Guaranteed Replacement Cost vs. Extended Replacement Cost

Your homeowners’ insurance has so many different realms of coverage within one policy contract that it is best to break it down into a few different guides to prevent information overload. The write-up below will aim to cover your Dwelling coverage specifically and a key endorsement to ensure you are properly protected in the event of a large loss.  

 When looking at your home policy, it is hard to miss the top-line coverage that goes by the name “Dwelling Coverage”. One of the more important coverages on your policy is what covers your home and for how much in the event of a loss. Your Dwelling coverage is calculated by the replacement/ rebuild value of your home. Replacement value in simple terms would be in the event of a total loss of your home, what would it cost to rebuild the home back to the state where it was before the incident or loss. Replacement value is different from Market value (what you buy or sell the home for). Market value includes real estate market conditions, land value, etc. Where Replacement value is more driven by the cost of commodities and labor. Replacement value is used for insurance purposes due to insurance covering the home and the home itself. If a tornado were to blow your house away, you still have that land to build on.  

 Ok now that we got the basics of your dwelling coverage addressed. You might be asking, “What if it ends up costing more, to rebuild my home than the replacement value?” and that would be a great question.     

Most, if not all preferred insurance carriers, and hopefully all insurance agents place an endorsement on your home policy to protect against this type of scenario. Some carriers will offer Extended Replacement Costs on your dwelling coverage, others will offer Guaranteed Replacement Costs. What is the difference between the two? I am so glad you asked that! 

• Extended Replacement Cost 

The extended replacement cost endorsement will provide an additional percentage to your dwelling coverage to help account for potential overruns with the cost of materials and labor. Insurance carriers will vary the percentage they offer anywhere from an additional 10% all the way up to 100%. So let’s say you have $500,000 in dwelling coverage and you have an extended replacement cost endorsement of 50%. This will provide an additional $250,000 in dwelling coverage totaling your dwelling coverage at $750,000. 

Taking into account what we have seen with supply chain issues and extreme volatility of materials like lumber and copper in the last couple of years. You should request at least 50% extended replacement cost when shopping for home insurance or reviewing your current coverages.    

• Guaranteed Replacement Cost 

Guaranteed replacement cost is the top-tier plan. This endorsement will pay for the full cost of replacing your home, even if it exceeds your dwelling coverage limits by any amount. It is the highest level of coverage you can obtain for your dwelling. It will cost significantly more than the extended endorsement which would most likely be enough, but also provides an exceptional piece of mind when it comes to insuring your home.  

 Something to keep in mind with both of these endorsements, your base dwelling coverage must equal 100% of the calculated replacement/ rebuild value. You cannot opt for less than rebuild value on your dwelling coverage and hope that these endorsements close the gap. They are merely safety nets against the unknowns of volatility. If you would like to discuss how to set up a quality home insurance policy, please contact one of our home insurance professionals at The Staples Agency. A specialist will walk you through every detail of your home policy to ensure you have a strong set of coverages and are properly protected.