The 80% rule means that an insurer will only fully cover the cost of damage to the home if the owner has purchased insurance coverage equal to at least 80% of the home’s total value. If the coverage is less than 80%, the insurance company will only reimburse the proportionate amount required for minimum coverage.
Note: Because home improvements and inflation can affect home values, homeowners should review their insurance policies periodically to ensure their coverage continues to meet the 80% rule.
An Example
James and Jane own a home with a replacement cost of $500,000 and their insurance coverage totals $395,000 (79% of the home’s replacement cost). An unanticipated natural disaster caused $250,000 worth of damage.
According to the 80% rule, James and Jane should have purchased a minimum of $400,000 in coverage in order to have the entire cost of the damage paid by the insurance company. Since their coverage was below 80%, the insurance company will only pay for the proportion of the damages represented by the amount of coverage purchased.
$395,000 / $400,000 = 98.75%
Therefore, the insurance company would pay out 98.75% of the damages ($246,875) and the couple would have to pay the remaining ($3,125) out of pocket.
