Most U.S. Home Insurance Policies Cover Only 70% of What a Rebuild Would Cost. The Shortfall Has Widened for a Decade.

The average U.S. homeowner with a mortgage insures only 70% of what it would cost to rebuild their home from scratch. That's the finding of a Harvard Business School working paper that, for the first time, links roughly 100 million individual mortgage records to insurance policy data at scale. And 70% understates the current problem: the researchers found that average coverage ratios declined from 70% in 2011 to roughly 50% by 2020. The shortfall between what policies pay and what rebuilds cost has widened steadily for more than a decade.

The Marshall Fire put that math into real numbers. It destroyed more than 1,000 homes in Boulder County, Colorado in December 2021. A Federal Reserve Bank of Philadelphia working paper using contract-level data from roughly 5,000 Marshall Fire claims found that 74% of affected homeowners were underinsured, with 36% classified as severely underinsured, meaning their coverage fell below 75% of replacement cost. Colorado's Division of Insurance found that only 8% of homeowners carried guaranteed replacement coverage.

The study, "The Limits of Insurance Demand and the Growing Protection Gap," was led by Parinitha Sastry and co-authors from Harvard Business School, Columbia Business School and the Federal Reserve, and presented at the 2024 Duke Corporate Finance Conference. Using approximately 100 million mortgage records linked to insurance policy data, the researchers calculated what share of estimated rebuild costs homeowners carry in coverage.

Homeowners in Alabama and Mississippi carry close to or below 50% of their rebuild costs in coverage. Louisiana homeowners cover only 58% to 60%. A total loss in any of those states leaves the household responsible for a large share of the reconstruction bill, drawing on savings, debt or federal disaster aid. But underinsurance isn't limited to high-risk coastal states. Coverage shortfalls are widespread in any market where home values and construction costs have risen faster than policyholders have updated their coverage limits.

Underinsurance rarely starts as a deliberate choice. It accumulates through several factors most homeowners never think about.

Policies are typically set at purchase and never adjusted for inflation. Coverage A limits, which set the maximum payout for a total loss, don't automatically adjust as construction costs rise. The Turner Building Cost Index, which measures nationwide nonresidential construction labor and materials costs, rose 8% in 2022 and 6% in 2023 during the post-pandemic surge, then continued rising 3.9% in 2024 and 4.1% in 2025, reaching its highest recorded value. Homeowners who haven't revisited their Coverage A limit in several years are carrying a limit that reflects a construction market that no longer exists.

Market value and replacement cost are different numbers. Market value includes the land, which can't burn. Replacement cost is the price to rebuild the structure at current labor and materials costs, which in high-cost markets like California or Colorado can be much higher than the sale price.

Premium increases push coverage down, not up. The Sastry research found that a 1% increase in insurance prices is associated with a 0.3% to 0.8% decline in coverage. When premiums rise and homeowners try to keep total housing costs manageable, they accept lower coverage limits. Higher premiums can erode coverage from the inside.

Lenders require insurance at the loan balance, not at replacement cost. A homeowner who has paid down their mortgage may carry a policy that protects the lender's interest but not the full cost to rebuild.

MoneyGeek combined Sastry et al.'s state-level coverage ratios with its own 2026 premium data to produce a comparison that hasn't appeared elsewhere. The pattern it surfaces undermines a common assumption: that homeowners paying the most for insurance are buying the most protection.

Louisiana homeowners pay $7,304 per year on average and cover only 58% of rebuild costs at the median. Massachusetts homeowners pay $1,647 and cover 84%. Louisiana homeowners pay 4.4 times more annually and absorb roughly 26 additional percentage points of rebuild exposure themselves. Texas homeowners pay $6,715 and cover 59% of rebuild costs. Georgia homeowners pay $2,498, comparable to Connecticut's $2,054, but carry a coverage ratio 20 percentage points lower.

The pattern inverts the intuition that higher premiums signal better coverage. They signal higher risk, not higher protection. The worst-covered states aren't paying less to absorb more risk. In most cases, they're paying more.

Underinsurance falls hardest on the homeowners least able to absorb it.

A 2026 NBER working paper by Blonz, Keys, Mulder and co-authors, using 70 million insurance policies linked to mortgage data, found that homeowners with low credit scores pay 24% more for identical coverage than high-credit homeowners, a difference of roughly $550 per year on average nationally. In some states, low-credit homeowners spend over 40% of their mortgage costs on insurance alone.

The Sastry research found a direct correlation between credit scores and coverage ratios. Homeowners with lower credit scores pay the most and carry the least coverage. Those above 780 average 70% to 85%.

In California, a March 2026 report from UC Berkeley's Terner Center found that 40% of mobile home owners without a mortgage, around 98,000 households, were entirely uninsured in 2023. Uninsured rates for condo owners were 31%. Low-income California homeowners earning under $66,000 annually spent 3% of household income on home insurance in 2023, versus roughly 1% for the median earner.

The financial consequences of underinsurance extend past the repair bill, and the Marshall Fire data shows exactly how.

Sastry and co-authors tracked borrower outcomes after Hurricanes Harvey and Irma in 2017 and found that underinsured borrowers were more likely to default on their mortgage after the storm by 38 basis points compared to fully insured borrowers, with elevated default rates persisting for the following year.

The Philadelphia Fed's Marshall Fire analysis adds a displacement dimension. Each 10 percentage-point increase in underinsurance reduced the likelihood of a homeowner filing a rebuilding permit within one year of the fire by four percentage points. Underinsurance reduced total rebuilding permits filed within one year by 25% and contributed to more than half of all property sales of destroyed homes within 18 months of the fire. For many households, the shortfall didn't just create a financial problem. It ended homeownership entirely.

Most standard homeowners policies include a coinsurance clause, often called the 80% rule, that requires policyholders to insure their home for at least 80% of its full replacement value to receive full claim payments on partial losses.

If a home costs $500,000 to rebuild and the homeowner carries $300,000 in dwelling coverage (60% of replacement value), partial claim payments are reduced proportionally. A $100,000 kitchen fire might pay out $75,000, not because of the deductible, but because the policy fell below the 80% threshold and the coinsurance formula applied. Most homeowners who trigger this provision didn't know it was in their policy.

Homeowners can calculate their coverage ratio in three steps. First, find the Coverage A (dwelling coverage) limit on the policy declarations page. Second, estimate replacement cost by multiplying square footage by local per-square-foot construction costs. Regional replacement cost data from CoreLogic's Marshall & Swift database, the industry standard for insurer dwelling valuations, shows wide variation by market. Your insurer or agent can run a precise replacement cost calculation using that tool. Third, divide the Coverage A limit by the replacement cost estimate.

A ratio below 0.8 puts the policyholder below the threshold where most standard policies apply the coinsurance penalty. A ratio below 1.0 means any total loss leaves a shortfall.

Two endorsements can address that shortfall where available: extended replacement cost coverage, which adds 25% to 50% above the stated limit, and guaranteed replacement cost coverage, which pays whatever the rebuild costs with no cap.

Use MoneyGeek's home insurance calculator to check your coverage against current replacement cost estimates for your state and home size, then ask your insurer about extended or guaranteed replacement cost endorsements if there's a shortfall.