The auto insurance industry calls it "premium leakage," and one way it occurs is when a car owner underreports the number of miles driven each year in order to obtain the cheapest car insurance available. Under-reported mileage can lead to trouble in the claims process in the event of an accident, or cancellation of car insurance policies. Why do insurance companies care about mileage, and is there ever justification for under-reporting mileage?
A 2008 study by auto insurance industry consultants Quality Planning Corp. (QPC) measured lost revenue through what's called "premium leakage," and found a whopping $15.9 billion in annual losses from this phenomenon. By definition, premium leakage occurs whenever a company is unable to identify a change in a policyholder's situation, even though a change has occurred that would otherwise affect a policy's price.
Some common examples of premium leakage are failing to disclose that a car is being used for business, taking discounts for memberships in organizations that no longer apply or forgetting to report a new driver. However, the No. 1 form of premium leakage is under-reporting of mileage, which clocks in at a cost of more than $3 billion annually, according to an insure.com report.
There is a correlation between the amount of miles a motorist drives annually and the frequency of filing an auto insurance claim, according to a second QPC study that looked into the use of odometer readings to predict future mileage. Since high-mileage drivers are bigger risks, it makes sense for motorists who rack up a lot of miles to pay higher premiums. When they don't, the cost is unfairly passed on to others. Yet, according to a California Department of Insurance report published in 2006, 46 percent of all drivers under-reported mileage.
Much like the Internal Revenue Service audits income tax returns, car insurance companies routinely audit car insurance policies. Such firms as QPC are employed by insurance companies to find errors. Advance computer algorithms and data mining are also sometimes used to find policy holders who are potentially lying. Finally, comparing maintenance data, accident reports and even cross-referencing state emissions tests can help car insurance companies find and crack down on mileage liars.
While some car insurance companies are slow to catch up to policy holders who underestimate annual mileage, they usually do find out. In the event of an accident, if the odometer reading proves substantially different than expected, the insurance company could challenge paying the claim, refuse to renew the car insurance policy or cancel the policy outright. Car insurance companies do not sit idly by while losing money. It is the honest car owners who end up paying the price in higher insurance premiums. Simply put, under-reporting mileage is not worth the price of getting caught.
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