10 dirty little secrets of insurance companies

Insurance companies, like most industries, hide the information which makes them — and costs you — money. But insiders, consumer groups, regulators and whistleblowers often spill the beans. You may be surprised at what’s going in those company cubicles.

They use ISO vehicle ratings to help price your car insurance policy – but you’re not allowed to see them!

A New Jersey-based company, ISO, provides information to car insurance companies about the likelihood of certain cars having accidents and how severe they will be. Its rating plan leads to surcharges of up to 25 percent and discounts of up to 20 percent against the insurance rates of nearly 300 makes and models of vehicles, says a company press release.

This information would be useful to you to buy a safer car or keep your car insurance rates down, but too bad.

“ISO considers the process and outcome of its services proprietary work products, available only to business entities,” says an ISO spokeswoman.

Oh well, not everyone plays along with this game. State Farm makes its own vehicle ratings public, and the Highway Loss Data Institute publishes insurance losses by make and model.

In addition, Insure.com has average car insurance rates for this year’s models.

They use a FICO insurance risk score to figure out the price of your auto policy — but you can’t see that, either

Another factor insurers use (where allowed) when figuring out what to charge you for auto insurance is an “insurance risk score” developed by FICO. You can obtain a copy of your FICO credit report – but you’ll never find out your insurance risk score.

The insurance industry says that, statistically, those who have poor insurance scores are more likely to file claims, according to the Insurance Information Institute (III), although some insurers defy the conventional wisdom. Cure’s Eric Poe says, “We buck the trend. We only look at how well you drive.”

About 300 insurers nationwide use the insurance risk score to calculate their insurance quotes, according to FICO spokesperson Craig Watts, who describes insurance risk scoring as “fairly arcane.” And it’s likely to stay that way. Like ISO, FICO treats this as proprietary information.

They might use proprietary software to shortchange you on accident injury claims

If you’re hurt in a car accident, chances are the information about this injury will be fed into a computer program called Colossus that generates settlement offers for bodily injury claims. And chances are better than average that the software is rigged to keep this offer low, warns the Consumer Federation of America (CFA).

New York state insurance regulators are watching these programs closely following a 2010 regulatory settlement which cost Allstate $10 million for “deficiencies” in managing and using Colossus, which is offered by CSC. New York’s examination concluded that Allstate failed to “tune” the software to reflect recently closed claims.

Others contend that the software is “tuned” to low-ball injury claims.”Someone in the home office dials it back so that the best offer is really 20 percent below what it should be,” says J. Robert Hunter, the CFA’s director of insurance.

They know if your attorney is a wimp

The day may come when you have to find a lawyer and sue your insurance company in a personal injury, workers compensation or civil suit.

You ask around and end up with someone’s cousin representing you.

Insurers have better sources of information. In addition to evaluating the value of bodily injury claims, Colossus also evaluates the attorney who’s representing you. Your insurer wants to see if he is likely to roll over for an inferior settlement offer – or has the backbone for a courtroom fight, defense attorneys say.

Colossus boasts in its literature that its software “lets you rate the performance of attorneys and their firms” and gives your insurer “information concerning bodily injury settlements.”

They sneak percentage-based deductibles into your homeowners insurance policy

It comes as no surprise to anyone living in the hurricane-prone Gulf Coast that many insurers are selling home insurance policies with percentage-based deductibles for storm damage instead of the traditional dollar-value deductibles used for other types of claims such as theft. Percentage-based deductible policies pass on more cost to homeowners when there’s a claim.

So read your renewal contract carefully. It could have a $1,000 deductible for fire losses, but up to a 25 percent deductible for hurricane damage in some high-risk areas, according to the Lawyers.com website.

And that percentage can translate to significant dollars. A hurricane, or in some cases even a windstorm, could cost a homeowner much more out of pocket than a claim for fire damage with a $1,000 deductible. And an earthquake policy could carry yet a third deductible, which could differ from all the deductibles in the homeowners’ policy for the same property.

Home insurance companies and regulators agree that percentage deductibles are necessary in order to provide coverage to storm-prone areas like Florida, but homeowners must keep a close watch on the insured value of their property whenever they make improvements. And percentage-based deductibles are sneaking into policies nationwide.

