What is Functional Replacement Cost?
Under certain circumstances, a Replacement Cost policy, which requires the insured to insure their home for its full replacement is not practical due to the disparity of the replacement cost versus the market value. Under those circumstances, an agent may offer the client an HO-8 also known as a Functional Replacement Cost policy.
To help lower costs, the functional replacement-cost policy allows the insured to lower the Coverage A (dwelling coverage) when insuring a dwelling. Coverage A is the base amount of the dwelling.
This type of policy will repair the home using functionally equivalent materials rather than obsolete, antique or custom methods of construction. A good example is where an older dwelling might have plaster walls that can functionally be repaired using drywall.
If you have any questions on Homeowners Insurance or Functional Replacement Cost.