What is Functional Replacement Cost? [Insure Smart]
If you have an older home built before 1986, you may not be able to get replacement cost coverage for your property. Instead, you may have the option to get what’s called "functional replacement cost coverage.”
With FRC, your insurer replaces your damaged property with items that serve the same purpose but may be made from different materials. For example, if a tornado wrecks through your plaster walls, your insurer might replace them with less expensive drywall that still gets the job done.
Intrigued? Keep reading to learn how functional replacement cost coverage can benefit you.
Key takeaways
- Functional replacement cost coverage pays to replace the damaged portion of your home with functionally equivalent items made up of more modern materials.
- It's often available for older homes with more ornate features, such as plaster walls and solid wood flooring, trim, or cabinets.
- Functional replacement cost coverage usually has lower premiums than replacement cost coverage.
- Your home's age and the importance of keeping its original features can help you decide whether functional or regular replacement costs are right for you.
How does functional replacement cost coverage work?
Functional replacement cost coverage is when your insurance company pays to replace damaged items in your home with items that serve the same purpose but may not be identical to the original. It’s also known as a modified replacement cost policy.
FRC insurance is usually used for older homes built before 1986 that use materials or techniques that aren’t commonly used in construction today. The goal is to achieve the same aesthetic look as before but with more updated materials and methods.
For instance, if a burst pipe destroys your walls, your contractor may install drywall with a thin layer of plaster finish instead of fully plastered walls. Or, if a fire destroys your kitchen, they may install medium-density fiberboard (MDF) cabinets instead of solid wood.
How to calculate functional replacement cost
Home insurance companies have different methods for calculating functional replacement values. However, many use proprietary software to get an estimate. The process usually goes like this:
- Your insurance company inputs information about your home into the software (i.e. its size, age, and location).
- The software analyzes your home’s original building materials and finds substitutes that serve the same function.
- The software gives an estimate of how much it would cost to rebuild your home using these alternative materials.
How does functional replacement cost insurance compare to other coverage types?
When you first purchase home insurance, you make separate decisions for the type of reimbursement you want for your home’s physical structure and your personal property. You may see options for actual cash value (ACV), replacement cost, functional replacement cost, extended replacement cost, and guaranteed replacement cost coverage.
So which should you choose? This table highlights the differences:
Coverage type | Definition | Cost |
|---|---|---|
Actual cash value | Pays depreciated value of damaged items | Lowest |
Functional replacement cost | Replaces damaged items | Moderate |
Replacement cost | Replaces damaged items with similar, new items | Higher |
Extended replacement cost | Pays 20% or more above policy limits for similar quality | Higher |
Guaranteed replacement cost | Pays full cost to rebuild to original specifications, regardless of policy limits | Highest |
What’s the difference between actual cash value and functional replacement cost?
Actual cash value (ACV) is often the default coverage for personal property and belongings. In some situations, you may have the option to choose it for dwelling coverage (like when you have a newer home). It pays the depreciated value of your damaged items, which factors in their age and condition at the time of loss.
For example, if your 10-year-old slate roof is damaged, the insurance company will pay you the value of a 10-year-old slate roof. This likely wouldn’t be enough to replace it. But with functional replacement cost, you'll receive enough money to replace your new roof. It just might be made up of less expensive materials than your slate-tiled one.
To learn more, check out actual cash value vs replacement cost.
Replacement cost vs functional replacement cost
Replacement cost coverage is commonly available for both dwelling coverage and personal property. It pays the full cost of repairing or replacing damaged items or property with similar, new items. It’s more expensive than ACV but provides more comprehensive coverage than functional replacement value.
For example, if your slate roof gets damaged, the insurance company would pay for similar slate tiles if you had replacement cost coverage. However, with functional replacement cost coverage, your insurer might determine that asphalt or concrete tiles are an equivalent substitute.
Functional replacement cost vs extended replacement cost
Extended replacement cost coverage will pay an additional 20% to 25% over your policy limits if material and labor costs skyrocket at the time of rebuild. For example, if your home is insured for $300,000 with 25% in extended replacement cost coverage, the insurance company will pay up to $375,000 to rebuild your home after a covered loss. That’s $75,000 over your policy’s limit.
However, functional replacement cost coverage would only pay to replace your home with a functionally equivalent structure, potentially using less expensive materials or construction methods.
Functional replacement cost vs guaranteed replacement cost
Guaranteed replacement cost coverage is the highest level of protection offered by home insurance companies. With this coverage, your insurer will pay whatever it costs to rebuild your home with similar quality materials — no matter how much it exceeds your policy limits.
So, if a covered disaster destroys your $300,000 home with guaranteed replacement cost coverage, the insurance company will pay the full cost of rebuilding it to its original specifications, even if it costs $400,000 or more.
Is functional replacement cost right for you?
It may make sense to add functional replacement cost coverage to your homeowners insurance in these situations:
- You own an older home. Some insurance companies do not offer replacement cost coverage for older homes. And in this case, you may have to go with functional replacement cost coverage instead.
- You would want a smaller home if you rebuilt. Sometimes, you end up with a house that’s way larger than you’d like, so you’d prefer to rebuild something smaller or less ornate if given the chance. In this case, having FRC insurance that covers the cost of a smaller rebuild can help you cut down on costs.
- You prioritize functionality over quality. You might want to consider FRC coverage if you’re more focused on keeping your home functional versus making sure every material used in the rebuild is exactly the same quality as before.
Still have questions?
Want to know more about functional replacement costs? Here are the answers to some of the most frequently asked questions.
What is the replacement cost value?
Replacement cost is the amount it would take to replace your damaged property with a brand-new property made out of similar materials. If you want your home to be built back to its original state—with custom wood cabinets, hardwood floors and period trim — you may want to opt for replacement cost instead. But be prepared to potentially pay a higher premium.
Is depreciation the same as replacement cost?
Depreciation and replacement costs aren't the same. Depreciation is the amount by which an item has decreased in value due to its age and condition. Replacement cost is the amount it would cost to replace your items with similar ones without factoring in depreciation at all.
When is functional replacement cost used?
You often see homeowners opting for functional replacement cost if they have older homes that have materials or features that would be expensive to replace. For instance, if your home has custom woodworking, expensive roof tiles, or intricate detailing that isn’t your style, FRC insurance can be a good alternative.
How does functional replacement cost work in a partial loss?
Many insurance policies have a "uniform appearance" or "matching" clause, so if part of your home gets damaged, the insurer will replace even the undamaged parts to keep everything looking the same. But if your policy is missing this clause, your insurer may only be required to replace the damaged parts. And in this case, you'd have to pay to replace the rest yourself if you want it to match.
Is functional replacement cost bad?
Functional replacement cost isn’t inherently bad; it may be your only choice if you have an older home with expensive or hard-to-source materials. You may also opt for it over standard replacement cost if you want to cut down on insurance costs and are comfortable with your home being built out of different materials.
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