When you buy home insurance, your goal is to protect your home from unexpected disasters. One key policy feature that can significantly improve your level of protection is extended replacement cost coverage.
This optional policy add-on enhances your dwelling coverage limit — often by 25% or more — should you need to rebuild your home after a covered loss. If the cost to rebuild exceeds your coverage limit due to factors like inflation, rising labor costs, or increasing material costs, this endorsement can help fill the gap.
The benefits of extended replacement cost coverage
Construction and material costs aren’t static. Over time, general inflation or other events can cause building prices to outpace your policy’s standard dwelling coverage limits. Likewise, after major disasters, like hurricanes, wildfires, and tornadoes, material and labor costs can surge due to increased demand.
If a covered peril destroys your home and rebuilding costs exceed your policy limit, you’d typically have to make up the difference out of pocket. However, if your policy has extended replacement cost coverage, your insurer will cover the additional expenses, up to the endorsement limit.
Replacement cost coverage example
Suppose a tornado destroyed your home, and you have a standard home insurance policy with a $500,000 dwelling coverage limit. Because the damage is widespread, the cost of both labor and materials is on the rise, and you find that it will actually cost $615,000 to rebuild your home.
If your policy didn’t include extended replacement cost coverage, you would likely be on the hook for the additional $115,000 in rebuilding costs. However, with extended replacement cost coverage, your dwelling coverage limit is extended by 25%, allowing for up to $625,000 in repair costs.
What does extended replacement cost cover?
Extended replacement cost coverage increases the limits attached to your dwelling coverage, or the part of your insurance policy that covers the structure of your home – e.g., foundation, walls, roof, windows, built-in cabinetry and systems, etc. Depending on your policy, it may also cover other structures on your property, such as a detached garage, gazebo, or pool house.
Though coverage specifics can differ by insurer, policy, and location, dwelling coverage in a standard home insurance policy will typically help you repair or rebuild your home after the following events, or perils:
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Fire or lightning
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Windstorm or hail
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Explosions
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Riots or civil commotion
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Damage caused by aircraft, vehicles, or a falling object
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Smoke
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Vandalism or theft
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Volcanic eruption
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Weight of ice, snow, or sleet
Remember that your extended replacement cost coverage only applies to losses typically covered by your dwelling insurance. The policy endorsement won’t cover damage caused by:
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Flooding and storm surges
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Water backups from failed sump pumps or sewer systems
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Earthquakes or sinkholes
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Intentional acts
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Any other exclusions specifically named in your policy
Tip: Extended replacement cost coverage also does not apply to other parts of a standard homeowners insurance policy, such as personal property coverage, personal liability insurance, or medical payments coverage. If you want to enhance coverage for these coverages, speak to your insurer about available options.
How does extended replacement cost differ from other coverage options?
Extended replacement cost coverage represents one method an insurer can use to determine your claim payout after a covered loss, but it’s not the only one.
When you purchase a home insurance policy, it may include one of the following:
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Actual cash value (ACV) coverage. If you have this type of coverage, your insurer will deduct depreciation (in addition to your deductible) from your claim payout. As such, policies with ACV coverage are often cheaper, but you will likely need to pay more out-of-pocket after a claim.
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Replacement Cost Coverage. Many standard homeowners insurance policies include replacement cost coverage. This pays to rebuild your home with similar materials at today’s prices, but coverage is capped at your policy’s dwelling coverage limit.
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Guaranteed Replacement Cost. Some insurers offer guaranteed replacement cost coverage as a policy endorsement for an additional cost. With this level of coverage, your insurer will pay the full cost to rebuild your home, regardless of limits.
Extended replacement cost coverage acts as a middle ground: It offers more financial protection than policies with ACV or replacement cost coverage, but it’s generally less expensive and more widely available than guaranteed replacement cost coverage.
Learn more: Replacement cost vs. actual cash value
Is extended replacement cost coverage worth it?
In many cases, yes. Extended replacement cost coverage is a wise investment for most homeowners, particularly in today’s market, where construction costs and inflation can be unpredictable. It’s especially beneficial if your area is prone to natural disasters or if you want to ensure you can fully rebuild at a total loss.
Extended replacement cost coverage is an option and one you hope you never need, but will be incredibly thankful for if the worst happens and the cost to rebuild exceeds your policy limits.