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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:
HailFireLightningExplosionsAircraftsVehiclesSmokeVandalismFalling objectsThe weight of ice or snowFreezing pipesTheftAccidental 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.
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 styleSpecial featuresCustom designMaterialsType of roofType of exterior wallsNumber of floors, bedrooms, and bathroomsNew building codes or bylawsHard-to-replace featuresInflation
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.
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.
