While not every homeowner’s insurance company adheres to what’s known as the “80% rule,” the majority do. So, if you are looking for a homeowner’s insurance policy, it’s a safe bet you’ll need to understand the 80% rule.
The 80% rule describes a policy in which insurers only cover the costs of damage to your house or property if you’ve purchased coverage that equals at least 80% of the property’s total replacement value.
Replacement value describes the amount of money it costs to replace or repair something that is damaged, stolen, or lost.
For houses, replacement value is typically calculated by multiplying the average local per-foot rebuilding cost by the square footage of the house.
Keep in mind that replacement value is not synonymous with market value.
Suppose that you would expect your house to sell for $600,000 due to its location in a high-demand area. This is the market value of your home. However, the cost to rebuild your home after a fire would be only $400,000. That number is the replacement value.
The 80% rule helps protect you and your assets in the event of damage to your house or property. If you’re not covered by the 80% rule, the insurer will only reimburse you a proportionate amount of the minimum coverage you’ve purchased. This could lead to high out-of-pocket costs.
To better understand the 80% rule, here’s an example:
You’ve purchased a house with a replacement cost of $400,000. The insurance coverage you’ve purchased totals $300,000.
Then, a natural disaster causes $250,000 worth of damage to your home.
You might assume that since the cost of the damage is lower than the amount of coverage you’ve purchased, your insurance company should reimburse you the entire amount.
Unfortunately, this isn’t always the case.
To reach the 80% threshold for your home, you should have purchased insurance coverage of at least $320,000, or 80% of $400,000.
If you had purchased $320,000 in coverage instead of $300,000, the insurance company would have paid for all repairs to your home.
However, since you purchased less than 80% of your house’s replacement cost in insurance, the insurer will only pay for a proportion of the minimum coverage. This means you are saddled with out-of-pocket expenses to cover repair costs.
The 80% rule offers some protections for homeowners, such as:
Some areas are more prone to natural disasters than others. Florida is notorious for devastating natural disasters, and the capital of Tallahassee isn’t immune. Connecting with an insurance agency in Tallahassee, Florida, can help keep you and your property protected.
When scouting for a reputable agency that offers homeowner’s insurance in Tallahassee, find out whether it follows the 80% rule. If it does, keep in regular contact with your broker to ensure that your coverage continues to meet the 80% threshold, especially if you make improvements to your home.