Functional Replacement Cost: History and Application of Available Coverages

building with less costly common construction materials and methods which are functionally equivalent to obsolete, antique, or custom construction materials and methods used in the original construction of the building.

The form makes clear that in determining the amount of insurance needed to meet the 80% functional replacement cost insurance requirement, the value of the following properties is not to be included: “excavation, footings, foundations, piers, or any other structures or devices that support all or part of the building, which are below the undersurface of the lowest basement floor, or those supports below the surface of the ground inside the foundation if there is no basement,” and underground flues, pipes, wiring, and drains.

The form also provides that if the ACV of the damage is less than the functional replacement cost, the insurer will pay no more than the ACV until the replacement is complete, except that if the cost to functionally repair the damage is both less than 5% of the amount of insurance in the policy and less than $2,500, the insurer will pay the full cost to repair whether repair is completed or not.

The insured may initially disregard the functional replacement cost feature and settle the claim for ACV, and then make an additional claim for functional replacement cost recovery, provided the insured notifies the insurer of their intent to do so within 180 days after the date of loss.

The form also provides that the 80% building insurance requirement of these forms applies to functional replacement cost, thereby reducing the amount of insurance required for full replacement considerably and making the insurance more readily affordable for the owners of older homes, yet still making possible the full recovery of the cost to put the building back if damaged, without requiring the insured to make expensive out-of-pocket outlay to cover the substantial depreciation on an older home.

This form does not specify any application

to household goods, but since there is no 80% insurance requirement on household goods, recovery of replacement cost is provided whenever conventional replacement coverage is provided on household goods, so there is no problem on recovery even on older household goods.

Commercial Buildings
For commercial buildings, ISO offers form CP 04 38 10 00 functional replacement valuation form. This form is considerably more detailed and complicated to use than the homeowners form. It begins with a schedule that must be completed listing premises, building, and limit of insurance.