What is Replacement Cost Coverage?

Many consumers or insurance shoppers that are looking for homeowners’ insurance have likely seen the term “replacement cost”. While the process of picking a plan is never easy, the decisions being made most of the time are for unpredictable for future evens that we do not want to think about. In case long term damage were to happen to your home, it is important to have rebuilding or replacement coverage to gain the comfort of your home back without draining a bank account.

Will My Homeowners Policy Completely Replace My Home Insurance Should the Worst Happen?

This depends on whether your policy is a replacement cost value policy or an actual cash value policy. If your policy is an actual cash value policy, it will not. For example, in California courts have decided that actual cash value, unless otherwise specified in the insurance contract, is the fair market value. Fair market value can be loosely defined as the amount that a knowledgeable, willing buyer would pay and that a knowledgeable, willing seller would take for an item, neither being under unusual pressure to buy or sell. Insurers are permitted to provide an alternate definition of actual cash value in the policy if another method of determining value is to be used.

Replacement Cost Policies

If you have a replacement cost policy, the chances that you will be able to completely rebuild your home are better; however, there are many types of replacement cost policies, so you need to be careful to purchase a replacement cost policy that best meets your needs.

A policy cannot be sold as a “guaranteed replacement cost” policy unless it will pay to completely rebuild the home. Other types of replacement cost policies will pay your policy limits, plus a certain percentage above those limits. Some policies do not have building code upgrade (ordinance or law) coverage. Cities and counties periodically change their building codes. Unless your policy has this coverage, your insurance company may not pay for changes you may need to make to the structure of your home to bring it up to current building codes.

What is Guaranteed Replacement Cost?

Sometimes you simply will not be able to have full coverage and protection over something like your house. In the event that your house becomes completely destroyed, pushing the limits of your insurance replacement costs and policies are inevitable. Insurance companies may not pay more than the set limit to help rebuild the home to its original shape. However, some insurance companies may offer an extended replacement cost option. While it is held to a certain extension of 10%-20% it will be guaranteed to act as money needed to rebuild your home.

This is something to consider based on the fact that it will be more expensive than the regular cost policy.

Should I Contact My Agent or Insurer to Help Rebuild My Home?

As discussed earlier your agent, broker, or insurer can assist you in establishing a limit that is adequate to rebuild your home.  It is important to update that limit periodically to maintain a limit that reflects current construction costs.  You may want to ask your agent, broker, or insurer if they automatically review or increase limits on a regular basis or if they offer an automatic inflation guard option that increases limits according to current inflation information.

In short, there is no substitute for reading your policy and your renewal declarations carefully. Whenever you are unclear about your policy, you need to contact your agent, broker, or company for clarification in writing.  Discovering after a loss that you did not have the right coverage is not a situation you want to experience.

Remember, if you only shop by comparing prices only and not by comparing coverage, you are doing yourself a disservice. Your home is one of most important purchases you will most likely make. Take the time to get the facts straight before you purchase homeowners’ insurance. It may be one of the best decisions you make for yourself and your family.

Sources:

1. Replacement Cost Insurance, Trusted Choice.