Homeowners May Be Underinsured: 3 Coverage Gaps to Know About

Many homeowners have big gaps in their insurance coverage — and they probably don’t know it, insurance experts say.

This exposes policyholders financially to damage, particularly from natural disasters that are becoming more frequent or costly, such as wildfires, hurricanes and floods, potentially putting their largest financial asset at risk, experts say.

The costs to consumers of maintaining coverage have increased significantly in recent years due to soaring insurance premiums.

“A large majority of homeowners want to fully and adequately insure their homes, are willing to pay for it, and believe they have it,” Kenneth Klein, a law professor at the California Western School of Law, wrote in an article in the Lewis & Clark Law Review this year. “But most of them are wrong and way behind the times.”

In the United States, about 90 percent of owner-occupied housing is insured, Klein writes.

The typical home insurance policy places financial limits on coverage in a variety of ways, such as excluding certain types of catastrophes or capping payouts for certain items or types of damage.

Klein conducted an analysis of California Department of Insurance data on 74,000 claims related to fires of all sizes – from wildfires to house fires – from 2018 to 2023. Among those claims, more than 70% of insured homeowners were underinsured by an average of about 20%, Klein wrote.

The problem is not limited to California, he said.

“This data shows that there is a barely hidden nationwide underinsurance crisis,” Klein wrote. This dynamic “persistently and inevitably deprives owners of any chance of fully recovering what they have lost,” he wrote.

There are many reasons why homeowners are underinsured, experts say.

Some consumers may intentionally choose a lower coverage amount simply to afford any coverage, Amy Bach, co-founder of United Policyholders, a consumer advocacy group, wrote in an email.

However, many consumers are unaware of the gap, experts say.

For one thing, a “wide range” of Americans don’t understand what they’re buying because of the confusing language in their insurance contracts, according to a study published in May in the Virginia Law Review.

Additionally, insurers continue to exclude more things from coverage and cap the dollar amounts for the things they cover, Bach wrote.

Consumers also typically underestimate how much it would cost them to rebuild their home, experts say.

Unfortunately, “coverage gaps are often discovered at the time of loss, which is when you don’t want to discover them,” said Lareesa Klingler, national claims director for the Private Risk Solutions Group at Lockton, an insurance brokerage.

Here are some of the biggest gaps in consumer insurance, according to experts.

The typical homeowners insurance policy excludes or limits coverage for damage caused by certain disasters, such as earthquakes, landslides and floods, according to insurance experts.

But consumers are most often fooled by the latter solution – and it can be costly, according to insurance experts.

Homeowners need separate insurance to cover physical damage caused by flooding, defined as water entering a home from below. This can happen due to storm surge, heavy rain, or overflowing water such as a lake or river.

Flooding is the most common and costliest natural disaster in the United States, according to the Insurance Information Institute.

According to the Federal Emergency Management Agency, just one inch of water can cause about $25,000 in damage to a homeowner’s property. Between 2020 and 2024, the average payout for all flood-related claims was $82,614, according to FEMA.

And flood insurance isn’t just for those who live near water: About 99 percent of U.S. counties have experienced flooding in the past 20 years, according to FEMA’s Floodsmart.gov website.

But a 2025 blog post from the agency indicates that less than 4% of U.S. households have a policy with the National Flood Insurance Program.

The NFIP is the primary source of flood insurance coverage for residential properties.

A standard home insurance policy covers some water damage: for example, in the event of “wind-driven rain,” essentially when water enters the house from above, experts say.

This could happen if a hurricane damages a roof and rain comes inside and floods the entire house or several rooms, experts say.

Insurers can, however, exclude or cap benefits for mold damage, Bach said. They may also cap water damage compensation at perhaps $5,000, $10,000 or $15,000 per loss, she said.

California Insurance Commissioner Ricardo Lara this week urged consumers to review their coverage and consider flood insurance ahead of a likely historic El Niño. People shouldn’t wait until a disaster approaches, Lara says: Flood insurance typically takes effect 30 days after purchase.

Even with flood insurance, there are caveats. For example, traditional policies typically limit coverage for basements.

Underestimating the cost of rebuilding is another major source of underinsurance, said Peter Kochenburger, a visiting law professor at the Southern University Law Center and director of its Insurance Law and Policy Institute.

“The cost of construction and repair has increased significantly,” Kochenburger said. “If you lose the house and your home insurance policy limits aren’t enough to rebuild it, you’re kind of stuck unless you have your own financial assets – which many people don’t have.”

Replacement costs for property and casualty losses increased by 45% on average between 2020 and 2023, according to a Treasury Department report released last year. Homeowners insurance is a type of property and casualty insurance, just like renters insurance and auto insurance.

Labor costs have also increased. The cost of employing workers who build single-family homes jumped 37% between 2018 and 2022 and 45% between 2014 and 2023, according to the report.

Consumers may consider purchasing “extended replacement cost” coverage, a supplement to a traditional insurance policy, said Klingler, of Lockton.

According to Policygenius, an insurance comparison site, that’s typically an additional 10 to 50 percent above a consumer’s home coverage limit, which is the most a policy pays to rebuild a home from scratch.

Consumers — especially those with older homes — may also consider purchasing what’s called “ordinance or statute coverage,” Klingler said.

This protects against higher costs resulting from the need to bring a home up to current building code standards – such as upgrading wiring, plumbing or insulation – during reconstruction.

Insurers generally limit the amount they pay for many specific content categories, which can include artwork, collectibles, rugs, furs and other big-ticket items, experts said.

However, consumers can purchase add-ons to a traditional policy to increase the monetary limits on those individual items.

“If people own antiques, guns, electronics, jewelry or those kinds of special items, they need to look into how they are covered and whether they need additional coverage for those items,” said Brenda Cude, professor emeritus of financial planning, housing and consumer economics at the University of Georgia and consumer representative for the National Association of Insurance Commissioners.