What’s It Worth to Us?

Learn about functional value as a potential alternative for older church buildings

Richey-Barrett Blog (42)

Read why functional value may be a practical choice for older churches

Generational shifts in church membership are real and widespread. With headcounts dropping and expenses maintaining at best, many churches are exploring options to cut costs. For those churches which qualify, the immediate good news is a cost-saving insurance alternative for determining building valuation. It is known as functional value.

Functional value is a tool that may be available to many churches in northern Ohio, as one qualifier is that the church building(s) be older. While functional value serves a real purpose, it is vital that church representatives considering it understand it is not a panacea. Property insurance coverage afforded under functional value is substantially less than what is provided under full replacement cost value. The reality is you may be trading a disproportionate cost savings in premium for a huge reduction in loss payout, if you experience an insured loss. It is a judgment call, and you should ask yourselves, “What’s it worth to us?”.

Property valuation for insurance purposes is more complicated than the term implies. Your independent insurance agent should always explain to your church committee that replacement cost value is the recommended building valuation method. Without getting into the weeds, realize that replacement cost value means property damage due to an insured peril will be replaced with like kind and quality. This is not the case with functional value. If a building is insured using functional value and is damaged by an insured peril, currently available construction materials will be used to repair or rebuild. The church building that you see afterward will not look like or be the prior building.

A main benefit of functional value is to provide some insurance protection to older church buildings that would be replaced with smaller, modern buildings in the event of a total insured loss. In this sense, functional building valuation balances viability with practicality; i.e. it allows a qualifying church to purchase some level of affordable property insurance. The most notable downside to functional value is the repair or replacement following an insured loss will not be of like kind and quality. This applies to both total and partial covered losses.

Consider the application of functional building valuation using a hypothetical partial loss. Assume one original stained glass window is damaged by vandalism. Regardless of whether the damaged stained glass window requires repair or full replacement, the functional value loss payout would be for colored glass, not stained glass. The new or repaired window would likely stand out like a sore thumb. Again, the question, “What’s it worth to us?”, should be asked.

In order for functional building valuation to be offered as an option, most insurance companies have qualifier requirement(s).  An across-the-board qualifier is age of construction, often accompanied by characteristics associated with older construction. Generally, the building construction must be pre-1945. Additionally, the buildings are usually larger and possess unique attributes such as ornamentation, original stained glass windows, or old hardwood beams, wall carvings, flooring. Depending on the insurance company, other qualifiers may be a marked decline in the congregation’s size or financial resources and/or inadequate financial resources to purchase full replacement cost value insurance. Your independent insurance agent can explain the reasoning for these qualifiers and offer examples of the differences in loss recovery amounts between a property insurance policy based on functional building value vs. full replacement cost value.

Richey-Barrett Insurance is your Trusted Choice Independent Insurance Agent in northern Ohio for church insurance. We have markets and expertise. We are available to meet with your church representatives in person to address your specific needs.

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