For many, purchasing functional replacement cost coverage instead of the more traditional “full” replacement cost coverage is an attractive alternative.
Adequately insuring an older building can be a difficult and often expensive proposition. This is especially true when a structure reaches an age and condition where its replacement cost begins to greatly exceed its actual market value. With functional replacement cost coverage (FRC), the policyholder can pay a lower premium, with the stipulation that the insurer will replace damaged property utilizing “functionally equivalent” building materials and workmanship.
At first glance this seems like a straightforward savings, but without careful consideration, choosing FRC coverage may place the insured at a serious disadvantage after a loss occurs. The following are some important points to consider when deciding if this type of coverage is right for you:
If being able to exactly replace specific architectural features of your property and/or building materials is important to you, FRC coverage is likely not the right choice. In historical structures especially, things like unique ornamental and features, brickwork, stained-glass windows and hardwood floors can account for a significant part of the value of the property. However, because these features are determined by the insurer to be decorative in nature and not functional, their repair or replacement is typically not covered by FRC coverage. Hardwood flooring might only be replaced by “engineered” hardwood flooring or an even more dissimilar substitute material, such as linoleum.
A historical structure with large supporting posts and beams, such as a converted barn, may have damaged beams replaced with modern load bearing walls and smaller supports, thus drastically altering its appearance. For businesses such as shops, restaurants, hotels, or bed and breakfasts, the aesthetically appealing features of a historic building may significantly contribute to their ability to attract customers. For this reason, replacement materials which are only “functional” may not be acceptable.
FRC coverage endorsements for homeowners and commercial building property typically come with a coinsurance requirement, stipulating that the amount of insurance be at least 80 percent of the replacement cost. This provision is ostensibly designed to prevent frequent abuse of the system by policyholders who first contracted for the lower rates of an FRC policy, and then enter into a frivolous dispute over the insurer’s estimate.
However, because interpretations of what constitutes functionality can differ greatly, especially involving the type of repurposed historical buildings as described previously, legitimate demands for repair or replacement can often result in costly coinsurance penalties for the insured.
Additionally, it is worth noting that a third type of endorsement exists for business personal property. This type has no coinsurance requirement, instead substituting a policy limit determined at its inception. This limit is based on an estimate of what it will cost to replace older furnishings and equipment with newer equivalents.
Actual Cash Value
Because of the limits of FRC coverage, as well as problematic differences in its interpretation, sometimes a more conventional approach produces the best outcome for the insured. Rather than engaging in the often difficult process of attempting to determine the functionally equivalent replacements for damaged property, policyholders may prefer to go by the “actual cash value” of the property in question.
To effectively determine the maximum value that may be legitimately claimed, it is necessary not only to consult with your insurance agent, but with a public adjuster. Particularly where negotiations with your insurer and interpretation of policy language are required, the services of an experienced public adjuster can be invaluable in achieving the desired outcome for your claim.
Have questions about your property insurance claim? Feel free to contact Stark Loss for more information about how a Public Adjuster can help.