The 80% rule refers to the fact that most insurance companies will not fully cover a claim for damage to your house due to the occurrence of an insured event (such as a fire or wind damage) unless you have purchased insurance coverage equal to at least 80% of you house’s total replacement value. In the event a homeowner has purchased an amount of coverage less than the minimum 80%, the insurance company will only reimburse the porportionate amount of the required minimum coverage that should have been purchased.
Let’s say Jane owns a house with a replacement cost of $500,000 and her insurance coverage totals $395,000, and a fire does $250,000 worth of damage to her house. At fire glance, she might assume since the amount of coverage is greater than the damage ($395,000 vs. $250,000), the insurance company should reimburse Jane the entire amount. However, because of the 80% rule, this is not necessarily the case.
According to the 80% rule, the minimum coverage that Jane should have purchased for her home is $400,000 ($500,000 x 80%). If that threshold had been met, any and all partial damage to her house would be paid by the insurance company. But since Jane did not buy the minimum amount of coverage represented by the actual amount of insurance purchased ($395,000 / $400,000), which ends up amounting to 98.75% of the damages, the insurance company would pay out $246,875. Unfortunately, Jane would have to pay the remaining $3,125 out of her own pocket.
Be sure to reach out to your insurance agent if you have any doubt that you are properly covered according to the 80% rule.
Be Aware, Be Safe!