House Insurance Replacement Cost: Your Questions Answered


Susan Kelly

Dec 06, 2021

What is house insurance replacement cost?

House insurance replacement cost (HIRC) is the amount of money it would take to rebuild your home in case of fire or another covered peril. Your insurer determines this value based on the current condition of your house, including the age and quality of its building materials, as well as how much energy efficiency you've added to the property.

It may also consider other factors that affect construction costs, such as local labor wages or material availability at a given time. Sometimes known as "cost to replace," HIRC should be your primary focus when insuring your home for rebuilding purposes. If you have a claim, it's the number insurers will use to determine how much coverage you have left after paying your deductible. Then, your insurer will pay your HIRC to either rebuild or, if you choose, buy another home in the area that's comparable to your current one.

Is house insurance replacement cost different from the maximum coverage amount (MCA) that appears on my insurance policy?

Yes. MCA shows the total dollar value of coverage for several perils, including fire and theft – but not necessarily what it would cost to rebuild your house due to a covered peril completely. While replacement costs are calculated differently than MCA, they can be similar depending on factors such as a home's construction type and condition at the time of loss.

However, many insurers only use HIRC when determining claims settlement amounts after payment of a deductible.

Are there rules for what my insurer can include in HIRC?

There are some limits. Your insurance policy should clearly state how your HIRC is calculated, including whether your property's current market value or the actual cost to build (known as "cost to replace") is used.

For the same reason that insurers keep track of pre-loss value when calculating MCA, they also need to know the post-loss condition before making an offer on its replacement cost. That means many insurers will require you to repair any damaged parts within two years of the loss date before paying out for rebuilding costs. However, no matter how complete your repairs are, they must leave room for at least 10% square footage than your original house had.

What if I add to my home during construction?

If you plan to add to your home or replace it with a larger one when you rebuild, make sure the extra space is covered under your HIRC. For example, if your current home has 1,600 square feet and you're planning on building a unit that's 2,000 square feet, then 10% of that total (200 square feet) should be added to your HIRC amount.

Your insurer may also ask for proof that such changes will stay in place for at least five years, so they don't have to adjust their offer after paying out claims on it. It is important to note that some insurers will only cover the cost of adding on to your home rather than rebuilding it if you're currently living in a condo or townhouse.

My house was built less than ten years ago, but my insurer says it can't use HIRC because its building material is outdated for replacement purposes. What's going on?

For many insurers, houses less than ten years old will not meet their minimum standards for using HIRC. This is because newer homes often come with more modern insulation and other energy-efficient features that make them easier and cheaper to heat or cool – sometimes even saving owners money over time!

As such, many insurers prefer to calculate coverage by looking at what you would get back if they paid out for replacement based on the actual cost of building your home when it was built. This is known as "cost to replace" and requires the same post-loss upgrades to make room for at least 10% square footage. Therefore, make sure you know how your policy calculates HIRC or any additional costs to rebuild before you purchase a new house that could factor into your insurance coverage.

What about my personal property?

All too frequently, homeowners don't realize they will need to insure their belongings until after a fire or other covered loss. This is because many insurers offer special limited coverage for residential and commercial content, but only up to a certain dollar value set by either state law or individual policy conditions. It's important to be aware of these limits because they can vary widely from insurer to insurer.

For example, some insurers will only cover up to $1,000 for a standard residential policy. Others may limit the number of items covered under this amount or include a separate deductible from your personal property HIRC before an offer is made. In most cases, the limit will increase with the value of your house, so you have enough coverage for all your belongings when rebuilding or replacing them in full after a major loss.


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