Functional replacement cost and replacement cost insurance are two different concepts related to property insurance.
Functional replacement cost refers to the cost of repairing or replacing a damaged or destroyed property with a similar property that serves the same function as the original property, but may not be identical in design, material or quality. For example, if a building is destroyed by fire, the functional replacement cost may include the cost of rebuilding the building using different materials, designs, or methods that can serve the same function as the original building.
Functional replacement cost is often used with older buildings. The materials used in the original construction, or the method of construction may be obsolete or very costly to re-build with like kind and quality.
Understanding Functional Replacement Cost in Property Insurance
On the other hand, replacement cost insurance is a type of insurance coverage that pays for the cost of replacing or repairing a damaged or destroyed property with the same or similar property, without deducting for depreciation. In other words, it covers the cost of rebuilding or replacing the property with the same or equivalent property, without considering any loss in value due to age, wear and tear, or obsolescence.
While both concepts relate to the cost of replacing or repairing a damaged property, they differ in their approach to valuation. Functional replacement cost takes into account the functional use of the property, while replacement cost insurance provides coverage for the actual cost of replacing the property with the same or similar property without considering any loss in value due to depreciation.
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