Home Ownership
What to Know About Homeowners Insurance Before You Buy or Renew
Homeowners insurance is required by virtually every mortgage lender — and for good reason. It protects the asset the loan is secured against. But the policy you buy at closing is not automatically the right policy, and the coverage that was adequate five years ago may not be adequate today. This page covers how the coverage works, where the gaps tend to appear, and what to look for when you are buying or reviewing a policy.
At a Glance
The Four Coverage Areas in a Standard Policy
A standard homeowners policy (HO-3) covers four things: the structure of your home, your personal belongings, your liability if someone is injured on your property, and your living expenses if you cannot occupy the home during repairs. Each of these has a coverage limit, and each can be adjusted.
Dwelling Coverage
The structure of the home
Should equal the cost to rebuild — not the market value or purchase price. These are different numbers.
Personal Property
Your belongings inside the home
Typically set at 50-70% of dwelling coverage. High-value items often carry sublimits that apply regardless of the overall limit.
Liability
Injuries or damage you cause others
Default limits often start at $100,000. Homeowners with significant assets typically carry more, or add an umbrella policy.
Loss of Use
Living expenses if the home is uninhabitable
Usually 20-30% of dwelling coverage. Covers hotel, meals, and temporary housing during a covered repair.
Other Structures
Detached garages, fences, sheds
Typically 10% of dwelling coverage. May not be enough if detached structures are substantial.
What Is Not Covered
Flood, earthquake, and gradual damage
Standard policies exclude these. Each requires either a separate policy or an endorsement added to the base policy.
Coverage Gaps
Where Policies Fall Short
The most common and costly coverage gaps fall into three categories: the home is insured for less than it would cost to rebuild, the policy excludes the specific event that caused the loss, or the coverage limit was accurate when the policy was written but has not kept pace with rising construction costs or home improvements. All three are correctable before a claim — and none of them are visible until after one.
Underinsurance: The Rebuild Gap
Homeowners insurance is not based on what you paid for the home or what you could sell it for today. It is based on what it would cost to demolish and rebuild the structure from the ground up — including current labor rates, material costs, permits, and local building code upgrades. After the 2021 Marshall Fire in Colorado, 74% of policyholders were underinsured, with 36% holding coverage below 75% of actual rebuild cost. The same pattern appeared after the 2025 Palisades Fire in Los Angeles. Construction costs have increased significantly since 2020 and policies written before that period are frequently below where they need to be.
The fix is straightforward: ask your insurer to run a replacement cost estimator, or hire a licensed contractor or appraiser to give you a current rebuild figure. Then confirm your dwelling limit matches that number, not your purchase price.
Replacement Cost vs. Actual Cash Value
These are two different settlement methods, and they produce very different results. Replacement cost coverage pays what it costs to replace or repair your property at today’s prices, without deducting for depreciation. Actual cash value pays what the property is worth today — meaning depreciation is subtracted. On a 15-year-old roof, actual cash value might pay a fraction of what a replacement costs. Many policies cover the dwelling at replacement cost but default to actual cash value for personal property unless you specifically add replacement cost coverage for contents. Check which method your policy uses for each coverage category.
Flood Is Always Excluded
No standard homeowners policy covers flood damage. This is not a technicality — it is a categorical exclusion. Flood coverage requires a separate policy, typically through the National Flood Insurance Program (NFIP) or a private flood insurer. According to the Insurance Information Institute, only about 4-15% of U.S. homeowners carry flood insurance nationally, and in Texas following the 2025 flooding, only approximately 7% of residential properties were covered. Flood risk exists outside of mapped FEMA flood zones — roughly 25% of NFIP claims come from properties not in high-risk designated areas. If your property is in the Mid-Atlantic, near a river, in a low-lying area, or in a region with heavy rainfall, flood coverage deserves a specific conversation with your insurer.
Earthquake Is Also Excluded
Earthquake damage is excluded from standard policies. This includes ground movement, landslides, and sinkholes. A separate earthquake policy or endorsement is required. When an insurer writes a homeowners policy in most states, they are legally required to offer earthquake coverage for an additional premium, though most buyers decline it. In states with higher seismic activity, the cost is meaningful. For properties on the East Coast, coverage is available and premiums are generally lower because the actuarial risk is lower — but the coverage is still separate.
Ordinance and Law Coverage
If your home is damaged and local building codes have been updated since it was built, you may be required to bring the repaired structure up to current code — at your own expense, unless you have ordinance and law coverage. A standard policy pays to restore what was there; it does not pay for required upgrades. In older homes this gap can be significant: updated electrical systems, plumbing, insulation, and fire suppression requirements all carry real costs. Ordinance and law coverage is typically available as an endorsement and is inexpensive relative to the exposure it covers.
