Functional Replacement Cost: Its Origin, Evolution and Application


Adjusters International Disaster Recovery Consulting

Functional Replacement Cost: Its Origin, Evolution and Application

By Joseph S. Harrington, CPCU, ARP

At first glance, functional replacement cost (FRC) coverage can seem very attractive.

Unless the implications of FRC are fully explained to them, however, all that most insureds are likely to comprehend is that they will be able to replace damaged property for a lower premium than with “full” replacement cost coverage. The fact that the insurer can insist on repairing or replacing property with less appealing but “functionally equivalent” materials and workmanship can seem remote and inconsequential.


Paying a lower premium than they would for full replacement cost insurance while believing they will still be able to restore original functionality to their property after a loss canmake functional replacement cost coverage an attractive alternative tomany insureds.

It’s not that simple, however. As author Joseph Harrington explains in this issue of Adjusting Today, an understanding of insurers’ different obligations under—and interpretations of — this coverage is essential to projecting how it would restore a given property that is damaged or destroyed.

In his discussion, he reviews the evolution of functional replacement cost coverage and looks at its application in the homeowners, commercial building and personal property arenas. It makes for interesting and informative reading.

Sheila E. Salvatore Editor