Why Are So Many Homeowners Under-Insured??

Why Are So Many Homeowners Under-Insured??

• Most homeowners don’t realize their insurance wouldn’t cover the cost to rebuild after a natural disaster — until it’s too late. 
• Construction inflation, outdated coverage limits, and confusion over “market value” vs. “replacement cost” have left millions dangerously underinsured across California.
• If you haven’t reviewed your policy since 2022, this is your wake-up call. Here’s what you need to know — and how to protect yourself before disaster strikes. 👇

In recent years, studies have shown that the majority of homeowners are underinsured — some by as much as 40% or more. A local insurance agent we’ve known for years, Jimmi Lewis, has this to say about being under-insured, “Almost everyone’s coverage is too low! Many carriers are recommending at least $400/sq foot for average SoCal homes.” If your home is above average, or with special features, the amount per sq foot should be even higher. He goes on to say, “If you haven’t reviewed your coverage since 2022 you are probably underinsured Major inflation has been occurring leaving most policies inadequate.” After Colorado’s Marshall Fire, for example, nearly three-quarters of affected homeowners found themselves without enough coverage to rebuild. In California, similar patterns have emerged as insurance carriers rely on outdated cost models that underestimate construction expenses. Colorado Marshall Fire

The Real Cost of Rebuilding

As briefly mentioned above, in Southern California, many insurance carriers now recommend setting your replacement cost coverage at roughly $400 per square foot for an average home. That figure might sound high, but it reflects the reality of today’s building costs — from soaring labor rates and materials to stricter energy and seismic codes.

If your policy hasn’t been updated since 2022, there’s a strong chance you’re underinsured. Inflation in the construction industry has been significant in recent years, and most insurance policies haven’t kept pace. Even modest remodels, landscaping, or upgrades can make your coverage limits outdated overnight.

When a wildfire, earthquake, or major storm hits, many homeowners make the heartbreaking discovery that their insurance falls far short of what would actually be required to rebuild. Recent investigations and real cases show that underinsurance is not just a risk — it’s a widespread crisis.

A landmark series by The San Francisco Chronicle exposed how many insurers use automated tools (such as 360Value) that systematically underestimate rebuild costs, leaving homeowners with insufficient coverage. San Francisco Chronicle

In fact, in California, new lawsuits now allege that major insurers knowingly rely on such flawed software to underinsure customers. San Francisco Chronicle Yahoo! News

Market Value vs. Replacement Cost

One of the biggest misconceptions in home insurance is the belief that your home’s market value and its replacement cost are connected. They’re not.

Imagine two identical 1,000-square-foot homes: one in Venice and one in Palmdale. The Venice home might sell for $2 million, while the Palmdale home might be worth $350,000. But the cost to rebuild either structure — materials, labor, and code compliance — would be about the same, roughly $400,000.

Insurance pays for reconstruction, not for the land or neighborhood. That’s why basing your coverage on market value is a costly mistake.

The 80% Coverage Rule You Can’t Ignore

Most insurance policies include what’s known as a co-insurance clause, requiring you to carry at least 80% of your home’s true replacement value. If your coverage falls short, your insurer can reduce any claim payout proportionally — even for partial losses.

For example, if your home should be insured for $800,000 but you only carry $600,000 in coverage, you’re insured at 75%. If you file a claim for $100,000 in damage, the insurer might only pay $75,000, minus your deductible. That’s a painful and unnecessary financial hit.

When Coverage Falls Short: The Caldor Fire Homeowners

In the aftermath of the Caldor Fire in California, many residents thought they were insured for “full replacement cost” — only to discover otherwise. 

• Jennifer McKim-Hibbard lost her home and found she did not have enough coverage to rebuild. 
• Another couple, Linda and Richard Salazar, had purchased $341,000 in fire insurance coverage based on agent recommendation. Their contractor’s estimate to rebuild was over $548,000. Because they lacked sufficient coverage, they had to settle for a manufactured (prefab) home instead of rebuilding their original home. 

This case is significant because it shows how even well-meaning coverage (from agent recommendation) can fall far short when the real rebuild cost is much higher than anticipated

These stories are covered in the Chronicle’s “A Broken System” investigation — see their story and many others here: “A broken system is keeping California homes underinsured.” San Francisco Chronicle

This case shows how even supposedly “full replacement cost” policies can fall tragically short in practice.

What to Do Before a Loss

Start by asking your agent for a Replacement Cost Estimate for your home — a detailed line-item projection of what it would cost to rebuild right now. Don’t just accept it; scrutinize the assumptions. Many insurer tools undercount upgrade costs, omit terrain or site condition complexities, or classify finish levels too conservatively.

Then, cross-check that estimate with a local contractor or builder who works in your area. They understand prevailing labor, material, permitting, and site-specific factors and may reveal that your insurance estimate is dangerously low.

Also, check whether your dwelling coverage meets at least 80% of the true rebuild cost. Many policies have co-insurance clauses: if your coverage is less than 80%, your payout may be reduced proportionally even for partial losses.

What to Do After a Loss, If You Discover You’re Underinsured

If tragedy strikes and you discover you’re underinsured, there are steps you can take — though none are easy.

1. Document everything immediately. Before cleanup or demolition (if safe), take photos, video, and detailed notes of all damage, downed structures, and materials. Save debris and structural remnants when possible for inspection.
2. Demand a full, detailed reconstruct estimate from your insurer. Get their line-item rebuild proposal and insist on visibility into every assumption (square footage, finish grade, site work, code compliance).
3. Get your own independent rebuild estimate. Hire a trusted local builder, architect, or professional cost estimator to develop a realistic cost to rebuild — including code upgrades, site work, foundation, grading, etc. Use that independently generated estimate in claims negotiations.
4. Negotiate and challenge lowball estimates. Present your evidence (photos, independent estimate, cost quotes) and ask the insurer to justify or adjust their numbers. If your policy allows it, invoke an appraisal clause — having an independent umpire decide between two estimates.
5. Seek legal counsel if necessary. If your insurer refuses to negotiate or seems to have used flawed estimating tools or bad faith practices, consider engaging an attorney with experience in insurance and disaster claims. The recent wave of lawsuits tied to flawed rebuild estimation tools makes this especially relevant. 
6. Explore additional funding and assistance. After federally declared disasters or wildfire zones, there may be low-interest disaster loans, state grants, or nonprofit assistance programs. Be careful, though: some funds require you to assign your rights to your insurer or government.

Staying Protected Going Forward

The best cure for underinsurance is vigilance. Review your policy annually, especially after upgrades, remodels, or when you learn about local cost escalations. Ask your agent to explain how coverage limits were calculated, and demand the inclusion of inflation guard or extended/guaranteed replacement cost riders whenever available.

If your dwelling coverage is below 80% of your rebuild cost, you’re vulnerable. Make sure your policy is designed to absorb construction inflation — not one that lags it.

Final Thoughts

Underinsurance is not just a problem for the unlucky — it’s a systemic issue that has already left families across California and beyond with painful, expensive gaps after disasters. The Salazar family’s story from the Caldor Fire is one of many that show how this issue plays out in real lives.

By proactively reviewing your policy, cross-checking estimates, and insisting on coverage that reflects reality (not outdated assumptions), you can protect your home, your finances, and your peace of mind — before you ever need to file a claim.