Are You Insuring Your Home for the Right Amount?

By Frederic Rault, Goosehead Insurance

Your home may be one of the largest investments you will ever make. But here is a question many homeowners have difficulty answering:

If your home were completely destroyed tomorrow, would your insurance provide enough coverage to rebuild it?

That is where dwelling coverage comes in.

What Is Dwelling Coverage?

Dwelling coverage is the portion of your homeowners insurance policy that protects the physical structure of your home. This generally includes the walls, roof, floors, foundation, and attached structures such as an attached garage.

If your home is damaged by a covered event, dwelling coverage helps pay to repair or rebuild the structure, subject to the terms, conditions, exclusions, deductibles, and limits of your policy.

One of the most common misunderstandings I encounter is how much dwelling coverage a homeowner actually needs.

Your Home’s Market Value Is Not Its Replacement Cost

Here in San Diego, property values can be very high. If your home is worth $1 million, that does not necessarily mean you need $1 million of dwelling coverage.

Why?

Because homeowners insurance isn’t insuring the land underneath your house. It is primarily concerned with what it would cost to rebuild the insured structure.

The reverse can also happen. A home’s market value might be lower than the amount it would cost to reconstruct the home after a major loss.

Think of it this way:

Market value asks: “What could I sell my property for?”

Dwelling replacement cost asks: “What would it cost to rebuild my house?”

Those are two very different questions.

What Determines the Cost to Rebuild?

Calculating an appropriate dwelling limit involves much more than looking at Zillow or your latest property tax assessment.

Some of the factors that can affect rebuilding costs include the size of the home, construction type, age and type of roof, quality of materials and finishes, number of stories, custom features, local labor costs, and current construction material costs.

Renovations matter too.

Did you remodel the kitchen? Add a room? Upgrade bathrooms? Install custom cabinetry, flooring, windows, or other higher-quality finishes?

Your insurance agent needs to know.

The house your insurance company thinks it is insuring should accurately reflect the house you actually own today.

Construction Costs Can Change

This is another reason I recommend periodically reviewing your dwelling coverage.

The amount that may have been appropriate several years ago may not be appropriate today.

Labor and material costs change. Building requirements change. Your home changes. And following a widespread disaster, demand for contractors and construction services can put additional pressure on rebuilding costs.

You don’t want to discover after a major loss that your dwelling limit has failed to keep pace with the actual cost of reconstruction.

What About Extended Replacement Cost?

Depending on the policy and insurance carrier, additional protection above the stated dwelling limit may be available.

For example, some policies may provide an additional percentage of coverage above the dwelling limit if reconstruction costs exceed the original estimate.

This can provide an important additional cushion, but homeowners should never simply assume that they have it.

Ask your agent:

Do I have extended replacement cost coverage? If so, how much?

You should also ask about building code or ordinance coverage. If an older home has to be rebuilt according to today’s building codes, complying with those requirements can add considerably to the reconstruction cost.

Don’t Confuse Dwelling Coverage With Personal Property

Dwelling coverage protects the house itself.

Your furniture, clothing, televisions, computers, appliances, jewelry and other belongings generally fall under personal property coverage, which is another part of your homeowners policy.

Similarly, detached structures such as a detached garage, shed, fence or gazebo may fall under “other structures” coverage rather than the dwelling portion of the policy.

Understanding these distinctions is important because each part of your policy can have its own coverage limit.

The Cheapest Policy Isn’t Always the Best Policy

Everybody wants to save money on insurance. I understand that.

But there is an important difference between finding a competitive premium and simply buying the cheapest policy available.

Saving a few hundred dollars today doesn’t help very much if you discover after a major loss that you didn’t have the coverage you thought you had.

My approach is to first understand the client, the property, and the risks. Then we can compare available insurance options and look for a combination of appropriate coverage and competitive pricing.

Insurance should be about protecting you from the financial risks you cannot comfortably absorb yourself.

When Did You Last Review Your Dwelling Coverage?

If you haven’t reviewed your homeowners insurance recently, take out your declarations page and find the amount listed for Coverage A – Dwelling.

Then ask yourself:

Would this amount realistically rebuild my home today?

If you’re not sure, that’s a good reason to have a conversation with your insurance agent.

Your home changes. Construction costs change. Insurance markets change.

Your coverage should be reviewed along the way.

Frédéric Rault
Goosehead Insurance
California Insurance License #4053635

Frédéric Rault is a Goosehead Insurance agent serving San Diego and is licensed in California, Arizona and Colorado. He works with clients to evaluate their individual insurance needs, compare coverage options from multiple insurance companies, and help identify appropriate protection for their homes, automobiles and other personal insurance needs.

This article is for general educational purposes only. Insurance coverage, availability, limits, exclusions and policy terms vary by insurance carrier and individual policy. Consult a licensed insurance professional and your policy documents regarding your specific coverage.