How Do Capital Improvements Impact The 80 Percent Rule

The 80 Percent Rule impacts how much of a payment you receive from your insurance company after your house is damaged or destroyed. Find out how capital improvements can mean major changes to your coverage status.

When people get home insurance quotes, it's a good idea to plan for coverage of at least 80 percent of the replacement value of the home. This is because thanks to the "80 Percent Rule," many insurance companies won't provide full benefits for damages incurred as part of the policy unless the policy holder has coverage for at least 80 percent of the full replacement value of the house.

Many people don't know this when they apply for free home insurance quotes. But even if they do, there are other issues with the 80 Percent Rule that can come into play when they make a claim on their homeowners insurance. One of them is: what happens if you make capital repairs, renovations or enhancements to your house after you get cheap home insurance? How does this impact your coverage in relation to the 80 Percent Rule?

The answer to this question is that any capital improvements can increase the replacement value of the house, so it can take you outside of the 80 Percent Rule and into the danger area where you may not be fully covered. For example, if you have $450,000 of coverage on a $500,000 house, you are within the 80 Percent Rule. But making $75,000 worth of improvements on the house means that your $450,000 of coverage is now only 78 percent of the home's replacement value, meaning you are not eligible for full coverage.

If you make improvements or repairs to your house, it's important to make sure you have enough coverage. This can be a good time to search for home insurance online to see if you can find a better deal on coverage based on your new home value.

Alvin Michaels is a writer based in Pocatello Falls, Idaho who has written about the insurance industry for several major online news sites, newspapers and magazines.