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Are you Under Insured?

Updated: Mar 23, 2023

We are watching the horror stories continue to unleash across the new stations regarding homeowners facing serious issues of under insurance when attempting to rebuild their home. One couple assumed their insurance policy covered the full cost of a rebuild but found out they were $600,000 under insured according to 9news.


So, how do we make sure our insurance policy will fully insure our homes when natural disasters occur? How Does the 80% Rule for Home Insurance Work?


The 80% rule is adhered to by most insurance companies. According to the standard, an insurer will only cover the cost of damage to a house or property if the homeowner has purchased insurance coverage equal to at least 80% of the house's total replacement value. If the amount of coverage purchased is less than the minimum 80%, the insurance company will only reimburse the homeowner a proportionate amount of the required minimum coverage that should have been purchased.


Key Takeaways:

  • The 80% rule means that an insurer will only fully cover the cost of damage to a house if the owner has purchased insurance coverage equal to at least 80% of the house's total replacement value.

  • If the coverage is purchased covers less than 80% of the replacement value, the amount paid by the insurance company will be proportionate to the amount of coverage originally purchased.

  • Capital improvements and inflation affect the value of a property and the 80% rule.

  • Homeowners insurance policies generally cover destruction and damage to a residence's interior and exterior, the loss or theft of possessions, and personal liability for harm to others.

  • Three basic levels of coverage exist: actual cash value, replacement cost, and extended replacement cost/value.

  • Policy rates are largely determined by the insurer's risk that you'll file a claim; they assess this risk based on past claim history associated with the home, the neighborhood, and the home's condition.

  • In shopping for a policy, get quotes from at least five companies, and definitely check with any insurer you already work with—current clients often get better deals.


What is the difference between the 3 basic levels of coverage:

  1. Actual cash value: Actual cash value covers the cost of the house plus the value of your belongings after deducting depreciation (i.e., how much the items are currently worth, not how much you paid for them).

  2. Replacement cost: Replacement value policies cover the actual cash value of your home and possessions without the deduction for depreciation, so you would be able to repair or rebuild your home up to the original value.

  3. Guaranteed (or extended) replacement cost/value: The most comprehensive, this inflation-buffer policy pays for whatever it costs to repair or rebuild your home—even if it's more than your policy limit. Certain insurers offer an extended replacement, meaning it offers more coverage than you purchased, but there is a ceiling; typically, it is 20% to 25% higher than the limit.

Tips:

  • Contact your homeowner insurance company

  • Because improvements to a home and inflation affect home values, homeowners should review their insurance policies periodically to ensure their coverage meets the 80% rule.

  • Establish which of the three basic levels of coverage you want for your home: actual cash value, replacement cost, and extended replacement cost/value.

  • Some advisors feel all homeowners should buy guaranteed replacement value policies because you don't need just enough insurance to cover the value of your home, you need enough insurance to rebuild your home, preferably at current prices (which probably will have risen since you purchased or built). This is beneficial for those who are upgrading the home for refinancing purposes.

  • When it comes to insurance, you want to make sure you are going with a provider that is legitimate and creditworthy. Your first step should be to visit your state’s Department of Insurance website to learn the rating for each home insurance company licensed to conduct business in your state, as well as any consumer complaints lodged against the insurance company. The site should also provide a typical average cost of home insurance in different counties and cities.


Does Homeowners Insurance Cover Fires?

All standard homeowners insurance policies include coverage for damage from fire and smoke. Such coverage generally includes tear down, cleanup, and rebuilding costs for the main structure and outbuildings, along with replacing furniture and possessions in the home. Most policies also include loss of use coverage to pay for alternate lodging while your home is rebuilt. You need to review your insurance policy periodically to ensure your coverage meets the 80% rule.



NAIC- The National Association of Insurance Commissioners


The National Association of Insurance Commissioners (NAIC) provides expertise, data, and analysis for insurance commissioners to effectively regulate the industry and protect consumers. Founded in 1871, the U.S. standard-setting organization is governed by the chief insurance regulators from the 50 states, the District of Columbia, and five U.S. territories to coordinate regulation of multistate insurers.


 

LINDSEY STAPAY

Lindsey@westwardbroker.com

970-453-5700



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