Kenneth Klein, who teaches at California Western School of Law, framed it starkly: "A supermajority of homeowners want to fully and adequately insure their homes, are willing to pay for it, and think they have it. But most of them are wrong and are short by a lot." In a Lewis & Clark Law Review article this year, Klein said the desire to be fully insured is real, but the coverage often is not.
Klein noted that about 90% of owner-occupied homes carry a policy. Yet when he examined California Department of Insurance records for 74,000 fire claims filed between 2018 and 2023, he found more than 70% of insured homeowners came up short by roughly 20% on average. He added the pattern is not unique to California, calling it a "barely hidden nationwide crisis of underinsurance" that keeps families from making a full recovery after a loss.
Standard policies trim exposure in lots of small print ways, from carving out certain disasters to capping payouts for particular categories of damage or belongings. Experts say earthquakes, landslides and floods commonly sit outside a typical homeowner policy. To cover flood damage to the structure itself, owners generally need a separate policy. For insurance purposes, a flood is when water comes up from ground level into the home, whether from storm surge, intense rain or a river or lake spilling over.
Flooding is the most frequent and most expensive natural disaster in the country, according to the Insurance Information Institute. FEMA estimates that just an inch of water can rack up about $25,000 in damage to a home, and from 2020 through 2024 the average payout on flood claims was $82,614. FEMA's floodsmart.gov also notes that roughly 99% of U.S. counties have seen at least one flood over the past twenty years.
Even so, a 2025 FEMA blog post indicates fewer than 4% of households have a National Flood Insurance Program policy. NFIP provides most of the residential flood coverage in the U.S. Standard home policies may still cover some water losses, like wind driven rain that gets in from above after a storm damages a roof. But, as Amy Bach of United Policyholders points out, insurers often exclude or limit mold coverage and may cap water damage payouts at around $5,000, $10,000 or $15,000 per loss.
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This week, California Insurance Commissioner Ricardo Lara pressed residents to go over their policies and to look into flood insurance before a likely historic El Niño, warning people not to wait until a disaster is close. Flood insurance typically starts 30 days after purchase. Even then, traditional flood policies often have tighter limits for basements.
Peter Kochenburger - a visiting law professor at the Southern University Law Center who also serves as managing fellow at its Insurance Law and Policy Institute - said, "The cost of building and repairing has gone way up." If the policy limit does not match today's replacement cost, families can be stuck unless they have other savings.
A report from the Treasury Department released last year concluded that replacement costs for property and casualty losses climbed 45% from 2020 to 2023. Hiring workers for single family construction got costlier too, with employment costs up 37% from 2018 to 2022, and climbed 45% between 2014 and 2023. Lareesa Klingler, Lockton's director of national claims within its private risk solutions group, put it bluntly: "coverage gaps are often discovered at the time of the loss - which is when you don't want to discover them."
Consumers can look at policy add ons that flex with real world costs. Extended replacement cost coverage, an upgrade to a standard policy, typically boosts the dwelling limit by roughly 10% to 50%, according to insurance marketplace Policygenius. Owners of older homes might also consider ordinance or law coverage to pay for code upgrades like wiring, plumbing or insulation when rebuilding.
Insurers also set specific dollar ceilings for categories of personal property, including items like artwork, collectibles, rugs, furs and other high ticket pieces. You can typically raise those limits by adding scheduled coverage for individual items. Brenda Cude, professor emeritus with the University of Georgia, as well as a consumer representative to the National Association of Insurance Commissioners, said owners of antiques, firearms, electronics and jewelry should confirm how those pieces are treated and whether extra coverage is necessary.
The upshot for your wallet: know what is and is not covered before a loss, not after. If you live far from the shoreline, you may still face flood risk. If your home is older, bringing it up to code can be a bigger swing than you expect. And if you have valuables, the standard limits might not come close to replacing them.
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