Question
What is the 80% rule in homeowners insurance?
I got a new home insurance policy and was reading the finer details and saw some warnings about an "80% rule" - I don't understand their definition or what it means. My coverage states my house is insured up to 150% of the "dwelling coverage." What does this mean?
Answer
That's a good question! The 80% rule in a home insurance policy is meant to encourage homeowners to insure their home up to (or greater than) 80% of the dwelling coverage. Ideally, you are insuring your home up to 100%+ but 80% is their minimum. If you are insuring your home lower than 80%, you are risking inadequate coverage and paying for damage out of pocket. Replacement cost value (RCV) is worth understanding if something devastating happens to your home.
The best way to understand the numbers behind the 80% rule and replacement cost value is through an example.
Consider you own a home that should be insured with $100,000 in coverage — $80,000 as a minimum with this rule. However, you elect to only pay for $70,000 in coverage. In the event a fire damages your home and causes $40,000 in damage, this is how the 80% rule would factor into your reimbursement:
| How much insurance should you have? | $100,000 |
|---|---|
| Minimum amount of insurance you should have? | $80,000 |
| How much insurance do you have? | $70,000 |
| What percentage of your home is covered? | $70,000 of $80,000 = 87% covered |
| How much would you get reimbursed in this claim? | 87% of $40,000 = $35,000 |
| How much would you be responsible for out of pocket? | $5,000 |
As you stated, your home is covered up to 150% of the dwelling amount so this is not something you should be concerned about. However, it is a good example of why it is so important to properly insure your home. It also benefits you as a consumer and homeowner to understand the basics of your homeowners policy and ask your insurance representative if you have specific questions. You can also call The Zebra's agency at 888-444-8949 to chat with one of our knowledgeable agents about options for properly insuring your home.
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