The catastrophic wildfires in Los Angeles represent a terrible human tragedy, and for many homeowners, it will become an awful financial tragedy as well, as thousands will discover that there is a big gap between what homes are worth and what they will get from insurance companies to rebuild on top of the ash.

They are not alone.  A recent article in Bloomberg News says that an estimated 17 million U.S. homes—roughly 19% of total housing—are significantly underinsured against damage from floods and wildfires alone.  The total gap between their market value and their insurance coverage, in aggregate, comes to $1.7 trillion.

And that number is rapidly growing, as the housing boom pushes home values higher.  Moreover, those who have so far managed to avoid the floods and hurricanes in Florida, the wildfires across the Pacific Northwest or the thunderstorms in Oklahoma are facing huge increases in insurance costs that erode the value of their properties.  From 2011 to 2021, the average U.S. home insurance premium rose 44%, and by some estimates it has exploded since; and that is if coverage is available.  Many insurers are pulling out of the hardest-hit areas, citing climate change-related increases in nature-related damage.

Adding fuel to the fire, so to speak, is the growing number of U.S. homes that have been built on what the U.S. Forest Service calls the wild land-urban interface (WUI), where wildfires are most likely.  In 1990, the census showed roughly 30 million homes at risk; now the number is 44 million.  The housing boom in Florida has put millions of additional homes at risk.

The article says there is no easy solution to the problem as climate-related disasters grow in number and intensity.  It estimates that in the near future, the gap between home values and coverage will reach $2.7 trillion, and more homeowners will have to pay the difference or risk losing their homes should an event happen.

This article was written by an independent writer for Brewster Financial Planning LLC and is not intended as individualized legal or investment advice.