As a homeowner, it is important to understand exactly what is included in your insurance policy. One term you’ll probably come across when considering coverage is the “80% rule.” While it may sound intimidating, it’s critical that you comprehend this aspect of your policy to make sure you have the right amount of coverage. So, let’s dive in so we can understand the 80% rule in homeowners insurance.
What is the 80% rule?
The 80% rule is an insurance requirement that states that homeowners must have coverage that is equal to or greater than 80% of their home’s total replacement cost. In other words, insurance companies require homeowners to purchase enough coverage to rebuild their home if it was destroyed by a covered event such as a fire, storm, or vandalism. If your coverage doesn’t meet the 80% requirement, your insurer may only pay a portion of your claim, leaving you to pay for the rest out of pocket.
Calculating the replacement cost of your home
To adhere to the 80% rule, you need to know how much it would cost to rebuild your home entirely from the ground up, including labor and materials. To calculate this amount, you can use a few methods such as hiring a professional appraiser or using online calculators provided by your insurance company. It’s advisable to update your home’s replacement cost regularly to ensure you have enough coverage as your home’s value increases over time.
How does the 80% rule affect your coverage?
The 80% rule can impact your coverage in several ways. For instance, suppose your home has a replacement value of $500,000, and you only have coverage of $300,000. In that case, you’re only 60% insured, which is less than the required 80%. If you make a claim for $200,000 due to a covered event, your insurance company will only pay 60% of your claim, which is $120,000, leaving you to cover the remaining $80,000. It’s crucial to review your policy and ensure you have the right amount of coverage to avoid such scenarios.
Exceptions to the 80% rule
While the 80% rule applies to most homeowners’ insurance policies, there are exceptions. For instance, if your policy includes an endorsement for extended replacement cost coverage, your insurer may pay more than your coverage limit, up to a certain percentage, to rebuild your home. Additionally, some states have laws that require insurers to provide full replacement cost coverage, no matter how much coverage the policyholder purchased.
Importance of complying with the 80% rule
The 80% rule may seem like a hassle, but complying with this requirement is crucial for homeowners. Ensuring that you have enough coverage can help protect you financially if disaster strikes. Remember, the cost to rebuild your home is often more than what you initially paid for it. Underinsuring your home can lead to financial ruin and affect your ability to get a mortgage or sell your home in the future. Failing to comply with the 80% rule can lead to financial strain and make it challenging to recover from losses. Be sure to review your policy and update your coverage regularly. Tom Needham Insurance will help you get the coverage you need so you will have the peace of mind that you are sufficiently protected. Call our office today to schedule an appointment.
** The information provided in this blog is intended for general informational purposes only. It does not constitute professional advice, legal guidance, or any specific recommendations. **