Could disaster strike twice? (© VisionsofAmerica/Joe Sohm/Getty Images)

© VisionsofAmerica/Joe Sohm/Getty Images

It's peak season for natural disasters — from hurricanes to wildfires — and this year could bring some nasty and financially devastating surprises for unprepared homeowners. A growing list of policy exclusions has shifted more of the liability in disasters to consumers, and consumers often aren't aware of that liability, says Bob Hunter, director of insurance for the Consumer Federation of America, an advocacy group.

"It's very hard for a regular person to find out what kind of coverage they have," given the confusing language in insurance documents, Hunter says.

One prime example of this consumer confusion is hurricane coverage. While damage from these storms is covered in most homeowner policies, the water damage caused by hurricane flash flooding is not. That requires separate flood insurance, something only a small fraction of consumers carry.

Moreover, even if policyholders do have the right kind of coverage, they often don't have it in the right dollar amount to replace the house, experts say. 

Replacement cost
One of the biggest mistakes people make is insuring a home for its resale value rather than the cost of rebuilding it, says Loretta Worters, vice president of the Insurance Information Institute.

"They can be underinsured by doing that," she says.

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In the institute's 2010 Pulse Survey, 48% of those polled thought their homeowners insurance premiums were based on the market value of the home. Many people pared back coverage after watching real-estate values slide.

But the cost of rebuilding, including materials and labor, has been going up. And it can be even more expensive when many of the homes in an area are affected by a hurricane or earthquake and local contractors and supplies are fully committed.

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Overages aren't automatically covered by insurers as they were in years past, says Jeremy Bowler, senior director of J.D. Power's insurance practice.

Bowler says that guaranteed replacement policies "have sort of gone away." And insurers aren't held liable if they guided you to lower coverage to get your business, Hunter says.

However, many insurers do offer extended replacement coverage to protect against rising labor and materials costs. These premiums are about 10% higher annually, Worters says.

Save now, pay later
Many homeowners knowingly roll the dice when it comes to insurance coverage, hoping to save money. In J.D. Power's 2011 U.S. National Homeowners Insurance Study, 16% of policyholders said they do not carry adequate coverage to rebuild their home in the event of a total loss.

"Insurance is one product that we all buy, but hope we never need," Bowler says. "Most people just buy what they have to buy" as required by the lender at the time they purchase their home.

Then they forget about it. They go for years without talking to their agent, and they don't bother to account for home upgrades and expensive purchases, such as that fancy plasma television or those new granite countertops, or even the rise in value of a piece of artwork or jewelry.

Read:  What does homeowners insurance really cover?

And many fail to get adequate insurance for expensive jewelry, watches and electronics, says Christie Alderman, vice president of new products and services with Chubb Personal Insurance. Payout limits for these items can top out at $1,000 with some insurers, hardly enough to cover some of the most precious family heirlooms or your laptop and iPad.

Sadly, Bowler says, "What we find is that the best-informed customers tend to be customers who have had a claim."

In other words, most people learn the hard way that they won't fully recoup their losses, and are more diligent about shopping for coverage or reviewing their policy afterward. 

Hurricanes and floods
This consumer confusion was made apparent in the wake of Hurricane Irene, which battered the East Coast last year. Fewer than one in 10 homeowners in the New England and Mid-Atlantic states reported carrying flood insurance before Irene, according to J.D. Power's survey, and therefore, most people wound up paying out of pocket for damage to their homes.

Standard homeowners and renters insurance policies cover water damage only when wind rips open the roof or shatters windows, allowing moisture inside. It does not cover rising waters from spot flooding or storm surges.

Read:  How to protect your home from a tornado

Nearly all flood coverage is purchased through the government's National Flood Insurance Program, and the cost of these policies — available to homeowners, renters and businesses — averages about $600 a year, according to the Federal Emergency Management Agency, which administers the program. Some private insurers also offer it.

However, this coverage has limits. Homeowners who have structures worth more than $250,000 and who have more than $100,000 in personal possessions would have to purchase supplemental coverage, Alderman says.

Read:  Can your insurance withstand a hurricane?

Another huge cost that most policyholders overlook until it comes time to repair is the special hurricane deductible that insurers in 18 high-risk states from Texas to Connecticut are allowed to include on policies. These deductibles, which range from 1% to 5% of the value of a home, must be paid in addition to a homeowner's standard $500 to $1,000 deductible if a hurricane causes the damage. A homeowner with a 3% deductible on a $300,000 home, for instance, would have to pay $9,000 plus his $500 deductible before an insurer would cut him a check.

Earthquakes and wildfires
Other natural disasters that most people aren't prepared for are earthquakes and wildfires.

Structural damage from earthquakes is not covered in most standard homeowners policies. Oddly enough, coverage for other damage during a quake is, such as fire and water damage from burst gas and water pipes.

Earthquake coverage may be purchased in the form of an endorsement or rider on an existing policy, Worters says, at an additional cost. In high-risk California, homeowners can get coverage from the California Earthquake Authority, a privately funded, publicly managed organization, as well as from some other private insurers. However, only 13% of U.S. homeowners buy earthquake coverage, the Insurance Information Institute says, in part because of its prohibitive cost, including percentage deductibles that can run as high as 20% of the replacement value of the structure.

Many homeowners don't realize this coverage doesn't include outdoor structures, such as that fancy gazebo or in-ground pool. They must be insured separately.

Wildfires are covered under most policies with a standard deductible, and this coverage includes any and all structures on the property.