Guaranteed Replacement Cost

If your policy has a guaranteed replacement cost clause, then you are guaranteed reimbursement for the actual cost of getting a damaged or destroyed property back into service—even if materials and labor cost much more than the amount you were originally insured for.

Some carriers have gotten away from issuing this policy because it transfers more risk from the customer back to the insurance company. A guaranteed replacement cost policy may well be worth the extra premium it costs—especially if you’re planning on owning the property for a long time. Fix-and-flippers may choose to save the extra premium since they know the costs better than most, and they’re not as exposed to price swings over a long period of time.

Most of the time, landlord insurance policies can be modified to suit your specific needs. For example, if you have an older property and rebuilding it would require artisanal materials and construction techniques, you can often get additional coverage to reflect the additional repair costs.

The alternative is a policy that pays the fair market value for destroyed or damaged property. That is, the carrier will calculate the value of the damage or destruction, then subtract depreciation from their eventual award to you. So if your property needs a new roof thanks to a thunderstorm, and the roof will cost $30,000 to replace, but you’ve owned the roof for 10 years, the company may subtract half of the amount for depreciation. You’ll then receive a check for about $15,000, minus your deductible, to pay for a $30,000 new roof.

These policies provide less protection, but they also sell at a lower premium. If you get a fair market value policy, you should be aggressively building up reserves against losses over the years so that when the need arises, you’ll have the cash ready for your share of the damages.