When a home burns down, the insurance payout is supposed to cover rebuilding it. In one large California claims study, that did not happen for most of the homeowners who filed.
Kenneth Klein, a law professor at California Western School of Law, went through 74,000 fire-related insurance claims filed in California between 2018 and 2023. More than 70% of insured homeowners in that sample were underinsured by an average of roughly 20%.
Klein called the situation a “barely hidden nationwide crisis of underinsurance.”
A nationwide underinsurance problem
About 90% of owner-occupied U.S. homes carry insurance, according to CNBC. Policies set ceilings on what they will pay, exclude certain disasters outright, and cap payouts for specific belongings. Many of those limits go unnoticed until a homeowner files a claim and the policy makes them obvious.
Reading the full contract, not just the declarations page, is the only way to know what a policy actually does and does not cover. Most homeowners skip that step and learn the limits at the worst possible time.
Why flood damage often goes uncovered
A standard homeowners policy does not cover flooding. Flood damage means water that enters a home from the ground up: storm surge, heavy rainfall, rivers or lakes overflowing their banks. Homeowners who want that protection need a separate flood policy.
Flooding is the most common and costly natural disaster in the United States, the Insurance Information Institute has found. Nearly 99% of U.S. counties had at least one flood in the previous 20 years, FEMA’s FloodSmart.gov reported.
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One inch of standing water can cause approximately $25,000 in property damage, according to FEMA. The average payout for flood claims from 2020 through 2024 was $82,614.
Fewer than 4% of U.S. households had a policy through the National Flood Insurance Program, based on a 2025 FEMA blog post cited by CNBC. The program is federally backed and available to homeowners in participating communities, regardless of whether a private insurer will write flood coverage in their area.
Rain that gets in through a wind-damaged roof is treated differently. If wind opens a hole and rain follows, that damage may fall under a standard homeowners policy. But mold remediation is often excluded or capped, and water-damage benefits can be limited to $5,000, $10,000, or $15,000 per loss.
The gap in rebuilding costs
Replacement costs for property-and-casualty insurance losses climbed an average of 45% between 2020 and 2023, a Treasury Department report found.
Labor costs for workers who build single-family homes rose 45% from 2014 through 2023. A dwelling-coverage limit set several years ago may fall well short of what rebuilding would actually cost today, with no automatic adjustment to close the difference.
A home insured for $300,000 that costs $435,000 to rebuild after a total loss leaves the owner responsible for $135,000 before any other expenses are counted.
Homeowners can ask their insurer about extended replacement-cost coverage, which typically adds 10% to 50% above the standard dwelling limit, as Policygenius reported.
Owners of older homes may also want ordinance-or-law coverage. Wiring, plumbing, and insulation updates required under current building codes can add significant cost to a rebuild, and a standard policy does not pay for them.
Flood insurance sold through the National Flood Insurance Program does not take effect right away.Inside Creative House / Getty Images
Limits on valuable personal property
Most homeowners policies cap what they will pay for specific categories of belongings.
Jewelry, antiques, artwork, collectibles, rugs, furs, firearms, and electronics all typically face per-category limits. Standard policies often cap jewelry coverage at around $1,500 for theft losses. A homeowner with a valuable collection or a single expensive item may find the policy pays out only a fraction of what replacing it would cost.
Brenda Cude, professor emeritus at the University of Georgia and a consumer representative at the National Association of Insurance Commissioners, has recommended that homeowners check how valuable items are covered under their current policy and whether additional protection is in place, according to CNBC.
Endorsements and scheduled-property coverage can raise those limits on individual items, though insurers usually require appraisals, receipts, or other documentation first.
How to check what your policy actually covers
Reviewing the policy before a disaster is the only opportunity to address a coverage gap.
Start with the dwelling-coverage limit and confirm it reflects what rebuilding the home would cost now, not when the policy was first written. Ask the insurer whether extended replacement-cost coverage is available. Check how the policy handles flood, earthquake, and landslide damage, and whether water-damage and mold benefits are capped.
Photograph jewelry, artwork, antiques, and other valuables, and keep receipts and appraisals somewhere safe. Check what additional living-expense coverage will pay if the home becomes uninhabitable for weeks or months. Get clear on deductibles, exclusions, and coverage caps before filing a claim makes them relevant.
Ask the insurer whether coverage is based on replacement cost or actual cash value. Replacement cost covers what it takes to rebuild or replace at today’s prices. Actual cash value deducts for depreciation, so a 10-year-old roof gets paid out at a fraction of what a new one costs.
Flood insurance sold through the National Flood Insurance Program does not take effect right away. Coverage generally starts 30 days after purchase, as CNBC reported. Once a storm is already in the forecast, it’s too late to buy a policy.