Many homeowners believe they are fully protected until disaster strikes, but insurance experts say a large and often invisible coverage gap is leaving millions financially exposed. The shortfall is especially dangerous as wildfires, hurricanes and flooding become more frequent and more expensive, threatening what is often a family's largest asset: the home.
The problem is not simply that insurance is getting more expensive, though that is part of it. Premiums have climbed sharply in recent years, forcing some consumers to scale back coverage just to keep a policy in place. Others assume they are protected against the full range of risks, only to learn after a loss that their policy excludes certain disasters, caps payouts for specific items, or limits the amount available to rebuild.
Kenneth Klein, a law professor at California Western School of Law, described the issue in stark terms in a Lewis & Clark Law Review article published this year. "A supermajority of homeowners want to fully and adequately insure their homes, are willing to pay for it, and think they have it," Klein wrote. "But most of them are wrong and are short by a lot."
Klein's analysis of California Department of Insurance data found that among 74,000 fire-related claims filed from 2018 to 2023, more than 70% of homeowners with insurance were underinsured by an average of roughly 20%. He said the pattern is not confined to one state. "This data shows that there is a barely hidden nationwide crisis of underinsurance," Klein wrote, warning that the dynamic "persistently and inevitably robs homeowners of any chance to fully recover what they have lost."
About 90% of owner-occupied homes in the United States are insured, Klein wrote, but having a policy does not necessarily mean having enough protection. Standard homeowners insurance typically places financial limits on coverage in multiple ways, including exclusions for certain disasters and caps on payouts for some categories of damage.
Amy Bach, co-founder of the consumer advocacy group United Policyholders, said some homeowners knowingly choose less coverage because they cannot afford more. But she said many others do not realize how exposed they are. Insurers, she noted, have continued to exclude more risks and cap more types of losses, while consumers often underestimate the cost of rebuilding their homes.
A separate study published in May in the Virginia Law Review found that a "broad swath" of Americans do not understand what they are buying because insurance contracts are written in confusing language. That misunderstanding can leave policyholders believing they have broad protection when, in reality, their policies contain significant gaps.
Those gaps are often discovered only after a disaster, when it is too late to fix them. "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, an insurance brokerage.
Among the biggest blind spots is flooding. Standard homeowners policies generally exclude or limit damage from earthquakes, landslides and floods, but flooding is the one that most often catches people off guard, experts say. Homeowners need separate flood insurance to cover physical damage caused by water entering from the ground up, whether from storm surge, heavy rainfall or an overflowing river or lake.
That omission can be devastating. Flooding is the most common and costly natural disaster in the United States, according to the Insurance Information Institute. Even a relatively small amount of water can cause enormous damage; just one inch of water can result in about $25,000 of damage to a homeowner's property, underscoring how quickly an uncovered event can become a financial catastrophe.
The broader warning from insurance experts is that the gap between perceived protection and actual protection is widening at the same time climate-related losses are intensifying. For homeowners, that means the policy in the file cabinet may not be enough to preserve the home, the savings tied up in it, or the financial stability built around it. In an era of rising premiums and escalating disaster costs, the real risk may not be having no insurance at all, but believing one is covered when the fine print says otherwise.