After someone used Robert Nighan's credit
card to
charge $2,000 worth of golf clubs in California, the insurance
executive got an
idea.
Nighan — who doesn't golf and lives in Hartford, Conn. — figured out a
way to
legally make crime pay: Sell an insurance policy to protect against
identity
theft.
"I
was involved in our crime insurance division at the time," said Nighan,
a
vice president of insurer St. Paul Travelers Cos. "What happened to me
was
relatively minor; it took only about a week to fix. Still, it was a
major
distraction, and for some victims it goes on for years."
So in 1999, St. Paul Travelers became the first company to offer
identity theft
insurance. It cost $25 as an option to a homeowner policy and covered
the costs
involved in fixing credit report problems in the wake of a crime.
The idea took off and other companies followed.
"Our anti-fraud people say it is one of the fastest-growing areas,"
said Bryon Tucker, spokesman for the National Assn. of Insurance
Commissioners.
Companies offering the coverage include Allstate Corp., American
International
Group Inc., Chubb Corp., Fireman's Fund Insurance Co. and MetLife Inc.
Neither the National Assn. of Insurance Commissioners nor insurance
trade
associations keep figures on the number of identity theft policies in
effect,
partly because the area is relatively new.
Some critics complain that the insurance companies are profiting off a
problem
they helped create. Like many businesses, insurance companies give or
sell
information about their customers to data aggregators such as
ChoicePoint Inc.,
which had its database breached by identity thieves and sparked a
national
debate over how personal information gets used.
"The unpleasant irony is that one of the main reasons we need
protection
is that actions by insurance companies helped make our personal
information too
readily available," said Doug Heller, executive director of the
Foundation
for Taxpayer and Consumer Rights, a consumer advocacy group based in
Santa
Monica. "They and other industries insist on their right to trade
private
information about all of us, and that makes it possible that the
information
can fall into the hands of thieves."
Insurance companies say the information helps them better evaluate the
risks
associated with individual policyholders, allowing them to offer more
equitable
rates.
Rather than rely on insurance, Heller and other activists said,
consumers
should demand tougher laws regulating how their personal data are used.
California has led the country in anti-identity-theft laws. It was the
first to
require that information brokers notify state residents if their
personal
information might have been revealed to scammers as the result of a
database
break-in. The state's law was seen as key to the disclosure of the
breach at
ChoicePoint.
Only five other states have notification laws as strong as California's
—
Arkansas, Indiana, Montana, North Dakota and Washington — according to
the
Public Interest Research Group.
Another law pioneered in California lets residents control access to
their
credit reports. This helps keep scammers from opening unauthorized
credit card
accounts or taking out loans in a victim's name. Only Louisiana has a
credit-freeze law as strong as California's.
The insurance generally costs $25 or more per year. Policies don't
cover the
cost of items bought in the victim's name. But those costs are usually
covered
by the credit card company if the crime is reported.
Some companies include the coverage free on premium home insurance
policies.
And a few even allow victims to turn over the tedious and sometimes
thorny task
of fixing their credit status to a business that specializes in the
field.
John Spagnuolo, director of new media for the Insurance Information
Institute,
a trade association, said he expected more companies to offer the
coverage.
"Because of all the coverage of the problem in the media, consumers are
aware that the possibility of being a victim of identity theft is not a
small
one," he said.
The Federal Trade Commission has put the number of yearly victims of
identity
theft at about 10 million, or nearly 5% of the adult population in the
U.S. The
agency estimates that identity theft costs $50 billion a year in false
charges
and lost time.
Consumer advocate Heller experienced the hassle associated with
identity theft
when someone used his wife's name to buy numerous items, including $600
worth
of furniture at Sears. The thief gave a home address to the store to
have it
delivered, establishing a trail for the police to follow.
"Not the brightest thief in the world," Heller said. "But he
sure caused a lot of trouble."
Four years later, the Hellers are still trying to get their credit
report back
in order.
Stories like Heller's help sell policies, said Bob Hunter, director of
the
insurance division of the Consumer Federation of America in Washington.
"Insurance companies love to play on fear," Hunter said. "It's a
classic development."
But Beth Givens, head of the Privacy Rights Clearinghouse, which took
information brokers to task before and after the database infiltration
disclosures of ChoicePoint and others, said identity theft insurance
might be
appropriate in some cases.
"If you are the victim of an especially aggressive thief, there will be
a
lot of certified-mail charges, faxes to credit bureaus and notary
fees,"
she said. "It can add up to $1,000 sometimes. And in rare cases, you
might
have to hire a lawyer."
The main cost, though, often is lost time.
"You might have to take days off work, just making phone calls,"
Givens said.
Most policies compensate victims for at least some of the time they
have to
spend away from work. Coverage backed by an AIG policy, for example,
repays as
much as $2,000 in lost wages.
Givens was an unpaid advisor to St. Paul Travelers when the company was
creating its first policy. The insurance company paid Privacy Rights
Clearinghouse a $1,000 licensing fee to use some of the group's
literature in
its brochures on the problems and time involved in fixing credit status
in the
wake of a crime.
"If you are out of pocket only $25 for coverage," Givens said,
"that's not so bad considering what might happen."
But $25 is about as much as individuals should pay, she said.
"Stand-alone ID theft insurance can cost upward of $125," Givens
said.
"Consumers should not be paying that kind of money for the insurance
when
they really should be getting protection under the law."