Understanding guaranteed building replacement

You may have heard of “guaranteed building replacement” at one time, but what does it mean?

It’s a very important coverage provided by most home insurance policies today. 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.

That sounds like a pretty good deal, right? Be aware that very often, you must comply with certain conditions in order to qualify for this coverage:

  • You need to insure the home to 100% of its replacement cost as determined by the insurance company. Your agent will have an evaluation tool, and will work with you to determine what this amount is.
  • You need to notify your insurance company 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 company needs to make the appropriate adjustments to your policy.
  • 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 company 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 company 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.

Determining the replacement cost of your house

You’ve just been to see your agent to get home insurance. The first thing he 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 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 an estimating tool 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 counter tops, custom skylights, or river rock fireplaces.

Understanding building bylaw changes

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 live 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.

So what’s the best way to protect yourself?

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.

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. If you would like more information, feel free to contact Square One at 1.855.331.6933.


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