Paul Petersen 
The year started strong as the Massachusetts real estate was still riding high on the market in 2019. However, the coronavirus flattened the sales curve. But it is not a reason for concern, particularly in the residential sector, as the demand for houses remains strong. According to forecasts, the market will start to correct itself, starting in August when people would have a clearer future regarding their job security and long-term finances.
However, if you are thinking about buying a home, you also have to consider the other associated costs of the investment. One of the crucial expenses would be the Massachusetts homeowner insurance, which helps protect you in case of natural or human-made calamities and personal liability in case someone is injured in your property.
When you are in the market for homeowner’s insurance, you will surely hear from customer representatives and agents about the “80% rule.”
What is the 80% Rule?
Nearly all insurance companies in Massachusetts and elsewhere in the country adhere to the 80% rule. It merely means that the insurer will cover the cost of the damage to your house or property if it is equivalent to 80% of the total replacement value of the home.
But what happens if your house sustained damage from a fire, but you only just paid your insurance? If your case does not fall under the 80% rule, the insurer will only reimburse you of the adequate amount in relation to the required minimum coverage.
Here is a clearer explanation of the 80% rule for Massachusetts homeowner insurance:
For instance, you own a house with a total replacement cost of $600,000. If you go by the 80% rule, the minimum coverage you should have for your home would be $480,000. So if your total payment premiums have not breached the threshold, the insurance company will not pay complete coverage post-disaster.
However, you only managed to pay about $400,000 before a fire caused $380,000 in damage to your home. Since you did not reach the threshold because $400,000 is only 83% of the minimum 80% cover, the insurer may not cover the total damage. It means that the insurance company will reimburse you for $315,000. Unfortunately, you will have to shoulder the remaining $65,000 balance.
Total Value of Replacement
According to the Insurance Formation Institute, fire and lightning topped the list of insurance claims in terms of average cost by a large margin, between 2014 and 2018. For example, insurers pay an average of $79,785 to cover fire and lightning damage. Meanwhile, property damage and personal injury were at far second with a mean weighted cost of $26,872. Rounding up the list are wind and hail ($11,200), water damage ($10,849), theft, and medical payments, among others.
Note that the replacement cost under the 80% rule is defined as the estimated expenses of rebuilding your house using similar materials that have been destroyed. The amount does not factor in the current market value of your home, the value of the land, and your mortgage. It is where the confusion comes from, and homeowners naturally protest that the insurance coverage is not up to par with their property’s market value. If you bought the house for $400,000, it does not matter if the current market value already shot up to over a million dollars, the base coverage would still be the original purchase cost.
While most insurers practice the 80% rule, it is recommended that you take out the full replacement value of your home for total peace of mind.
