Homeowners Insurance: Replacement Cost, Exclusions and Getting the Limits Right
The most expensive mistake in a homeowners policy is insuring the market value of the house instead of the cost to rebuild it.
At a glance
Figures checked 1 Sep 2026
What to take away
- Insure to rebuild cost, not market value. Land does not burn down.
- Replacement cost settlement pays to rebuild; actual cash value deducts depreciation and leaves a gap.
- Flood and earthquake are excluded from standard policies everywhere.
- Roof coverage is increasingly written on a depreciated schedule — read that endorsement.
A standard HO-3 policy covers the structure against most perils, your belongings against listed perils, your liability as a homeowner, and additional living expenses if the house becomes uninhabitable. The gaps tend to appear in the limits rather than the coverages.
| Coverage | Protects | Common limit |
|---|---|---|
| A — Dwelling | The structure | Full rebuild cost |
| B — Other structures | Fence, shed, detached garage | 10% of A |
| C — Personal property | Belongings | 50–70% of A |
| D — Loss of use | Living costs while displaced | 20% of A |
| E — Liability | Injury or damage you cause | $100k–$500k |
| F — Medical payments | Minor guest injuries | $1k–$5k |
Rebuild cost, not market value
If a house would sell for $520,000 but the land is worth $180,000, the rebuild cost is closer to $340,000 plus debris removal and code upgrades. Insuring the sale price wastes premium; insuring too little triggers the coinsurance clause, which reduces even partial claims proportionally.
Construction costs have risen faster than general inflation in several recent years. An inflation guard endorsement helps, but ask for a fresh rebuild estimate every few years, especially after renovating.
What is excluded
- Flood — needs a separate NFIP or private flood policy.
- Earthquake — separate policy or endorsement.
- Sewer and drain backup — usually a cheap endorsement, frequently omitted.
- Gradual damage, wear, and maintenance failures.
- High-value jewellery, art and collectibles above sub-limits — schedule these individually.
Common questions
It pays a percentage above the dwelling limit — often 25% — if rebuilding costs more than expected. In areas where whole neighbourhoods can be lost at once and demand spikes, it is valuable.
Usually only minimally. Business equipment and liability generally need a rider or a separate policy.
Video every room including inside cupboards, keep receipts for major purchases, and store the file somewhere off-site.