What is Co-insurance for Texas Homeowner’s Insurance?

It is not the same as the 80/20 split you see for co-insurance in  health insurance. For homeowner’s insurance, it is often called the 80% rule. This rule requires you to insure your home for at least a certain percentage of its total replacement value. If you fail to meet this requirement, the insurance company will apply a co-insurance penalty. This means that they will only pay a fraction of your claim for big or small losses.

The Half-Built Dream in Hurst

Ben is a homeowner in Hurst who bought his house ten years ago for $250,000. He kept the same insurance limit ever since, thinking he was being smart by saving on premiums. Over that decade, inflation and the Texas housing boom pushed the cost to rebuild his home to $500,000.

Last spring, a kitchen fire caused $50,000 in damage. Ben assumed his $250,000 policy would easily cover a $50,000 repair. But because Ben hadn't kept his coverage at 80% of the home's value (he only had 50%), the insurance company applied a penalty. They only paid him $25,000 for the $50,000 loss. Ben had to come up with the other $25,000 out of his own pocket just to make his kitchen functional again.

The Math of Co-Insurance

Insurance companies use a specific formula to calculate the co-insurance requirements and penalties.

• Did: The amount of insurance you actually carried ($250,000).
• Should: The amount you should have carried to meet the 80% requirement ($500,000 x 80% = $400,000).
• The Penalty: You divide what you did carry by what you should have carried ($250,000 / $400,000 = 62.5%).

In Ben's case, the insurance company was only responsible for 62.5% of any claim he filed, minus his deductible.

Why Co-insurance Exists

It might feel like a gotcha, but the co-insurance clause is designed to keep premiums fair. If everyone only insured their homes for half their value, the insurance company wouldn't have enough money in the pot to pay for the massive losses that hit Texas every year. It encourages homeowners to keep their coverage limits in line with the replacement cost value (RCV). This is the amount of money it costs to build the house from the ground up today, not what you paid for it in 1998.

The Hidden Danger: Inflation and Renovations

In Texas, your co-insurance amount changes every year for two specific reasons.

• Inflation: The price of lumber, labor, and concrete in Texas has skyrocketed. If your policy hasn't increased, your co-insurance percentage is dropping.
• Renovations: If you remodel your kitchen or add a sunroom, you’ve increased the replacement value of your home. If you don't tell your agent, you could accidentally trigger a co-insurance penalty.

Are You Accidentally Self-Insuring?

Most Texans are underinsured and don't even know it. They are co-insurers on their own homes, meaning they are on the hook for a percentage of every fire, hail, or wind claim.

Don't wait for a claim to find out you're short. A cheap policy with low limits is the most expensive mistake you can make. Our personalized risk assessment looks at the current local rebuilding costs in your specific Texas neighborhood to ensure you hit that 80% mark and keep your full protection intact.