You’ve probably seen a movie or two where the big reveal at the end is that the bad guy was committing some sort of fraud for a big payout. Maybe they were orchestrating a giant scheme to swindle people or faking some sort of injury for a big healthcare payout. Either way, the root of their devious plot was probably some kind of insurance fraud. But insurance fraud isn’t just something from the fictional media—there are real forms of insurance fraud that are punishable by law and that do occur in real life.
So what is insurance fraud really? Insurance fraud is a deliberate action to deceive done by either the buyer or seller of an insurance policy. Insurance fraud is illegal and punishable by law. Insurance fraud perpetrated by the seller could include selling fake policies, churning policies for higher commissions, or failing to submit premiums. Buyers or third-party claimants can commit fraud by exaggerating or padding claims, falsifying history or claims, or faking payout events like a kidnapping. While those may sound like a movie plot, these types of fraud can happen and can have very serious consequences. The most common type of fraud is a policyholder exaggerating a claim while faking a dramatic kidnapping is rare.
How Insurance Fraud Works
How an insurance fraud incident works will depend a lot on what type of insurance fraud is happening and who is committing fraud. Not all fraud is created equally. If the insurance provider is behind the fraud, these are the main four ways insurance fraud might be committed:
- Premium diversion. A company would sell policies, collect premiums, but then not cover any claims.
- Fee churning. This fraud usually requires intermediaries to be a part of it. Essentially everyone along the chain of premiums will take a commission from it until there is no money left to cover claims.
- Asset diversion. This fraud is the theft of any insurance company assets. Often it’s done by using the borrowed funds to buy an insurance company and then using those assets to pay off a debt.
If a policyholder or buyer is the one perpetrating fraud, it may look a little different. The most common way someone could commit insurance fraud is by exaggerating the claims they make to the company. Essentially, they would say that an accident that did actually happen cost more money than it did. Then when they receive a payout, they pocket the extra cash. Fraud like that is illegal.
Some policyholders will instead fake an entire incident and file a claim for it. Maybe they pretend their car was stolen or that someone broke into their house. Then they file a claim for their policy and keep all the money from the payout. Insurance is designed to protect people when something happens, but this type of fraud takes advantage of that protection. Instead, it’s someone using insurance policies to enrich themselves.
Types of Insurance Fraud
There are many areas in which someone might commit insurance fraud. Most of the ways insurance fraud works can be done within most of these areas of insurance.
Car insurance is a very common area for insurance fraud. The auto insurance industry loses millions each year from fraud. With car accidents, it’s easy enough for policyholders to inflate their claims for the damages and to steal the extra money they receive. In addition, someone might instead falsify the date or time of the accident to receive a payout they wouldn’t otherwise get. Basically, they’ll claim an accident just happened when that accident occurred years prior before they bought the insurance policy. Policyholders sometimes to stage accidents entirely and provide “proof” of an accident that never occured for a payout.
Theft is another big facet of auto insurance fraud. Policyholders will inflate theft claims to get more money for their stolen vehicles, or they’ll stage a theft entirely where their vehicle was never really stolen. These are just some of the ways that fraud is committed with car insurance.
Homeowners insurance is another very common type of insurance, so there are people who take advantage of that and commit fraud. Like with auto insurance, these thieves will inflate claims for an event that really happened. They’ll claim more was stolen than what was actually taken, or they’ll falsify the date of a previous theft to get money for something that happened outside of their policy terms. Thefts are also sometimes staged or faked for money.
Homeowners insurance also covers damage to the house’s structure, and people will stage damage to the house. It’s also considered tax fraud to intentionally damage a home for insurance money. Whether through arson or other types of damage, some people committing fraud will damage or destroy their house for a big homeowners insurance payout.
Health care insurers commit tax fraud in a variety of ways that mostly revolve around charging for services. Health insurance companies may charge policyholders for services that never happened, or they may charge more than what the service actually should have cost. Double billing is also a form of fraud. Policyholders can also commit health care fraud by claiming that certain services were necessary when they weren’t.
Life & Disability Fraud
Life insurance and disability insurance are ways to protect your family, but some policyholders and insurers take advantage of that system. Fraudulent insurers may sell life insurance policies that aren’t real policies or charge much higher and not pay out should a claim be filed. On the other hand, policyholders might fake a beneficiary claim or disability claim to receive money. In extreme cases, people have even faked deaths to receive life insurance money.
Worker's Compensation Fraud
Employment injuries are a real problem, but some people will fake injuries to receive workers’ compensation money. Sometimes the person will actually be injured, but they’ll falsify proof that they were injured at work in order to receive a payout. On the flip side, employers can also commit workers’ compensation fraud by under-reporting employees to get a lower premium—or even by failing to have workers’ compensation insurance in the first place.
How to Combat Fraud
If an insurer or policyholder suspects fraud, they’ll need to be able to show legal professionals that there was both an act committed as well as that there was intent to commit fraud. If someone can prove both of these, then legal action can be taken against the policyholder or provider who committed the fraud.
But how do you prevent fraud in the first place? Here are some tips to combat fraud as you look for the right insurance coverage for you:
- Pay attention to low premiums. If something seems too good to be true or too cheap to be true, it probably is. Ridiculously low premiums are a way fraudulent “providers” try to bring in potential customers.
- Always be wary of agents who reach out unsolicited. If you’re hearing from an agent regularly or they’re using high-pressure tactics to try and motivate you to buy a policy, you should be wary and fully investigate the policy. Most likely, you’d be better off getting insurance from someone else.
- Keep track of documentation. If some kind of fraud does take place, you’ll want to have all the proof ready to go. Always keep track of every bit of information, including the names of people you talked to and the dates of things like phone calls.
- Never pay in cash. A card or check payment can be traced and verified, which makes it safer. If you have to pay in cash, make sure you request a receipt.
- Take your time. There’s no reason you have to rush with choosing a policy, and an agent that won’t respect that may have ulterior motives. It’s better to be sure and safe with your insurance decisions.
At the end of the day, insurance fraud may sound like something that won’t happen to you, but it’s a real and relevant problem. Ultimately, one of the best ways to avoid being scammed by an insurance company is to choose a reliable provider—like HNI. Learn more about HNI insurance to own your risk and get started with safe insurance!