Most insureds think of replacement value as what it takes to put your home back into the position it was in before a loss. Read your homeowners insurance policy to see if it even mentions "Replacement Value." You might be surprised.
Companies used to offer Guaranteed replacement cost. This meant that even though the policy would have a limit of $250,000 for the dwelling, the insurance company had to pay to restore the home even if it cost over $250,000 with no percentage limits over. After the Northridge Earthquake, there was a high demand for building contractors and materials, which inflated the normal cost of reconstruction. Insurers took huge losses, so in the State of California they stopped writing "guaranteed replacement cost" policies.
Currently you can get "guaranteed replacement" but you have to ask your insurance company if they offer this as an additional endorsement. You may have to shop around to find a high percentage replacement cost endorsement, from 25-100% above your limits. If you suffer a major loss and it turns out your insurer set your limits low, this endorsement pays the difference. Even after paying for the "guaranteed replacement" rider, your home's contents or personal property may not be adequately covered.
After Northridge, California Insurers started writing "extended replacement cost" plans which paid a certain amount above the policy limit to repair or replace a damaged home, generally 120 percent or 125 percent of the coverage limit. Many are no longer providing "extended replacement cost" coverage. If you read your policy, you may find that it does not require that the insurance company immediately pay a set amount.
Today, California Home Insurers usually pay "actual cash value", which also may be undefined in your policy. If it’s not spelled out what "actual cash value” is in the policy, it has to be the reasonable market value of the home at the time. Actual cash value is usually around 20 percent less than the replacement cost value of the home.
Insurance Company Holdbacks are when home insurers do not pay the full amount of coverage until they are done repairing the dwelling. They hold back paying the total amount to verify (with receipts) the insured is going to completely restore the home; once that happens, the insured gets their remaining 20 percent. READ YOUR POLICY NOW! Don't wait until it's too late and you are forced to litigate a major loss. If you are unsatisfied with the language in your policy, contact your home insurance company. If they refuse to offer alternatives, shop around!