The “Functional Replacement Cost” Trick That Lets Your Insurer Use Cheaper Materials.
My Historic Plaster Walls Were Replaced with Cheap Drywall.
My 100-year-old home had beautiful, thick plaster walls. After a water damage claim, I was horrified when the contractor, at the direction of my insurance company, started putting up cheap drywall. I called my agent, and he pointed to the “Functional Replacement Cost” clause in my policy. It allowed the company to replace my damaged, expensive materials with modern, cheaper, but “functionally equivalent” ones. It was a cost-saving trick that destroyed the historic character of my home.
How Your Plaster Walls Could Be Replaced with Drywall (And Why Your Policy Allows It).
The Devil is in the Definition.
True Replacement Cost means the insurer must pay to replace your damaged property with materials of “like kind and quality.” Plaster for plaster. Functional Replacement Cost (FRC) means the insurer only has to pay to replace the damaged property with materials that are “functionally equivalent.” They can successfully argue that drywall serves the same “function” as a plaster wall, even though it is of a vastly different quality and character. This definition is the key to the entire trick.
If You Own a Historic Home, FRC is Your Worst Nightmare.
It Robs Your Home of Its Soul.
For the owner of a unique, historic, or custom-built home, a Functional Replacement Cost policy is an absolute nightmare. The very things that make your home special—the custom millwork, the hand-carved details, the lath and plaster walls—are the first things an FRC policy will try to eliminate in a claim. It is a policy that is designed to replace the soul of your home with cheap, modern equivalents. If your home has character, you need a policy that is designed to protect it.
Replacement Cost Means “Like for Like.” Functional Replacement Cost Means “Close Enough.”
The Difference Between Precision and Approximation.
This is the simple, powerful distinction. True Replacement Cost is a promise of precision. It is a commitment to restore your property to its pre-loss condition using materials of a similar kind and quality. Functional Replacement Cost is a promise of approximation. It is a commitment to give you something that is “close enough” or that “does the same job,” even if it’s of a lower quality or different character. One is a promise of restoration; the other is a promise of mere function.
Why is This Policy Cheaper? Because the Payout is Cheaper.
You Are Pre-Paying for Your Own Downgrade.
An insurance policy with a Functional Replacement Cost provision will always have a lower premium than one with True Replacement Cost. The insurance company is giving you a “discount” because they know that, in the event of a claim, their payout will be significantly lower. You are effectively pre-paying for the right for them to downgrade the quality of your home’s materials. The small savings on the premium are a terrible trade-off for the massive potential loss in quality and value.
A Tale of Two Kitchens: One Rebuilt with Custom Cabinets, One with Home Depot Cabinets.
A Real-World Example of the Value Gap.
Two neighbors had similar kitchen fires. One had a True Replacement Cost policy. Her policy paid to have her beautiful, custom-built hardwood cabinets recreated by a local craftsman. The other had a Functional Replacement Cost policy. Her insurer argued that cheap, particle-board cabinets from a big-box store were “functionally equivalent,” and they would only pay for those. One kitchen was restored to its former glory. The other was downgraded to a builder-grade replacement.
Don’t Let Your Insurance Company Downgrade Your Home’s Character.
Your Home’s Unique Features Have Value. Insure Them Properly.
If your home has unique, high-quality, or historic features, you must ensure your policy is written on a True Replacement Cost basis. The character of your home—the things that make it special—have real, tangible value. A Functional Replacement Cost policy is designed to ignore that value. It sees a wall as a wall, not as a piece of history. A True Replacement Cost policy is the only way to ensure you have the funds to restore your home’s unique character after a loss.
The Clause to Look for in an HO-8 Policy That Should Be a Major Red Flag.
The Policy Designed for Under-Insuring.
Functional Replacement Cost is the defining feature of a specific type of homeowners policy called an HO-8. This policy is specifically designed for older, historic homes where the true replacement cost is so high that it’s difficult to insure. While it can be a last-resort option, you must understand what you are buying. An HO-8, with its FRC provision, is a contractual agreement to receive a lower-quality repair. It should be a major red flag that you are not getting the best coverage.
For Owners of Unique, Older Homes, This Distinction is Worth Tens of Thousands of Dollars.
The Most Important Clause You’ve Never Heard Of.
For the owner of a standard, modern tract home, the difference between FRC and RCV might be minimal. But for the owner of a Victorian, a Craftsman, or any home with unique architectural details, this distinction can be worth tens or even hundreds of thousands of dollars in a major claim. It is the clause that determines whether you get to rebuild the home you fell in love with, or just a cheap, modern imitation.
Demand True Replacement Cost. Don’t Settle for “Functionally Equivalent.”
Be an Educated Consumer.
When you are buying homeowners insurance, you must specifically ask your agent this question: “Does this policy settle claims on a True Replacement Cost basis, or a Functional Replacement Cost basis?” Demand to see the policy language. Do not accept a policy that contains the words “functional,” “equivalent,” or “similar” when it comes to materials. You want to see the words “like kind and quality.” It is a small detail in the contract that has a massive impact on your reality after a claim.