Save Money on Insurance by Knowing the Harsh Truth About Insurance Companies

Oh brother, that annoying Allstate ad is airing again.  You know, the one with the obnoxious dweeb who pretends to be the latest hazard or absent-minded mistake that causes a huge accident before warning how screwed you will be if you have “cut rate auto insurance?”  The laughable suggestion is that you will be much better protected and defended if you pay more for invaluable Allstate insurance.  Allstate also likes to torture us with the endless stream of Dennis Haysbert “Are you in Good Hands?” ads.

State Farm, of course, promotes a similar myth by touting how this insurance company is “like a good neighbor,” while Nationwide promises how it is “on your side.”  Honestly, can these tacky companies finally stop it with the tired, cornball platitudes?

As both a seasoned consumer and an attorney who formerly worked with my share of these insurance companies, I can tell you all that you need to know when deciding which insurance company to choose for personal insurance lines (e.g., auto, home, and life).  It can pretty much be summarized with one sentence: They all suck, so go with the cheapest.

It sounds harsh, I know.  Why do I say all of these insurance companies suck, you ask?  For many reasons, but mainly because every one of them — Allstate, State Farm, Nationwide, GEICO, Liberty Mutual, and your local Farm Bureau Mutual Company — are penny-pinching, profiteering schmucks who don’t care a whit about you and who would gladly sell you down the river if it means they can close a file and save a buck on defense costs.  I like the way a law school professor explained the concept of personal insurance.  This, he explained, depicts the Allstate good hands while accepting your premium dollars:

This, conversely, is what becomes of those same hands when you file a claim under the policy:

All kidding aside, let me share some real life examples of how bad these insurance companies are.

First, from my consumer experiences: About eight years ago I finally got around to comparing my current insurance premium with other companies.  My wife and I had been State Farm insureds for roughly fifteen years running, with nary a claim made.  During that span of time, between our homeowner’s and auto policies, we had probably paid at least $25,000.00 of hard-earned money to State Farm.  I was quite surprised to learn that GEICO, with whom I had never been insured, gave me a quote that was a good bit cheaper than State Farm.  At my suggestion, my wife visited our State Farm agent and pleasantly explained the lower premium that was available to us.  I foolishly believed that State Farm would immediately offer to match, if not beat, that lower premium.  Surely, I thought, my long-time, “good neighbor” would be able to offer a loyal insured with no claims history the same premium as a company that had never insured me.

But I was wrong.  The local agent informed me that premiums are set my their underwriters with no room for negotiation.  I still had no clue how it was that GEICO’s underwriters were able to beat State Farm’s.  But the lesson was clear that customer loyalty amounts for nothing to the insurance companies of the world.

The State Farm agent did urge us to stay with her and suggested that we would see a marked change in quality of service.  The suggestion was that because GEICO does everything over the phone with long-distance faceless customer service representatives, we would be sorely disappointed with the quality of service.  This, of course, was little solace since I had never had occasion to make a claim in fifteen years.  So we made the switch and never regretted it.  (Fairness requires me to point out that about five years later, we called around again only to find that State Farm was beating GEICO at that time, thus proving that the lack of loyalty is hardly unique to State Farm.)

Now, let me share my more extensive experience working with insurance companies as a litigation defense attorney.  To appreciate it fully, you need first to understand how liability insurance works.  Not everyone realizes it, but when you have an accident, your insurance company owes you two primary duties.  One is called the duty to indemnify — or pay — for the loss.  In other words, the insurance company has to pay for the injured party’s damages up to the limit of your insurance.  If you have a $50,000.00 limit, for example, the insurer will have to pay the person you hit for up to $50,000.00 for personal injury damages.  Beyond that amount, you are on your own.

The second duty, which many people are not aware of, is a duty to defend.  This is a separate obligation that requires the insurer to provide you with a legal defense if you are sued as a result of an accident.   If you are sued by the driver that you hit in an accident, your insurer has to hire an attorney to defend you.  Insurance companies are supposed to defend your interest aggressively, the same as if their interests were on the line.

Through the years, however as the Allstates and State Farms of the world have sought more and more ways to increase profits, they have come up with a myriad of approaches to cutting defense costs.  One of their favorite tricks is to chisel away at their defense lawyers’ bills.  The trend started about twenty years ago when auto insurers demanded that defense attorneys provide discounted hourly rates.  Instead of paying $150/hr., the insurer might demand that the rate be lowered to $90/hr.  Insurers would also arbitrarily refuse to pay for certain expenses incurred in the course of defending a lawsuit.  They would refuse to reimburse defense lawyers for mileage incurred driving to courthouses in other counties; they would refuse to pay for postage and long-distance telephone charges.  They would arbitrarily complain of the length of time that a given defense tasks might take, then whack away at the bill further.

Even as these tricks cut away at defense costs, the insurers became greedier still.  It has reached the point to where many of these personal insurance carriers now simply pay a “flat fee” to attorneys who defend the lawsuits.  They might pay an attorney one or two thousand dollars for defending a case from start to finish, thus making the effective hourly rate $25/hr. or less.  Now ask yourself, how aggressive of a defense do you believe you will receive from an attorney who is paid under such an arrangement?  Fortunately, as my career advanced, I stopped working for these companies fifteen years ago, and I have never worked under this flat fee arrangement.  But I would hate to think of what a poor defense I would receive from an attorney paid by this method.

So what should you, as the consumer, do?  Two things.  First, call around and obtain quotes from all of the major carriers every year or two.  Do not hesitate to go with the cheapest option.  However, you also must be sure that you have a sufficient amount of coverage to protect your assets.  If you own any personal assets of any value, minimum liability coverage is not enough.  If you own substantial assets, you should not consider anything less than $250,000.00 in liability limits.  The far wiser course is to also obtain an umbrella policy that will provide you with an additional one million dollars of coverage.  Surprisingly, the additional premium for such an umbrella is not substantial, and it is well worth it.  I say this because it takes only one major accident for you to face substantial exposure to an injured party.

If you indeed purchase sufficient protection, it really does not matter which insurance company you choose.  Why?  Because the insurance company will essentially be gambling with its own money.  Allstate or State Farm can chisel away at its defense attorney and discourage him or her from doing what needs doing to defend the case effectively.  You will not care because the high verdict or settlement that results will come straight out of the insurer’s pocket, not yours.

As for first party insurance, which covers you for damage to your own property, you should also try to minimize your need for insurance at all.  Do this by carrying the highest deductible that you can manage and, better still, by dropping comprehensive and collision coverage altogether as soon as the value of your car declines significantly or as soon as you have enough in savings to buy a reasonable replacement car in the event that your vehicle is lost.

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