Extended Replacement Cost

Definition - What does Extended Replacement Cost mean?

Extended replacement cost refers to an insurance policy that usually provides a benefit over and above the limits specified by the policy for replacing a damaged house. This coverage could pay a benefit ranging from approximately 120 to 125 percent. Conventional homeowners' policies often do not track (or do so on a limited basis) the inflation in building costs. However, a major disaster could lead to a high demand for building contractors and materials. The higher-than-usual demand would inflate the normal costs of reconstruction.

By paying a higher benefit above the policy limit, extended replacement cost policies protect policyholders from an inflation in the reconstruction costs after a major disaster. In this way, these policies typically emulate guaranteed replacement cost policies that provide the cost for rebuilding the property as long as the policyholder meets the requirements specified within the policy.

Insuranceopedia explains Extended Replacement Cost

A regular homeowners' insurance policy usually includes property protection and liability protection. The property protection section comprises:

  • Dwelling: This covers the house, attached structures, fixtures in 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, retaining walls etc.
  • Personal Property: This covers the contents of the house and other personal items owned by the occupants on an actual cash value basis or on a replacement cost basis
  • Loss of Use: This covers living expenses beyond the normal living expenses in case the policyholder cannot live in the house while it undergoes repair or reconstruction

Some policyholders often include endorsements such as guaranteed replacement cost coverage or extended replacement cost coverage in their policies.

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