What Is Dwelling Coverage Homeowners Insurance?

Coverage A, also called dwelling coverage, is one of the six major homeowners insurance coverage policies. This type of home insurance will provide you with coverage against damage or destruction of a house that you own but not a property that you rent.

The type of damage or destruction coverage A (dwelling) homeowners insurance protects you against can vary from policy to policy, although in general, you can expect to receive coverage against losses caused by fires, tornadoes and other natural disasters. You should however, check to see exactly what protection a specific policy offers you.

This type of insurance policy is therefore designed to protect homeowners against significant financial losses which they would find difficult to recover from by themselves.

Although the risk of suffering a major financial loss is relatively low, insuring against such risks is still recommended because you never know what is going to happen to your home in the future, so it is best to protect yourself against large losses just in case the unexpected happens.

It is worth noting however, that with any home insurance policy there will be things that you are insured against and things you are not insured against.

Taking the time to understand the level of coverage your policy provides you with is something that is recommended for all homeowners, as you may discover that you are left unprotected against a risk which is specific to where you live.

Typically, such risks tend to be environmental, such as property damage due to heavy snowfall or water damage due to flooding.

You should therefore, always ensure that you are indeed receiving full coverage against such risks to prevent yourself suffering from uninsured losses in the event that you ever need to make a claim due to property damage.

Although this might seem like common sense, and it is, you would be surprised at how many people have gaps in their insurance policies because they assumed that by taking out one general policy that they would be insured against all forms of loss.

This however, is not the case, as you are only protected against specific risks as listed in your policy. It is then up to you to determine whether that policy provides you with an adequate level of insurance coverage, or whether you would benefit from upgrading or extending that policy to provide greater insurance coverage.

Below we will look at some of the main points related to homeowners insurance dwelling coverage, and the different options you have when insuring your home.

For information on other homeowners coverage policies, please see the following articles:

Coverage B (Other Structures) Homeowners Insurance
Coverage C (Personal Property) Homeowners Insurance
Coverage D (Additional Expenses) Homeowners Insurance
Coverage E (Personal Liability) Homeowners Insurance
Coverage F (Medical Payments) Homeowners Insurance

You may also be interested in viewing the following videos which discuss the main types of home insurance and the different types of policies that you can take out.

In general, you have two options when it comes to your policy agreement. You can either insure your home with a less than replacement cost policy, or with a full replacement cost policy. The advantages and disadvantages of each of these two options shall be discussed below.

Less Than Replacement Cost

You may, if you choose, take out coverage A homeowners insurance for less than the full replacement cost of your property.

The advantage of doing this is that your insurance policy will cost you less money to maintain. This can be good for families who are on a budget but still want to provide their property with insured protection.

However, taking out less than replacement cost coverage comes with two main drawbacks or risks that you should be aware of. These are listed below.

1) Financial Risk From Being Underinsured

If your house is completely destroyed and you are underinsured because you did not take out full replacement cost coverage, then you will have to pay out of your own pocket the additional amount above your insurance coverage limit that it will cost to rebuild.

For example, suppose your property is insured for $300,000 and is completely destroyed in a hurricane. To rebuild your home it would cost $350,000. Because your home was only insured for $300,000, you will have to pay the extra $50,000 by yourself.

Having to pay this extra amount however, isn’t necessarily a bad thing if you can afford to do so. For some people, they judge the risk of suffering from such a total loss as being so low that it is worth taking out less than replacement cost coverage because by doing so they can insure their home at less expense.

If they do suffer a total loss, then they have savings which they can use to compensate themselves with to rebuild their property or to relocate.

Of course, not everyone can afford to do this, so unless you have a backup plan, then taking on this extra risk may not be the smartest move to make as it could one day end up leaving you homeless if you can’t afford to rebuild.

It is also worth noting, that the risk of you suffering a total loss to your house can vary depending on where in the country you live. Some areas are considered to be low risk in terms of natural disasters, whilst others are considered to be of high risk.

You might therefore want to find out how risky it is where you live, as this is going to influence the type of home insurance coverage that you take out.

In general, factors which can elevate your risk of suffering from a total loss include living near a fault line that may cause earthquakes, living near a large river that may cause flooding and living in an area that is known to suffer from periodic hurricanes or tornadoes.

2) Partial Damage Risk

If your home is partially damaged, for example because of a fire in one or two rooms, most homeowners insurance policies will only pay you the full cost to repair that damage if you initially insured your home for at least 80% of the cost to rebuild it new.

If you insured your home for less than 80% of the full replacement cost, you will get less money to repair that damage in your eventual home insurance settlement claim.

In other words, if you insure your home for at least 80% of what it would cost to rebuild your home from new today, then you will get full coverage to pay for partial damage to your property.

If you insure your home for less than this amount, such as because you are insuring it on a depreciated market value, then you will not receive full coverage to pay for partial damage to your home.

For example, suppose you purchased a home 10 years ago for $350,000 and you insure it for less than the purchase price at $300,000. If you were to build a similar house today, it would cost you $550,000. If your home were to suffer partial damage and it will cost you $150,000 to repair, your insurance company will only pay out $100,000 and you will have to cover the additional $50,000 by yourself.

The reason you get paid less than the full amount to cover your partial damage is because the amount you initially insured your home for, $300,000, is less than 80% of the amount it would cost to rebuild your home from new today, $550,000.

Full Replacement Cost Home Insurance

For the reasons given above, it is advisable to insure your home for 100% of the estimated new replacement cost, although in some cases, a minimum of 80% may be sufficient.

Paying the extra insurance premium now can end up saving you thousands of dollars should your home be damaged or destroyed in the future.

Again, the risk of this happening to you can vary depending on where you live and your individual circumstances, and not everyone can afford to take out full replacement cost coverage.

If the latter applies to you, then you may want to start out by taking a lower level of coverage, such as less than replacement cost, as this will still provide you with a reasonable level of protection and will be at a price that you can afford.

As your income improves, you can always upgrade your home insurance policy at a later date to insure yourself against greater risk.