| Misunderstood Property Ins. Issues (Part 2) | |||
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Functional replacement cost on buildings Functional Building Valuation CP 04 38 The Functional Building Valuation CP 04 38 endorsement addresses building use. That is, it provides a means to insure buildings to reflect USE and not construction. Coinsurance is not applicable with Functional Building Valuation. The amount of insurance is not based on like, kind, and quality of type of structure they have at the time the policy is written. Rather, the amount is based on replacement cost for the type of building they could or would replace. Building Ordinance coverage is built into the Functional Building Valuation with no sub-limit. The amount of insurance must reflect the increased amount that would be necessary to rebuild the structure to current codes at the time of the loss. Let's consider this coverage example. The building to be insured is an old, fully equipped factory building, with a replacement cost of $2,000,000. The insured uses the building as a warehouse. The insured could build a new building to be used as a warehouse for $l,000,000. Substantial damage to the building (50% destruction) will trigger a local ordinance and the entire building will have to be destroyed. The estimated cost of demolition of 50% of the building (the undamaged portion) is $30,000. The additional cost to install sprinklers to comply with a local ordinance is $200,000. To illustrate, the following is a possible way to develop the Functional Building Valuation Limit of insurance. Provide coverage for: (1) The cost to replace the existing building with a building that is functionally equivalent ($1,000,000) (2) The cost to demolish the undamaged part of the existing building after loss occurs ($30,000) (3) The additional cost for a sprinkler system to comply with the local ordinance ($200,000) In this example, the total Functional Building Limit would be $1,230,000. Commercial Lines Manual The following comes from the Commercial Lines Manual: "1. Description of Coverage. Functional Building Valuation Endorsement provides coverage for specifically scheduled buildings which can be replaced with similar property that performs the same function as currently used but that is less costly. a. Coinsurance. Not applicable b. Blanket Insurance. Not applicable c. Premium Determination. Determine the premium for Functional Building Valuation for each cause of loss by multiplying the 80% coinsurance building rate by 1.30." |
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Not only are policy forms, clauses, rules and court decisions constantly changing, but forms vary from company to company and state to state. This material is intended as a general guideline and might not apply to a specific situation. The authors, LunchTimeCE, Inc., CEfreedom, and Insurance Skills Center, and any organization for whom this course is administered will have neither liability nor responsibility to any person or entity with respect to any loss or damage alleged to be caused directly or indirectly as a result of information contained in this course.
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