Functional Replacement Cost Provision or Endorsement - a property insurance provision changing the valuation basis otherwise applicable (actual cash value (ACV) or replacement cost (RC) value) to valuation at the cost to replace the damaged or destroyed property with property that serves the same function. What is a functional replacement cost in insurance?ĭefinition. In the insurance industry, "replacement cost" or "replacement cost value" is one of several methods of determining the value of an insured item. The term replacement cost or replacement value refers to the amount that an entity would have to pay to replace an asset at the present time, according to its current worth. What is meant by replacement cost or replacement value? Thus, $23,000 is the replacement cost of the $20,000 truck because this is how much it would cost to buy that same truck today. In this situation, it would cost the company $23,000 to purchase a similar asset to the one they current have in order to replace it. What does functional replacement cost mean in insurance?įunctional Replacement Cost - the cost of acquiring another item of property that will perform the same function with equal efficiency, even if it is not identical to the property being replaced. "Functional replacement cost" means the amount which it would cost to repair or replace the damaged building with less costly common construction materi- als and methods which are functionally equivalent to obsolete, antique or custom construction materials and methods used in the original construction of the building. FCR coverage may be more favorable for certain items than actual cash value. What is the difference between replacement cost and functional replacement cost?įunctional replacement cost valuation provides a lower valuation than replacement cost, resulting in a reduction of the amount of insurance coverage required and thus lower premiums. How does functional replacement cost work? 'Functional replacement cost' means the amount which it would cost to repair or replace the damaged 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.
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