What Is Insurance Fraud?

What Is Insurance Fraud?

Insurance fraud happens when someone lies or misrepresents insurance information for financial gain. For example, a home insurance policyholder might inflate damage caused by a fire to collect a heftier insurance claim.

Among the types of insurance subject to fraud are:

• Car insurance
• Homeowners insurance
• Life insurance
• Workers' compensation insurance

Policyholders aren't the only ones who commit insurance fraud. For instance, an insurance broker or agent might:

• Hang on to policyholders' premiums instead of forwarding them to the insurance company
• Sell insurance without holding a license
• Collect premiums but not pay claims

Here are some common types of insurance fraud.

Soft Fraud

Soft fraud occurs when a policyholder exaggerates an otherwise legitimate claim, or intentionally omits or lies about information on an application to obtain a lower premium, according to the National Association of Insurance Commissioners (NAIC). Soft fraud happens more often than hard fraud.

Examples of soft fraud include:

• Falsifying a car repair claim
• Failing to name all of a household's drivers on an auto insurance policy
• Overstating the extent of injuries suffered in a car accident
• Purposely underestimating the number of miles driven to lower your insurance premium
• Lying about a student's grades to score a "good student" discount
• Exaggerating damage to one's home
• Fabricating a slip-and-fall accident at someone's home
• Reporting a home burglary that didn't happen
• Submitting a fake death claim for life insurance
• Faking an injury for a workers' compensation claim
• Working while receiving workers' compensation benefits
• Stealing policyholders' premiums
• Selling phony insurance policies

Hard Fraud

Hard fraud happens when a policyholder deliberately destroys property so they can file an insurance claim, the NAIC reports.

Examples of hard fraud include:

• Setting a home on fire to collect an insurance claim for property damage
• Staging a car accident to receive a payout for property damage
• Arranging for a car to be stolen to file a theft claim and destroying the vehicle or stripping it of parts and selling them

How to Avoid Insurance Fraud

To avoid committing insurance fraud:

• Be honest when you submit an insurance application. For instance, don't lie about where you usually park your car to gain a lower insurance premium.
• Don't exaggerate financial losses to receive a bigger claim. For example, don't tell your insurance company that your TV was damaged in a lightning storm when it actually just stopped working.
• Don't work while you're receiving workers' compensation benefits. As soon as you are cleared by your medical providers to return to your job, you should stop receiving workers' comp benefits. Even taking on part-time work in a different industry while receiving workers' comp could be considered fraud.
• Don't double-dip. If your home was damaged during a natural disaster, don't try to add damage from a previous disaster to a newer claim.
• Make sure your car is covered. Nearly every state requires motorists to carry car insurance. Buying a policy after your car has been damaged in a crash or you have been injured in an accident and then filing an accident claim is considered fraud.

To avoid becoming a victim of insurance fraud:

• Shop around for coverage. Don't choose the first policy you come across. Compare quotes from several insurers, ask for references and read customer reviews to ensure you're working with a good company.
• Buy coverage only from authorized agents, brokers and companies. Contact your state's insurance department to verify whether an agent, broker or company is licensed to operate where you live.
• Check an insurer's record. Read online reviews to get a sense of the company's reputation.
• Don't sign blank applications or forms. These could be used to commit fraud later, and your signature could get you caught up in the scheme.
• Don't use cash to pay your premium. Instead, rely on methods such as automatic payments or paper checks.
• Store your insurance documents in a safe place. This can prevent them from being stolen and used to commit fraud.
• Take photos of damage to your car following an accident. This evidence can be used to ensure your claim covers the damage that actually occurred in the accident and nothing more.
• Be careful about sharing insurance information, such as policy details. Bad-faith actors could take your insurance information and pair it with other identifying information about you (your full name and address, for example) to commit insurance fraud.
• Carefully choose which repair companies you work with. Insurance fraud can come from a variety of sources, including unscrupulous car repair shops, roofing companies or general contractors. Hiring companies with proper state licensure, ample experience and positive customer reviews is the best way to prevent an issue. Be wary of anyone who approaches you following an accident or natural disaster suggesting they can help you file your insurance claim and get your repairs covered.

How to Report Insurance Fraud Scams

If you've been the victim of an insurance fraud scam, here's how to report it:

• Contact your state's insurance fraud bureau or insurance regulator. To find a list of state insurance fraud bureaus, visit the National Association of Insurance Commissioners website.
• Reach out to your insurance company and inform them of the possible fraud.
• File a fraud report with the National Insurance Crime Bureau by calling 800-835-6422 or filling out an online form.

When reporting insurance fraud, the Coalition Against Insurance Fraud recommends:

• Giving complete details of the suspected scam
• Offering dates, names, phone numbers, email addresses and URLs of suspected fraudsters
• Providing the names of insurance companies involved in the suspected fraud
• Supplying documents and other evidence, including copies of insurance policies, photos and any email or mail communications you receive

Keep in mind that every state outlaws insurance fraud, meaning a fraudster could be punished for victimizing you.

The Bottom Line

Insurance fraud causes billions of dollars in financial losses every year. To combat insurance fraud, be honest when filing insurance applications and insurance claims, and report insurance fraud if it happens to you.