Personal Property Sublimits
Even if your total personal property limit is adequate, individual categories of items carry their own sublimits within that total. Jewelry theft is typically capped at $1,500 to $2,500 for all pieces combined — not per item. Fine art, collectibles, coins, and firearms have similar category caps. Electronics coverage varies by policy. These sublimits apply regardless of the overall coverage amount. If you have specific high-value items — an engagement ring, a watch collection, antiques, or art — a personal articles floater or scheduled property endorsement covers those items individually for their appraised value.
Additional Gaps Worth Knowing
Sewer and water backup: Water entering through a backed-up drain, sump pump failure, or sewer line is not covered by a standard policy. An endorsement adds this coverage, typically for a modest annual premium.
Gradual damage and maintenance: Insurance covers sudden, accidental loss — not deterioration over time. A roof that has been slowly leaking, mold from chronic moisture, or structural damage from deferred maintenance falls outside the policy. Timing and cause of loss matter in claims.
Home-based business: Standard policies do not cover business property or liability arising from business activity in the home. If you have clients visiting, store inventory, or run any commercial operation from your address, a business owner policy or endorsement is needed.
Short-term rentals: Renting your home through a platform like Airbnb or Vrbo changes your liability exposure in ways a standard homeowners policy does not cover. Most platforms carry some host protection, but it is not a substitute for purpose-built short-term rental coverage.
The Insurance Market
What Is Happening in the Market Right Now
The homeowners insurance market has changed meaningfully since 2020. Understanding what is driving those changes helps you make better decisions about your own coverage — particularly if you are buying in a state that has seen significant market disruption.
Non-Renewals and Market Exits
When Insurers Stop Writing in Your Area
In the Pacific Palisades area of Los Angeles, State Farm non-renewed approximately 1,600 policies in July 2024 — representing nearly 70% of policies in one ZIP code. When the Palisades Fire burned through those neighborhoods in January 2025, many homeowners had already been pushed onto California’s FAIR Plan, the state’s insurer of last resort. FAIR Plan coverage is intentionally minimal; it is a backstop, not a comprehensive policy. Allstate, AIG, and other carriers had also pulled back from the California market in the years prior. This is not a California-only trend — Florida, Texas, Louisiana, and parts of the Carolinas and Midwest have seen similar capacity reductions from admitted carriers, with homeowners increasingly landing in the Excess and Surplus (E&S) market, which carries higher premiums and fewer consumer protections.
Rising Costs and Higher Deductibles
How the Market Is Adjusting
Premiums rose significantly between 2020 and 2025 across most of the country. The drivers include increased catastrophe frequency, higher construction and labor costs, and reinsurance price increases passed through to consumers. Average deductibles increased roughly 24.5% from 2024 to 2025 alone. In high-risk states, hurricane and hail deductibles are now often set as a percentage of dwelling coverage rather than a flat dollar amount — a 2% deductible on a $500,000 home is $10,000 out of pocket before the insurer pays anything. As of 2026, the market is showing early signs of stabilization, but premiums remain historically high and availability in high-risk areas continues to be constrained.
What This Means at Closing
Insurance as a Purchase Variable
In some markets, homeowners insurance availability and cost have become material variables in whether a purchase works financially. A property that is difficult to insure — because of its age, location, construction type, or claims history — may carry insurance costs that change the monthly payment calculation significantly. In markets where admitted carriers have exited, buyers may face E&S policies with higher premiums, higher deductibles, and stricter terms. Getting insurance quotes before you go under contract — not at the final stages of closing — gives you an accurate picture of total carrying costs and time to address any coverage issues.
Underinsurance at Scale
A Pattern That Repeats After Every Major Disaster
Research published in December 2024 found that three-quarters of homeowners who lost their homes in a recent urban wildfire were not fully covered for total losses. After the Palisades and Eaton fires, insurers processed nearly 40,000 claims and paid over $20 billion — but settlement amounts fell short of rebuild costs for many policyholders. The consistent finding across these events is that coverage limits were set at purchase and never updated to reflect appreciation in rebuild costs. A home that cost $300,000 to replace in 2018 may cost $450,000 or more to replace today. If the policy limit has not changed, the gap is real and the homeowner bears it.
Policy Review
How to Assess Your Policy
A policy review does not require an insurance license. It requires reading the declarations page carefully and asking specific questions. The declarations page — the summary page at the front of your policy — tells you your coverage limits, your deductibles, and what endorsements you carry. These are the questions worth asking every time you renew.
