What is extended replacement cost?

Extended replacement cost is an optional homeowners insurance add-on that covers unexpected increases in construction and labor costs after a major disaster.

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Pat Howard

Pat Howard

Senior Editor & Licensed Home Insurance Expert

Pat Howard is a senior editor and licensed home insurance agent at Policygenius, where he specializes in homeowners insurance. His work and expertise has been featured in MarketWatch, Real Simple, Fox Business, VentureBeat, This Old House, Investopedia, Fatherly, Lifehacker, Better Homes & Garden, Property Casualty 360, and elsewhere.

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Deante' Peake

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Deante' Peake is a licensed property and casualty insurance expert and a former operations manager at Policygenius.

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Extended replacement cost is a homeowners insurance endorsement that provides an added layer of coverage for your home in the event of an expensive disaster. If your house is badly damaged by a wildfire or severe storm and the cost to repair or rebuild it exceeds your policy’s dwelling coverage limit, extended replacement cost can increase your limit an extra 25% to 50% — whichever amount you choose. 

This endorsement comes at an additional cost, but it’s well worth the added premium if you live in high-risk area prone to natural disasters.

Key Takeaways

  • After natural disasters, demand for construction materials and labor is typically high in impacted communities — causing rebuild costs to skyrocket

  • If the cost to rebuild your home is higher than your dwelling coverage limit, extended replacement cost provides additional funds so you’re not left covering the gap out of pocket

  • Not every insurance company offers extended replacement cost, and coverage availability may be limited by state

How does extended replacement cost work?

If your home is badly damaged or destroyed and the cost to rebuild it is more than your policy’s dwelling coverage limit, you’ll have to pay the additional amount to reconstruct your home to its original condition. By purchasing an extended replacement cost endorsement for your homeowners insurance, you’re financially protected from this unexpected cost increase.

Most major insurance companies offer this coverage in increments of 25% to 50% of your policy’s dwelling coverage limit. That means if you purchase 25% extended replacement cost on a house that’s insured for $200,000, then you really have $250,000 in coverage. 

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Extended replacement cost example

Imagine you own a house that’s insured for $300,000. One day, a tornado destroys your home and several others in your community. Thousands of home insurance claims are filed after the storm, causing construction demand and prices to skyrocket. All of a sudden, your house costs $400,000 to rebuild, leaving you with a $100,000 deficit. 

Here’s how your claim would play out under three different coverage scenarios.

Coverage levelDwelling coverage limitClaim payoutOut-of-pocket expenses after payout
Standard replacement cost coverage$300,000$300,000$100,000
Extended replacement cost of 125%$375,000$375,000$25,000
Extended replacement cost of 150%$450,000$400,000$0

A standard replacement cost policy would pay out $300,000, but you’d have to pay $100,000 of your own money to build the house the way it was before the disaster. At that point, you may be better off just building a less expensive home.  

An extended replacement cost policy provides you with a bit more of a coverage cushion. The 25% option caps your payout at $375,000, but leaves you with a $25,000 deficit. The 50% option extends your dwelling coverage to $450,000, giving you more than enough to cover the new rebuild cost without having to pay anything out of pocket.

How much is extended replacement cost?

Most insurance companies offer extended replacement cost for an additional policy premium — typically an extra $25 to $50 annually depending on the percentage you choose and your dwelling coverage amount. You may also pay more if you live in a coastal community or an area with high wildfire risk.

Where can I buy extended replacement cost coverage?

Extended replacement cost is offered by most major insurance providers, although coverage availability may vary by state or region. If you’re interested in this coverage for your home, Policygenius may be able to match you with one of the following companies that offers it. 

  • Progressive

  • Safeco

  • Mercury

  • Hippo

  • AIG

  • Chubb

  • Metlife

  • Plymouth Rock

  • Openly

  • Swyfft

  • Encompass

  • Tower Hill

  • Travelers

  • Allstate

  • Nationwide

Genius tip

If an insurance company gives you the option of adding increased dwelling coverage or extended dwelling coverage to your policy, what they’re offering you is extended replacement cost coverage.

When do you need extended replacement cost?

Extended replacement cost is an essential policy add-on for anyone who owns a home in an area with severe weather or wildfire risk, especially when you consider natural disasters and construction costs are more expensive than they’ve ever been.

In fact, there’s been almost as many billion-dollar disasters the last three years as there were throughout the entire 1990s. [1] And to further complicate things, issues with the global supply chain and labor shortages have sent construction prices through the roof.  

So if you live in a high-risk area and you can afford it, extended replacement cost is well worth the additional policy cost.

Extended replacement cost vs. guaranteed replacement cost

Guaranteed replacement cost pays to rebuild or repair your home to its original specifications, even if your home’s rebuild cost doubles or even triples after a covered disaster. With guaranteed replacement cost, there’s no limit to how much your insurance company will pay out.

Similar to extended replacement cost, guaranteed replacement cost isn’t offered by every insurance company, and availability typically varies by location.