After someone used Robert Nighan's credit card to charge $2,000 worth of golf clubs in California, the insurance executive got an idea.
Nighan — who doesn't golf and lives in Hartford, Conn. — figured out a way to legally make crime pay: Sell an insurance policy to protect against identity theft.
"I was involved in our crime insurance division at the time," said Nighan, a vice president of insurer St. Paul Travelers. "What happened to me was relatively minor; it took only about a week to fix. Still, it was a major distraction, and for some victims it goes on for years."
So in 1999, St. Paul Travelers became the first company to offer identity theft insurance. It cost $25 as an option to a homeowner policy and covered the costs involved in fixing credit report problems in the wake of a crime.
The idea took off and other companies followed.
"Our anti-fraud people say it is one of the fastest-growing areas," said Bryon Tucker, spokesman for the National Association of Insurance Commissioners. Companies offering the coverage include Allstate Corporation, American International Group Inc., Chubb Corporation, Fireman's Fund Insurance Co. and MetLife Inc.
Neither the National Association of Insurance Commissioners nor insurance trade associations keep figures on the number of identity theft policies in effect, partly because the area is relatively new.
Some critics complain that the insurance companies are profiting off a problem they helped create. Like many businesses, insurance companies give or sell information about their customers to data aggregators such as ChoicePoint Inc., which had its database breached by identity thieves and sparked a national debate over how personal information gets used.
"The unpleasant irony is that one of the main reasons we need protection is that actions by insurance companies helped make our personal information too readily available," said Doug Heller, executive director of the Foundation for Taxpayer and Consumer Rights, a consumer advocacy group based in Santa Monica, Calif. "They and other industries insist on their right to trade private information about all of us, and that makes it possible that the information can fall into the hands of thieves."
Insurance companies say the information helps them better evaluate the risks associated with individual policyholders, allowing them to offer more equitable rates.
Rather than rely on insurance, Heller and other activists said, consumers should demand tougher laws regulating how their personal data are used.
California has led the country in anti-identity-theft laws. It was the first to require that information brokers notify state residents if their personal information might have been revealed to scammers as the result of a database break-in. The state's law was seen as key to the disclosure of the breach at ChoicePoint.
Only five other states have notification laws as strong as California's — Arkansas, Indiana, Montana, North Dakota and Washington — according to the Public Interest Research Group.
Another law pioneered in California lets residents control access to their credit reports. This helps keep scammers from opening unauthorized credit card accounts or taking out loans in a victim's name. Only Louisiana has a credit-freeze law as strong as California's.
The insurance generally costs $25 or more per year. Policies don't cover the cost of items bought in the victim's name. But those costs are usually covered by the credit card company if the crime is reported.
Some companies include the coverage free on premium home insurance policies. And a few even allow victims to turn over the tedious and sometimes thorny task of fixing their credit status to a business that specializes in the field.
John Spagnuolo, director of new media for the Insurance Information Institute, a trade association, said he expected more companies to offer the coverage.
"Because of all the coverage of the problem in the media, consumers are aware that the possibility of being a victim of identity theft is not a small one," he said.
The Federal Trade Commission has put the number of yearly victims of identity theft at about 10 million, or nearly 5 percent of the adult population in the U.S. The agency estimates that identity theft costs $50 billion a year in false charges and lost time.
Consumer advocate Heller experienced the hassle associated with identity theft when someone used his wife's name to buy numerous items, including $600 worth of furniture at Sears. The thief gave a home address to the store to have it delivered, establishing a trail for the police to follow.
"Not the brightest thief in the world," Heller said. "But he sure caused a lot of trouble."
Four years later, the Hellers are still trying to get their credit report back in order.
Stories like Heller's help sell policies, said Bob Hunter, director of the insurance division of the Consumer Federation of America in Washington.
"Insurance companies love to play on fear," Hunter said. "It's a classic development."
But Beth Givens, head of the Privacy Rights Clearinghouse, which took information brokers to task before and after the database infiltration disclosures of ChoicePoint and others, said identity theft insurance might be appropriate in some cases.
"If you are the victim of an especially aggressive thief, there will be a lot of certified-mail charges, faxes to credit bureaus and notary fees," she said. "It can add up to $1,000 sometimes. And in rare cases, you might have to hire a lawyer."
The main cost, though, often is lost time.
"You might have to take days off work, just making phone calls," Givens said.
Most policies compensate victims for at least some of the time they have to spend away from work. Coverage backed by an AIG policy, for example, repays as much as $2,000 in lost wages.
Givens was an unpaid advisor to St. Paul Travelers when the company was creating its first policy. The insurance company paid Privacy Rights Clearinghouse a $1,000 licensing fee to use some of the group's literature in its brochures on the problems and time involved in fixing credit status in the wake of a crime.
"If you are out of pocket only $25 for coverage," Givens said, "that's not so bad considering what might happen."
But $25 is about as much as individuals should pay, she said.
"Stand-alone ID theft insurance can cost upward of $125," Givens said.
"Consumers should not be paying that kind of money for the insurance when they really should be getting protection under the law."