1. Forms
2. DP
3. DP-05-30

What the Form Is

The DP 05 30, Functional Replacement Cost Loss Settlement endorsement, alters the standard loss settlement conditions found in Dwelling Property policies (specifically forms DP 00 02 and DP 00 03). Instead of paying for repairs or replacement with identical or equivalent materials to the damaged property, this endorsement allows the insurer to cover the cost of repairing or replacing the damaged portion of the dwelling or other structures using modern, commonly available, and less expensive materials and methods that are functionally equivalent. The intent is to restore the property to a functional condition without necessarily replicating its original, potentially obsolete or costly, features.

Classes of Business It Applies To

This endorsement is used with residential dwelling policies, specifically:

• DP 00 02 (Broad Form)
• DP 00 03 (Special Form)

It is particularly well-suited for older homes or properties where the architectural style or construction materials are outdated, unique, or exceptionally expensive to replace on a like-for-like basis. For example:

• A home with ornate, custom plasterwork on the walls could be repaired using standard drywall, which serves the same function.
• An older home with original, hard-to-source wood siding might be repaired with modern, functionally equivalent siding materials.
• Properties with features that are no longer standard or necessary for the insured's current use of the house.

Special Considerations

• Insurance-to-Value Requirement: For the functional replacement cost provision to apply fully after a loss, the policy typically requires the dwelling to be insured for at least 80% of its functional replacement cost immediately before the loss. If the coverage is below this threshold, the loss settlement may be adjusted to a proportionate amount, or the lesser of actual cash value or the functional replacement cost.
• Repair/Replacement Timeframe: The insured usually must contract for the repair or replacement of the damaged property within a specified period (often 180 days) after the loss for the functional replacement cost terms to apply. Failure to do so might result in a settlement based on actual cash value or the FRC amount, whichever is less.
• Cost Savings vs. Payout: While this endorsement can lead to lower insurance premiums compared to standard replacement cost coverage, it also means that in the event of a loss, the payout might not be sufficient to restore the property to its exact pre-loss condition if that involves rare, antique, or high-cost materials.
• Matching: Disputes can arise if only a portion of the property is damaged and the new, functionally equivalent materials do not match the undamaged, older portions (e.g., a section of a roof or siding). The policy language will dictate how such situations are handled.

Key Information for Agents and Underwriters

• Pricing: This endorsement typically results in a lower premium for the policyholder due to the reduced potential payout from the insurer.
• Risk Assessment: It's crucial for properties where the market value is significantly lower than the cost to replace with like-kind materials, or where specific unique features are not essential to the dwelling's functionality for the insured. Underwriters should verify the suitability of FRC for the specific risk, ensuring the property is well-maintained and that the insured understands the valuation method.
• Coverage Explanation: Agents must clearly explain the differences between functional replacement cost, actual cash value, and standard replacement cost to clients. Policyholders need to understand that they may not receive funds to restore aesthetic, non-functional, or obsolete features to their original state.
• Underwriting Guidelines: Confirm the basis for the 80% insurance-to-value requirement (i.e., based on functional replacement cost). The phrase "common construction techniques and materials" implies using widely accepted and currently available building practices and materials. This endorsement is not intended for properties that are poorly maintained or in a state of disrepair. It is designed for situations where the original construction is sound but simply outdated or overly expensive to replicate.