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

What the form is

The HO 05 30, Functional Replacement Cost Loss Settlement endorsement, alters the standard loss settlement conditions for the dwelling (Coverage A) and other structures (Coverage B) found in homeowners insurance policies like the HO 00 02, HO 00 03, and HO 00 05. Instead of settling losses based on full replacement cost with identical materials, this endorsement provides for the cost to repair or replace damaged property with less costly, common construction materials and methods that are functionally equivalent to the original construction. For example, plaster walls might be replaced with drywall, or ornate, custom woodwork with standard modern equivalents.

Classes of business it applies to

This endorsement is primarily used for owner-occupied dwellings, particularly older or historic homes. These properties often feature architectural styles, materials, or craftsmanship that are obsolete, antique, or exceptionally custom, making a like-kind replacement prohibitively expensive or unnecessary for the insured's current use of the home. It addresses situations where the market value of the home might be significantly lower than its full replacement cost using original materials.

Special considerations

• Valuation Basis: The Coverage A limit of liability should be based on the "functional replacement cost" of the dwelling, not its actual replacement cost or market value.
• 80% Insurance Requirement: The endorsement often stipulates that the amount of insurance carried on the dwelling must be at least 80% of its functional replacement cost at the time of loss for the functional replacement cost provisions to fully apply without penalty. If not met, the settlement may be reduced.
• Partial vs. Total Loss: In a partial loss, the insurer will pay the cost to repair or replace the damaged portion with functionally equivalent materials. In a total loss, the payout is typically the lesser of the policy limit or the amount actually spent to repair or replace the dwelling on a functional replacement cost basis.
• Option for Actual Cash Value (ACV): The insured may have the option to disregard the functional replacement cost settlement and make a claim on an actual cash value basis. They might then be able to claim additional amounts if they proceed with repair or replacement under FRC terms within a specified timeframe (e.g., 180 days).
• Ordinance or Law: The definition of functional replacement cost typically includes the cost to comply with applicable ordinances or laws governing construction and repair.

Key information for agents and underwriters

• Affordability: This endorsement can make homeowners insurance more affordable for properties with unique or outdated features, as the insured doesn't need to carry limits reflecting the high cost of replicating those specific features.
• Risk Assessment: Underwriters should carefully assess if a property's characteristics genuinely warrant FRC. The age, construction type, and uniqueness of features are key factors. It's crucial to establish an accurate functional replacement cost at the inception of the policy.
• Client Communication: Agents must clearly explain to the insured how functional replacement cost differs from standard replacement cost and actual cash value. Policyholders need to understand that repairs may involve different, more modern materials and that they are insuring the functional use of their home rather than its exact historical replication.
• Comparison to HO 05 31: The HO 05 31 (Modified Functional Replacement Cost Loss Settlement) is a related endorsement. A key difference is that the HO 05 31 may settle the loss on an actual cash value basis if the amount spent to repair or replace on a functional basis is less than the ACV of the damaged part of the building.
• Market Alignment: FRC helps align insurance coverage with the practical and financial realities of repairing or rebuilding older, unique homes, reducing the potential for moral hazard associated with overinsurance based on non-functional, expensive features.