Sometimes It's What the Policy Doesn't Say That Counts!



...had hand-painted imported tiles installed when the home was built in 1926. Amazingly, it was still possible to order similar tiles, but at considerable cost. The insurance company adjuster suggested that the homeowner accept a functional replacement flooring tile which, while of high quality, was not hand painted nor imported, each tile being unique. The tile suggested by the insurance company would have cost substantially less. Here the insurance company wanted to substitute the higher replacement cost value with the lesser functional cost value.

The concept of functional replacement is to replace the damaged property with property that performs the same function. One of the most common examples is replacing a damaged wall with drywall instead of with plaster. Unless there is a specific statute or policy provision, the insured is entitled to replacement cost value under a replacement cost policy.

There are policies that contain a provision for functional replacement cost. Most often, one finds this provision on older buildings with very ornate and/ or obsolete features (i.e., lathe and plaster walls). The building can be repaired using today’s common construction materials and methods, while retaining the same functionality for the owner. Another example is when a business occupies a building but no longer uses the top floor or back extension. If a fire destroyed the building, it could be rebuilt without the top floor and back extension, giving the business owner the same functionality.

Personal computers, televisions and other electronic devices may be replaced on a functional basis. For instance, an insured’s damaged personal computer is three years old and still very functional, but the model is no longer available and current models have additional features with enhanced storage capabilities at less cost than what the insured originally paid.


Sometimes the insurer and insured will entertain what is commonly known as a “walk-away” or negotiated settlement. This means both have agreed to a settlement figure that is somewhere between actual cash value and replacement cost. In accepting the figure, the insured agrees not to make a supplemental claim for replacement cost at a later date. This can be a win-win situation: the insured wins because they have use of the money up-front and do not have to buy items that they choose not to replace. For the insurer, besides saving money, this arrangement also saves a lot of time, accounting, and adjusting red tape.

In the final analysis, replacement cost coverage is both a desirable and necessary part of today’s property insurance programs. The...