Your homeowners insurance policy and replacement cost coverage

Your homeowners insurance policy will have one of the following coverages in the event of a loss. 

  • Actual Cash Value
  • Replacement Cost
  • Guaranteed Replacement Cost

Actual cash value is the least preferred coverage as it will take depreciation into account when adjusting your loss. For example, if you have wind damage to your roof and the age of the roof is 10 years, then you will be paid for the remaining life of the roof. In other words you will not be paid for the full amount to replace the roof.

Replacement cost coverage is preferred to actual cash value as you will receive the full amount it takes to replace your damaged roof. Most policies will offer replacement cost coverage in their homeowners insurance policy.

Guaranteed replacement cost is the best coverage to have if possible as this coverage will pay your policy limit plus an amount of 25% - 50% more depending on the agreement in your policy. For example, you insure your home for $300,000 and you have a total fire loss. After working with the adjuster and contractor it is determined that it will take $375,000, due to increases in construction costs, to replace your home with like kind and quality. If you have guaranteed replacement cost homeowners insurance policy written at 25% then you will receive $375,000 to replace your home even though your policy limit is only $300,000.

Of course in each of the examples above, there would be a deductible that would apply.