EDITOR'S NOTE

Since the early 1900s, replacement cost insurance has been a valuable and necessary coverage. However, for older structures with expensive, ornate or obsolete features, coverage to replace these with like, kind, and quality was exorbitantly expensive, prohibiting many from purchasing the coverage.

In order to make coverage affordable for these types of properties and allow for replacement in the event of a loss for both building and personal property, functional replacement cost was created. This coverage allows for replacement of expensive and obsolete items with less expensive and more modern and state-of-the-art work.

In this issue, insurance expert Paul O. Dudey analyzes the history and application of this coverage.

The evolution of replacement cost insurance has an interesting history. In the early 20th century, underwriters were reluctant to offer the coverage, and did so quite selectively, requiring professional appraisal of the property to be insured.

Initially, insurers used what was called “depreciation” insurance, which applied over the top of actual cash value (ACV) insurance and covered the difference between ACV or

depreciated value of the insured property and its cost to replace new. For example, given a building that would cost $100,000 to replace new, but was depreciated 30%, the ACV would be 70%, or $70,000, and the depreciation would be 30%, or $30,000. In the event of a loss, the ACV coverage would immediately pay the depreciated value of the loss: 70%. Then when repairs had been completed, the depreciation coverage would pay the other