Auto Insurance: Scam Or Necessary Evil?

Auto insurance scams are a serious issue, costing the US over $300 billion annually. While some scams are designed to simply take your money, others put you in harm's way. Staged accidents, false medical claims, and agent fraud are among the most common scams. For example, in a wave down scam, two scammers in separate vehicles will coordinate to wave a driver on, only to collide with them. Auto repair scams, towing scams, and fake insurance companies are also prevalent. To protect yourself, it's important to be vigilant, document accidents, and work with reputable companies.

High premiums and unfair pricing models

Auto insurance premiums have been described as “outdated and unfair". Insurers have been accused of using a “spray-fire approach” to determine premiums, relying on generalised, non-driving factors such as occupation, ZIP codes, education, credit score, and homeownership status. These factors have been criticised as poor measures of driving behaviour and have been proven to be discriminatory, leading to accusations of systematic discrimination across the insurance industry.

The use of credit scores to determine insurance prices disproportionately affects lower-income individuals and communities of colour, as those with low credit scores are charged significantly more for car insurance. According to NerdWallet, drivers with poor credit pay 75% higher rates on average than those with good credit, regardless of their driving behaviour. This places an additional financial burden on individuals with lower credit scores, who may already be facing financial difficulties.

In addition to credit scores, other non-driving factors such as education level, job type, and homeownership status can also influence insurance rates. For example, a teacher may pay more for car insurance than a lawyer, and a person with a PhD may pay less than someone without a high school diploma. These factors have been criticised for having little to do with one's driving ability or risk of getting into an accident.

The use of complex and hidden formulas by insurers to set rates has led to accusations of rampant use of Big Data without adequate scrutiny from state insurance regulators. The result is that insurance rates can vary widely across different locations, with cities like Detroit having significantly higher insurance rates than cities like Winston-Salem, North Carolina.

The high premiums and unfair pricing models in the auto insurance industry have left many drivers feeling ripped off and questioning the value of their insurance policies.

Difficult claims process

One of the main reasons why drivers believe auto insurance is a scam is the difficult claims process. Filing a claim can be challenging, time-consuming, and stressful, requiring extensive documentation and often resulting in low or no payouts. The process typically involves the following steps:

• Contacting the insurance company: After an accident, you must contact your insurer and provide details such as the location, date, and time of the accident, personal information, and insurance policy numbers of those involved, as well as photo evidence.
• Reviewing coverages and deductibles: Understanding your policy's coverages and deductibles is crucial. This includes knowing whether you have rental car reimbursement coverage or gap insurance, and being aware of your policy's limits and deductibles.
• Working with an insurance adjuster: Your insurance company will assign an adjuster to investigate your claim. They will assess the damage to your vehicle, review reports, and may interview witnesses. You may need to obtain repair estimates from vehicle repair shops.
• Repairing or replacing your vehicle: You can choose the repair shop, but your insurer will issue a payment minus your deductible. If your vehicle is deemed a total loss, they will provide compensation for the vehicle's value, minus the deductible.

The claims process can be further complicated if the other driver is at fault or uninsured. In such cases, you must inform your insurance provider, and they will communicate with the other driver's insurer to determine financial responsibility. Additionally, insurance companies may delay the claims process, leaving individuals in limbo and facing financial strain.

To navigate these challenges, it is essential to understand your policy, be diligent in gathering and providing the necessary information, and stay in communication with your insurance company and the assigned adjuster.

Low or no payouts

One of the most common complaints about car insurance companies is low or no payouts. Even when a claim is settled, the insurance company may pay a lower amount than expected, or reject the claim altogether. This can be extremely frustrating for customers, as they feel they are paying high premiums without receiving the expected benefits.

The issue of low or no payouts is often linked to the complex nature of car insurance policies. Customers may not fully understand what their insurance policy covers, leading to disappointment when their claim is denied. For example, a policyholder with liability-only coverage may not receive a payout if their vehicle is damaged in a natural disaster. Similarly, those without comprehensive or collision coverage may not be covered if their vehicle is totaled or stolen.

