Available at: Insured, but Still on the Hook: Who Bears the Most Risk in Homeowner's Insurance?
Summary
In this research article, economists Hyeyoon Jung and Jaehoon (Kyle) Jung examine an increasingly important problem in homeowners insurance: The households least able to absorb catastrophic property losses are often those whose insurance policies leave them bearing the greatest financial risk.
Using millions of homeowners insurance contracts, matched with property-level disaster exposure, borrower characteristics, and insurer financial information, the authors examine how insurance companies allocate risk between themselves and policyholders.
Their central finding is striking:
Despite purchasing homeowners insurance, households remain exposed to approximately 29% of expected property losses because of deductibles, coverage limitations, and other contractual restrictions.
This residual exposure is not evenly distributed.
Households with lower credit scores, which frequently correlate with more limited financial resources, bear disproportionately greater uninsured risks. Similarly, homeowners in areas with greater exposure to catastrophic disasters retain more financial responsibility for potential losses.
The authors explain this allocation of risk through the economic concept of moral hazard.
Insurance companies cannot perfectly monitor whether homeowners adequately maintain their properties, prevent avoidable damage, or take reasonable steps to minimize losses. Deductibles and other restrictions provide homeowners with financial incentives to protect their property.
The research finds, however, that the direct estimated cost of moral hazard to insurers is relatively small, while the financial consequences of limiting insurance coverage can be substantial for policyholders.
In other words, insurance companies can manage their own financial exposure relatively inexpensively by transferring considerable risk back to homeowners.
Lower Credit Scores, Greater Financial Exposure
The authors identify several particularly troubling relationships.
Homeowners with lower FICO scores tend to:
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Be more risk-averse and place greater value on insurance protection.
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Pay higher estimated risk premiums for that protection.
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Retain greater uninsured exposure despite paying for insurance.
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Face potentially greater financial consequences when disasters occur.
The authors' chart on page 3 illustrates that estimated residual exposure declines from approximately 43% among the lowest FICO decile to approximately 38% among the highest.
Importantly, the researchers caution that these are correlations rather than proof that lower credit scores themselves cause greater uninsured exposure.
Nevertheless, the practical consequence is unmistakable: Financially vulnerable homeowners may purchase insurance precisely because they cannot afford a major loss, only to discover that their policies still require them to absorb damages they cannot possibly pay.
Greater Disaster Risk, Greater Uninsured Exposure
The study also finds that properties subject to particularly severe disaster risks tend to retain more uninsured exposure.
This creates a second troubling relationship.
Homeowners facing the greatest potential losses may also have insurance contracts that provide less complete protection against those losses.
The authors find substantial geographic variation, reflecting differences in property risk, insurer characteristics, and local insurance markets.
They also examine insurers' financial circumstances, concluding that more financially constrained insurers tend to insure riskier properties. Higher premiums charged by those insurers therefore do not necessarily reflect higher profit margins, but may instead reflect the underlying risks associated with their insured properties.
Commentary
1. Homeowners Insurance Is Increasingly an Incomplete Financial Safety Net
For consumer bankruptcy attorneys, the importance of this research is not theoretical.
Homeownership is frequently a family's principal financial asset, and homeowners insurance is supposed to protect that asset against catastrophic loss.
But an insurance policy that leaves a homeowner responsible for tens of thousands of dollars in uncovered damage may provide far less protection than the homeowner reasonably expects.
Consider a homeowner with a $200,000 house who suffers $100,000 in storm damage.
If deductibles, exclusions, depreciation adjustments, and coverage limitations leave the homeowner responsible for $25,000, that homeowner may face a financial crisis even though the property was insured.
For a financially secure household, this might require drawing on savings or obtaining additional financing.
For a household already struggling with mortgage payments, credit card debt, medical bills, or automobile expenses, the same loss may result in foreclosure or bankruptcy.
The research's 29% figure is an estimate of aggregate expected loss exposure, not a prediction that every insured homeowner will personally pay 29% of a particular claim. Nevertheless, the broader implications are substantial.
Being insured is not the same as being financially protected.
