What is Extended Replacement Cost Coverage?

When reviewing your recently purchased Home Insurance policy you may have noticed a coverage listed as “Extend Replacement Cost” and wondered what the coverage is for. Is it worth the additional cost to have it on your policy? The answer is: YES!

Extended Replacement Cost is a common endorsement that you can add to your policy that will help protect your home in the event of an unusual surge in the price of materials or labor. The most common amount endorsed for extended replacement cost is 25% but each carrier will vary in the percentage amount you can select.

Example: Your home is destroyed by a wildfire and your dwelling coverage is $400,000. Since the wildfire spread and damaged a lot of homes in your area, the cost to rebuild has gone up dramatically due to the high demand for materials. The invoice you receive from your contractor estimates that it will cost $450,000 to rebuild your home. If you have a 25% extended replacement cost endorsement, your dwelling would extend up to $475,000, covering the updated rebuild cost of your home.

When Can I Use This Coverage?

A common misconception about this coverage is that it can be added as a way to keep the premium low by letting you keep a lower Dwelling Coverage amount. This is false because this coverage doesn’t come into play unless there is a shortage of materials and/or labor that has caused you to be insured for less than what your home costs to rebuild. In a broader sense, an insurance provider will not pay out the additional coverage amount just because you had a loss and your home was not insured for the right amount; it is only available for use when the home is insured for the right amount but the cost has exceeded the provider’s expectation for reconstruction due to extraordinary circumstances.