Unraveling The Web Of Deceit: Understanding Insurance Deceits And Their Synonyms

Insurance fraud is a type of scam that involves any misuse of insurance policies or applications to illegally benefit or gain. It can be committed by both the buyer and the seller of an insurance contract. Insurance fraud is a civil tort and a criminal wrong, and it is considered a serious crime by governments and organizations worldwide. The term insurance fraud covers a wide range of acts, from exaggerated claims to deliberately causing accidents or damage. It can also include billing for services not provided, providing unnecessary services, and falsifying documents. Insurance fraud costs the insurance industry billions of dollars each year and results in higher premiums for consumers. To combat this issue, governments and organizations work to deter, investigate, and prosecute insurance fraud.

Characteristics of Insurance Frauds

Soft fraud

In the healthcare industry, soft fraud can occur when patients provide false information during the application process for certain programs or services or when they forge or sell prescription drugs. It is important to note that soft fraud can also occur unintentionally. For instance, when filing a car insurance claim, accidentally including damage from previous accidents in the current claim can be considered soft fraud. Therefore, it is crucial to be accurate and only list the damages caused by the accident specifically tied to the claim.

Hard fraud

In a hard fraud scheme, the perpetrator intentionally executes a plan to cause an accident, theft, arson, or other types of loss covered by their insurance policy. For example, a person might intentionally set fire to their house and then file a claim with their insurance company, feigning that the fire was an accident. This is a form of arson for insurance fraud.

Another example of hard fraud is staging a car accident to claim insurance money. In this scenario, a driver might plan to force another driver into a collision, and a planted witness falsely tells the police that the victim is at fault. This is a deliberate and malicious act intended to defraud the insurance company.

In all cases of hard fraud, the key element is the deliberate and premeditated nature of the act, specifically intended to defraud the insurance company and collect money illegally.

While hard fraud is less common than soft fraud, it poses a significant challenge for insurance companies and law enforcement due to its deceptive and malicious nature. Hard fraud is a criminal act, and perpetrators can face severe penalties, including jail time and fines, if they are caught and convicted.

Premium diversion

When an individual purchases insurance, they usually do so through an insurance agent. However, the insurance policy is provided by an underwriter who receives the premiums through the agent. Premium diversion happens when the insurance agent retains the premium payments instead of passing them on to the insurance underwriter. This type of fraud can also occur when someone sells insurance without a license, collects the premium payments, and then fails to pay claims.

In some cases, those involved in premium diversion scams will create false documentation to make those paying believe they are covered. The scam may go undetected for years, until policyholders try and fail to make a claim. Law enforcement may then need to unravel years of complicated financial records to determine where the money went and how the scam worked.

The consequences of premium diversion can be severe for policyholders. If the underwriter never receives the premium payments, the policyholder does not have the insurance coverage they believed they had. This can leave them unprotected and vulnerable to financial loss in the event of a covered incident.

To avoid becoming a victim of premium diversion, individuals should be wary of companies they are unfamiliar with, aggressive agents or representatives who promise rates far below competitor pricing, and companies that are difficult to contact. It is important to verify the legitimacy of the agency and insurance company, maintain records of payments, and confirm with the insurer that they have been receiving the payments.

Fee churning

In fee churning, the initial premium is reduced by repeated commissions until there is no money left to pay claims. The company left to pay the claims is often a business set up by the conspirators to fail. When viewed in isolation, each transaction appears to be legitimate—only when the cumulative effect is considered does the fraud emerge.

Churning in the insurance industry is used in a variety of contexts. Insurance companies use it to refer to the customer churn or attrition rate of customers who stop doing business with them. Churn can happen for a variety of reasons, both natural and unnatural. For example, customers may churn when they sell their homes and downsize, or when the insurance company charges rates that are no longer competitive, so customers go elsewhere for their insurance.

Churning also occurs when an insurance agent replaces a policyholder's insurance policy with another insurance policy, usually without consulting the policyholder and often with no changes to the coverage itself. Agents who engage in churning do so in order to secure an additional commission for the new policy they swap in.

Churning in order to boost earnings is an illegal practice when it is done without the customer's consent and brings no benefit to the insured. Most states have laws that will punish those who engage in the practice.

Asset diversion

The Federal Bureau of Investigation (FBI) considers asset diversion as one of the most common insurance fraud schemes, along with premium diversion, fee churning, and workers' compensation fraud. According to the FBI, insurance fraud costs more than $40 billion annually, with non-health insurance fraud resulting in an increase of $400 to $700 in premiums for the average American family.

To prevent asset diversion, insurance companies need to implement clear internal policies and guidelines, conduct regular audits, and establish proper due diligence procedures. These measures aim to hinder fraudsters from carrying out their plans and deter them from attempting such crimes.

Frequently asked questions