Only 1 in 12 Homes in This State Has Full Replacement Coverage—Is Yours One of Them?

Only 8% of homeowners insurance policies analyzed by the Colorado Division of Insurance included the kind of “no-cap” protection that can virtually eliminate the risk of coming up short when rebuilding a home after a catastrophic loss.

In its review of 951 homes connected to claims from the December 2021 Marshall Fire—which destroyed nearly 1,000 homes and businesses and caused more than $2 billion in property damage—the DOI found just 76 policies included guaranteed replacement cost coverage. This type of coverage pays what it actually costs to rebuild to like kind and quality, even if construction prices surge past the stated dwelling limit.

This isn’t just a Colorado problem, though. As natural disasters like wildfires, tornadoes, and hurricanes grow more frequent, and rebuild costs keep climbing, underinsurance is becoming a growing risk nationwide.

In 2024, the most recent year for which data is available, the average construction cost of a typical single-family home was just under $430,000, or roughly $162 per square foot—the highest in the history of the National Association of Home Builders’ series. 

Yet most homeowners think they’re covered: Nearly three-quarters (74%) of Americans reported they believe their insurance would pay the full cost to replace their home if disaster struck, according to a 2020 Policygenius survey.

It’s a sobering reminder nearly a year after the Los Angeles wildfires destroyed close to 11,000 homes. Claire O’Connor, a Los Angeles real estate agent and homeowner who lost her home in the Palisades fire, told Realtor.com® in May that the old habit of “set it and forget it” insurance policies no longer works.

Prevention now starts on paper, by knowing what your policy will actually pay before you need it.

Most 'replacement cost' policies are still capped

When people hear “full replacement coverage,” they often assume it means that if their home is destroyed, insurance will pay whatever it costs to rebuild. 

But that level of protection is usually the rarest “no-cap” form of coverage—often called guaranteed replacement cost—that’s designed to pay the full cost to rebuild, even if construction prices surge past the stated limit. 

Most homeowners policies work differently. 

Even if your policy is written on a replacement cost basis, your dwelling/structure limit (often shown as Coverage A – Dwelling) still functions as a cap. That’s why homeowners can be insured and still come up short: Rebuild bids can exceed the dwelling limit, especially after a disaster when labor and materials spike.

Then there’s the middle ground: extended replacement cost coverage. This is a common add-on that increases how much your insurer can pay above Coverage A, often by a set percentage. It can reduce the risk of a shortfall, but it’s still not unlimited, and eligibility or other conditions vary by insurer and state.

One reason that underinsurance may be so common is simple confusion. Nearly half (49.4%) of homeowners mistakenly think insurance should be based on a home’s market value, when the critical number for coverage is rebuild cost, according to the Policygenius survey.

The Marshall Fire coverage gap in charts

The Marshall Fire offers a glimpse at the risk that these knowledge gaps create for homeowners. Colorado's DOI analysis found that guaranteed replacement cost coverage was highly uncommon.

Instead of a no-cap policy, most homeowners had extended replacement cost coverage, the middle-ground option that allows insurers to pay above the dwelling limit (Coverage A). While this buffer helps, it isn’t unlimited.

To illustrate the real-world impact of the coverage gap, the DOI modeled rebuilding costs of $250, $300, and $350 per square foot for each affected town, such as Boulder, Louisville, and Superior. In those scenarios, underinsurance could force homeowners to cover roughly $98,967 to $242,670 out of pocket to rebuild.

Market value confusion is a major driver of underinsurance

So why is underinsurance still a problem? Researchers at the University of Colorado at Boulder and the University of Wisconsin-Madison set out to find out.

Their 2024 research found that homeowners shopped based on their monthly premium, not the coverage limits, even when they were displayed prominently on the declarations page of a policy.

It’s easy to understand why. Home insurance prices ballooned by 33% from 2020 to 2023, and are projected to surge 16% more by 2027. Those kinds of rising costs put additional pressure on homeowners, who may feel forced to opt for the most affordable option today, forgoing the highest level of coverage for a tomorrow that may never come.

The study describes this as “coverage neglect.” People respond to the sticker price, but don’t fully account for how much coverage they’re giving up to get that lower bill. The result is that a policy can look like a deal, when it’s really cheaper because it would pay less after a total loss.

Some of this may be solved by shopping policies from different providers. The researchers estimate that if homeowners compared insurers using coverage-adjusted pricing—so quotes are normalized to the same coverage level—the average homeowner could save about $290 a year.

Policy check: The numbers you need to know (and where to find them)

It’s worth taking a moment to review your coverage so you understand your potential exposure. Here’s where to start.

Step 1: Find Coverage A (dwelling)

Begin with your declarations page (the summary at the front of your policy packet). Look for a line that reads “Coverage A – Dwelling” (or “Dwelling”). This is the base limit your insurer will use to rebuild the main structure.

Step 2: Identify any 'extended replacement' language (and the %)

On the declarations page or in an endorsement, you may see “Extended Replacement Cost,” “Extended Dwelling,” or similar wording, sometimes shown as a percentage above Coverage A.

If you see it, write down the percentage and any conditions noted (some policies require you to rebuild, or to document higher costs, to access the extended amount).

If you don’t see it on the declarations page, check the endorsements section for anything that modifies Coverage A or mentions “replacement cost” beyond the limit. And if it's not there, you may not have any additional coverage over your dwelling cap. That could leave you exposed to additional costs in the event of a total loss of your home.

Step 3: Run a rough rebuild estimate

To calculate a rebuild estimate, multiply the square footage of your home by the local rebuild cost per square foot, which you may be able to estimate from local contractors, and use NAHB’s national benchmark as a gut check.

Step 4: Compare your coverage to your rebuild estimate

If your coverage is less than your rebuild estimate, you likely have a coverage gap, meaning your policy limit (even with the “extended” buffer) may not be enough to rebuild at today’s costs.

It may be time to review your policy, and consider shopping among insurance providers for the most savings.