Functional Replacement Cost: Its Origin, Evolution and Application


...counterpart and includes a schedule for listing insured locations and limits of insurance. This approach eliminates coinsurance by establishing the functional replacement cost for each building and, in effect, adjusting losses in advance.

In the event of loss or damage to a scheduled building — and the insured contracts within 180 days to restore it to the same occupancy and use — the insurer will pay the least of:

If the insured does not contract within 180 days to rebuild the property, recovery is limited to the least of the following:

Note that this endorsement’s requirement to contract for repairs within 180 days is more stringent than the customary requirement under full replacement cost coverage to simply notify the insurer of one’s intent to rebuild.

Other Features

ISO’s endorsement for establishing FRC coverage on commercial buildings has two other distinct features.

One is a dual application of the “other insurance” provision. With respect to any other insurance on the property with the same terms and conditions, coverage under the ISO endorsement will apply on a pro rata basis. As for insurance not on the same terms and conditions, coverage under the ISO endorsement will apply as excess, up to the scheduled limit.

The other distinct feature of the ISO endorsement is its inclusion of coverage for increased replacement costs due to building ordinances or laws. This coverage is provided within the scheduled FRC limit and is subject to exclusions for costs in excess of legal requirements, pollutant testing and cleanup, or costs for failing to comply with requirements before the loss occurred.