Understanding The 80 Percent Rule

The 80 Percent Rule is a tricky part of insurance policies that many people don't know about until it's too late. Find out more about the 80 Percent Rule and what you need to do to keep your home covered.

Many people think that after they get a home insurance online quote and then sign a policy, they will be covered for the full cost of replacing or repairing their house in case of a catastrophic incident. Unfortunately, many people don't find out until something happens and they file a claim that this isn't always true. Because of the so-called "80 Percent Rule" many people wind up with a check from their home owner insurance provider that is far less than they need to cover their damages.

The 80 Percent Rule refers to the fact that in most cases, homeowners insurance providers will not pay full value on damages incurred during an insured event (such as a flood, fire or earthquake) unless the policy holder has purchased insurance for the home which covers at least 80 percent of the replacement value of their house.

If the homeowner hasn't purchased insurance that is equal to or greater than 80 percent of the replacement value of their home, in many cases an insurance company will only pay out a sum that is proportional to the percentage of the minimum value that the homeowner had coverage for. For example, a person with a $500,000 home should purchase $400,000 worth of coverage, but in fact only purchased $300,000 of coverage. Because their coverage is only 75 percent of what it should be, the insurance company will only cut a check for 75 percent of the losses.

This is why it's a good idea to factor in at least 80 percent of the replacement value of the house before you get a free home insurance quote. Having the proper amount of coverage can save you money and big headaches down the road.

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.