What is insurance fraud?
The definition of insurance fraud is a deceptive act against an insurance company by a person, usually for financial gain. The FBI estimates that non-healthcare insurance fraud costs around $40 billion a year for insurance companies, resulting in a $400-$700 yearly increase in premiums for the average American family.
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Who can commit insurance fraud?
Applicants, policyholders, and third-party claimants can commit insurance fraud during a transaction to obtain benefits to which they're not entitled. Insurance scams can occur in any sector but are typically most prevalent in healthcare, workers’ compensation, and auto insurance.
Hard fraud vs. soft fraud
Insurance fraud falls into two broader categories: hard and soft. Both types are illegal, but significant differences exist between the two:
Hard fraud
Hard fraud is pre-meditated and planned. The person performing the fraud deliberately causes an act that results in a fraudulent insurance claim.
Example: An example of home or renters insurance fraud would be intentionally committing arson on your home to collect insurance money. This is considered hard fraud.
Soft fraud
Soft fraud is usually unplanned and occurs when a policyholder exaggerates a claim for a larger payout. This type of insurance fraud is harder to prove because it stems from a legitimate claim. Soft fraud is significantly more common than hard fraud because it often arises from a legitimate claim.
Example: An example of car insurance fraud would be exaggerating the severity of your injuries from a car accident to collect a larger payout. This is considered soft fraud.
Most common insurance frauds
The insurance industry is massive—over 7,000 companies collect more than $1 trillion in premiums annually. Common insurance scams across industries can include:
False theft fraud
Occurs when a person files a false police report for property stolen during a faked burglary with the intent of collecting an insurance payout.
Example: Removing valuable items from your home and reporting them as stolen is considered false theft fraud.
False claims fraud
A policyholder stages a claim or files a claim that never happened. Fraudulent claims can include intentionally causing a car accident, staging a slip-and-fall, or faking death to collect a life insurance payout.
Example: A person forging a death certificate to collect on a life insurance policy is a form of life insurance fraud.
Identity theft to secure health benefits
It's just as it sounds — a person uses someone else's identity to use and receive healthcare benefits.
Example: A person may use stolen insurance information to get medical treatment or prescription drugs.
Inflation or exaggerated claims fraud
Padding your initial claim to receive a bigger payout. Inflation fraud can occur in many scenarios, from exaggerating injuries after a minor fender-bender to exaggerating the damage from a natural disaster.
Example: Inflated claims are common with natural disasters because the extent of the damage can be hard to prove.
How to report insurance fraud
If you believe you have witnessed insurance fraud or may be a victim of a scam, follow these steps to report the issue:
- Contact your state's fraud bureau. Most states sponsor a fraud hotline or let you report an insurance scam on their website.
- Call, write, or email the insurance company that's being scammed. contact their headquarters if the company doesn't appear to have a system for reporting fraud.
- Call the National Insurance Crime Bureau (NICB) hotline at 800-835-6422. The NICB partners with law enforcement and insurance companies to help identify and prosecute insurance frauds.
What is the penalty for insurance fraud?
The penalty for insurance fraud depends on the type and severity of the crime and can result in various punishments.
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