Guaranteed and Extended Replacement Explained


When you suffer a loss as a homeowner, it can be disruptive and even scary. Storm, wind or hail damage, water damage caused by plumbing problems or appliance issues, and theft are all among the most common homeowners insurance claims.
To help make you whole, it is common for homeowners insurance policies to include a feature known as extended replacement cost (sometimes called guaranteed replacement cost). What exactly does that cover?

Just as consumer goods like cars and computers depreciate over time, so do construction materials. You probably wouldn’t buy an insurance policy if it only paid for the depreciated value of drywall and nails originally purchased in the 1950s. The expectation is that if your home is a total loss, it will be rebuilt as it was. This is why the insurance company assigns a value to your home when you take out the policy; that figure is not the market value, it is their estimate of the cost to rebuild.

With an extended replacement cost clause, the company is promising to pay even more than the amount stated on your policy in order to allow for cost overruns. But whether that actually turns out to cover all of the overages depends on the particular terms offered by your homeowners insurance provider.

Within the insurance industry, different companies define extended replacement cost different ways. A typical mass-market insurer may offer home insurance replacement value up to 120% of the original cost estimate stated on your policy, meaning you are reimbursed for the full value, plus you are eligible for up to an additional 20% to make up for any cost increases in the intervening period of time.

This may seem like a safe margin, but it isn’t in all cases. When a weather-related disaster affects an entire region, it is common for the cost of construction materials and labor to increase. According to Risk Management Services, a company that analyzes risk for financial institutions and public agencies, construction costs increased an average of 15% in Louisiana after Hurricane Katrina. However, in communities located on the Gulf of Mexico, the increase was closer to 35%. Coastal homeowners with extended replacement cost clauses of 120% were not be able to rebuild their homes to the previous standard without dipping into their own pockets.

When you own a high-value home, having the right homeowners insurance replacement value is even more important. When you end up paying the percentage that your insurer does not cover, your out-of-pocket amount increases exponentially the more your home is worth.

Through Kelly Klee, you can access insurers offering extended replacement cost that guarantees you will be made whole. (Note that this is true in most states; in California and Florida, there is a 200% cap on the dwelling amount—still a healthy allowance for price increases.)

As a high-value home insurance expert, Kelly Klee knows the ins-and-outs of extended replacement cost clauses. We can provide a complimentary review of your current policy, recommend areas for improvement, and get quotes from several insurers who specialize in the high-net-worth arena.

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