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
To meet the 80% rule, if your home has a total replacement cost value of $400,000, you'd need to purchase $320,000 in coverage (80% of 400,000). If you fail to meet this rule, you won't be covered for the entirety of the damages and instead will have to pay out-of-pocket to cover a portion of the expenses.
What is the 80% rule in homeowners 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 clause in a property insurance policy requires that a home (or other physical property) be insured for a percentage of its total cash or replacement value. Usually, this percentage is 80%, but different providers may require varying percentages of coverage (90%, 70%, etc.).
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 rule in insurance? ›
The 80/20 Rule generally requires insurance companies to spend at least 80% of the money they take in from premiums on health care costs and quality improvement activities. The other 20% can go to administrative, overhead, and marketing costs.
What does 80% mean on 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.
What is the 80 percent rule? ›
The 80% rule was created to help companies determine if they have been unwittingly discriminatory in their hiring process. The rule states that companies should be hiring protected groups at a rate that is at least 80% of that of white men.
Why is 80 coinsurance better than 90? ›
A typical 80% coinsurance clause leaves more leeway for undervaluation, and thus a lower chance of a penalty in a claim situation.
What is a $100 000 house insured on a policy with an 80 coinsurance? ›
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.
What requirement calls for a home to be insured for 80% and in some cases 100% of its replacement value in order for any loss to be fully covered? ›
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.
The formula is used to determine the proportion of the loss that will be covered by the insurance company. For example, if a property is insured for 80% of its actual value and suffers a partial loss, the average clause may specify that the insurance company will only cover 80% of the loss.
What is the rule of thumb for homeowners insurance? ›
The 80 percent rule in homeowners insurance means that you must insure your home for at least 80 percent of the replacement cost for an insurer to cover the damages.
How to calculate replacement cost of home? ›
The easiest way to calculate the replacement cost is to estimate the local cost per square foot to build a home by your home's square footage. So, if your local contractors charge an average of $150 per square foot, and your home is 2,000 square feet, the RCV for your home would be $300,000 (150 x 2,000 = 300,000).
What is the 80% rule in property insurance? ›
The 80% rule describes a policy in which insurers only cover the costs of damage to your house or property if you've purchased coverage that equals at least 80% of the property's total replacement value.
What is the best explanation of the 80-20 rule? ›
The Pareto principle states that for many outcomes, roughly 80% of consequences come from 20% of causes. In other words, a small percentage of causes have an outsized effect. This concept is important to understand because it can help you identify which initiatives to prioritize so you can make the most impact.
How do you take advantage of the 80-20 rule? ›
How to use the 80/20 rule
- Examine all of your daily or weekly tasks.
- Prioritize your most important tasks.
- Identify the tasks that offer the greatest return.
- Brainstorm how to delegate or remove tasks that give less return.
- Make a plan that outlines time and resources versus prioritized tasks.
You have an “80/20” plan. That means your insurance company pays for 80 percent of your costs after you've met your deductible. You pay for 20 percent. Coinsurance is different and separate from any copayment.
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 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.
