In order for HO-2, HO-3, and HO-5 to provide coverage, a dwelling must be insured for at least what percentage of replacement cost?

• A. 60%
• B. 70%
• C. 80%
• D. 90%

Answer: (C)

This question hinges on the coinsurance requirement in homeowners policies. For HO-2, HO-3, and HO-5 to provide full replacement cost coverage on a covered loss, the dwelling must be insured for at least 80% of its replacement cost.

If you meet or exceed that 80% threshold, losses are paid up to the policy limit without a coinsurance penalty (aside from deductibles). If you fall short of 80%, a coinsurance penalty applies and the payout is reduced proportionally to the ratio of insurance carried to 80% of replacement cost. For example, if the replacement cost is 300,000, you’d need at least 240,000 to meet 80%. Insuring 240,000 or more means full payout up to the limit; insuring 180,000 would yield a payout of losses multiplied by 180,000/240,000 (0.75), illustrating how underinsuring reduces the amount paid.