- ✓Is my dwelling coverage limit equal to the current cost to rebuild — not the market value or purchase price? If you have not had this figure verified since 2020, the answer may be no.
- ✓Does my policy settle claims on a replacement cost basis or actual cash value? For personal property specifically — replacement cost for contents is not always the default and must be added.
- ✓What is my deductible structure? Is there a separate deductible for wind, hail, or hurricane events? In coastal and storm-prone markets, these are often percentage-based rather than flat amounts.
- ✓Do I have flood coverage? If not, what is my property’s flood risk — including areas outside designated high-risk zones?
- ✓Do I have ordinance and law coverage? If my home is more than 20 years old and sustained partial damage, local code compliance could represent a significant uninsured cost.
- ✓What are the sublimits on my personal property? Is jewelry, art, electronics, or any high-value category capped below what I own?
- ✓Do I have sewer and water backup coverage? This is an endorsement in most policies and is one of the more common residential water loss events.
- ✓What is my liability limit? If it is at $100,000, does that reflect my actual net worth and asset exposure?
- ✓Has anything changed since I last reviewed this policy — renovations, major purchases, a home office, short-term rentals, or a significant increase in home value?
- ✓Has my insurer issued a non-renewal notice, or do I know whether my carrier is still actively writing in my area? In some markets this is worth confirming proactively.
The Home Inventory
A home inventory is a documented record of your personal property — what you own, what it is worth, and ideally photographic or video evidence of its condition. Most people do not have one. In the event of a total loss, the burden of proving what you owned falls on you, not the insurer. A walkthrough video of your home stored somewhere off-site (a cloud service or external drive at a different location) costs nothing to make and is worth considerably more than nothing if you ever need it.
Insider Tips
Things That Are Not Always Explained at Closing
These are patterns that come up repeatedly for homebuyers and homeowners — points that get covered quickly at closing or not at all.
Get Insurance Quotes Before You Make an Offer
In markets where coverage availability is constrained, or where a property has features that affect insurability — age, roof condition, claims history, location — waiting until closing to shop insurance can create a last-minute problem. Some buyers have found that adequate coverage was materially more expensive than they anticipated, or that the property was difficult to insure at all. Getting quotes early makes the cost visible before you are committed.
The Escrow Amount and the Right Amount Are Not the Same Thing
When your lender sets up an escrow account to pay your homeowners insurance premium, they are collecting what is required to pay the policy you chose — not necessarily the policy you should have. Lenders require you to carry insurance on the structure; they do not audit your dwelling limit for accuracy, verify your contents coverage, or check whether you have endorsements that fill gaps. The escrow process confirms payment, not adequacy.
Extended and Guaranteed Replacement Cost
Standard replacement cost coverage pays up to your policy limit. Extended replacement cost pays a specified percentage above that limit — commonly 20-25% — if rebuild costs exceed what was projected. Guaranteed replacement cost pays whatever it actually costs to rebuild, regardless of the limit. Not all carriers offer guaranteed replacement cost, and extended replacement cost is available on many standard policies as an endorsement. In markets where construction costs have moved significantly, either option provides a meaningful buffer against the rebuild gap.
Your Claims History Affects More Than Your Premium
Insurers access a database called CLUE (Comprehensive Loss Underwriting Exchange) that tracks claims reported on a property for the prior seven years — including claims filed by previous owners. A property with multiple prior claims may be more expensive to insure or face restrictions on coverage. Before you purchase a home, you can request the CLUE report for the property, which will show the claims history. This is useful context for understanding any existing damage disclosures and for anticipating what your insurance shopping experience may look like.
Bundling Discounts and Independent Agents
Bundling your homeowners and auto policies with the same carrier typically produces a meaningful discount. A captive agent represents one insurer; an independent agent can shop your coverage across multiple carriers. In markets where pricing and availability vary significantly by company, working with an independent agent gives you broader access and a comparison point. In markets where admitted carriers have pulled back, an independent agent is often better positioned to source coverage through the E&S market than a direct-to-consumer channel.
Mitigation Measures Can Affect Both Coverage and Cost
In wildfire-prone, hurricane, and hail markets, some insurers offer premium credits for documented mitigation — impact-resistant roofing, storm shutters, wildfire-resistant landscaping, updated electrical panels, or whole-home generators. In some markets, mitigation is increasingly a condition of coverage rather than just a discount driver. If you are in a high-risk area, understanding what your insurer credits for — and what competing insurers require — can affect both the availability and the price of your coverage in future renewal cycles.
