Extended Replacement Cost is one of the line items you should consider immediately when evaluating optional coverages on your Grapevine Home Insurance.
To better understand, see the video for an explanation or read below:
True Texans buy their homeowners insurance policy for many different reasons, but the single biggest thing that the policy does is to make sure that your home can be rebuilt in the event that a catastrophe strikes. Does not matter if it is a fire, tornado, hurricane, or some other freak act of nature, the very simple goal is to rebuild the home so that you can live in it again. Most Texans believe that will happen and likely don't give it much thought, but what if that's not the case?
During the last 24 months we have seen inflation in all areas of the economy, but there have been few areas quite as dramatic as construction. Lumber prices have skyrocketed. The labor pool available to builders has plummeted. The cost of construction of homes in Texas, quite frankly, has accelerated at paces that just do not make sense. 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.
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. It should include debris and site clean up, along with an appropriate estimation of construction costs based around square footage of your home, number of bedrooms and bathrooms, garage spaces, stories, construction materials, 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. What happens when it's not?
The Extended Replacement Cost Endorsement is an optional line item coverage on your home insurance policy that will apply an extension of that Replacement Cost Estimate in the dwelling value to cover a short run in 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%. That 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 percentage to complete the construction or your home. But remember, extended replacement cost only applies to construction costs associated with your dwelling. It does not extend to personal property or separate structures.
How Does Extended Replacement Cost Work?
When a Texas homeowner has a total loss, the real work begins by the 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 is there to pay for those costs.
The Extended Replacement will begin to pay those costs if you exhaust your dwelling value in the rebuild. There are two considerations at this point. The first is if the dwelling value was grossly miscalculated too low, 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 10% in extended replacement cost versus 25% or 50% in extended replacement cost might leave you wishing you had paid the extra pennies per month if you are still short of money to rebuild. In our volatile inflation environment, it has definitely been a concern.
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 a reconstruction cost of $175 per square foot. 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. Dwelling value was set to $573,000 with a 25% extension on the extended replacement cost. That means that there is $716,250 available 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?
The unfortunate reality for the homeowner is that the difference is coming out of their pocket since the policy benefits with the insurance company were exhausted. If the policy limit for Extended Replacement Cost 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.
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 issued in Texas should have due to the what Texans actually make claims on most frequently. If you would like to see if your home has True Texas Home Insurance, you can either take our Quiz here or 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.