Functional Replacement Cost Insurance and Property Coverage

April 14, 2011

We have a large commercial claim in which the insurance carrier has put a functional replacement cost type of policy on the property. The building has custom interior window trim, custom wood windows, ornate crown trim, oversized base trim, special milled door trim and so forth. The majority of this trim is restorable. The insurance carrier wants to replace some of the materials with a lesser quality of materials where it will not match the existing materials that are now there.

We can restore 95 percent of this trim by removing it, restoring the trim elsewhere, and reinstalling all above mentioned trim throughout the entire home. The cost of this may exceed the replacement cost of the other lesser quality of trim the carrier wants to replace it with. My position is that this trim is not damaged but just in the way when it comes time to remove the plaster walls and then replacing the walls with sheetrock. The trim work that is irreplaceable can be restored and cosmetically returned to its prior condition. My question is since this trim is only in the way, not really structurally damaged just cosmetically in need of restoring and can be saved, can the insurance carrier say that it owes the lesser of the two: the repair or replacement cost whichever is less?

Indiana Subscriber

While it does depend on the policy wording, if the policy has ISO wording or similar, the insurer does have the option to replace the lost or damaged property with other property used for the same purpose if that is the lowest cost option of the three listed. If the trim is not damaged but will become damaged in the repair of the building, that can still be considered part of the cost of repair.

 

Insureds generally carry functional replacement cost insurance when they want lower limits and the materials or property can be replaced with cheaper materials. If the cost to repair the trim (or any other features of the building)  is more than the cost to replace it with functional replacements, and the insured wants that type of replacement as opposed to functional, then the building should not be insured on a functional replacement cost basis.

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