How much dwelling coverage do I need? Coverage A on a homeowners policy: the house itself and what is attached to it, set to the cost of rebuilding rather than to what the home would sell for.
Dwelling coverage is Coverage A, the limit on the structure. It reaches the house and what is built into it: the framing, the roof, the windows, the cabinets, the flooring, the built-in appliances, the attached garage and the plumbing, wiring and ducting inside the walls. It does not reach the land, and it does not reach a detached casita, a block wall or a free-standing shed, which are Coverage B, other structures. Contents are Coverage C. The limit is what the policy pays at the outside on a total loss, which is why it is the number to check first on the declarations page.
The limit should be the cost to rebuild, not the price of the home. An insurer sets it with a replacement cost estimator that works off the square footage, the finish level, the roof and the local cost of labor and material, and the result can land well under the sale price in a neighborhood where the lot carries much of the value, or well over it on an older home with expensive finishes. Extended replacement cost and guaranteed replacement cost endorsements sit on top for the case where rebuilding costs more than anyone projected, commonly adding 10 to 50 percent above the limit. The other coverages are commonly written as percentages of Coverage A, commonly 10 percent for other structures, 50 to 70 percent for contents and 20 to 30 percent for loss of use, so Coverage A drives the whole policy and most of the premium with it.
Being under-insured costs more than the missing coverage. A total loss pays the limit and stops, and many policies also carry a coinsurance provision requiring the limit to be at least a stated share of replacement cost, commonly 80 percent, or a partial loss is settled at a reduced share as well. Construction costs move, so a limit that was right at closing drifts, which is what an inflation guard endorsement exists to track and what a look at the declarations page each renewal is for. This is general information: the declarations page and the policy decide a claim, and the agent who wrote it is who to ask about the limit.
A worked example
A 2,100 square foot house sells for $450,000 on a lot worth about $120,000. The insurer's estimator puts the rebuild at $160 a square foot, so Coverage A is $336,000, with other structures at 10 percent ($33,600), contents at 50 percent ($168,000) and loss of use at 20 percent ($67,200). Insuring to the $450,000 price instead would raise the premium for coverage that can never be claimed, because the lot is not at risk.
What the lender calls this coverage
Questions people ask
Should dwelling coverage equal the purchase price?
No. The price includes the land and the location, and neither burns. The limit should be the cost to rebuild the structure, which in a neighborhood with expensive lots is commonly well below the price and on an older home with costly finishes can be above it.
What happens if dwelling coverage is too low?
A total loss pays the limit and stops, leaving the rest on the owner. Many policies also carry a coinsurance provision requiring the limit to be at least a stated share of replacement cost, commonly 80 percent, and a partial loss under an underinsured policy is then settled at a reduced share too.