Extended Replacement Cost Coverage

Will your home insurance cover the cost of rebuilding in the event of a disaster? Even if your policy includes replacement cost coverage, if building expenses rise, the reimbursement may not be sufficient to support reconstruction.

If you want an extra layer of protection against being underinsured, consider extended replacement cost coverage.

What is extended replacement cost coverage?

Home insurance policies often provide replacement cost coverage, which implies that your policy will pay to rebuild or repair your home following a covered loss, up to your dwelling coverage level.

Extended replacement cost coverage goes a step further, paying a percentage above your coverage limit if the cost of restoring your house exceeds expectations. This coverage normally adds 10% to 25% to your insurance maximum, while some insurers may pay up to 50% of your limit. 

Assume your dwelling coverage limit is $300,000. You purchase an extended replacement cost coverage rider, which offers an additional 25% beyond the maximum. If your home is destroyed in a covered disaster and the estimated cost of rebuilding is $375,000, your insurer will pay the $300,000 dwelling limit plus 25% of that limit, which is $75,000. You would receive a total of $375,000—enough to reconstruct your home.

Most insurance providers provide extended replacement cost coverage. Many provide it as an optional endorsement, while others automatically include it with your insurance. Policies with extended replacement cost coverage are typically more expensive than those without it.

Extended replacement cost vs. guaranteed replacement cost

When shopping for home insurance, you may notice an option to add extended replacement cost or guaranteed replacement cost coverage to your policy. What is the difference between the two?

Extended replacement covers up to a certain percentage of your dwelling limit, whereas guaranteed replacement will pay to rebuild your home following a covered calamity, regardless of the cost.

To apply the preceding example, if you have a $300,000 dwelling limit and 25% extended replacement cost coverage, your policy will pay up to $375,000 to repair or rebuild your home to its original state. However, if the building business quoted you $400,000 to reconstruct, you would be responsible for $25,000 of the cost. With guaranteed replacement cost coverage, your policy would cover the entire $400,000.

In other words, while extended replacement cost coverage allows you to pay out of pocket, guaranteed replacement cost coverage pays for the total cost of reconstructing your house, regardless of how much it costs. You only need to pay your deductible, which is the amount you are liable for paying before coverage begins. 

Who should consider extended replacement cost coverage?

If you reside in a location prone to hurricanes, wildfires, and other severe events, you should consider getting extended replacement cost coverage. It provides a buffer in case the cost of reconstructing your home exceeds your policy limitations owing to inflation or a rapid spike in construction prices, as is frequent after disasters.

Remember that this coverage will only pay a proportion of the amount beyond your dwelling limit, so you may still have to pay out of pocket in some situations. You will also be liable for paying the deductible.

Companies that offer extended replacement cost coverage

Most home insurance carriers provide extended replacement cost coverage, though availability may vary by state or region. These home insurance companies provide extended replacement cost coverage as standard.

• Chubb.
• Mercury.
• State Farm.