Busted How to Tell If You’re Dealing with a Reputable Insurance Company or AgentA few weeks after Hurricane Katrina struck Louisiana in 2005, I received a call from an elderly woman who was confused about her insurance policy. She said that she had paid a significant sum of money for homeowner’s insurance coverage to a person who claimed to be an insurance agent.

This supposed agent insisted the woman write her homeowner’s insurance premium checks payable to his company instead of her insurance company. He told her this would “allow him to more effectively manage her investment.” Little did she know, the dishonest promoter instead deposited the money into his own bank account.

The financial repercussions for her were heartbreaking. The woman thought she was covered for the loss of her home from Katrina. When she tried to file the claim with her insurer, she was told she wasn’t a policyholder.

She had been scammed.

Pocketing insurance premiums vs. sending them to the insurer is a common way for agents to steal premiums. Selling a phony insurance policy through a fake insurance company is another way.

It’s not just homeowner’s insurance that attracts criminals, either. For example, “ghost brokering” occurs when criminals set up fake websites, use social media, or post classified advertisements and offer cheap auto insurance policies. When a driver purchases a policy through the broker, the broker pockets the cash and sends the driver a phony policy.

These scammers are known to target both young drivers who typically pay more for auto insurance because of their driving inexperience and those with little understanding of how auto insurance works. Some of these scammers promote heavily discounted insurance policies on student websites and university notice boards. A victim may only discover the lack of coverage after he or she has been involved in an accident.

(Read more: Tips for finding a good insurance agent)

Legitimate agents may also sell coverage you neither want nor need. The coverage may be real, but it also could be expensive and unnecessary, and your current policy may already cover the risk.

These types of scams can include:

1. Churning: Dishonest agents might convince you to use the built-up value of your current whole life policy, a type of policy that pays your beneficiaries in the event of your death at any time, to buy a better policy—even though your current coverage might be perfectly fine. The agent gets a nice commission, but the victim must start building up cash value all over again.

2. Sliding: A dishonest agent or insurer may slip you extra coverage you didn’t request but for which you will have to pay. This can easily add significantly to your premium. The agent may say it’s simply part of a package or not tell you about the coverage at all. Motor club memberships, accidental death coverage, and guaranteed renewable life insurance are three of these types of policies that sometimes are sold to unwitting people.

3. Twisting: A dishonest agent may urge you to change policies prematurely by twisting the truth about the downside. For example, the new policy may be promoted as having better coverage for a lower cost by using misleading comparisons. You may also be urged to invest in an insurance-like policy, such as a “viatical.” A viatical enables sick or terminally ill people to access the proceeds of their own life insurance policy to pay for expenses such as medical care and it can be a legitimate investment, but some viaticals can be phony or misleading.

Another scam is for an agent to provide a promissory note, which is a written promise to pay a debt. Dishonest agents sometimes promise quick, high, and certain returns for investing in promissory notes supposedly backed by insurance. Often the promissory notes don’t exist, and they are just a sham to steal your money.

How to protect yourself

With all the scams out there, how do you pick a reputable insurance company or agent? Before signing on, be sure to do the following:

  • Check the financial health of insurance companies with rating companies such as A.M. Best, Moody’s, or Standard & Poor’s.
  • Do an Internet search for the agent or insurance company you’re considering and add the words “rip off” or “scam” to see whether any complaints appear.
  • Contact your state insurance department to verify that a company or agent is licensed and in good standing.
  • Contact the Better Business Bureau to see if there have been any complaints lodged against the agent or insurer.
  • Get quotes from different types of insurance companies. Some sell through their own agents; others sell through independent agents who offer policies from several insurance companies; and some companies sell directly to consumers over the phone or via the Internet without using agents at all.
  • Don’t shop by price alone. Pick an agent or company representative that takes the time to answer your questions.

One way to evaluate an agent or insurance company is by talking with people you trust. If a family member has an agent or insurance company he or she has been with for years, the chances are the company or agent is reputable. However, that doesn’t preclude you from doing your homework.

If you suspect your agent or insurance company of fraud, immediately contact your state’s insurance department, call the NICB at 800-TEL-NICB, or visit nicb.org/speak_up/speak-up.

Loretta Worters is vice president with the Insurance Information Institute, a non-profit organization whose mission is to improve public understanding of insurance—what it is and how it works. Follow her on Twitter: @LWorters.