As wildfires ravage the Los Angeles area, thousands of homes have been lost, putting insurance coverage in the spotlight. But a study of a 2021 wildfire in Colorado suggests most homeowners are underinsured.

Wildfires ravaging the Los Angeles area have destroyed thousands of homes, but a recent study suggests three-fourths of homeowners don’t have enough insurance to recoup all their losses after a disaster.

That estimate is based on the Marshall Fire, which consumed more than 1,000 homes in Boulder County, Colorado, on Dec. 30, 2021.

Researchers from the University of Colorado at Boulder and the University of Wisconsin-Madison looked at insurance contracts, focusing on nearly 5,000 policyholders who filed claims after the fire.

They found that 74% were underinsured, meaning they weren’t fully covered for total losses. And of that share, 36% of them were severely underinsured, meaning they were covered for less than 75% of their home’s replacement cost.

“To put that in context, if it costs $1 million to rebuild, that’s $250,000 people have to come up with,” study coauthor Tony Cookson, finance professor at the University of Colorado at Boulder’s Leeds School of Business, said in a statement. “Most households don’t have ready access to those types of resources.”

While underinsurance doesn’t necessarily prevent a homeowner from rebuilding, it represents a major obstacle. The study found that underinsured homeowners are 25% less likely to rebuild within a year.

Homeowner neglect and rising costs aren’t the main drivers of underinsurance, according to Emily Gallagher, who also coauthored the study and is an assistant professor of finance at Leeds.

In fact, their research found that the amount of coverage varies widely, even for similar properties, depending on the insurance company.

According to the study, carriers with more policyholders and a longer history of insuring homes often provided more complete coverage.

“When consumers focus on premiums rather than coverage limits, insurers have a very natural incentive to cut prices by offering less insurance,” Cookson said in the statement.

While wildfires are still spreading in California, whether to rebuild after losing a home is already top of mind for some families.

That’s as the Eaton fire in Altadena has damaged or destroyed an estimated 7,000 structures so far, and the Palisades fire has destroyed more than 5,000 buildings. Meanwhile, the confirmed death toll has hit 13 and is expected to grow.

Homeowners in California in particular faced tougher challenges, even before the latest wildfires. Carriers have been fleeing the state in recent years, driven out by increasingly costly weather events, including previous fires that have wiped out company profits. Last year, State Farm dropped nearly 70% of its policies in Pacific Palisades.

The state tried to address the situation late last month, announcing a new regulation that requires insurers in the state to write more policies in risk-prone areas, in exchange for passing on reinsurance costs to policyholders.

Consumers are likely facing steep hikes in premiums as the current wildfires are shaping up to be the most costly in modern U.S. history. Estimates from AccuWeather put damages at $135 billion-$150 billion.

Three-fourths of homeowners may not have enough insurance to fully cover losses after a disaster, study says