US auto insurers deny 45% of liability claims as payouts shrink

Auto insurers paid nothing on 45 percent of resolved liability and medical claims last year, up from 35 percent a decade ago.

"The industry uses claim lowballing and denials to wring extra profit out of customers who don't have the resources or, in some states, the rights to fight back," Douglas Heller, director of insurance at the Consumer Federation of America, said.

Personal auto insurers paid out around 61 cents in claims for every dollar in premium last year, their lowest net loss ratio since 2020, according to S&P Global Market Intelligence. Among the 10 biggest auto insurers, Farmers, Liberty Mutual and State Farm posted the largest increases in no-payment rates for liability and medical claims over the past decade, the Journal's analysis of National Association of Insurance Commissioners data found.

The trend mirrors what's happening in homeowners insurance and raises questions about the value of mandatory auto coverage. State Farm, which lost its decades-long crown as the nation's leading auto insurer to Progressive this year, began cracking down on claims involving undisclosed drivers in October, a policy shift that could push denial rates higher.

Undisclosed Drivers

State Farm changed the terms of renewal auto policies last October to add a "duty to notify us of changes," including any new regular drivers of the car, according to internal documents reviewed by the Journal. The insurer said claims involving drivers not listed on a policy cost it nearly $1.5 billion a year. The initiative will likely result in more claim denials, the memo suggests, citing sample scenarios where the insurer would often have paid out in the past.

The crackdown follows a broader industry push to scrutinize household disclosures. Christopher Benton, a California lab technician, filed a claim with Allstate-owned National General after a 2023 fender-bender, only to have the insurer refuse payment because his 15-year-old son wasn't listed on the policy application. Benton said neither he nor his broker knew of the requirement to disclose all household members ages 14 and over. He is now part of a class-action lawsuit alleging National General designed its application process to discourage required disclosures.

The Litigation Debate

Insurers blame rising fraud, including fake claims enhanced with AI tools, and an uptick in attorney involvement. "People are going to litigation as a first step, instead of a last resort," Sean Kevelighan, chief executive of industry group the Insurance Information Institute, said. Plaintiff lawyers dispute that framing. "Litigation is increasing because more claims are being denied—not the other way around," John Morgan, founder of Orlando, Fla.-based law firm Morgan & Morgan, said.

Location also plays a major role in payout odds. Drivers in Hawaii and California were last year almost twice as likely not to get paid on a resolved claim as those in Michigan, the analysis found. State regulations, including caps on attorney fees, and average deductible levels influence nonpayment rates, industry bodies said.

The near flip-of-a-coin odds of receiving a payout on liability claims could accelerate regulatory scrutiny of auto insurers and push more drivers toward legal action. State Farm's undisclosed-driver crackdown and the National General class action over household disclosure requirements will test how far insurers can go in denying coverage.

This article is for informational purposes only and does not constitute investment advice.