Am I Underinsured — and How Would I Know?

Surveys of California wildfire survivors — including research published by United Policyholders — have found that the majority of victims discover after a loss that their coverage doesn’t cover the cost of rebuilding. Most had no idea until the claims process began. This page explains how underinsurance happens, how to check your own coverage against your actual rebuild cost, and what to do if you find a gap.

Why underinsurance is so common

Homeowner’s insurance coverage limits are typically set at purchase and updated — if they’re updated at all — at renewal. The problem is that the cost to rebuild a home in California has increased significantly over the past decade, driven by labor shortages, materials costs, supply chain disruptions, and the elevated cost of rebuilding in areas with limited contractor access and high post-disaster demand.

A home insured for $600,000 several years ago may cost considerably more to rebuild today. If the coverage hasn’t been updated to reflect that change, the gap comes out of the homeowner’s pocket — after they’ve already lost their home.

Three specific factors drive most underinsurance in California fire country:

• Policy limits set at purchase and not meaningfully reviewed since
• Inflation-adjustment provisions that don’t keep pace with actual construction cost increases
• Coverage that reflects market value rather than replacement cost — these are two different numbers, and only replacement cost matters after a fire

Coverage type matters: replacement cost vs. actual cash value

Your policy covers either replacement cost (RCV) or actual cash value (ACV). The difference is substantial.

Actual cash value pays what your property was worth at the time of the loss — depreciated value. For a 20-year-old roof, that might be a fraction of what it costs to replace it. ACV policies are cheaper, and they’re more common in fire-country markets where standard coverage has become difficult to find. If you have an ACV policy, your coverage is very likely insufficient to rebuild.

Replacement cost value pays what it actually costs to replace what was destroyed with materials of like kind and quality. This is the coverage type you need. But even RCV policies can be inadequate if the coverage limit was set too low.

Extended and guaranteed replacement cost provisions

The best policies include extended replacement cost (ERC) or guaranteed replacement cost (GRC) provisions. These protect you when construction costs spike after a disaster.

Extended replacement cost pays up to a specified percentage above your stated limit — typically 20–50% over. If your home is insured for $700,000 with 25% ERC, you have up to $875,000 in coverage.

Guaranteed replacement cost pays whatever it actually costs to rebuild, with no ceiling. GRC policies have become increasingly rare in California’s fire-country market, but they still exist.

If your policy doesn’t include either of these provisions, your coverage limit is the hard ceiling on your claim — regardless of what it actually costs to rebuild.

How to check your own coverage

Pull your current declarations page and identify these numbers:

• Coverage A (Dwelling) — the limit on your main structure
• Coverage B (Other Structures) — fences, outbuildings, detached garages
• Extended or guaranteed replacement cost provision — the percentage above Coverage A your policy will pay
• Personal property coverage limit

Then get an independent rebuild estimate. Do not rely on your insurer’s estimate alone — compare it against an independent calculation. CDI advises homeowners to review their replacement cost estimate carefully and to request a revised estimate if they believe it is inaccurate. The most widely used independent tool is the Marshall & Swift/CoreLogic calculator, available through most independent insurance brokers.

For rural and custom properties — which describes much of the East County San Diego market — the gap between standard estimating tools and actual rebuild costs in limited-access, high-demand post-disaster environments tends to be larger than for standard suburban properties.

Your right to a replacement cost estimate

California Insurance Code § 10102 requires that when an insurer or broker communicates a replacement cost estimate in connection with an application or renewal of a replacement cost homeowner’s policy, a written copy must be provided to the applicant or policyholder. If you have never received a written replacement cost estimate from your insurer, you can request one. CDI’s consumer guidance covers what that estimate should include and how to evaluate it.

What to do if you discover a gap

If you identify a gap between your coverage and your actual rebuild cost:

• If you’re with an admitted carrier: request a coverage review, provide the independent rebuild estimate, and ask to increase Coverage A. If they won’t increase coverage to an adequate level, begin the process of finding alternative coverage.
• If you’re on the FAIR Plan: explore whether increased DIC coverage is available to bridge the gap. Some surplus lines carriers will write higher dwelling limits on a DIC basis.
• If you’re facing non-renewal and attempting to re-enter the market: use the independent rebuild estimate in your coverage conversations with new carriers.

The FAIR Plan and underinsurance

If you’re on the FAIR Plan, underinsurance is a specific and serious concern. The FAIR Plan’s residential coverage is narrower than a standard homeowner’s policy. The DIC policy most FAIR Plan policyholders use to supplement their coverage adds perils but doesn’t necessarily increase your dwelling coverage limit. If the combined FAIR Plan + DIC limit doesn’t cover your actual rebuild cost, the gap is your exposure. The fix requires a conversation with a broker who understands both FAIR Plan limits and surplus lines DIC options.