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What is the 80% Rule for home insurance?

tony • January 2, 2019

Today we’re going to share with you a little know home insurance rule that could cost you thousands of dollars out of pocket if you need to file a home insurance claim and this rule applies – it’s called the 80% rule.

Home insurance on a primary residence in Florida is generally covered on replacement cost basis.  This typically mean your losses are covered dollar for dollar up to policy limits.  However, insurance companies require that you insure at least 80% of the total replacement cost of the home for the insurance policy to be a replacement cost policy up to policy limits.  If your insurance coverage falls below this threshold – things get complicated and very expensive. 

Here’s an example

Let’s assume that the replacement cost of your home is $250,000.  You will need to have at least 80% of this amount to ensure your policy is a replacement cost policy up to policy limits.  This means that you will need to have at least $200,000 in coverage to have a replacement cost policy. 

Quick side note here – you’d still be underinsured by $50,000 in this scenario.  So if your house were to  burn down to the ground you wouldn’t have enough money from the insurance company to rebuild your house.  However, your losses would still be covered dollar for dollar up to policy limits – in this case $200,000.

But what if you only had $150,000 in coverage on your insurance policy? 

The short answer is a coinsurance clause kicks in.  This means that because you only chose to insure 75% of the required amount of coverage, your insurance will only cover 75% of your claim.  To put it another way – if you only want to insure 75% of your home, then the insurance company will only cover 75% of your losses.  So, if you have a $20,000 claim due to a small kitchen fire, you’ll likely only receive $15000 less your deductible.

So what should you do? 

The first thing to do is see how much dwelling coverage you have on your homeowner’s insurance policy.  If you suspect it’s lower than the cost to rebuild your home, contact your insurance company or your insurance agent and ask them to do a revised replacement cost estimate.  In just a few short minutes they’ll be able to calculate the replacement cost and tell you if you’re underinsured.

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