Identity Restoration Insurance: Why Would I Need That?

March 20, 2018

This article is originally a publication of National Insurance Law Forum, March 2018. Legal opinions may vary when based on subtle factual differences. All rights reserved.

When retired nurse Helen Anderson[1] flew to visit her sick daughter, she let her niece, Samantha, house sit. Though she had instructed her niece that no friends were allowed over, Helen found Samantha in the house with her friend, Alice Lipski, when she returned. After asking Alice to leave, Helen didn’t think more about her friend being in her house.

It turns out that Alice was an expert identity thief and meth addict. After stealing mail and receipts from Helen’s home, she completely took over Helen’s identity, withdrawing money from existing bank accounts and opening new credit cards. She even signed up for a credit monitoring service so she could view Helen’s entire credit history. Alice reported every inactive card on Helen’s credit history as lost or stolen so she could get new cards, usernames, and passwords – effectively locking Helen out of her own accounts. The relevant bills and statements were rerouted to a different mailing address.

“I would call a credit card company. They’d ask for the account number and password, but I couldn’t give them either one.” All she could do was go to the stores and banks in person, and show her driver’s license to prove who she was. She would cancel the cards, and then later learn of a new wave of attacks.

Alice was finally caught after forgetting her purse at a Macy’s. She was charged with ten counts of identity theft; she and her friends had stolen nearly $1 million using the personal identification information of other people.

In the wake of the attacks, Helen sold her house of more than 40 years and moved in with her 95-year-old mother. Although her stolen funds were restored after she filed police reports, Helen’s credit score sunk 100-points during the months Alice was active. Nearly two years later, Helen was still cleaning up her damaged credit. She was stymied by the paperwork involved in getting the credit bureaus to correct her record and is fatalistic about the possibility of future fraud, “my information is out there.”[2]

Identity Theft and Fraud: Growing Concerns

Although the terms are often used interchangeably, an important distinction is made between them:

• Identity fraud is generally used to refer to the unauthorized use of someone’s personal information for illicit financial gain. Identity fraud ranges from using a stolen payment card account for a fraudulent purchase to opening fraudulent new accounts.
• Identity theft is unauthorized access to personal information. It can occur without identity fraud, such as through data breaches. Once the theft is used for illicit financial gain, some industry standards consider it fraud.

Despite high-profile efforts to combat the problems, the IRS has been challenged by identity theft and tax fraud. For the 2015 filing season, the IRS reported identifying 163,087 tax returns with more than $908.3 million claimed in fraudulent refunds and preventing the issuance of approximately $787 million (86.6%) in fraudulent refunds.[3]

According to Javelin Strategy & Research’s (Javelin) yearly Identity Fraud Study for the reporting year of 2016,[4] about 1 in every 16 U.S. adults were victims of ID theft (6.15%) — an increase in the incidence rate by 16% year over year.[5] The study also found that, despite industry efforts to prevent identity fraud, fraudsters victimized two million more U.S. consumers than in the prior year, with the amount stolen rising by one billion dollars, for a total of $16 billion.[6]

Javelin’s 2018 Identity Fraud Study reported that the number of identity fraud victims increased by eight percent (rising to 16.7 million) in 2017.[7] The study found that despite industry efforts to prevent identity fraud, fraudsters successfully adapted to net 1.3 million more victims in 2017, with the amount stolen rising to $16.8 billion.[8]

The Cost

The most obvious consequence that identity theft victims encounter is financial loss, which comes in two forms: direct and indirect. Direct financial loss refers to the amount of money stolen or misused by the identity theft offender.[9] Indirect financial loss includes any outside costs associated with identity theft, like legal fees or overdraft charges.[10]

Overall, in 2012 and 2014, victims who experienced a direct and indirect financial loss of at least $1 lost an average of $1,343, with a median loss of $300.[11] In addition to any direct financial loss, 5% of all identity theft victims reported indirect losses associated with the most recent incident of identity theft.[12] Victims who suffered an indirect loss of at least $1 reported an average indirect loss of $261 with a median of $10.[13]

In addition to suffering monetary losses, some identity theft victims experienced other financial and legal problems. They paid higher interest rates on credit cards, they were turned down for loans or other credit, their utilities were turned off, or they were the subject of criminal proceedings.[14] Victims who experienced the misuse of an existing account were generally less likely to experience financial and legal problems as a result of the incident than victims who had other personal information misused.[15] Thirty-six percent of identity theft victims reported moderate or severe emotional distress as a result of the incident.[16]

Insurer Response

Identity restoration insurance is widely available.  Allstate, Liberty Mutual, State Farm, and Travelers, all offer such coverage through an endorsement to homeowners or renters policies.[17] While it does not protect you from identity theft, identity restoration insurance can make the recovery process easier, faster, and less expensive.

