Replacement Cost Calculation

What does Replacement Cost mean?

For purposes of explaining  how a typical homeowner insurance policy work, the replacement cost is referencing the settlement terms on a property claim.  Having replacement cost coverage means that when an insurance company settles a claim such as in the case of a fire or water damage, the insurance company pays the insured the cost to replace or repair the damaged property for like, kind and quality, WITHOUT depreciation.

What is expanded replacement cost on a home insurance policy? 

 Expanded replacement cost is applies only to the dwelling coverage or coverage A, on a home insurance policy.  It is usually purchased in increments of  25% or 50% of coverage A.  For example, if you purchase a policy with  $400,000 in coverage A with 25% expanded replacement cost, the policy could potentially pay $500,000 ($400,000 X 25%= $100,000) + $400,000 (coverage = $500,000

One condition to get the expanded replacement cost is that the home is insured to value.  This means that there is  enough coverage to rebuild the home completely in coverage A.  The expanded coverage is intended as contingent benefit to cover unforeseen circumstances

In order to confirm homes are insured to value, insurance companies

 have a third party service perform an onsite inspection.  T

How do insurance companies calculate the replacement cost of a home?

All insurance companies have a slightly different formula, but the main driver in every case is the square feet of gross living space and the zip code of the house.  Basically, the look at the size of the home and multiply it by the typical cost of construction per square foot in the area.  In order to to distinguish between the variability in quality of contraction, insurers will usually use a grading such as builders grade, standard, semi-custom and custom.  Each being a different value per sq. ft.