Confusing policies, rising construction costs, and lengthy claims resolution timelines can leave families in disarray even when they think they are fully compensated.
“It’s like a dollhouse,” Emily Gershon says of her Maryland home. “From the front, it looks OK. But the whole back of the house and the roof is gone.”
On a crisp October day, Gershon and her husband were clearing limbs and burning leaves, an annual fall ritual across the Northeast. They weren’t reckless, Gershon said. “We’re the ones who look at county codes in advance. Is there a certain time of year? Does it have to be a certain distance from the house? What condition does the ground have to be in?”
A small fire scorched the side of the house during the work, but was quickly extinguished. At first, the damage seemed minimal. However, when he looked up after putting out the fire, he saw smoke rising from the chimney.
The fire chief called it a “freak accident.” Somehow, embers became wedged between the house’s vinyl siding and exterior, spreading the fire throughout the attic.
Gershon and her husband were able to safely evacuate their two young children, but in the weeks that followed, they faced a different kind of challenge: the wide gulf between the promise of their insurance policy and the reality of rebuilding.
When coverage and costs differ
After the fire, Gershon and her husband began putting together estimates to rebuild their home. The local fire department estimated the damage at about $750,000. An architect’s feasibility study estimates the rebuilding cost to be between $600,000 and $900,000. What is the insurance company number? Actual cash value is approximately $258,000, with replacement cost in the low $300,000 range.
For Gershon, the contradiction was jarring. Her homeowners insurance policy listed $500,000 in home coverage and 25% extended coverage.
Seeking clarity, the Gershons hired a veteran restoration contractor, a former insurance agent with decades of experience. His initial estimate was about $383,000 for the basement, first floor, roof and exterior. But even this amount won’t fully restore the home to its pre-loss condition, since his estimate doesn’t include the second floor, hidden porch, or landscaping.
As of this writing, Mr. Gerson’s claims are continuing, and these assessments may change as the process progresses. But questions remain. Even if the homeowner believes they did everything right, how can a discrepancy of this magnitude occur?
“When you look at your insurance policy, it feels like you have coverage there,” she says. “But then we get a number that doesn’t reflect the actual cost of rebuilding, and it just doesn’t make any sense.
How Replacement Cost Coverage Issues
In situations like the Gershons’, a combination of factors can result in coverage discrepancies, from differences in reconstruction estimates to policy limitations, valuation methods, and claims procedures.
Insurers control the claims process and the language of the insurance contracts themselves, creating an inherent power imbalance between insurers and policyholders. Homeowners who earn less than their insurance policy promises may feel that their carrier is being dishonest or operating in bad faith.
However, the legal standard for bad faith is much higher than a simple dispute over insurance payments. Courts typically seek evidence that the insurance company knowingly or recklessly failed to fairly investigate, communicate, and settle the claim.
Gershon isn’t ready to say the situation has reached that point yet, and says he’s surprised people are suggesting bringing in outside help so quickly. “People kept telling us to hire a lawyer or a public adjuster,” Gershon said. “I’ve been thinking: Why do I have to hire someone just to enforce a legally binding contract? That shouldn’t be the first step a homeowner feels they have to take to get their insurance company to comply with the terms of their policy.”
Although bad faith requires clear evidence of wrongdoing, many conflicts arise from more complex forces. Challenges with estimating software, rising construction costs, suppressed depreciation, and confusing rebuilding estimates can all lead to a gap between a homeowner’s expectations and the insurance company’s initial payment.
Common quoting software and inflation leave homeowners underinsured
Many policies rely on approval of inflation guards to prevent coverage limits from lagging construction inflation. “Dwelling and personal property limits for homeowners are automatically increased each year to account for rising construction materials and labor costs,” said Mark Friedlander, senior director of media relations at the Insurance Information Institute. “This protects against under-insurance and ensures policyholders receive sufficient replacement cost coverage to repair or rebuild their home after a covered loss.”
But over the past few years, construction costs have been completely unpredictable. Inflation peaked at 9.1% in June 2022, but construction costs remain volatile. Prices for home construction materials and labor rose sharply from 2020 to 2022. In some cases, this far exceeds the inflation guard adjustment, which averages 2% to 4% per year.
If the cost of reconstruction exceeds the insurance limit adjustment, the results are not only confusing, but can also mean significant underinsurance.
Consumer advocates argue that the way residency limits are calculated could widen the gap even further.
“The crux of the problem is that in areas experiencing urban conflagrations, such as Boulder and Los Angeles, insurers continue to use quoting software and set housing limits that are unrealistic at current prices. Inflation guard provisions rarely generate enough additional coverage to fill gaps in underinsured coverage.”
— Amy Buck, co-founder of United Policyholders
In recent cases reviewed by United Policyholders, Bach said homes insured for less than $400 per square foot faced rebuilding costs of nearly $850 per square foot. “And that’s the lowest gap people have.”
