With functional replacement cost, if this hand-laid stone porch was destroyed, the insurance company would pay to replace the porch with a functionally equivalent porch using conventional construction materials and methods, such as brick or stacked stone.
Older homes, particularly houses built prior to 1945, often have unique construction features. While the history and uniqueness of these building characteristics add to the allure of the home they can also be extremely difficult and expensive to replace.
The most common example of an obsolete construction feature in older homes are plaster walls. Most builders and remodelers now routinely use drywall as it is less expensive, easier to install, and has fire-resistant properties that combine to make it a more ideal selection for walls in a home.
Other examples of unique construction features of older homes may include: ornate woodwork, mahogany banisters, hand-laid stone foundations and porches, and imported, individually hand-painted floor tiles.
The replacement provision of home insurance policies customarily specify the insurance company will repair covered damages using like kind and quality materials. With older homes insurance companies typically amend the policy to instead provide what is known as functional replacement cost coverage.
Functional replacement cost means the insurance company will pay to repair or replace covered damages to an older home with construction materials and methods of construction that are functionally equivalent in condition and appearance to the original construction, but would not be an exact replacement of matching kind and quality materials.
Referring to the earlier cited examples: plaster walls would be replaced with drywall, stone foundations would be replaced with poured concrete, hand-laid stone porches (such as the one pictured above) would be replaced with brick or stacked stone, a mahogany banister may be replaced with a pine banister, and hand-painted individual floor tiles would be replaced with more readily available, high quality tiles.
The end result with functional replacement cost coverage is covered damages will be fully repaired and functionally equivalent to the original construction, but the cost of labor and materials would be substantially less than an exact replacement. This provision lowers the amount of insurance needed and thereby also lowers the cost for insuring an older home.
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