Shopping for the right home insurance plan means doing homework, and there’s no more important assignment than nailing your dwelling coverage. That’s because dwelling coverage is the amount you’re counting on to rebuild your home — whether a falling tree squashes your garage, a grease fire guts your kitchen, or you need to rebuild your entire house from the studs up.
Or put it this way. A policy without adequate dwelling coverage is like a home security system without a hub. It doesn’t matter how proud you are of your home security camera set-up — without the central hub, your home’s at risk. Which is why we like to say, home insurance is home security. Your policy, and the dwelling coverage specifically, secures your investment from catastrophe.
The truth is, figuring out how much coverage you need isn’t all that complicated. (I’m going to show you how to get started in just a sec.) But there are a few things to know about protecting your property before we get to the nuts and bolts. In this homeowners dwelling coverage guide, I’m going to show you:
- What dwelling coverage is (and isn’t)
- What your dwelling insurance covers
- What dwelling insurance typically doesn’t cover
- How much dwelling coverage you need
- Two additional types of insurance that may come in handy
FYI: Standard HO-3 home insurance policies usually have separate coverage for structures on your property, such as garages, fences, and gazebos. If an additional structure, such as a porch, is attached to your home, however, you may be able to insure it under your main dwelling coverage.
What Is Dwelling Coverage?
First off, just to make this absolutely clear, a dwelling is a house, not a hole in the Shire where Bilbo Baggins lives. The best home insurance companies have been insuring folks for centuries (yes, centuries), so some of the terms we use today may sound a little old-fashioned. But rest assured, when you get to the section of your HO-3 policy that’s talking about your “dwelling,” it means home sweet home.
And, actually, not just your home. Dwelling insurance covers your porch, your garage, your basketball hoop, your swimming pool, your fence, and even your gazebo (if you’re lucky enough to own a gazebo). In short, anything on your property that’s bolted to the ground falls under the rubric of dwelling coverage.
Because dwelling coverage includes all those physical structures, it eats up the lion’s share of your homeowners premium. Even when you’re considering add-ons such as replacement cost coverage (more on this in a sec), water damage coverage, or extra coverage for your roof, your primary concern is structural, because that’s the kind of bad news that costs the most to fix.
Before we get into what your HO-3 policy actually protects your home from, let’s take a quick detour into what dwelling coverage isn’t, because that’s important too.
Did You Know: When you rebuild after an accident, you may have to build back to code. One way of offsetting those future costs is to consider building ordinance coverage. Some insurance policies — such as Nationwide — throw building ordinance coverage in for free. Earmarking 10 percent of your total dwelling coverage is the usual.
What Dwelling Coverage Is Not
When folks start hunting for home insurance quotes online (which, by the way, I recommend), a lot of them plug in the amount they paid for their home or its current market value to determine their dwelling coverage.
That’s actually not the way dwelling coverage works.
Dwelling coverage isn’t how much your home costs or how much it’s worth now. It’s the amount it will cost to build back your home if and when you need to.
Think about it this way: Say we bought a wireless security system in 2001, and then had to replace it in 2020. It’s very unlikely we’d pay the same amount twice, even if it’s just a question of inflation. It’s the same with houses.
And it’s not just inflation we have to consider with houses. Building materials usually get more expensive over time. Contractors may charge more because of higher demand or the changing market. If you bought the home you live in from someone else, there may even be trouble with the foundation you didn’t know about. Trouble you can’t afford not to fix.
For all those reasons (and many more), the first mental shift to make when you’re thinking about dwelling coverage for your home is planning for the future, not for now.
Sound reasonable? Great. Now let’s talk about those protections.
HO-3 Pop Quiz: True or false: Your home insurance policy covers frozen pipes. Not sure? As a homeowner, you should probably know this. Read on for the answer.
What Does Dwelling Coverage Protect You From?
Your HO-3 policy protects you from a standard list of disasters and accidents. Home insurance providers call these events “perils.”
When a peril strikes, your home insurance policy should kick in and cover your home — as long as the accident you suffer meets two criteria. One: The damage should be accidental or beyond your control. Two: It needs to happen out of the blue and not as a result of your neglect or an underlying fault in construction.
