Making Sure Clients Understand the 80% Rule in Home Insurance?

Home insurance, at its simplest, is a basic policy that every homeowner needs and understands. Unfortunately, there are aspects of home insurance that can be confusing to even the most insurance-savvy client. One such topic is the 80% rule in home insurance. 

Some clients may hear this term without understanding what it means while others may have never heard it at all. Not knowing about this rule can leave clients vulnerable to not receiving compensation after a disaster or accident. 

What is the 80% Rule? 

The 80% rule in home insurance states that a homeowner must have at least 80% of their home’s total replacement cost value in home insurance in order to receive compensation. 

When a home insurance file is claimed and approved, the insurance agency is expected to compensate for any damage and loss that falls under the scope of the signed home insurance policy. Most companies won’t cover all replacements unless a certain amount of home insurance is purchased, however. This amount varies depending on the home, but it should be 80% of the home’s total replacement value.

Difference Between Replacement Value and Market Value 

Be careful not to let clients confuse their home’s replacement value for its market value. These are not the same, and only insuring a home for the amount they paid for it can leave them without coverage. 

The total replacement cost value of a home is how much it would cost to completely replace it after a disaster. This includes the value of the square footage, roof, amenities, labor costs to rebuild, etc. They should calculate this amount before signing a home insurance policy to be sure their home is covered under the 80% rule. 

Homeowners should always let their insurance company know when renovations or improvements are made on the home so a new total replacement cost value can be calculated.  

How the 80% Rule Works 

Say a home’s total replacement cost value is $600,000. A homeowner purchases $360,000 in insurance. Soon after, a storm sweeps in and causes $100,000 in damage. Since the damage ($100,000) is substantially less than the amount of home insurance ($360,000), it may seem that the homeowner is covered. Unfortunately, this isn’t the case. 

Instead, compensation will be based on how much insurance the homeowner should have been carrying, which is 80% of the home’s total replacement cost value. With a total replacement cost value of $600,000, the homeowner should have carried $480,000 in home insurance.

In this case, the insurance company will only pay 75% of the damages ($360,000/$480,000). This leaves the homeowner to pay the remaining $75,000 in damages out of pocket. 

This rule generally applies to dwelling coverage rather than personal belongings coverage. Homeowners should carry 100% of their personal belonging’s replacement value in insurance to guarantee their items will be compensated for after a disaster. Some expensive items, such as jewelry, arts, furs and electronics, may need additional policy floaters in order to cover the entire replacement value. 

Does the 80% Rule Apply to Liability? 

The 80% rule in home insurance only concerns property coverage, not the liability coverage that also comes with a basic policy. Since there is no real way to predict how much will be spent on a liability claim, there are simply recommended amounts based on the homeowner’s location, lifestyle, pets and occupation. This insurance isn’t replacing belongings or the home, but serves to handle bodily injury, third party property damage and legal claims. Liability insurance generally comes in millions, such as $1,000,000 for a yearlong policy.