It is estimated that approximately two-thirds of U.S. carriers use the software program 360Value to estimate home limits on home insurance policies, and adjusters use the Xactimate program to estimate the cost of rebuilding after a loss. Both estimating tools are owned by Verisk, an insurance analytics company.
Policy language and limited cash flow create additional hurdles for homeowners
Policy language can also cause confusion for homeowners, especially regarding the difference between actual cash value (ACV) and replacement cost (RCV). ACV reflects the value of an item or structure at the time of loss after taking depreciation into account. Some insurance policies only pay ACV. This means that the depreciated value is never recovered.
Replacement cost policies work differently and don’t always work the way homeowners expect. Even with RCV coverage, insurance companies typically issue initial payments based on ACV. The remaining amount (often referred to as the depreciation reserve) will only be paid after the repairs are completed and receipts are submitted.
In these cases, the problem is not a lack of coverage, but a lack of liquidity. Replacement cost benefits and certain deposits are often paid in stages or through redemption, so homeowners may need to access savings, credit or other funds to begin repairs before receiving the full amount of the claim. Additional living expense payments may also be reimbursed monthly rather than upfront.
That can be a challenge for many families. According to Bankrate’s 2026 Annual Emergency Savings Report, only 47% of Americans say they have enough available funds to cover an emergency expense of $1,000.
“We completely underestimated how much it would cost just to replace the basics,” Gershon says. “The night of the fire, when the truck was still out, I was ordering toothpaste, contact fluid, underwear and socks over the phone. We have a baby and a toddler, and I was just waiting until the next morning to drop them off. It was $1,000.”
Some homeowners utilize benefit assignment agreements that allow contractors to receive insurance proceeds directly in exchange for starting repairs. But these arrangements are facing increasing scrutiny.
“Benefit allocation provisions allow cash-strapped consumers to allocate insurance funds to a roofer or contractor to begin the necessary work,” Bach says. “But there has been so much abuse of these provisions that Florida has banned them, and other states, including Washington, are considering similar restrictions.”
Decoding insurance terminology
Undisclosed home improvements may expand coverage
Beyond policy mechanics and cash flow issues, other factors can widen the gap between coverage and rebuilding costs, such as home renovation costs that weren’t reported to the insurance company. Homeowners often renew their policies after major renovations, but smaller upgrades can add up over time and significantly increase a home’s rebuild value.
Gershon discovered this when her insurance company started estimating the value of her home’s finishes. The insurance company’s original estimate allowed about $1,500 for wallpaper throughout the house. “Just the wallpaper in my daughter’s room costs that much,” she says. The same issue occurred with upgraded light switches and hardware allowances.
Gershon acknowledged that he did not notify carriers about these incremental upgrades at the time, saying, “There were no individual upgrades that would cost $25,000.” Still, she expected those differences to become apparent during testing.
Before and after images of the Gershon home’s living room with custom wallpaper and upgraded finishes before the fire.
Many homeowners, like Mr. Gershon, have chosen to purchase additional coverage, such as replacement cost extensions and replacement cost coverage, which kick in once the home is no longer restricted. Extended replacement allows you to pay 25% or 50% on top of your home limit, and guaranteed replacement pays for the full cost of rebuilding your home after a disaster.
However, these approvals often come with policy clauses that require the homeowner to allow the airline to maintain the inflation guard in place. The carrier may also require you to notify them of any changes to your home that may increase the cost of rebuilding.
“Some insurance policies require you to notify your insurance company if you make modifications that cost more than a certain amount,” says Bach. United policyholders generally recommend an annual insurance checkup to fine-tune your limits.
How to strengthen your insurance safety net
Homebuyers scrutinize mortgage rates and loan terms down to the decimal point, but many rely on others to make insurance coverage decisions. “There are so many things in life that you need to know and worry about,” Gershon says. “It’s easy to trust the experts and think you’re covered.”
But each of these professionals has their own priorities. Lenders want to protect their loans. A real estate agent wants to sell a house. Agents must balance coverage with underwriting guidelines and what buyers are willing to pay. Home insurance costs average $2,424 per year and rising, so while price is important, coverage is more important. There is no point in saving on insurance premiums if you run out of insurance premiums when a disaster occurs.
Homeowners insurance is designed to share the financial risk of loss, but several factors must work together to do so effectively. In addition to maintaining adequate coverage, homeowners also need to understand what their insurance actually provides and have access to sufficient savings and funds to navigate the claims process.
It also depends on trust that the carrier will honor the promises made in the contract.
In most cases, claims are resolved without major disputes. However, if a homeowner’s expectations and what the insurance ultimately pays do not match, policyholders may need to seek additional guidance from contractors, public adjusters, and legal experts to ensure the coverage they purchase works as intended.
“We realize how blessed we are,” Gershon says. “This is stressful financially, but it doesn’t destroy us. We are educated, have flexible jobs, and have the time and confidence to advocate for ourselves. But if it’s this hard for us, I can’t imagine how hard it is for someone who doesn’t have those advantages. That’s why I’m sharing our story. I hope it helps other homeowners understand what they’re facing.”