Have Questions
Questions About Insurance as It Relates to Your Purchase or Mortgage
Insurance questions come up throughout the mortgage process — at pre-approval, during underwriting, and at closing. If you have questions about how insurance affects your loan, what lenders require, or how coverage fits into your total monthly payment, call or text me directly.
Call or Text 410-795-8900FAQ
Common Questions
The dwelling coverage limit should equal the cost to rebuild your home at current construction prices — not the market value, not the purchase price, and not the outstanding loan balance. To get an accurate figure, ask your insurer to run a replacement cost estimator using current local labor and material costs. If you have made significant renovations since the policy was written, those improvements need to be reflected in the coverage limit as well.
No. Standard homeowners policies exclude flood damage categorically. This includes water that enters from the ground, rising water from storms, overflow from rivers or storm drains, and flash flooding. If rain enters through a damaged roof or broken window, that may be covered as windstorm or water damage from a covered peril — but water entering from the ground or through drainage is a flood loss. Flood coverage requires a separate policy through the National Flood Insurance Program or a private flood insurer. This applies even if you are not in a designated high-risk flood zone.
Your lender requires you to carry coverage on the structure of the home in an amount sufficient to protect their collateral. That is the minimum. It does not mean your contents are adequately covered, that you have replacement cost coverage rather than actual cash value, that you carry endorsements for flood, earthquake, or ordinance and law, or that your liability limits are appropriate. Lender requirements and adequate personal coverage are related but not the same thing.
A personal umbrella policy provides liability coverage above the limits of your homeowners and auto policies. If someone is seriously injured on your property and the damages exceed your homeowners liability limit, the umbrella policy covers the difference up to its own limit — typically $1 million to $5 million. Umbrella policies are generally inexpensive relative to the coverage they provide. Homeowners with meaningful assets, a swimming pool, a trampoline, or teenage drivers are commonly advised to carry one. The threshold question is whether your homeowners liability limit is meaningfully less than what you stand to lose in a serious liability event.
Insurers are required to provide advance notice of non-renewal — typically 30 to 60 days depending on your state. During that window, you need to find replacement coverage. If you cannot find coverage through the admitted market, your state’s FAIR Plan (or equivalent last-resort program) provides a backstop, though FAIR Plan policies generally carry narrower coverage, higher premiums, and lower limits than standard market policies. If your mortgage requires insurance and coverage lapses, your lender is permitted to place force-placed insurance on the property — which is expensive and covers only the lender’s interest, not your personal property or liability.
Yes. You can request a CLUE (Comprehensive Loss Underwriting Exchange) report for a property you are under contract to purchase. The report shows claims filed on that address for the prior seven years, including claims by previous owners. Your real estate agent can request the CLUE report as part of due diligence, or you can request it directly. A history of water damage claims, fire claims, or wind events is useful context for understanding the condition of the home and for anticipating what insurance underwriters may flag when you go to bind coverage.
A percentage deductible for wind, hail, or hurricane events is calculated as a percentage of your dwelling coverage limit — not a flat dollar amount. If your home is insured for $400,000 and you have a 2% hurricane deductible, your out-of-pocket exposure on a hurricane claim is $8,000 before insurance pays anything. At 5%, it is $20,000. These deductibles apply broadly in Gulf Coast, Atlantic Coast, and some Midwest markets. They are disclosed in your policy but are not always explained clearly at purchase. Review your declarations page to confirm whether any percentage deductibles apply and what the trigger event is.
Yes. Renovations that increase the rebuild cost of the home — a kitchen remodel, bathroom addition, finished basement, or structural expansion — should be reported to your insurer so your dwelling coverage limit reflects the current state of the structure. If you file a claim after a significant renovation and your coverage limit was set before that work was done, the settlement may not cover the full cost of restoration. Most policies have provisions for notifying the insurer of improvements, and many insurers will adjust your limit accordingly.
Loss of use coverage (also called additional living expenses) pays for the increased costs of living elsewhere while your home is being repaired from a covered loss — hotel or rental costs, meals above your normal food budget, and other documented additional expenses. It does not pay your normal living costs; it covers the difference between your normal costs and the elevated costs you incur because you cannot live in your home. Most policies set this limit at 20-30% of your dwelling coverage. Loss of use claims do not typically require a deductible, but they apply only when the displacement results from a covered peril — if the home is uninhabitable due to a flood and you do not have flood coverage, loss of use does not apply.
Questions
Insurance questions that come up during a purchase or refinance are worth a direct conversation.
I work through the insurance requirements with every client I work with. If you have questions about what lenders require, how insurance affects your escrow payment, or how coverage fits into the full cost picture of a purchase — call or text me.
Call or Text 410-795-8900