- Coverage A or dwelling coverage is the main section of a home insurance policy covering the structure of the home and any attached structures.
- Dwelling coverage varies across various forms of homeowners insurance in terms of what exactly is covered and how the reimbursement for damage repairs is calculated.
- How much dwelling coverage depends on a number of factors such as the type, size, and age of the house.
What is a dwelling?
In the context of a home insurance policy, a dwelling constitutes the actual structure that the homeowner lives in along with any structures that are attached to that structure. Attached structures may include things like a garage, deck, chimney, built-in appliances, etc. Structures such as a shed or detached garage would not be included under this coverage. They would fall under section B “other structures” coverage.
There are some different nuances to what is included in the dwelling section of coverage if the dwelling owned is a condo. We will discuss this in more depth below. For now, just note that what’s included may differ.
What does dwelling coverage A cover?
Dwelling coverage will cover repairs to a home or the rebuilding of a home if damage occurs to the home due to a peril covered in the policy. The list of perils covered varies among different types of homeowners policies.
What perils are covered by dwelling coverage
What constitutes a covered peril for dwelling insurance in a home insurance policy differs across the various forms of homeowners insurance. There are two ways that perils can be included and excluded in a policy for dwelling coverage. The two ways are a named perils basis and an open perils basis.
Dwelling coverage in other policies such as HO-3 and HO-5 are typically offering protection on an open perils basis. An open perils policy covers all perils that are not explicitly excluded from the policy. This form is generally more encompassing. If you have a standard homeowners insurance policy, HO-3, which is by far the most widely used policy, your dwelling coverage provides open-peril protection.
What perils are typically included in dwelling coverage A?
The perils that are typically covered when it comes to dwelling insurance include:
- Fire or lightning
- Wind or hail damage
- Vandalism or theft
- Weight of ice, snow, or sleet
- Falling objects
- Damage caused by an aircraft or vehicle not owned by the homeowner
- Volcanic eruptions
- Sudden and accidental water damage
While these are standard perils that are included, the perils may differ from policy to policy, insurer to insurer, and location to location. It is important to read through and understand what is covered in your specific policy. Make sure to talk with your insurance agent to understand what you are covered against as well.
What perils are typically not covered by dwelling insurance?
There are a few perils that are typically excluded from every form of homeowners insurance. These include perils such as:
- Earthquakes or other ground movement
- Normal wear and tear
- Sewage backups
Some of these perils can be covered if the homeowner purchases separate policies to specifically cover that peril or adds an endorsement or rider to their home insurance policy. As to be expected, adding these coverages will increase the total homeowners insurance premium.
Again, it is important to read through your policy to understand what is covered and not covered and talk with your insurance agent to determine what options are available to you.
Maximum coverage limits in dwelling insurance
The various forms of home insurance policies differ in the maximum amount that will be awarded to the homeowner for damage to or destruction of their dwelling. There are two normal reimbursement forms and two optional add-on reimbursement forms. The two standard forms are actual cash value and replacement cost value. The two optional add-ons are extended replacement cost value and guaranteed replacement cost value. No matter which limit is utilized in the specific policy, the dollar amount of the maximum amount that would be awarded and any calculations for how the number would shift over time, are outlined in the policy. The typical factors that are taken into account when determining the maximum reimbursement amount include:
- Construction and labor costs in the local area
- Size of the home (square footage)
- Custom features that have been built into the home
- The style of the home
Usually, the insurance provider will have their own appraiser come out and value the home. It is good to note that most policies contain clauses that allow a homeowner to hire their own independent appraiser. This could be good as the insurance appraiser may provide an estimate of the home’s value that is wildly off what the homeowner believes the house is worth.
Actual cash value
The actual cash value basis provides the lowest coverage limit of all the reimbursement options. If a homeowner experiences damage to their home that is the result of a covered claim and they have an actual cash value limit in their policy then the amount that was originally stated as the maximum reimbursement amount will be reduced by depreciation over time, leading to a lower dollar amount limit as time goes on.
