Extended and Guaranteed Replacement

The next step up in coverage is extended replacement. You insure the home for the appraised value, and the policy will pay up to 125 percent to cover unforeseen problems. But the best protection is guaranteed replacement cost, which has no present limit on what it’ll take to replace your home and contents. However, because of big losses in recent years, many insurance companies have dropped this policy. You may have to shop around to find it, but it’s definitely worth considering. You’ll need this rider if you buy an older home. Don’t assume that if your policy reads guaranteed replacement that you’re fully covered in case of a disaster. The guarantee can mean different things with different companies, but it usually applies if the cost of rebuilding a home is higher than the face value of your policy. If you buy an older home, chances are some of the wiring, plumbing, heating/ cooling systems, and structure may no longer meet newer building codes. If you have a fire, the insurer is required to replace what you had, not what you’re required to have in order to rebuild. So here’s the catch—when you rebuild, you’ll need to include the newer building codes and upgrades. That expense isn’t included in your policy. And those upgrades can cost you a bundle.
You can solve this potentially expensive problem by getting Ordinance and Law coverage. This is a rider to your policy that applies to the costs of upgrading your home to meet existing building codes. However, keep in mind that this rider will pick up the tab only for bringing the damaged part of the house up to code. It will not pay for bringing the undamaged part of structure up to code. In other words, you could be better off if the house were totaled rather than partially damaged.
Rick and Andrea had this happen
when they bought a 1940s brick bungalow with the dream of restoring it. They loved the wood floors and trim, the brick construction, and the wide front porch.
The home still had the old-style wiring through a fuse box that should have been the first upgrade project. But Rick and Andrea were excited and instead started on the floors, wood trim, and interior decorating in aztec styles. Sometime during the second week of restoration, debris got into an electrical receptacle after the faceplate was removed. The old wiring sparked and ignited partially stripped wallpaper and engulfed the wall in flames. Fortunately, the fire department was close and reacted quickly. Only the front part of the house was gutted. After getting together with the insurance adjuster and their agent, Rick and Andrea were shocked to find out that it would cost them more than $12,000 out of their pocket to restore the house. Their insurance policy would restore the home to ‘‘as was’’ condition but not pay to bring it up to code. And they could not get a building permit unless the house incorporated building code upgrades.
So what’s the bottom line of all this? If you buy an older home, make sure the home inspector gives you a list of items that don’t meet current building codes. Wiring and heating systems are often at the top of the list for potential fires. As your budget allows, upgrade those items on the list that don’t meet code first. By doing this, you’ll not only make your home safer but also increase its value. If disaster strikes, it will be replaced to ‘‘as was’’ condition, and you won’t be out the money you spent on improvements.
Also, be sure to keep all the contracts, receipts, and paperwork in a safe place so that you can document these improvements. This is where photos or a video can be worth thousands of dollars to you.