Coverage A of your standard homeowner’s insurance policy which is known as the dwelling coverage is going to protect the main dwelling of your property against physical damage caused to the residence including any interior fireplaces, flooring, bathrooms, or structures that may be attached to it on top of the same foundation, e.g. decking, garages, or a porch.
Insurance companies are able to determine the amount of dwelling coverage based on factors such as square footage, garage type, number of fireplaces, and many other considerations. This is not an exact science and, therefore, carriers will offer clients endorsements known as ‘Extended’ dwelling coverage or ‘Guaranteed’ Replacement Cost.
What Is Dwelling Extension?
Dwelling extension is an additional amount of coverage that has been allotted by the insurance company to reimburse for a complete loss that goes above and beyond the coverage on the dwelling that is listed on the policyholder’s plan. So, if the policyholder has a set limit of $100,000 for their dwelling but their plan allows extended dwelling coverage in the amount of another 25%, the insurance company will max their payment at $125,000. This gives the client extra cushion in the event that their home’s rebuild costs exceed the limits set on their standard policy.
By paying this higher benefit above your policy limit, these extended replacement cost policies are able to protect you from rises in reconstruction costs that occur after a catastrophic event. In these instances, conventional homeowner’s policies tend to not track how inflation may affect building costs or how a major disaster will elevate the demand for building contractors and materials which would, in turn, inflate the normal costs for construction and, therefore, rebuilding. In this sense, these policies can mimic guaranteed replacement cost policies which provide reimbursement for a rebuild as long as specific requirements are met in the policy.
The insurance carriers are strict about making sure that the proper value is placed on the home with the standard home insurance plan, however. They won’t allow the policyholder to underinsure on their standard plan and then take out the endorsement for the extended dwelling coverage. You are expected to take your dwelling coverage on the standard insurance plan up to full value prior to being able to sign up for the extended dwelling coverage. The language with your policy can get really confusing, but make sure that you understand all that you’re eligible for when you sign up so that your home is covered above and beyond the value on your standard plan in the instance of a devastating loss.