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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.
Insurance fraud losses totalled around $80 billion in 2016, according to estimates from the Coalition Against Insurance Fraud. That's about four times the $20 billion in losses due to global credit card fraud for that year. And the insurance problems are growing. In Pennsylvania alone, auto insurance fraud increased by 34% in 2017.
Insurance fraud occurs if a claim is filed with an insurance company where the origin of the claim was falsified in some way. Fraudulent insurance claims breach the insurance contract, so they disqualify the claimant from a payout. However, many fraudsters hope the origin of the bogus claim is either not properly investigated, or that they’ve hidden the fraud well enough that the claim investigation misses the deception.
Auto Insurance Fraud Outlined
Automobile insurance fraud results in over $7.7 billion a year in losses. Those who commit this type of fraud are almost exclusively policyholders. Fraud includes claims that are entirely fake—that is, where no accident at all occurred. In other cases, a collision took place and the policyholder trumps up, or invents from whole cloth, bodily injury claims. Another category of fraud claim is "premium rating errors," which includes deception in the insurance application, such as registering a vehicle in a different state where lower premiums are available.
On occasion, outside parties 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 in 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 policyholders doing damage to their own property, in order to later file a false insurance claim. A classic example would be a failing restaurant owner who burns down their own business property to recover their debts.
Such fraudulence represents a major part of property-insurance fraud. But other varieties of dishonest claims are more subtle. Homeowners may claim a burglary that did not occur, or even stage a burglary of their own property. Or the burglary may be legit, but the claimant falsifies the value of the belongings lost or changes the date of the event, in order to add to the claim items lost in other ways. Another form of fraud is homeowners working in collusion with unscrupulous contractors, in order to have construction or renovation work covered by an insurance claim.
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 or homeowners pay to cover those who are dishonest. That can easily result in insurance rates that rise for everyone.