What is the name given to the coinsurance requirement in the homeowners policy?

What is the name given to the coinsurance requirement in the homeowners policy?

• A. Seventy Percent Rule
• B. Eighty Percent Rule
• C. Ninety Percent Rule
• D. One Hundred Percent Rule

Answer: (B)

That requirement is called the Eighty Percent Rule. In a homeowners policy, you’re expected to carry insurance that covers at least 80% of the dwelling’s replacement cost. If you meet or exceed that 80%, you can recover the full eligible amount for a covered loss, up to your policy limit, based on replacement cost value. If you fall short, the payout for a loss is reduced proportionally to the ratio of insurance carried to 80% of the replacement cost, which means you bear more of the loss yourself. For example, if the replacement cost is 200,000, 80% of that is 160,000. If you insure for 120,000 (60% of replacement cost), and you have a 20,000 loss, the insurer would pay 20,000 × (120,000 / 160,000) = 15,000. You’d cover the remaining 5,000. This rule encourages insureds to maintain adequate coverage to reflect replacement cost and avoids underinsurance.

That requirement is called the Eighty Percent Rule. In a homeowners policy, you’re expected to carry insurance that covers at least 80% of the dwelling’s replacement cost. If you meet or exceed that 80%, you can recover the full eligible amount for a covered loss, up to your policy limit, based on replacement cost value. If you fall short, the payout for a loss is reduced proportionally to the ratio of insurance carried to 80% of the replacement cost, which means you bear more of the loss yourself.

For example, if the replacement cost is 200,000, 80% of that is 160,000. If you insure for 120,000 (60% of replacement cost), and you have a 20,000 loss, the insurer would pay 20,000 × (120,000 / 160,000) = 15,000. You’d cover the remaining 5,000. This rule encourages insureds to maintain adequate coverage to reflect replacement cost and avoids underinsurance.