understanding 150% replacement cost on homeowner's policy

Question

We'd like to switch our auto insurance from Company A to Company B because the premiums are significantly lower. Because both companies offer discounts for bundling home and auto, it might make sense to move out homeowner's insurance to B as well. At first glance the home quotes were nearly the same cost and so we just about made the switch. But then I looked closer and noticed that the dwelling replacement was much lower for Company B.

Company A's policy

We are currently insured under this policy.

The dwelling replacement cost is approx. $350k

Company B's policy

The dwelling replacement cost is approx. $275k. But, a benefit listed further down the policy reads "Dwelling Replacement Cost - 150%" The agent told me that we would actually have more coverage because up to 150% of the Dwelling Replacement Cost could be paid out if the house were destroyed. Is this information accurate, and why do they do it this way?

NB - I do see other similar questions. Before you vote this as a duplicate, consider the question as "is the 150% replacement cost the same as a 50% higher replacement cost?" (Or, would we need some new extraordinary burden of proof to exceed the replacement cost?)

Answer 1

The typical example for extended replacement cost coverage (the 50% extra the policy you're reviewing mentions) is when a natural disaster hits and damages many homes. Costs to rebuild are higher than expected because the surge in demand/constrained supply for materials and labor drives up prices. The extended replacement cost coverage will kick in and make up that unexpected difference in cost up to a point.

Extended replacement cost coverage does not always kick in just because the replacement cost is more than your coverage limit. You could still be under-insured and left to pay the difference. Like if you had an electrical fire that burned just your house down and costs were higher than your coverage.

You'll have to review policy language for specifics about when the extended replacement cost coverage would/wouldn't apply. It is typically recommended where natural disasters are more likely.