The 80% rule means that most insurance companies will not fully cover the cost of home damage due to the occurrence of the insured event (for example, fire or flood) unless the owner purchases insurance equal to at least to 80% of the total value of the house. In the event that the owner sells a specific mortgage for less than 80%, the insurance company will reimburse the lessor only for the fair amount of the small loan that should have been purchased.
For example
Let's say James owns a house with a replacement cost of $ 500,000 and his insurance costs $ 395,000, but an unexpected flood caused damage to his house of $ 250,000. At first glance, you can swear that the cost of coverage is greater than the cost of damages ($ 395,000 versus $ 250,000), the insurance company must return the total amount to James. However, due to the 80% rule, this is not true.
Under the 80% rule, the minimum amount James would have to buy for his home is $ 400,000 ($ 500,000 x 80%). If that path was fulfilled, the insurance company would pay the damages caused to James's house. But since James did not buy the minimum loan amount, the insurance company will only pay the minimum rejection rate covered by the actual amount of insurance purchased ($ 395,000 / $ 400,000), which amounts to 98.75% of the damage. Then, the insurance company would pay $ 246,875 and, unfortunately, James would have to pay the remaining $ 3,125 for himself.
How the higher price improvement affects the 80% rule
As capital improvements increase the number of home replacements, it is likely that coverage that would have been sufficient to comply with the 80% rule before development was no longer adequate.
To illustrate, suppose James realizes that he has not bought enough insurance to cover the 80% rule, so he is going to buy coverage that covers $ 400,000. A year goes by and James decides to build an addition to his home, which increases the replacement value to $ 510,000. While $ 400,000 would have been enough to cover a $ 500,000 house ($ 400,000 / $ 500,000 = 80%), capital improvements have increased the value of the house, and this addition is no longer enough ($ 400,000 / $ 510,000 = 78.43%). In this case, the insurance company will not be fully responsible for any other damage.
Inflation can also increase the price of home replacements, so it would be wise for homeowners to periodically review their insurance policies and replacement rates to see if they have enough information to recover partial damages.
For example
Let's say James owns a house with a replacement cost of $ 500,000 and his insurance costs $ 395,000, but an unexpected flood caused damage to his house of $ 250,000. At first glance, you can swear that the cost of coverage is greater than the cost of damages ($ 395,000 versus $ 250,000), the insurance company must return the total amount to James. However, due to the 80% rule, this is not true.
Under the 80% rule, the minimum amount James would have to buy for his home is $ 400,000 ($ 500,000 x 80%). If that path was fulfilled, the insurance company would pay the damages caused to James's house. But since James did not buy the minimum loan amount, the insurance company will only pay the minimum rejection rate covered by the actual amount of insurance purchased ($ 395,000 / $ 400,000), which amounts to 98.75% of the damage. Then, the insurance company would pay $ 246,875 and, unfortunately, James would have to pay the remaining $ 3,125 for himself.
How the higher price improvement affects the 80% rule
As capital improvements increase the number of home replacements, it is likely that coverage that would have been sufficient to comply with the 80% rule before development was no longer adequate.
To illustrate, suppose James realizes that he has not bought enough insurance to cover the 80% rule, so he is going to buy coverage that covers $ 400,000. A year goes by and James decides to build an addition to his home, which increases the replacement value to $ 510,000. While $ 400,000 would have been enough to cover a $ 500,000 house ($ 400,000 / $ 500,000 = 80%), capital improvements have increased the value of the house, and this addition is no longer enough ($ 400,000 / $ 510,000 = 78.43%). In this case, the insurance company will not be fully responsible for any other damage.
Inflation can also increase the price of home replacements, so it would be wise for homeowners to periodically review their insurance policies and replacement rates to see if they have enough information to recover partial damages.
0 Comments