As coverage features are adopted by more and more insurers, they are often standardized by insurance advisory organizations or bureaus, the most prominent of which is the Insurance Services Office (ISO), now part of Verisk Analytics.
ISO has developed three functional replacement cost endorsements — one for homeowners insurance, one for commercial building property and one for commercial personal property.
The ISO homeowners endorsement (HO 53 05) replaces the full replacement cost coverage under Coverage A (for the principal dwelling) and Coverage B (for related private structures) provided in three of its owner-occupied homeowners policy forms (HO 00 02, HO 00 03 and HO 00 05).
The endorsement defines functional replacement cost to mean the amount it would cost to repair or replace a damaged structure using materials and methods that are less costly but “functionally equivalent” to “obsolete, antique, or custom” methods or materials used originally.
Coverage is subject to a coinsurance requirement of 80 percent of the functional replacement cost; however, foundations and other building supports below the ground or basement undersurface are not considered in the coinsurance calculation.
If the ACV of the damage is less than the estimated FRC, the insurer will pay no more than the ACV until repairs and/or replacement are complete. (This provision was modified in the late 1990s to allow immediate and full payment of small FRC losses. Under recent versions of the endorsement, if the cost to repair damage is less than $2,500 and 5 percent of the applicable limit, the insurer will simply pay the functional replacement cost recovery whether or not the property has been repaired or replaced.)
Under the ISO homeowners endorsement an insured may initially disregard the functional replacement cost feature and submit a claim for the ACV of the loss, then make an additional claim for full FRC recovery, provided the insurer is notified of the intent to do so within 180 days of the loss.
The ISO homeowners FRC endorsement makes no reference to personal property of the insured, which will be covered under the base form for ACV or full replacement cost, as the policyholder chooses.
Things are considerably more complicated when it comes to functional replacement cost coverage for commercial property.
ISO’s endorsement for commercial buildings (CP 04 38) is more detailed than its homeowners...