What is Guaranteed Replacement Cost Coverage?

Protecting Your Investment

Fred C. Church answers your Guaranteed Replacement Cost questions, so you can make a more informed decision about your home insurance coverage.

As your insurance broker and risk manager, it’s our job at Fred C. Church to not only think about the worst-case scenarios that can happen to your home but also to help make sure you have the right insurance coverage in place to repair or rebuild it if there is ever a substantial loss due to a fire, natural disaster, or other similar tragedy. This is why we would like to talk to you today about the broader financial protection that guaranteed replacement cost coverage offers versus basic replacement cost and extended replacement cost.

By answering some of the most common questions homeowners have about their replacement cost coverage options, we will help you learn more about guaranteed replacement cost and assist you in determining if this extra coverage is a good fit with your property.

What does replacement cost mean?

Your home’s replacement cost is the amount that your insurance agent and carrier estimate it would take to restore your house to its previous condition, if it is seriously damaged or destroyed. Wondering how a number of such importance is calculated? It is based on many factors, including your home’s square footage and architectural style, the type of roof materials used, special features such as fireplaces, exterior trim, or arched windows, improvements you’ve made since moving in, and more.

At Fred C. Church, we walk our clients through a thorough replacement cost estimator process, asking many questions that help us understand all that their home is today. We also dig into the costs of goods, materials, and labor that are specific to your ZIP code, to help with our understanding of how much it would take to rebuild your home in your neighborhood after a disaster. All this information contributes to the final replacement cost estimate for your home, which is submitted to your insurance carrier to verify if the coverage is adequate.

What is guaranteed replacement cost?

The best way to explain guaranteed replacement cost is to compare it to the other homeowners insurance dwelling coverage options: replacement cost and extended replacement cost. The following describes how these three coverages stack up against each other.

If you choose replacement cost, you may have the most popular coverage choice of homeowners but not necessarily the smartest financial protection for your property or wallet. When you get this type of baseline replacement cost coverage, your insurance carrier sets a limit on how much it will contribute financially to repairs or a rebuild of your house if it is destroyed in a covered event. If the cost of construction ends up exceeding this predetermined limit, then it’s you, the homeowner, who will have to pay out of pocket to make up the difference to return your home to its exact original condition.
If you choose extended replacement cost, you do get more financial protection than you have with basic replacement coverage, as it can extend your policy’s limit anywhere from 25% to 50%. However, extended replacement cost still establishes a ceiling that your insurance carrier will reimburse up to for repair or rebuild costs, but not over. Again, this could leave you having to cover any gap.
If you choose guaranteed replacement cost, you’re getting the best possible level of dwelling coverage for your home and the peace of mind that your home will be replaced to the same footprint, function, and features it had before it was destroyed, regardless of how much construction might exceed original replacement cost estimates.

Why would the cost to rebuild a home ever exceed the estimated replacement cost?

Homeowners often believe that the cost of rebuilding their home will never blow through the limits of their home insurance coverage, especially since great care is given to putting these estimates together.

The following are some of the circumstances that can lead to a gap between your replacement cost coverage value and the actual amount it could take to rebuild your home today.

Natural disasters are occurring with more force and frequency. Tornados, hailstorms, wildfires, hurricanes, and other extreme weather events are increasingly impacting entire communities. Experts predict this trend will continue, due to global warming. If a catastrophic event were to hit your area, homeowners like you across the region would all need to rebuild their houses at the same time. This could create intense competition for contractors and building supplies in one locality and drive up construction costs to the point where the expense to rebuild your home could quickly surpass the limits of your replacement cost policy.
General construction costs are escalating faster than inflation. While your home insurance carrier probably makes an automatic inflation adjustment to your replacement cost coverage of between 4% and 6% every year, this may not be nearly enough of an increase if construction costs are rising faster than inflation. For example, since 2019, the price of lumber has risen over 170%, and the cost of a lumber framing package for a new home has more than doubled. If you were forced to rebuild your home in today’s marketplace, just the cost of lumber and other common building materials like plywood, steel, and plumbing fixtures and fittings could quickly send the price of your build over the limits of your replacement cost coverage.
Homeowners are not reporting their home improvement projects to their insurance agent. There has been an enormous spike in home improvement projects, with 76% of U.S. homeowners completing at least one upgrade since the start of the pandemic and 78% planning to undertake at least one renovation in the next 12 months. Unfortunately, many of these homeowners do not report these projects to their insurance professional. These types of changes to a property are likely to increase a home’s replacement value, often significantly. If disaster strikes and a homeowner has neglected to report home improvements to their insurance agent, then their replacement cost coverage won’t properly reflect the pricey upgrades that have been made. Instead, it may be the homeowner who ends up having to pay for these renovations—again—if they want their house back exactly how it was before the loss.

Who offers guaranteed replacement cost?

Not all insurance carriers offer guaranteed replacement cost coverage. If you’re interested in this coverage, Fred C. Church can help you determine if your current carrier provides this option in its home insurance program. If it does not, then working with Fred C. Church gives you the advantage of partnering with an experienced insurance broker who has relationships with numerous home insurance carriers that do provide this exceptional coverage to their insureds.

How much is guaranteed replacement cost coverage?

You might be surprised how affordable enhancing your home insurance policy with guaranteed replacement cost can be. At Fred C. Church, we even have some carriers who automatically include this coverage in their home insurance program, because they believe it is the smartest way to safeguard the value of your home.

Do you want to find out more about guaranteed replacement cost coverage?

You’ve put a lot of time, energy, and investment into making your home a comfortable, efficient, safe, and convenient place for you and your family to live. If a disaster strikes, we know you want your home insurance to be there to help you put it back to this condition as quickly as possible, without your having to shell out any money to cover unexpected insurance gaps. Guaranteed replacement cost might be the best dwelling coverage choice for many homeowners like you.

Whether you’re new to Fred C. Church or already an existing home insurance client, if this information has made you more curious about guaranteed replacement cost, then please contact us for assistance.

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