Many moons ago all insurance companies used to have guaranteed replacement cost endorsement you could put on your homeowner policy. This endorsement would guarantee that the insurance company would rebuild your house exactly as it was prior to the claim even if your limit of insurance on the house was lower than the cost to rebuild. Today many insurance companies limit that endorsement to only homes that are considered high value (homes valued at $500,000 or more). The endorsements also require that the insurance companies send out professional reconstruction appraisers to figure out as best they can what it would cost to rebuild your home.
For those homeowner clients who have a house valued at less than $500,000 the endorsement that needs to be added to the homeowner policy is Extended Dwelling Coverage. What this endorsement does is give a percentage of the homeowner limit as extra coverage in case of a total loss on the home. For example, if you have 25% Extended Dwelling Coverage and your house is insured for $200,000 then you would actually have $250,000 if your home suffered a total loss ($200,000 X 1.25 = $250,000).
We feel this coverage is important for two reasons. One reason is we do not send out professional reconstruction appraisers to every house. Instead, insurance companies use in house software that helps determine reconstruction cost on your house using things like square footage, construction type, location, year built, etc. to come up with a value. These programs are usually very accurate but nothing replaces the accuracy of an in home visit with measuring tape and details of the type of amenities in the house. The Extended Dwelling Coverage endorsement helps make sure that if for some reason the calculations on the house are a little off, there is still enough insurance there to replace the house to its original state.
The second reason we encourage this endorsement is for catastrophe situations. Let’s say a tornado wipes out not only your house but two other neighborhoods worth of homes. Every builder and building supplier in town will be in demand. Economics 101 will tell you that if demand goes up and supply is the same, then prices are going to rise. That home that only cost $200,000 to rebuild just got a lot more expensive but if you have the Extended Dwelling Coverage on your homeowner you would be in a much better situation.
One thing to note about this endorsement, you can’t use it to underinsure your home. In our example above, you can’t insure the house for only $160,000 and add the 25% Extended Dwelling Coverage (which would put your total insurance at $200,000). That is not the intent of the coverage. The insure companies will use their software to figure out a good estimate of the cost to rebuild your house and you would have to have it insured for that amount in order to add the coverage.
