Most homeowners assume that if their house is destroyed, their insurance policy will cover rebuilding it. That assumption gets tested only when it’s too late to fix, and when it has been tested at scale, the results have been worse than most people expect. A specific, well-documented case, Colorado’s 2021 Marshall Fire, gives a rare, measured look at just how common underinsurance actually is, even among homeowners who thought they had adequate coverage.
What did the Marshall Fire actually reveal about homeowners insurance?
A March 2025 Federal Reserve Bank of Philadelphia working paper, “Coverage Neglect in Homeowners Insurance,” examined policyholders affected by the fire and found that 74% were underinsured, meaning their dwelling coverage limit was below what it would actually cost to rebuild their home. More strikingly, 36% were severely underinsured, with dwelling coverage limits below three-quarters of their home’s actual replacement cost. This wasn’t a lower-income population without access to good coverage, either, the study looked at a relatively affluent Colorado county, which is part of what makes the finding notable.
Is this specific to Colorado wildfires, or does it say something more general?
It’s worth being precise here, because this is real, rigorous academic research, but it’s also a specific event in a specific location, not a national average that applies uniformly everywhere. What makes it useful beyond Colorado is that it’s one of the few times underinsurance has actually been measured directly, most homeowners never find out whether their coverage was adequate, because most homes never burn down or wash away completely. The Marshall Fire created a rare, comprehensive dataset. There’s no equivalent hard number for Dayton or Ohio specifically, but there’s also no clear reason to assume the underlying dynamic, homeowners underestimating their own replacement cost, is somehow unique to Colorado.
Why would so many people be underinsured without realizing it?
Because “replacement cost coverage” and a policy’s face value can drift apart over time in ways that are easy to miss. A dwelling coverage limit set correctly when a policy was purchased ten years ago doesn’t automatically track rising construction costs, material prices, and labor rates since then. A homeowner who hasn’t specifically reviewed and updated that number recently may be carrying a policy that reflects what it cost to rebuild their home years ago, not what it costs today. This is a passive, easy-to-overlook gap, not a mistake anyone makes on purpose.
What’s the actual difference between a policy’s coverage limit and true replacement cost?
The coverage limit is the maximum amount the policy will pay out for dwelling damage, a number chosen when the policy was written or last updated. Replacement cost is what it would actually cost, today, in current material and labor prices, to rebuild the home to its prior condition. When the limit is lower than the true replacement cost, a homeowner facing a total loss discovers the gap at the worst possible moment, mid-rebuild, when the insurance payout runs out before the house is finished.
How would a homeowner actually find out if they’re in this position?
By asking directly, rather than assuming the original coverage amount is still accurate. A periodic conversation with an insurance agent specifically about current replacement cost, not just renewing the same policy year after year, is the practical version of this. Some insurers offer replacement-cost estimators or inflation-guard endorsements that adjust the limit automatically, but it’s worth confirming that’s actually part of a given policy rather than assuming it is.
Does a recent renovation or addition change this calculation?
Significantly, and this is a common way coverage quietly falls behind. A finished basement, a kitchen remodel, or a home addition adds real rebuild cost that an unchanged policy limit doesn’t reflect. If a policy hasn’t been updated since a major renovation, the gap between coverage and actual replacement cost may be larger than a homeowner would guess, and larger than general inflation alone would explain.
What’s the actual, practical takeaway here?
Not that homeowners insurance is unreliable, but that a policy’s adequacy isn’t something to assume and forget. The Marshall Fire data is a rare, direct look at what happens when that assumption goes untested for years across a large group of homeowners, and the answer, even in a relatively affluent area, was that most of them were underinsured, and more than a third significantly so. A periodic review, checking the dwelling coverage limit against an honest current replacement-cost estimate, is a modest task that directly addresses the exact gap this research measured.
By the numbers:
- 74% of policyholders were underinsured after Colorado’s Marshall Fire, meaning their dwelling coverage limit fell short of their home’s actual replacement cost, per a March 2025 Federal Reserve Bank of Philadelphia working paper.
- 36% of those policyholders were severely underinsured, with dwelling coverage limits below three-quarters of their home’s replacement cost, per the same study.
- The research, led by economists Cookson, Gallagher, and Mulder, examined a relatively affluent Colorado county, suggesting this gap isn’t limited to homeowners without access to adequate coverage options.
Sources: Federal Reserve Bank of Philadelphia, Working Paper 25-09, “Coverage Neglect in Homeowners Insurance” (Cookson, Gallagher, and Mulder, March 2025)
Call Ram Restoration for water and fire damage restoration: 937-885-0088 or www.ramrestorationusa.com
