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Price of Fender-Bender May Be Premium Hike

It was another tale of outrage: A woman had rear-ended a car that stopped suddenly on the freeway, the total claim to her insurer was a few hundred dollars, and then “they simply raised my premium enough for the next three years to cover the damage,” she said. “I ask you, what is insurance?”

Even those who suspect that a claim could affect their premium may have to dig for information. One man who submitted a $150 claim for a fender-bender was assured (and only after asking) by one agent of his company that there’d be no premium increase, by a second that there’d be an increase of $196 a year for three years, and by a third that there’d be a one-time increase of $142--no, wait a minute, $142 for three years running , or $426. He paid the $150 himself .

Auto insurers believe consumers know about this system, perhaps because such “surcharges” have been common since the early 1970s. But many consumers say they first heard only when they made a claim, or, worse, when they got their next renewal bill.

Called “Safe Driver Insurance Plans,” even though they only indirectly reward good drivers while punishing bad, surcharge systems bring “some form of equity to the overall rating process,” says Robert Thompson, president of 20th Century Insurance. “The theory,” State Farm spokesman Bob Sasser says, “is that people who have a lot of accidents should pay a higher premium,” instead of causing higher rates across-the-board.

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Triggered by Payment

Basically, each company has a schedule of surcharges triggered by the payment of certain claims--usually liability for bodily injury or property damage, or a one-car collision. These are “fault” categories, covering “accidents for which the person (insured) was determined to be at fault, or contributing to its causation,” says Alan Morris, director of insurance underwriting for the Automobile Club of Southern California’s insurance arm. Furthermore, the claim may have to pass a dollar threshold--typically $200 or $300 (at State Farm, the nation’s largest auto insurer, 80% of claims do exceed $200).

Some surcharge systems levy a flat dollar amount, added to premiums for the next three years. More apply ascending percentage increases--10% for the first claim at State Farm, for example, another 20% for a second claim within three years of the first, another 50% for the third and yet another 50% for the fourth, each for three years. Some assign point values to various claims and convictions, then percentage surcharges for the number of points.

The surcharge may well exceed the claim, but “this plan is not a recoupment,” says Fred Tolland, Liberty Mutual’s director of casualty underwriting. “It’s strictly punitive.” It’s also meant to be predictive, “another actuarial exercise,” says Thompson, “to cover future losses.”

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“The underlying principle,” Morris says, “is that there’s a correlation between having an accident and the possibility of having a future accident, and the purpose of the surcharge program is to match a price to the amount of risk. People tend to look at it from a value standpoint: They say they only hit a supermarket cart, it wasn’t worth that much. Underwriters look at it from an incident viewpoint: It could be a child next.”

In general, surcharges aren’t levied on consumers who bear no fault. But an accident, Morris says, “is not a clear-cut, you-or-me situation.” There’s often a squabble, and consumers expect their insurer to back them up, insisting, Thompson says, “that it’s not their fault and we shouldn’t pay it.”

Surcharges make the determination of fault even more important to the consumer, but less important to the insurer: The company could actually profit from the resulting surcharge. “They don’t always care to settle the squabble,” says Robert Hunter, president of the National Insurance Consumer Organization, “because both companies can surcharge their client.”

Not Always Told

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Of equal concern is the amount of the claim: Consumers must choose whether it’s worth triggering a surcharge. “If you have a $100 deductible and a $200 scratch, you won’t submit it now,” Hunter says, “because you don’t want a $50 surcharge for three years.”

But consumers may never get to choose. They are often not told about surcharges until the time of claim. Even then they may not be told, although “the claims adjuster should advise that there might be a surcharge,” Morris says, “particularly if the claim is a minor amount. The insured could withdraw it.”

At many companies, they may not be given that chance. “Once the file is opened, we have to pay it,” Thompson says. If the consumer admits fault by paying, insurers say, he somehow invites the other party to come back with another, bigger claim (a possibility that one would think applies whoever pays). He also destroys the “integrity” of this whole rating system.

And, of course, he euchres the company out of a surcharge.

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