Hurricane Katrina brought out the worst in insurance companies. With potential payouts in the tens of billions of dollars from the 2005 storm, many insurers seemed to take the low road. They refused to reimburse thousands of policyholders who lost their property and belongings in New Orleans and the Mississippi Gulf Coast, claiming that the devastation wasn't caused by wind, which is covered, but by flooding, which is not.

Some insurers refused to renew policies in coastal areas of Florida, Massachusetts, and New York, among other states. Homeowners have had to find other coverage, generally at higher rates. Even people fortunate enough to retain their policies probably pay much more than they did a few years ago. The average cost of a policy rose nearly 13 percent between 2002 and 2003, and 9 percent a year later, according to a report released in February 2007 by the National Association of Insurance Commissioners. After Katrina, premiums rose even more, by as much as 100 percent in shore communities, experts say. In addition, homeowners are encountering an increasing number of coverage limitations and hidden deductibles.

"All the insurers with a national presence took a step back to see where they were overexposed in terms of risk, and they adjusted their coverage and coverage portfolios accordingly," says Mike Barry, director of media relations at the Insurance Information Institute, a trade group.

Consumer advocates say these changes are particularly egregious because of the timing. Despite the flood of claims related to the harsh hurricane season a couple of years ago, studies show that insurance companies' earnings are at all-time highs. "We saw record profits in 2004 and 2005 despite significant hurricane activity," says J. Robert Hunter, director of insurance for the Consumer Federation of America. "Profits in 2006 rose to unprecedented heights," he adds, while "the amount that insurers paid in claims and expenses as a percentage of the premiums collected in 2006 plummeted to a 50-year low."

For the top 10 insurers, losses paid to policyholders represented an estimated 52 percent of premiums in 2006, down sharply from about 75 percent in 1987, according to Hunter's group.

In this environment, keeping sufficient coverage at the best possible price and understanding the terms of your policy can take some doing. The key is to learn where the traps lie in your homeowners policy and what you can do to protect yourself.


New wrinkles and gotchas

If you're like most homeowners, you would be hard-pressed to cite what your policy actually covers and what you're on the hook for in the event of a disaster. But it's important to analyze your policy; it may include coverage gotchas that could cost you dearly. Some are insurer mandates that homeowners can't do anything about.

Among them are "windstorm deductibles," which homeowners must pay if there is damage to their property from a hurricane. Some insurance companies began to impose the deductibles after Hurricane Andrew walloped Florida in 1992, and they have become increasingly common in storm-prone areas. While typical insurance deductibles are expressed in dollar terms--the homeowner pays $250 or $500 for every claim before the insurance kicks in--windstorm deductibles are usually 1 to 5 percent of a policy's total value. For example, an owner of property insured for $400,000 could pay as much as $20,000 before the insurer is required to pay a penny.

A new wrinkle is the "anti-concurrent causation" clause, in which insurers attempt to eliminate all coverage for hurricanes if a noninsured incident like a flood occurs, even well after the wind damage has been sustained. "Insurers have used this clause to refuse to pay for storm damage from Katrina and other hurricanes recently," Hunter says. "I knew the clause existed but I did not understand it, in part because it is so illogical. And I am an expert," Hunter adds. "Imagine what consumers don't know."

Indeed, you may also not be aware of new limits on your coverage for mold. Some insurance companies have dropped reimbursement for mold damage or limited the amount that they're willing to pay to as little as $10,000.

Until about 10 years ago, most homeowner policies guaranteed to fully rebuild a damaged home. Some still provide such guaranteed replacement cost, but others offer either replacement cost, which covers only the stated value of the home, or extended replacement cost, which provides additional insurance coverage, typically 20 percent over the home's stated value.

This change has left many homeowners, especially those with only replacement-cost coverage, without enough insurance. In fact, 58 percent of the residential property in the U.S. is undervalued for insurance purposes by an average of about 21 percent, according to Marshall & Swift/Boeckh, a supplier of building-cost data. One reason: Some homeowners have failed to bump up the value of their policies for years, despite upgrades to their property and inflation-driven increases in construction costs.

