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Understanding the 80/20 Rule for Home Insurance

The 80/20% rule is also referred to as the replacement cost amount. It means that you need to ensure your home for at least 80% of its insured value. If you don’t, you’re responsible for any claims over your property’s actual cash value (ACV) or market value. The 80% rule protects you from major financial loss should your home be destroyed or damaged by a covered peril.

How does the 80/20 Rule for Home Insurance work?

The formula insurers use to calculate home insurance rates is a variation of compound interest. Say you have one client who files five claims that average $5,000 each in one year. Using the 80/20 rule, the insurer will divide $25,000 by five to arrive at an average claim amount of $5,000. They’ll then multiply that number by four to get an annual premium. The 20% of your clients who don’t file claims are responsible for the remaining 80% of the calculation. Using this example, the insurer will multiply $20,000 by four to get an annual premium of $80,000. The average client pays insurance premiums equivalent to 80% of their expected claim amount.

Now, say you have another client who has no claims, but their home is in an area with high theft rates. The insurer will not factor this into your premiums. This client will pay the average premium of 20% who don’t file claims or $80,000 per year. It’s also worth noting that while clients are responsible for the remaining 80% of the calculation, they’re not responsible for 80% of your claims. Familiarizing yourself with some ‘at-risk’ populations and lifestyle habits can help you reduce premiums and ensure that you don’t get stuck footing a disproportionate amount of the claim bill.

Types of at-Risk Clients

People who experience regular high volumes of traffic around their homes, such as those living close to a train line or bus route, may be charged higher premiums. Homeowners who live near high-crime areas and have valuables that thieves covet could increase their premiums. People who consistently leave their garage door open or their car running and unattended may also see premiums rise.

Home insurance rates vary by individual, so it’s important to seek an insurer that offers a premium that best reflects the level of risk you pose to your insurer. If paying higher premiums is not an option, try shopping around for other coverages, like auto insurance.

The Co-operators offer several policies that offer the same level of protection as home insurance but are based on individual lifestyles and risk factors. Look for umbrella insurance or Critical Illness / Disability Insurance to subsidize your premiums if you cannot work.

Factors that will Affect your Home Insurance premiums

Here are factors that might affect how insurers apply the 80/20 rule for home insurance to calculate your premiums.

Type of Home

Insurers use a formula to compute home insurance premiums. The 80/20% rule for home insurance determines how insurers use the type of home to calculate premiums. To apply the 80/20% rule for home insurance, an insurer will consider the type of home and its age when determining how much to insure it for. This is because different homes are more likely to incur certain damages than others. For example, single-family homes with a basement are more likely to incur water damage cleaning expenses due to pipe leak repairs, which is not the case with a house that does not have a basement. This means the insurer will charge more for home insurance to cover the increased risk of water damage.

The 80/20% rule for home insurance states that the maximum amount an insurer will charge to insure a property is usually around 80% of its replacement value. The formula for this rule does not include the property’s age because it is difficult to determine what age represents 20%. However, insurers require homeowners to replace their homes with ones that meet current building codes. When this happens, the 80/20% rule for home insurance usually kicks in and requires homeowners to replace their homes with new ones. Once this happens, insurers will calculate how much they would have to charge if the entire property was being insured by using a formula known as ‘replacement cost minus depreciation,’ which a home’s replacement value is subtracted from its actual cash value.

Special Features

How will insurers use the availability of special features in a home to determine how they apply the 80/20% for home insurance? Insurers can see the special features of your house by viewing your house plans. They will consider the things they will range from whether you have accomplished your water well drilling project to how frequently you repair a water heater. Once they have had time to review these, you will get an offer that outlines what percentage of the total value of your home insurance they’ll insure. If you accept the offer, there is no need to make changes, but if you feel that they’ve been misestimated and the percentage offered doesn’t reflect the true value of your home, call them and negotiate a different percentage.

By applying the 80/20% rule for home insurance, insurers can make more educated decisions on your home insurance quotes. However, some insurers may include special features in the 80/20% of the total value of your home, while others may take them outside this 20% percentage. Feel free to renegotiate a different percentage if you disagree with how they’ve calculated your total value or included certain features. If you’re happy with the value they’ve come up with, you can hire competent roof contractors to install additional features like; HVAC system, which might be executed by a company that offers HVAC services. By following these simple guidelines, you should be able to get the best home insurance quotes.