A few examples will make this crystal clear.
Fine points aside, most insurance companies consider theft a peril. As long as you didn’t hang a “FREE HD TV INSIDE!” sign from your mailbox and remove your front door, burglary isn’t your fault.
Similarly, your dwelling coverage has your back in cases of bad weather such as storms and fires caused by lightning. (You even get coverage for some very unlikely events such as a plane or meteor destroying your property.)
The common thread here is accidents. If you can prove one, you’ll likely get a reimbursement check from your insurer to rebuild your home and any structures on your property.
Here’s a full list of the 16 perils your dwelling coverage protects against. According to the National Association of Home Insurance Commissioners, the first six categories account for about 96 percent of home insurance claims.1
- Storms (wind and hail)
- Ice, snow, and sleet damage (usually to your roof)
- Water overflow or steam damage
- Freezing
- Fire or lightning
- Theft
- Smoke
- Exterior or interior tearing or cracking
- Vandalism
- Short circuiting
- Explosion
- Riots
- Aircraft
- Damage from vehicles
- Falling objects
- Volcanic eruption
FYI: One big omission on this list you may have noticed is floods. To insure your property against flood damage, you’ll need a separate policy. If you’re insuring a home in Florida or looking for home insurance in Texas, then flood insurance may not be optional.
Does Dwelling Coverage Cover This?
We’ve talked about the accidents (or perils) your dwelling insurance covers, and we’ve mentioned at least one scenario — flooding — that HO-3 policies never cover. Are there any other cases in which your provider will probably say no?
Yes.
If the blanket requirement for home insurance coverage is “accident,” when an insurer denies a claim, it’s usually because of homeowner neglect. Most of the time, distinguishing between the two is pretty straightforward.
Did a bolt of lightning hit your wall and cut a pipe in two, causing massive internal flooding and floor damage? You’re covered.
Did you let your 30-year-old pipes disintegrate (despite witnessing the telltale signs of an imminent plumbing fiasco) and destroy your drywall? You’re going to have to foot the bill.
Did You Know: Knowing when plumbing is covered by home insurance can get tricky. Our complete guide to plumbing coverage lays out all the rules, along with a few tips for how to avoid plumbing damage in the first place.
We can also put “existing issues” in the neglect column.
Take the pipes from the example above. Imagine if those pipes were the roof of a home you just bought. Now imagine that, instead of the grade A, five-year-old cedar shingles you thought you paid for, you were the not-very-proud owner of a moldering, termite-infested shell. How did you find out? After the first big storm of the season, your bedroom became an above-ground swimming pool.
Unfortunately, your home insurance policy probably wouldn’t come to the rescue here because to an insurance underwriter (the guy with the checkbook), it was your responsibility to check the roof before buying the house.
That’s the big picture. Of course, not every home insurance claim will hinge on neglect or a structural issue. Here’s a list of the five most common scenarios in which your home insurance policy won’t have your back. The good news (if paying more is ever good news) is that you can purchase extra coverage for all of them.
- Water backup (sewers and sump pumps)
- Earth movement (earthquakes, landslides, and sinkholes)
- Mold
- Wear and tear (a first-rate home warranty may also help here)
- Neglect or existing issues
Pop Quiz: A few paragraphs ago, I asked if you thought your insurer would cover you for frozen pipes. I think you know the answer now. If the damage is sudden and accidental, you’re covered. If there was already something wrong, you’ll probably be stuck with the bill.
How Much Dwelling Coverage Do You Need?
We looked at one of the biggest myths about home insurance: that your dwelling coverage is your home’s value or buying price. Now we know it’s actually the amount you’ll need to rebuild your home if and when disaster strikes.
That seems like a paradox from Back to the Future, right? How can you figure out what you’ll be paying in the future?
Good point. You can’t really pinpoint the cost of a rebuild to the dollar. But you can get close. You just need to know how big your house is and how much it costs to build in your area. If you haven’t done this before, here are some tips for calculating home insurance costs.
To make this real, let’s take a 2,500-square-foot home. If we multiply 2,500 by the national average building cost in 2020 ($114 per square foot),2 we arrive at $285,000. Piece of cake, right?
