Understanding the 80% Rule in Homeowners Insurance

What Is the 80% Rule in Homeowners Insurance?

As a buyer, understanding the details of your future home's insurance requirements can help you avoid unexpected costs, and one important concept to know is the 80% rule in property insurance.

What Is the 80% Rule?

The 80% rule refers to how much insurance coverage a homeowner must carry to be fully protected in the event of a claim. Most insurers require that a home be insured for at least 80% of its replacement cost, not its market value, to receive full compensation for partial losses.

If a property is insured for less than that threshold, the insurance company may reduce the payout amount, leaving the homeowner responsible for covering the gap.

Replacement Cost vs. Market Value

The replacement cost of a home is the amount it would take to rebuild it using similar materials and quality, regardless of the home's market value. Market value includes land, location, and real estate demand, but those factors aren’t relevant when repairing or rebuilding after a loss.

How It Works

To avoid being underinsured, the coverage amount should be at least 80% of the home’s estimated replacement cost.

For example, if the replacement cost of a home is $500,000, insurance coverage should be at least $400,000.
If it's insured for less, the insurance company may only pay a portion of a claim, not the full repair cost.

Here’s a simple illustration:

• Replacement Cost: $500,000

• Insurance Coverage: $250,000 (50%)

• Claim Amount: $100,000

• Claim Paid: About 62.5% (based on the formula: actual coverage ÷ required coverage)

The homeowner would need to cover the rest out of pocket.

Why This Matters When You're Buying

This is especially important to consider when purchasing a home. While insurance quotes and policies are typically arranged after going under contract, being aware of the 80% rule ensures you're prepared to:

• Ask the right questions when speaking with your insurance provider

• Understand why coverage quotes might vary from what you expect

• Budget appropriately for insurance premiums that meet this requirement

We always recommend that buyers speak with a qualified insurance professional early in the purchase process to ensure the property is properly protected—and that there are no surprises at closing or after move-in.