When it comes to your home, making sure you’re adequately insured is of the utmost importance. Despite this, many homeowners are unaware of the “80% rule” for home insurance and, as a result, find themselves underinsured when trying to replace their personal property after a loss. Understanding the 80% rule—and following it—can help you protect yourself and your home.

For example, you may have bought your home for $275,000 but, based on current labor and material costs, it may be determined that to replace the entire house with like kind and quality materials it would cost $350,000.  You would need to have insurance for at least $280,000 for the insurance company to fully cover any potential claims, whether they be a full replacement of your home or partial repairs such as wind damage to your roof.

The 80% Rule in Action

Following the example above, let’s say you secured insurance for $280,000—or 80% of the replacement cost of your home—when you first purchased it. Then, you renovated your home, and these improvements significantly raised the replacement cost of your home to $400,000. For your insurance company to fully cover claims, you’d need to increase your insurance coverage to reflect 80% of the new replacement cost of your home, which would be $320,000 in this case. A storm causes $100,000 of damage to your home, but because you increased the amount of insurance on your home to $320,000, the insurance company covers the total cost of the repairs, minus your deductible.

Let’s say you didn’t adjust your insurance coverage, so you only had $280,000 in coverage for your home that now costs $400,000 to replace. Instead of having at least 80% of the new replacement cost of your home insured, which would be $320,000, you only have 87.50% of the total cost insured. In the event of a claim, the insurance company would divide the amount of coverage you purchased ($280,000) by 80% of the replacement cost of your home ($320,000) and only cover the difference between those two amounts. So, in the same scenario from above, instead of the insurance company paying the full $100,000 (minus your deductible) to repair the damage caused by the storm, they would only pay roughly $87,500, as the difference between the amount of insurance you purchased and the 80% replacement cost was 87.50%. You would then be responsible for paying the remaining $12,500 in repair costs, plus your deductible.

As you can see, failing to adjust the amount of insurance you have on your home to ensure you’re following the 80% rule can be extremely costly. Regularly reviewing your coverage amounts, especially after you’ve done home renovations, can help you make sure you’re properly covered, even if your home’s replacement cost increases.

Edited by Aebly & Associates Insurance Services, Inc. © 2021 Zywave, Inc. All rights reserved. This Know Your Insurance document is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.