Beware of insurance scammers

Charles Lloyd, owner of Scramblez Cafe in Quartz Hill and in Lancaster, lost $2,800 in premiums and went almost a year without valid workers’ compensation insurance without knowing it.

His insurance agent, who won the business after a cold call, sent Lloyd official-looking documents with an insurance policy number, the name of a major insurance company and details of his supposed coverage.

“Everything was perfect,” Lloyd said.

Then, in 2005, the cafe owner learned that he had been ripped off. The agent didn’t have a license to sell insurance and had pocketed the premium money from Lloyd and at least 13 other Los Angeles-area small businesses.

The majority of the approximately 275,000 insurance agents licensed in California are legitimate, but the ones who aren’t can wreak havoc on a small business.

Protecting your small company from unscrupulous insurance agents isn’t difficult. But busy small-business owners, who usually are unfamiliar with how the insurance market works, often overlook the few steps required.

“You have small businesses, especially start-up businesses, that are concerned with anything but insurance,” said Michael C. Strickler, a principal at Strickler Insurance Agency in Encino and owner of LyteSpeed Learning Center, which provides insurance and financial services training.

The cost of insurance and the lengthy list of insurance types a business owner needs can add to the confusion.

“Insurance is a big ticket -- it’s a huge cost for us -- and everybody is always looking for some sort of relief,” said Greg Owen, owner of Ability/Tri-Modal Transportation Services Inc. in Carson and a former chairman of the California Trucking Assn.

Businesses that need insurance that is hard to get or is very expensive also may be more prone to running across fraudulent agents, said Steve Young, general counsel of IBA West, a trade group for independent insurance agents and brokers.

That can include workers’ compensation, liability and commercial auto insurance. The way the insurance market is organized also plays a role. Because the agent acts as a go-between, a small-business owner may never have direct contact with the insurance company that provides coverage.

Agents are authorized to issue binders, documents that list your policy number. A binder arrives a day or two after you pay. Your actual policy usually is mailed to the insurance agent, who is supposed to verify its accuracy and then mail it to you.

Agents also can issue the certificates of insurance that small firms often need for business purposes, and collect the premium money, which is supposed to go into a trust account that is separate from the agent’s regular business account.

Technology has made it easier than ever for fraudulent agents to create legitimate-looking forms and documents, said Kim Johnson-Woods, chief investigator for the Los Angeles regional office of the California Department of Insurance.

The agency has handled more criminal insurance cases in recent years, she said. That’s in part because new laws have made insurance fraud a more serious crime. And the Insurance Department has won limited peace officer powers for some investigators, allowing them to execute search warrants and make arrests in coordination with police officers.

Within the next year, Johnson-Woods said, the department will have a team of peace officers with full powers to operate more independently and access law enforcement data.

“We are focusing more on these cases, trying to spend our time where it would help the public the most,” Johnson-Woods said.

Here are some tips to help you protect your business from fraudulent insurance agents.

* Check license status.

Agents are required to be licensed by the state and they must put their license numbers on their business cards and their marketing material. To verify that a license number is valid, go to www.insurance.ca.gov or call the state Insurance Department at (800) 927-HELP.

* Know your agent.

“Check references. Make sure they are a reputable broker firm,” said John Prichard, senior vice president and manager of small business at Heffernan Insurance Brokers, which has offices in Orange and Walnut Creek.

He recommends asking an agent for customer and insurance company references. Prichard also suggests checking an agent’s website for signs of credibility, including accreditations. Also, ask whether the company’s financial statements are audited or at least reviewed by a certified public accountant, he said.

* Get several quotes.

It’s important to shop around, but remember that cheaper is not always better.

“The best price is not always an indication of the best insurance,” Prichard said. Fees should be disclosed and justified, he said. “It’s often necessary for a broker to charge a fee, especially in the small-business arena where premiums are so low there is often not enough commission to pay for the time the broker spends on the client,” he said.

* Don’t pay cash.

Always pay by check or money order, advised Loretta Worters, vice president of the Insurance Information Institute. Get a receipt for all payments and be sure the receipts show your policy number, date of payment and the name of the insurance company providing the coverage.

The bottom line: “Never pay for insurance until you’re sure the agent and the company are legitimate,” Worters said.

* Confirm coverage.

The actual insurance policy can take as many as 90 days to receive, but within a day or two you should receive from the agent what’s known as a binder. It’s a document that has your policy number, the name of the insurance company providing the coverage and a summary of the coverage. It usually is effective only for 90 days.

Call the insurance company to verify that the policy number is legitimate and that it belongs to you and that you have the coverage you expected.

It also makes sense to check the financial stability ratings of the insurance company issuing the coverage. Moody’s (www.moodys.com), Fitch (www.fitchratings.com) and A.M. Best (www.ambest.com/bestline) provide unlimited free ratings on their websites and up to five free ratings via telephone, Worters said.

When Lloyd, the cafe owner, had to find legitimate workers’ compensation insurance for the 12 employees at his two restaurants, he checked the license of his new agent, a longtime customer, and checked the insurance company’s rating online.

“It’s kind of hard to take the time,” Lloyd said. “But the cost of not doing it could be significant.”

cyndia.zwahlen@latimes.com

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Cautionary guide

Signs of possible insurance fraud:

Cheap policy: A policy costs far less than what other companies are charging.

Low bar: An insurance company accepts everyone, no matter how risky.

Evasive agent: An agent or company representative becomes evasive when you ask about insurance licenses, insurance coverage or prices.

High pressure: An agent tells you, “This is your last chance to get this special offer,” or discourages you from seeking the advice of a family member or attorney.

Personal information: An agent asks you to supply personal information not needed to write an insurance policy, such as your bank personal identification number or password.

Cash requested: An agent or company insists on cash payments.

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Source: Insurance Information Institute