Understanding The 80% Rule In Insurance

  • John A. Osborne
  • Jan 08, 2023
Small Business Insurance Oklahoma

Insurance policies can be complex and confusing, especially when it comes to understanding the coverage limits and deductibles. One of the most important concepts to understand is the 80% rule in insurance. This rule can have a significant impact on how much you pay for insurance and how much coverage you receive in the event of a claim.

Essentially, the 80% rule in insurance means that your insurance policy will only cover up to 80% of the cost of a covered loss. This means that you will be responsible for paying the remaining 20% out of pocket. While this may seem straightforward, there are several nuances to the 80% rule that are important to understand.

How the 80% Rule Works

The 80% rule is most commonly applied to property insurance, such as homeowners or commercial property insurance. Let’s say you have a commercial property that is insured for $1 million. According to the 80% rule, you would need to insure the property for at least $800,000 in order to receive full coverage in the event of a claim. If you only insured the property for $600,000, you would only be eligible for 75% of the claim amount, minus any applicable deductibles.

It’s also important to note that the 80% rule applies to the entire policy, not just individual items or sections. This means that if your policy includes multiple types of coverage, such as liability and property coverage, you must insure each section for at least 80% of its value.

Exceptions to the 80% Rule

While the 80% rule is a general guideline for insurance coverage, there are some exceptions to the rule. For example, some insurance policies may have specific limits or exclusions that override the 80% requirement. Additionally, certain types of property may be exempt from the 80% rule, such as antiques or artwork. It’s important to carefully review your insurance policy to understand any exceptions or limitations that may apply.

How to Calculate the 80% Requirement

Calculating the 80% requirement for your insurance policy can be a bit tricky, but there are some general guidelines you can follow. First, determine the total value of your property, including any buildings, equipment, and inventory. Then, multiply that value by 80% to get the minimum coverage amount required by the 80% rule.

For example, if your property is valued at $1.5 million, you would need to insure it for at least $1.2 million to meet the 80% requirement. Keep in mind that this is just a minimum requirement, and you may want to consider additional coverage depending on your specific needs and risks.

Why the 80% Rule Matters

Understanding the 80% rule is important because it can have a significant impact on your insurance coverage and premiums. If you don’t insure your property for at least 80% of its value, you may not receive full coverage in the event of a claim. This means that you could end up paying a significant amount out of pocket for repairs or replacements. Additionally, failing to meet the 80% requirement could result in higher insurance premiums, as insurers view underinsured properties as a higher risk.

Final Thoughts

The 80% rule is an important concept to understand when it comes to insurance coverage. By ensuring that you meet the minimum coverage requirements, you can protect yourself from financial losses in the event of a claim. If you have any questions or concerns about the 80% rule, be sure to speak with your insurance provider to get a better understanding of how it applies to your policy.

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