Glossary

Underinsurance

Carrying a coverage limit below what a loss would cost to repair or rebuild, which leaves the owner to pay the gap.

Also called: underinsured, underinsured home, inadequate coverage

Underinsurance means your limit is lower than what it would cost to put the property back. It most often shows up on the dwelling (Coverage A) but can apply to belongings and other coverages. Common causes are a limit set from the purchase price or tax assessment, years of rising construction costs, a remodel nobody reported to the insurer, and a policy renewed on autopilot.

The consequences depend on the loss. In a total loss, the policy pays up to the limit and nothing more. Say a home needs $450,000 to rebuild but is insured for $350,000: you cover the $100,000 difference. In a partial loss, a limit below 80% of rebuild cost can trigger the proportional formula in the loss settlement clause, so even a small claim is paid short. See coinsurance for the arithmetic.

Fixes are cheap compared with the risk. Get a current replacement cost estimate, compare it with your limit each year, report improvements, and consider extended replacement cost or an inflation endorsement as a margin. Rising premiums tempt owners to trim the limit, which is the wrong cut; see cutting coverage to save money: the cuts that backfire. If the gap has already been exposed by a disaster, underinsured after a disaster: your options covers the options.

Last reviewed October 10, 2026

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Related terms

Insurance to value The ratio of the coverage on a home to what it would cost to rebuild it today; 100% means the limit matches the rebuild cost. Coinsurance A policy clause that reduces a claim payment when the insurance carried falls below a required percentage of the property's value, usually 80% for homes. Replacement cost estimate A calculation of what it would cost to rebuild a home today, from its size, construction details and local labor and material prices. Extended replacement cost Extra dwelling coverage, often 25% or 50% above the Coverage A limit, that helps pay to rebuild when the actual cost after a loss exceeds the limit. Inflation guard An endorsement that raises your coverage limits a set percentage each year so they keep pace with rising rebuilding costs between renewals. Dwelling coverage (Coverage A) The part of a homeowners policy that pays to repair or rebuild the house itself, including attached structures such as a garage, porch or deck.

Related guides

FEMA disaster assistance vs insurance: what each pays FEMA grants and SBA loans are limited aid, not a substitute for insurance. What they pay, how they interact with your claim and the order to act. How much dwelling coverage do I need? Insure for the cost to rebuild at today's local prices, not your purchase price or mortgage. A six-step method, the 80% rule worked through and when to recheck. How much personal property coverage do you need? Your contents limit is usually a percentage of your dwelling limit, which is only a guess. Price what you own room by room and compare, with a worked example. Inflation, rebuilding costs and underinsurance Rebuilding costs rose nearly 30% in five years. How that leaves limits short, what research says drives underinsurance, and how to keep your limit current. Inflation guard and automatic coverage increases Inflation guard raises your dwelling limit by a set percentage or an index each year. How it works, what it misses and why it can't replace a rebuild estimate. Replacement cost vs market value: why your home's price is the wrong number Market value includes land and location; replacement cost is what builders charge to rebuild the structure. Why they diverge and which should set your limit.

Related insurers

AAA - Automobile Club of Southern California (Auto Club Enterprises) Southern California's AAA insurer, a member-only reciprocal exchange that writes home, condo and renters policies for the Auto Club and affiliated AAA clubs.

Related tools

Coinsurance and insurance-to-value calculator Test your dwelling limit against the 80% insurance-to-value rule and see how much a partial loss claim shrinks if you fall short. Homeowners coverage gap checker Tick the 16 statements that are true of your homeowners policy and the checker lists the gaps to fix or raise with your agent before renewal.