What Is the 80% Rule in Home Insurance? How It Affects Your Claim
Learn how the 80% rule works, why replacement cost matters and how to avoid reduced insurance payouts after a covered loss.
When you buy home insurance, you probably expect it to pay the full cost of any damage covered by the policy (minus any deductibles). But if you haven't followed the 80% rule (also known as the 80/20 rule), you might be in for an unpleasant surprise.
Used by most insurers, the 80% rule determines whether your insurance will cover the claims you make in full. If your policy doesn't follow the rule, you might only receive a partial payout for any damage.
If you've never heard of this rule, it's worth learning what it is, how it works, and when to update your home insurance policy to ensure you're fully covered before disaster strikes.
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What is the 80% rule in home insurance?
The 80% rule in home insurance dictates that to receive full coverage on a claim, homeowners must have coverage worth at least 80% of their home's total replacement cost. The total replacement cost isn't the current market value of your home, but the estimated cost of rebuilding the house from the ground up.
If your coverage limit is less than 80% of the replacement cost, your insurance will only pay a portion of any claim you make, based on the coverage you do have.
For example, say the current replacement cost for your home is $600,000. To follow the rule, your policy would need a coverage limit of at least $480,000 (80% of the replacement cost).
But you haven't updated your home insurance in a while, so your policy only covers up to $450,000. That's only 75% of the actual replacement cost, and only 93.75% of the $480,000 minimum coverage limit according to the 80% rule.
Quick math breakdown:
- Replacement cost: $600,000
- Required coverage (80% rule): $600,000 × 0.80 = $480,000
- Your coverage: $450,000
- $450,000 ÷ $480,000 = 93.75% of what's required
Because your coverage falls short of the 80% rule, your insurer might reduce your payout on a claim.
If a hurricane rips through, flooding your basement, and a contractor estimates the repairs will cost $50,000, you'll make a claim for the damages.
Instead of receiving the full $50,000, your insurance will only pay 93.75% of your claim, or $46,875. You'll be on the hook for the remaining $3,125. That would be on top of any home insurance deductible you need to pay.
At first glance, being stuck paying a few thousand more than you thought might not seem like the end of the world, especially when your insurance still covered more than $45,000 worth of damages. But that money can add up over time, especially as the gap between the replacement cost and your coverage continues to widen with inflation.
How do you calculate your home's total replacement cost?
It's important to regularly review your home's total replacement cost value and adjust your coverage limit as needed.
You can't really calculate the exact replacement cost yourself without knowing exactly what criteria your insurer uses or getting actual quotes from contractors to rebuild your house. However, you can note any upgrades or changes you've made since moving in and talk to your insurance agent about how they might impact the replacement cost.
As it can be complicated to calculate this total, most insurance companies estimate this value for you. However, here are the essential factors that go into calculating your total replacement cost, according to Horton Insurance Group.
- Square footage of your home
- Home renovations and improvements (e.g., changing flooring, appliances and fixtures; updating a roof; or installing new windows)
- Cost of replacing materials
- Labor costs in the event repairs are needed
- Value of interior and exterior components
How to avoid being underinsured
One common way homeowners end up falling below the 80% rule is by making upgrades and not notifying their insurance. Say you recently finished your basement, complete with flooring, insulation, drywall and everything else needed to turn it into usable square footage.
If your insurance company doesn't know about the upgrade, the replacement cost is still going to be based on the assumption that the basement is unfinished. The same is true for other big-ticket home upgrades such as replacing the HVAC, adding a pool or building an addition that adds square footage to your home.
Even if you haven't made any major changes, you might still find yourself underinsured depending on how your coverage limit is calculated. In some policies, your limit might already be tied to the replacement cost, meaning your coverage adjusts each year to match the full replacement cost estimate.
However, other policies might calculate the coverage limit differently, such as using the actual cash value. This factors in depreciation of the materials through normal wear and tear.
As your home ages, your coverage limit might shrink rather than increase to keep up with inflation. While that might mean lower home insurance premiums, it also means you won't get nearly a big enough payout if your home was destroyed.
It also means the amount you'd get for smaller repairs would shrink, too.
Use the tool below, powered by Bankrate, to explore today's top home insurance offers and connect with a professional who can help:
Don't over-insure your home
Falling below the 80% rule puts you at risk of paying more out of pocket for repairs. But increasing your coverage too much can be costly, too. If you try to come up with your own rough estimate of the replacement cost and increase your coverage accordingly, you might end up overpaying.
If you set your limit at $800,000, but the actual replacement cost is only $600,000, you're paying for $200,000 worth of coverage that you can't use. That's going to increase your premiums unnecessarily.
Similarly, some changes you've made to your home might have decreased the replacement cost. For example, if there was a pool in the backyard when you moved in but you've since had it removed, your replacement cost might still be including the estimated cost of replacing a pool you no longer have.
Keep in mind insurance pays close attention to risk as part of its underwriting process. By closing the pool or replacing it, you reduce the risk of incidents occurring outside of your home, which could lower your premiums.
Furthermore, while coming up with a rough estimate on your own is useful for figuring out if your coverage might be too low, talk to your agent before you make any adjustments to your policy. Talk to them about any upgrades or changes to your home that might impact the replacement cost. They can help you figure out if any coverage adjustments are needed.
Another option is to shop around for home insurance quotes. During the process, insurers will typically ask you for details about your home so they can come up with a replacement cost estimate. Compare the replacement cost given in the quote to your existing policy to see how they line up.
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