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Losing a home to a fire, flood or other natural disaster can be one of the most traumatic experiences a person goes through. The last thing you need to find out as you're recovering from an event is that your homeowner's insurance coverage isn't enough to rebuild the same home you once had.

You can find yourself in such a situation for a variety of reasons you may not have considered.

If many other homes in your area were struck by the same fire, flood, hurricane or other natural disaster, for instance, you may find that competition for labor, lumber and other building materials has sent prices soaring. Whereas your policy coverage might have been adequate to rebuild in a normal market, it may fall many thousands of dollars short when labor and materials are in higher demand.

Furthermore, many homeowners fail to advise their insurance companies of upgrades made to their homes, which are likely not reflected in the policy coverage.

tip iconTIP"Insurers generally recommend that homeowners have a yearly conversation with their insurer or agent to go over their coverages, any renovations, major purchases, or remodeling that may have occurred," says Karen Collins, assistant vice president for the American Property Casualty Insurance Association. The APCIA is a national trade association for home, auto and business insurers.

A national Harris poll conducted on behalf of the APCIA, and published in May 2022, found that among insured homeowners who completed renovations or remodeling during the pandemic, less than half (40%) had updated their home insurance to account for those changes.

"This may leave many homeowners with less coverage than they need," Collins says. The same Harris poll found that only 36 percent of insured homeowners have reviewed their policy within the past year.

What is extended replacement cost and what does it cover?

Extended replacement cost coverage is an endorsement, or add-on, to your home insurance policy that acts like a buffer to help safeguard against cost overruns. It essentially extends your coverage so you can hopefully rebuild the home you once loved, including the marble countertops and upgraded hardwood floors.

What you pay for extended replacement cost coverage varies according to insurer, but it can generally be purchased in increments of 10% to 50% above the basic dwelling coverage.

Here is an example:

  • Your home is destroyed by a fire and your policy's dwelling coverage is $300,000.
  • Due to soaring prices, the actual cost to rebuild the same home is $350,000, which would leave you $50,000 short. Money that would have to come out of your savings or by making sacrifices on features in the rebuild.
  • If you have a 25% extended replacement endorsement on your policy, your dwelling coverage would increase up to $375,000, easily covering the extra costs.

“This type of coverage is widely available and highly recommended by insurers, especially if you live in an area prone to large-scale natural disasters like hurricanes or wildfires,” Collins says.

How to calculate how much extra coverage you need

There is no sure way to predict how much extra coverage you may need in the event of a disaster, but there are several ways to get a better handle on how much it would cost to rebuild your home today.

A good place to start is by having that conversation with your insurer. Insurers regularly update coverage limits based on construction cost information provided by builders in local markets. This has become particularly critical in the current environment.

In April 2022, the National Association of Homebuilders reported the cost of building materials is up 8% percent through the first three months of 2022.

"I would not buy homeowners insurance without an inflation guard," says Bill Wilson, who served as the associate vice president of research for the Independent Insurance Agents & Brokers of America until 2016 and now advises the industry.

Another good strategy is to look at the build prices of new homes in your area. This could be done as simply as attending a few new home open houses and talking to builders about the average cost per square foot to build a home similar to yours, with similar features.

If your home has a number of custom features or upgrades, it may be wise to hire a professional appraiser. The appraiser can physically inspect your home and come up with a much more accurate estimate of replacement costs right down to the countertops, custom cabinetry, bathroom features and flooring.

How much extra do you pay for extended replacement cost?

Determining how much extra this will cost is best determined by talking to your insurer. Online insurance company Hippo, for one, says you can expect to pay in the range of $50 and up for the addition. Pricing will vary depending on the size and features of the home, as well as location.

Be prepared to pay a little more if you live in an area that is at increased risk for such threats as wildfires, floods or hurricanes.

Extended replacement cost versus guaranteed replacement cost: What’s the difference?

If you're looking for absolute certainty that all replacement costs will be covered, no matter the circumstances, there's one further product to consider: Guaranteed Replacement Cost Coverage.

That one word – guaranteed – is the key difference. Guaranteed replacement cost coverage will pay for the cost of rebuilding your house back to its previous size, features and specifications.

tip iconTIP"Guaranteed replacement cost coverage was designed to give a policyholder total peace of mind that their property would be fully covered without the risk of running out of funds," says APCIA's Collins.

As far as the premiums, the cost for extended replacement is often comparable to guaranteed replacement coverage, according to Erie Insurance’s website.