Insurance Fraud: Understanding The Red Flags

Insurance fraud is a deceptive act committed against an insurance company by a person or entity, usually for financial gain. It involves deliberately lying or misrepresenting information to obtain benefits or advantages to which they are not entitled. The crime of insurance fraud can be prosecuted when the suspect has the intent to defraud and completes an act, such as making a misrepresentation to an insurer with the knowledge that it is untrue. Insurance fraud can occur during the buying, using, selling, or underwriting of insurance and can be committed by individuals against consumers or insurance companies. The most common types of insurance fraud include false or inflated claims, intentional damage claims, falsifying information, identity theft, and unlicensed or unauthorized activity. The consequences of insurance fraud can be significant, with fraudsters facing multiple felony charges, restitution, and jail time.

False theft fraud

In a case of false theft fraud, an individual might claim that valuable items were stolen during a burglary, when in fact, those items never existed or were not actually stolen. This type of fraud is often committed by consumers who may not even realise that their actions are fraudulent. For example, they may exaggerate a legitimate claim, falsely reporting additional items as stolen in order to collect more in insurance benefits.

Another example of false theft fraud is filing a false claim for a stolen vehicle. This could involve reporting a vehicle as stolen when it has not been stolen, or providing false information about the circumstances of the theft. In some cases, individuals may even work with organised criminal rings to stage auto collisions or falsely report their vehicles as stolen in order to collect insurance money.

To detect false theft fraud, insurance companies and law enforcement use various techniques such as special investigation units, antifraud claims databases, and social media activity analysis. By cross-referencing new claims with existing records, investigators can identify questionable or fraudulent patterns. Additionally, behavioural indicators, such as avoiding direct answers or minimising references to oneself, can also help uncover deceptive behaviour.

Soft fraud

Another example of soft fraud is filing multiple claims for a single injury or accident, misreporting wage losses due to injuries, or reporting higher costs for repairs or treatments than what was actually paid. Soft fraud can also include failing to report a pre-existing medical condition in order to obtain lower premiums.

While soft fraud may seem like a harmless exaggeration or "little white lie", it is important to remember that it is still a crime and has real consequences. It raises insurance costs for everyone and costs insurance companies billions of dollars each year.

Hard fraud

In a hard fraud scheme, a criminal may deliberately cause an accident, injury, theft, arson, or property destruction to collect money from an insurance company. For example, staging a car accident by forcing another driver into a collision and having a planted witness tell the police that the victim is at fault. Another example is planning the theft of a vehicle and then filing a claim with the insurance company. Criminal rings are sometimes involved in hard fraud schemes, stealing millions of dollars.

Another form of hard fraud is vehicle dumping, where the owner disposes of the vehicle by leaving it somewhere, burning it, dumping it in a body of water, or even selling it, and then claiming it was stolen. This type of fraud can result in two payouts: one through an insurance settlement to replace the "stolen" vehicle, and another through the sale of the original car.

The motivation behind hard fraud is often financial gain, with individuals seeking to obtain payments that exceed the value of the property destroyed or to receive money for goods that cannot be sold otherwise.

False claims

Another example of a false claim is misrepresenting facts on an insurance application, such as lying about where a vehicle is primarily garaged and driven to obtain lower rates. Fraudulent activities like these affect the lives of innocent people, both directly through accidental or intentional injury or damage and indirectly by increasing insurance premiums for everyone.

Premium diversion

When purchasing insurance, consumers usually do so through an insurance agent. However, the insurance policy is provided by an underwriter who receives the premiums through the agent. If the insurance agent retains those premium payments instead of passing them along to the insurance underwriter, they are committing premium diversion. This means that the customer never actually has insurance coverage, even though they have been dutifully paying their premiums.

One prominent case involved the owner of an insurance agency who diverted premiums to fund his successful congressional campaign. He later served three years in prison for his actions.

Another form of premium diversion occurs when someone sells insurance without a licence, collects the premium payments, and then fails to pay claims. This is also considered insurance fraud, as the seller never intended to provide coverage in the first place.

To avoid becoming a victim of premium diversion, consumers should be wary of companies they have never heard of, aggressive agents or representatives who promise rates far below competitor pricing, and companies that are difficult to get in touch with. It is also a good idea to contact your state insurance department to ensure you are dealing with a legitimate agency and insurance company, and to maintain records of payments submitted. If you suspect premium diversion or other insurance fraud, you can report it to your state's insurance commissioner or to national organisations dedicated to fighting insurance fraud, such as the Coalition Against Insurance Fraud or the National Association of Insurance Commissioners.

Frequently asked questions