Home insurance includes several types of coverage, but nothing is more important than dwelling coverage. If your home is damaged in a covered incident, dwelling coverage can help repair, rebuild, or replace it. This valuable type of coverage protects your home from the foundation to the roof, and it protects your other assets when disaster strikes.
Definition and Examples of Dwelling Coverage
Dwelling coverage in an insurance policy helps pay for the costs of rebuilding or replacing your home after a covered loss occurs. It also covers attached structures, such as a carport or garage, as well as permanently installed home fixtures like air conditioning and heating units, electrical wiring, and plumbing.
Dwelling coverage only covers the structure of your home and does not cover personal property such as clothing and furniture, or separate structures like a swimming pool 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 the market value of the home or the purchase price. Generally, dwelling coverage is designed to cover the costs of replacing your home, without applying depreciation for wear and tear.
How Does Dwelling Coverage Work?
Dwelling coverage is not difficult to understand, but knowing how it works can ensure you have adequate protection.
Here’s a quick overview of how dwelling coverage works. If a windstorm blows through and a tree falls on your home causing $8,000 in damage, you can file a claim against your dwelling coverage. You will pay the deductible, and then the insurance company will pay the remaining amount to cover the full cost of the damages. Any damage to your furniture or television, which is considered personal property, will be covered in other sections of your insurance policy.
Perils Covered by Dwelling Coverage
Most homeowners insurance policies cover damages caused by:
- Accidental or sudden water or smoke leaks
- Aircraft and other vehicles
- Civil disturbances, vandalism, and malicious mischief
- Explosions
- Fires
- Hail
- Tornadoes
- Lightning
- Theft
- Windstorms
The HO-3 policy, also known as the special form, is the most common type of homeowners insurance policy. It covers all perils, except those that are explicitly excluded.
Note: Most standard homeowners insurance policies, including HO-3s, do not cover damage to your home resulting from earthquakes or floods.
Deductibles
Deductibles apply to dwelling coverage. A deductible is the amount of money you must pay out of pocket when you file a claim. For example, if you have a $1,000 deductible on your dwelling coverage and file a claim for $5,000 after a fire, the company will pay a maximum of $4,000.
Regional Exclusions
In some areas of the country, homeowners insurance policies may exclude certain perils. For example, homeowners insurance policies on the Gulf Coast of Texas may not 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 insurer may apply a percentage deductible to hail and wind damage caused by a named storm from the government weather service.
For instance, if your home is damaged by hail during a storm named Hurricane Gwendolyn by the National Hurricane Center, the insurance company may apply a 2% storm deductible to your claim. So if you have dwelling coverage of $200,000, you would need to pay a $4,000 deductible for storm damages, even if you have a $1,000 deductible.
Actual Cash Value vs. Replacement Cost
Most homeowners insurance policies feature “replacement cost” coverage for dwelling coverage. Replacement cost coverage pays to rebuild or replace your home, without applying depreciation, if it is completely destroyed in a covered incident.
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The “actual cash value” coverage applies to certain residential structures, particularly your home’s roof. Actual cash value settlements deduct depreciation. For example, if a hailstorm causes $10,000 worth of damage to a roof that is 15 years old, the insurance company may arrive at a settlement of $5,000, after deducting the depreciation, based on the actual cash value of the roof.
Note: Insurance companies often require policyholders to purchase dwelling coverage equal to at least 80% of the cost to replace the home. So if your home would cost $200,000 to rebuild, you will likely need at least $160,000 in dwelling coverage.
However, some insurance companies may require you to purchase dwelling coverage equal to 100% of the cost to replace your home.
You should keep in mind that dwelling coverage in most policies will only pay up to the maximum limit. So if your costs exceed your dwelling coverage limit, you will have to pay the remaining expenses out of pocket, even if you have a policy that provides 100% replacement cost coverage. It’s important to increase your dwelling coverage whenever you make improvements that enhance the value of your home.
Dwelling Coverage in Action
Let’s look at some examples of how dwelling coverage works. In each example, the home is covered by $300,000 in dwelling coverage, with a $1,000 deductible.
A hailstorm causes $5,000 in damage to a roof that is 10 years old. Due to the wear and tear on the roof, the insurer values the roof at $3,000. After the $1,000 deductible is applied, the insurance company settles the claim for $2,000.
A fire causes $25,000 in damage to the kitchen and living room of a home. The company agrees to the claim and pays the policyholder $24,000.
A flood causes $10,000 in damage to the structure of a home on the Gulf Coast. The homeowner does not 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 the dwelling coverage is adjusted. Rebuilding the house with the new addition will cost $350,000, but the insurance company pays $299,000, based on the coverage limit and deductible in the policy.
Factors that affect the cost of replacing your home may include its age, condition, type of construction, and special features.
Optional Coverage to Consider
Dwelling coverage in standard insurance policies may not provide all the protection you need. However, most large insurance companies offer endorsements and riders to help enhance your protection.
Extended replacement cost coverage: This endorsement comes into play once your dwelling coverage limit is exceeded. This optional coverage typically increases dwelling coverage by 25% above your dwelling coverage. For example, if you have $200,000 in dwelling coverage, the extended replacement cost endorsement would increase your protection to $250,000.
Flood insurance: Standard homeowners insurance policies may not protect against flood damage. However, you can purchase flood insurance through the National Flood Insurance Program. Many national insurance companies sell flood insurance, and some offer their own flood insurance policies.
Building ordinance or law coverage: When an older home is destroyed by a covered loss, dwelling coverage may not provide enough money to rebuild it according to current building codes. Building ordinance or law coverage can help pay for the costs of upgrading elements like electrical systems, heating and cooling systems, and plumbing.
Do I Need Dwelling Coverage?
Yes,
If you own a home and have a mortgage, dwelling coverage is included in standard insurance policies. Although the law does not require you to purchase a homeowners insurance policy, if you finance a home, the loan will require it. Even after you pay off your mortgage, it makes financial sense to carry a homeowners insurance policy with enough coverage to rebuild or replace your home.
Takeaways
Dwelling coverage helps pay for the costs of rebuilding or replacing your home after a covered loss. Insurance companies typically require policyholders to carry dwelling coverage that equals 80% to 100% of the home’s replacement cost. Dwelling coverage is subject to deductibles and exclusions. Optional coverages can help enhance your dwelling coverage protection. Lenders require homeowners insurance for homes they finance.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
National Association of Insurance Commissioners. “Homeowners Insurance.” Accessed September 28, 2021.
Texas Department of Insurance. “Understanding Homeowners Insurance.” Accessed September 28, 2021.
Maine State. “Consumer Guide to Homeowners Insurance.” Accessed September 28, 2021.
Massachusetts State. “Understanding Homeowners Insurance.” Accessed September 28, 2021.
Source: https://www.thebalancemoney.com/what-is-dwelling-coverage-5203374
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