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CNBC Explains: Why is flood insurance so sparse?

Imagine being a homeowner in South Carolina facing more than two feet of hurricane-induced flooding in your home.

According to the National Flood Insurance Program (NFIP), the cost of damage to your home could total $33,700 for a 1,000-square-foot house. For 2,000 square feet, it's almost double that cost.

A vehicle and a home are swamped with floodwater from nearby Black Creek in Florence, South Carolina, Monday, Oct. 5, 2015.
Gerry Broome | AP
A vehicle and a home are swamped with floodwater from nearby Black Creek in Florence, South Carolina, Monday, Oct. 5, 2015.

Yet, according to a poll conducted by the Insurance Information Institute (III), only 14 percent of Americans are insured against flooding. This percentage has remained relatively steady since 2009.

In Charleston, South Carolina, alone, census data records nearly 144,000 households but the NFIP reports that it has only 24,000 policies in the area. Statewide, South Carolina holds nearly 2.2 million housing units yet fewer than 200,000 flood insurance policies. This means that much of the residential damage caused by Hurricane Joaquin is most likely not going to be covered by insurance.

So what explains the gap between the amount of households and actual policy numbers?

One reason why people might not be getting the coverage they need is through a simple misunderstanding of their insurance policy.

Loretta Worters, vice president of III, said that while most disasters are covered under a standard homeowners policy, flooding is not. Homeowners aren't necessarily aware of this fact and underestimate the importance of talking to their insurance agent.

"They don't read their policies," she added. "They say, 'I've got my insurance, now I'm done.' "

Flood coverage is almost exclusively provided by the NFIP and a few other private insurers and the lack of competition among flood insurance providers has kept premiums relatively high. This distinction in policies and who provides them requires households to make an extra purchase when considering buying flood insurance.

Flood insurance premiums are determined by individual flood risk, based on location, elevation as well as the structure and contents of one's home. According to the NFIP, the average cost of flood insurance is currently $700 per year but according to the Federal Emergency Management Agency, premiums can inch over $10,000 for full-risk households.

Worters said homeowners living in low-risk areas may feel like they don't need to pay for the added insurance, when in fact, the NFIP reported that more than 20 percent of flood claims come from people outside of high-risk areas.

However, Worters added that some residents in high-risk areas still don't purchase flood insurance. She said people often forget that flooding is not only caused by large hurricanes or a specific location, but also excessive snow meltoff or heavy rains.

"There's this mindset, that it's not going to happen to me," Worters said. "In reality, there are so many areas of the country that are prone to flooding ... it's not just what you perceive."

— CNBC's Ben Berkowitz contributed to this report.