Two-Thirds of Wildfire-Zone Homeowners Are Underinsured by Six Figures

Research from the University of Colorado Boulder analyzing insurance contracts from 24 insurers after the Marshall Fire found that 74% of policyholders who filed claims were underinsured. The Insurance Information Institute estimates that roughly two-thirds of US homeowners in wildfire-prone areas carry dwelling coverage limits that fall short of actual reconstruction costs, with typical shortfalls around 20% and some gaps reaching 60%. A concrete example: a home with a $1 million reconstruction cost carried a policy capped at $750,000, leaving the homeowner $250,000 short. This matters because underinsurance does not become apparent until the worst possible moment, when a home has been destroyed and the owner needs every dollar to rebuild. After the Marshall Fire, 83% of homeowners wanted to rebuild, but only 60-70% actually did, and the gap was driven significantly by how underinsured they were. Nine months after the January 2025 LA fires, which damaged over 13,500 properties, Los Angeles County had issued fewer than 50 rebuilding permits, partly because homeowners could not close the gap between insurance payouts and actual construction costs. The structural cause is that coverage limits are set using automated replacement cost estimators maintained by insurers, not by independent appraisals. These estimators systematically lag actual construction costs, especially in post-disaster environments where labor and materials are scarce and expensive. Homeowners rarely challenge these estimates because the numbers are opaque, and there is no standardized methodology across carriers. The same home valued by two different insurers can receive dwelling limits that differ by hundreds of thousands of dollars, and the homeowner has no practical way to know which estimate is accurate until it is too late.