Homeownership comes with a host of benefits, but there are also risks. Dwelling insurance is a key part of a homeowners insurance policy that covers the cost of rebuilding or repairing structural damage to a home following a covered event.
Dwelling insurance pays either to repair or rebuild your home when a covered disaster — called a peril — strikes. A policy will specify what damage is covered and by what types of disasters, but you can often supplement your coverage with another insurance product to address the gaps —like adding a flood insurance policy to a home located in a flood zone.
What Is Covered by Dwelling Coverage?
You can think of a dwelling policy as the part of homeowners insurance that specifically covers the structure of your home — the roof, windows, walls, floor and foundation, for example.
Coverage typically includes damage to a home’s attached structures, including porches and garages. Repairs to electrical, plumbing and HVAC systems are often covered, too.
In general, dwelling insurance covers damage to your home’s structure caused by weather or crime. Common perils include:
- Lightning
- Hail and other falling objects
- Wind storms, including hurricanes and tornadoes
- Fire and smoke
- Snow, sleet or ice
- Theft
- Burst pipes
Although not as common, car collisions, vandalism and explosions might count as covered perils in a standard policy.
Dwelling Coverage Limits and Exclusions
Like any insurance policy, dwelling policies come with coverage limitations and exclusions. When you create your home insurance policy, you’ll decide on the maximum dollar amount it’ll pay when a covered event causes damage to a home.
Before the insurer covers a claim, you must pay an out-of-pocket deductible toward the claim. The policy will cover the rest, up to a stated maximum payout. If the claim falls under an exclusion — perhaps a fire in an uninsured, detached garage — or exceeds your policy limit, you may have a personal liability for some or all of the repair costs.
Common exclusions under a dwelling policy include:
- Sewer backups
- Flooding
- Pest damage
- Earthquakes
- Sinkholes
- Mudslides
- Routine wear and tear
- Damage following a lack of maintenance
While they do not receive coverage under your homeowner’s insurance, these risks can be covered with a separate insurance policy. High-risk dwellings, such as homes in flood zones that are prone to water damage, might benefit from additional insurance that covers the heightened likelihood of damage to the home’s structure.
Dwelling Insurance vs. Other Home Insurance Coverages
Home insurance comprises four coverage areas. These coverages work together to cover the costs of repairing or rebuilding your home after a disaster destroys it or a lawsuit attempts to hold you liable for an incident on your property. The four coverage areas are:
- Dwelling coverage
- Personal property coverage
- Liability coverage
- Additional living expenses coverage
Where dwelling coverage protects the structure of a home, personal property coverage protects a homeowner’s belongings. When a covered peril occurs, the insurance company pays to replace furniture, clothing, electronics and other personal items.
Liability coverage provides financial assistance for legal matters. When someone gets injured on your property, this part of the policy addresses the costs of a lawsuit, including lawyer’s fees and medical payments.
Additional living expenses coverage addresses costs related to loss-of-use situations. Typically, it assists with temporary relocation that might be necessary immediately after the damage and during any subsequent construction.
Choosing the Right Amount of Dwelling Coverage
When deciding how much dwelling coverage to purchase, it’s generally better to have too much than not enough. You should carry enough insurance to fund the cost of rebuilding your home and its attached structures (you can account for detached structures through other structures coverage). When working with an insurance agent to prepare an estimate, don’t forget to include the costs of built-in appliances like the water heater, HVAC system and electrical or plumbing systems.
While square footage and age have an impact, your premium or insurance cost depends largely on the value of your home.
Insurance companies generally value homes using one of two methods, and the method selected can impact the quality and cost of your dwelling coverage. It’s important to note that a home’s market value, which can fluctuate, does not directly impact the cost to insure it.
Some special groups, such as veterans, can lower their insurance costs by taking advantage of targeted discounts.
Replacement Cost Value
A replacement cost value (RCV) policy treats your home’s value as the cost to rebuild it using similar materials and quality based on today’s prices for material and labor.
Say a tree falls on your attached garage. If the incident counts as a covered loss, an RCV policy will cover the cost of a brand-new garage door — even if yours was 15 years old — up to your policy’s coverage limit.
Actual Cash Value
A home’s actual cash value (ACV) is its RCV after subtracting depreciation. Though property typically appreciates over time, the aging of the home’s materials causes depreciation.
With an ACV policy, your insurance company won’t cover the entire cost of replacing damaged property. Consider the same example of a tree falling on your attached garage. Your insurance policy will only pay you the market value of a 15-year-old garage door rather than the value of a brand-new one.
In general, a policy that bases your home’s value on its ACV will come with a lower premium to match a lower coverage limit.
Guaranteed Replacement Cost and Extended Replacement Cost
Policies with guaranteed replacement cost (GRC) or extended replacement cost (ERC) provisions, called endorsem*nts, work like replacement cost value policies but allow the insurance payout to exceed the coverage limit.
GRC policies guarantee that your insurer will cover all necessary rebuilding costs, even if they exceed your coverage limit. ERC policies will cover a specified percentage above your policy limit. Both options boost the cost of your premiums.
Say your standard policy’s coverage limit is $300,000. After a fire destroys your home, your contractor estimates that it’ll cost $350,000 to rebuild it. If you have a GRC endorsem*nt, the extra $50,000 will be covered after you pay an additional deductible. With an ERC endorsem*nt that extends your coverage by another 15%, your insurance company will cover a total of $345,000.
The Bottom Line
Dwelling coverage is part of a standard homeowners insurance policy that protects the structure of your home in the face of a covered disaster. Your policy’s coverage limit determines how much assistance you’ll receive, and exclusions specify what types of disasters aren’t covered.
It’s important to carry enough insurance coverage to restore your home, which may mean adding additional coverage to supplement a standard policy. Review your home insurance policy to determine how it values your home: While an ACV level offers the most affordability, it could leave you unprotected and with hefty out-of-pocket expenses when you need it most.
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Frequently Asked Questions About Dwelling Insurance
Dwelling insurance is a part of homeowners insurance. Dwelling insurance covers the cost of repairing damage to the structure of your home, while other parts of a homeowners insurance policy cover other incidents, such as the cost to replace stolen personal property.
Coverage A is another term of dwelling coverage, which is a significant part of homeowners insurance. The Coverage A component of a homeowners insurance policy covers the cost of damage to a home’s structural elements, including the foundation, windows, floors and walls.
You have three overarching coverage options for dwelling policies (DPs): DP1, DP2, and DP3. Among these types of coverage, DP1 offers the least coverage, and DP3 offers the most coverage, with DP2 somewhere in the middle.
DP1 and DP2 are named peril policies because they list which risks the policy covers.
On the other hand, DP3 policies are known as open peril policies because they list only what perils are specifically excluded.
DP1’s coverage limit is generally based on a home’s ACV, whereas DP2 and DP3 are based on a home’s RCV. While DP3 policies offer wider coverage, you’ll likely find that an insurance quote for a DP3 policy will come in higher than one for a DP1 or DP2 policy. You can find sites online with tools and calculators to help estimate homeowners insurance costs and compare the cheapest rates.
Dwelling insurance may cover damage resulting from a break-in. It won’t pay to replace your personal belongings; this would fall under personal property coverage.
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