A severely damaged house stands next door to a reconstructed home in the Lake View neighborhood of New Orleans. Thousands of homeowners battled insurers in court after Hurricane Katrina in 2005 over limitations of their policies.

BLOOMBERG NEWS / DANIEL ACKER

As wildfires threaten California homes and East Coasters brace for hurricane season, people should make sure their homeowners’ coverage keeps pace with current construction expenses.

About two-thirds of U.S. homes were underinsured last year by an average 18 percent, according to data compiled by Los Angeles-based Marshall & Swift/Boeckh, which provides building-cost information for the insurance industry.

Owners often confuse the estimated resale value of their homes, which includes the value of the land, with what it costs to rebuild. The latter is determined by market prices for contractors and building materials, not the local housing market.

“Most policies used to be guaranteed replacement cost,” said Robert Hunter, insurance director at the Consumer Federation of America in Washington. “That isn’t true anymore. It puts people in a rather fragile situation.”

Insurance agents may provide a figure for coverage, but it’s the responsibility of homeowners to make sure that’s enough. Insurers generally pay up to a set amount, even if it’s less than what it costs to restore a home. And, some homeowners mistakenly think they’re covered for floods, earthquakes, mold, termites and water-line breaks, according to a survey last year by the National Association of Insurance Commissioners in Kansas City, Mo.

“Companies are always looking at different aspects of homeowners’ policies that they may exclude,” said Marta Arrington, director of consumer services at Florida’s Department of Financial Services. “Mold is a good example.”

While Hurricane Katrina added to pressures on insurers, it was Hurricane Andrew in 1992, which followed wildfires and earthquakes in California, that led to an overhaul of the way the industry wrote homeowners’ policies, according to Hunter, who was the Texas insurance commissioner in 1993 and 1994.

Companies turned to consulting firms such as McKinsey & Co. and computer programs with names such as Colossus to pinpoint where they were losing money. Results were dramatic, Hunter told Congress in October testimony. Even after record-setting amounts of damage by hurricanes, the insurance industry made $38.5 billion in 2004 and $44.2 billion in 2005, he said.

Thousands of homeowners battled insurers in court after Hurricane Katrina in 2005 over whether damage to their property was due to wind, which is covered by private insurance, or water, which would make the federal flood insurance program liable for repairs.

Allstate Corp., the largest publicly traded U.S. home and auto insurer, hasn’t offered unlimited replacement coverage since the Oakland Hills, Calif., wildfires in the early 1990s, said Rich Halberg, a company spokesman.

The Northbrook, Ill.-based insurer paid $2 billion to victims of four Florida hurricanes in 2004. Afterward, it undertook a comprehensive review that resulted in new policy exclusions, the purchase of reinsurance to protect against catastrophic losses and a move away from writing new policies in Florida, Halberg said.

Coverage for excluded items can sometimes be added at extra cost such as riders that automatically adjust for inflation. Customers also can add clauses covering expenses from tougher building codes after a natural disaster. For protection from floods, policies have to be backed by the federal government.

The insurance industry has moved away from a promise to rebuild to policies that stop at a set dollar amount, author Peter Gosselin wrote in his book, High Wire: The Precarious Financial Lives of American Families. It’s part of a gradual transfer of risk from companies to individuals, he said.

So-called extended replacement cost policies often will cap payouts at 25 percent over reconstruction estimates. This forces homeowners to keep up with local building costs, according to Gosselin’s book.

Chubb Corp., which sells policies to higher-income families, said in May it would offer “unlimited replacement coverage” in Texas. That now makes the coverage, for all rebuilding costs even if they exceed policy limits, available in 41 states and Washington, D.C., said Peter Spicer, a spokesman for the Warren, N.J.-based company.

Policies are written annually so insurers can add exclusions. Consumers should talk to their agents at least once a year or when major improvements are made, said Jeanne Salvatore, consumer spokeswoman at the industry-backed Insurance Information Institute in New York.

A policy “may or may not” cover the costs of rebuilding, Salvatore said. “You don’t want to find out when you are filing a claim.”