Insurance Fraud Is Not a Victimless Crime!

Pouring gasoline on a fire

Image courtesy of [James Brey] / Getty Images

Insurance fraud is a major problem in the United States. About 10% of all property and casualty claims are fraudulent, according to the Insurance Information Institute. Fraudulent claims cost an estimated $32 billion a year. These costs are borne by insurers, insurance buyers, and the general public.

Fraud occurs in all types of insurance, but some lines are more susceptible than others. Two commercial coverages that are particularly prone to fraud are workers compensation and business auto insurance.

Insurance Fraud

The term insurance fraud means an intentional act committed by a person to obtain a benefit that he or she is not entitled to receive. Fraud may be committed by anyone involved in an insurance transaction. This includes policyholders, claimants, attorneys, health care providers, agents or brokers, and even insurers.

Hard Versus Soft Fraud

Insurance fraud can be divided into two broad categories. Hard fraud occurs when someone fakes an accident or loss. For example, a business owner deliberately pushes a company-owned truck off a cliff. He then files a physical damage claim, telling his insurer that the truck rolled off the cliff accidentally.

Soft fraud involves the exaggeration of a legitimate claim. For instance, the owner of an accounting business discovers that a thief has broken into his office and stolen several items. When the business owner reports the loss to his commercial property insurer, he inflates the value of the stolen property so he can collect a bigger claim settlement.

Not a Victimless Crime

Many perpetrators of insurance fraud contend that their crimes have no victims. This is not true. Insurers cover the cost of fraud by charging businesses and government entities higher premiums for insurance policies. Business entities pass these costs on to their customers. Government entities that buy insurance pass the extra costs on to taxpayers.

Combating Fraud

In virtually all states, insurance fraud is classified as a crime. Moreover, most states have created a fraud bureau that is part of the state insurance department. While their specific functions vary, most fraud bureaus are responsible for investigating insurance fraud and prosecuting the offenders.

Some states have enacted a law requiring insurers to establish a fraud plan. In these states, insurers are obligated to create written procedures for identifying and responding to fraud. Insurers may also be required to file an annual report summarizing the actions they have taken to prevent and fight fraud.

Even if they are not required to do so by law, most insurers have established procedures for dealing with fraud. Some combat fraud by participating in anti-fraud organizations such as the National Insurance Crime Bureau or the Coalition Against Insurance Fraud.

Common Types of Fraudulent Acts

Here are some types of fraud that are common in commercial property/casualty insurance:

  • Agents or Brokers. Dishonest agents or brokers may issue fake policies for the purpose of collecting premiums. Alternatively, they may pocket the premiums charged on legitimate policies. Another common scam involves padding policies with coverages that policyholders don't need or want in order to jack up the premium (and the agent's commission). Some unscrupulous agents offer kickbacks to policyholders in exchange for buying a policy.
  • Auto Insurance. Some types of auto insurance fraud are committed by organized crime rings. Examples are vehicle cloning and "chop shops" that sell stolen autos. Other fraudulent acts, such as tow truck scams and staged auto accidents, are perpetrated by small groups of auto thieves. Acts of fraud may also be committed by individual policyholders. For example, a business owner purchases a commercial auto policy to insure a nonexistent truck. A few months later he files a claim under his comprehensive coverage, alleging that the vehicle was stolen. Auto fraud has been a particular problem in states that have no-fault auto laws. It has driven up the cost of insurance in those states. 
  • Workers Compensation. Employees may commit fraud by filing claims for fake injuries or for injuries that they sustained off the job. Some workers exaggerate the extent of their injuries so they can collect disability payments. Employers may commit fraud by understating payrolls or deliberately assigning workers to the wrong classification. Employers may also intentionally misclassify employees as independent contractors.
  • Property Insurance. Property insurance fraud often involves arson (willful and malicious burning of property) or claims submitted with inflated property values. Also common are theft claims that involve nonexistent property.
  • Liability Insurance. Many fraudulent liability claims involve faked slip-and-fall accidents. Alternatively, a claimant may exaggerate the scope of injuries he or she sustained in a real slip-and-fall event. Another type of scam is the faked product liability claim. The plaintiff alleges that the policyholder's product malfunctioned and caused an injury. The injury is either non-existent or was caused by something else.
  • Insurers. Insurance fraud may also be committed by insurance company employees. An employee may steal cash by issuing a false check or altering a valid check and then depositing the funds into a personal account. Alternatively, the worker may engage in skimming. He or she may steal checks that the insurer has received but not yet entered into its accounting system.