With Insurance, the Risks of Ignorance Are High

Studies Find Many Consumers Expect More From Their Policies Than Is Actually Covered

NEW YORK -- If your house is flooded during a hurricane, is the damage covered by your homeowners insurance policy? Will it cover a motor scooter stolen from the back yard? Or your son's possessions when he moves into his college dormitory?

The answer to all those questions is generally "no," though a surprising number of homeowners don't know that, according to a study by the National Association of Insurance Commissioners. That means many homeowners may not be carrying the right insurance to protect against storms, fire and other perils.

The association, which represents state regulators, asked nearly 700 insured homeowners about their policies and found widespread misunderstandings about what's covered and what isn't.

"We were surprised at some of the misperceptions," said Catherine Weatherford, the NAIC's chief executive. "But it will help us create better consumer education programs."

The study found that despite all the media coverage of Hurricane Katrina and its aftermath, one-third of those surveyed incorrectly believed flood damage would be covered by standard homeowners insurance policies.

"After so many reports from New Orleans about flood damage not being covered, about homeowners unable to collect, I would have thought all of us would have gone back to check with our insurance companies and our agents," Weatherford said.

While most homeowners policies cover rain damage, most specifically exclude flood damage. But flood coverage is available separately through the National Flood Insurance Program, which can provide protection of up to $250,000 for the structure of a home and $100,000 for contents. The flood policies, which are sold by insurance agents, also can be purchased by renters to cover up to $100,000 of their belongings.

Homeowners policies also routinely exclude earthquake damage, which requires special coverage through state-sponsored entities such as the California Earthquake Authority and riders offered by some private companies.

A misconception held by more than two-thirds of policyholders is the belief that cars, boats or motorcycles stolen from or damaged on their property are covered by homeowners policies, Weatherford said.

"They figure that if they're in the garage or in the back yard and a tree falls on them, their homeowners [policy] covers it," she said. "In fact, vehicle coverage covers vehicles; homeowners coverage covers the home and outbuildings."

As for the son heading off to college, his property in the dorm probably won't be covered by his parents' policy, so the family should consider purchasing separate coverage, NAIC said.

A recent MetLife survey of about 1,200 homeowners and renters also found confusion about insurance coverage.