Homeowners: What Does it Mean to be Underinsured?

Megan Simonsen | Aug 23, 2022

A home is perhaps the single largest investment in a person’s life. When someone takes out a mortgage, they are also required to purchase a homeowner’s insurance policy that is acceptable to their lender. 

Homeowner’s insurance is important as it protects you and your home when fire, theft, injuries to others on your property, or natural disasters strike. But what happens when you have the wrong amount of insurance coverage for your home? 

All too often, homeowners have come to The Lane Law Firm because their insurance company refused to pay for covered damages because they were underinsured. Unfortunately, there is little we can do beyond explaining they were not fully covered. That's why we're dedicating this blog to the topic: what does it mean to be underinsured?

What Does it Mean to be Underinsured?

When a home is underinsured, it means the coverage limits are lower than your claim (or your potential claim) amount. In other words, the policy will pay you less than the expenses associated with the damage. You are also underinsured if you have an “ACV” or actual cash value policy.

Being underinsured is a huge risk and might not pay off when you have to file a claim.

3 Common Reasons Your Home May Be Underinsured

Here are three common reasons that homeowners might not have adequate insurance coverage. Unfortunately, most people don’t know or think about these reasons until after damages occur. If any of these situations apply to your homeowner’s insurance policy, it's smart to update your policy as soon as possible. 

1. You Only Purchased Insurance to Cover Your Mortgage

Lenders require only that the homeowner’s policy covers the amount of the mortgage. This often creates a problem because the mortgage amount rarely matches the home’s value. In fact, a significant down payment will widen this gap, leaving you even more exposed. 

2. Your Current Policy Doesn't Account for the Cost of a Rebuild

Even if your homeowner’s insurance covers the full, current sales value of your home, you may be underinsured due to the cost of rebuilding. Oftentimes, rebuilding a home will cost much more than your home is currently worth since construction costs are always rising.

3. Your Policy Did Not Provide Recoverable Depreciation

While the value of a home may appreciate over time, its individual elements will depreciate. Policies that do not provide for reimbursable or recoverable depreciation, called actual cash value policies (ACV), tend to create an ever-worsening situation. 

As an example, if you file a claim to replace a 15-yr old hail-damaged roof, you will receive a check based upon its actual cash value. Meaning the insurer will depreciate the value of your 30 year roof by at least 50%, leaving you far short of what it will cost to replace it. If instead you have a replacement cost policy (RCV), you will receive a second check to “recover” or reimburse you for the depreciation once the repairs are finished. 

What Do I Do if My Home is Underinsured and I Have an Open Claim?

When your home is underinsured, there is a gap between the actual cost of repairing or rebuilding your home and the payout from your insurance company. This can cause claim settlements to be delayed or derailed into litigation. Underinsurance is one of the most challenging obstacles we face when helping homeowners. 

If you've discovered that your home was underinsured and you have a denied or disputed claim, it's best to connect with a qualified insurance dispute resolution attorney as quickly as possible before any statute of limitation runs out. A qualified attorney can walk you through your options, and help you pursue the action that is most likely to deliver a favorable outcome.


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