Extended Replacement Cost
What Does Extended Replacement Cost Mean?
Extended replacement cost refers to an insurance policy that provides coverage beyond the specified limits for replacing a damaged house. This coverage typically offers a benefit ranging from approximately 120 to 125 percent of the policy limit. Conventional homeowners’ policies often do not fully account for inflation in building costs, or only do so to a limited extent. However, a major disaster can lead to increased demand for building contractors and materials, which in turn drives up reconstruction costs.
By offering a higher benefit above the policy limit, extended replacement cost policies protect policyholders from inflation in reconstruction costs following a major disaster. These policies are similar to guaranteed replacement cost policies, which cover the cost of rebuilding the property as long as the policyholder meets the specified requirements.
Insuranceopedia Explains Extended Replacement Cost
A standard homeowners’ insurance policy typically includes both property protection and liability protection. The property protection section consists of:
- Dwelling: This covers the house itself, attached structures, fixtures within the house, plumbing, heating, permanently installed air-conditioning systems, and electrical wiring.
- Other Structures: This covers detached structures such as storage sheds, garages, driveways, patios, sidewalks, and retaining walls.
- Personal Property: This covers the contents of the house and other personal items owned by the occupants, either on an actual cash value basis or a replacement cost basis.
- Loss of Use: This covers additional living expenses if the policyholder cannot live in the house while it is being repaired or reconstructed.
Some policyholders choose to add endorsements to their policies, such as guaranteed replacement cost coverage or extended replacement cost coverage.