A main part of your homeowner’s insurance policy is what’s called “Coverage A,” or Dwelling Coverage. This is the part of your policy that protects you from financial losses stemming from damages or destruction to your dwelling as the result of a covered peril. This also includes structures attached to your home such as the porch, deck or garage.
When you file a claim under the Coverage A of your policy, reimbursement is typically factored on your home’s replacement cost, meaning repair or replacement is paid for up to your policy limit, without considering depreciation. Replacement cost means the amount of money it would take to rebuild your home to the condition it was before the loss occurred.
Competing Prices for Rebuilds
When choosing the limit for Coverage A on your homeowner’s policy, it’s wise to insure your dwelling for the amount of money it would take to completely rebuild the home if it were to be totally destroyed, such as in a house fire. That figure represents what it would cost to rebuild your home, not the price you paid to buy it or its current market value. A loss in an amount above your dwelling coverage limit is your responsibility to pay (the difference) out-of-pocket.
It’s possible that the replacement cost limit on your policy is insufficient to completely cover your home rebuild for a number of reasons. It partly depends on the current market price for building materials and labor. If a widespread disaster such as a wildfire affects numerous homes in your area, you can bet that those affected homeowners will all be vying for a dwindling supply of construction materials and labor. This will naturally force the cost of these things to increase.
Extended Dwelling Coverage
Many insurers offer a policy endorsement called extended replacement cost that adds extended dwelling coverage to their homeowner’s policy. This upgrade makes it possible for your insurer to pay for rebuilding your home to its former condition even if the cost exceeds your dwelling coverage policy limits.
Insurers typically allow you to extend your policy’s Coverage A limit in increments from 10% to 50% for an additional premium. This endorsement is very affordable and, depending on the percentage you select, could cost as little as $100 or less per year. Another endorsement that may be available to you is “guaranteed replacement cost.” This avoids any replacement cost limits.