How to prevent underinsuring your home| Insurance.com

Why are so many homes underinsured?

Keith Balsiger, president of Balsiger Insurance in Reno, Nevada, says rising construction costs are one reason why so many homeowners become underinsured. Inflation drives up construction costs, but insurance policies don't always keep up.

Carole Walker, executive director at Rocky Mountain Insurance Information Association in Greenwood Village, Colorado, says one way to ensure your home is properly insured is to understand what replacement cost means. "That's not the market value, but the cost to rebuild in today's dollars -- your insurance company doesn't have an investment in what you can sell it for, but rather current repair and rebuilding costs," Walker says.

Few people know that insurance companies have an 80% rule for replacement cost insurance. You must insure your home for at least 80% of its replacement cost in order for claims to be covered in full. If you don't, the insurance company will reduce your claim payment based on how underinsured you are.

And if your home is totally destroyed and you're underinsured, there won't be enough to rebuild it.

How to make sure your home isn't underinsured

To ensure your home isn't underinsured, don't choose minimum coverage levels unless you're sure it's enough, notify your insurer of changes to your property, and review all of the coverages on your policy each year, including personal property and other structures, and any endorsements or exclusions on your policy.

Don't buy the minimum coverage

If you have a mortgage, your lender will require a certain minimum amount of homeowners insurance coverage. Depending on the terms of your financial contract, that amount may be the same as the unpaid mortgage balance or higher, sufficient to cover the home's replacement cost. Remember that neither the loan balance nor the market value represents the actual replacement cost of your home. Your coverage should always reflect the replacement cost.

The minimum liability protection you can get is usually $100,000, but experts recommend at least $300,000.

Skimping on coverage isn't worth it. You could save $50 or $100 by cutting your coverage, but your home is your largest investment and asset. It's wiser to look for other ways to save. For instance, consider raising your home insurance deductible. An Insurance.com rate analysis found that by jumping from a $500 deductible to $2,500, you'll save an average of $260 a year, though in some states you can save more than twice that much. You can also bundle your home and auto policies with the same company. Bundling is one of the biggest home insurance discounts you can get, saving on average about 19% a year.

Notify your insurer and update your policy if you do home renovations or add features

Improving your home adds to its value, but it can also leave you underinsured. Notify your insurer when you improve your home and increase your coverage to adequately protect your home.

A survey by Nationwide Insurance, a leading insurer, found that 55% of homeowners who completed a major renovation in the past two years did not report it to their insurer. That leaves those homes underinsured.

Even if you add a deck, pool, trampoline or woodstove to your property, you should tell your insurance company. Failing to do so could mean your policy won't pay out for damages or injuries from such new features.

Check your other structures coverage

Coverage B, or Other Structures, covers any structure that's not attached to the house. It's calculated as 10% of the dwelling coverage. So, if you have $200,000 in dwelling coverage, your other structures coverage is $20,000. The ZestyAI study found that 31% of homes have two structures, 11% have three, and 4% have more than three. Your insurance company may not be aware of the presence of these structures, especially if you live on an acreage.

Even if you have enough replacement-cost coverage for the home, your other structures coverage may not be enough if you have multiple structures or if one is furnished, such as a pool house. Increase your other structures coverage to protect all of the buildings on your property.

Update your personal property inventory

Make sure you adequately cover your personal items and that the inventory of what’s inside your house is up to date.

The contents of your house are protected under the personal property coverage part of your policy. Coverage limits are set as a percentage of dwelling coverage, usually 50% to 70%.

Personal possessions that are worth a lot, such as jewelry, art, antiques, guns and coin collections, are usually limited to $2,500 worth of coverage. If your items’ worth exceeds this amount, it’s wise to purchase extra coverage, called a rider or endorsement, up to the limit on these types of items. You'll need to provide receipts and appraisals to document replacement costs.

"Document your personal belongings by creating a home inventory with photos and receipts. Most insurance programs provide downloadable home inventory apps that make the process easier and will help take the headaches and heartaches out of the claims settlement process," Walker says.

Assess your exclusions and endorsements

You should also review your exclusions and endorsements, the parts of your policy that give or take away coverage. Endorsements can ensure you are fully protected and are typically very affordable. Reviewing your exclusions will help you determine how to protect your home from severe weather and if you need to buy more liability insurance.

