Many U.S. Homeowners Remain Unaware of Insurance Coverage Gaps
A significant coverage deficiency exists for numerous homeowners, though most remain unaware of this vulnerability, as indicated by insurance professionals, according to a new CNBC report. This gap in protection exposes policyholders to considerable financial risk from damage caused by increasingly prevalent and expensive natural disasters, including wildfires, hurricanes, and flooding—thereby jeopardizing their most substantial financial investment, according to industry specialists.
Consumers have experienced considerable increases in the expenses associated with maintaining adequate insurance protection in recent years, driven by escalating insurance premium rates.
According to industry experts, the following represent some of the most significant insurance coverage deficiencies among consumers:
- Flooding
- Rebuilding costs
- Limits on specific items
“A supermajority of homeowners want to fully and adequately insure their homes, are willing to pay for it, and think they have it,” Kenneth Klein, a law professor at California Western School of Law, wrote this year in a Lewis & Clark Law Review article. “But most of them are wrong and are short by a lot.”
Insurance & Climate Risk Affecting Homeowner Premiums
Approximately 90% of owner-occupied residences throughout the U.S. maintain insurance coverage, according to Klein. Standard homeowners insurance policies establish financial restrictions on coverage through multiple mechanisms—including the exclusion of particular disaster categories or the establishment of maximum reimbursement amounts for specific items or categories of damage.
Klein performed a comprehensive examination of California Department of Insurance records encompassing 74,000 insurance claims related to fire incidents of varying magnitudes—spanning from large-scale wildfires to residential structure fires—occurring between 2018 and 2023. Within this dataset, Klein documented that over 70% of insured homeowners possessed insufficient coverage, with an average shortfall of approximately 20%.
According to Klein, this challenge extends beyond California’s borders.
“This data shows that there is a barely hidden nationwide crisis of underinsurance,” Klein wrote. The dynamic “persistently and inevitably robs homeowners of any chance to fully recover what they have lost.”
According to industry experts, numerous factors contribute to homeowners maintaining insufficient insurance coverage.
Certain consumers may deliberately opt for reduced coverage limits to make insurance financially accessible, as noted by Amy Bach, executive director of United Policyholders, a consumer protection organization, in her written correspondence. Conversely, a substantial portion of consumers remain unaware of this coverage deficiency, experts indicate.
On the one hand, “a broad swath,” of the American population lacks comprehension of their insurance purchases due to obscure terminology embedded within their policy documents, as demonstrated by research findings released in May within the Virginia Law Review.
Further, insurance providers persist in broadening the scope of exclusions from their coverage policies while simultaneously establishing lower monetary limits on the benefits they do provide, according to Bach’s analysis. Additionally, industry experts have noted that consumers typically underestimate the financial expenditure required to reconstruct their residences.
“[…] coverage gaps are often discovered at the time of the loss—which is when you don’t want to discover them,” said Lareesa Klingler, Director of National Claims for the Private Risk Solutions Group of Lockton.
Consumer’s Biggest Concerns
Standard homeowners insurance policies typically exclude or restrict coverage for losses resulting from specific natural disasters, including earthquakes, landslides, and floods, as noted by insurance professionals. However, consumers frequently encounter difficulties with the latter category—a situation that can result in substantial financial consequences, according to insurance professionals.
Homeowners are required to obtain supplementary insurance coverage to protect against physical damage caused by flooding, which is characterized as water infiltrating a residence from ground level upward. This phenomenon may result from storm surge, intense precipitation, or the overflow of water bodies such as lakes or rivers. According to the Insurance Information Institute, flooding represents the most prevalent and expensive natural disaster affecting the U.S.
According to the Federal Emergency Management Agency, merely one inch of water can inflict approximately $25,000 in damage to a homeowner’s property. FEMA data indicates that between 2020 and 2024, the median compensation for all flood insurance claims reached $82,614. Further, flood insurance extends beyond waterfront residents: According to FEMA, approximately 99% of U.S.counties have encountered flooding within the preceding two decades.
According to Peter Kochenburger, a visiting law professor at Southern University Law Center and managing fellow of its Insurance Law and Policy Institute, the underestimation of reconstruction expenses represents a significant contributor to inadequate insurance coverage.
“The cost of building and repairing has gone way up,” Kochenburger said. “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.”
According to a Treasury Department report released in the previous year, the average replacement expenditures associated with property-and-casualty-related losses experienced a 45% increase throughout the period spanning 2020 to 2023. Property and casualty insurance encompasses homeowners insurance, renters insurance, and auto insurance.
Labor expenditures have similarly risen. According to the report, the expense of compensating workers engaged in single-family home construction increased by 37% during the 2018-2022 period and by 45% from 2014 to 2023. Consumers may explore purchasing “extended replacement cost” coverage, which represents an supplementary addition to a standard insurance policy, according to Lareesa Klinger, Associate VP and Director of National Claims at Private Risk Solutions at Lockton.
Homeowners, particularly those residing in older properties, may also explore the option of obtaining what is referred to as “ordinance or law coverage,” according to Klingler.
This protection safeguards against elevated expenses that result from the requirement to update a residence to comply with contemporary building standards—including enhancements to electrical systems, water systems, or thermal insulation—during the reconstruction process.
Insurance providers frequently establish monetary caps on reimbursement across numerous categories of particular possessions, encompassing items such as fine art, collectible objects, carpets, pelts, and other high-value goods, according to industry specialists. Nonetheless, policyholders retain the option to acquire supplementary coverage attachments to their standard insurance plans in order to elevate the financial thresholds applicable to those specific possessions.
“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,” said Brenda Cude, Professor Emeritus of Financial Planning, Housing and Consumer Economics at the University of Georgia and a consumer representative at the National Association of Insurance Commissioners.
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