Unpacking Your Homeowners Policy: Part 1 – Coverage A: Dwelling Coverage
Home insurance isn’t just about having a policy, it’s about protecting your largest investment, you biggest liability and where your family sleeps at night. Unfortunately, many homeowners don’t always have a clear picture of their coverage until they need to file a claim.
This happens because insurance policies can be complex, and while keeping costs manageable is a priority, the fine print often doesn’t get the attention it deserves.
Important details about coverage limits, exclusions, and deductibles may not always be front and center in policy discussions.
That’s why we’re launching this series: Unpacking Your Homeowners Policy—to help homeowners navigate their policies with confidence and clarity.
Today, we’re starting with Coverage A: Dwelling Coverage—the foundation of your home insurance policy. Let’s break down what it covers and why it matters.
Coverage A: It’s NOT What Your Home is Worth
One of the biggest misconceptions about home insurance is that your Coverage A amount equals what your home is worth on the market.
Coverage A represents the cost to rebuild your home—not its fair market value. These are usually two very different numbers.
- Fair Market Value = What your home would sell for in the open market.
- Rebuild Cost = The cost to reconstruct your home from the ground up, including materials and labor. This is sometimes referred to a Valuation or Replacement Cost
And here’s something most people overlook:
The Rebuild Cost a home isn’t just about materials and labor, it also includes debris removal costs.
If your home burns to the ground, someone has to clear out the debris and pay to have it dumped before rebuilding starts. And that cost is built into your Coverage A calculation.
The Lifesaver: Extended Replacement Cost Coverage
Insurance companies know that construction costs can fluctuate, especially in times of high inflation or after a major disaster when materials and labor skyrocket.
That’s why many policies include Extended Replacement Cost Coverage—an additional buffer of funds that kicks in in the event of a total loss if the cost to rebuild exceed your stated Coverage A limit.
Extended Replacement Cost typically comes in set percentages above your dwelling coverage, like:
- 20% more coverage
- 40% more coverage
- 50% more coverage
Why does this matter? Because if your home is underinsured, and rebuilding costs spike after a widespread disaster (think hurricanes, wildfires, or even supply chain crises), you could be on the hook for the shortfall.
And if you have a mortgage on your home, this can create a major legal and financial mess.
The Mortgage Problem No One Talks About
Most homeowners don’t realize that their mortgage contract requires them to fully insure their home for its rebuild cost.
And if your insurance falls short? Well, here’s where things get tricky.
If your Coverage A limit and the Extended Replacement Cost in your policy isn’t enough to rebuild the home exactly as it was when the loan was made, you may be in default of your mortgage agreement.
We are not lawyers (and you should consult one for specifics) but ignoring this could open the door to legal or financial consequences down the line. The bottom line? If you have a loan on your home, make sure your policy protects the bank’s investment and positions you to uphold your contractual obligations in the loan agreement.
Where Is Your Agent compromising Coverage to reduce premium cost?
Sometimes, in an effort to make a policy less expensive, an agent will remove or reduce Extended Replacement Cost Coverage without fully explaining it.
An insurance agent should be upfront about where coverage is being cut to lower your premium and let you decide if the savings is worth the financial and legal risk.
The Takeaway: Don’t Gamble on Your Dwelling Coverage
Here’s what you need to do right now:
- Check your Coverage A amount – Is it based on rebuild cost, not market value?
- Look for Extended Replacement Cost Coverage. How much extra protection do you have?
- Ask your agent what’s been reduced or removed to reduce your premium?
Because when disaster strikes, you want to be sure that you understand where your policy falls short and your financial obligations to fill those gaps.