The 80% rule in homeowners insurance means you need to have coverage for at least 80% of what your home costs to rebuild. If you don’t have enough coverage, your insurance company will not pay you the full amount when something bad happens.
This rule is called “coinsurance.” It protects insurance companies from people who under-insure their homes. Under-insuring means buying less coverage than your home actually needs.
If your home needs $500,000 to rebuild and you only buy $300,000 in coverage, you are breaking the 80% rule. Your insurance might not cover all your losses.
How the 80% Rule Works
The coinsurance rule has a simple math formula. Your insurance company divides what you actually got paid by what you should have had in coverage.
Let’s say your home costs $400,000 to rebuild. The 80% rule means you need at least $320,000 in coverage. That’s 80% of $400,000.
If a fire causes $80,000 in damage and you have $320,000 in coverage, you get paid the full $80,000. You hit the 80% mark, so coinsurance does not kick in.
Related articles:
- Will a New Roof Decrease Homeowners Insurance
- Does Homeowners Insurance Cover Roof Replacement
- Can I Get My Homeowners Insurance to Pay for a New Roof
- Will Roofing Prices Go Down in 2025
What Happens If You Don’t Have 80% Coverage
Breaking the 80% rule costs you money. Your insurance company will reduce what they pay you.
Here is an example. Your home needs $500,000 to rebuild. You only buy $300,000 in coverage. That is only 60%, not 80%. A storm causes $50,000 in damage.
Your insurance company calculates the payment like this. They divide $300,000 by $400,000 (which is 80% of $500,000). That equals 75%. So they only pay 75% of your $50,000 damage, which is $37,500. You lose $12,500.
Why Insurance Companies Use This Rule
The 80% rule protects the insurance industry. According to the National Roofing Contractors Association, homeowners underestimate rebuild costs by an average of 20% to 30%.
Insurance companies need customers to buy real coverage amounts. If everyone bought too little insurance, the company could not pay claims when big disasters happened.
This rule also makes rates more fair. People who buy enough coverage help pay for people who have disasters.
How to Find Your Home’s Rebuild Cost
You need to know what it costs to rebuild your home from scratch. This is not the same as what your home is worth to sell.
Rebuild costs include labor and materials only. They don’t include the land or the foundation usually. Recent studies show the average rebuild cost is between $150 and $200 per square foot in the United States.
You can get a professional assessment. Many insurance agents will help you calculate this for free.
| Home Square Feet | Cost Per Square Foot | Total Rebuild Cost | 80% Coverage Needed |
|---|---|---|---|
| 2,000 | $175 | $350,000 | $280,000 |
| 3,000 | $175 | $525,000 | $420,000 |
| 4,000 | $175 | $700,000 | $560,000 |
Related articles:
- How Old May a Roof Be Before Insurance Claims It’s Too Old
- Can You Claim for a New Roof on Your House Insurance
- What Is the 2 2 2 Credit Rule
- Should You Pay a Roofer in Cash
Common Mistakes People Make
Many homeowners buy insurance based on their home’s market value. That is wrong. A home might sell for $400,000 but cost $500,000 to rebuild.
According to HomeAdvisor, about 40% of homeowners do not have enough coverage. They think their home’s sale price equals rebuild cost. It usually doesn’t.
Another mistake is not updating your coverage. Rebuild costs go up over time. Insurance industry data indicates that rebuild costs increase about 3% to 5% every year.
You should review your coverage every year. Add more coverage if rebuilding costs have gone up.
Getting the Right Amount of Coverage
Start by knowing your home’s rebuild cost. Talk to your insurance agent about this number.
Here are key steps to follow:
- Get a professional home assessment or reconstruction cost estimate
- Calculate 80% of that total cost
- Buy at least that much coverage
- Check your coverage every year
- Increase coverage when costs rise
Your agent can tell you if you meet the 80% rule. They will show you exactly what your current coverage equals as a percentage.
When the 80% Rule Does Not Apply
Some insurance policies don’t use the coinsurance penalty. These are called “agreed value” policies.
With agreed value coverage, you and your insurance company agree on what your home is worth. If a disaster happens, they pay up to that agreed amount without using the 80% math penalty.
These policies cost more money. But they give you better protection if you have doubt about your home’s true rebuild cost. According to insurance data, about 15% of homeowners choose agreed value policies for this reason.