Homeowners Are Responsible For Having Proper Fire Insurance Coverage
Wildfire insurance claims and the devastating problem of underinsurance are not new issues in Colorado, but they have grown more urgent with each passing year. The Waldo Canyon fire in 2012 generated more than $350 million in insurance claims, nearly $1 million for every home lost. That record stood less than a year before the 2013 Black Forest fire surpassed it with more than $420 million in claims covering nearly 500 homes. Combined, the two fires generated roughly $770 million in insurance claims and left hundreds of Colorado Springs families navigating the painful and often contentious process of dealing with insurance companies in the aftermath of total loss.
Attorney Terry Rector knows this firsthand. He was living in Mountain Shadows in 2012 when the Waldo Canyon fire destroyed his home completely. In the aftermath, Rector Stuzynski Law Firm filed approximately 15 suits against insurers that were negotiating in bad faith for Mountain Shadows homeowners who had not been paid in a timely manner or were not receiving what they were owed. All closed cases were satisfactorily resolved. The experience gave Attorney Rector a uniquely personal and professional perspective on what can go wrong between a homeowner and their insurer after a disaster.
The Marshall Fire Made The Problem Impossible To Ignore
If the Waldo Canyon and Black Forest fires illuminated the underinsurance problem in Colorado Springs, the 2021 Marshall Fire drove the lesson home at a statewide level. Researchers analyzing nearly 5,000 policyholders who filed claims after the Marshall Fire found that 74% were underinsured, and 36% were severely underinsured, meaning their coverage would cover less than three-quarters of the cost to rebuild. The average shortfall was $139,000 per policy.
The fire caused more than $2 billion in damages. The extent of underinsurance created widespread delays in home repairs and extended the period of evacuation for more than 30,000 residents. Underinsurance reduced the number of rebuilding permits filed in Boulder County within one year of the fire by 25%, and was a contributing factor in over 50% of destroyed home sales 18 months after the fire. In other words, underinsurance does not just hurt individual families — it can unravel entire communities.
Why Are So Many Homeowners Underinsured?
The short answer, as Attorney Rector learned after the Waldo Canyon fire, is that most homeowners are insuring their home for what they think it is worth on the market, not what it would cost to rebuild it from the ground up.
“I talked with people about how much insurance they’d have on their house,” Rector recalls. “‘Oh, $250,000. I went on Zillow and that’s what it’s worth.’ No, my friend — not what you can resell it for. What will it cost to rebuild? It will be twice as much.”
Rebuilding costs are significantly higher than market values for several reasons. They include demolition and debris removal, which are not factored into a home’s sale price. They also reflect current construction labor costs, which have risen dramatically in recent years, material costs, current building codes that may require upgrades beyond what the original structure required, and contractor availability following a widespread disaster when demand for builders spikes across an entire region simultaneously.
Research suggests that insurance companies play a key role in the underinsurance problem. The amount of coverage homeowners receive varies widely depending on the insurer, even for similar properties. Homeowners may be shopping for the lowest possible premium when comparing insurance quotes, but a cheaper premium does not always provide enough coverage to rebuild.
Common Gaps That Leave Homeowners Short
Beyond simply insuring for the wrong dollar amount, there are several specific coverage gaps that frequently surprise homeowners after a disaster.
Unreported remodels and upgrades. Every significant improvement you make to your home — a finished basement, a kitchen remodel, an addition, a detached garage — changes the cost to rebuild it. If you do not report those upgrades to your insurance agent, your coverage may reflect a home that no longer exists. This is one of the most common and costly mistakes homeowners make.
Special limits on high-value personal property. Base homeowners policies often have capped payouts for antiques, artwork, jewelry, collectibles, and other high-value items. Those caps may be far below the actual replacement value. Have valuable items professionally appraised and documented, and ask your agent about scheduling specific coverage for them.
Home-based businesses. A base homeowners policy typically caps business property losses at around $2,500. For someone running a business out of their home — even a small one involving computers, equipment, or inventory — that cap can leave a massive shortfall. Separate business coverage or an endorsement is needed to bridge that gap.
Ancillary structures. Sheds, workshops, detached garages, and other outbuildings are often insured only as a percentage of the primary structure’s value. If the coverage percentage is low and your outbuilding is substantial, you may not be able to replace it.
Code upgrade costs. If your home is older and a rebuild must comply with current building codes, the additional cost of updated electrical systems, insulation, plumbing, and other requirements may not be covered under a base policy. Code upgrade coverage — sometimes called ordinance or law coverage — addresses this gap and is particularly worth considering for older homes.
Coverage Options Worth Knowing About
Extended replacement cost coverage is an endorsement that bumps your policy limit by a specified percentage — often 25% to 100% — if the actual cost to rebuild exceeds your coverage limit. It is one of the most important additions a homeowner in a wildfire-prone area can make to their policy. Guaranteed replacement cost coverage goes further, promising to cover the full cost of rebuilding regardless of the policy limit, though it is less commonly available and typically more expensive.
Reviewing your coverage every two to three years — and any time you make a significant improvement to your property — is a baseline standard of care that every homeowner should follow. Your agent should understand local building costs in your area, not just pull square footage data from an online records system and call it a day.
Practical Steps To Protect Yourself
- Do not base your coverage amount on your home’s market value or what you paid for it. Get a replacement cost estimate from a contractor familiar with local building costs, or use a reputable rebuilding cost calculator, and insure to that figure.
- Inventory your personal belongings thoroughly. Take photos or video of every room, document serial numbers and purchase information for valuable items, and store copies of that inventory somewhere other than your home — a cloud service, a safe deposit box, or with a trusted family member.
- Ask your agent specifically about extended or guaranteed replacement cost coverage, code upgrade coverage, and any endorsements available for high-value personal property or home-based business equipment.
- Create a paper trail. After any conversation with your agent about coverage, follow up in writing via email to confirm what was discussed and what your coverage will provide in a worst-case scenario.
- Maintain a relationship with your agent and revisit your policy whenever you complete a significant home improvement project.
When Your Insurance Company Is Not Dealing Fairly
Even homeowners with adequate coverage can find themselves in a difficult battle with their insurer after a disaster. Insurance companies may delay claims, undervalue personal property, aggressively depreciate belongings, or dispute the scope of necessary repairs. Under Colorado law, insurers are required to act in good faith. Colorado Revised Statute 10-3-1115 prohibits insurers from unreasonably delaying or denying valid claims, and Colorado Revised Statute 10-3-1116 allows policyholders to seek twice the benefits owed when an insurer acts in bad faith.
If you are facing resistance from your insurance company after a fire or other property loss, our Colorado Springs bad faith insurance attorneys are here to help. We have been through this process ourselves and have represented homeowners against insurers in the aftermath of some of Colorado’s most devastating wildfires. You should also review our guides on actual cash value and replacement cost value to understand the differences between these two coverage types and how they affect what you are owed.
Call us today at (719) 578-1106 for a free consultation. We are available 24/7 and ready to help.
