Underinsured After a Wildfire: What to Do When Your Policy Isn't Enough

One of the most devastating discoveries after a wildfire is learning that your insurance is not enough to rebuild. Your home is gone, and the insurer tells you the policy limit is $500,000 — but contractors are quoting $800,000 to rebuild. This gap, sometimes hundreds of thousands of dollars, is the underinsurance crisis. Insurance claim underpayment is a well-documented problem — congressional testimony, regulatory investigations, and policyholder advocacy groups have consistently shown that insurers routinely reduce field adjusters' damage estimates through desk reviews, sometimes cutting payments dramatically. After the 2025 Los Angeles wildfires, according to a January 2026 survey of 2,443 adults in fire-impacted Los Angeles communities, commissioned by the Department of Angels, nearly 80% of victims reported serious insurance claim issues. This is not an isolated problem — it is systemic.

Why Are So Many Homeowners Underinsured?

• Insurers' automated valuation tools underestimate rebuild costs. Most insurers set dwelling coverage limits using automated tools like CoreLogic, Marshall & Swift, or Xactware's 360Value. These tools use national databases and algorithms that frequently underestimate actual California construction costs — particularly in high-demand post-disaster markets where labor and materials are scarce.
• Construction costs have surged. According to NAHB data, the average cost of constructing a single-family home increased roughly 37% between 2019 and 2024, with construction cost inflation reaching record highs. In disaster-affected areas, the increases can be substantially higher due to demand surge and supply chain disruptions. Your policy limit, set years ago, has not kept pace.
• Inflation guard is not enough.Many policies include an “ inflation guard” that automatically increases Coverage A by 2–4% annually. But actual construction cost increases have far outpaced this adjustment.
• Demand surge after a disaster. After a major wildfire, thousands of homes need to be rebuilt simultaneously. Contractor availability plummets and prices spike. After a major disaster, demand surge — the spike in labor and material costs caused by overwhelming demand — can significantly increase rebuild costs. Industry catastrophe models typically apply a 15–20% demand surge factor, though actual cost increases have reached 30–50% for specific materials and labor categories in past disasters. This is not reflected in your pre-loss policy limit.
• Policyholders choose lower limits to save on premiums. With California premiums rising dramatically, some homeowners deliberately accepted lower coverage limits to keep their insurance affordable. This is an understandable but dangerous trade-off.
• Code upgrade costs. When you rebuild, you must comply with current building codes — which may be significantly more stringent than when your home was originally built. These ordinance or law costs can add $50,000–$200,000+ to a rebuild but are covered under a separate, often inadequate, sublimit.

Your Policy Provisions That Can Help

Extended Replacement Cost

Many California homeowner policies include an extended (or “enhanced”) replacement cost endorsement that pays an additional 25–50% above your Coverage A limit. Check your declarations page. If your Coverage A limit is $500,000 and you have a 50% extended replacement cost endorsement, your effective dwelling coverage is $750,000. However:

• You typically must actually rebuild to access the extended amount — you cannot take a cash settlement and pocket the extended coverage
• Under California Insurance Code § 2051.5(c), after a total loss, you may use replacement-cost coverage to rebuild on the same lot, build on a different lot, or purchase an already-built home elsewhere — the insurer cannot reduce your payment because you relocate. Older policy language requiring same-premises rebuilding does not control over § 2051.5(c).
• Under California Insurance Code § 2051.5(b)(1) (as amended by AB 1800), after a state-of-emergency declaration you have at least 36 months from the date of your first ACV payment to collect the full replacement cost. Additional six-month extensions are available for good cause. (The pre-2019 minimum of 24 months has been superseded; older policy language and some adjusters still reference the obsolete figure.)

Ordinance or Law Coverage

This is a separate coverage (not part of your dwelling limit) that pays for the additional cost of complying with current building codes. It typically covers:

• The increased cost of construction to meet current codes
• Demolition of undamaged portions that do not meet code
• The value of the undamaged portion that must be demolished

O&L limits are often 10–25% of Coverage A. If your O&L is 10% on a $500,000 policy, that is only $50,000 for code upgrades — which may not be enough. Review your O&L coverage guide for details.

Debris Removal

Debris removal is a separate coverage that pays for clearing the lot before rebuilding. After a wildfire, debris removal can cost $50,000–$200,000+ due to hazardous material (asbestos, lead, ash) requirements. If debris removal costs exhaust the sublimit, additional coverage may be available under your dwelling limit.

