How to ensure good insurance

As Californians scorched by this month's wildfires pick through the charred remains of hundreds of lost homes and businesses, the dire scene points to a weighty question: Will insurers cover costs to rebuild?

Fire victims aren't the only ones with a stake in the answer. Insurance consumers everywhere want to know they're dealing with fair underwriters, and few situations suggest fairness – or lack thereof – as poign­antly as a company's response to a natural disaster.

But according to consumer advocates, people wanting to buy insurance from an ethical operator need not rely solely on cautionary tales from the grapevine. There are additional ways, they say, to figure out which companies treat their customers fairly and which ones don't. These include information tracked by state departments of insurance and by industry and watchdog groups.

"You need to go to someplace that provides some comprehensive information, as opposed to stories and anecdotes from individuals with bad experiences," says Sally Greenberg, executive director of the National Consumers League, a Washington, D.C.-based consumer advocacy group. The reason: Horror stories aren't necessarily representative of client experience with a company.

The ethical practices of insurance companies have come under fresh scrutiny in recent years. On the downside, Gulf Coast claimants who lost just about everything in hurricane Katrina are in many cases still fighting for payouts more than two years after the disaster.

On the upside, insurers have at times won praise for waiving deductibles after multiple disasters hit a region, a trend reportedly jump-started by MetLife after a series of hurricanes hit Florida in 2004.

Consumers eager to work with the insurance industry's good guys should weigh two primary considerations, advocates say: access and claims. That's because people across the spectrum need to be able to get coverage at affordable prices, just as they need their policies honored when they have a legitimate claim, says Bob Hunter, director of insurance for the Consumer Federation of America (CFA), an advocacy group. He's also former insurance commissioner for Texas. But this dual consideration means consumers sometimes need to make some tough choices. "Poor people need insurance just as much as we do – or maybe more, in some regards, because they're more vulnerable," Mr. Hunter says, "and yet they tend to be priced out. So if a company has systems that, in my view, really target poor people as people to raise prices on – if that's true, and I think it is – then that's a serious potential problem, an ethical problem for me as a buyer."

Hunter cautions that some companies seem to harbor biases against minorities and low-income people. He objects, for instance, to auto insurance giant GEICO's use of education and occupation as factors to determine a driver's risk. Through a formula, he says, domestic workers and high school dropouts pay higher premiums to GEICO than do their better-educated counterparts who have identical driving records. His tip for ethical consumers: Beware when an insurer starts asking about your schooling and your job. Even though you might get a good rate, your less-educated neighbor may be paying an exorbitant fee due to an unfair process.

"A lot of people don't think about how this classification system works," Hunter says. "I think most people say, 'Oh, the rate is $50 less, I'll take it.' They don't [realize], 'The reason I'm paying $50 less is because some poor people over there have to pay $100 more.' " GEICO spokeswoman Christine Tasher declined to comment on company practices.

The American Insurance Asso­­ciation (AIA), a trade group for property and casualty insurers, defends such risk-calculating means as legitimate ones that have passed muster in a highly regulated industry.

Industry defends risk yardsticks

"It's absolutely incorrect to argue that those things that are permitted by state law are in any way improper for the companies that do them," says David Snyder, vice president and assistant general counsel at AIA. "The best definition of fairness is a rate which most accurately reflects risk. Some advocacy groups don't like some risk measurements versus others. That's a matter of preference.… But all [measurements] comply with the law. The law punishes things like discrimination on the basis of race, religion, and national origin. And that's vigorously enforced by state regulators."

To determine a company's track record for settling claims fairly, consumers have a range of tools at their disposal. Armed with a little knowledge about where to look and which questions to ask, they can discern a firm's ethical portrait without investing a lot of time or money.

One core indicator is a company's complaint ratio. This figure indicates how a company's track record for satisfied customers stacks up against the competition. A ratio of 0.1 to 0.3 suggests good performance vis-à-vis the median for a particular insurance market (marked by a score of "1"). A number higher than 1 suggests a relatively large number of complaints per customer served.

'Complaint ratios' available online

To see a company's complaint ratio in a particular state, try visiting the website for that state's department of insurance. To view a firm's national performance, check out aggregated complaint data on the website of the National Association of Insurance Commissioners. One tip from NAIC president-elect and Kansas Insurance Commissioner Sandy Praeger: Watch out for firms mired in disagreements over benefits.

Her example: Companies "sometimes will dispute whether a house hit by a tornado was totally destroyed," Ms. Praeger says. "If a portion of the house is left standing, they may not want to pay the policy limit. Those kinds of complaints, I think, demonstrate that perhaps a company is not living up to its contract."

She echoes advice from advocates: Call the state insurance department.

Some websites offer quick summaries of many customers' experiences with particular companies. J.D. Power and Associates, for instance shows which auto insurers got the highest and lowest marks from surveyed customers who had been in collisions. Best ratings go to USAA and Amica. Worst ratings: Allstate, Farmers, Progressive, and Safeco, among others.

For certain information on perceived fairness, ethically minded consumers need to pay. Greenberg recommends Consumers' Checkbook for shoppers in metro areas covered by its service. For a $30 subscription, consumers can research a firm before they buy and determine from aggregated feedback whether other customers have, on the whole, felt that they received fair treatment.

What behavior of stock reveals

Still, thrifty consumers can learn a lot just by reading between the lines. Kevin Flynn, president of HealthCare Advocates, a private advocacy firm in Philadelphia, suggests using two proxies that help predict when an insurance company is likely to get more aggressive in denying claims. If an insurer's stock price is falling faster than stock market indices, he says, it's probably only a matter of time before the firm starts clamping down on claims paid or hiking premiums to raise funds. He also suggests asking a company's communications office about claims paid as a percentage of revenue. The closer to 100 percent, he says, the better.

Unethical behavior among some insurers "is always there," Mr. Flynn says. "You'll simply find it as they get into cash flow crunches."