In the event of a total loss, you may find yourself without enough home insurance coverage. The good news is that you can purchase additional coverage to account for the full cost of rebuilding your home.
Before buying a home insurance policy, it’s important to understand your options, including extended replacement cost (ERC) coverage. Read on to find out how ERC works, its costs, pros and cons, and how it compares to other types of coverage.
If the cost to rebuild your home exceeds your dwelling coverage limit, ERC provides extra coverage up to a certain percentage. The Insurance Information Institute (Triple-I) states that a typical extended policy pays 20%–25% over your coverage limit.1
An ERC differs from replacement cost (RC) coverage, which a standard homeowners policy offers. RC should theoretically provide enough insurance coverage to rebuild your home with similar materials and quality after a covered disaster, but this isn’t always true. That’s where ERC can come in handy.
Inflation has caused an uptick in construction prices, increasing labor and material costs. And if your home sustains damage in a large-scale natural disaster, material and labor shortages can result in repair costs that exceed your policy limits.
Once your insurance company approves your claim, it’ll provide coverage up to your policy’s RC limit. If the cost to rebuild your home exceeds your dwelling coverage amount, ERC coverage kicks in. Your insurer will then increase your payout amount up to the ERC limit in your policy. In other words, you’ll receive a larger claims payout with ERC coverage.
For example, say your insurance policy has an RC limit of $500,000. An electrical fire destroys your home, resulting in $625,000 worth of damage. Assuming your policy covers up to 25% on top of your dwelling limit, an ERC endorsement will pay out an extra $125,000 to restore your home completely.
The cost of ERC coverage depends on your insurance dwelling coverage limit and ERC percentage limit. In general, buying more coverage results in more expensive premiums.
Insurance companies also consider risk factors such as your home’s age and location when calculating your rates. Insurers assume more financial liability when covering properties with increased risk levels. So, they charge higher premiums to offset this risk.
If you’re wondering whether ERC is right for your situation, here are a few things to consider.
If you lack sufficient insurance coverage, you may have to take out a loan or use your savings to rebuild your home following a natural disaster damage or another total loss. But ERC coverage could protect you from this.
ERC isn’t for everyone, but you may want to consider it if you’re a homeowner who:
Lives in a high-risk area
Lives in an area with rising construction costs
Owns an older home
Owns a high-value home
Owns a home that requires specialized materials and labor
The amount of home coverage you need depends on your home’s value, risk levels, and local construction costs. Speak to your insurance agent, and take the following steps to determine the right coverage amount:
Figure out your home’s replacement cost. Generally, you can estimate your rebuilding cost by multiplying the square footage of your home by local building costs per square foot. Speak to your insurance agent to help you calculate a more accurate estimate of your home’s rebuilding costs.2
Understand local risk factors. If you live in an area susceptible to severe or various risk factors, you may want to select a higher percentage limit on your ERC endorsement.
Review your policy regularly. Read and update your policy periodically to ensure you have adequate coverage. You should review your policy during renewal (usually every year), after a home renovation or major upgrade, and after a life change like a marriage or birth.3
Homeowners choose from different levels of coverage based on their circumstances and financial situation. Your options include actual cash value (ACV), replacement cost (RC), extended replacement cost (ERC), and guaranteed replacement cost (GRC), listed from the least to most comprehensive coverage. It’s a good idea to understand each type and its pros and cons to choose one that best suits your needs.
Below, you can see how these coverage types compare against one another in greater detail.
ERC and GRC both protect your home against inflation, providing more coverage than your dwelling limit. But unlike ERC, GRC doesn’t enforce a percentage cap.
If you live in an area with moderate fluctuations in construction costs, you may find ERC coverage sufficient. But if you live in an area where construction costs increase rapidly, especially in high-risk regions, you may benefit from the comprehensive protection that GRC provides.
A standard replacement cost policy covers the expense to rebuild your dwelling up to its replacement cost value. You can add extended coverage for an additional premium for protection above your dwelling limits.
But if construction costs in your area are relatively stable, you might stick with your replacement policy’s standard coverage limits to save money. Meanwhile, if you live in an area with moderate or high fluctuations in construction costs, consider an ERC for coverage against unexpected price increases.
While RC coverage covers the cost of rebuilding your home to its original condition (RC differs from the market value of your home), ACV replaces your home up to your replacement cost minus depreciation. This means, in essence, ACV offers less coverage. ACV is uncommon for dwelling coverage, and most policies include replacement cost coverage.
Most homeowners benefit from insuring their home up to its dwelling cost, as ACV won’t pay to restore your home to its original state. But if you have enough savings to pay for the gaps in coverage after a covered loss, you may opt for ACV to save money on your policy.
Choosing the right coverage to include in your insurance policy can be overwhelming. Consider the following factors before making a decision:
Take a look at the following answers to frequently asked questions for additional information about extended replacement cost coverage.
An extended replacement cost of 125% means your insurance company will pay 25% over your policy’s dwelling limit to rebuild your house after a major loss. For instance, if your policy has a dwelling limit of $300,000, extended replacement cost covers additional costs up to 25%, or up to $75,000.
Having extended replacement cost can be worth it if you’re concerned about inflation or unexpected costs leaving you underinsured. This coverage can be beneficial if you live in a high-risk zone, live in an area with fluctuating construction prices, or own a high-value home.
Yes. Replacement cost coverage provides more protection than actual cash value coverage. Replacement cost repairs or replaces your property with items of similar value at current prices, while actual cash value deducts depreciation from the replacement cost.
Yes. You can insure a home for less than the replacement cost with an actual cash value policy, but this is very uncommon. It’s often cheaper, but you risk not having enough insurance to fully cover damages if your home sustains a loss from a covered event.
Determining dwelling coverage depends on your home’s replacement cost, local construction and building costs, your home’s risk factors, and your lender’s requirements. Your insurance agent can help you assess whether you have adequate dwelling coverage for your specific situation.
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