Dwelling Replacement Cost and Extended Replacement Coverage
With the horrific wild fires that Northern California experienced, I think that now is the time to review your Dwelling Replacement Cost and Extended Replacement Coverage on your homeowner’s insurance policy. So what does each of these mean?
Dwelling Replacement Cost – Also known as Coverage A, this is the maximum amount that is stated on the insurance contract that the insurance company would have to pay to repair or replace your home if it was damaged or destroyed by a covered loss such as fire. This amount is usually lower than the market value of your home because if the house burns to the ground, the ground is still there and usually carries great value.
In many other states, it is required that the Dwelling Replacement Cost equals the mortgage loan amount but in California, this isn’t feasible since the property itself is oftentimes much more valuable than the house that sits on top of it.
Insurance Agents (like us) are provided software to assist us with determining the Dwelling Replacement Cost of a home. We input information about the type of roof, flooring, and plumbing. We ask whether or not pieces of the home have been upgraded such as kitchens, counter tops, and cabinets. Even with the technology and software available, our final result is a best-guess estimate. Neither the insurance agent, the insurance company, nor the homeowner can profess to be an expert on determining the exact replacement cost of a home unless you are actually a contractor who does this sort of thing for a living.
It is very important that the insurance agent comes very close to insuring the home to value as you will see in just a bit.
Extended Replacement Coverage – This is a percentage stated in the policy which will pay up to the stated percentage over the Coverage A (Replacement Cost) limit in order to fully replace a damaged home. The percentage is usually shown as 120, 125, or even 150 percent of the stated limit of coverage. Why is this important?
· First, this is a great “fudge factor”. Like I stated earlier, even with the latest technology and software tools used to determine a dwellings Replacement Cost, it is not an exact science so this gives us a little “wiggle room”. It is still vitally important that the insurance agent insure the home to 100% to replacement value and not use the Extended Replacement Coverage to lower the Coverage A Replacement Cost to get a lower premium and to be lower than competitors in the marketplace. Again, you’ll see why in a few moments.
· The second reason that the Extended Replacement Coverage is important is because the replacement cost of a home fluctuates (99% of the time, this increases). Home owners will make upgrades to their homes many times without thinking about calling their agent to increase the replacement cost on their policy. Changes can be smaller such as replacing doors, upgrading walkways, or replacing windows to the bigger ticket items such as painting the house, putting in a new kitchen or bathroom, adding a room, or even putting in a pool or spa.
· The biggest reason that the Extended Replacement Coverage is important is occurring in Northern California right now. Homes were destroyed by fire including entire neighborhoods. The cost of building supplies and contractors will increase as a result of supply and demand and yes, even price gouging. I read that some contractors have already increased their fees by 500% or more.
Can you now see why it is so important to not only have your home insured to 100% of replacement cost but to also have a healthy extended replacement cost as well? You’re not insuring the house for today. You’re insuring the house for when you will need the coverage. For some poor souls in Northern California, it could take years and a lot of out-of-the-pocket money to rebuild their homes and lives.