They might replace your lost Pottery Barn items with Walmart merchandise

Insurance company adjusters often dispute the value of furniture, jewelry and other items lost in a fire or flood, says Kim Cary, an independent adjuster with Quality Claims Management Corp. in San Diego. It may be an honest mistake, as when an insurance adjuster from low-cost Mississippi is sent to evaluate high-end California claims. The adjuster could also be overworked, as many were after Hurricane Katrina.

But remember that these the insurer’s adjusters always work for the insurer, not you, and if given the opportunity they may offer discount-merchandise prices or current value rather than true replacement cost. If you buy expensive items, compile a list and store it and your sales receipts off-site.

Home insurance companies could also try to wear you down with lowball offers, or play “telephone tag” by switching adjusters and forcing you to start the process anew. “They hope you’ll give up and walk away,” says Cary. It’s in your best interest to actually hire your own public insurance adjuster who will work for you.

They make hospitals charge other health insurance companies more

As the dominant health insurers in many states, member plans of the Blue Cross and Blue Shield Association use their clout to negotiate hospital contracts that guarantee Blue Cross plans better rates than other insurers, according to a civil lawsuit filed by the U.S. Department of Justice against Blue Cross Blue Shield of Michigan.

According to officials, in some cases Blue Cross required hospitals to charge other insurers a specified percentage more than they charge Blue Cross — as much as 30 to 40 percent more, the lawsuit says.

If you’re a not a Blue Cross customer, you get the short end of this stick. You’ll end up paying more in premiums because your insurer failed to negotiate such a lucrative deal first. U.S. Attorney General Christine Varney called it “pernicious.”

They’ll force you to buy a more expensive homeowner’s insurance policy

Sometimes the deck seems stacked against you when you seek affordable insurance. Homeowners who fall behind in their home insurance payments face an expensive threat. Your mortgage lender has the right to obtain another insurance policy for your property – and bill you. “Force-placed” insurance has exploded in recent years, according to consumer advocate Birny Birnbaum, nearly quadrupling in six years.

Lenders will also stop paying home insurance premiums out of escrow when homeowners fall behind on mortgage payments, and then provide force-placed insurance.

But force-placed insurance benefits banks, which often funnel the business to insurance units that are part of their own company or make deals with other insurers in which both profit — particularly when the new policy costs five times as much as the old one. Banks make “hundreds of millions of dollars” on these commissions, according to Birnbaum, the executive director of the Center for Economic Justice.

They don’t tell you their “preferred providers” may be cutting costs

When your home is damaged by flood, fire, or other catastrophes, your insurance company may refer you to one of its “preferred providers” for remediation work. These providers usually are contractors who work under an ongoing arrangement with the insurer. The insurer may promise to guarantee the preferred provider’s work as an incentive for you to use them.

So be aware that these contractors have a business relationship with your company. Because of that, they may put the insurer’s interest ahead of yours. They also may feel pressure to hold down costs and do less work than what is truly necessary in order to keep the insurance company’s costs low.

As an alternative, you have the right to take the claim money your insurance adjuster sets aside for your repairs and hire your own contractor. If you do this, you will have more control over the process and can be more certain that the contractor is doing the job that needs to be done, not simply holding down costs for your insurance company. The downside is thatyou will lose any added guarantee of workmanship that your carrier gives for work done by its preferred providers.

Whoever does your repairs, be sure to hire a licensed contractor and check their credentials through your state’s contractor-licensing agency.

They don’t contact your life insurance beneficiaries when you die

Traditionally, life insurance companies wait until policy beneficiaries notify them that an insured person has died. This laid-back approach worked pretty well for them until state regulators discovered that life insurers can easily find out if a customer died, and notify his or her beneficiaries. Insurers already use a Social Security file called “Death Master” to cancel an annuity when a policyholder dies. This benefits the insurer, who stops making annuity payments upon the customer’s death.

Insurance commissioners say there are millions of unclaimed dollars because insurers didn’t notify the beneficiaries of these policies after the insured died.