Let’s look at a simplified example. Say the homeowner initially has a $250,000 actual cash value limit for their dwelling coverage. Ten years later damage as the result of a covered peril occurs that destroys the home and it will take $500,000 to rebuild the home because of inflation of building materials and labor. The insurance company will pay out $250,000 minus depreciation. Let’s say in this case depreciation is $10,000 per year. Therefore, the insurance provider will reimburse the homeowner for $250,000 minus $100,000 equaling $150,000. This leaves the homeowner to have to foot the bill for the other $3350,000 to rebuild the home. As time goes on actual cash value coverage can lead to minimal coverage to the homeowner.
Side note: the house or a structure attached to the house, like the roof or chimney have different useful lives that are set by the IRS. These useful lives are used in the calculation of the depreciation in the value of the home or an attached structure.
Replacement cost value
The replacement cost value provides the same coverage limit as the actual cash value basis but does not factor in depreciation. Looking at the previous example, if damage to the home caused by a covered peril occurs and it is determined that it will take $500,000 to rebuild the home to the same standard as it was before, then the company will reimburse the homeowner for $250,000. This will happen even if the damage occurs ten years after the policy was originated. As the protection is higher for the homeowner with RCV, the premium cost to the homeowner will be higher as well. Notice that the coverage is limited to the amount stated in the policy. In this example, the homeowner is left to pay for the additional $250,000 that will be required to rebuild the home.
Extended replacement cost
Extended replacement cost is an optional protection that can be added to dwelling coverage A, by the homeowner. This additional coverage increases the replacement cost protection from 100% of what the cost would be to replace the home to its previous standard. The extended replacement cost protection offered will normally increase the protection amount to 125-150% of the replacement cost value.
Looking back at the example we have been using, assume the same damage to the home occurs and it is again determined that $500,000 is how much it would take to replace the home in full. The homeowner will receive $312,500 to $375,000 depending on how much extended replacement cost coverage they added to the policy. This can provide the homeowner with an opportunity to upgrade their living arrangements.
The extended replacement cost add-on is only a minimal additional cost to a homeowner and is offered by most insurance providers. The add-on coverage will typically only add an additional $25 to $50 in annual premium cost to the homeowner. More disaster-prone areas may have higher costs to add this protection.
Guaranteed replacement cost
Guaranteed replacement cost is the most protective form of reimbursement that can be put on a policy. With guaranteed replacement, the cost of rebuilding of the home, no matter how high it is, will be reimbursed to the homeowner.
Looking at the example again. Covered damage occurs and it costs $500,000 to rebuild the home. With the guaranteed replacement add-on on the policy, the insurance company will pay out $500,000 to the homeowner to rebuild the home.
As one would expect, because this is the most protective form of dwelling coverage, it also adds the most expense to a home insurance premiums. The typical cost of this add-on is around $50 to $100 per year. It could potentially be higher depending on the location of the home.
Dwelling coverage for condos
Dwelling coverage is a bit different for condo owners. Condo owners will purchase the HO-6 form of homeowners insurance. Dwelling coverage under an HO-6 policy is similar to that of the standard HO-3 policy. Everything above applies to some extent.
The above being said, there is an added wrinkle with a condo not being a stand-alone structure as well as being a part of a larger association of condos. Each condo association will have a master insurance policy that will then dictate any additional coverage that the condo owner may need to purchase. Master condo policies have one of three coverages: bare walls-in, single entity or walls-in, and all-in.
- Bare walls-in covers the bare walls and anything behind the walls. Any structure that is a part of the building and unit like plumbing, structure, wiring, etc. will be covered, but nothing else
- Walls-in (also called single entity) includes everything that is covered in bare walls, and also covers fixtures like countertops as well as built-in appliances and other things of that nature.
- All-in master policy will cover essentially everything that would normally be covered in a standard dwelling coverage including remodels and alterations.
With the all-in master policy, the condo owner will most likely not need to get any dwelling coverage A in their HO-6 policy. With the other two forms of master policies, there may be gaps in coverage, like some sort of upgrades, alternations, or renovations that are done to the home by the homeowner. If you have a condo, it is vitally important to understand what your condo association’s master policy covers and what your HO-6 policy covers so that you can correctly set your dwelling coverage limits.
