Let’s talk about 80% coinsurance for your home and how it works…
The 80% rule means that most insurance companies won’t completely cover the cost of damages to a home caused by an insured event (like a fire or flood), unless the owner has purchased insurance coverage that is at least 80% of the home's total replacement cost. If the homeowner purchased an amount of coverage less than the minimum requirement of 80%, the insurer will only reimburse the insured a proportionate amount of the required minimum coverage that should have been purchased for the home.Let us say that Jim owns a home here in Mesa, AZ with a valued replacement cost of $500,000. His current insurance coverage for his dwelling is set at $395,000. Unfortunately, he experiences an unforeseen flood that amounts to $250,000 in damages. One might assume that since the amount of the loss is less than the amount of coverage that the insurance company will pay the full amount to Jim. Because of the 80% coinsurance rule, however, this is not really how it works. Once you do the math you realize that the minimum coverage Jim should have had for his home was $400,000 (this is the actual replacement cost of $500,000 multiplied by 80%). Since that was not met, all partial damages to Jim's home would only be paid for the proportion of the minimum coverage represented by the actual amount of insurance purchased. This means that $395,000/$400,000, which amounts to 98.75% of the damages less the deductible. Therefore, the insurance company would pay out $245,887.50 in damages and Jim would pay the rest. This is often referred to as the co-insurance penalty. Had Jim been properly covered by a realistic replacement cost, the full loss would have been paid.
Questions will always arise when you are trying to insure the things that matter to you and your family. If you have questions, give Insurance Professionals of Arizona a call today at (480)981-6338. We can help take the worry out of insurance for you!