Consumer misunderstanding of the various flavors of "replacement cost" homeowners insurance can mean a natural disaster is a financial disaster, according to a story in The New York Times > Business > "Homeowners Come Up Short on Insurance".
Most insurance claims are not for the total loss of a home, which is where "replacement cost" coverage is most important. When wildfires strike in the West, or a Hurricane like Charley or Andrew hits in the East, folks learn far more about the technicalities of their insurance coverage. A total loss of house and contents tests the extent to which coverage applies.
The problem can be aggravated by a rise in the cost of labor and materials following a major disaster. Despite calls to prevent "price gouging," the law of supply and demand means that the need for massive amounts of lumber, shingles, siding and skilled labor after a disaster will naturally drive prices above "normal." This may leave consumers underinsured. Part of this is due to insurance marketers efforts to keep premiums "competitive" by underestimating replacement costs, and by consumer choice for the less expensive version of homeowners coverage.
The article includes sources to further information about the different types of "replacement cost" homeowners insurance coverage, and highlights the potential exposure if an agent fails to get "full coverage" when such is requested by a consumer.