In other cases, the insurance company's assessment of the vehicle's value may be lower than expected. The company typically determines the actual cash value (ACV) of the vehicle before the accident, taking into account factors such as mileage, age, make, model, and existing wear and tear. This ACV is usually lower than the replacement value, and customers may feel that it does not adequately cover the cost of a new vehicle.

Additionally, the payout amount may be affected by the policy's maximum limits, the type of loss (partial or total), and the state's regulations. If the payout is less than or equal to the amount owed on the vehicle, the policyholder may not receive any cash and may still need to make payments.

To avoid disappointment, it is crucial to carefully review and understand the terms of your car insurance policy. Communicating with your insurer and seeking clarification can help manage expectations and ensure a smoother claims process.

Poor customer service

The process of filing a claim is often painfully difficult and time-consuming, requiring extensive documentation and sometimes taking several months to settle. This can cause financial strain for those awaiting a claims payout. Some insurers may even purposely delay a claim to encourage the claimant to settle faster.

In addition, claimants are often paid a lower amount than expected, or their claim may be denied altogether.

The high cost of premiums is another common grievance. These premiums may increase at renewal time, and some feel that pricing models are unfair and inequitable, taking into account factors such as age, gender, job title, and credit score, rather than solely focusing on how and where someone drives.

Fraudulent practices by insurance companies

While auto insurance is not inherently a scam, there are fraudulent practices by insurance companies and agents that have been reported. Fraud may be committed by applicants, policyholders, third-party claimants, or professionals who provide services to claimants. Insurance agents and company employees may also commit insurance fraud.

• Counterfeit airbags: Deployed airbags are sometimes replaced with counterfeits during the repair process after an accident. Counterfeit airbags bring a high likelihood of malfunction and can explode, injuring drivers and passengers with metal shrapnel. The National Highway Traffic Safety Administration (NHTSA) estimates that fake airbags represent less than 0.1% of what is installed in U.S. vehicles. However, the ease of online shopping has facilitated the proliferation of these counterfeit airbags. Certain repair shops may also knowingly opt for these cheaper, illegal replacements, putting people's lives at risk.
• Staged accidents: Staged accidents are incidents where a driver intentionally or strategically causes a collision with another vehicle to receive a fraudulent insurance payout. The facts of the incident are often inflated or misrepresented to make it seem like the unsuspecting driver is at fault. Common types of staged crashes include the "swoop and squat," where two vehicles trap a victim and force them into a rear-end collision, and the "wave down," where two vehicles set up a crash by waving to a victim that it is safe to pull out of a parking lot or side street. The FBI estimates that staged accidents cost insurance companies up to $20 billion per year.
• Premium diversion: In this scam, a dishonest insurance agent steals your premiums by pocketing your money and not setting up your coverage. When an accident occurs, you discover that you have no insurance to pay your claim and are left to cover the loss yourself. This is one of the most common forms of insurance fraud, according to the FBI.
• Sliding: This is a practice where an unethical agent slips extra coverage that you didn't want or request into your policy. This sneaky form of auto insurance fraud can add hundreds of dollars to your annual premiums while also padding the agent's commission.
• Windshield replacement rip-offs: In states like Florida, Kentucky, and South Carolina, insurance companies are not allowed to charge a deductible for windshield replacement. Unscrupulous glass replacement contractors in these states have been known to trick customers into having their windshields replaced even if there is only minimal damage. They entice customers with gift cards to sign a false Assignment of Benefits (AOB), allowing them to handle the repair and claim process with the insurer. While AOB for windshield glass was prohibited in Florida in 2023, shady vendors continue to prey on drivers by using quasi-AOB agreements called "Direction to Pay."
• Tow truck scams: After an accident or breakdown, a "bandit" tow truck may appear, offering to tow your vehicle. However, these fraudulent tow services will often demand hundreds of dollars for repairs and release of your vehicle. It is recommended to contact your insurer to verify if they sent out the tow service and to be cautious of any tow service that does not offer information about themselves or their services.

Frequently asked questions