Functional Replacement Coverage: How It Can Affect Your Insurance Claim

Residential Fire Damage | Professional Loss Adjusters

You’ve had a loss to your property. You want the damage fixed as soon as possible and you expect it to be restored to its original condition, using similar materials. After all, you’ve paid your insurance premiums on time and you have a great relationship with your insurance agent. This should be a no-brainer. Unfortunately, some insurance policy endorsements can make this process more difficult, including an endorsement known as “Functional Replacement.” 

What is an endorsement? 

An insurance endorsement is an amendment or an addition to an existing insurance policy that changes the terms or scope of the original policy. Endorsements may also be referred to as riders. An insurance endorsement can be used to add, delete, exclude or otherwise alter your insurance coverage.

During the settlement of an insurance claim, Functional Replacement Coverage (FRC) replaces the damaged property with a functional replacement, which isn’t necessarily the same quality and craftsmanship of the original materials. A simple example would be replacing lathe and plaster walls with drywall or gypsum. Both provide solid walls and have the same function, yet the cost varies greatly between the two. Yet, one could argue that they are not of the same quality. The idea behind FRC is to reduce premiums on insurance policies, but FRC can cause great grief for the homeowner or business owner in the event of a loss. Oftentimes, a functional replacement endorsement is worded ambiguously, leaving it open to interpretation. 

Residential Fire Damage | Professional Loss Adjusters

We received a call from a homeowner who owns an antique farmhouse that had been destroyed by fire. The house was more than 100 years old and was constructed of hand-hewn posts and beams. The client’s insurance company cited Functional Replacement Coverage, stating that they could replace functionally obsolete items during reconstruction, but would not pay for custom construction. Although the client had insured the building for enough to rebuild with comparable post and beam construction, the insurance company offered him a settlement of $100,000 less. Their beautiful post and beam home, which was constructed using 6x6 beams, would have to be replaced with 2x6 construction.

As most people are aware, post and beam construction has no structural walls. It is a system of horizontal beams that transfer structural loads to a system of vertical posts. Additionally, it typically leaves the large beams exposed rather than covered with sheetrock as is customary with 2x6 construction.

We pointed out to the insurance company that structural loading and the appearance of 2x6 construction is not equivalent to the original 6x6 post and beam, and that, if the home was reconstructed in this manner, it would not be as it was before the fire. While it wasn’t reasonable to expect the insurance company to pay for hand-hewn beams, recreating the post and beam the insured is entitled to was possible using standard dimensional lumber and machine drilling or steel plate connections. These are standard modern construction methods. 

The end result was that the insurance company revised their estimate, giving our client an additional 50% increase in the settlement of the claim. More important, the client was able to restore their home to its original pre-loss condition.

A word to the wise: It is always a good idea to make sure you fully understand the language and endorsements in your policy. A licensed Public Adjuster is trained to read and understand insurance policies and is your strongest ally in the event of a loss. We are happy to answer any questions you may have—before any loss occurs—so you can make sure you have adequate coverage. Feel free to contact us in our Maine office at 888.747.8260 or email me at


Michael Creed

Michael is a 1983 graduate of St. Anselm College and resides with his family in Medway, Massachusetts. After graduating from college, he served as an officer in the United States Marine Corps.

A Licensed Public Adjuster since 1990, he has adjusted numerous claims throughout New England, as well as hurricane claims in Florida and the Caribbean. He has served in various leadership positions within the Massachusetts Association of Public Insurance Adjusters (MAPIA) and is a member of the National Association of Public Insurance Adjusters (NAPIA). Outside of work, Michael enjoys spending time with his family and following all of Boston’s sports teams. He is an active member and a past-president of the Medway Lion’s Club, as well as a member of the Ancient & Honorable Artillery Company of Massachusetts.

Michael is licensed in Massachusetts, Connecticut, Maine, New Hampshire, Rhode Island, Vermont, North Carolina, South Carolina, Texas, and Florida.