Homeowners insurance can leave you exposed

Homeowners filed lawsuits after Hurricane Katrina, arguing that their windstorm coverage should pay for damage from storm surges and related flooding. Few got anywhere with these arguments. For decades now, homeowners insurance policies have specifically excluded flood damage. If you want coverage, you need to buy it through the National Flood Insurance Program. There's a 30-day waiting period.

Even flood insurance doesn't cover everything. Damage to basements isn't included, and coverage is limited to $250,000 for the structure of the home and $100,000 for personal possessions. Coverage for possessions is cash-value only, so you get a check for the depreciated value of your stuff, not what it would cost to replace it.

Hurricane coverage also works differently from standard homeowners insurance.

There's usually a "hurricane deductible" equal to a percentage of your total coverage. In other words, instead of paying a flat deductible of $500 or $1,000, you're required to pay a deductible equal to 1% to 5% of the home's insured value. For a house insured for $200,000, that could be as much as $10,000. (Here's where it can pay to have an emergency fund or at least access to low-cost credit.)

Another big problem: Many homeowners discover too late that they're underinsured, often because the value of their coverage hasn't kept up with the cost of rebuilding their homes and replacing their stuff. At least every few years, you should ask your insurance company to review your coverage to see if it's adequate. Another method, if you don't trust your insurer, is to ask a local contractor how much it would likely cost to rebuild your house, and compare that with your policy limits.

By the way, if you're a renter, your landlord's insurance covers the building -- not your stuff. You need a renters insurance policy if you don't want to get wiped out.

Build a strong case for your claim

Past experience has taught us that insurers face trying to process billions of dollars in claims when a disaster strikes. Pressure will be on to settle claims quickly. But you shouldn't accept a lowball offer just to get it over with.

Here's what you need to do:

• Document any damage with photos or video before you start cleaning up. (This assumes you're not dealing with life-threatening emergencies; again, life comes before stuff.)

• Make a list of what's lost or damaged and the approximate dollar value. Keep track of any expenses you incur to prevent further damage, such as boards to cover broken windows, temporary roof fixes or a moving van to transport your possessions to a safer location, since you can get reimbursed as part of your claim.

• Call your insurer or check to see if you can start your claim online. Make sure you find out exactly what you need to file a claim; if you're not clear, ask the insurer. Don't delay starting this process, since insurers generally take a first-come, first–served approach to settling claims.

• If you don't feel the amount offered by your insurer is fair, ask for a better payout. "Think of your insurance claim as a business negotiation -- you're dealing with a for-profit company," advises United Policyholders, an advocacy group for the insured that was born out of the devastating 1991 Oakland Hills fires in California.

The United Policyholders site offers tips and resources to help people navigate the claims process on their own. But if you run into trouble with your insurer or a large amount of money is at stake, you may need to hire professional help, such as a public adjuster, an attorney or a construction estimator. Another resource may be your state department of insurance, which regulates insurers.

You own what you can prove you own

The people with the best shot at getting their lives restored with minimal financial damage are those who have good coverage -- and good records.

You can't count on your memory, said United Policyholders President Amy Bach. Most people can remember only a fraction of what they own, even after the shock of the catastrophe has worn off.

The Insurance Information Institute has software and an app to help you create a home inventory. At the very least, you should walk around your home and take photographs or videos ofyour stuff. Scan receipts of big purchases and home improvements so you can prove what you paid.

All this information needs to be stored somewhere safe -- and that's not in your home.

The cloud is your friend

As I write this, I'm scanning the latest version of our insurance policies (thank you, Fujitsu ScanSnap, for making this process almost painless). I'll save the scans to Dropbox so I can access the file anywhere I have an Internet connection. My Dropbox account also has scans of our insurance appraisals, home inventory, receipts and financial contact information.

This disaster that devastates your house also can destroy your computer and your records. You might keep a copy of your records in a safe deposit box, but the disaster could take out the bank, too. That's why I prefer the cloud.

Wherever you store your information, you'll be smart to have an overview of your financial life handy so you can pick up the pieces after a disaster. The Federal Emergency Management Agency has an Emergency Financial First Aid Kit on its site. You may never need it, but a few hours spent getting ready can pay off in a much quicker recovery.

Click here to become a fan of MSN Money on Facebook

Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.

More from Liz Weston: