What to Do if You’re Underinsured After a Wildfire

After a wildfire, some homeowners experience a second shock when they open their policy and discover their insurance won’t cover the full cost to rebuild. If your policy limit is too low to restore your home, you’re considered underinsured, and it’s a problem that affects many Californians, even those who thought they were fully protected.

Amy Bach, Executive Director of United Policyholders, a nonprofit that helps disaster survivors navigate insurance claims, said underinsurance is one of the most common and complex challenges after a wildfire. But there are ways to identify your options, close the gap, and, in some cases, push back on your insurer.

Start by Understanding Your Policy Limit

The first thing to do is figure out how your coverage amount was set, and whether the underinsurance is the result of something you did, or the result of bad advice or miscommunication from your agent or insurer

“We encourage people to look through their emails and see what kind of communications they had with their agents and their insurance company,” Bach said. “Did you ask for full coverage and get that assurance in writing?”

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If you can find emails or records showing that your agent told you the coverage would be enough, and it wasn’t, you may have a case to challenge the policy limits

“That’s the make-or-break for an underinsurance case,” Bach said. “If you have any evidence that the insurance company gave you that assurance, that can be the difference between getting your limits retroactively increased and just being stuck.”

How Underinsurance Happens

Underinsurance often occurs when a homeowner hasn’t adjusted their policy to keep up with rising construction costs or changes to their home. A policy might have been adequate years ago, but inflation, new building codes, and post-disaster price surges can leave coverage tens or even hundreds of thousands of dollars short.

To avoid this, experts recommend:

• Purchasing an extended replacement cost endorsement of at least 25% above your base dwelling limit
• Opting for replacement cost policies instead of actual cash value coverage, which deducts for depreciation
• Adding inflation guard coverage to keep limits aligned with construction price increases
• Conducting annual insurance check-ups with your agent

In some cases, homeowners may have chosen not to add these features without fully understanding the risks, or weren’t clearly advised about their options.

“The law in California is that the insurance company only has a duty to get you insurance. It doesn’t have to be customized or adequate unless they voluntarily undertook a duty to make the coverage fit what you needed,” Bach said.

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What Can You Do?

Even if your limits can’t be increased, there are strategies to help you close the coverage gap.

Use Other Parts of Your Policy
Some survivors use unspent personal property coverage to help pay for rebuilding, especially if they’re not replacing everything they owned. In some cases, careful use of Additional Living Expenses (ALE) coverage can also help bridge short-term financial needs.

Scale Back the Rebuild
Bach said some homeowners choose to adjust their relocation or rebuilding plans based on how far their insurance money can go.

“Some people fill their gap by using their contents money,” Bach said. “Some people fill their gap by building a smaller home.”

Consider a Group Rebuild
In fire-damaged communities, some homeowners work together to lower costs by organizing group rebuilds.

“They get together with a bunch of neighbors. They hire one builder. The builder gives them five choices of plans,” Bach said. “It’s sort of a semi-custom situation, and it makes it financially viable.”

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Apply for a Loan

Homeowners may choose to borrow money to rebuild through a loan or a home equity line of credit (HELOC).

Bach said the best approach for most people is the Small Business Administration (SBA) disaster loan because of their very low interest rates. Affected homeowners can secure an SBA loan to supplement their insurance payment, even if they don’t own a business.

What If You Want to Fight It?

If you believe you were misled or that your insurer acted in bad faith, it may be time to seek legal help.

“Very often, people who are underinsured end up having to hire a lawyer if they really want to push back,” Bach said. “It’s very hard to do it on your own.”

United Policyholders has more information and self-help materials on its website to guide underinsured wildfire survivors through the recovery process.”