After major wildfires, regulators and consumer groups have heard the same story again and again: homeowners who thought they had plenty of coverage found their policy limits weren't enough to rebuild. The California Department of Insurance has noted that many homes in past wildfires were underinsured, and that code upgrades and debris removal added unexpected costs. Underinsurance often goes unnoticed until it's too late. Here are the warning signs and what to do about them.
Warning sign 1: your limit is based on market value or purchase price
Your dwelling limit should reflect the cost to rebuild your home, not what you paid or what it would sell for. Market value includes land, which doesn't burn and isn't insured, and it moves with the real estate market. Construction costs can be higher or lower than market value. The California Department of Insurance and the NAIC both stress this distinction.
Warning sign 2: your limit equals your loan amount
Lenders often require coverage at least equal to the mortgage. But your loan amount has nothing to do with rebuild cost. Meeting the lender's requirement doesn't mean you're fully insured.
Warning sign 3: you've renovated or added on
Kitchen remodels, room additions, new bathrooms, upgraded finishes, solar, or a new ADU all raise rebuild costs. If you didn't tell your insurer, your limit may not reflect them. See our home renovation insurance checklist.
Warning sign 4: you haven't reviewed the replacement cost estimate in years
Construction costs change. If your limit hasn't been reviewed against a current estimate, it may have fallen behind. Ask whether your policy includes an inflation guard, which adjusts limits automatically at renewal. See our inflation guard guide. Even with inflation guard, a periodic review is wise.
In California, if your insurer or agent gives you a replacement cost estimate when you apply or renew, you're entitled to a copy. Ask for it, and check the details: square footage, number of stories, foundation, roof, finishes and special features.
Warning sign 5: you don't have extended replacement cost
Extended replacement cost pays a set percentage above your dwelling limit, such as 25% or 50%, if rebuilding costs more than expected. Guaranteed replacement cost, offered by fewer insurers, pays to rebuild regardless of the limit, subject to policy terms. See our guaranteed vs. extended replacement cost page.
Warning sign 6: no building code upgrade coverage
After a major loss, you may have to rebuild to current building codes, which can add significant cost. Many policies include only limited ordinance or law coverage, and some include none. See our ordinance or law page.
Warning sign 7: you live in a disaster-prone area
After widespread disasters, demand for contractors and materials can push prices up, a phenomenon called demand surge. The CDI's Top 10 tips for wildfire claimants notes that insurer estimates may not reflect local conditions or demand surge.
Warning sign 8: your contents and ALE limits are percentages of a low dwelling limit
Other structures, personal property and additional living expense limits are often set as percentages of the dwelling limit. If the dwelling limit is too low, those may be too low as well. See our additional living expenses guide.
Warning sign 9: your home has unique features
Custom or historic homes, hillside foundations, difficult access, and high-end materials can make rebuilding cost more than a standard estimate suggests. See our high-net-worth homeowners guide.
Warning sign 10: you're on the FAIR Plan with a low limit
FAIR Plans may have maximum limits that are lower than your rebuild cost. Some owners add excess or difference-in-conditions coverage. See our FAIR Plans by state table.
The 80% issue
Many homeowners policies have a loss settlement condition: if your dwelling limit is below a set percentage of replacement cost, often 80%, the insurer may pay less than full replacement cost on a partial loss. The NAIC and New York's Department of Financial Services both describe this. Check your policy's loss settlement terms.
How to check your coverage
- Find your current limits on your declarations page.
- Get your insurer's replacement cost estimate and verify every detail.
- Get a second opinion from a local licensed contractor or appraiser.
- Use our free worksheet. The home insurance coverage worksheet lets you enter your own figures for rebuild cost, code upgrades, debris removal and a cost buffer, and compare them with your limits. For a rough California planning range, try our rebuild cost estimator.
- Review endorsements: extended replacement cost, ordinance or law, inflation guard.
- Update your home inventory. See our home inventory template.
- Talk to your broker about raising limits or adding coverage.
If your insurer won't raise your limit after you document the need, California consumers can contact the CDI at (800) 927-4357.
Underinsurance checklist
- ☐ Base your dwelling limit on rebuild cost, not market value or loan amount
- ☐ Tell your insurer about renovations and additions
- ☐ Ask for and verify the replacement cost estimate
- ☐ Consider extended or guaranteed replacement cost
- ☐ Check ordinance or law coverage
- ☐ Ask about inflation guard
- ☐ Check that contents and ALE limits are high enough
- ☐ Review annually
Contact Alishahi Insurance or call (877) 711-4545 for a coverage review.
Frequently asked questions
How do I know if my home is underinsured?
Warning signs include a limit based on market value, purchase price or loan amount, recent renovations, an old replacement cost estimate, and no extended replacement cost or code upgrade coverage.
Should my dwelling coverage equal my home's market value?
No. It should reflect the cost to rebuild, which excludes land and can differ greatly from market value.
What is the 80% rule in homeowners insurance?
Many policies may pay less than full replacement cost on a loss if your dwelling limit is below a set percentage of replacement cost, often 80%.
Can I get a copy of my insurer's replacement cost estimate in California?
Yes. If an insurer or agent communicates a replacement cost estimate when you apply or renew, you're entitled to a copy.
What is demand surge?
Higher construction prices after widespread disasters, when contractors and materials are in short supply.
Alishahi Insurance · 439 N Canon Dr, Penthouse, Beverly Hills, CA 90210 · (877) 711-4545 · CA License #4348151. General information only. This isn't legal, tax or financial advice or a coverage determination. Coverage depends on policy language and underwriting, and rules vary by state.