Crash course in insurance costs
You caused the damage to your car. Is it worth filing a claim?
Last year, Steve Anderson damaged the bumper on his pickup truck when he backed into a fence post he did not see. It was his fault and he instantly knew it would cost him money.
But how much?
Anderson submitted a claim to his longtime insurer, MAPFRE, which paid most of the $4,900 cost of replacing the bumper (he paid the $300 deductible).
Anderson was grateful for the coverage until his insurance renewal notice arrived about six months later. MAPFRE, one of the state’s largest insurance companies, quoted him a premium that was 62 percent higher than his current policy.
Steve’s wife, Rhonda, thought that was outrageous, and contacted me to complain about such a steep increase in the premium for the family’s several vehicles.
“All because of a minor fenderbender?” she asked.
What I found out is that, yes, your insurance will very likely go up — significantly — as a result of even a minor at-fault accident. That’s because surcharges are imposed on drivers with blemished driving records.
The standard surcharge for an accident like Steve’s is a 45 percent hike in the premium. But insurers in Massachusetts can impose even bigger increases.
Insurers are allowed to follow their own complex actuarial computations to set premiums. The system, known as “managed competition,” aims to keep premiums low by incentivizing consumers to shop around for the best prices.
(After I contacted MAPFRE, it rechecked its calculations on renewing the Andersons’ policy and discovered it had made a mistake and that the in
‘All because of a minor fenderbender?’ RHONDA ANDERSON after the premium for the couple’s car insurance was raised 62 percent
crease should have been 48 percent, a MAPFRE spokesperson said.)
Here are some things to know about how at-fault accidents (and traffic law violations) affect the cost of auto insurance in Massachusetts:
Q. How does a minor at-fault accident affect your insurance premium?
A. Risky driving gets penalized in Massachusetts. The most obvious way insurers do this is under a merit rating plan — known as “surcharges.” The standard merit rating plan is called the Safe Driver
Insurance Plan. All insurers were required to use it until the advent of managed competition about 15 years ago. Some still use it. But insurers are now allowed to develop surcharge plans of their own and submit them to the state Division of Insurance for approval.
Q. What’s an “at-fault” accident?
A. It’s one in which the insurer determines that you are more than 50 percent at fault. You have the right to appeal a finding of fault to the state Division of Insurance Board of Appeals, which requires a nonrefundable $50 fee. I know of insured drivers who successfully appealed by pointing out their accident occurred while driving on slippery, snow-covered roads.
Q. How does the SDIP work?
A. Every driver listed on an insurance policy is assigned a merit rating score based on their driving record. The more surcharge points you have, the higher the cost of insurance. If you have a clean driving record (for six years on most policies) you are deemed an excellent driver and qualify for a significant discount.
Q. How do I find out my rating?
A. Pull out your policy. The first page should list all drivers along with personal data, such as dates of birth and “merit rating,” or “MRB.” An excellent driver is designated as having a 99 merit rating, while those with imperfect records are ranked in points from 2 to 5 (ranking can go higher than 5 for those who have multiple accidents or infractions).
Q. Explain the point system.
A. There are two categories of points: those you get for atfault accidents (like Steve’s) and those for traffic law violations. An at-fault accident that causes damage of $1,000 to $5,000 is deemed “minor” and gets 3 points. When the damage is more than $5,000 it’s deemed “major” and you get 4 points.
Q. What about traffic law violations?
A. You get 2 points for a “minor” traffic law violation (speeding, for example) and 5 points for a “major” traffic law violation (operating while under the influence of alcohol or narcotics, for example).
Q. How do the points affect your premium?
A. Points increase your total premium by a certain percentage. Let’s say your basic total premium is $1,000 a year. Each point costs you 15 percent, or $150 on your $1,000 policy. A minor accident is 3 points, so that means a 45 percent surcharge, thus increasing your premium by $450 to $1,450.
The most expensive surcharge is for a major traffic law violation (5 points). It increases your premium by 75 percent (15 percent per point): a $1,000 premium becomes $1,750.
Q. How long do the surcharges last?
A. Usually, six years. So a minor accident on a $1,000 policy would cost $2,700 over the long run and a major traffic law violation on a $1,000 policy would cost $4,500 over six years.
Q. What if my spouse and I are listed as drivers on both cars?
A. Only the driver who had the accident or driving infraction gets surcharged. But insurers aren’t required to apply the surcharge to the automobile that had the accident or infraction. This allows insurers to maximize their premiums. Let’s say my premium is $1,000 and my spouse’s is $2,000 (many factors go into computing the basic premium on vehicles, including its value). Let’s say I get into an atfault accident in my car, which is less expensive to insure. But I’m also listed as a driver on my spouse’s car, which is more expensive to insure. My insurer has the discretion to apply my 45 percent surcharge to my car ($450) or my wife’s ($900). Often, insurers apply the surcharge to the more expensive vehicle.
Q. What do I get for being an “excellent driver”?
A. You get a 17 percent
Q. Where do I see that in my policy?
A. Look on the “coverages and limits on liability” page. It lists a dozen compulsory and optional insurance categories (”collision,” listed as “part 7,” is usually the most expensive one, for example), along with limits on coverage, deductible amounts, and the cost in premium for each category. At the bottom should be a line for “merit rating plan” — either a negative number for an excellent driver (“-170 on a $1,000 premium) or a positive one (“450 on a $1,000 premium for 3 points). Remember, there are a lot of variables, so the numbers may not come out perfectly.
Q. Does it ever make sense to pay for repairs out of pocket to forgo surcharges?
A. Yes, it can. If your premium is $2,000 and you are facing an annual $900 surcharge for a minor accident for six years, that’s $5,400, payable to your insurer. If your out-of-pocket expense would be less than that, it might be better not to file a claim.
Insurance agents aren’t supposed to tell you not to report an accident to your insurer. But some agents have ways of hinting that it may be better to avoid a claim because the cost of surcharges and other increases is likely to exceed the cost of repairs.
But it’s not always easy to project the “break-even point” to help an insured driver decide what to do.
Q. Why is projecting that difficult?
A. Because surcharges are only one way your premium may go up as a result of an accident. Insurance companies typically have their own internal “tiers” of drivers based on their “risk profiles,” and an accident or other events, such as making a claim for a windshield repair, may push you to a more expensive tier. Those computations by insurers are somewhat opaque. Even agents sometimes referred to an insurer’s “black box” for computing premiums.
Insurers want as much information as possible on accidents and driving infractions and rely on agents and police to make reports to the Merit Rating Board, which in turn shares its data with the insurance companies.
Q. Insurance companies can charge whatever they want in premiums?
A. Pretty much, yes. In Massachusetts, insurance companies are free to set their own rates, although the state insurance commissioner has the authority to review them to make sure they aren’t excessive, in which case approval can be withheld.
Q. Once I make a claim can I withdraw it?
A. No, not when the claim is for an at-fault accident (insurers want that information to help calculate future premiums).
Q. What is accident forgiveness?
A. Some insurance companies, including MAPFRE, may agree not to factor an accident into calculating your premiums if you have “accident forgiveness.” You can get it by paying a slightly higher premium. Insurers sometimes offer it free to attract new customers.
Q. What did the Andersons do?
A. Rhonda shopped around and found a policy with another insurance company, Norfolk & Dedham, for a lot less than the MAPFRE quote, and made the switch. The Norfolk & Dedham policy wound up being only slightly higher than the premium before Steve’s accident.
You can say competition worked in their case.