Homeowners Insurance

Insurance Fraud and What Regulators and Insurers Are Doing About It

What might surprise drivers is the startlingly high incidence of fraudulent auto and home insurance claims. The Coalition Against Insurance Fraud estimates insurance fraud losses for the year to be around $80 billion.

Most consumers are wearily familiar with the existence of financial fraud involving credit cards, Social Security scams, or email phishing scams. What might surprise many is the startlingly high incidence of fraudulent insurance claims. Indeed, among the range of transgressions involving financial deception, insurance fraud may be the sleeper crime. To underline that, consider that global credit card fraud in 2016 resulted in over $20 billion in losses. Yet the Coalition Against Insurance Fraud estimates insurance fraud losses for the year to be around $80 billion. And the insurance problems are growing. In Pennsylvania alone, auto insurance fraud increased by 34% in 2017 and is estimated to cost over $2 billion per year across all lines of insurance.

Generally, something is considered insurance fraud if a claim is filed with an insurance company where the origin of the claim was falsified in some way. Fraudulent insurance claims will always breach the insurance contract, and so disqualify the claimant from a payout. However, but many fraudsters hope the origin of the bogus claim is either not properly investigated, or that they’ve hidden the fraud well enough thato pass the claim investigation misses their deception.

Auto Insurance Fraud Outlined

Automobile insurance fraud results in upward of $7.7 billion a year in losses. Those who commit this type of fraud are almost exclusively policy holders. The fraudulent activity can include claims that are entirely fake; that is, where no accident at all occurred. In other cases, a collision took place and the policy holder trumps up, or even invents from whole cloth, bodily injury claims. Another category of claim the industry classifies as fraud are what are known as “premium rating errors,” including deception in the insurance application, such as registering a vehicle in a different state where lower premiums are available.

On occasion, outside parties may try to purposefully cause accidents, such as hard braking to force a rear-ending scenario, in order to later file a claim with the other party’s insurance provider. Fortunately, these frauds are less prevalent than is some other countries. In Russia, for example, citizens are required to have dashboard cameras due to the overabundance of insurance claims resulting from individuals who intentionally hop in front of vehicles, with the aim of collecting a settlement while suffering only minor injuries. Thankfully, auto insurance fraud in the U.S. is a bit less dramatic, but these types of fraud attempts can and do still occur.

Types of Home Insurance Fraud

Insurance fraud, which costs insurers some $30 billion-plus a year, is most commonly associated with wayward policy holders doing damage to their own property, in order to later file a false insurance claim; think the proverbial failing restaurant owner who burns down his own business property to recover his debts.

Such fraudulence indeed represents a major part of property-insurance fraud. But other varieties of dishonest claims are more subtle. Some homeowners claim a burglary that did not occur, or even stage a burglary of their own property. Or the burglary itself may be legit, but the claimant falsifies the value of the belongings lost, either during the application process or after a loss event, or the date of the event, perhaps in order to add to the claim items lost in other ways after the event. Also depressingly common: collusion with unscrupulous contractors, in order to have construction or renovation work covered by an insurance claim rather than paid for by the homeowner.

How Insurers and Governments Are Responding

Insurance companies have become adept at detecting fraud and creating systems to mitigate the issue. New efforts to make fraud detection smarter are in the works, including the use of artificial intelligence and machine learning to root out fraud attempts. Governments also play a role. Almost every state in the country (excluding Virginia and Oregon) has laws that criminalize insurance fraud specifically. In most cases, these states classify insurance fraud as a felony that can result in hefty fines and years of jail time. Most of those states also have a government agency specifically devoted to rooting out fraud.

Fraud involving insurance is hardly a victimless crime. Its cost must be borne somewhere, and that includes a portion of the premiums that honest drivers pay to cover those who are dishonest. That can easily result in insurance rates that rise for everyone.

Maxime Rieman

Maxime is a Product Manager at ValuePenguin focusing on insurance. Previously she was the Director of Product Marketing at CoverWallet.