The Variations in Replacement Costs as a Part of Homeowners Insurance Coverage

Posted on: 23 February 2017

You have probably heard that you can insure your home for its replacement value, which means your insurer will pay to reconstruct your house if it's destroyed by a covered risk. However, this is a generalization because nobody can foresee how much your house will cost to construct in the future. That is why insurers have come up with these three different solutions:

Replacement Cost

Conventional replacement cost ensures that your house is replaced or repaired as long as the repair or replacement cost doesn't exceed a preset dollar limit. Therefore, if your limit is $100,000, then that is what the insurer will spend if your house is damaged.  This means if the repair/replacement cost is $88,000, the insurer will take of it all, but if the cost is $130,000, you will have to foot the extra $30,000. As you can see, this can easily happen to you if a disaster damages multiple houses in your region and housing prices, as well as contractor charges, shoot up.

Extended Replacement Cost

Insurers understand the limitations of replacement cost, which is why they have come up with other offers to plug the gap. A good example is extended replacement cost, which promises to exceed your replacement limit by a percentage. Take a case where your house is insured with a replacement cost of $200,000 and an extended replacement percentage of 125%. In this case, if your house is damaged and you need $280,000, the insurer would pay $250,000 and let you handle the additional $30,000. However, if you didn't have the extended replacement cost coverage, the insurer would only pay the replacement cost of $200,000 and let you handle the remaining $80,000

Guaranteed Replacement Cost

From the discussions above, it's clear that even though the extended replacement cost is good, it doesn't protect you a hundred percent. You can't be sure that your replacement cost won't cost more than the percentage offered by the extended replacement cost. If you want something that protects you completely, then look for guaranteed replacement cost. With this coverage, you are sure that your house will be repaired or reconstructed even if the cost is twice as much as the value of the house when you bought the policy.

Therefore, before you purchase homeowners insurance, compare the different forms of replacements costs and what they offer. Note that the different forms of coverage will attract different rates, with guaranteed replacement cost being the most expensive. Also, guaranteed replacement cost may not be available from all insurers.