There seems to be a lot of confusion about what lunacy does, and what "protection" it will and will not afford. So I am posting the section of text that deals with it. As a note, Wolf-blooded recieve a +2 to the effects of lunacy, and supernaturals (essentially, the major templates) are immune.

Forsaken Core Book: 175-176

LUNACY
Human beings have long recognized the power of the moon to inspire them, to cause them to become contemplative… and to drive them mad. The Uratha benefit from a concentrated form of this power derived from their alleged spiritual mother, Luna. This power wraps around a werewolf like a cloak, infecting human observers with the same sort of insanity that causes them to become more violent under the full moon, to forget what the night led them to do. This madness — which humans vaguely recognize, as evidenced by their use of the words “lunatic” and “moonstruck” — is a weapon and a mask that Uratha use to conceal themselves.

When a human observer clearly sees a werewolf in Dalu, Gauru or Urshul, he is affected by the Lunacy to a degree that depends on his Willpower dots. He might run in terror, curl up into a catatonic ball or even stand his ground. Lunacy is strongest when facing a werewolf in nightmarish Gauru form. Onlookers use the following chart to determine the effects, depending on their Willpower. An onlooker gains +2 to Willpower when observing an Uratha in Urshul form, and +4 to Willpower when he sees an Uratha in Dalu. The use of certain clearly supernatural Gifts, rites or fetishes, even when a character is in Hishu or Urhan form, might also trigger Lunacy (although onlookers are at +5 effective Willpower). This Willpower boost is only for the purposes of determining observers’ reaction to Lunacy, and cannot take effective Willpower higher than 10. If multiple Uratha make supernatural displays before human witnesses, the most overt prevails over all. So, if one character is in Dalu form, another is in Urshul and a third is in Gauru, all onlookers are subject to the effects caused by the Gauru werewolf. If he weren’t present, the Urshul-form Uratha would make for the most daunting spectacle. All werewolves cause Lunacy, regardless of their fealty. Although the Pure reject Luna as a patron, a measure of her power and protection nonetheless seems to abide within them.

The results are as follows:
• Willpower 1–2: Most humans at this level have suffered great trauma or are impaired in some way. They lack even the slightest protection against Lunacy. An onlooker has no control over his actions and could go catatonic, suffer a heart attack, revert to animalistic behavior (hiding in dark places and snarling, tearing at his clothes) or perform practically suicidal actions in an attempt to escape (such as throwing himself out of a tenth-story window). Any actions taken suffer a –5 penalty out of fear. Victims don’t remember the scene at all, and they refuse to believe any evidence that implies they were present at such a scene.
• Willpower 3–4: This is the level of the average to slightly below average human in the World of Darkness. Lunacy affects them as fear affects herd animals. Onlookers are likely to flee in abject terror and have no real control over their actions. All actions that might be taken (attempting to drive a car, climb a fence) incur a –4 penalty. Onlookers don’t remember the event save in the most general sense, and they always rationalize it. (“Yeah, three years ago I saw this girl get attacked by some pit bull that had gotten loose. I’d rather not talk about it. It was pretty bad.”)
• Willpower 5–7: Humans at this level have above average strength of will, but still not enough to cope with the Uratha. A person is overcome with fear and attempts to flee in panic. She has some control over her actions, though. If she attempts to hide in a building, she has the presence of mind to lock the door. If the victim is cornered, she might fight, albeit in a berserk state. Any actions the person takes suffer a –3 penalty. She forgets the event unless she attempts to actively remember it (under questioning, for instance). Attempting to remember the event requires an Intelligence + Composure roll at a –3 penalty (see World of Darkness Rulebook, p. 44). Success on this roll allows the character to remember general circumstances, but not the true nature of the Uratha. An exceptional success allows her to remember with perfect clarity. A roll must be made each time she attempts to remember the scene, though. Her mind and soul want to forget.
• Willpower 8–9: Humans at this level have exceptional self-control. A subject still feels great terror and an almost irresistible desire to flee, but a Willpower point may be spent to retain control for a turn. Any actions suffer a –1 penalty, save in a turn in which a Willpower point has been. The victim always retains a hazy, nightmarish half-memory of the event, but she must make a conscious effort to focus directly on it. Attempting to remember the event requires an Intelligence + Composure roll at a –2 penalty. Success on this roll allows the character to remember the event, but not the true nature of the Uratha. An exceptional success allows her to remember with perfect clarity. This roll must be made each time the subject attempts to remember the scene.
• Willpower 10: The rarest of the rare, humans with this level of Willpower are practically made of iron. The subject is completely unaffected by the Lunacy. She has control over her actions and remembers the event as clearly as she remembers any other significant event in her life.

Even photographic records of the Uratha benefit from the protection of Lunacy to a limited degree. Although a snapshot taken of a werewolf in Gauru doesn’t frighten anyone who looks at it, most humans (Willpower 8 or lower) simply refuse to believe that the picture could be more than a hoax.

And from page 177:

STORYTELLER’S FIAT
Sometimes things aren’t as cut-and-dried as these Lunacy rules imply. Sometimes people remember spectacles in spite of themselves. The Storyteller may make a roll for any human observer to boost his or her Willpower temporarily. If a witness is granted this fiat, a Resolve + Composure roll is made. Success achieved are added to the subject’s Willpower dots for this particular exposure to Lunacy. This fiat is usually granted for purposes of a character potentially becoming a threat to the Uratha, even if he isn’t ordinarily a steely paragon of courage.

The Storyteller should exercise this fiat rarely, and with discretion. If too many humans are able to remember their experiences with the Uratha, it becomes hard to believe that werewolves have remained concealed for so long. It does, however, make a fine way of creating a new antagonist for a pack.

THE HUMAN SIDE
What does Lunacy feel like to the humans who experience it? Few are in a state to articulate their fear, but it takes various flavors, depending on the form a werewolf is in. If a person is subject to Lunacy due to a werewolf in Dalu form, the fear is akin to that felt regarding dangerous people, of becoming prey to another person’s appetites. If an Urshul-form werewolf triggers Lunacy, it awakens memories of nights when predators actually stalked humans for food. But Gauru triggers a surreal, nightmarish fear that is beyond simple. The onlooker knows that the beast is coming to eat him, but he’s never seen such a creature before or imagined that it could possibly exist. The werewolf is that inescapable beast that haunts dreams — unreal, yet present in the flesh.

Those who are affected by the Lunacy by watching a werewolf in human or wolf form use an obviously supernatural power (such as a Gift or rite) have almost no frame of reference. They suffer similarly to those who see a Gauru-form werewolf.