ettus Mohair, Ltd. (PML) is in trouble. Demand for fuzzy mohair cooled and PML, a major distributor of this product, is feeling the financial heat, with a full warehouse and declining orders.

Fortunately, Dick Pettus, a large, loosely-put-together man of fifty with a basset hound face, is quite resourceful. A successful entrepreneur and PML's primary stockholder, Dick has a history of identifying new fads, riding the wave of popularity, and then selling out at just the right time before the world moves to something else. He became a rich man selling Koosh balls and mood rings.

However, Dick has strong feelings about mohair. He doesn't think of it as "faddish" and is convinced that the downturn in demand is just temporary. But to stay in business he knows he must significantly cut expenses. In a stroke of genius he hires Ralph Turner, a renowned risk management consultant, to review his insurance program and recommend ways to save money.

PML operates from the former headquarters of a now defunct bank. The bank, mindful of its image, spared no expense with a liberal use of marble, mahogany paneling and molding, and ornate craftmanship throughout. The interior exudes a feeling a stability and strength to all who stand in its stately corridors.

"Why this building" Ralph asks, looking at an old box of Koosh balls sitting on a solid mahogany teller's counter.

"It was cheap; I bought it for less than half price on the courthouse steps when the bank went under," says Dick. "It cost $10 million to build and I got it for a heck of a deal. While not ideal for my business, it works fine."

"It says here the building is insured for $15 million," says Ralph, perusing PML's property insurance policy.

"That's what it would cost to replace the building," interrupts Dick. I was told that I needed to insure it for its full replacement cost or I might get shafted trying to collect if I have a claim - even if it's a pretty small one. I don't remember exactly - something about coinsurance penalties."

"Dick, if this building were destroyed, would you rebuild it like it is today?"

"Heck no! doubt I could if I wanted to. They don't build them like this anymore; I don't think anybody even knows how. For $5 million I could build a very suitable replacement facility. I would just pocket the remaining $10 million."

"It doesn't work that way, Dick," explains Ralph. The 'principal of indemnity' won't allow you to profit like that on a property insurance claim. Trust me on this. Since you are looking for ways to save money, I have an idea that may help."

"Talk to me."

"In property insurance there is a coverage approach called 'functional building valuation', which exactly fits your situation. You won't replace this beautiful, old building, because you probably can't, and even if you could, it doesn't fit your needs."

"The functional building coverage endorsement would allow you to replace the property with similar property that performs the same function, even better, but at less cost. It is designed for buildings that have became obsolete or with expensive features unnecessary to the current use of the building. If you can replace the building for $5 million using less expensive materials and the insurance company agrees, we can insure it for removal if the local government regulations say we have to do that. You will save a lot of insurance premium, money you desperately need now. How does that sound?"

"Let's look into it, Ralph," says Dick.

Use of the Functional Building Valuation endorsement, in the appropriate situation, accomplishes three things:

It deletes the coinsurance clause with respect to the building or buildings to which it applies;

Provides coverage for replacement cost of partial losses or "market value" if not replaced; and

Includes ordinance or law coverage without specific limits.

Your McNeary consultant can help you determine which insuring options best fit your needs. Give us a call, e-mail, or fax.