Identity-theft services face legal test

Suit targets claims by rival of local start-up

IdentityTruth Inc. of Waltham says it will reimburse customers up to $2 million if they're victims of identity theft. But a Phoenix lawyer says the identity-protection company's promise isn't worth nearly that much.

IdentityTruth charges $10 a month or $100 a year to insure people against unauthorized use of their personal information. The privately held company is funded with about $20 million in venture capital from investors that include Argonaut Ventures and Stata Venture Partners. It's one of a host of companies that say they protect consumers from identity theft crimes, which cost Americans $49 billion last year, according to Javelin Strategy & Research Corp.

IdentityTruth posts fraud alerts with credit reporting agencies on behalf of its customers. These alerts warn banks and other businesses not to open new accounts unless they confirm the identity of the customer. In addition, IdentityTruth scours the Internet and a host of private and government-run databases, looking for evidence that somebody out there is pretending to be you. The company doesn't actually pre vent identity theft; it's designed to warn you immediately when a theft occurs.

"We really focus on technology to give you that early warning," said IdentityTruth chief executive Steven Domenikos.

The IdentityTruth website states, "if you are a member of our service and are a victim of identity theft resulting in the loss of your money, we will reimburse you up to $2 million."

But Rob Carey of the law firm Hagens Berman Sobol Shapiro in Phoenix said the fine print of the IdentityTruth guarantee belies this assertion. Carey recently filed a lawsuit in the US District Court of Arizona against a rival service, LifeLock Inc. of Tempe. The suit, which seeks class-action status, claims LifeLock's $1 million guarantee is fraudulent because it contains loopholes that make it far less generous. Carey said the same loopholes are present in the IdentityTruth guarantee.

For instance, the guarantee covers damages caused by a failure of the IdentityTruth service. But banks often ignore fraud alerts. If that happens and an IdentityTruth customer gets stung, the company isn't liable, because the bank failed, not IdentityTruth. "What did they do wrong?" Carey said. "Their product worked as designed."

In addition, the IdentityTruth guarantee excludes coverage of "consequential damages." According to Carey, that would include any debts incurred by an identity thief. If a user of the service was unjustly saddled with a $10,000 credit card bill, for instance, "they're not covering that," said Carey. "They're specifically exempting that from coverage."

David Masciulli, IdentityTruth's director of customer service, agreed that his company's guarantee doesn't specifically promise to cover all costs of an identity theft, but said that most customers would be made whole. "We do what we can do for the user, if they suffer a loss from a malfunction in our service," Masciulli said. Asked why the guarantee doesn't cover debts incurred by identity thieves, he replied, "The reality is that most of the money that would be lost here would be covered by the person's bank."

Lisa Gerber, a financial technology program manager for Merrill Lynch & Co. in New York, said IdentityTruth revealed problems she'd never have found on her own. Gerber signed up for IdentityTruth in February and was soon warned that someone using her name and date of birth had ordered telephone service at several addresses where she'd never lived. A fraud alert service would probably not have detected these intrusions. Gerber is now working with IdentityTruth to clear her record before she's saddled with unpaid bills.

"I absolutely would not have found this," Gerber said. "It's really great for me to spend $10 a month to have somebody else do it."

But James Van Dyke, president of Javelin Strategy, said consumers shouldn't be too quick to sign on with any identity theft preventers.

"There's some real value with all these products," said Van Dyke. But he added that with a little effort, consumers can protect themselves at no cost. For instance, people can contact the credit reporting services to request free fraud alerts. And while Van Dyke admitted that few people can search multiple databases for evidence of fraud, they can be more careful in handling personal data. For instance, Van Dyke said people should get all their bills via e-mail and pay them online, to eliminate paper bills, which identity thieves frequently steal when they're tossed in the trash.

Hiawatha Bray can be reached at bray@globe.com.