Most business owners understand Replacement Cost and Actual Cash Value when it comes to insuring their building. However, they may not be familiar with Functional Replacement Cost. There are several situations in which this is a cost-effective and practical approach to building insurance. The most common application is when the owner would not rebuild the same type of building if destroyed by a covered loss. They might replace it with a different size and type of building that better fits their needs.
For example, a business is run in a two-story, 7,000 sq. ft. building but is only utilizing the first floor for their restaurant operation. The second floor is unoccupied, and the business owner has no plans to use it. Functional Replacement Cost allows them to purchase enough coverage to rebuild a one-story, 3,500 sq. ft. building instead.
An additional use of Functional Replacement Cost is for older structures with unique or obsolete features. The insurance carrier will pay to replace damaged property with less expensive and more modern materials and workmanship, while keeping the same functionality as the original property. Under Functional Replacement Cost, plaster and lath walls are replaced by drywall, shingles are used instead of roof tiles, and elaborate woodwork and ornamental fixtures are replaced with a basic design.
Another common application is to provide building coverage that allows the option of Market Value settlement in the event of a total loss. Functional Replacement Cost gives the building owner the option to not rebuild and to settle for the Market Value of the building. This allows them to either retire from the business or buy a building in a different location.
It is important to understand your needs when determining which valuation provision is best. Your ICC Agent can help you determine which option is best for you.
Questions to consider:
- Will you rebuild in the event of a total loss?
- Will you rebuild the same type or size of building?
- Will you want to stay in the same location?
- How important are the materials and more expensive features and details of your building?
ICC may recommend the use of Functional Replacement Cost when:
- there are no recent updates to the building.
- the requested building limit is low based on our building valuation tools.
- the building is for sale.
- the building is partially unoccupied.
Please contact your ICC Agent with any questions or Find an Agent in your area.
