Should You Choose Functional Replacement Cost or Replacement Cost to Rebuild Your Home
The actual replacement cost is an estimate of how much it would cost to replace the structure to its actual state using the same materials that currently exist in the structure. The functional replacement cost is an estimate of how much it would cost to replace the structure with a functionally equivalent structure.
Most Replacement Cost Estimator (RCE) tools provide two policy type options for older home reconstruction:
a) actual replacement cost and
b) functional replacement cost.
Homes built prior to 1940 were built before mass production of common construction materials and methods, such as pre-engineered trusses and drywall. Homes built between 1940 and 1986 also used different materials, such as wood trim/moldings and wood soffit with galvanized gutters rather than today's commonly used MDF (medium density fiberboard) and metal soffit with aluminum gutters. These differences are accounted for in RCEs based on the correlating policy type as described below.
1940 and 1960 were break-through years in the fabrication of construction materials. There were many similar construction milestones throughout the 20th century. RCEs uses these milestones to apply different types of windows, doors, moldings, exterior siding, etc. for replacement cost calculation. RCEs employ appropriate items based upon the year the home was built and whether Actual or Functional Replacement Cost was selected. The calculated value changes if the year built is altered and it will change when another replacement cost method is selected.
Actual Replacement Cost
RCE's default is to calculate Actual Replacement Cost. This means that the cost to rebuild the home is based on using materials and construction techniques that are like kind and quality (as close as possible) to those used when the home was originally built (as long as they are compliant with current building codes). For example, a home built in 1910 will typically have lath and plaster walls. The equivalent using today's building codes is gypsum (drywall) "lath" with a two coat plaster finish, which costs much less than having a specialist use historic home techniques to restore to the original wood lath. (For more information on historical homes (often listed on a historic registry), see the "Original Period/Restored Finishes" white paper).
Functional Replacement Cost
The second calculation option is Functional Replacement Cost. Functional Replacement Cost is available for homes built prior to 1986, with the most significant differences for homes built prior to 1940. Functional replacement bases the cost to rebuild the home on modern materials and techniques. The modern equivalents give the rebuilt home the same aesthetic value as the original home using current, common construction methods. For example, the same home mentioned above built in 1910 calculated using Functional Replacement Cost, would result in a lower replacement cost estimate and with typical materials and methods used in construction today, such as thin coat plaster finish, MDF trim/moldings, and metal soffit with aluminum gutters. Please note that these materials will vary depending on the Quality Grade selected.
"Disclaimer: The content contained in this blog is for informational purposes only. It should not be considered insurance advice since every client's needs and circumstances are different.. Bergen Insurance Group, LLC makes no representation as to accuracy, completeness, currentness, suitability, or validity of any information on this site and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. All statements represent the sole opinion of the author and is provided on an as-is basis. For an actual description of all coverages, terms and conditions, refer to your insurance policy.”