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Most consumers are wearily familiar with the existence of financial fraud involving credit cards, Social Security scams and email phishing. But 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 that year. And insurance fraud is growing. In Pennsylvania alone, auto insurance fraud increased by 34% in 2017.
Insurance fraud occurs if a claim is filed with an insurance company and the origin of the claim is 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.
The state of auto insurance fraud
Auto insurance fraud results in over $7.7 billion in losses a year. 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 takes place and the policyholder trumps up or entirely invents a bodily injury.
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 rates are available.
On occasion, scammers purposefully cause accidents, such as hard braking to force a rear-ending scenario, to later file a claim with the other party’s insurance company. Fortunately, these frauds are less prevalent in the U.S. than in some other countries.
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 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 to fraud
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. 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 devoted to rooting out fraud.
Insurance fraud is hardly a victimless crime. Its costs 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.