What Is the 80% Rule for Home Insurance?
The 80% rule is adhered to by most insurance companies. According to the standard, an insurer will only cover the cost of damage to a house or property if the homeowner has purchased insurance coverage equal to at least 80% of the house's total replacement value. If the amount of coverage purchased is less than the minimum 80%, the insurance company will only reimburse the homeowner a proportionate amount of the required minimum coverage that should have been purchased.
Key Takeaways:
- The 80% rule means that an insurer will only fully cover the cost of damage to a house if the owner has purchased insurance coverage equal to at least 80% of the house's total replacement value.
- If the coverage is purchased covers less than 80% of the replacement value, the amount paid by the insurance company will be proportionate to the amount of coverage originally purchased.
- Capital improvements and inflation affect the value of a property and the 80% rule.
How the 80% Rule Works for Home Insurance
For example, James owns a house with a replacement cost of $500,000, and his insurance coverage totals $395,000. An unanticipated flood causes $250,000 worth of damage to James' house. At first glance, you might assume since the amount of coverage is higher than the cost of the damage ($395,000 vs. $250,000), so the insurance company should reimburse the entire amount to James. However, because of the 80% rule, this is not necessarily the case.
According to the 80% rule, the minimum coverage that James should have purchased for his home is $400,000 ($500,000 x 80%). If that threshold had been met, any and all partial damages to James's home would be paid by the insurance company. However, since James did not buy the minimum amount of coverage, the insurance company will only pay for the proportion of the minimum coverage represented by the actual amount of insurance purchased ($395,000/$400,000),which amounts to 98.75% of the damages. Therefore, the insurance company would pay out $246,875and,unfortunately, James would have to pay the remaining $3,125 himself.
Because improvements to a home and inflation affect home values, homeowners should review their insurance policies periodically to ensure their coverage meets the 80% rule.
How Capital Improvements Affect the 80% Rule
Since capital improvements increase the replacement value of a house, it is possible that coverage that would have been enough to meet the 80% rule before the improvements will no longer be sufficient after.
For example, let's say James realizes he did not purchase enough insurance to cover the 80% rule, so he purchases coverage that covers $400,000. One year passes, and James decides to build a new addition to his house, which raises the replacement value to $510,000. While the $400,000 would have been sufficient to cover the $500,000 house ($400,000/$500,000 = 80%), the capital improvement has driven up the replacement value of the house, and this coverage is no longer enough ($400,000/$510,000 = 78.43%). In this case, the insurance company will once again not fully compensate for the cost of any partial damages.
Inflation can also cause the replacement value of a house to increase. Therefore, homeowners should review their insurance policies and home replacement values periodically to see if they have adequate coverage to cover any damages fully.
FAQs
The 80% rule dictates that homeowners must have replacement cost coverage worth at least 80% of their home's total replacement cost to receive full coverage from their insurance company.
What is the 80% rule in property insurance? ›
When it comes to insuring your home, the 80% rule is an important guideline to keep in mind. This rule suggests you should insure your home for at least 80% of its total replacement cost to avoid penalties for being underinsured.
What does 80% coinsurance mean in a homeowners policy? ›
The coinsurance formula is applied when a property owner fails to maintain coverage of at least 80% of the home's replacement value. If a property owner insures for less than the amount required by the coinsurance clause, they are essentially agreeing to retain part of the risk.
What clause requires that the homeowner have insurance that is equal to 80% of the home's replacement value? ›
Coinsurance clause. A coinsurance clause is a provision that requires you to carry coverage equal to 80% of your home's value.
What is the 80/20 split in an insurance policy? ›
A typical co-insurance split is 80/20, although this varies. An 80/20 split means the insurer will pay 80 percent of the cost it has defined as appropriate (or “allowable”) for a health care service, while the insured individual pays 20 percent.
Should you insure your home to its full value? ›
Replacement cost is how much it would cost to reconstruct your home as it is now, and most homeowners policies offer replacement cost coverage. However, if you don't insure to the full value of your home, you may find yourself responsible for a significant portion of the rebuilding costs in the event of a loss.
Is replacement cost home insurance worth it? ›
Replacement cost homeowners insurance may be worth considering for the contents of your home if you want to replace older items with newer ones. Like dwelling replacement cost, contents replacement cost usually has a coverage limit maximum as defined in your home insurance policy.
Is 80% coinsurance good or bad? ›
Common coinsurance is 80%, 90%, or 100% of the value of the insured property. The higher the percentage is, the worse it is for you.
What is an example of 80% coinsurance? ›
A building has an actual replacement value of $1,000,000 and has an 80% coinsurance clause but is insured for only $500,000. Since its insured value is less than 80% of its actual replacement cost value there will be a coinsurance penalty at the time of a loss.
What is the difference between 80% and 100% coinsurance? ›
Response 9: In the case of 100% coinsurance, if a property insurance limit is lower than the value of the insured property, a proportional penalty will be assessed after a loss. A typical 80% coinsurance clause leaves more leeway for undervaluation, and thus a lower chance of a penalty in a claim situation.
What insurance companies are pulling out of Louisiana?
- State Farm.
- Allstate.
- USAA.
- Liberty Mutual.
- Farmers.
- LA Farm Bureau.
- Progressive.
- Travelers.
A mortgagee clause is found in many property insurance policies and provides protection for a mortgage lender if a property is damaged. While lenders do receive protections with the mortgagee clause, borrowers benefit as well from reimbursem*nts for repairs to the home as well as any documented lost property.
What is excluded from coverage in a homeowners policy? ›
Many things that aren't covered under your standard policy typically result from neglect and a failure to properly maintain the property. Termites and insect damage, bird or rodent damage, rust, rot, mold, and general wear and tear are not covered.
What does having 80/20 coverage mean in Ramsey? ›
It's a way to split the costs of health care with your insurance carrier. On most policies, coinsurance is usually a fraction—like 80/20 or 70/30. So if your plan says 80/20, your insurer will handle 80% of the costs, and you'll take care of the other 20%—but only after you've hit your deductible for the year.
How does split coverage work? ›
What is split-limit insurance coverage? Split-limit car insurance is defined as a policy that divides liability coverage into three separate limits for bodily injury per person, bodily injury per accident, and property damage per accident. Insurance companies often write these limits as three separate numbers.
What is a 100 deductible with 80 20 coinsurance? ›
If your doctor visit costs $100 and you've met your deductible, your coinsurance payment of 20% would be $20 out of pocket. Your insurance would then pay the rest of the allowed amount ($80).
What does it mean when a 100000 house insured on a policy with an 80% coinsurance requirement? ›
Final answer: Given a 80% coinsurance requirement on a $100,000 house, the owner should have $80,000 coverage. But he has only $60,000 coverage, giving a ratio of 0.75. Hence, for a damage of $40,000, he can collect 75% of it, amounting to $30,000.
Is 80/20 insurance good? ›
Is 80/20 Insurance Right for You? In the end, 80/20 insurance offers a lot of coverage but still does require a significant financial commitment from the policyholder. The choice of purchasing an 80/20 insurance policy all really comes down to what you can afford and what your medical needs are.
What is the rule of thumb for property insurance? ›
A general rule of thumb is to buy enough liability insurance to cover your net worth or what can be taken from you in a lawsuit, such as real estate and bank accounts. Having enough liability coverage is key to protecting your assets.
