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Understanding Replacement Cost on Property Insurance Policies

Unfortunately, many people in our community were again impacted by wildfires in the recent weeks. While not everyone’s property was damaged, it has many people thinking about their insurance should a claim occur. We’ve had many calls from our insureds who wanted to have a better understanding about “Replacement Costs” and what is – or isn’t – included on their current policies. Let’s take a look at what replacement cost, extended replacement cost and guaranteed replacement cost really mean for insureds.

Replacement Cost
If you have damage or possibly even a total loss of your home, vacation home, cabin rental property, etc., you’ll face costs to rebuild. If your insurance policy pays for these claims based on “Actual Cash Value” then there will be a deduction for depreciation of value in the amount paid to you. Replacement Cost will pay to replace the items you lost to a covered peril (what caused the claim) at a similar quality up to the stated policy limit. So, if it is personal property like a TV, a similar model or quality would be paid for to replace it. If it is the structure itself, similar building materials would be covered up to the stated policy limit.

Extended Replacement Cost
With incidents that or more widespread – like wildfires – the cost of replacing items can be higher than normal. It may also be difficult to find materials, labor, etc. – resulting in increased costs that are out of your control. Extended Replacement Cost can be added to most policies to give you additional coverage for the dwelling structure. Typically, this can be added in increments of 10% to 25% (and in some cases as much as 100%) of the “Coverage A” limit on your policy. This can give you a “cushion” in case you face a loss that results in the rebuild costing more than the dwelling limit of the policy.

Guaranteed Replacement Cost
Guaranteed is obviously the word to focus on here. If you have Guaranteed Replacement Cost on your policy, the insurance company is agreeing to pay the actual costs to rebuild your property back to its original condition. This is obviously a more expensive option, and not all insurers offer it. However, if available for your property, this would be the way to ensure that you can completely rebuild after a loss with the quality and materials of the original structure no matter the external circumstances impacting those costs.

As you can imagine, there are caveats to these coverages including availability, costs, and policy language. We’d love to help you walk through your current policy or discuss options for a new one. Please contact us at or 865.453.1414 for more information.