After California Wildfires: What Homeowners Need to Know

The Problem of Underinsurance

After every major wildfire in California, thousands of families discover that their homeowner’s insurance policy does not cover the full cost of rebuilding. This problem—known as underinsurance—has been well-documented for years.

In the past, many insurers offered guaranteed replacement cost coverage, which promised to rebuild the home regardless of actual costs. But as wildfire and natural disaster risks increased, insurers phased out these policies. In their place, insurers now rely on Coverage A, which caps the payout at a specific dollar amount listed on the policy.

The problem: after a total loss, that amount is often far less than what it costs to actually rebuild.

Why Rebuilding Costs Exceed Policy Limits

Several factors drive the gap between policy limits and rebuilding costs:

• Rising construction costs: After major disasters, demand for building materials and labor spikes, often pushing prices dramatically higher.
• Labor shortages: Especially in rural or high-fire areas, there may not be enough contractors or skilled workers, further driving up costs.
• Custom homes: Many policies rely on generic software estimates that don’t reflect the cost of custom features unique to individual homes. 

Faulty Estimates and Outdated Tools

As highlighted in a San Francisco Chronicle investigation, insurers rely heavily on software tools to estimate rebuilding costs and set policy limits. These tools often:

• Use outdated or incomplete data.
• Fail to account for regional labor shortages or disaster-driven price spikes.
• Underestimate the cost of custom features and finishes.

The Chronicle found that insurers often prioritize offering “affordable” policies that attract customers, rather than policies that would truly cover rebuilding—because higher premiums can drive homeowners to shop elsewhere.

The result: many homeowners unknowingly pay for policies that leave them dangerously underinsured.

Legal Challenges for Homeowners

When underinsurance becomes clear after a loss, some homeowners turn to lawsuits against insurers or agents. But California law makes these cases difficult.

Generally, insurance agents in California have no duty to ensure a homeowner purchases “sufficient” coverage.     Instead, liability usually arises only if:

• The agent failed to obtain coverage the customer specifically requested.
• The agent misrepresented or omitted important policy details.
• The agent held themselves out as having special expertise in replacement-cost coverage and gave faulty advice.

A key case—Volk v. State Farm General Insurance Co. (2021) 69 Cal.App.5th 243—illustrates the challenge. Both the trial court and the Court of Appeal dismissed the homeowner’s claim, finding:

• The insured did not make a specific request for higher coverage.
• The agent did not make specific promises about coverage adequacy.
• State Farm gave clear notice that its estimates were not guarantees of coverage.
  

What Homeowners Should Do

Because legal remedies are limited, the best protection is prevention. Homeowners should:

1. Review their policy limits carefully each year—especially Coverage A.
2. Ask their agent for updated replacement cost estimates, and whether the policy truly reflects local rebuilding costs.
3. Consider extended replacement cost endorsements or inflation protection options, if available.
4. Document upgrades and custom features that may increase rebuilding costs and confirm they’re accounted for.
5. Get independent estimates from contractors rather than relying solely on insurer software. 

Bottom Line

Underinsurance is not a new issue, but it’s becoming more urgent as wildfire risks and rebuilding costs soar. Homeowners cannot assume their current policy will be enough to rebuild after a catastrophic loss. By taking proactive steps—and not just relying on insurer estimates—they can reduce the risk of devastating financial shortfalls after a wildfire.

If you should have any questions or are in need of further information, please call the Law Offices of Timothy D. McGonigle for a free confidential consultation. Telephone number: (800) 713-5260