David loves his house in Dallas. It just ticked over being 100 years old. He’s proud to own a piece of history since so many Dallas homes have been built into the last 35 years. His original hardwood floors creak in all the right places, the plaster walls give it a charm you don’t find in newer homes, and the detailed windows shine that the home was handcrafted decades ago.
But when it came time to review his homeowners insurance policy for the year, David was confused. His insurance agent was discussing changes in the insurance coverage being offered in Texas due to the crazy current market for property insurance. His agent brought up the difference between replacement cost coverage or functional replacement cost coverage. He had never heard this term before and was perplexed.
The good news for David is that both options would cover damage from storms or fires, so his mortgage lender would be fine with either. The confusion came because these two ways to settle a claim work in different ways. David wanted to make sure that if something happened to his home, it would be rebuilt to the original property standard he enjoys .
Many Texas homeowners with older homes find themselves in this same situation. It is important to understand what these two types of coverage actually mean before you make a claim and find out the wrong way!
Replacement cost insurance is the gold standard of coverage for homeowners in Texas. It means that if your home is damaged or destroyed, your insurance will pay to repair or rebuild with materials of the same kind and quality that were originally there. It does not take depreciation into account like an actual cash value policy does. Ultimately, your insurance will cover the full cost to rebuild your home as it was before the loss even if it was built with outdated materials. Most lenders require this type of coverage.
For someone like David, this is an important option. If a storm damages his handcrafted wood trim or ornate glass windows, replacement cost coverage would pay to match the original. If his roof needs to be replaced, it would be rebuilt using materials that are just as good as what was there before.
This coverage endorsement is ideal for homeowners who want their house to be restored exactly as it was, no matter how old or unique it may be. However, because it covers higher-end materials and does not factor in depreciation, it costs more than other types of coverage.
Functional replacement cost coverage works differently than standard replacement cost insurance. Instead of replacing damaged parts of the home with the exact same materials, this type of policy allows the insurance company to use modern building materials that perform the same function but might not look or feel the same.
For David, this would mean that if his home needed major repairs, his insurance company wouldn’t pay for handcrafted wood trim or the ornate windows he loved. Instead, they would likely replaced with modern, alternative materials. His plaster walls would likely be replaced with drywall, and if his roof needed repairs, it might be rebuilt with more affordable materials than before.
The benefit to the insurance company of functional replacement cost coverage is that it costs less than full replacement cost coverage. Homeowners who aren’t as concerned about keeping the exact original materials may prefer this option because it keeps their insurance premiums lower while still covering repairs and rebuilding.
With this choice of coverage being looked at for his homeowners policy renewal, he asked one question that was really insightful. He wanted to know if he could just increase the policy limits for his dwelling coverage and choose to rebuild it how he wanted to since he was buying that much coverage.
While it is a brilliant idea, if a major storm or fire damaged David’s home his choice of coverage features would determine how it was rebuilt no matter how much coverage limits are increased.
With replacement cost coverage, his home would be restored with the same high-quality craftsmanship and materials it had before. The custom wood trim, plaster walls, and original-style roofing would all be replaced to match the home’s original condition.
With functional replacement cost coverage, his home would still be repaired, but with modern, more cost-effective materials. The end result would look similar, but the charm and character of certain features would be different. His handcrafted trim might be replaced with factory-made trim, and his plaster walls might be swapped for drywall.
David had to decide what mattered most to him—keeping his home exactly as it was or saving money on his insurance policy while still having solid coverage.
The right choice depends on the homeowner and the home itself. It is also important to realize that many insurance carriers will not offer you anything but functional replacement cost endorsements.
WIth that in mind, homes that have historic or custom features often find replacement cost coverage the best option because it allows the homeowner to rebuild with the same level of craftsmanship. This is the safest choice for homeowners who want to preserve the unique character of their house.
For homeowners who want to lower their insurance costs or have more options available to them, functional replacement cost coverage is a more affordable option. It still allows the home to be repaired or rebuilt after a disaster, but it keeps costs lower by using modern materials instead of custom ones.
True Texas Home Insurance, available only through Insurance For Texans, can work to help you find either replacement cost or functional replacement cost options. Options on historical homes are tight if you want more than functional materials. But we understand that choosing the right one can make a big difference if a disaster does strikes.
Insurance For Texans is made up of independent agents who work for Texas homeowners and not big insurance companies. They understand how the Texas home insurance market works and can help homeowners like David figure out which option makes the most sense for their home, their budget, and their long-term goals.
David took the time to review his options, talk to an experienced independent agent, and pick the coverage that made the most sense for him. If you’re a Texas homeowner wondering whether replacement cost or functional replacement cost is the better fit for your home, now is the time to get answers.
Click the button below to find out which coverage is right for your Texas home.