Which insurance term relates to the valuation method that replaces property with functionally equivalent items?

The term that refers to the valuation method that replaces property with functionally equivalent items is functional replacement cost. This method is used in insurance to evaluate a loss by providing compensation that reflects the cost of replacing damaged or destroyed property with items that serve a similar purpose but may not be identical in form or quality.

For example, if a home sustains damage and needs repairs, a functional replacement cost approach allows the insurer to provide coverage based on the cost of materials and methods that are available in the current market and that fulfill the same utility, rather than the exact same materials that were originally present. This can be beneficial in cases where older materials may be hard to find or might not meet current building codes.

The other terms listed have different meanings. The cash value method reflects the depreciation of the property and pays out the current market value minus depreciation rather than replacement costs. Replacement cost refers to the amount needed to replace the property with identical items without factoring in depreciation. Market value replacement typically refers to what the property could sell for in the open market, which may not reflect the functional equivalence aspect.