How financially stable is the insurer you are considering?

When it comes to evaluating insurers, it pretty much comes down to money: you want to feel comfortable that the insurer will not default on your claims. The insurance company that covers you should have both stable investments and large cash reserves.

This may require paying higher premiums. But the difference in premiums with a more stable company is often worth the extra cost.

However, if you decide to go ahead and place your business with a more risky company, you should definitely look into a premium installment plan. That way, if the company goes under, you will suffer less of a loss.

In addition, you may want to check if your policy is protected by state guaranty funds. All states have funds that can be used against insurer collapse, but this reserve only applies to in-state insurers selling to in-state companies. Your broker should be able to assist you in providing specific details on coverage provided by your state's guaranty fund.

Rating agencies

Several rating agencies evaluate the financial strength of a given insurer. The ratings are similar to grading for students, generally running from a low of "F" to a high of "A." However, take note: There are many different levels of "A"--therefore, weaker insurers can still claim the cherished "A" ranking.

The A. M. Best Company publishes the annual Best's Insurance Reports, which rates the insurers. Your evaluation should take into account not only the current year's rating but also a historical five-year snapshot. That way, you will be able to spot trends and see if the company's performance has improved, weakened or been stable over this period.

Standard & Poor's offers a less comprehensive rating service of insurers. However, private financial data is analyzed by the company when determining the rating. Companies that earn their highest ratings are virtually sure to be solid.

However, insurers have the option to refuse publication of their rating if they so choose, which makes unrated firms somewhat open to question.

History of insurers' payment

Obviously, you want to avoid insurers that may leave policyholders holding the bill longer than necessary--or even forever. And there are in fact companies that tend to be late or negligent with all claims payments. Still others can be responsive to small claims, but may drag their feet when it comes to major settlements.

For the best knowledge of insurers' claims histories, turn to your broker. If you happen to be dealing with more than one broker, you should be able to get especially good information on the insurers they do not serve.

And don't forget--each state has a department of insurance that handles insurance-related complaints. You can usually learn how many complaints have been lodged against an insurer; most states will also provide a summary listing the nature of each complaint.