Your homeowners' insurance policy is a shield that financially protects you from paying for all repairs and replacement from your purse if your insured home and property get destroyed in the sudden event that causes significant collateral damage such a fire outbreak or windstorm. But the unanswered question remains — how much precisely will your policy pay? This is where the 80 percent rule in homeowner insurance sets in. Let's take an in-depth look at what this rule is all about.
How Does the 80 Percent Rule Work in Homeowners Insurance?
A series of benefits comes along when insuring your home for replacement cost (RC) over the actual cash value (ACV). Insurance companies lower the cost of your insurance premium by offering you the option to insure your home for a percentage of its actual value. If not careful, you might be left underinsuring your home, which might leave you paying hugely.
If your house is burnt down and your homeowner's dwelling coverage covers more than 80% of the house replacement value, then your homeowner's insurance typically covers the entire claim. Your provider would determine the amount to be paid out based on your claim by confirming first whether or not your premium covers that minimum. Anything different from this leaves you at risk.
Here's an example
For instance, if the replacement cost of your home is $100,000, it's required of you to have at least 80% of this sum to ensure your policy is a replacement cost policy that matches up the policy limits. It means you need to have a minimum of $80,000 to have a concrete replacement cost policy.
NOTE: Although, in this situation, you're still underinsured by $20,000. So if your house is burnt down, the insurance company won't provide you enough money to rebuild your home. But then, your losses would be extremely covered up to policy limit.
But what if you had $75,000 in coverage on your insurance policy?
The coinsurance clause kicks in here! Since you've opted to insure just 75% of the required amount of coverage, your insurance will only cover 75% of your claim. So, if you have a $10,000 claim due to a kitchen fire, you're likely to receive just $7500 less your deductible.
How to Avoid Being Negatively Affected by the 80 Percent Rule?
Regular contact with your insurance agent and keeping them updated on your home is a brilliant way to stay fully protected. Keep them informed on any additions or renovations made to your home. It will increase your premium, but so will your coverage.
More so, you can request for the inclusion of an inflation guard coverage endorsement to your homeowner insurance policy. The inflation coverage automatically adjusts your policy with inflation, leaving you covered without having to update your dwelling coverage yearly.
You now know how to maneuver the coinsurance penalty!
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