Extended replacement cost is not intended as a cure for underinsuring your building. According to the terms of your insurance policy you are obligated to maintain replacement cost on your building to a certain percentage of the actual replacement cost such as 80%, 90% or even 100%. If you recall, this is co-insurance and we discussed this in our last blog.
When Hurricane Katrina struck New Orleans the vast amount of rebuilding actually led to shortages of building materials regionally and around the United States. And, depending on your proximity to Louisiana it may have been very difficult to find licensed contractors who were not already on the job rebuilding. If you were unfortunate to have had a loss or a complete loss of your building during that time frame there was a real possibility that the cost to rebuild would have exceeded your replacement cost value. That means that you would have had to pay the difference.
Extended replacement cost steps in during crises such as the one described to ensure that there is enough coverage even during a regional catastrophe. Think of the terrible tragedies where an entire community is destroyed by a tornado or multiple communities completely destroyed by a hurricane or fire. There will be shortages of materials and qualified contractors and the cost to repair or replace your home and business will increase dramatically.
Discuss the insurance needs of your building with your agent to make certain that you have enough coverage now today and in the future. We hope that you never need to use the coverage but making certain that it is there will allow your family and your business to recover in the event of a crisis.