Extended replacement cost insurance is an endorsement of your standard replacement cost claim terms. The endorsement increases your home’s insured value an additional 25% to 50% above your standard dwelling coverage limit.
If a homeowner is to understand what Extended Replacement Cost insurance means, it is important to know that the fundamental component of any homeowners insurance policy is the coverage that insures the structure itself, often referred to as either dwelling coverage or Coverage A.
When a homeowner files a dwelling coverage claim, they are usually reimbursed at the home’s replacement cost, which means the insurer will pay to repair or rebuild the home up to the coverage limit without deducting depreciation.
Depreciation, as you probably know, is the reduced value of a property because of its age or condition. Today, most real estate values appreciate, although there are homes that lose value in depressed markets. Depreciation can also be applied to items such as computers, furniture, vehicles, and fixtures within the home
How does extended dwelling coverage work?
The dwelling coverage in a homeowners policy includes standard replacement cost, so the policyholder is reimbursed the amount needed to replace or restore the home to its condition before it was damaged. Keep in mind that replacement cost is determined by how much it would cost to rebuild the home—not its market or assessed value.
With extended replacement cost, your insurance pays for your home to be rebuilt or repaired to its condition before the damage, even if the loss amount is above your dwelling coverage policy limits. The extended coverage is typically shown as 125 to 150 percent of the stated limit of coverage, depending on which one you choose.
Who needs extended replacement cost insurance?
Almost anyone should consider this extended dwelling coverage. Think about this: a standard replacement cost policy will reimburse you only for the amount shown in your policy. You can update your coverage limit if you make upgrades to the house, but there are costs that you can’t account for or control. For instance, a sudden spike in construction costs—both labor and materials–could elevate rebuilding costs beyond what was expected.
And this extended replacement cost coverage could become critically important to those living in certain areas that are prone to tornadoes or those coastal regions that might experience multiple tropical storms each season.
Many homeowners mistakenly believe that if they have their home appraised occasionally and update the coverage amounts to reflect any home improvements, they will be sufficiently covered. Unfortunately, one weather catastrophe or other extenuating circumstance that is out of the homeowner’s control is all it takes to leave them underinsured by tens of thousands of dollars.
With the extended replacement cost, however, they can have the peace of mind that comes from knowing that a major loss won’t leave them financially devastated.
Here is an example: Your coastal home has a standard replacement cost of $600,000 on your homeowners policy. A few months later, a hurricane hits the region, destroying your house and several others in the area. Construction and labor costs climb sharply because of the storm, and now it’s been determined that it will cost $750,000 to rebuild your house. This scenario would leave a $150,000 gap for you to make up out-of-pocket.
If you had chosen the 125% extended replacement cost insurance, your dwelling coverage would have been increased to $750,000 after rebuilding costs had exceeded your initial limit. The additional coverage would have been more than worth it!
How to calculate home replacement cost
You can calculate your home replacement cost by contacting a local builder to find out the building cost per square foot in your area. Then, multiply that figure by the home’s square footage.
According to the National Association of Home Builders, the average build price in 2019 is between $100 and $155 per square foot, which means the average cost of building a new 2,000-foot home is between $200,000 and $310,000 depending on the location.
Talk to the insurance experts at NSI Insurance Group to help you determine your replacement cost and for more information on extended replacement cost coverage. We are an independent insurance agency in Miami, Florida, representing the finest and most reputable insurance companies.