Guaranteed Replacement Cost

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.

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