Underinsured Rental? How the 80% Rule and Roof Age Can Shrink Your Claim

Most landlords pick their dwelling limit once, usually the purchase price or the loan amount, and never look at it again. That number decides more than the most you'd get after a total loss. On many policies it also decides how much of a small claim gets paid.

Three numbers that aren't the same

• Market value: what the property would sell for. Includes the land. Irrelevant to rebuilding.
• Replacement cost: what it would cost today to rebuild or repair with like kind and quality, at today's prices.
• Actual cash value (ACV): replacement cost minus wear and age (depreciation).

Your dwelling limit should track replacement cost, not market value or the mortgage. In some neighbourhoods rebuilding costs more than the house would sell for. In others it costs much less.

The 80% rule (coinsurance), in plain English

Most DP-3 policies pay claims at replacement cost, but only if your dwelling limit is at least 80% of the full replacement cost at the time of the loss. Some insurers require 100%.

Fall below that and the claim is cut. The usual formula:

repair cost × (your limit ÷ the limit you should have had)
…or the actual cash value of the damage, if that's higher.

Worked example

• The house would cost $300,000 to rebuild. 80% of that is $240,000.
• Your limit is $180,000 (it was the purchase price years ago).
• A kitchen fire does $40,000 of damage.

Payment: $40,000 × (180,000 ÷ 240,000) = $30,000, less your deductible. You're $10,000 short on a $40,000 claim, and the house wasn't anywhere near a total loss.

At $240,000 or more, you'd have received the full $40,000 (less the deductible).

Try it with your own numbers: coinsurance calculator.

Replacement cost has fine print too

Even when you're properly insured:

• You may get ACV first. On many policies, once a repair costs more than a set amount (for example, the lesser of $2,500 or 5% of your limit), the insurer pays ACV first and the rest after the work is done.
• Tell them you plan to repair. Some policies let you take ACV now and claim the difference later, but only if you notify the insurer within 180 days.
• Some items are always ACV, even on a DP-3: appliances, carpets, awnings, window air conditioners and tenant improvements.
• Code upgrades aren't included. If the city makes you bring wiring or plumbing up to current code during the repair, that extra cost needs Ordinance or Law cover, a separate add-on.
• Older homes may get "functional" replacement. One insurer settles homes built before 1940 with modern equivalents (drywall instead of plaster, for example), not exact replicas.

Roofs: when replacement cost turns into ACV

Roofs are where many landlords lose money without knowing it. A growing number of policies switch the roof from replacement cost to ACV once it reaches a certain age, so a hail claim on an older roof pays only its depreciated value.

One insurer's rule: once more than half the roof surface is older than the age set for that state, roof claims are paid at ACV. Here's what that program uses in the states we serve:

This is one insurer's program, not a state law. Other insurers use different ages or schedules, and the rules change. Always check the roof wording in your own policy.

Two more roof traps:

• Multiple layers: some policies cover only the top layer, and won't pay to tear off the old layers underneath, even when code requires it.
• Cosmetic hail damage: dents in a metal roof that still keeps the weather out may be excluded as "cosmetic".

And the upside: an impact-resistant roof or a recent full replacement can improve both your price and how a roof claim is paid. Keep the invoice.

How to set the right dwelling limit

1. Ask your agent for a replacement-cost estimate based on square footage, construction, age and quality, not the price you paid.
2. Update it when building costs rise. An automatic increase add-on raises the limit by a set percentage each year.
3. Update it after improvements: a new kitchen, a finished basement or a new roof all raise the rebuild cost.
4. Don't over-insure either. Insurers won't pay more than the real rebuild cost, and some won't insure above your actual interest in the property.
5. Read your roof wording and write down the roof's install year.

The bottom line

An outdated limit doesn't just hurt after a total loss. It can cut every claim. Keep your dwelling limit at or above the policy's requirement (often 80% of replacement cost), know when your roof switches to ACV, and keep proof of your roof's age and upgrades.

Want a second look at your limit? Ask in the LandlordSpeak Facebook group, or get a quote and we'll run a replacement-cost estimate.

Common questions

What is the 80% coinsurance rule on a rental policy?

To get full replacement cost on a claim, many policies require your dwelling limit to be at least 80% of the cost to rebuild. Below that, claims are cut in proportion.

Should I insure my rental for its market value?

No. Insure it for what it would cost to rebuild. Market value includes land and can be higher or lower than rebuild cost.

Why was my roof claim paid at actual cash value?

Many policies pay roofs at actual cash value once the roof passes a certain age. The age varies by insurer and by state, so check your policy.

Does replacement cost cover code upgrades?

Usually not. Bringing a damaged building up to current code needs Ordinance or Law coverage, which is a separate add-on.