FEARS of bin-raiders and internet phishing expeditions are fuelling the popularity of identity theft insurance. Sainsbury’s Bank is the latest financial institution to offer cover to help victims in the event that their identity is stolen and their personal details are used to obtain goods or credit. But is this type of cover a rip-off?

Sainsbury’s Bank follows Halifax, Barclaycard and Lloyds TSB into a growing market for identity protection policies. Donald McLeod, credit card manager at Sainsbury’s Bank, says: “Identity theft is a serious problem, and one that is getting much worse, so we all need to take greater care in protecting ourselves.”

Research from the bank shows that almost one in ten British adults — more than four million people — claims to have been a victim of identity theft at some stage. Cifas, the fraud prevention service, estimates that there were about 68,000 victims of identity theft last year, and that the incidence of the crime rose by more than 20 per cent in the first three months of the year, compared with the same period in 2005.

But it is worth pointing out that while Sainsbury’s Bank says that the average financial value of the crime was a little more than £3,000 per victim, the victim does not bear the loss — the bank or credit card company does.

However, Mr McLeod says: “There are three losses when you are a victim of identity fraud. There is the initial financial loss, which will ultimately be covered by your bank or credit card company. The second consequence is that you may struggle to get credit or have to pay a higher price for it. The third cost to you is the time you waste trying to sort out the problem.”

Victims often face an uphill struggle to clear their names and their credit files. Cifas estimates that the typical victim will spend between three and 48 hours trying to sort out the problem, but in the case of “total hijack”, where as many as 20 to 30 organisations could be involved, it may take the victim more than 200 hours of work to rectify the problem.

So can identity fraud insurance help? Sainsbury’s Bank, Royal Bank of Scotland and Lloyds TSB offer PrivacyGuard, a protection product devised by Affinion. David Palmer, UK managing director of Affinion, says: “What PrivacyGuard offers at the outset is immediate and full details of your credit status, as well as an analysis of your credit score and details of any searches done by financial services companies — so you are given a good view of what has been happening on your credit file. There is unlimited access to your credit report, but more importantly, PrivacyGuard offers continuing monitoring of any activity on your file and you will receive an alert whenever something significant happens.”

In addition to the detection service, PrivacyGuard also gives access to a fraud resolution service should anything go wrong, as well as up to £10,000 reimbursement if your identity is stolen. Mr McLeod says: “Although you are unlikely to suffer direct financial losses, you may have to pay solicitor’s fees if you have to sign any affidavits. You may also lose wages if you take time off to talk to the police or solicitors and you may have to pay loan application fees on loans that are declined because of the fraud.”

Sainsbury’s identity fraud cover, which can be purchased as a standalone product as well as with a credit card, costs £6.99 a month, or nearly £84 a year. Experian, the credit reference agency, offers a similar service, Credit Expert, for £72 a year and is currently running a 30-day free trial.

Identity fraud insurance will not save you money, but it will save time. If the thought of spending hours on the phone to your bank fills you with dread, about £80 on insurance may seem worthwhile.

CASE STUDY CREDIT RATING IN SHREDS

DAWN JONES, an examinations officer from Southend-on-Sea, Essex, fell victim to fraudsters when she moved to a new home, butit was not until two years later, when Ms Jones had a credit application refused, that she realised something was amiss. “I have never had problems with credit, so I was immediately suspicious,” she says.

Ms Jones applied for her credit file from Experian and discovered several items that had nothing to do with her. “Someone had been purchasing from catalogue companies that I had used, but not for some time,” she explains. The fraudster bought goods on credit but never paid for them. The goods were delivered in Ms Jones’s name to her previous address.

“Although I didn’t lose money, sorting it out was a lengthy process,” Ms Jones says. “I had to write to the catalogue companies to explain that I was not the person ordering the goods and I had to prove that I had not been living at that address at the time.”

Overall, it took two years before the bad debts were removed from Ms Jones’s credit file. “I now shred everything,” she says. “I wouldn’t want to go through that again.”

Prevention is better than cure