What is guaranteed replacement cost coverage?

What is guaranteed replacement cost?

Replacement cost is the estimated cost to rebuild your home with materials of like kind and quality. With a standard replacement cost policy, your insurer pays up to your dwelling coverage limit to cover those rebuilding costs. There is no limit to the amount that guaranteed replacement cost coverage will cover.

Insurers estimate your home's replacement cost using details such as its size, age, construction type, features, and building materials.

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 on 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?

Guaranteed replacement cost coverage pays to repair or rebuild your home after a covered loss, even when costs exceed your dwelling limit. For example, if your home has a $450,000 limit and a tornado causes $600,000 in rebuilding costs, the insurer will pay the additional $150,000, subject to your policy terms and deductible.

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 replacement cost pays the covered repair or replacement cost up to the policy limit, while guaranteed replacement cost can go beyond that limit.

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 and guaranteed replacement cost both pay rebuilding costs, but they work differently. Extended replacement cost adds a set percentage above your dwelling limit, while guaranteed replacement cost is designed to cover the full rebuilding cost, regardless of how much the cost exceeds your policy limit.

Guaranteed replacement cost serves a similar purpose to extended replacement cost, but without a specified percentage cap.

What does guaranteed replacement cost cover?

Guaranteed replacement cost covers the cost to repair or rebuild your home's structure after a covered loss, regardless of the total cost. Rebuilding costs include labor, materials, and other expenses needed to restore the home.

It covers all parts of your home's structure and any attached structures, such as a porch, deck, or garage.

It will also cover all interior features of the structures, from kitchen cabinets to 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.

What companies offer guaranteed replacement cost?

Several insurers, such as Erie, Farmers, and The Hanover, offer guaranteed replacement cost coverage, but it is not available in every state. Coverage details differ by insurer, so check the actual policy language before assuming the coverage works the same way.

The list of companies offering it includes:

Nationwide (Private client only)
Erie
Farmers
The Hanover
AIG

FAQ: Guaranteed replacement cost coverage

Does guaranteed replacement cost cover personal belongings?

No. Guaranteed replacement cost coverage applies to rebuilding or repairing your home's structure. Your furniture, clothing, electronics, and other belongings are covered under personal property coverage.

Do I still have to pay my deductible with guaranteed replacement cost?

Yes. You are still responsible for the deductible stated in your homeowners policy. Guaranteed replacement cost addresses the cost of rebuilding when it exceeds your dwelling coverage limit; it does not eliminate your deductible. For example, a $2,000 deductible will still apply to a covered rebuilding claim.

Is guaranteed replacement cost available with every homeowners insurance policy?

No. Guaranteed replacement cost is not available with every homeowners policy. Insurers can limit the coverage by state, property type, policy, and eligibility requirements.

Is guaranteed replacement cost worth it?

Yes. Guaranteed replacement cost provides extra protection if construction costs rise significantly after a major covered loss. It is most relevant when rebuilding costs exceed your dwelling limit.