What is guaranteed replacement cost?

Replacement cost is the amount your home insurance provider will pay in the event your home is destroyed; guaranteed replacement cost means the cost of rebuilding is covered even if it’s above the dwelling coverage policy limits. There is no limit to the amount guaranteed replacement cost coverage will cover.

Josiah Hatch, CEO of Bender Hatch Insurance in Boston, gave an example of how home replacement cost is determined. This is important because it’ll determine the cost of your policy and, in turn, the price of a guaranteed replacement cost rider.

“Most of the insurance companies give us a cost estimator tool,” Hatch said. “So we enter in the information of when it was built, what type of house it is, how many bedrooms, all this information about the house. Then [the tool] spits out ‘ok, we think you should insure this house for $700,000’, and then we’ll write the policy.” 

However, over time, the cost to rebuild a home will go up, and that can leave you underinsured. Guaranteed replacement cost coverage protects you.

How does guaranteed replacement cost coverage work?

Here’s an example of how guaranteed replacement cost works. Your home is insured for $450,000, which was the calculated replacement cost when you purchased the policy. A tornado destroys your home. As the insurance company adds up the cost to rebuild, it comes out much higher due to increases in construction costs and materials. The new total is $600,000.

With a standard policy, you’d only get $450,000. However, if you have a guaranteed replacement cost endorsement, the insurance company will pay the full $600,000. Either way, however, you’re responsible for the deductible.

Guaranteed replacement cost vs. replacement cost.

Replacement cost is the amount required to rebuild your home. It differs from the other common method of paying out on home insurance policies (actual cash value) in that it doesn’t consider depreciation. Standard home insurance policies use replacement cost coverage.

A calculation is made to determine the replacement cost of your home, and with a replacement cost policy, you’re insured for that amount.

Guaranteed replacement cost has no limit. The insurance company guarantees it will pay whatever is required to rebuild your home, regardless of the limits on the policy.

Guaranteed replacement cost vs. extended replacement cost

Extended replacement cost, also called increased/extended dwelling coverage, is an endorsement you can add to your policy to help cover higher repair or rebuilding costs for your home. It increases your dwelling coverage by a specified amount, usually up to 50%. 

Guaranteed replacement cost serves a similar purpose, but without a specified limit.

What does guaranteed replacement cost cover?

Everything needed to rebuild or repair your home will be covered by guaranteed replacement cost. That includes materials, labor, and planning costs at current prices.

It covers all parts of the structure of your home and any attached structures like a porch, deck or attached garage.

It will also covers all interior features that are part of the structures, from your kitchen cabinets to your hardwood floors.

Guaranteed replacement cost applies to any covered loss, from a fire to a tornado.

What isn’t covered by guaranteed replacement cost coverage?

Guaranteed replacement cost covers the rebuild or repair of your home. It doesn’t cover anything in the home that can be removed; it only covers the structure itself. So furniture, appliances and other personal property are not covered by guaranteed replacement cost.

Those items will be covered under the personal property portion of your policy.

Guaranteed replacement cost coverage doesn’t cover anything that’s excluded from your policy. For example, floods are not covered by standard home insurance, so guaranteed replacement cost doesn’t cover damage from a flood.

Which companies offer guaranteed replacement cost?

Not all home insurance companies offer the guaranteed replacement cost endorsement. The list of companies offering it includes:

  • Nationwide (Private client only)
  • Erie
  • Chubb
  • Farmers
  • The Hanover
  • AIG