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How insurance claim fraud affects policyholders

False claims raise premiums and can lead to steep legal penalties, based on the scam committed

There’s a consensus among crime and fraud-fighting bureaus that insurance fraud happens all the time, draining the bank accounts of both insurance companies and consumers. But fraud also includes situations less obvious than staging damage or forging a doctor’s diagnosis, and some people commit insurance fraud without thinking of it as a crime. Learn what’s considered insurance fraud and how you can stay above-board.

How does insurance fraud affect customers?

Insurance fraud in the US costs the industry over $40 billion per year, not including medical fraud, according to the FBI Insurance Fraud Report. To make up for those extra claims payouts, insurance companies increase everyone’s premiums. This leads to an extra $400 to $700 charge to annual premiums for every family insured.

On top of that, states penalize insurance fraud as a crime — and the penalties can vary based on the type of fraud and the state’s laws.

What is insurance fraud?

Insurance fraud is the act of giving false information to an insurance company so that you can gain something you’re not entitled to. It’s also an insurance company withholding of a payout that the policyholder is entitled to based on the policy’s terms.

Soft fraud vs. hard fraud

In most states, soft fraud involves someone overcharging or overestimating the damage that the insurance company should pay. This type of fraud is considered a misdemeanor and can lead to fines, a few months in jail or another minor to moderate penalty.

However, hard fraud involves someone causing intentional damage, staging an accident or organizing some other event to get an undeserved insurance payment. Most states consider hard fraud a major crime with steep penalties and several years in jail possible.

For example, California penalizes insurance fraud as a felony with up to $50,000 in fines and up to five years in state prison.

Kinds of insurance fraud

Nearly any situation intended to get undeserved reimbursement can be considered insurance fraud, including:

Lying or misrepresenting facts on your application

  • How it works. A policyholder leaves out important details like previous injuries, car accidents or they straight-up say something untrue. An insurance company can deny a future claim, even if the damage is unrelated to the false information.
  • How to avoid it. Read through your policy and make sure all the details are accurate and complete. If you find any inaccuracies, let your agent know right away.
  • Tips for avoiding denied claims. You can point out any inaccuracies in writing like an email and have your agent put your statement on file. That way you have proof that you gave notice in case the details become important in a future claim.

Padding an insurance claim

  • How it works. Policyholders or service providers inflate the repair costs, medical bills or replacement items in hopes of getting extra money.
  • How to avoid it. Get accurate estimates for repairs in writing if possible, keep receipts and file those receipts with your insurance claim. Report the exact dollar amount for repairs to your insurance company.

Staged accidents

  • How it works. Someone damages their own or someone else’s car, home or valuables to get an insurance payout. For example, someone runs their car into a tree, purposefully collides with another driver or pretends to get hit as a pedestrian in a parking lot.
  • How to avoid it. A few tips can help you steer away from these staged accidents:
  • Don’t rely on someone waving you on to enter traffic or back up in a parking lot unless you can see that the way is clear.
  • Be aware of whether that person could damage your property if you follow their directions.
  • Wait for pedestrians to pass well out of your car’s path before backing up.
  • Report all accidents to your insurance company, even if the damage wouldn’t go above your deductible. That way you’re not leaving yourself open to another person’s false claim against you.

    Claims for pre-existing damage

    • How it works. Some people try filing claims for medical conditions or damage that happened in a previous incident. Or they might add the pre-existing damage to a new claim along with legitimate damage.
    • How to avoid it. Snap pictures of your car, home or belongings before a claim happens, showing any current damage. Report only the damage that happened in the recent accident.

    Claims for damage that never happened

    • How it works. Someone files a claim for false damage like a stolen car or broken wrist. They might hide a car from the police or insurance adjuster, wear an old cast or convince a doctor to write a false diagnosis.
    • How to avoid it. Before making this deliberate false claim, consider that you could get jail time or fines for tens of thousands of dollars if you’re found out. Report anyone who tries to get you involved in this kind of scam.

    How do I avoid insurance claim fraud?

    As mentioned above, fraud costs each family hundreds of dollars extra each year in raised premiums. To avoid fraud, take these active steps for prevention:

    1. Disclose all important details when applying. Tell the insurance company any information that could affect how it looks at your risk and ask questions if you’re not sure. Pre-existing medical conditions or damage that happened in a previous car accident are examples of important details.
    2. Take detailed photos of your property. Create an inventory of your property and each item’s condition before it gets damaged. That way you don’t add previous damage to your claim by accident.
    3. Report the exact property value and purchase details. Note details about the damaged property, like its purchase date or brand and model number. This info helps your insurance company find the fair market value.
    4. Call attention to inflated repair estimates. Have a hunch that a contractor overcharged for repairs? Voice your concerns to keep your settlement cost down.
    5. Ask questions if you feel your claim settlement is too low. While you want to avoid false claim details, you should get the payment you deserve. If you don’t feel you can pay for repairs with the payout offered, ask your adjuster how they came to their estimated repair amount.

    How do I know if an insurance company is a scam?

    Some criminals start fake insurance companies to steal money, or insurance agents may defraud customers while working for reputable companies. Avoid falling victim to insurance fraud by watching for red flags.

    • Premiums cost far less than well-known insurance companies
    • Few traces of the insurance company online or elsewhere
    • Pressure to sign up for a policy or buy extra coverage
    • Not receiving your insurance card or policy documents
    • No evidence of payment on your account
    • Reported government actions listed on the Better Business Bureau or in the media, especially if the company fails to pay claims

    How do I report insurance fraud?

    If you suspect fraud is happening, report it to your state’s insurance fraud bureau. How to report your case:

    • Look up your state bureau’s contact details with the National Insurance Crime Bureau (NICB) online directory.
    • Call the NCIB at 800-835-6422 on weekdays from 7 a.m. to 7 p.m., CT.

    Bottom line

    Insurance fraud comes in many forms and can involve small details, like avoiding relevant info on your application or padding property value. But reporting fraud can go a long way toward lowering future insurance costs.

    Since businesses can commit fraud too, do your research to find legitimate insurance companies before buying a policy.

    Frequently asked questions

    What types of fraud happen the most?

    Independent agents using your premiums for themselves instead of towards an insurance policy is the most common type of insurance fraud, according to the FBI. People only find out when they go to use their coverage for a policy that doesn’t exist.

    For policyholders, common fraud situations happen when people are struck by disaster. They may misclassify damage for claim approval, exaggerate claims or file false claims.

    How do states and insurance companies fight fraud?

    Most states have fraud bureaus that investigate claims for fraud and reduce insurance losses from this crime. Some insurance companies also have special investigation units if fraud is suspected. Insurers gather evidence from the claim and previous claims, plus other sources like social media images.

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