Are You Adequately Insured? The Hidden Risks in Your Homeowner’s Policy
I’ll never forget the water-filled light bulbs. Weeks after Hurricane Floyd devastated the North Carolina towns of Princeville and Tarboro in 1999, I went there to report on how residents were coping. One man led me into his single-story home, which had been submerged for days under water that reached the height of a basketball hoop. As we stood under the kitchen chandelier – his table had floated into the living room – he tapped the flame-shaped bulbs. Water had displaced the gas inside.
The man was happy to have salvaged his water-stained army discharge certificate. But rebuilding his ruined house was another matter, and he doubted his insurance would cover the full cost. Unfortunately, underinsurance is still a significant problem.
You might be underinsured right now, and it could leave you and your finances vulnerable. Here’s how to ensure your policy covers you in a disaster.
Undercoverage: A Widespread Problem
The core of your home insurance is dwelling coverage: the part that pays to repair or rebuild your home. This coverage has a maximum payout. If that maximum is too low, you could struggle to rebuild after a disaster.
“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 is widespread. A research paper, “Coverage Neglect in Homeowners Insurance,” published in December 2024 by scholars from the University of Colorado and the University of Wisconsin, studied the Marshall Fire, a 2021 wildfire that destroyed almost 1,000 buildings in Boulder County, Colorado. The researchers found that almost three-quarters of the homeowners were underinsured.
“We find that underinsurance significantly delays rebuilding and makes fire survivors more likely to sell their homes,” the paper concludes, highlighting the significance of adequate coverage.
What could that look like in your life? Imagine this: Your house burns down. You have $300,000 in dwelling coverage, but it will cost $400,000 to rebuild. Your mortgage lender requires a home of similar value. You could be left scrambling to find $100,000 before you can rebuild. Or, if you can pay off the mortgage, you sell the property and move away.
In addition to having a dwelling coverage limit that’s too low, there’s also the risk of not having all the necessary policy types, such as separate insurance policies for earthquakes or floods. Standard home insurance rarely pays to fix damage from those disasters, so separate policies are often required.
Getting the Coverage You Need
Whether you’re buying a home or renewing your policy, the best approach is to ask detailed questions and determine the rebuild cost. Here are some questions to ask an insurance agent:
- Should I buy earthquake or flood insurance? You might think you know the answer, but it is essential to ask.
- Do I have enough dwelling coverage to replace the home if it’s destroyed?
Keep in mind that dwelling coverage is not the same as the market value of your house.
“Do not confuse market value with replacement value,” Santana said. An insurance agent will likely use the home’s square footage and other details in a calculator to determine the cost to rebuild. However, don’t take that calculation as the final word.
Call contractors to determine if the insurer’s recommended coverage limit is adequate, advises Kevin Daley, president of the private client group for EPIC Insurance Brokers & Consultants. Ask the contractor: “Could you rebuild my house within this coverage limit?”
Daley says contractors will often respond with something like: “Your insurance company thinks this house can be built for 400 grand. I’m telling you right now it’s 455 minimum.”
If you have a contractor visit your house, expect to pay a consultation fee.
Consider Extended Replacement Cost Coverage
Even after you find out the true cost of rebuilding, that figure might be insufficient after a major disaster. The issue is that prices for materials and labor often increase dramatically after a widespread event.
If your house burns but neighboring houses are untouched, there’s a normal market for building materials and labor. If a disaster damages an entire neighborhood, demand exceeds supply, and prices and wages go up.
That’s where extended replacement cost coverage becomes valuable. It pays up to a specific percentage above your dwelling coverage limit if costs are higher than expected. For instance, if your dwelling coverage is $400,000, and you have an endorsement adding 25% in extended replacement cost coverage, the insurer will add 25% (or $100,000) to your coverage, bringing your total coverage amount 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, says Emily Rogan, senior program officer for United Policyholders, a nonprofit information resource for policyholders. Extended replacement cost coverage is essential for community-level disasters.
Shopping for Insurance
Ideally, you get full coverage the day you buy a home. If you don’t have full coverage, you can increase your coverage when you’re better informed and have the funds available. Because you cannot know when a disaster will strike, it is best to do these things as soon as possible.
When you talk to agents, ask what is covered in different scenarios. For example, if a tree crashes through your roof, will insurance pay for a new roof, or just the damaged section? A homeowner can often add endorsements – for additional charges – that add to the coverage.
Buying adequate homeowner’s insurance might cost a little more. But it’s worth it for peace of mind. With solid coverage, you’ll sleep better knowing you are protected.
