pay replacement costs up to the limit, minus your deductible. You can also file claims against your policy’s personal property coverage to help replace items such as furniture and clothing, and loss of use coverage to help cover temporary living expenses such as hotel and restaurant bills.
Dwelling Coverage Perils
Most home insurance policies cover damages caused by:
- Accidental, sudden discharge of smoke or water
- Aircraft and other vehicles
- Civil unrest, malicious mischief, and vandalism
The HO-3 policy, also called Special Form, is the most common type of homeowners insurance policy. It covers all perils, except those specifically excluded.
Most standard home insurance policies, including HO-3s, don’t cover damages to your home caused by earthquakes or floods.
Deductibles apply to dwelling coverage. The deductible is the amount of money you must pay from your own funds when filing a claim. For instance, if you have a $1,000 dwelling deductible and file a $5,000 claim following a fire, the carrier will pay a maximum of $4,000.
In some regions of the country, home insurance policies may exclude some perils. For example, policies for homes along the Texas Gulf Coast typically don’t cover hail or wind damage. However, homeowners in Texas can purchase separate hail and wind coverage through the Texas Windstorm Insurance Association.
Special deductibles may also apply to hail and wind damage claims. In North Carolina, an insurance company may apply a percentage deductible for hail and wind damage caused by a severe storm named by a government weather agency.
For example, if your home sustains hail damage during a storm named Hurricane Jane Doe by the National Hurricane Center, your insurer may apply a 2% storm deductible to your claim. So if you carry $200,000 in dwelling coverage, you’ll have to pay a $4,000 deductible for storm damage, even if you have a $1,000 deductible.
Actual Cash Value vs. Replacement Cost Coverage
Most homeowners policies feature “replacement cost” dwelling coverage. Replacement-cost coverage pays to rebuild or replace your home, without applying depreciation, if it’s completely destroyed in a covered loss.
“Actual cash value” coverage may apply to some home structures, particularly your roof. Actual cash value settlements deduct for depreciation. For example, if a hailstorm caused $10,000 worth of damage to a 15-year-old roof, the insurance company may settle for $5,000, minus deductible, based on the roof’s actual cash value.
Typically, insurers require policyholders to purchase dwelling coverage equal to at least 80% of a home’s replacement cost. So if your house would cost $200,000 to rebuild, you’d most likely need to carry at least $160,000 in dwelling coverage.
However, some providers may require you to purchase dwelling coverage equal to 100% of your home’s replacement cost.
Bear in mind that the dwelling coverage of most policies will only pay up to the limit. So if costs exceed the limit of your dwelling coverage, you’ll have to pay the remaining expenses out of pocket, even if you carry a policy that provides 100% replacement cost coverage. It’s important to raise your dwelling coverage whenever you make improvements that increase your home’s value.
Dwelling Coverage in Action
Let’s look at a few examples of how dwelling coverage can work. In each example, the home is covered by $300,000 in dwelling coverage, with a $1,000 deductible.
- Hail causes $5,000 worth of damage to a 10-year-old roof. Due to the roof’s wear and tear, the insurer assesses the roof’s value at $3,000. After subtracting the $1,000 deductible, the provider settles the claim for $2,000.
- Fire causes $25,000 in damages to a home’s kitchen and living room. The carrier approves the claim, paying the policyholder $24,000.
- A flood causes $10,000 in structural damage to a Gulf Coast home. The homeowner doesn’t carry flood insurance and must pay all costs out of pocket.
- After the homeowner adds a new family room to their home, the house burns to the ground before adjusting dwelling coverage. Rebuilding the home with the new addition will cost $350,000, but the insurance company pays $299,000, based on the policy’s dwelling limit and deductible.
Characteristics that impact your home’s replacement cost can include its age, condition, construction type, and special features.
Optional Coverages Worth Considering
The dwelling coverage of a standard homeowners policy might not provide all the protection you need. But most large insurers offer endorsements and riders to help beef up your protection.
Extended replacement cost coverage: An extended replacement cost endorsement kicks in once you exceed your dwelling coverage limit. This optional coverage typically pays 25% above your dwelling coverage. For example, if you carry $200,000 in dwelling coverage, an extended replacement-cost rider would increase your protection to $250,000.
Flood insurance: Most standard home insurance policies won’t protect your home from flood damage. However, you can purchase flood insurance through the National Flood Insurance Program. Many national insurers sell NFIP flood insurance, and some offer private flood insurance policies.
Ordinance or law coverage: When an older home is destroyed by a covered loss, dwelling coverage may not provide enough money to rebuild to current building codes. Ordinance or law coverage can help pay to upgrade elements such as electrical, air-conditioning and heating, and plumbing systems.
Do I Need Dwelling Coverage?
Yes, if you own a home and have a mortgage. Dwelling coverage is included in standard homeowners insurance policies. Although the law doesn’t require you to purchase a home insurance policy, if you finance a house, the lender will. Even after you pay off your mortgage, it makes good financial sense to carry a homeowners policy with enough coverage to rebuild or replace your home.
- Dwelling coverage helps pay to rebuild or replace your home following a covered loss.
- Typically, insurers require homeowners to carry dwelling coverage equal to 80%-100% of the home’s replacement cost.
- Dwelling coverage is subject to deductibles and exclusions.
- Optional coverages can help maximize your dwelling coverage protections.
- Lenders require homeowners insurance for the homes they mortgage.