What's the Value of Phone Insurance?

Little-known Asurion insures the handsets

of 100 million cell phone owners. Consumer

advocates say the policies aren't worth it

The little-known Tennessee company insures the

handsets of more than 100 million cell phone owners

globally. Consumer advocates say the policies are a poor value

Verizon Wireless calls its mobile phone insurance program Total Equipment Coverage. Sprint Nextel (S) has Total Equipment Protection. T-Mobile USA: Premium Handset Protection. The names are barely distinguishable, and the insurance all comes from the same place: Asurion, a 16-year-old company in Nashville that would prefer you never heard of it.

Asurion, which has 5,000 employees in more than two dozen offices around the world, is the quiet giant of the mobile phone industry. The four top U.S. wireless carriers offer its insurance exclusively, and more than 20 percent of the 293 million mobile customers in the U.S. pay Asurion to protect their handsets, according to the company. Asurion charges policyholders between $5 and $12 a month, depending on the model and type of coverage. If a customer loses a phone, breaks it, drops it in the toilet, or renders it unusable in any way, Asurion will try to ship a replacement in a single day—after the person pays a deductible.

Some accident-prone owners—and parents of phone-toting kids—praise the sense of security Asurion provides. Consumer advocates, though, almost uniformly say the insurance isn't worth the extra expense. "We think it's worthless," says Michael Shames, executive director of the Utility Consumers' Action Network. Consumer Reports magazine advises cell phone shoppers to skip the coverage and hang on to their old phones as a backup should the new hardware meet its demise.

Asurion disagrees with those opinions, of course, but just getting the company to pipe up in its own defense isn't easy. "We like anonymity. We don't think publicity is generally a great thing," says its chief executive officer, Kevin Taweel, who starts an interview by asking a reporter to forgo a story on Asurion altogether. Taweel believes Asurion should stay out of the news because it merely "white labels" its product, selling insurance through 18 wireless carriers around the world and letting them rename and market the service. He adds that the insurance solves a significant problem for the one in four consumers who have some kind of phone problem each year.

Whatever its reason for staying under the radar, Asurion appears to be a growing and profitable company. One person familiar with its financials, who asked for anonymity because the privately held company doesn't disclose revenue or profit, says Asurion is on track to make $3.8 billion in revenue this year and $98 million in profit. Another person knowledgeable about the numbers says Asurion's profit, excluding interest payments to the three private equity firms that own it, is actually about half a billion dollars.

Taweel co-founded the operation that became Asurion in 1995 along with Jim Ellis, a fellow graduate of Stanford Business School. The pair had raised a "search fund" to seek out a company to buy and remake. They first acquired a 45-employee roadside assistance company for $8 million. In 1999 they acquired a cell phone insurer called Merrimac Group. The renamed Asurion acquired its main competitor, Lock/line (DST), in 2006 and consolidated its position as the dominant cell phone insurer in the U.S.

The carriers appear to benefit from wireless insurance, too. Asurion pays them billing fees for each policy they sell, which primarily covers administrative costs. Though he declines to get specific, Taweel also says that some carriers set up so-called captives, or insurance subsidiaries that allow the carriers themselves to finance the policies and reap some tax advantages. He argues, however, that Asurion's primary value to the carriers is reducing their customer "churn" or defections to rivals. Says Mark Siegel, spokesman at AT&T Wireless (T): "Cell phone insurance could give some customers additional peace of mind in the event they lose or damage their device. We benefit to the degree that it can help provide an additional measure of customer loyalty."

Consumer advocates point to Asurion's escalating revenue and profit as evidence the service is a bad deal for consumers. In certain cases, simple math bears them out. If a customer decides to get Total Equipment Coverage for a Verizon BlackBerry Curve 2, for example, an $8 charge shows up on the wireless bill each month. If the phone gets stolen or breaks, Asurion charges an $89 deductible to get a replacement. Here's the rub: There's a good chance Asurion will send that hapless BlackBerry owner a refurbished Curve 2, not a new one. Used Curve 2s currently sell for under $100 on eBay (EBAY). For anyone more than one month into their phone contract, it may be a bad deal.

Those refurbished phones may not even work that well. Robert Nissenbaum, owner of Blue Ridge Wireless Cell Phone Repair Center in Tucson, Ariz., sees many used phones from Asurion and other, smaller insurers: Customers bring them in, complaining of problems. "You tend to get phones back that aren't necessarily up to standard," he says. "We see a lot of people who say, 'This phone's really bad, I went through four of them,' " sending them in, over and over. He says cell phone insurers don't always use original manufacturer parts to fix phones, which can cause problems. (An Asurion spokesman says on the rare occasion that a part is not available from the original manufacturer, it finds other reputable suppliers.)

Taweel aggressively counters these complaints. He says only about half of all the phones Asurion sends out are refurbished, which is necessary when handset makers stop making a certain model or when there is limited supply of a hot new handset. He also says the company's customer satisfaction scores, as measured by an outside firm, are consistently high. Finally, he notes that Asurion offers not just financial protection but a sense of reassurance that the math doesn't capture. "If you are a cell phone insurance customer, you have until 10:00 p.m. central time to go onto our Web site, file a claim, and you are going to get that phone the next day," he says. "The alternative is to be without that service for some period of time, and then go in a store and get it replaced out of pocket. There's a huge hassle factor associated with it."

Asurion has tried and failed to stay out of the limelight before. In 2008, Maryland Attorney General Douglas F. Gansler, whose wife was angered by the process of getting a replacement when their teenage son lost his cell phone, investigated whether the company was adequately disclosing all the caveats of its service such as the deductibles and used phones. Asurion maintained that it had not broken the law; after a six-month investigation, it agreed to pay a $1.5 million fine and enhance the clarity of its brochures. Gansler still does not believe the company is transparent enough. He'd like to see Asurion put the details of its policies on wall placards in cell phone stores—like the signs in rental car offices that disclose fuel costs. He also believes there is still a possibility that other AGs could bring similar actions against Asurion. "They are making billions a year by not telling people what they are buying," Gansler says. "If most people knew the actual terms, they wouldn't get it."

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