Many American homeowners carry large insurance shortfalls they never discover until a wildfire, flood, or storm leaves them unable to fully rebuild.
CNBC reported that insurance experts say a large share of policyholders sit on coverage gaps they do not even know exist, gaps that can leave a family financially exposed after wildfire, hurricane, or flood damage.
The problem is not that Americans refuse to buy insurance. Roughly 90% of owner-occupied homes in the United States carry a policy. The problem is that the policy many people hold is thinner than they think.
Law professor Kenneth Klein put it bluntly in a Lewis & Clark Law Review article this year. He analyzed California Department of Insurance data on 74,000 fire-related claims of any size, wildfires and house fires alike, from 2018 to 2023. Among those claims, more than 70% of insured homeowners were underinsured by an average of roughly 20%.
"A supermajority of homeowners want to fully and adequately insure their homes, are willing to pay for it, and think they have it,"
Klein wrote. Then the punch line:
"But most of them are wrong and are short by a lot."
He called the pattern “a barely hidden nationwide crisis of underinsurance” that “persistently and inevitably robs homeowners of any chance to fully recover what they have lost.”
Lareesa Klingler, director of national claims for Lockton’s private risk solutions group, said the worst time to learn about a shortfall is after the loss.
"coverage gaps are often discovered at the time of the loss, which is when you don't want to discover them,"
Amy Bach, co-founder of the consumer group United Policyholders, told CNBC by email that some buyers deliberately choose thinner coverage just to afford a policy at all. She also said carriers keep excluding more perils and capping dollar amounts. Mold benefits may be excluded or capped. Water damage payouts may be limited to $5,000, $10,000, or $15,000 per loss.
That is not a paperwork nuisance. It is a balance-sheet event for a household that just lost a kitchen, a basement, or a roof.
Standard homeowners insurance generally does not cover flood damage from the ground up. Separate flood insurance is required. The National Flood Insurance Program remains the main source of residential flood coverage.
Yet a 2025 FEMA blog post found that less than 4% of U.S. households had bought an NFIP policy. FEMA’s floodsmart.gov material says about 99% of U.S. counties have seen a flood in the past 20 years. The Insurance Information Institute calls flooding the most common and costly natural disaster in the country.
The dollar figures are not small. FEMA says one inch of water can cause about $25,000 in damage to a homeowner’s property. Between 2020 and 2024, the average payment for all flood claims was $82,614.
California Insurance Commissioner Ricardo Lara urged consumers this week to review their coverage and consider flood insurance ahead of a likely historic El Niño. He warned people not to wait until a disaster is already approaching. Flood insurance generally takes effect 30 days after purchase.
Thirty days is a long time when the water is already rising.
Underinsurance is not only about excluded perils. It is also about math that no longer matches the real world.
Peter Kochenburger, a visiting law professor at Southern University Law Center and managing fellow of its Insurance Law and Policy Institute, said underestimating rebuild cost is a major driver of the shortfall.
"The cost of building and repairing has gone way up,"
A U.S. Treasury Department report published last year found replacement costs for property-and-casualty-related losses rose 45% on average between 2020 and 2023. The cost of employing workers who build single-family homes jumped 37% between 2018 and 2022, and 45% from 2014 to 2023.
Kochenburger spelled out the consequence for families without deep savings:
"If you lose the house and the limits of your homeowners policy aren't sufficient to rebuild, you're sort of stuck unless you have your own financial assets, which many people don't."
That is the hard edge of the story. A policy that looked adequate five years ago can leave a family short of the cash needed to put walls and a roof back up at today’s prices.
Klingler pointed to two tools that can shrink the gap. Extended replacement cost coverage generally adds another 10% to 50% above a homeowner’s dwelling limit, according to Policygenius material cited in the reporting. Ordinance or law coverage can help pay the extra cost of meeting current building codes when a home is rebuilt.
Those endorsements only help people who buy them before the loss. They do nothing for the household that assumes the base policy already stretches that far.
Contents limits create a second trap. Policies commonly restrict payouts on categories such as artwork, collectibles, rugs, and furs. Brenda Cude, professor emeritus at the University of Georgia and a consumer representative at the National Association of Insurance Commissioners, said owners of higher-value personal property need to check the fine print.
"If people have antiques or guns or electronics or jewelry or those kinds of special items, they need to verify how those are covered, and whether [they] need additional coverage for those items,"
Virginia Law Review research published in May found a broad swath of Americans do not understand what they are buying, in part because insurance contracts use confusing language. Wanting full coverage is not the same as holding it.
Klein’s California fire-claims sample is not a national census. It is still a large data set: 74,000 claims over six years, more than seven in ten underinsured by about one-fifth on average. Pair that with FEMA’s flood take-up rate under 4%, replacement costs up nearly half in three years, and water-damage caps that can run out in five figures, and the picture is plain enough.
Disasters do not wait for a family to finish reading the exclusions page. Neither does a 30-day flood-policy waiting period. Markets price risk. Carriers cap exposures. Building labor and materials cost more than they did a few years ago. None of that is mysterious. What is dangerous is the gap between what people believe their policy will pay and what the contract actually delivers when the claim is filed.
Homeownership still rewards people who treat insurance as a living document, not a set-it-and-forget-it bill. Review the dwelling limit against today’s rebuild cost. Check flood exposure even if the last storm missed your street. Confirm the sublimits on water, mold, and specialty items. Buy the endorsements that close the holes you can afford to close. Waiting for a government program, a last-minute warning, or a claims adjuster’s surprise is not a plan.
A policy that only looks complete on paper is no shield at all when the bill to rebuild comes due.