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Dwelling insurance is the portion of your homeowners insurance policy that protects the physical structure of your home. It also includes attached structures, such as your garage.

Dwelling coverage is calculated using the replacement cost of your home, which is the cost to rebuild the home at today’s construction costs, not to be confused with market value, which is what your home could sell for.

There are a number of ways to calculate your dwelling coverage, and an easy one is to consult with a licensed insurance agent with access to a replacement cost calculator.

“These calculators factor in the price of goods and labor in your ZIP code, along with features of the house which include square footage, quality (and) unique features,” says Patrick O’Keefe, an owner and managing partner of Cascade Insurance Center in Bend, Oregon. 

Key Takeaways

  • Dwelling coverage is the part of a homeowners insurance policy that covers the physical structure of your home and attached structures like a deck.
  • Use a replacement cost calculator to determine how much dwelling coverage you need.
  • Your dwelling coverage should match the replacement cost of your home, which is the cost to revuild it and not the market value.

What is covered by dwelling insurance?

Dwelling coverage on a standard home insurance policy covers your home’s structure, including interior and exterior features like siding, roofing, flooring, windows and more.

Standard homeowners insurance is an all perils or open perils policy. That means it covers anything that isn’t specifically excluded by the policy. Some of the common perils covered by home insurance include:

  • Fire or lightning
  • Windstorm or hail
  • Explosion
  • Riot or civil commotion
  • Damage caused by aircraft
  • Damage caused by vehicles
  • Smoke 
  • Vandalism or malicious mischief
  • Theft   
  • Volcanic eruption
  • Falling object   
  • Weight of ice, snow or sleet
  • Accidental discharge or overflow of water or steam
  • Freezing of a plumbing, heating or air conditioning system

Again, with a standard HO-3 policy, a peril doesn’t need to be listed to be covered. As long as it’s not excluded, it’s covered.

What isn’t covered by dwelling insurance?

While dwelling coverage will protect you from damages associated with a host of events and natural disasters, some losses are not covered.

Standard exclusions on a homeowners policy include:

  • Floods
  • Earthquakes
  • Water and sewer backup
  • Mold
  • War and terrorism
  • Intentional damage
  • Wear and tear or poor maintenance

Some of these items can be covered with an endorsement or a separate policy. Talk to your insurance representative about what is or isn’t covered by your policy so you can get additional coverage if necessary.

How much dwelling coverage do I need on my homeowners insurance?

Your homeowners insurance should cover the full cost to replace your home. That means you should purchase coverage in a dollar amount equivalent to 100% of the cost of rebuilding your home from scratch.

Even after you figure out the right amount, you should update your policy periodically. Alongside inflation, building and repair costs can grow over time, so it is crucial to keep an eye on your dwelling coverage limits and make sure they do not slip below the cost of replacing your home. It is also possible to get an inflation guard endorsement that will increase your dwelling coverage limit annually to keep it in line with inflation.

If your dwelling coverage falls below 80% of the home’s full replacement cost, your insurer may refuse to pay out your claim in full. This is known as the 80/20 rule in home insurance and is in place to ensure that homeowners are paying the correct premium for their coverage in order for the insurer to pay out the full replacement cost.

How is dwelling coverage calculated?

To calculate how much dwelling coverage you need, you first need to know how much it would cost to rebuild your home. You want to ensure you are using current construction costs for your local area. A real estate agent or home construction company can help you with these details.

Once you have the cost to rebuild, you can get a ballpark estimate of how much dwelling coverage you need. All you need to do is multiply the square footage of your home by the square-foot price of local rebuild costs. 

Dwelling coverage = Square footage x Current area rebuild cost per square foot

Our replacement cost calculator can help you determine approximately how much dwelling coverage you need. Bear in mind that this is just an estimate. Many factors can affect replacement cost, including higher-end materials like granite countertops and features like fireplaces, cathedral ceilings and more.

Also, do not forget that in addition to the cost to rebuild, there may be other costs, such as tear-down and debris removal and labor and construction costs.

What is replacement cost coverage?

The replacement cost of your home is not the same as the home’s market value.

Market value can fluctuate and includes the value of the land. By contrast, full replacement cost is how much you would need to spend to actually replace the home in the event of a complete loss.

Replacement cost coverage is calculated based on the size, construction type, and features of your home and changes based on things like inflation or remodeling over time.

What is extended replacement cost?

In some cases, you may want to purchase coverage beyond the full replacement cost of your home. This is known as extended replacement cost.

“Extended dwelling coverage is designed to give wiggle room from the replacement cost coverage listed on your policy,” O’Keefe says.

It usually extends your dwelling coverage by 25% or 50%, although you may also be able to buy guaranteed replacement cost coverage that has no limit.

Frequently asked questions

Does dwelling insurance cover water damage?

Dwelling insurance covers some forms of water damage but not others. Water damage covered by home insurance must be sudden and accidental, such as a burst pipe or high winds damaging the roof and allowing rain in. Floods caused by overland sources are not covered.

Why is my dwelling coverage so high?

Your dwelling coverage is carefully calculated based on the reconstruction cost of your home. It may even be higher than the market value of your home. If you think there’s been an error in the calculation of your home’s dwelling coverage, contact your insurance company to review the features of your home.

How much dwelling coverage do I need for a condo?

Condo insurance works differently from home insurance because condo owners aren’t required to insure the entire structure. Dwelling coverage for a condo is usually called building property coverage and covers the parts of the structure for which the owner is responsible. Check with your homeowners association to find out what the master policy covers and what you need to cover to determine how much coverage you need.

Sources:

Insurance Information Institute (III).” How much homeowners insurance do I need? ” Accessed March 2024.

Department of Commerce & Insurance and National Association of Insurance Commissioners (NAIC). “ A Consumer’s Guide to Home Insurance ” Accessed March 2024.

– Chris Kissell contributed to this article

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Lena Borrelli
Contributing Researcher

 
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Lena Borrelli is a freelance writer from sunny Tampa Bay who has worked with such leading industry titans as Gronk Fitness, Morgan Stanley, Wells Fargo and Simon Corporation. Her work has most recently been published on sites like TIME, Microsoft News, Bankrate, Investopedia, Fiscal Tiger, The Simple Dollar, ADT and Home Advisor.