Square Footage

The home insurance market is changing. After the housing crash in 2008, many people retreated to their homes to save money. This trend has led to a rise in homeowner’s insurance claims, and premium rates have increased by 20%. To determine how they will apply this new pricing model, insurers note your home’s square footage. Homeowners with smaller homes will not see a big increase in premium rates if their home is around 1,500 square feet, but they may notice an increase in premiums if a home exceeds 4,000 square feet. Insurance companies are looking at the square footage of your home because they consider bigger homes to be riskier than smaller ones. The amount of property damage is mostly proportional to the size of a house. A house with more square feet means there’s more furniture, appliances, and other items for damages. Even though most home insurance policies cover flood and fire damage, they limit the total amount of money you can claim. This is why some homeowners purchase flood insurance to help cover more damages. Bigger homes are also more likely to have higher replacement costs, which would cost the insurer more if replacements were needed.


Unfortunately, there is no simple formula for an insurance company to apply when it comes to the question of how much coverage they will provide on your home. The 80/20 rule is a guideline that some companies use. This is where your home’s location comes into play. Some homes are more at risk for theft, vandalism, and problems to do with bug extermination, which would factor into a company’s decision to offer you a lower deductible or perhaps even skip the deductible entirely. Once again, it is important to shop around and get quotes from multiple companies to determine who is willing to offer you the best deal. What does this mean? It is a bit unclear. However, it’s likely that your home’s location only has a small role in determining the risk of insuring you and thus how much they’re willing to offer.

Even if your neighborhood is particularly crime-ridden, your insurance company shouldn’t be basing their decision to lower your deductible on this. What will matter most is whether you’ve chosen a place with an exceptionally high risk of damage: for example if you live near the coast and there’s a pretty decent chance that your house will flood, then yes, they’ll increase the risk associated with insuring you and correspondingly increase your deductible to take care of unforeseen events that might demand emergency plumbing service to fix.

Credit Score

Has your credit score been adversely affected by the economic downturn? If you are one of the many people whose credit score has dropped, you are not alone. It has happened to millions of people. It also happens to thousands of people every day. What does this mean for you? If you are looking to purchase home insurance, it may mean that your insurer will look at your credit score to determine if they will allow you to use the 80/20 or 70/30 provisions of your policy.

Instead of asking you how much coverage you need, home insurers are looking at your credit score to determine how much they will allow you to buy. For example, assume you have a home insured for $ 300,000, and you purchased the 80/20 policy option. Under this option, your insurer would allow you to purchase coverage of up to 80% or $ 240,000. However, if your insurer looks at your credit score and determines that you have a lower than average score, they might only allow you to buy coverage of up to 70% or $ 210,000.


Before you go to another insurance website or ask someone else for their advice, make sure that you understand the concept behind the 80/20 rule. This is an important concept in today’s litigious society, and just about every insurer has adopted it into its home insurance underwriting policies. Understand that your age affects how much you will be charged for your insurance premiums. By understanding how your age determines your insurance premiums, you can better prepare yourself for the costs.

The 80/20 rule sets out to do just that. Insurers want younger individuals who are healthy and live in safe areas to take care of their minor claims instead of passing them on to other customers via higher premiums. At the heart of the 80/20 rule is how insurance companies determine their premiums. They look at an individual’s age to determine how much they should charge that person for coverage. Statistics show that younger individuals are more concerned with their safety and might even hire a fence company to put up a fence for them. This means that they will suffer fewer claims than older people or those with health issues. The idea behind the 80/20 rule is that insurers want to have a higher percentage of their customers less likely to file claims. They accomplish this by offering lower rates to younger, healthier people who live in safe areas and charge more for those who are older or have medical conditions.

Claims History

If you own a home, you most likely have renters insurance as well. If this is the case, your insurer most likely has determined that your claim history falls within what they call an ’80/20′ rule. This means that of all the claims made on your policy over the last five years, 80% of those claims were for losses that totaled less than $2000, and only 20% of the claims made were for losses that equaled or exceeded that amount. Most insurers use these claims ratios to determine your risk level with them. The lower the number, the better your insurance rate will be. If you have one claim for over $2000 on your policy, then most likely, your insurance rate will be higher than someone who has no claims.

The 80/20 rule is certainly not the only way insurers look at your past claim history when determining rates. They also review whether or not you have any open claims, how many claims you’ve had over the years, and their total costs (if you’ve had more than one claim in a short time, that is considered to be a higher risk), the number of claims you’ve made with your current insurer vs. another insurer, whether or not you are currently under investigation by the state’s department of insurance, etc.

The 80/20 rule, commonly known as the deductible, is designed to protect you from paying more than 20 percent of a covered loss or disaster.80/20’s are more often used in homeowner’s policies than any other type of insurance. You pay your premium, and you usually get to pick your deductible amount out of a handful of possible options. The 80/20 rule for homeowners insurance is easy to understand. It’s also easy to misunderstand, which can cost you big bucks if a covered loss damages your home. This article seeks to unravel the mysteries surrounding the deductible and help you understand how it works.


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