Home Insurance Articles

The Eighty Percent Rule And What It Means When Collecting From The Insurance Company

2010-05-05

Home insurance, at its best, not only gives a home a blanket of protection in the event of damage or theft, but gives the homeowner piece of mind. The knowledge that a home is well-protected in almost any situation can do a great deal to help a new owner feel that their house is safe and secure, and can make the monthly premiums paid feel like money well spent on a necessary service. Sadly, for many homeowners, a catastrophic event which results in a loss of the home can mean a far smaller payout than they are anticipating. This is often because of what is known as the eighty percent rule.

The eighty percent rule is not always mentioned during the purchase phase of a home insurance policy, but it can have a significant impact on how much is paid out to a client in the event of a total home replacement. Many homeowners take the common-sense approach that if their home is insured they will be paid out the entire replacement cost of their home by the insurance company. However, many companies offer policies which state that if a home is not insured up to or over 80% of its market value, they will only pay out the proportion of the damages that are covered by the policy. Take a home worth $500,000. If the home insurance coverage is a combined total of $300,000, or 60% of the home's value, the insurance companies will only payout 60% of the market price in the event of a total loss. This can come as a rude surprise to homeowners who are not aware of this policy, or who have less coverage than needed on their home.

Not every insurance company uses the eighty percent rule, but it is always a good idea to check with an insurance provider before a home insurance claim becomes necessary. Purchasing extra coverage after the fact will do nothing to offset the costs of a home insurance claim made under the eight percent rule if the coverage did not total the 80% value. It is also important to remember that a home does not need to be 100% insured, even under this rule. Once a home's coverage exceeds 80% of its value, it will be 100% covered by the company should a loss occur. Although this is a common home insurance practice, not every company uses this rule, and some require even higher limits in order to fully cover a home which has been destroyed. Be sure to read over any home insurance policy carefully and contact an agent if any questions arise. It is better to be 100% sure than take a any large loss.