I wish I could tell you it was that easy. But from 2020 to 2022, building costs skyrocketed. To get painfully concrete, what cost $114 per square foot in 2021 now costs over $152!3
That doesn’t mean building prices won’t drop again, but it means even if you’d done your homework and based your dwelling coverage on local contractors’ rates, you’d still have been short a whopping $95,000.
But it doesn’t have to happen to you — and if you invest in a little replacement cost coverage, it won’t.
In a nutshell, replacement cost coverage is a dwelling coverage boost, usually between 20 percent and 50 percent over your basic coverage. Replacement cost coverage will drive your monthly premium up, yes, but it’s also insurance against any rebuilding nightmares where you’re stuck for tens of thousands of dollars you didn’t see coming.
In our case, a 30 percent replacement cost boost would give us $385,850 to rebuild. If we put 10 percent into the pot for inflation coverage, we’d arrive at $399,000, which totally covers us.
Did You Know: Every home insurance provider has a different idea of what goes into a basic HO-3 policy. Lemonade insurance plans, for example, start simple, but they’re cheap and inexpensive to build out. State Farm policies, on the other hand, come with goodies such as replacement cost coverage (for your stuff), nudging the price up a bit.
Do I Need Vacant Home or Landlord Insurance?
Did you know that if you’re not living on your property for 60 days, your insurance provider may consider it empty and stamp null and void on your HO-3 coverage? I’m not trying to scare you. I’m just drawing your attention to a not-so-well-known fact that could leave you scrambling for money if you ever suffer house damage.
The logic behind this policy is that houses that aren’t occupied are at greater risk for basically everything. Vandalism, theft, unchecked damage — you name it. The antidote to getting stuck with an ugly repair bill for your second “dwelling” is vacant home insurance. Just be prepared for a higher-than-average bill. Vacant home insurance tends to run a bit more than a standard home insurance policy.
Landlords may be at the exact opposite end of the home insurance spectrum from second homeowners. Their homes are occupied. But, like folks with empty homes, they’re exposing themselves to a slew of financial risks if they dodge insurance, including personal liability. (Yes, a renter injured on your property may sue you for damages.)
Bottom line? Whether you’ve got an empty house or a house full of strangers, consider a separate policy to protect your investment.
FYI: Dreading a second insurance policy? For landlords, there’s a silver lining. Landlords insurance will also insure you against any rent you lose if your property is uninhabitable.
Final Thoughts
Your dwelling coverage isn’t something you should worry about from day to day. On the contrary, it should be there in your back pocket, correctly calibrated and ready to spring into action if you ever need it. Getting to that level of readiness isn’t rocket science (it’s basic math), but there are a few wild cards.
At present, the biggest wild card is building rates. They’ve gone bonkers over the past few years, which means you may be in for an ugly surprise when it comes time to rebuild — even if you’ve calculated your dwelling coverage wisely (look up top for the magic formula).
I strongly recommend homeowners look into some form of extra coverage beyond standard dwelling insurance. The best protection is replacement cost coverage. At the very least, consider some inflation protection.
Both will drive your insurance rates up a bit, but just imagine the alternative: paying a little less every month and having to take out a $100,000 loan in five years for catastrophic damage you didn’t see coming.
Homeowners Tip: Standard HO-3 insurance policies don’t cover mold damage, because insurers consider mold a homeowner’s responsibility. If you live in an area where mold is a threat, then you should know how to identify mold and find a strategy for dealing with it.
FAQs
Yes, you do. If you’re paying off a mortgage, you’re required to have dwelling coverage (the part of your homeowners policy that covers your house and any structures on your property).
No, flood insurance is always separate. In some areas, it may be required.
Dwelling insurance covers you against 16 big perils, as long as the damage is accidental and not the result of neglect. For a full breakdown, see our list above.
The million-dollar question! These are our top picks for cheap homeowners insurance. As with every service or product we recommend, our choices are based not just on affordability, but also a number of other factors, including coverage, customer service, and the ease of getting an online quote, to name only three.
No, it isn’t. It’s the amount you need to build your home back in the event of a disaster, which — generally speaking — will always be more than your home’s current market value or the amount you paid to buy it.
