Guaranteed Replacement Cost - What is it?

What is it?

First things first.   Understand what Replacement Cost is.  

Replacement Cost means that when a loss occurs the insurance company will pay the actual amount of what it costs to repair or replace whatever is damaged.   The only thing that you must pay is the deductible you choose when purchasing your insurance.  

You must repair or replace the damaged property in order to get the full benefit of Replacement Cost. 

If you do no repair or replace the damaged property you will receive the Actual Cash Value instead.  The actual cash value somewhat reflects what you could expect to sell the item for just before it was damaged.   In addition it will be based on an amount that reflects the age and condition just before the loss.  If the property is 10 years old and has a useful life of 20 years the property  has depreciated by 50%.  

Replacement cost has become very common in home insurance policies and is usually provided automatically.  (If you have replacement cost coverage it will say so on your policy)

Most people, understandably, want replacement cost coverage. 

Guaranteed Replacement Cost.  

In a nut shell Guaranteed Replacement Cost says - even if the amount shown on the policy is not adequate to repair or replace your home the amount of coverage will automatically be increased to deal with the shortfall.  So, in essence you would never be short of coverage when it comes to having to rebuild your home after a loss.

Why would this be of concern if you already have replacement cost coverage?

There are two factors that come into the picture when you go to rebuild your home after a big loss.  These factors very well could increase your rebuilding costs by a much as 20%.

When things are booming contractors are often booked well into the future.  Many contractors will not want to deal with demolition and debris removal problems.   That leaves a smaller pool of qualified contractors who are willing to take on the job.  They know they are able to charge more to.

Secondly, you will have preparation expenses. Any time there is a fire you have to clean up the site, remove debris, possibly even remove the foundation before you can rebuild. This could add 10% or more to what it would normally cost to build a home on a new fresh site.

Guaranteed Replacement Cost only applies to your Home, and not to contents.

What is required to get this coverage?

You will be offered this coverage if your home is reasonably new or has been well maintained.  This coverage is usually free .  Most of the time you will receive the coverage without asking.  You can check your policy as it will indicate if this coverage is being provided.

However, a replacement cost estimate must be completed when you purchase your insurance and you must insure to the amount of the estimate.  The estimator must be completed accurately.  Most of the time your agent will complete the estimator with you prior to placing the insurance for you.

If any changes are made to your home after your have purchased insurance your cost calculator must be updated and recalculated to reflect the changes.   If you are adding a deck, completing an addition, or installing a hot tub or swimming pool they must reported and your calculator must be updated.

Inflation pressures are already insured through the Inflation Protection Clause
Back in the 80's the "Inflation Protection Clause" was added to insurance policies because we were experiencing run away inflation where construction costs were increasing by as much as 14% in a single year.   An individual could very quickly find himself under-insured.  So insurance companies introduced this clause so insurance policies were not obsolete before they renewed a year later.   This "Inflation Protection Clause" is already present in just about every home insurance policy.

Bylaws can make your insurance a nightmare.
Another important factor in insuring a home is the secondary or indirect costs that are unknown.  Bylaws may be in place in your subdivision.  If a bylaw was passed after your home was constructed it could mean that you home could cost more to rebuild to meet the bylaw requirements.  Guaranteed replacement cost often adds this coverage to your policy.  However, it is very important that you understand bylaws can prevent you from rebuilding you home. 

Unfortunately, this added coverage may not be available to some people.  If you live in an older home that has not been completely modernized (meaning that you have replaced the old steal plumbing, the old wiring, the old windows, the lathe and plaster, the heating system) this coverage will not be offered to you.  The majority of Bylaws problems exist where older homes are located.  "Character"  homeowners  - be aware that you have risks you may not be aware of, and this especially applies if your home is classified as "historical".   Please, please, please make sure you discuss bylaws coverage with your adviser if you are one of these people.

The No Hassle Insurance Guy  Phone 306-821-1620