When looking at a property insurance policy, there are a few different options with regard to the replacement cost for the property:

· Replacement Cost
· Extended Replacement Cost
· Guaranteed Replacement Cost

Replacement Cost means just that – this is the estimate of how much it would cost to replace (or rebuild) the property which is insured. This is the starting point for all policies and should be generated by considering the type and number of buildings, square footage, type of construction and roof type, and physical location among other details. Usually, an agent enters this information into a computer program which generates a replacement cost for the items entered. If yours is a “replacement cost” policy, the insurance carrier will pay up to that amount to replace damaged buildings in the event of a covered loss.

Extended Replacement Cost endorsements on policies provide a certain percentage of extra coverage over the stated replacement cost. This amount is between 25 and 50%, and generally kicks in when there is a total loss of insured property. Since coming up with a replacement cost is not an exact science (pricing and inflation can fluctuate over the course of the policy year), extended replacement cost endorsements provide a safety net, so to speak, in case it actually costs a bit more to rebuild an entire community.

Guaranteed Replacement Cost endorsements on policies state that, as long as the original replacement cost was calculated correctly in the first place, it doesn’t matter how much the actual cost is to replace the damage – the amount will be guaranteed. Coverage is not guaranteed, however. It still has to be a covered cause of loss to property that is insured by the policy. We have seen this come into play recently with the Northern California wildfires. After a catastrophic event such as this, the cost to rebuild can increase dramatically due to high demand and low supply.

These types of policies are also useful for those condominium communities which provide coverage for unit interiors – including any upgrades made by unit owners. While this is rare, I have seen some governing documents which require this type of coverage. Unless the board of directors (or manager) keeps track of every upgrade and change within the unit, including countertop and carpeting material, how will you know how much insurance is required? With a guaranteed replacement cost endorsement, you won’t need to keep track of every upgrade.

Do you know which type of replacement cost your insurance policy provides? Should you change to a different type? Consult your insurance agent to discuss what is best for your community.

Terri Guest, CIRMS, CMCA is the Northern California Sales & Marketing Representative for Berg Insurance Agency and can be reached at Terri@berginsurance.com.