Basically, it means that if your home is destroyed by an insured peril, the insurance provider guarantees that they will rebuild your home, even if it costs more than the limit of insurance on your policy.
It’s a very important coverage provided by most home insurance policies today. This is more advantageous than extended building replacement cost coverage, as it will guarantee replacement. Extended replacement coverage will only cover up to a specified limit.
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Be aware that very often, you must comply with certain conditions in order to qualify for this coverage, such as:
You need to insure the home to 100% of its replacement cost as determined by the insurance provider. Your agent will have an evaluation tool, and will work with you to determine what this amount is.
You need to notify your insurance provider if you make changes which increase your home’s value beyond a set amount. For instance, if you finish your basement, or put an addition on your home, you’ve increased its replacement value, and the insurance provider needs to make the appropriate adjustments to your policy. Find out what types of renovations will increase your home’s value.
You accept the yearly adjustments made to the policy. If inflation or other factors have caused the cost to rebuild your home to go up, your insurance provider may need to increase the coverage on your home to keep the values up to date.
You rebuild your home on the same site, in the event of a loss.
These restrictions may vary from one provider to another, so it’s important to review your specific policy with your agent. If you don’t comply with all of the conditions, your coverage will be limited to the amount shown on your policy. Hopefully, this will be enough to rebuild your home. If it isn’t, you could face a huge out-of-pocket expense.
Some providers do not offer guaranteed building replacement on rental or vacation properties; instead, coverage is limited to the amount shown on the policy. At Square One, we automatically include guaranteed building replacement on all of our policies, whether it’s your primary residence, rental property, or vacation property.
You’ve just been to see your agent to get home insurance. The first thing they did was calculate the replacement value of your house. It came out much higher than you expected, and in some cases, even more than you paid for it. You might be wondering why. Well, there are several reasons and examples why this may happen:
If a developer built your home, they likely built several homes at once, allowing them to purchase supplies in large amounts, resulting in big discounts. Should your house burn down, and have to be rebuilt, there would be no such “economies of scale“. When purchasing one garage door, or one toilet, there will be no bulk discounts.
When rebuilding one house, rather than coming in with a big bulldozer, the contractors have to take care not to destroy any existing landscaping, or damage your neighbour’s property. This will increase the time, and the cost, to rebuild your home.
After a loss, there will be an expense to remove all the damaged property, referred to as “debris removal”. This needs to be accounted for when establishing the rebuilding cost.
If there’s a major loss and several houses in your area are damaged, the cost of construction may go up, due to a lot of demand for contractors, and not enough supply.
It is more expensive if it’s necessary to bring in contractors specializing in reconstruction or restoration. Specialized craftsmen may be required if you have any special features, especially in an older home.
Building codes may cause costs to rise, for example, there may be new requirements for sprinkler systems, more expensive building materials, or updated wiring.
Your insurance agent will have a replacement cost estimation calculator that will help to determine the rebuilding cost of your home. Be sure to let your agent know if you have any special features, such as granite countertops, custom skylights, or river rock fireplaces.
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What do bylaws have to do with home insurance? Well, if your home burns down, it will have to be rebuilt to comply with today’s building codes and bylaws. Here are a couple of examples of how bylaws can affect the replacement cost of your home:
Bylaws may have changed in your area: Bylaws and building codes are constantly changing. For instance, did you know that if you have a home in Vancouver, and need to rebuild your home after a loss, it is a requirement that a sprinkler system be installed? As a result of this bylaw, the cost to rebuild your home has just gone up. Who’ll pay for this? If you don’t have bylaw coverage on your home insurance policy, you’ll be paying for it out of your own pocket.
Bylaw requires rebuilding: Some municipalities have bylaws that state if your home is damaged to a certain percentage, you cannot just repair the damage; you need to tear down the home and rebuild it. This can result in a huge extra expense, not covered by most home insurance policies if you haven’t added a bylaw coverage. Even if you’ve added bylaw coverage, you may not have enough in a case like this.
When you purchase home insurance, ask your agent if the policy provides bylaws coverage. Most policies include a small amount of protection and may offer additional coverage for an extra charge for the endorsement of 100% replacement costs.
You may think you don’t need much bylaw coverage if your home is brand new. After all, a new home should be constructed to meet all the current bylaws and building code requirements. But remember, your municipality may require your house to be rebuilt, even if it’s only partially damaged. This can happen to a home of any age, and as mentioned, could be a tremendous expense.
You can rest easy once you know your home is insured to its proper replacement cost. At Square One, we automatically cover the cost to upgrade your building after an insured loss so that it complies with the current codes or bylaws. No limit. This is a very important coverage that is often overlooked. Without it, you could be out thousands of dollars.
There are no laws dictating that guaranteed building replacement is mandatory, but it does make things easier should something catastrophic happen that renders your home unliveable. However, if a catastrophic event were to severely damage your home, the last thing you want to worry about during the rebuilding process is if you have enough coverage to ensure your new home is rebuilt to the same quality and standards as the former. Also, guaranteed building replacement cost coverage takes into account changes in bylaws so any mandatory upgrades that are needed to comply with city standards are included.
Square One automatically accounts for the cost to upgrade your building to make sure it’s up to code in the event of a rebuild.
The main difference between guaranteed replacement and extended replacement cost lies in the overall coverage provided, specifically: how much coverage will be offered in the event.
Extended replacement cost will only account for a predetermined percentage of your determined coverage limit. In the event of a total loss, it may turn out that this coverage will leave you open to incurring costs as you enter the rebuild process.
Guaranteed replacement cost, as its name implies, grants total coverage for the complete cost of replacing and rebuilding your home, including any unexpected changes in bylaws or building specifications that may have arisen between your home’s original construction and the current day. Simply put: guaranteed replacement cost offers the most comprehensive coverage available.
Replacement cost is always determined to be the number to best indemnify your losses in the event of a claim. In other words, the goal is always to replace or repair your home back to or as close to the original state it was in before it suffered damage. The main difference with guaranteed replacement cost, as state above, is that it accounts for any unexpected changes to bylaws, which may require your home be rebuilt to a condition considered greater than it was in when you purchased insurance – which, without this coverage, would leave you open to incurring the cost of these upgrades yourself.
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About the expert: Rena Novotny
Rena's 23-year career started as an independent adjuster where she specialized in complex property, liability and special risk loss. As a branch manager, Rena hired, trained, mentored and coached several adjusters. She continues part-time post-graduate studies in neuro-psychology and traumatization, learning how both may impact the insured's engagement on catastrophic claims. Rena has a MA (Conflict Analysis and Management), CRM, CIP, and holds a level 3 adjusting license.
About the expert: Stefan Tirschler
Stefan is responsible for underwriting leadership, market expansion, and product research and development for Square One's operations. Stefan has earned his Fellow Chartered Insurance Professional designation, and maintains a level 2 general insurance license in British Columbia, Alberta, Saskatchewan, Manitoba and Ontario. Stefan is also an Education Committee member and CIP/GIE instructor for the Insurance Institute of Canada.
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