Central Insurance Blog

With home values significantly rising across the country over the past few years, it’s important to understand the difference between dwelling coverage vs. market value when it comes to home insurance. When buying or selling a home, much of the conversation and considerations focus on market value, which is the amount a home can be bought or sold for in the current market. In contrast, insurance companies prioritize dwelling value, which is the estimated replacement cost of a structure. 

How Much Dwelling Coverage Do I Need?

An insurance company is never going to sell your home, but they will replace it should you suffer a catastrophe like a tornado or house fire. For this reason, it’s vital that your home is insured for the amount needed to rebuild, not what the real estate market might dictate.

Here are the key factors in determining dwelling coverage:

A few years ago, when it was a “buyer’s market,” many homeowners were confused about why they had to insure their home for more than its potential sale value. Due to low demand and ample homes on the market, market values had been driven below the cost to rebuild. However, in 2024, we find ourselves in a very different situation.

Rising inflation, the pandemic’s lasting impact, and the current “seller’s market” have driven up both market and dwelling values. However, Insuring your home for less than the required amount could mean sacrificing upgrades like your granite countertops or hardwood floors when rebuilding.

How Has Dwelling Coverage Been Impacted?

Beginning with the COVID-19 pandemic, there was significant impact on the construction industry, which in turn affected dwelling coverage costs:

• Production Slowdowns: Building material manufacturers slowed or stopped production, while demand increased as people moved to suburbs and rural areas.
  
• Supply and Demand: This imbalance drove up the cost of building materials, and the pandemic’s effects disrupted many worldwide supply chains.
  
• Labor Shortages: Post-pandemic, worker shortages hindered production, raising labor costs for builders. The construction and manufacturing industries are still recovering in 2024.

These factors continue to push up both market and dwelling values, especially for those building or renovating homes.

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What Does Dwelling Coverage Actually Include? 

Even in a stable market, you may find yourself wondering why you’re insuring your home for the same amount it might cost to rebuild. It’s important to remember that contracting costs include labor, materials, and contractor overhead. Insuring your home for less means you may not get all the upgrades you currently enjoy.

Another often-overlooked factor is debris removal. In the event of a fire or other disaster, most policies cover the removal of your home’s remains, and this can be a significant expense. Additionally, local ordinances may require the demolition of undamaged portions of your home, especially if a certain percentage (typically 60%) of the home is destroyed. Your dwelling coverage must account for hauling debris to make way for rebuilding.

Importance of Regular Reassessment

Insurance carriers often use inflation guard coverage to keep dwelling values aligned with rising contracting costs. However, this automatic yearly increase can, over time, cause your dwelling value to exceed the actual cost of rebuilding.

To avoid this, it’s important to reassess your dwelling value every 3 to 5 years with your insurance agent. Ensure your coverage reflects actual rebuilding costs rather than inflated estimates.

The Central Difference

By preparing for the worst-case scenario today, you can save yourself hassle and headaches should the unthinkable ever happen. You can rest easy knowing Central will be right there with you at every step of the way.