It pays to face up to big insurance companies.

When you consider buying insurance, you have to contemplate worst-case scenarios that are so contrary to what you hope will happen that they're hard to think about rationally. Yet when the worst does happen, your insurance company seems to find a way to avoid paying for expenses and losses that you thought your policy covered. After you dig through your files and find a policy that's an inch thick, you're tempted just to accept whatever your insurance company offers you.

However, as some homeowners who suffered huge losses from Hurricane Katrina have discovered, it pays to fight for your rights. According to Reuters, State Farm, the largest provider of home insurance in the country, is close to settling hundreds of lawsuits from Mississippi homeowners who claimed that State Farm inappropriately denied claims for damage the hurricane caused. Other insurers, including Allstate (NYSE: ALL) and the Nationwide Mutual Insurance subsidiary of Nationwide Financial (NYSE: NFS), face similar claims. Although the initial settlement would provide $80 million for 639 homeowners, State Farm may agree to review up to 35,000 additional claims.

Make a solid claim

The first step toward getting the insurance benefits your premiums have paid for is to do a good job filing your claim. Whether you have an independent insurance agent to help you through the claims process or you're working directly with your insurance company, you need to keep a written record of all of the conversations you have, especially telephone conversations. Get the name and direct phone number or extension for each company representative who handles your claim. Not only will doing so help you document your claim if problems arise later on, but it will also let you keep in touch with representatives who are particularly helpful, since you'll inevitably talk with some people who have a better handle on their jobs than others do. If you're lucky enough to find a good person, do your best to keep working with that person.

The best evidence of the extent and type of damage to your home is with pictures of your home from before and after the damage. A thorough inventory of your household property is also extremely valuable to support your claim, but this step requires that you create such a list before disaster strikes. Remember that you should keep your pictures and inventory list somewhere outside your home, such as a safe deposit box or with a relative. In addition, keep receipts for all of your costs, including any repairs and living expenses, such as hotel bills, that you have to pay as a result of your loss.

If your claim is denied

If your insurance company declines your claim, then it may be time to speak to an attorney. Most insurance companies have procedures in place that allow you to object in writing to your claim denial and present any information supporting your request that your insurance company reconsider its decision. Make sure you keep copies of all correspondence between your insurance company and yourself.

In your denial letter, your insurance company may try to explain its decision. By looking at your full insurance policy, you should be able to follow the explanation. In some cases, the provisions of the full policy may differ from your understanding of what your policy covers or the way your sales representative initially explained the policy provisions. The facts of your case may also differ from how the denial letter describes what happened. Every detail can potentially make a difference. For instance, much of the controversy about Katrina-related claims stems from whether water damage to homes came from wind-driven rain, which many insurance policies cover, or by flooding, which most policies don't.

Partial payments

Perhaps the most difficult situation you can face is having your claim granted, but for less than what you expected. In such situations, you need to be extremely careful before taking action. Sometimes, cashing an insurance check may stop you from contesting the claim and receiving any more money.

The most important thing to understand about insurance in general is that when it comes to legal action, insurance companies are often in an uncomfortable situation. Courts tend to interpret ambiguous legal language in insurance policies in whatever way is most beneficial to the homeowner, and they are also aware of the potential for big discrepancies between the provisions of the policy and what sales representatives tell their customers. While you can fight your claim on your own, you may well reach a point at which your insurance company will take you seriously only if you retain legal counsel and threaten a lawsuit.

When disaster strikes, the last thing you want to do is to have to fight your insurance company for the benefits you've paid premiums for over the years. Unfortunately, your insurance company may not immediately agree to pay for everything you expect. If you've been treated unfairly, consider whether fighting for your rights will make the difference between having your claim accepted or not.

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By Dan Caplinger (TMF Galagan)
Motley Fool

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