2. The Interaction Between Insurance, Mortgage Servicing, and Bankruptcy
One aspect not directly addressed in the article, but particularly important for consumer bankruptcy practitioners, is the relationship between insurance claims and mortgage servicing.
Most homeowners with mortgages are contractually required to maintain hazard insurance.
Indeed, mortgage lenders require coverage primarily to protect their collateral.
Yet the borrower remains responsible for deductibles, excluded damages, insufficient coverage, and repairs that insurance proceeds do not fully fund.
The mortgage servicer may also control the disbursement of insurance proceeds following a casualty loss, frequently requiring inspections, contractor documentation, and staged payments before releasing funds.
Consequently, a homeowner may experience several simultaneous financial pressures:
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The property has been damaged and may be uninhabitable.
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The homeowner must continue making mortgage payments.
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The insurance company may not cover the entire loss.
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The mortgage servicer may control the release of insurance proceeds.
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Contractors may demand deposits or progress payments before completing repairs.
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Temporary housing and other living expenses may increase substantially.
For Chapter 13 debtors, these problems can be especially severe.
A debtor who has successfully maintained plan payments and current mortgage obligations may suddenly confront a substantial uninsured repair expense.
The resulting financial disruption can jeopardize both the home and the Chapter 13 plan.
This also raises questions about whether mortgage servicers are exercising appropriate discretion in administering insurance proceeds, particularly when delayed repairs threaten the value of the very collateral that both the lender and homeowner seek to preserve.
Bankruptcy attorneys should be prepared to review not only the insurance policy but also the servicer's handling of casualty-loss proceeds and the potential need for bankruptcy court intervention.
3. The Insurance Problem Can Become an Escrow and Foreclosure Problem—And Rule 3002.1 Provides Important, but Incomplete, Protection
Another important concern is the increasing cost of homeowners insurance.
Although the authors' primary focus is residual risk rather than premium inflation, their findings have important implications for mortgage affordability.
For many homeowners, insurance premiums are paid through mortgage escrow accounts.
Increases in premiums can cause substantial escrow shortages, followed by increases in monthly mortgage payments.
Even homeowners with fixed-rate mortgages may therefore find that their monthly housing costs have become unaffordable.
For Chapter 13 debtors, these increases can undermine plans that appeared feasible when confirmed.
And the resulting delinquency may have little to do with the debtor's willingness to pay. The household may simply be unable to absorb an unexpected increase in insurance costs while maintaining other necessary living expenses.
Bankruptcy Rule 3002.1 provides an important procedural safeguard against these problems, but it cannot eliminate the underlying affordability crisis.
Under Rule 3002.1(b), mortgage creditors must file and serve notices of changes in mortgage payment amounts, expressly including adjustments resulting from escrow accounts, at least 21 days before the new payment becomes due.
This notice requirement applies whether mortgage payments are being made directly by the debtor or through the Chapter 13 trustee.
The amendments effective December 1, 2025, strengthened these protections in several important respects.
First, Rule 3002.1(b)(3) now expressly provides that an untimely notice of a mortgage payment increase delays the effective date of that increase until the first payment due date after the required 21-day notice period expires. A servicer cannot simply impose an increased payment retroactively and treat the debtor as delinquent for failing to pay an amount of which the servicer failed to provide timely notice.
Second, Rule 3002.1(b)(4) permits a party in interest to challenge a mortgage payment change by filing a motion to determine its validity. This creates an opportunity to examine whether the servicer's calculations are correct, including whether an escrow shortage actually exists and whether the proposed increase is justified.
Third, the newly added Rule 3002.1(f) permits a debtor or trustee to seek a determination of the status of the mortgage claim during the Chapter 13 case, rather than waiting until its conclusion. This is particularly important when escalating insurance premiums, escrow shortages, and payment changes threaten to create postpetition mortgage defaults.
And Rule 3002.1's end-of-case procedures provide another opportunity to identify and resolve disagreements about whether the mortgage is current before the debtor exits bankruptcy.
