Home reconstruction costs often increase in the aftermath of natural disasters and during periods of inflation, which can leave homeowners underinsured, or without enough insurance to rebuild their home.
If your house is damaged and the cost to repair or rebuild it exceeds your policy’s dwelling coverage limit, you may have to cover the remaining costs out of pocket to get your home back to its pre-disaster condition.
Extended replacement cost, also known as increased dwelling coverage and extended dwelling coverage, safeguards you from having to cover these excess costs yourself.
Extended replacement cost is an optional homeowners insurance policy endorsement that gives your home an added layer of protection in case of an expensive disaster. For example, say your house is badly damaged in a wildfire and the cost to rebuild it exceeds your dwelling coverage limit. A policy with extended replacement cost coverage will automatically cover these higher costs up to a capped percentage amount of your choosing.
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How does extended replacement cost work?
Your home insurance policy’s dwelling coverage limit is based on how much it would cost to rebuild your house from the ground up at today’s prices. Also known as home replacement cost, this amount is primarily a calculation of your home’s square footage, construction style, and the cost of construction materials and labor in your area.
While insurers often adjust policy limits on the homeowner’s behalf each year to reflect inflation forecasts for the coming year, these adjustments don’t factor in dramatic rebuild cost increases after natural disasters or the record-high inflation we saw in 2022. As a result, many homeowners end up underinsured and have to dip into their own funds to get their home back to its pre-disaster condition.
With climate change-related disasters on the uptick and the inflation rate at all-time highs, extended replacement cost coverage is one of the most important endorsements you can purchase for your homeowners insurance. Most major insurance companies offer this coverage in increments of 10% to 50% of your policy’s dwelling coverage limit. That means if you add 25% extended replacement cost to a policy with $200,000 in coverage, then your house is really insured for $250,000.
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.
Dwelling coverage limit
Out-of-pocket expenses after payout
Standard replacement cost coverage
Extended replacement cost of 125%
Extended replacement cost of 150%
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.
Who needs 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.  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.
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. 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.
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.
Frequently asked questions
What does extended replacement cost mean?
Replacement cost refers to the amount that it would cost to rebuild your home with similar materials at today’s prices. But demand surge (temporary inflation) after natural disasters can cause rebuild costs to skyrocket, potentially leaving homeowners without enough coverage to repair or replace their home. In the event this were to happen, extended replacement cost “extends” the amount of insurance on your house by an additional amount (usually 10% to 50%).
What does dwelling mean?
Dwelling refers to a house, condo, apartment, or any place of residence where you live. On homeowners insurance policies, dwelling coverage is the portion that covers the structure of your home in the event of covered damage or loss.
What is functional replacement cost?
Functional replacement cost is a reimbursement provision that estimates how much it would cost to repair or replace a home with more common, less costly materials that are functionally similar to the existing structure. This provision is often included in home insurance policies on older or historic homes that are constructed with building materials or features that are too expensive for the insurer to replace or replicate.