What does Functional Replacement Cost allow for in insurance?

Functional Replacement Cost is a method in insurance that focuses on replacing damaged items with new items that perform the same function rather than being identical in form or design. This approach recognizes that in many cases, the exact replacement of an item may not be feasible or necessary. Instead, it allows for the use of modern equivalents that fulfill the same purpose, which may be more cost-effective and practical.

For instance, if an older appliance were to be damaged, the policy would cover the cost to replace it with a new appliance that serves the same function, even if the new item differs in style or features from the original. This method helps insurers to minimize costs while still providing adequate coverage to the policyholder.

Options discussing identical items, depreciation, or adjustments based on market value do not align with this approach. Functional Replacement Cost is specifically about ensuring that the insured can continue to perform the same function as before, rather than focusing on exact replicas or financial adjustments.