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UPDATED: Mar 13, 2020
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More than 1 out of 3 insurance claims for bodily injury from a car crash involves fraud. Fraud has become extremely common in the auto insurance industry, and it costs everyone. As the problem grows, penalties have grown more severe, and insurers and other agencies have devised various ways of detecting and preventing insurance fraud.
How Does Car Insurance Fraud Happen?
Approximately 90 percent of insurance fraud results from people padding insurance claims, policyholders adding extra damages and injuries to their claims, and claimants adding fictitious passengers when reporting an accident. The other 10 percent of insurance fraud results from organized rings of criminals who stage fake accidents.
Criminals organize and actively solicit individuals employed in the car repair and salvage industries to work together in creating staged accidents. Crooked doctors, lawyers and even insurance agents often participate in this activity. Some of these accidents never even take place, and the only evidence is a stack of papers documenting the fake accident so that a claimant can get payment from insurance companies.
Crime Rings and Techniques
Crime ring members make up elaborate accidents, staged with fake injuries in order to collect payments on insurance policies. They may intentionally destroy a vehicle or property, and tell the insurance company that an “accident” happened. They might make a false report of a theft, or inflate a regular insurance claim, or an owner of a car that was previously damaged will call the police and claim to be a victim in a hit-and-run accident. One scheme involved 53 people in New York who scammed insurance companies for $1 million by playing a game of bumper cars on the streets of the city with unsuspecting drivers.
How Common is Car Insurance Fraud?
In 2009, about 143,000 requests came to the Crime Bureau, a group of industry insiders and companies that investigate insurance fraud, for assistance with a new fraud investigation. One scam that has become increasingly common, especially with people who owe more on their car than it is worth, is called “owner give-up.” A driver dumps their car in a lake, pays someone to set it on fire or otherwise dispose of it, and then the driver reports the car stolen. This way, if they can get their insurance company to pay out, their car loan disappears without hurting their credit.
Insurance Fraud Penalties
Penalties for individuals charged with defrauding an auto insurance company are very severe, since fraudulent auto insurance claims have become such a serious issue. Typical convictions vary by state, but will fall into either the misdemeanor or felony category depending on how serious the nature of the fraud was.
Most convictions for insurance fraud are for an exaggeration of a claim, or falsified information on an insurance application. These convictions are typically misdemeanors. This type of conviction can result in fines of up to $50,000, probation or possibly jail in an extreme case, for up to five years. Unfortunately, some fraudulent insurance schemes are very sophisticated and difficult to detect. What looks to be a misdemeanor-level fraud may be part of a much larger staged accident. Since the penalties for a misdemeanor are relatively low in comparison to the amount of money that can be made from staged accidents, they’ve become much more common recently.
In order for the perpetrator of fraud to be convicted as a felon, the fraud scheme needs to involve property destruction. This might involve setting a car on fire, and will also apply to a staged accident where somebody was killed. Insurance investigators scrutinize felony cases much more carefully, which means the conviction rate is higher. Penalties are much more severe, and most likely a convicted person will automatically receive between five and 10 years in jail, with no alternative probation. Fines could be as much as $150,000, although exact fines and jail terms will vary by state.
How Much Does Fraud Cost Insurance Companies?
The annual cost of fraud in the auto insurance industry is $30 billion. According to Edmunds.com, car insurance fraud costs consumers an additional $200-$300 each year added onto their insurance premium, and that does not include business insurance policies. This matters since, when businesses have to pay more for expenses like insurance, they need to charge more for goods and services, which ultimately means consumers pay more for those goods and services, on top of their inflated insurance. Not to mention the costs associated with investigating a fraudulent claim, which also costs policyholders more money in the long run.
How Insurance Fraud Gets Detected
The Crime Bureau, made up of about 1,000 member organizations including insurance companies, transportation- type businesses like car rental companies, and self-insurerd organizations, works to assess suspicious claims. Additionally, many states have set special groups and task forces that focus on detecting and eradicating insurance fraud.
One way a suspicious claim can be spotted happens when the claimant has a personal history or current situation of financial distress or high personal debt, which is found through an investigation by the insurance company using forensic accounting. Another sign is adding insurance coverage or increasing it, shortly before an accident occurs or a vehicle is stolen. Some claimants may be unusually calm after they experience a major loss, and upon investigation it is revealed that they have a history of previous claims and losses. Additionally, the absence of a police report, or suspicious hand-written receipts to document repairs to a vehicle or replacement of property covered on a policy signals a possible bogus claim.
Special investigative units have been created by the nation’s insurers to detect and fight insurance fraud. Many states have specific laws, regulations and bureaus dedicated to fighting fraud. The only downside to this extra effort is when insurance companies become hyper-vigilant about fraud and accuse true victims of an accident or loss. For example, when anti-theft responder chips, considered “undefeatable,” were first available as an implanted chip in a car’s key fob, insurance companies asserted that any driver who claimed their vehicle was stolen but still had their keys was lying, since the car theoretically would not start without the chip key. Insurance companies did not know that thieves had found ways to get around the chip keys, and innocent victims paid the price.