The coverage would not reimburse an insured for fraudulent credit card charges, stolen money or missing tax refunds. Instead, it would provide coverage for expenses related to dealing with the aftermath of having your identity stolen and/or used to commit fraud. This coverage is typically offered for about $35 per year, and would be added an existing policy insuring a home, apartment, condominium, manufactured home, or farm. Coverage would extend to the named insured’s household (ie, spouse, and relatives/dependents (under 21 years old) living in the subject residence). Limits range around $15,000 per occurrence and $30,000 per policy period, with deductibles from $100 to $500.[18]

Coverages typically exist for the following types of expenses:

• Approved reasonable attorney fees. Victims have been known to spend thousands of dollars on attorney fees as they work to restore their good name.
• Employer-documented lost wages for work time lost to meet with attorneys, law officials, and others concerning your claim.
• Loan application fees when reapplying for a loan that was rejected due to credit fraud.
• Costs for notarizing the appropriate official documents.
• Costs for certified mail to appropriate law enforcement agencies, financial institutions, etc.
• Related long-distance phone calls to merchants, law enforcement agencies, creditors, etc.

In addition to expense reimbursement, some identity restoration insurance may include the assignment of a case manager who would work directly with an insured’s credit card companies, credit bureaus, creditors, and other financial institutions for up to one full year for a covered incident.

Conclusion

What happened to Helen Anderson is a nightmare that has taken her years to overcome. But her situation appears to be an extreme case. In fact, you are unlikely to be a victim of identity theft and/or fraud, although data breaches like those at Yahoo (2013-2014), eBay (2014), Anthem (2015), and Equifax (2017), appear to be ‘improving’ your odds. Even if a person’s identity is stolen and used to commit fraud, however, the DOJ’s study shows the impact is likely to be more manageable than what Ms. Anderson has experienced.

Nevertheless, beyond money lost, identity theft and/or fraud can negatively impact credit scores. While credit card companies detect a majority of credit card fraud cases, the rest can go undetected for extended periods of time. A criminal’s delinquent payments, cash loans, or even foreclosures slowly manifest as weakened credit scores. Victims often only discover the problem when they are denied for a loan or a new credit card.

Therefore, a real value of the $35 per year coverage may be having the assistance of a dedicated counselor to help you through the process of restoring your credit. Having a case manager working on your behalf can streamline the process, and his or her experience and contacts can make it more effective. If you’d rather do the work yourself, a case manager can provide an identity recovery guide that shows what steps to take after discovering identity theft and/or fraud, and has other useful information to aid with the identity restoration process.

Another valuable benefit of some identity restoration insurance is a year of credit monitoring service provided after you’ve been victimized. As it is a service which typically costs $120 to $180 per year,[19]having it could make the coverage worthwhile on its own.

Whether or not identity restoration insurance makes sense is a decision for the individual consumer. Along with the cost, other considerations to include are your ability to conduct your own research as to identity and credit restoration, comfort level in dealing with banks and credit bureaus, and the amount of time you will be able to dedicate to the process.

1. [Name changed to protect identity.
2. “She Stole My Life,” by Doug Shadel, AARP The Magazine, Oct/Nov 2014.
3. Treasury Inspector General for Tax Administration – Press Release, Sep. 21, 2015. ttps://www.treasury.gov/tigta/press/press_tigta-2015-28.htm
4. Javelin Strategy & Research. Under the heading, “Contributing Organizations,” the report states:
   The study was made possible in part by LifeLock, Inc. To preserve the project’s independence and bjectivity, the sponsors of this project was not involved in the tabulation, analysis, or reporting of final results.
5. https://www.javelinstrategy.com/press-release/identity-fraud-hits-record-high-154-million-us-victims-2016-16-percent-according-new
6. Id.
7. A record high since Javelin Strategy & Research began tracking identity fraud in 2003. 2017 Identity Fraud Study, Javelin Strategy & Research. https://www.javelinstrategy.com/press-release/identity-fraud-hits-all-time-high-167-million-us-victims-2017-according-new-javelin
8. Id.
9. “Victims of Identity Theft,” Bulletin, at p. 6, Erika Harrell, Ph.D., BJS Statistician, Sep. 2015. https://www.bjs.gov/content/pub/pdf/vit14.pdf
10. Id.
11. Id.
12. Id. at p. 7.
13. Id.
14. Id. at p. 8.
15. Id.
16. Id. at p. 1.
17. “Identity Theft Insurance: What Does It Cover And Is It Worth it?” Forbes Mar. 31, 2016, Janet Berry-Johnson.
18. Id.
19. “Identity Theft Insurance: What Does It Cover And Is It Worth it?” Forbes Mar. 31, 2016, Janet Berry-Johnson.