If your house was damaged or destroyed by fire or
natural disaster, would your insurance cover the cost of rebuilding
Before you answer -- even if you see the word "replacement"
in your policy, don't assume the insurance company will pay to replace
everything and all your costs would be covered.
Why not? Because the good, old-fashioned term "guaranteed
replacement coverage" is quickly becoming a thing of the past.
It used to be common for homeowner's policies to offer this coverage,
which provided the peace of mind that your home would be protected
regardless of rebuilding costs. If your policy was for $100,000,
but it cost $200,000 to rebuild, the insurer would have covered
But that was the 1980s. Today, policies usually specify
coverage of what's called "replacement coverage" or "extended
Most homeowner's policies use one of the following
four terms in defining their coverage:
"Actual cash value" doesn't mean
exactly what you may think. "Actual cash value is replacement
cost minus depreciation," says Gary Julian, insurance specialist
with the Texas Department of Insurance in Austin. So, with each
passing year, the coverage amount typically declines. It's highly
unlikely that a policy for actual cash value would even come close
to covering the costs to rebuild your home.
"Replacement coverage" means the
policy will cover the cost of rebuilding, up to the amount of the
policy. So, if your policy is for $100,000, and you have a total
loss, you'll get up to that much to rebuild -- and no more. Of course
if you sustain a major, but not total loss -- if your roof came
off and it will cost $20,000 to fix it -- you will be covered for
that loss, less your deductible.
"Extended replacement coverage," sometimes
known as "specified additional amount of insurance," means
the company will cover the cost of rebuilding your house, up to
a stated percentage over the amount for which it is insured. Usually,
it's up to 20 percent or 30 percent above the face value of the
insurance policy, says Joseph Annotti, vice president of public
affairs with the National Association of Independent Insurers, Des
Plaines, Ill. A few extended replacement-cost policies go up to
about 80 percent over the value of the policy.
Again, on a home insured for $100,000 a total loss
in this case would result in benefits up to $120,000 or $130,000.
Extended replacement coverage can help protect against
short-term price fluctuations in building materials and labor that
can occur after a catastrophe. It also provides some protection
against skyrocketing costs due to tighter building codes or major
disasters, like hurricanes and wildfires.
"It's not a guarantee, but it is a cushion,"
says Amy Bach, executive director with United Policyholders, a consumer
advocacy group based in San Francisco.
"Guaranteed replacement coverage"
means that in a total or near-total loss, the insurer will pay out
the necessary amount to rebuild or restore the home, no matter what
the cost -- not including such things as antique, hand-carved doors,
In Florida, for instance, anecdotal evidence indicates
that just such a post-disaster spike is occurring in the wake of
Hurricanes Charley, Frances, Ivan and Jeanne, says William Stander,
a Tallahassee, Fla.-based regional manager with Property Casualty
Insurers Association of America. "Insurers are telling me that
the cost to replace a roof is two to three times what it should