(MONEY Magazine) – Jane Sorrell Walden, 40, of Durham, N.C. slowly drove homeward during a torrential downpour on Aug. 11, 1986 only to find a swarm of reporters, cameramen and curiosity seekers gawking at her three-bedroom house -- or what was left of it. A neighbor's giant oak had toppled onto the house, canting the walls at fun-house angles. ''It was like a freight train hitting the house at full steam,'' says Walden, who is single and an artist and designer. The damage: the house (at an estimated value of around $70,000) and most of its contents were destroyed, including dozens of her paintings and other works of art. Her insurer, North Carolina Farm Bureau, demanded an inventory of her lost personal belongings -- as well as proof of their value. So over a six-week period, Walden carted water-stained clothes to merchants for cost estimates and collected sales receipts for previously sold artworks as evidence of the value of her lost paintings. The company rejected her five-figure claim and offered $4,000 less. (Walden refuses to disclose the size of her original claim.) Her lawyer, Stewart Fisher of Glenn Bentley & Fisher in Durham, pressed for a better award, pointing out that her inventory was unusually thorough. After two days of negotiations, the company raised its offer by $3,000 and Walden accepted. Still enraged, she says: ''When you file a claim, you find out about all the loopholes in the policy that benefit the insurance company.'' Caught in a squeeze on profit margins caused largely by a rise of more than 100% in personal-injury and auto claim payouts from 1978 to 1987, property and casualty insurers have been increasingly using exclusions. But by knowing how to file an airtight claim and, if necessary, challenge an inadequate settlement offer, you can keep a financial insult from being added to your injury. Spend an hour or so now, before trouble occurs, carefully reading your auto and homeowners insurance contracts to find out what is not covered, advises William Shernoff, author of Payment Refused (Richardson & Steirman, $10.95). Some insurers, for example, will not cover an auto accident if a family member other than the policyholder was driving. Next, take an inventory of your belongings. ''After a disaster strikes, many people don't know what they own. They aren't paid for items forgotten, so they lose money,'' says David Kennedy, author of Insurance: What Do You Need? How Much Is Enough? (Knight-Ridder, $9.95). For details of what documents to include in a household inventory, see the box on page 150. Should you have to file a claim, follow this procedure: First, in the case of a theft or an accident, file a report with the police. If you don't, the insurer will deny your claim. As soon as possible, write a detailed account of what happened to make sure you don't forget important details. If you are in a car accident, take photos of your car before it's repaired. Similarly, take photos of damage to your home. Next, notify your agent by phone and send him or her a copy of the police report. Ask the agent what steps you should take to prevent further loss or damage. If a door lock has been broken, the insurer could deny any part of your loss that could have resulted after the break-in. Some agents will send you a one- or two-page claim form to fill out. Others will ask you questions over the phone and enter your claim themselves. Either way, don't rush to complete this chore. Take time to assess the damage and collect all the backup documents you need. For a homeowners claim, an adjuster for the insurance company will evaluate the loss within a week. If your car is damaged, your insurer may require you to get two or three repair estimates from body shops of its choosing. Large auto insurers such as Allstate and State Farm will often send you to their own drive-in centers for an estimate. Routine claims are settled on the spot, more complicated ones usually in one to three months. If you decide the insurer's offer is stingy, ask for a written explanation of how the company calculated it. You may want to hire a lawyer who is knowledgeable about dealing with insurers, as Jane Sorrell Walden did. A letter or call from your lawyer, at a fee of $50 to $200, may persuade the insurer that it will be cheaper to raise its offer than to fight. Some claims are ideal candidates for challenges. Three examples: -- When you disagree with an insurer's interpretation of murky wording in its policy. ''If language is vague, you have a very good case,'' says Robert Hunter, president of the National Insurance Consumer Organization in Alexandria, Va. Courts routinely side with customers who dispute ambiguous language in policies. -- When your insurer's offer is based on a repair estimate from a shop that you have visited and think does shoddy work. In this case, get an estimate or two from firms you choose to prove that the insurer gave you a lowball figure. -- When your insurer's adjuster neglected important evidence concerning your claim. For instance, if your car was totaled, the adjuster will probably use the NADA Official Used Car Guide or the Kelley Blue Book to estimate the car's pre-crash value. But if your car has low mileage or you have records of improvements, such as a new paint job or new tires, you might get a better settlement. Whatever the reason for challenging an award, appeal first to your agent. If you're still not satisfied, call the insurer's claims department manager. Follow up with a letter describing the dispute, cataloguing your evidence and summarizing the phone conversation. Attach pertinent documentation such as a police report, inventory or photos. Still no resolution? Your next move should be mediation or binding arbitration. Here, you and the insurance company hire a mediator or arbitrator (your cost: normally $150 to $650), whom you can find by calling an arbitration group such as Arbitration Forums (800-426-8889). Go to court only as a last resort. Small-claims courts let you defend yourself, although disputes typically must not exceed $1,000 to $5,000. A lawyer who represents you in a district court will probably collect 25% to 33% of any award you receive.

BOX: Money Tip Taking stock

You can make filing a homeowners claim easier by taking a household inventory now. Keep it in your bank safe-deposit box. Include the following: -- A description of possessions that matter a lot to you. Also list the makes and model numbers of electronic equipment and appliances. -- Photographs or a videotape showing the condition and quality of your valuables. -- Appraisals of expensive items such as antiques, artwork, furs and jewelry. -- Sales receipts to establish the original value of your belongings. If you have lost a receipt, a canceled check or charge-card statement should do.