Dwelling insurance, or Coverage A, is the part of your homeowners insurance policy that covers the physical structure of your home and any attached structures, such as a garage. It pays to repair or rebuild your home if it’s damaged by a covered peril, like a fire, windstorm, falling objects, or break-in.
What does dwelling insurance cover?
Generally, standard homeowners insurance policies include “open peril” coverage, meaning your dwelling insurance will cover all perils, or issues, except those expressly excluded from coverage based on your policy agreement.
Typically, these perils are sudden and accidental, meaning they are entirely out of your control. Standard dwelling insurance policies often cover losses caused by the following:
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Fire and smoke
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Lightning
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Hailstorms
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Vandalism
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Theft
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Explosions
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Falling objects
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Damage from the weight of snow and ice
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Damage from vehicles and airplanes
Damage from some perils, like windstorms and hailstorms, may be excluded from coverage. This is often true for policies that insure properties in high-risk areas, such as along coastlines that experience frequent hurricanes.
Learn more: Open and named perils.
What isn’t covered by dwelling insurance?
While dwelling insurance covers many losses you could face as a homeowner, it doesn’t cover everything. Here are some examples of common perils that aren’t covered under Coverage A:
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Floods
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Earthquakes
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Sinkholes
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Damage from lack of maintenance or negligence
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Damage to unoccupied homes
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Damage to homes under construction
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Damage from rot or mold
If you live in an area that experiences flooding or earthquakes, you should consider purchasing a separate flood insurance or earthquake insurance policy. The same is true if you live in an area prone to sinkholes, as Coverage A typically excludes resulting damage.
How are dwelling coverage claims paid?
There are several ways an insurer may pay out on a dwelling insurance claim, but the most common approaches are actual cash value and replacement cost value. Here’s what you need to know about these two approaches.
Actual cash value dwelling coverage
Actual cash value (ACV) dwelling insurance covers the cost to repair your home, minus depreciation, after a covered loss. Depreciation is based on factors such as the age of the house and its condition at the time of the incident.
For example, imagine you built your home seven years ago and, based on the costs at the time, you insured it for $350,000. A massive fire burns your home to the ground, and you have to rebuild. With an ACV policy, your insurer might only give you $300,000 to rebuild because the house has depreciated in the last five years.
Replacement cost value dwelling coverage
Replacement cost value (RCV) dwelling insurance pays to rebuild your home without subtracting depreciation from your claim settlement. Most standard dwelling insurance policies include RCV. However, RCV dwelling policies tend to be more expensive than ACV policies.
To understand how RCV dwelling insurance works, we can revisit the situation from above. If you had an RCV dwelling insurance policy and rebuilding costs were equal to or more than your replacement value, the insurance company would issue a claim check for the full $350,000 because the payout doesn’t include depreciation.
How much dwelling coverage do you need?
You should have enough dwelling insurance to cover the cost of rebuilding your home to its original condition after a loss.
For example, if you estimate that rebuilding your home will cost $300,000, you should have at least $300,000 in dwelling coverage. You might need to choose higher coverage limits if the house has expensive construction materials or high-end fixtures.
The easiest way to determine your home's replacement cost value is to multiply your home's square footage by the building cost per square foot in your area. An insurance agent or representative can also help you determine your replacement cost.
It’s important to know that the replacement cost of your home is not the same as its fair market value. Depending on your home and where you live, the replacement cost can be higher or lower than the fair market value.