What is guaranteed replacement cost homeowners insurance

What is guaranteed replacement cost?

Guaranteed replacement cost is a type of home insurance coverage. It means a home insurance policy will cover the full cost of repairing or rebuilding the home, even if the final cost is greater than the policy’s Building coverage limit.

Replacement cost refers to the cost of replacing an item (in this case a building) with a new item of similar kind and quality.

When you buy a homeowners insurance policy, one of the most important coverages on that policy is for the house itself. This might also be called dwelling coverage, building coverage, or Coverage A.

In any case, this coverage has a limit. Your home insurance provider will calculate the replacement value of the house—the estimated cost to rebuild it completely. You can (and should) insure the home for that estimated value; not doing so could mean your policy won’t cover the full cost of repairing your home if the worst should happen.

Something to note: The replacement cost is not the market value. It’s the cost of replacing (in other words: rebuilding) the building itself, and doesn’t include the value of the land or any detached structures on the lot.

With typical replacement cost coverage, your policy will cover repair or rebuilding of the home up to the chosen limit. With guaranteed replacement cost, your policy will cover repair or rebuilding beyond the chosen limit.

There’s just one stipulation:

To qualify for guaranteed replacement cost coverage, you will need to insure your home for the full replacement value, as estimated by your insurer. If you choose to insure your home for less than the insurance provider’s estimation, you won’t be eligible for guaranteed replacement cost.

Related to guaranteed replacement cost is extended replacement cost, which is sort of a middle ground. Sometimes, extended replacement cost will cover rebuilding costs in excess of the policy limit, but only up to a certain percentage. In other cases, extended replacement cost will behave very similarly to guaranteed replacement cost.

If you aren’t sure how your individual policy will respond, talk to your home insurance provider.

Why guaranteed replacement cost is important

There are many reasons that it’s important to find a home insurance policy that offers guaranteed replacement cost. While it’s certainly possible to estimate the cost of rebuilding a home, there are plenty of things that can ramp up the cost when it comes time to rebuild.

For example, the cost of building materials and labour can be unpredictable. This is especially true if it’s a natural disaster that damaged your home. In that case, there are likely dozens of other homes damaged as well; the resulting squeeze on labour and materials can cause rebuilding costs to spike.

And another example: bylaw changes.

When you rebuild your house, it has to comply with any new building codes or bylaws that came into effect since it was originally constructed. Those changes can run up the cost as well.

Not every home insurance policy includes bylaw coverage. So, in addition to looking for guaranteed replacement cost coverage, make sure you’re getting bylaw coverage as well.

To learn even more about guaranteed replacement cost coverage, check out our full article on the subject.

The important points

• Guaranteed replacement cost coverage will cover the full cost of rebuilding a home following an insured loss—even beyond the policy limit
• To qualify for guaranteed replacement cost, a homeowner needs to insure their home for at least their insurer’s estimated rebuild cost amount
• Not every insurance provider offers guaranteed replacement cost coverage

Looking for another insurance definition? Look it up in The Insurance Glossary, home to dozens of easy-to-follow definitions for the most common insurance terms. Or, get an online quote in under 5 minutes and find out how affordable personalized home insurance can be.

About the expert: Stefan Tirschler

Stefan is responsible for underwriting leadership, market expansion, and product research and development for Square One's operations. Stefan has earned his Fellow Chartered Insurance Professional designation, and maintains a level 2 general insurance license in British Columbia, Alberta, Saskatchewan, Manitoba and Ontario. Stefan is also an Education Committee member and CIP/GIE instructor for the Insurance Institute of Canada.

Insurance is sold by Square One Insurance Services (1410-650 W Georgia St, Vancouver, BC V6B 4N8). Home insurance is underwritten by The Mutual Fire Insurance Company of British Columbia. Legal protection insurance (not sold in Quebec) is underwritten by HDI Global Specialty SE.

Three distinct levels of coverage, defined

Guaranteed replacement cost is the highest level of coverage and is the best way to insure your home against the most catastrophic and expensive disasters. It is a type of dwelling coverage offered by a number of homeowners insurance companies that specialize in coverage for high-value homes, including AIG, Chubb, and PURE. If your home is a total loss and you have guaranteed replacement coverage, the insurer will pay for the full reconstruction value of the home. Depreciation or coverage amount limits do not factor into your claim settlement.

Many agents, brokers, agencies, and insurers recommend guaranteed replacement cost for homes located in a high-risk area where labor and construction materials costs have been known to rise steeply in the aftermath of a natural disaster. With guaranteed replacement cost, you don’t have to ever worry about being underinsured. It doesn’t matter how much the rebuild costs – you’re fully covered.

The second level of coverage is extended replacement cost. Extended replacement cost is an upgrade, or endorsement, of your standard replacement cost claim settlement terms. With this coverage, your insurer will pay for your home to be repaired or rebuilt to its condition before the damage occurred, even if the loss is above your dwelling coverage limits, with one caveat – the extended cost is limited to an additional 25% to 50% bump from your standard replacement cost coverage. So, unlike guaranteed replacement cost, extended cost has limitations.

The third level of coverage is your standard homeowner’s policy with replacement cost coverage. With this coverage, your home is insured for its replacement cost (not guaranteed). If your home sustains a loss, depreciation won’t be factored into the payout of the claim. However, your homeowner’s policy still has a specified coverage limit. If the replacement cost of your home is underestimated, you could be severely underinsured in the event of a disaster.

How does guaranteed replacement cost work?

You can’t be underinsured with guaranteed replacement cost coverage because there is no coverage limit; the insurer has agreed to fully reimburse you regardless of your cost to rebuild. Not so with pure replacement cost or extended replacement cost coverage.

For example, if you have a replacement cost policy and your home’s rebuild value is $1 million, you’d want to insure it for $1 million. If you are covered by a replacement cost endorsement, you will be limited to that amount (less your deductible) if you lose your home due to a covered loss.

If your home has appreciated in value and would now cost $1.4 million to replace if it were a total loss, an extended replacement endorsement would still fall short with a 25% increase in the coverage limits.

With replacement cost or extended replacement cost coverage, if your home is lost along with hundreds of other homes due to a natural disaster and the cost of rebuilding jumps to $1.5 million because of the inflated construction costs, you would be out of pocket anywhere from $100,000 to $500,000 to reconstruct your home to the condition it was in before the disaster.

Not so with guaranteed replacement cost. In the example above, your claim would be settled for $1.5 million even with the unexpected spike in construction costs. You are guaranteed a full payout. 

How much is guaranteed replacement cost and who offers it?

Pricing for the addition of guaranteed replacement cost to your homeowner’s policy will vary from insurer to insurer, and the availability of the endorsement varies from state to state. 

There is a limited number of carriers that offer guaranteed replacement cost for high-value homes. Kelly Klee works with those carriers that cater to the affluent, and we’ll find you the highest quality coverage for your home. Call us today at (844) 885-1600, and we’ll start crafting a coverage plan that will never leave you underinsured.

What does guaranteed replacement mean?

What does replacement cost mean on a homeowners policy?

What is the difference between replacement cost and extended replacement cost?

What is the difference between RCV and ACV?