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An insurance valuation is an assessment of how much it would cost to rebuild a property in the event of a total loss, such as after a fire or building collapse. The correct valuation makes sure it’s insured for the correct amount. It also specifies how much money the insured would receive from their insurance provider if the property is lost.

Several types of valuation clauses can be written, including replacement cost, guaranteed or extended replacement cost, functional replacement cost, and actual cash value

Actual Cash Value.

Pays to replace your home and possessions minus a deduction for depreciation.

Replacement Cost.

Pays the cost of rebuilding/repairing your home and replacing your possessions without a deduction for depreciation.

Guaranteed or Extended Replacement Cost.

A guaranteed replacement cost policy pays whatever it costs to rebuild your home even if it exceeds the policy limit. This gives you protection against sudden increases in construction costs due to a shortage of building materials after a widespread disaster or other unexpected situation.

Functional Replacement Cost (FRC).

For older structures with ornate or obsolete features, replacement cost coverage to replace these with like, kind, and quality can be exorbitantly expensive. To make coverage affordable, functional replacement cost coverage was created, allowing for replacement of expensive and obsolete items with less expensive and more modern options. FRC is the cost of acquiring another item of property that will perform the same function with equal efficiency, even if it is not identical to the property being replaced. FRC valuation provides a lower valuation than replacement cost, resulting in a reduction of the amount of insurance coverage required and, thus, lower premiums. Most FRC loss settlement provisions provide that losses will be settled following one of these two methods: replacement with a less costly, but functionally equivalent building; or, in the case of a partial loss, restoration of the damaged portion in the same architectural style, but with less costly material (i.e., replacing a mahogany banister with a pine banister).