When your policy is up for renewal, ask your agent to reassess the house and the dollar amount of the policy accordingly. Don't forget to point out any renovations that you've done on the property since it was originally valued. The final figure will probably be less than the resale value of the home because the land it sits on is not insured. For a second opinion, hire an appraiser to do an independent evaluation --at a cost of $250 to $350. You can also do it yourself with an online calculator (www.accucoverage.com offers evaluations of your home's replacement cost for $7.95; the calculator on www.building-cost.net is free).

In addition to getting sufficient coverage, make sure that your policy has an inflation guard, which automatically increases replacement coverage each year to account for higher construction costs. Some insurers offer this provision free; others charge a few dollars extra for it.

If you have an older home or live in an area where municipal codes for lumber, electrical systems, heating, air conditioning, or storm protection have changed significantly since the home was built, consider purchasing a law-and-ordinance rider that covers the additional cost of bringing the property up to current codes if it has to be rebuilt. Most policies automatically provide a small amount for rebuilding to code--usually about $10,000 or so--but for more coverage, expect your premium to increase by about 25 percent.


Protect your belongings

Basic homeowners insurance covers the contents of a house--furniture, clothing, electronic equipment, musical instruments, and so on--for a total of up to 50 percent of the value of the policy. The home's contents are typically insured at "cost." That means if your possessions are damaged, you'll be reimbursed for their depreciated value, not for what it would take to replace them. Insurance experts recommend that you buy "replacement" coverage for about 10 percent more. Also consider raising personal-effects coverage to 75 percent of the home's value, although this might not be necessary if a recent reevaluation raised the amount of your property coverage. (In that case, the insurance on your belongings will have gone up as well.)

Valuables like jewelry, artwork, antiques, and coin or stamp collections are not fully protected by regular homeowners policies. Jewelry, for instance, is limited to about $1,500 to $2,500 in coverage. So consider having your rare and expensive property appraised, then buy a separate floater policy that guarantees full dollar value. Expect to pay about $17 per $1,000 in coverage.


Don't make small claims

Not surprisingly, insurance companies are allergic to claims. With increasing frequency, they are adding surcharges on premiums at renewal--or some may even drop your policy altogether--for a single claim in the past year. "They're taking a much closer look at claims activity and have a shorter fuse about it," says Terry McConnell, vice president and manager of personal lines underwriting at Erie Insurance in Erie, Pa.

So it often makes sense not to submit claims that exceed your deductible by just a few hundred dollars. Paying for the loss yourself might cost you less than the premium increase you'll probably face later. Most claims--and sometimes even conversations with insurers about damage, particularly water-related, that don't result in actual claims--are reported to the CLUE (Comprehensive Loss Underwriting Exchange) database maintained by ChoicePoint, a company that provides services to insurers. Consumers are entitled to one free copy of their CLUE report annually (for more information, go to www.choicetrust.com and click on CLUE Reports). Homeowners should read these files carefully, and immediately dispute errors or submit a written statement that fully explains any large losses.

ChoicePoint also takes data from a consumer's credit reports to produce a Home Insurance Score, which is used by insurers to determine whether the customer is a good risk. Because most insurers rely on the same scores when making underwriting decisions, it's more than likely you will pay quite a bit more to purchase insurance from a new carrier if your company decides not to renew your policy.


Protect your home for less

Here are some other steps you can take to protect your home while keeping your coverage costs in check.

Raise your deductible. Insurance policies typically carry a $250 deductible. But if you're willing to bear more of the risk, you can save upward of 15 percent a year in premiums with a $500 deductible and 25 to 30 percent with a $1,000 one. "Most homeowners are not aware of the significant savings awaiting them in their policy by reevaluating the deductible," McConnell says.

Maintain and upgrade your home. At least once a year, inspect your home for developing problems, particularly the roof, plumbing, exterior paint, and washing machine and dishwasher hoses, to protect against water-related disasters-the type of damage that insurers like least. Wiring and heating systems should also be checked. In addition, you might be able to cut your premiums by 10 percent or more by installing upgrades such as fire detectors, security alarms, and deadbolt locks.

Buy a flood policy if you need one. Flood insurance is available through the government's National Flood Insurance Program (www.floodsmart.gov) and can be bought from insurance agents. Maximum coverage limits are $250,000 for property and $100,000 for personal belongings. Premiums run from about $350 a year in a moderate- to low-risk area to more than $4,000 in high-risk coastal zones.

Shop around. Insurers are looking for new business in low-risk areas. If you live in one, you might be able to find a better deal on your rate and coverage.