The Risk of Being Underinsured
I’ll never forget the water-filled light bulbs. Weeks after Hurricane Floyd devastated North Carolina in 1999, I traveled to Princeville and Tarboro to report on the aftermath. A homeowner showed me his house, submerged for days under floodwaters. As we stood under the kitchen chandelier, with furniture floating in the living room, he tapped the flame-shaped bulbs, revealing the water that had replaced the gas inside.
The man was happy to have salvaged a water-stained military discharge certificate. But he had doubts that his insurance would cover the expense of rebuilding. Sadly, being underinsured still happens far too often.
You can protect yourself financially by shopping for home insurance carefully. Here’s how to ensure you’re adequately covered.
Beware Undercoverage
The core of your home insurance policy is dwelling coverage: the part of the policy that will pay to repair or rebuild your home after it’s been damaged. This policy specifies the maximum amount that will be paid out. A critical risk is having a dwelling coverage limit that’s too low.
“One of the biggest mistakes we see, when reviewing policies, is that the dwelling coverage is not enough to rebuild the home in the event of a disaster,” said Celia Santana, CEO of Personal Risk Management Solutions, an insurance brokerage in New York City. “We see this on 65% of the prospects we meet with.”
Undercoverage appears to be widespread. Consider the Marshall Fire, a 2021 wildfire that destroyed almost 1,000 buildings in Boulder County, Colorado. A research paper, “Coverage Neglect in Homeowners Insurance,” published in December 2024 by scholars from the University of Colorado and the University of Wisconsin, found that almost three-quarters of the homeowners were underinsured.
The paper concludes that after such disasters as the Marshall Fire, “we find that underinsurance significantly delays rebuilding and makes fire survivors more likely to sell their homes.”
Here’s how this could affect you: imagine your house burns down, and you have $300,000 in dwelling coverage, but it costs $400,000 to rebuild. Your mortgage lender will likely expect you to rebuild a house of similar value. So, you may spend months, even years, gathering the $100,000 difference before you can start rebuilding. Or, if you’re able to pay off the mortgage, you need to sell the property and relocate.
Beyond just having a low dwelling coverage limit, there’s another crucial type of undercoverage: not having all the necessary insurance policies. Standard home insurance policies don’t cover damage resulting from earthquakes or floods. Separate policies are needed to cover these potentially devastating events.
Get the Coverage You Need
Whether you’re buying or renewing your policy, the best route is to ask insurance agents probing questions and find out the cost to rebuild your home. Start by asking about the need for earthquake or flood insurance. You might think you already know the answer, believe it or not, you might be wrong.
It’s essential to make sure you have enough dwelling coverage to replace your home if it’s completely destroyed. This amount isn’t the same as the market value of the house.
“Do not confuse market value with replacement value,” Santana said.
When giving a rate quote, an insurance agent typically enters the home’s square footage and other information into a calculator that determines costs needed for rebuilding. But you should not take this calculation as the final word. Instead, call general contractors to determine if the insurer’s recommended coverage limit is adequate.
Kevin Daley, president of the private client group for EPIC Insurance Brokers & Consultants, recommends asking contractors: ‘Could you rebuild my house within this coverage limit?’
Daley said that contractors often respond with something like: “Look, your insurance company thinks this house can be built for 400 grand. I’m telling you right now it’s 455 minimum.”
If a contractor comes out to assess your house, expect to pay a fee.
Consider Extended Replacement Cost Coverage
Even after confirming the true cost of rebuilding with a contractor, that figure might not be sufficient following a natural disaster. Here is why: If your house burns down, but nearby homes are untouched, you are in a market where building supplies and construction workers are available, and prices and wages are predictable. However, if your entire neighborhood is hit by a wildfire, the markets become unpredictable.
Following a widespread disaster, hundreds of homeowners nearby will all need building materials and construction workers simultaneously. As demand exceeds supply, prices and wages go up. A house that normally costs $455,000 to rebuild could suddenly cost upwards of $500,000.
This is where extended replacement cost coverage comes in. It pays up to a specific percentage above your dwelling coverage limit if costs are higher than expected. For example, if you have $400,000 in dwelling coverage, plus an endorsement adding 25% in extended replacement cost coverage, the insurer would add 25% (or $100,000) to your limit, increasing it to $500,000.
“You want to get your dwelling coverage to an amount where you’d be able to rebuild if it’s just your house” that’s destroyed, said Emily Rogan, senior program officer for United Policyholders, a nonprofit information resource for policyholders. “Beyond that, you’d rely on extended replacement cost coverage for a worst-case scenario, community-level disaster.”
Shopping for Insurance
Ideally, you have full coverage the day you buy your home. If not, you can increase your insurance when you’re better informed and have the resources to spend. Sooner is better, because you don’t know when disaster will strike.
As you speak to agents, bring up the scenarios that you think of as you try to fall asleep. If a tree crashes through my roof, will insurance pay for a whole new roof, or just the section that’s damaged? Will insurance pay my rent if I’m displaced, and if so, how much or for how long? The insurer might add endorsements (for additional charges) that add oomph to your basic coverage.
Buying sufficient home insurance might cost more, but it will provide a sense of security.
