Functional Replacement Cost in Insurance

Functional Replacement Cost is an insurance term to determine how much money you will be paid for property or item damages covered under your policy.

What is Functional Replacement Cost

Functional Replacement Cost is an insurance term to determine how much money you will be paid for property or item damages covered under your policy. It will figure out what items will be used to replace or repair the damages and how much to install the given item, which will amount to your overall payout.

You will then receive the required amount of money to replace, repair or restore your property to its fully functioning state. Usually, less expensive materials will be used, but the function of your property will be equivalent to its pre-damaged state.

Functional replacement coverage is cheaper than the other two options available: actual cost value (ACV) and replacement cost value (RCV).

Your insurer will be searching for the most similar alternative that costs the least amount of money that has the same functional result.

How Do Functional Replace Costs Work?

Firstly, you will have to put in your claim to your insurer. Now, your insurer will figure out what materials are the least expensive to restore your property to functional order.

Bear in mind: It’s likely your insurer will use the cheapest option available to them. So, if you have antique floor tiles, expect your tiles to replace with a more inexpensive and more modern tile.

You will receive the money to repair or replace the damages. You should always keep a folder of pictures and receipts of your insured property; this will help if you want to put forward a case for better-quality materials.

When Are FRC Policies Not Suitable?

There may be some conditions where an FRC policy is unsuitable to meet the needs of your damaged property or item. If this is the case, then you may need to look for a higher coverage reimbursement.

Here are some instances where you will need to seek higher cover:

  • If you have antique items or customized constructed goods you want to keep
  • Historically areas that require ACV or RCV calculations.
  • A Homeowner’s Association Policy (HOA) needs RCV or ACV.
  • Detailed manufacturing or specific possessions that are unique, imported, or difficult to replicate that you want to keep the same.

Although you may want to keep the older look to your home, your insurer wants to spend as little money as possible.

For example, you may have an expensive wood stain such as mahogany. Still, the insurer will replace it with a less expensive wood type and use a stain to replicate the expensive material previously used.


Suppose you are not particularly worried about retaining the high quality of your previous items but instead are just wanting a functioning item or repaired damage to your property. In that case, Functional Replacement Costs may be ideal for you.

Storage facilities, workshops, or older homes with outdated materials are just some of the property types that may be suitable for FRC cover.

Remember: Functional Replacement Cost cover will help you to reduce your insurance premiums. See also, Insurance to Value which is a method insurers use to figure out what amount they need to pay towards a loss covered under the homeowner’s policy on your insurable interests.

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