These protections matter because mortgage servicers do not always properly calculate escrow obligations, particularly when payments are being administered through a Chapter 13 trustee or when mortgage modifications, forbearances, or other payment adjustments have occurred.
An asserted escrow shortage may result from legitimate increases in insurance premiums or property taxes. But it may also reflect payment misapplication, incorrect accounting, improper treatment of funds held in suspense, or inaccurate escrow projections.
The distinction is critical.
A debtor should not be required to increase Chapter 13 plan payments or jeopardize a home based on an erroneous escrow calculation.
At the same time, even a perfectly calculated and properly noticed escrow increase may be financially devastating.
Rule 3002.1 can require transparency, facilitate objections, and provide remedies for noncompliance. It does not require insurance companies to charge affordable premiums, nor does it require mortgage servicers to absorb legitimate increases in insurance costs.
This creates a potentially cruel irony: A debtor may successfully complete several years of Chapter 13 payments, cure substantial mortgage arrearages, and be on the verge of financial rehabilitation, only to face an unaffordable mortgage payment increase caused by rising homeowners insurance premiums.
For consumer bankruptcy attorneys, regular review of Rule 3002.1 payment-change notices, underlying escrow analyses, and periodic mortgage statements should therefore be an essential part of Chapter 13 representation—not merely a task performed when the case approaches discharge.
An increase in homeowners insurance can become an escrow shortage, which can become a mortgage default, which can become a foreclosure, which can become a bankruptcy—or derail an existing bankruptcy.
Rule 3002.1 gives debtors and their attorneys important tools to identify and challenge improper charges before that happens. But where the charges are legitimate and simply unaffordable, procedural protections alone cannot solve the problem.
4. The Moral Hazard Argument Deserves More Scrutiny
The most interesting finding may be that the estimated direct cost of moral hazard to insurers is relatively modest.
Insurance deductibles are generally justified as necessary to encourage homeowners to maintain their properties and avoid preventable losses.
There is certainly some validity to that argument.
But the authors' findings raise an important question: How much financial risk must homeowners actually retain to encourage reasonable property maintenance?
A homeowner facing a hurricane, tornado, wildfire, or other catastrophic event generally has limited ability to prevent the disaster itself.
While maintenance and mitigation measures may reduce the damage, the notion that substantial uninsured losses are necessary to encourage responsible behavior seems less persuasive when applied to catastrophic natural disasters than to ordinary preventable property damage.
There is also an important distinction between an insurer's moral-hazard cost under the authors' model and the broader social cost of leaving homeowners underinsured.
A deductible that saves an insurer a modest amount may impose an enormous financial burden on a household with no savings.
And that burden does not necessarily end with the homeowner.
If the homeowner cannot repair the property, the consequences may extend to mortgage lenders, neighboring property owners, local governments, and ultimately the bankruptcy system.
The economically efficient allocation of risk from an insurer's perspective is not necessarily the socially desirable allocation of risk.
5. Bankruptcy Is an Imperfect Remedy for Inadequate Insurance
Bankruptcy can address some of the financial consequences of catastrophic property damage, but it cannot substitute for adequate insurance.
Chapter 13 may permit debtors to cure mortgage defaults, reorganize unsecured debt, and preserve their homes while arranging necessary repairs.
Chapter 7 may eliminate unsecured debt incurred in attempting to recover from a disaster.
But neither chapter ordinarily compels an insurer to pay for excluded damage or creates money to repair uninsured property losses.
Nor does a bankruptcy discharge eliminate a valid mortgage lien merely because the underlying property has been substantially damaged.
For homeowners with little equity, insufficient insurance proceeds, and substantial repair costs, surrendering the property may ultimately be the only economically viable option.
For homeowners with substantial equity, however, the failure to repair the property may destroy value that could otherwise have been preserved for both the debtor and creditors.
This is particularly important in Chapter 13, where the feasibility of the plan and the best-interests-of-creditors calculation may be affected by the property's value, repair costs, and available insurance proceeds.
Insurance coverage is therefore not merely a household budgeting concern. It may directly affect whether a debtor can reorganize successfully
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