Insurance fraud occurs when individuals or businesses manipulate or falsify information to obtain financial gain from insurance companies. The FBI estimates that insurance fraud (excluding health insurance) costs around $40 billion annually. As a result, the average U.S. family ends up paying between $400 and $700 more each year in premiums.

What Is Insurance Fraud?

Insurance fraud happens when someone lies or provides misleading information to profit from an insurance policy. For example, a homeowner might exaggerate the damage caused by a fire to receive a larger claim payout. Various types of insurance, including car, homeowners, life, and workers’ compensation, can become targets for fraudulent activities.

It’s not only policyholders who commit insurance fraud. Sometimes, insurance brokers or agents may:

• Pocket premiums without sending them to the insurance company
• Sell insurance policies without being licensed
• Collect premiums but fail to pay out claims

Types of Insurance Fraud

There are two main types of insurance fraud: soft fraud and hard fraud. Both types can have severe legal and financial consequences.

Soft Fraud

Soft fraud occurs when someone inflates or exaggerates an otherwise legitimate claim. It also happens when applicants misrepresent information on insurance applications to obtain lower premiums. Though it may seem harmless, soft fraud is common and significantly contributes to higher costs for all policyholders.

Examples of soft fraud include:

• Exaggerating damages in a car repair claim
• Underreporting miles driven to reduce auto insurance costs
• Falsifying injuries after a car accident to increase a claim payout
• Lying about a student’s academic performance to qualify for discounts
• Faking the extent of home damage during a storm
• Filing a workers’ compensation claim for an injury that never occurred

Hard Fraud

Hard fraud is more severe and involves deliberate actions to stage or cause damage with the intent to file a false insurance claim. This type of fraud involves premeditated deceit and is a criminal offense.

Examples of hard fraud include:

• Setting fire to a home to collect an insurance claim for property damage
• Staging a car accident to receive a payout for injuries or damages
• Arranging for a vehicle to be stolen, then filing a theft claim to collect insurance money

How to Avoid Insurance Fraud

Avoiding insurance fraud requires honesty and responsibility when applying for coverage or filing claims. Here are several key actions you can take:

• Be honest when applying for insurance. Don’t misrepresent information like your driving habits, where you park your car, or your home’s value.
• Don’t inflate claims. If your home suffers minor damage in a storm, don’t try to exaggerate the extent to receive a bigger payout.
• Report workers’ compensation fraud. If you’re cleared to return to work, make sure you stop receiving workers’ compensation benefits immediately.
• Avoid double-dipping. If your home suffered damage from a previous event, don’t include it in a new insurance claim.
• Don’t backdate insurance coverage. Purchasing insurance after an accident or event and then filing a claim is fraudulent.

Protecting Yourself from Fraud

Sometimes, you can also fall victim to fraud. Insurance agents, brokers, or service providers may try to scam you by manipulating policies or claims. Here’s how you can protect yourself:

• Research before buying insurance. Compare quotes from multiple insurers, check references, and read customer reviews to ensure you’re dealing with a reputable company.
• Work only with licensed professionals. Always verify the credentials of agents, brokers, and contractors with your state’s insurance department.
• Don’t sign blank forms. Signing blank forms can leave you vulnerable to fraud. Always review documents before signing.
• Pay premiums through traceable methods. Use checks, credit cards, or direct deposits rather than cash to create a record of payment.

How to Report Insurance Fraud

If you suspect you’ve been a victim of fraud or know of fraudulent activities, you should report it immediately. Here’s how:

• Contact your state’s insurance fraud bureau. Every state has a bureau dedicated to handling reports of insurance fraud.
• Notify your insurance company. Let them know about the suspected fraud, providing as much detail as possible.
• File a report with the National Insurance Crime Bureau (NICB). Call 800-835-6422 or use the online form to report fraud.

When reporting fraud, ensure that you provide accurate and detailed information, including dates, names, phone numbers, and any documents that may help the investigation.

Preventing Insurance Fraud

Fraud impacts everyone by raising premiums and creating financial strain. You can help prevent fraud by staying honest in your dealings with insurance companies and reporting any suspicious activity. When you understand insurance fraud, you can protect yourself and others from its costly effects.

The Bottom Line

Insurance fraud costs billions of dollars annually and affects everyone by increasing premiums. By being honest on applications and claims, you can avoid becoming part of the problem. If you come across fraud, report it promptly to protect yourself and others from its damaging consequences. Understanding insurance fraud is crucial to maintaining a fair and reliable insurance system.

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