What is Guaranteed Replacement Cost?


Three Distinct Levels of Coverage, Defined

Guaranteed replacement cost is the highest level of coverage and is the best way to insure your home against the most catastrophic and expensive disasters. It is a type of dwelling coverage offered by a number of homeowners insurance companies that specialize in coverage for high-value homes, including AIG, Chubb, and Pure. If your home is a total loss and you have guaranteed replacement coverage, the insurer will pay for the full reconstruction value of the home. Depreciation or coverage amount limits do not factor into your claim settlement.

Many agents, brokers, agencies, and insurers recommend guaranteed replacement cost for homes located in a high-risk area where labor and construction materials costs have been known to rise steeply in the aftermath of a natural disaster. With guaranteed replacement cost, you don’t have to ever worry about being underinsured. It doesn’t matter how much the rebuild costs – you’re fully covered.

The second level of coverage is extended replacement cost. Extended replacement cost is an upgrade, or endorsement, of your standard replacement cost claim settlement terms. With this coverage, your insurer will pay for your home to be repaired or rebuilt to its condition before the damage occurred, even if the loss is above your dwelling coverage limits, with one caveat – the extended cost is limited to an additional 25% to 50% bump from your standard replacement cost coverage. So, unlike guaranteed replacement cost, extended cost has limitations.

The third level of coverage is your standard homeowner’s policy with replacement cost coverage. With this coverage, your home is insured for its replacement cost (not guaranteed). If your home sustains a loss, depreciation won’t be factored into the payout of the claim. However, your homeowner’s policy still has a specified coverage limit. If the replacement cost of your home is underestimated, you could be severely underinsured in the event of a disaster.

How Does Guaranteed Replacement Cost Work?

You can’t be underinsured with guaranteed replacement cost coverage because there is no coverage limit; the insurer has agreed to fully reimburse you regardless of your cost to rebuild. Not so with pure replacement cost or extended replacement cost coverage.

For example, if you have a replacement cost policy and your home’s rebuild value is $1 million, you’d want to insure it for $1 million. If you are covered by a replacement cost endorsement, you will be limited to that amount (less your deductible) if you lose your home due to a covered loss.

If your home has appreciated in value and would now cost $1.4 million to replace if it were a total loss, an extended replacement endorsement would still fall short with a 25% increase in the coverage limits.

With replacement cost or extended replacement cost coverage, if your home is lost along with hundreds of other homes due to a natural disaster and the cost of rebuilding jumps to $1.5 million because of the inflated construction costs, you would be out of pocket anywhere from $100,000 to $500,000 to reconstruct your home to the condition it was in before the disaster.

Not so with guaranteed replacement cost. In the example above, your claim would be settled for $1.5 million even with the unexpected spike in construction costs. You are guaranteed a full payout. 

How Much Is Guaranteed Replacement Cost and Who Offers It?

Pricing for the addition of guaranteed replacement cost to your homeowner’s policy will vary from insurer to insurer, and the availability of the endorsement varies from state to state. 

There is a limited number of carriers that offer guaranteed replacement cost for high-value homes. Kelly Klee works with those carriers that cater to the affluent, and we’ll find you the highest quality coverage for your home. Call us today at (844) 885-1600, and we’ll start crafting a coverage plan that will never leave you underinsured.

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