Endorsements

Check your endorsements and ask about any you might need, such as for sewer back-up, additional personal property coverage, or a home-based business.

Sewer and sump-pump backup: Adding sewer and drain backup coverage to your homeowners policy is wise. It is one of the most common homeowners claims, averaging $10,000-$20,000 in expenses, and it is almost always excluded from a basic policy.

Extended personal property coverage: You can add additional coverage for damage to your personal property that is generally not covered by a standard policy, such as from a power surge.

Home-based business: If you have just a simple home office, you can typically get a home-based business endorsement to cover your office equipment and related property. But if you have a daycare, dog grooming or other type of full-fledged operation, you will need a separate commercial business policy to ensure full coverage.

Exclusions

Read the exclusions section of your policy to see if the coverage you need is excluded, such as for specific dog breeds or weather damage, such as wind or hail. Flood is always excluded; you must purchase a separate policy.

Dog breeds: Typically, a home insurance policy's liability coverage includes dogs. But a growing number of home insurers now exclude "dangerous" breeds from liability coverage due to the increasing amount and cost of dog bite claims. Others require dog owners to sign liability waivers for dog bites. If you have a dog, check your policy to see whether it excludes liability coverage.

Some insurers, including Liberty Mutual, Nationwide and Amica, don't discriminate based on breed and evaluate your dog based on its history and behavior. Also, some states, such as Maryland, Pennsylvania, and Michigan, don’t allow insurance companies to deny coverage to owners based on a specific dog breed. However, that doesn't prevent insurance companies from charging higher premiums, so some dog owners may still have difficulty getting coverage.

Wind and hail (some states): Standard policies in most states cover wind and hail damage, but in some areas, they are excluded, particularly where hurricanes and tornadoes are common. That means damage isn’t covered unless you buy separate wind and hail coverage. There are also exclusions for cosmetic roof damage from hail, which means if the roof is structurally damaged, you can file a claim, but if it is dinged up, you can’t. Be sure to check your policy for wind and hail exclusions to be sure you’re sufficiently covered.

Floods and earthquakes. Both floods and earthquakes are excluded from homeowners insurance. Flood insurance is sold as a separate policy, while earthquake coverage is usually an endorsement, but may be a separate policy.

How to choose replacement cost coverage limits

To choose replacement cost coverage limits for your home, get an accurate calculation of your home's replacement cost from an appraisal or by using the insurance company's calculator.

Make sure that you review it regularly to keep up with inflation. Your carrier will recalculate your replacement cost at each renewal as a guard against inflation, but it might not be enough. "While most policies have a built-in inflation guard it is very likely that it has not kept pace with the increasing cost to build," Balsiger says.

You can also add extended or guaranteed replacement cost endorsements to your policy. These add extra protection if the calculated amount falls short.

How to choose liability coverage limits

Liability coverage should be high enough to cover the costs of injuries or damage for which you could be held responsible, and protect your assets in a lawsuit.

"We live in a litigious society and you need to consider what could be at stake if you had a claim or lawsuit filed against you when someone is injured on your property or if you, a family member or a pet is responsible for hurting someone or causing damage to someone else's property," Walker says.

Liability limits range from $100,000 to $500,000, although some carriers offer up to $1 million, with $300,000 recommended to ensure sufficient coverage. If your assets exceed the highest available limit, you may want a separate umbrella policy. Umbrella insurance coverage starts at $1 million.

FAQ: Avoiding underinsurance

Can I insure my home for less than the replacement cost?

Yes, you can insure your home for less than the replacement cost, but it's not recommended. If you do, you might not have enough coverage to rebuild your home fully if it's destroyed. It's best to insure your home for its full replacement cost to ensure you're fully protected.

Sources:

ZestyAI. "Hidden in Plain Sight: A New Era of Risk Assessment Accounts for Multi-Structure Properties." Accessed October 2026

Nationwide. "Survey shows uptick in home renovation projects, but insurance coverage still lags." Accessed October 2026.

Kin Insurance. "Report: How many U.S. homes are underinsured?" Accessed October 2026