FUNCTIONAL REPLACEMENT COSTS info from the experts at Big I Virtual University
The Big I Virtual University ' s " Ask an Expert " service received a question recently from an agent who represents an insurer who has begun using a Functional Replacement Cost Loss Settlement endorsement on older homes that have construction materials that are obsolete, antique, or custom. This endorsement says that in the event of a claim, the damaged building will be repaired or replaced with less costly common construction materials and methods. The big issue is how to arrive at the Functional Replacement Cost limit.
QUESTION
Question..." One of my companies is starting to use the Functional Replacement Cost( FRC) Loss Settlement on older homes which have construction materials that are obsolete, antique or custom. This endorsement says that in the event of a claim, the damaged building will be repaired or replaced with less costly common construction materials and methods.
" I understand this. What I don ' t understand is how to arrive at the Functional Replacement Cost limit. We have replacement cost programs using the RCT program, Boeckh guides, etc. for figuring replacement coverage on the dwelling. But when figuring Functional Replacement Cost, is there a certain percentage of this RC figure that should be used?
" One of the company underwriters advised our office that as long as the dwelling is insured to at least 50 % of the replacement cost, and the policy was endorsed with the Functional Replacement Cost Loss Settlement Endorsement, there would be no coinsurance penalty.
" If you can help explain how to figure the amount of coverage on the dwelling when using this endorsement, it would be appreciated."
ANSWERS
Functional replacement cost has been around for many years in commercial lines, but we ' re just now seeing it in a similar format in personal lines. ISO has addressed this problem historically with the HO-8 form that provides ACV or market value coverage. Below are some comments and caveats from the VU faculty on this issue.
28 KANSAS INSURANCE AGENT & BROKER