What Is the 80% Rule in Homeowners Insurance—and Why It Could Cost You Thousands

When it comes to protecting your home, having insurance isn’t enough—you also need the right amount of coverage. One often-overlooked but critical guideline is the 80% rule, a provision in most homeowners insurance policies that can significantly affect how much you receive after filing a claim.

Understanding the 80% Rule

The 80% rule requires that you insure your home for at least 80% of its total replacement cost—not its market value—to qualify for full reimbursement on partial losses. Fall below that threshold, and you could face a substantial shortfall in your payout.

This isn’t just a theoretical risk. In an environment of rising construction costs, many homeowners are unknowingly underinsured—and learning the hard way that they’re responsible for the difference.

How It Works

Let’s say your home would cost $500,000 to rebuild from the ground up. According to the 80% rule, you should carry at least $400,000 in dwelling coverage.

Now, imagine you only insured the property for $350,000 and suffered $100,000 in damage. Because you didn’t meet the 80% threshold, your insurer will apply a formula to determine your payout:

In this case:

You’d receive $87,500, leaving you to cover the rest—out-of-pocket.

Why It Matters More Than Ever

• Construction inflation has pushed up rebuild costs nationwide, making older coverage limits increasingly obsolete.

• Many homeowners mistakenly base their coverage on market value, which includes land, rather than the cost to physically rebuild.

• Renovations and additions can raise your replacement cost—but unless you inform your insurer, your policy won’t reflect those changes.

What You Can Do

1. Get an accurate replacement cost estimate. Many insurers offer cost calculators, but a professional appraisal provides the most precise number.

2. Review your policy annually. Adjust coverage levels to reflect changing construction costs or property upgrades.

3. Ask about inflation guard coverage. Some policies automatically increase your coverage limits over time to keep pace with rising costs.

Bottom Line

The 80% rule is one of the most important—yet least understood—aspects of homeowners insurance. Ignoring it can result in thousands of dollars in uncovered losses at the worst possible time. As building costs rise, ensuring your coverage meets or exceeds 80% of your home’s replacement cost is not just smart—it’s essential.