How-to · Updated October 2, 2026
What is the 80% rule in homeowners insurance?
Direct answer
If your dwelling limit is at least 80% of the full replacement cost, a partial loss is paid at replacement cost minus the deductible. Below 80%, the payment is the larger of actual cash value or (limit ÷ 80% of replacement cost) × (loss − deductible). A $400,000 home insured for $280,000 (70%) pays $42,875 on a $50,000 loss with a $1,000 deductible, not $49,000.
The same loss at two limits
| Under 80% | At or above 80% | |
|---|---|---|
| Replacement cost | $400,000 | $400,000 |
| Dwelling limit | $280,000 (70%) | $340,000 (85%) |
| 80% threshold | $320,000 | $320,000 |
| Loss / deductible | $50,000 / $1,000 | $50,000 / $1,000 |
| Payment | $42,875 | $49,000 |
The actual-cash-value option on the 70% example is $34,000. The proportional amount is larger, so that is what the form pays.
How the $42,875 is built
- Insurance-to-value: $280,000 ÷ $400,000 = 70.0%
- 80% of replacement cost = $320,000
- Below 80%: proportional payout = ($50,000 − $1,000) × ($280,000 ÷ $320,000) = $49,000 × 0.8750 = $42,875
- Actual cash value option: $35,000 − $1,000 deductible = $34,000
- Policy pays the larger of the two: $42,875
- Out of pocket: $50,000 − $42,875 = $7,125
A total loss
Destroying the same $400,000 home, still insured for $280,000, pays $280,000. The unpaid gap is $120,000. Extended replacement cost, often 10% to 50% above the limit, is what covers a rebuild that runs past Coverage A. Guaranteed replacement cost has no cap, and few insurers still sell it.
Limits
- This follows the coinsurance condition on the standard ISO HO-3 form. Your policy may waive it, use a different percentage, or pay actual cash value only. Read the form.
- 80% avoids the partial-loss penalty. It does not rebuild a destroyed house. Coverage at 100% of replacement cost is the dwelling target.
- Educational estimate, not an insurance appraisal and not a coverage opinion.
Use the calculator
To get the replacement-cost number first: how much it costs to rebuild a house per square foot. Run your own limit in the home replacement cost calculator.