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Making Your Insurer Pay

With Hurricane Isabel huffing and puffing toward the East Coast, many people are wondering if she'll blow their house down -- or at least send a tree limb through a window.

If Isabel does even a fraction of the damage predicted, people from the Carolinas to New Jersey will be scrambling for their homeowners insurance policies. After all, if insurance companies are to be believed, "you're in good hands" -- they'll treat you "like a good neighbor."

Maybe.

Despite the warm and fuzzy slogans emanating from Allstate (NYSE: ALL  ) , State Farm, Travelers (NYSE: TPK  ) , and their ilk, times have been tough for companies underwriting homeowners insurance. Over the past few years, the costs of claims have risen significantly. According to the Insurance Industry Institute, an industry trade group, companies nowadays pay $1.18 in claims for $1 in premiums collected.

Insurance companies never made much money on homeowners insurance, using it as a way to attract more profitable business, such as auto coverage. But low-cost providers, such as Berkshire Hathaway's (NYSE: BRK.A  ) GEICO, have taken away a lot of that business. And the insurance companies' investment portfolios -- i.e., where they keep premiums until claims have to paid -- have performed just as poorly as everyone else's during the bear market.

So insurance companies are stingier than ever when it comes to paying up. Which means homeowners must be even more prepared, diligent, and persistent when it comes to filing a claim. Here's what you need to do.

Step 1: Don't wait until disaster strikes
It all starts with making sure you have the right policy, and knowing what is and isn't covered. You're better off with an inclusive "all risk" policy than one with "named perils," which limits the accidents covered to those listed in the policy. Also, it's better -- and, of course, more expensive (but worth it) -- to have a policy that will replace property at its "replacement value" instead of its "actual value." After all, your tools may not be worth much on eBay (Nasdaq: EBAY  ) , but they would be expensive to replace.

But before you can claim a loss of property, you have to prove that you owned it in the first place. Document the contents of your home by either photographing or videotaping what's in each room. Record serial and model numbers of electronics and appliances. Also, get some photographic evidence of the condition of the outside of your house. Then, store the photos and/or video tapes somewhere safe and away from home -- such as a safety deposit box -- so they don't burn down with the house or float away with the sofa.

Be aware that most homeowners policies don't cover flood or earthquake damage, or pricey items such as jewelry and antiques. Also, many policies have separate deductibles for "wind damage" or "hurricane damage," which are often a percentage of the insured value of the home (and higher than the usual $250-$1,000 deductible). And any damage done to your car will be covered by your auto policy, even if the damage was caused by your garage roof caving in. (Visit our Insurance Center for help with other kinds of insurance.)

Step 2: Document the destruction
Once again, whip out that camera or camcorder and record the damage -- before you touch anything. Then, begin cleaning up. You can make temporary repairs to prevent further damage to your property (such as boarding up a hole in your wall), but keep receipts for materials. And don't throw anything away, especially destroyed items that you expect to claim as a loss.

Step 3: Contact your insurer and local contractors
Follow your insurer's claims process exactly. Depending on the damage, the company might send out a representative to prepare a damage report (make sure you get a copy). If repairs are necessary, get estimates from at least two reputable sources who can provide references and would be willing to sign a contract if hired.

Step 4: Get ready to rumble
In his book Personal Finance for Dummies, Eric Tyson writes, "To get what you're owed on an insurance claim, you must approach claims filings for what they are -- a negotiation that is often not cooperative." Tyson would know. After a storm did significant damage to his backyard, including knocking over part of his fence, his insurer offered to pay $1,119 -- way below the cost of repairing the damage. It took Tyson five rounds of fighting with the company until it finally agreed to cover the total costs of repair: $4,888.

When you make a claim, you'll have to prove several facts: that you suffered a loss, that the loss was covered by the policy, and the amount of money the insurer should pay to settle that loss. And as any lawyer will tell you, the more evidence you have, the better. Besides the aforementioned photos, videos, and repair estimates, keep the receipts of any expenditures incurred because of the loss. Keep records of all pertinent correspondences and phone calls. And be persistent!

Step 5: Get help
If the insurer denies your claim or lowballs the cost of the loss, you have options. Each state has its own insurance commission, which regulates the industry and offers some consumer protection. (The website of the National Association of Insurance Commissioners has links to the regulator in each state.)

You might also consider hiring a public insurance adjuster, who works on your behalf for a percentage of the claim. Adjusters know the process and have experience dealing with insurance companies. And, of course, a lawyer is only a phone call away. If you choose this course, make sure you hire an attorney who specializes in insurance claims.

The best type of insurance
Homeowners insurance is getting more expensive, and the claims process is a hassle. Here's a solution: Choose a policy with a high deductible ($500 to $1,000) and don't make small claims. This has three benefits:

  1. Your premiums will be lower.
  2. You won't suffer the consequences of making too many claims, such as higher premiums or even getting dropped by your insurer.
  3. You'll save yourself a lot of headaches.

Add the savings you realize from lower premiums to your emergency fund (learn about the best places for short-term money in our Savings Center). And hope Isabel passes you by.

As a resident of the Mid-Atlantic, Robert Brokamp has prepared for Hurricane Isabel by moving his Sony (NYSE: SNE  ) PlayStation 2 to the basement. He is the co-author ofThe Motley Fool Personal Finance Workbookand author ofThe Motley Fool's Guide to Paying for School.


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