What is the difference between guaranteed replacement cost and extended replacement cost

Guaranteed Replacement Cost covers the cost to repair or replace your home after a covered loss, even if the cost exceeds your policy limit.

If your Dwelling coverage limit is too low, your policy might not cover the full cost of the damage.

Your insurance company may provide you with a replacement cost valuation for your home. When insured at this amount, you will be provided guaranteed replacement cost.

Replacement Cost is the amount to repair or replace a building after a loss.

Your home's estimated replacement cost factors in the use of similar kind and quality materials, labor, and equipment to rebuild your home today. It does not consider your home's market value, purchase price, or mortgage loan.

Your insurance company will be able to help you determine the estimated replacement cost of your home. You can check if you have guaranteed replacement cost by reviewing the Declarations Page of your policy.

How does guaranteed replacement cost work?

Guaranteed replacement cost is available for most homeowners (HO-3 and HO-5) and dwelling (DP-3) policies.

After a covered loss, this coverage will pay to repair or replace the home with materials of similar kind and quality and for like use. The payment is subject to limitations and exclusions.

For example:

Policy Without Guaranteed Replacement Cost

Coverage A - Dwelling Limit = $500,000

Policy With Guaranteed Replacement Cost

Coverage A - Dwelling Limit = $500,000 (Replacement Cost)

Why choose guaranteed replacement cost?

Guaranteed replacement cost gives you the peace of mind of knowing that you'll be covered if the unexpected strikes.

• Your policy will provide coverage even if the cost of materials or labor increases over time.

• You won't have to worry about being underinsured if you need to rebuild your home.

• Some homeowners policies may cover improvements, alterations, or additions that increase the cost of the building by up to 5%. However, you should notify your insurance company within 30 days of completion of any work that increases the cost of the building by more than 5%.

What would happen if your home was destroyed and you were forced to rebuild after a total loss? Would your insurance cover it all? The answer is, as uneasy as it sounds, maybe! It all depends on if your insurance carrier is able to offer you extended or guaranteed replacement coverage. In other words, will they cover partial or all expenses to completely replace your home.

For example, if you happen to purchase a foreclosed home for $230,000, but in today’s economy it’s worth $270,000 to rebuild, you would want to opt for $270,000 coverage to insure your home is fully covered in the case disaster strikes. Otherwise, if you opted to insure your home for the purchase amount, you’d find yourself paying out of pocket an additional $40,000 to cover the remaining construction costs which in most cases could result in severe financial hardship.

It’s also important to point out that due to inflation and market volatility, building materials and labor are sure to rise with time. Sure they dip in price too, but you must prepare for worst case scenarios — the main purpose of insurance. Extended and guaranteed replacement coverage are vital options meant to protect you against unpredictable circumstances that may occur.

Extended Replacement Coverage

For the most part, companies offer homeowners a special home coverage endorsement — extended replacement coverage — that typically pays out an additional 25% or 50% over the dollar amount you insured on your home. In the unfortunate case your $270,000 home catches fire and burns to the ground, and is estimated to cost $300,000 to replace, extended replacement coverage will kick in and and pay the additional $30,000 to make you whole again.

Guaranteed Replacement Coverage

Guaranteed replacement coverage is the premier choice of coverage for homeowners. You can expect no cap on the dollar amount your insurance provider is willing to pay to rebuild your home due to total loss. Meaning, that in the event of catastrophic circumstances where your home valued at $270,000 is estimated rebuild cost is $400,000, your insurance company is responsible for the additional expense to ensure your home is renewed. For this reason, choosing a home policy that includes guaranteed replacement coverage is the best choice, despite all insurance companies offering this type of coverage.

Take note that these add-on endorsements are available to protect you against rising construction costs, not add additional square footage to your damaged home that weren’t there previous to the loss. Your main goal is to reduce the risk of rising costs should you experience an unplanned, devastating event.

To learn more about extended and guaranteed replacement coverage, please contact an insurance advisor at Bennett & Porter. We will help you determine an accurate amount of insurance protection for your dwelling.

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