How to Actually Determine Your Coverage Limit

The most reliable way to set your dwelling coverage limit is not to rely on the insurer’s estimating tool. It is to ask a qualified general contractor what it would cost to rebuild your home from the ground up.

Get a Contractor’s Estimate

Find a reputable, licensed general contractor — ideally one who has experience with insurance-related rebuilds — and ask a straightforward question: what would it cost to rebuild this house from the ground up? Make sure the estimate is comprehensive. A good contractor will price the structure itself — but may not automatically include every category of cost. When you review the estimate, confirm it includes:

Soft costs that square footage calculators miss:

• Building permits and plan check fees— permit fees in California can run from several thousand to tens of thousands of dollars depending on the jurisdiction.
• Architectural and engineering plans— a total loss rebuild requires full architectural drawings and structural engineering. These fees typically run 8% to 15% of construction costs.
• Demolition and site preparation— the cost of scraping a lot to remove the debris from a damaged or destroyed structure, including potential asbestos abatement, lead remediation, and contaminated soil disposal.

Site improvements your contractor may not automatically include:

• Plants, trees, and shrubs
• Walkways, patios, driveways, and retaining walls
• Landscape lighting (path lights, Malibu lighting, security lighting)
• Sprinkler and irrigation systems
• Fencing and gates
• Pergolas, outdoor kitchens, fire pits, and other exterior features

The contractor’s number, with all of these categories included, is your starting point for how much dwelling coverage you need. Not your home’s market value. Not the square footage calculator. Not the number your insurer suggested when you bought the policy five years ago.

Understand the Land vs. Structure Distinction

If your property sells for $1,000,000, it is very likely the land is worth about $500,000 and the structures are worth about $500,000 (very rough numbers). Your dwelling coverage limit should be based on the cost to rebuild the structures— not the market value of the property. The land does not burn. You are only insuring what sits on it.

Strategies to Maximize Recovery When Underinsured

1. Get an independent rebuild estimate.Do not accept the insurer's estimate of rebuild cost. Hire a licensed contractor or professional estimator who understands current local costs. This is your baseline for negotiation.
2. Claim every applicable coverage separately.Ensure that debris removal, O&L, other structures, landscaping, and ALE are all claimed and paid from their own sublimits — not from Coverage A. Every dollar that comes from a sublimit rather than Coverage A preserves your dwelling limit for actual construction.
3. Maximize your contents claim. Use our free Personal Property Inventory Tool to document every item you owned. Be thorough — many policyholders significantly underutilize their contents coverage by not inventorying completely.
4. Invoke the extended replacement cost endorsement. If you have one, commit to rebuilding and trigger the additional coverage. The math often works out heavily in your favor.
5. Challenge the insurer's valuation. If the insurer is undervaluing the rebuild cost within your policy limits, fight the scope and Xactimate pricing. Even within an underinsured claim, the insurer must pay your full limit — they cannot lowball you below that.
6. Investigate agent or insurer liability. If the insurer or agent set your Coverage A limit based on their valuation tool and that tool was materially wrong, consult an attorney about a potential negligence claim. This is separate from your insurance claim and can potentially recover the gap.
7. Explore government assistance. FEMA grants (up to $43,600 as of the 2025 fiscal year, adjusted annually), SBA disaster loans (low-interest), and state programs may help fill the gap. These are not substitutes for insurance but can supplement it.

Rebuilding vs. Cashing Out When Underinsured

If you are significantly underinsured, you face a difficult choice: rebuild with a large out-of-pocket cost, or take a cash settlement and use it toward a different property. Key considerations:

• Rebuilding triggers extended replacement cost. If you have an extended replacement cost endorsement, rebuilding unlocks the additional 25–50%. Cashing out forfeits this.
• Cash settlement is limited to ACV. If you do not rebuild, the insurer pays the actual cash value (depreciated value) of your home — not the replacement cost. This is a significant reduction.
• Contents holdback requires replacement. Under a replacement cost policy, you receive the depreciation holdback on contents only when you actually replace items. If you do not replace, you receive only ACV.
• Tax implications differ. Insurance proceeds for rebuilding are generally not taxable. Cash settlements above your cost basis may have tax implications. Consult a tax professional.

This article is for informational purposes only and does not constitute legal advice. Insurance policies and applicable law vary by state and by policy form. Consult with a licensed professional regarding your specific situation.

Written by Leland Coontz III, Licensed Public Adjuster, CA License #2B53445.