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.
The best way to understand this 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 considered about. However, it is a good example of why it is so important to properly insure your home.
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