During the winter, as furnaces get used for the first time in quite a while here in Texas, the number of house fires can increase. Makes sense right? Sources of heat that have been dormant get used and suddenly you get a spark that can ignite things. Theresa had this exact scenario happen recently in her Amarillo home and was faced with the process of rebuilding. Fortunately for her, her home insurance policy had provisions for covering her costs to live someplace else while the rebuild was in process. But she was faced with a separate issue as the construction process got closer to completion.
All of the inflationary pressures on building prices over the last four years, reconstruction of homes during claims in Texas has been a wild ride. For many years, dwelling coverage limits on Texas homeowners policies were kept fairly low to reflect the affordability of building costs in this great state. But if you remember the lumber prices skyrocketing and the labor pool available to builders shrinking, you can begin to understand that rebuilding costs for the average homeowner in this situation have changed dramatically. How does that affect the average Texan homeowner if they are forced to rebuild as part of a home insurance claim scenario? If your policy isn't True Texas Home Insurance, it could be a grim situation. Unfortunately for Theresa, she was affected by the dramatic increase of the cost of construction for her home when compared to her insurance coverage. She was not properly protected with adequate Extended Replacement Cost Coverage on her coverage options. But what exactly does that mean?
Extended Replacement Cost Defined
The first that the independent insurance agents at Insurance For Texans do when evaluating a home insurance policy is to calculate the dwelling coverage on the policy. The dwelling coverage is an estimated amount of money that would be required to rebuild your home back to the standard that it was in the event of a total loss. Seems pretty simple, right? This calculation should include an appropriate estimation of construction costs based around square footage of your home, number of bedrooms and bathrooms, garage spaces, stories, construction materials, level of finish out, and roof type just to name a few things. There are some obvious fluctuations in the cost of each of these items, but year over year increases should be in line with overall general inflation. Oh, and don't forget to include site cleanup and preparation. The obvious next question should be what happens when it's not? That's what Theresa wanted to know!
A standard homeowner policy should include Extended Replacement Cost Coverage or Extended Dwelling Coverage in your insurance policy terms. This is an extra coverage item that can be added to your homeowners insurance policy. Extended replacement coverage will allow an extension of that Replacement Cost Estimate in the dwelling value to cover a shortage of money if the cost to rebuild exceeds the estimate. That extension is usually done as a percentage of the dwelling value ranging from 5% up to 100%. The bottom line is that this means that if your home insurance policy's dwelling value is not enough to rebuild your entire home you can access that extra amount specified in the endorsement to cover the additional cost to rebuild your home. But remember, the extended replacement cost endorsement only applies to construction costs associated with your dwelling. It does not extend to personal property coverage or separate structures.
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How Does Extended Replacement Cost Work?
When a Texas homeowner has a total loss, the real work begins by the homeowners insurance company on behalf of the insured. The first step is always to make sure that you are safe and have your temporary needs taken care of immediately. The process of the rebuild of your home will be lengthy and costly, but fortunately you bought home insurance. The property will be cleaned up, getting rid of the debris and subsequently preparing it for construction. As the construction begins, contractors are paid as various jobs are completed. The dwelling amount and separate structure coverage is there to pay for those material and labor costs up to the policy coverage limits.
The Extended Replacement Coverage will begin to pay those costs if you exhaust your dwelling value in the rebuild. There are two considerations at this point. The first being if the dwelling value was grossly miscalculated too low. If this is the case, the insurance company can deny the benefit since it is predicated on insuring to what is perceived to be full replacement cost. The second is that only having the 10% extended replacement cost option versus 25% or 50% in extended coverage. If you are short of money to rebuild from either of these circumstances, you will likely be asking a lot of questions about extended replacement cost policies. In our volatile inflation environment, it is not really difficult to imagine what can happen with the rebuilding process.
Extended Replacement Cost - A Case Study
When the agents at Insurance For Texans explain the various coverage items on a home insurance policy with an insured, one of the questions that we always hear is does anyone ever really use this. Here is a real life scenario from the last few months.
A homeowner purchased a policy in 2020 for a home that is 3,274 square feet and two stories that had a dwelling value of $573,000 reflecting $175 per square foot building costs. Extended replacement cost was included at 25% of that dwelling value.
During a brush fire incident in late 2021, the home was completely destroyed as were several neighbors. Debris removal and site cleanup totaled just over $50,000 prior to construction beginning. Calendar year 2021 produced inflationary pressures on construction costs pushed the price of lumber up approximately 75% and the price of other materials up over 25%. The cost to rebuild the home after site clean up and construction was $868,500.
Let's look back at the policy coverage limits. The dwelling value was set to $573,000 with a 25% extension on the extended replacement cost. That means that this Texas homeowner had $716,250 available in reconstruction costs after all benefits are afforded under the insurance policy. The gap between actual construction and policy benefits is $152,250. Where does the rest of the money come from?
Remember Theresa? The unfortunate reality for Theresa is that the $152,250 difference was coming out of her pocket since the policy benefits with the insurance provider were exhausted. If the Extended Replacement Cost Insurance Policy limit had been set to 50% instead of the 25% amount selected there would have been money left over in this very real situation. The cost for that change would have been less than $100 total in premium for the year. This is why we say that having TRUE Texas Home Insurance matters. The value that you receive across all types of coverage on your policy matters more than $8 a month.
Extended Replacement Cost Is A Part of True Texas Home Insurance
With the cost of insurance rising and policies becoming more complicated, the agents at Insurance For Texans use a proprietary system to maximize the benefits you receive while keeping costs in check. This is done with True Texas Home Insurance. Extended Replacement Cost is one of the five key items that each home insurance policy should have! We pay attention to what Texas homeowners should have due to what Texans actually make claims on most frequently. If you would like to see if your home has True Texas Home Insurance, you can smash that blue below to speak with one of our agents. The bottom line is that if you don't have True Texas Home Insurance your ass-ets likely are not covered.