Coverages included in homeowners insurance policy
There are six sections to a standard home insurance policy:
- Dwelling coverage A: this is the coverage we have been discussing in this article.
- Other structures coverage B: meant to protect any detached structures on the property.
- Personal property coverage C: meant to protect any personal belongings of the homeowner.
- Loss of use coverage D: meant to reimburse the homeowner for any additional living expenses incurred as the result of a covered damage claim.
- Personal liability coverage E: meant to pay for any medical expenses or legal fees that are incurred as the result of an injury on the property that was deemed to be the fault of the homeowner.
- Medical payments to others coverage F: meant to pay any medical bills for a guest that is injured on the property, no matter who is deemed to be at fault.
What needs to be included in dwelling coverage? How much coverage do I need?
Your dwelling coverage covers more than just your home itself. The value of your dwelling needs to include:
- Grading and foundation costs
- Attached garage
- Attached deck
- Screened-in patio
- Inground pool
- Any permanently installed features such as steam showers, custom tile in the kitchen, large fireplaces
- All built-in appliances (other appliances are covered under personal property coverage)
When you are determining the value of your home, make sure the agent or company helping you with the replacement cost estimator knows about all the special features of your home.
These features, the age of your home, and the construction style will affect the replacement value considerably. Older homes will have a much higher replacement cost because the style of construction and materials used in the early 1900s are more expensive than materials common today.
What is not included in the replacement cost of your coverage A:
The replacement cost of your dwelling should only cover your dwelling and the structures that are permanently attached to the dwelling. If it can be removed, it is covered under your content’s coverage. If it is a permanent part of the dwelling structure it needs to be included in the replacement cost of your dwelling.
Your replacement cost of the dwelling or condo will be based on:
- The square foot of the dwelling
- The cost of construction and labor in your area
- Age of the dwelling
- Style of construction
- Exterior and interior construction materials
- Any custom-built features
The most accurate valuation of your home is from a licensed home appraiser in your area. You should update your appraisal every 3 – 5 years or after any major renovations or remodels have been completed.
If you do not have a current appraisal your agent or company may offer to help you create a value with a replacement cost estimator. These tools provide a general guideline of the replacement cost but are not as accurate as an appraisal.
Types of dwelling policies
There are several common homeowners forms that offer different levels of coverage. The most common homeowners form is the HO-3, but you may be offered one of the other forms.
- HO-2. The HO-2 policy is a “named peril” policy. This form covers about 15 named perils, including fire, lightning, windstorm, hail, explosion, riot, vandalism and malicious mischief, and theft. Some mortgage companies will not accept the HO-2 if you purchase this policy form check with your mortgage company to make sure they accept it!
- HO-3. The HO-3 policy is a special form policy that covers all perils, except those specifically excluded. The most common exclusion are earthquakes, floods, landslides, mudslides, nuclear accidents, and sinkholes. Overflow of septic and sewer backup are also excluded under the HO-3.
- HO-6. The HO-6 covers condo owners. The covered perils are the same as the HO-3, but it only covers the dwelling from the outside walls in and coverage for the roof is optional depending on the contract with the condo association. The dwelling coverage limit on a condo owners policy needs to cover the structural components required in the contract and the walls, built-in appliances, floors, and roof trusses.
- DP-2. The DP-2 is the fire policy equivalent of the HO-2. This policy is a landlord coverage for rental dwellings or homes that are not owner-occupied. It is a named peril policy with the same 15 named perils that the HO-2 policy covers.
- DP-3. The DP-3 is the fire landlord policy equivalent of the HO-3. It offers open peril coverage for rental or homes that are not owner-occupied. It offers the best coverage for homes that do not fit a homeowners policy.
Now, you should have a solid understanding of how dwelling coverage A works. Dwelling Coverage or Coverage A is the primary coverage on the homeowners, condo owners, or dwelling fire policy. It covers repairing or rebuilding your home due to a covered peril. It is also important to understand your coverage limits so you are not left surprised if your dwelling insurance doesn’t cover the full cost to rebuild your home.