What is the 80% rule when it comes to insuring a home?

Mon May 13 2024

A young couple going through insurance papers at home

Your home isn’t just a necessity; it’s what you’ve put your hard-earned money into. It’s a valuable asset, especially as many homes go up in value over time. Having insurance coverage can provide a necessary safety net if your home needs repairs and can reduce the amount you’ll pay out of pocket.

Whether you’re a new homeowner or have been one for a while, you should know your home’s insurance coverage. Keep it above 80% of the total replacement value to meet the 80/20 coinsurance rule. 

The 80/20 coinsurance rule is a standard practice in most homeowners insurance policies and is backed by law in a handful of states. 

Due to the 80/20 coinsurance rule, having insurance coverage of less than 80% of the total replacement value limits your potential settlement in a claim. The replacement value of your home is the total cost to rebuild your home using materials of a similar quality. This is different from the appraisal value, which is the value of your home in today’s housing market.

Understand that with this rule, your insurance provider only needs to reimburse you for a proportionate amount based on the coverage you should have had. In black and white? That means your insurer covers the actual cash value of your damaged property if you don't have the required coverage.

That's the penalty for failing to have adequate coverage. At Kin, we don’t let homeowners underinsure their properties. We make sure you have the appropriate coverage you need when you need it most.

The relationship between coverage and replacement cost

The relationship between coverage and replacement cost is crucial in insurance policies, particularly in property insurance. Coverage refers to the type of protection provided by the policy, while replacement cost pertains to the amount required to replace or repair damaged property with similar materials and quality. 

Ensuring adequate coverage that aligns with the replacement cost of the insured property is essential to avoid being underinsured or facing potential financial losses in the event of a claim. 

Implications of not meeting the 80% threshold

If you don't meet the 80% threshold, you risk being subject to a coinsurance penalty. This penalty means that your insurance company only pays a portion of the claim, leaving you responsible for a larger percentage of the repair or replacement costs.

The result of facing greater out-of-pocket expenses? You may have to delay repair, or worse, you may not have the ability to fully restore your property. That can lead to significant financial strain and emotional distress.

Calculating the 80% rule correctly

To calculate the 80% rule correctly, you need to determine the total replacement cost of the structure of your home. This involves assessing your home's structural features, such as its square footage, number of rooms, and the materials used in construction. Additional features like custom finishes, upgrades, and amenities that may impact the overall replacement cost.

What isn’t included when determining the 80%? Things like:

  • Excavations, foundations, piers, or any supports below the undersurface of the lowest basement floor.

  • Supports of those same structures that are below the surface of the ground inside the foundation walls if there is no basement.

  • Underground flues, pipes, wiring, and drains.

Factors influencing replacement value:

  • Inflation. As the price of materials increases, so can the replacement value of a home.

  • Home upgrades. Each upgrade to a home may change the amount of lumber, steel, or other materials needed to rebuild it, which factors into the replacement cost.

  • Capital improvements. Adding a new permanent structure, such as a garage, increases the cost of replacing the home and structures on the property.

  • The housing market. When homes are in high demand, the cost of materials can surge. If you have to rebuild, getting parts, labor, or materials could be more expensive than usual, which leads to a higher replacement value overall.

You might want to consult with a professional appraiser or use reputable online tools to refine your estimate and ensure that you have a comprehensive understanding of your home's replacement value for insurance purposes. Your insurance agent or company may provide resources or guidance on estimating replacement costs. Some insurers offer tools or worksheets to help homeowners assess their property's value. In fact, these are a requirement in California.

Once you have your total replacement cost, you multiply this value by 0.8 to find out what 80% of the replacement cost is. Finally, check that your insurance coverage equals or exceeds this calculated amount to meet the 80% threshold to avoid a reduction in coverage in the event of a claim.

Kin members don’t have to worry about meeting the 80% threshold. We tailor coverage to fit your home so you know you’re protected. Everything from today’s inflation rates to the cost of replacing your latest home upgrades factors into determining replacement value.

How the 80% rule is used in various coverages

The 80% rule only applies to property coverage, not liability coverage. Liability coverage compensates for third-party property damage, legal claims, and bodily injury. Generally, the minimum for this coverage is around $100,000 annually, but it can be more, depending on your situation.

Meeting vs. not meeting the 80% rule

Failing to have 80% coverage impacts the value of your home insurance claim. Consider this hypothetical scenario:

Suppose your home has a total replacement cost of $300,000. To meet the 80% rule, you should have at least $240,000 ($300,000 x 0.8) in insurance coverage.

But let's say you only have $180,000 in coverage. That’s just 60% of your home’s replacement cost. If your home sustains damage amounting to $100,000, the insurance company calculates your payout based on the proportion of coverage you have compared to the required 80%.

In this case, your coverage is only 75% of what it should be (180,000 / 240,000) or the actual cash value or the loss, whichever is greater. So if the insurance company covers 75% of the $100,000 in damages – $75,000 – you’re responsible for covering the remaining $25,000 out of pocket.

Lessons learned from insurance cases

Watching someone move away or seeing a house go unrepaired because of a lack of coverage can be upsetting. Fortunately, there is one easy way to avoid this problem. Reviewing your homeowner's insurance periodically (at least annually) can help you avoid falling below 80% coverage.

Final thoughts on properly insuring your home

The 80/20 rule helps ensure you have the right coverage. However, your home's value may change over time, so you may need to increase your home's insurance coverage or risk falling below the 80% threshold. If you don't stay on top of your coverage (or work with an insurer who does), you could end up paying a greater portion of repair costs, equivalent to the percentage of insurance you should have had.

Taking action to ensure adequate coverage

Getting adequate coverage can help you make sure your home is protected in the case of damage. We make affordable home insurance easy and are here to provide a quick quote to help you get the coverage you need. Visit us online today for your free quote.


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