When getting insurance for your home or property, it would be wise to get functional replacement cost coverage.
In this article, I’d like to shed some light on what functional replacement cost is, why it matters, and how an adjuster can help you.
What is Functional Replacement Cost?
When homeowners insure the value of their property, they are typically given one of two options; they can opt to go for either Replacement Cost or Actual Cash Value.
In almost all cases, it is a wise idea to insure your property for the Replacement Cost Value. This is usually defined in the policy as being the cost that is required to replace the property that has been damaged with something that is of equal value and quality. This is done without making any deductions for depreciation.
Insuring a building or any property with Functional Replacement Cost means being covered to cover the cost of getting another item or property that has the potential to perform the same functions, with the same efficiency.
The replacement item does not have to be identical to the original property which is being replaced. This type of coverage can be made use of when a functionally equivalent building has the potential to replace the original building, but at a much lower cost than it would be if you were to get an identical replacement.
When this type of valuation is used, it provides a much lower valuation than that of the replacement cost. This results in a reduction of the insurance coverage that is required, and thus lowers premiums that have to be paid.
This type of functional replacement cost also does the job of eliminating coinsurance clauses and also Ordinance or Law issue, which is very important for homeowners. It is also the type of coverage that most agents have the tendency to overlook.
When you are insuring a property, it would be wise to make use of these coverages for your maximum benefit.
Insuring your home to full Replacement Cost Value
Getting insurance for your homes is a basic part of being a homeowner, and it is often a decision that is taken too quickly during the closing process. However, with your home being the most important and valuable asset that you have, it may be wise to ponder your insurance options in a much more thorough way, so as to get the best possible coverage.
A lot of research has shown that in the US, about two thirds of homes are underinsured by an amount of at least 18%. This means, in the event of a total catastrophe, such as a fire, the homeowner may find themselves in the very awkward position of having to pay for the repairs of the home.
As we have discussed above, replacement cost is the amount of money it would cost to reconstruct your home as it is now.
The good news is, most homeowners’ policies do offer replacement cost coverage. If, however, you do not insure your home to the full valuation that your home has, you may find yourself having to pay out of pocket for a major part of the costs of rebuilding your home in the event of a disaster.
When you do insure your home to its maximum capacity, many of the insurance providers will offer you the benefit of extended replacement cost. This one simple provision in the contract will pay beyond the limit of your policy in the case that the amount of loss is not adequate.
In fact, most insurance policies require you to insure your home by at least 80 percent of the money it would take to rebuild the home in order for you to get a replacement cash value settlement.
If you happen to be insured for less than the full value at the time of an unfortunate event, then you may receive an actual cash value settlement.
This will factor in depreciation of the property and also take into account its age and condition – or else you may be required to pay for a significant share of the loss.
What Are Public Adjusters?
In any case, related to insurance and insurance companies, you are more or less guaranteed to have to deal with adjusters. The adjusters that you will normally deal with, are the ones that are assigned to you by your insurance providers.
These adjusters are the employees of the insurance company and they are therefore working on behalf of their employer.
This is key; remember that even though the pretext is that they are there to help you navigate the insurance process, it is important to understand that they are not working for you, but they are rather working for the insurance company.
Public adjusters, on the other hand, are people who are independently hired by holders of insurance policies or people who want to get insurance (for whatever it may be), to help them deal with the insurance providers.
These are the people who are experts in the field of insurance, and as such, are uniquely situated to help out homeowners.
The key thing to remember about public adjusters is, they are working on your behalf and not on the behalf of the insurance providers.
Their interests are aligned with your interests, the more money they can get you in insurance claims or settlements, the more money they will make for themselves.
How can they help?
As we have already explained, these are people who are experts in the field of insurance. They had to go through specific training and certification processes in order to be able to do the job of a Public Adjuster.
When it comes to the particular issue of Functional Replacement Costs, an adjuster can really help you with their expert knowledge on the issue.
Oftentimes, the adjuster assigned by the insurance company will make matters difficult for you and will try to make the whole process confusing just so that you settle for less coverage.
This is where an expert in the field can guide you to make the right decision and is exactly where public adjusters come into play.
Frequently Asked Questions (FAQ)
Q. How is Functional Replacement Cost Calculated?
Ans: The simplest formula you can follow to understand is,
Functional Replacement Cost = Actual Cash Value of the property + Depreciation of the property