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. Because the right amount of coverage depends on local rebuilding costs and the size of the home, it is worth working through how much homeowners insurance you actually need before deciding whether the extra 20 to 25 percent buffer is enough.

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. Insurers vary in whether they offer this endorsement and at what percentage above the policy limit, which is one reason it helps to compare top homeowners insurance companies before buying a policy.

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.

The dollar amount listed for dwelling coverage is meant to reflect the cost of rebuilding the home, not its market value, and the way insurers arrive at that figure is explained in more detail in our guide to how homeowners insurance is calculated. Some policyholders choose to add endorsements to their policies, such as guaranteed replacement cost coverage or extended replacement cost coverage.