Lauded by some as a ‘victimless crime’, the impact of insurance fraud in the US tells us that, in reality, it is far from it. All across the United States, insurance fraud is having a considerable impact not only on the insurance industry, but also on the entities – individual, corporate, and public – that rely on insurance every day. Whether the details of a car accident are being fabricated or a major corporation is underreporting employee numbers, insurance fraud of various kinds is pervasive and impacts are threatening not only the people involved, but swathes of the economy at large. Indeed, fraud accounts for at least 80 billion US dollars’ worth of theft per year in the United States, according to the Coalition Against Insurance Fraud. Insurance Fraud Investigators are often called to investigate and assist in fighting fraud.
What is Insurance Fraud?
In its most basic form, insurance fraud is the act of deceiving insurance companies to obtain more money than that to which one ordinarily would be entitled. Common acts of insurance fraud include exaggerating personal injuries to secure greater health insurance payouts, fabricating damage to a vehicle to be awarded more in an accident claim, and damaging one’s own property and alleging criminality of another (for example, setting fire to a building) to collect victim compensation. That said, insurance fraud is not only committed by individuals or businesses against an insurance company. Insurance companies themselves may commit fraud, and usually that arises when they unlawfully or otherwise improperly deny an insurance benefit to a policyholder.
Regardless of the ultimate form of the fraudulent act, in the US an insurance fraud is generally understood to exist when three conditions are met:
- A false or misleading statement was knowingly made;
- The statement made was in connection with a claim, payment made, or payment to be made under the terms of an insurance policy; and
- The statement made was material (in other words, important and has a bearing on the outcome of the claim).
Hard vs Soft Insurance Fraud
Two basic forms of insurance fraud exist: hard fraud and soft fraud.
Hard fraud is understood as a deliberate, intentional, or planned action and is committed when a person creates a situation that may lead to them claiming more money than is due to them under the terms of their policy. Good examples of hard insurance fraud include faking one’s own death for a life insurance payout and getting into a car accident on purpose to claim no-fault compensation (particularly common are rear-ended collisions, where one driver brakes especially hard or unpredictably and the driver behind them cannot help but collide with the rear end of the car in front of them).
Soft fraud, on the other hand, is understood more as an opportunistic defraudment of an otherwise legitimate claim, which again leads to the person claiming more than they would ordinarily be entitled to under their policy. Good examples of soft fraud include exaggerating the damage caused by a fire of which the claimant was genuinely a victim, or claiming that stolen jewelry is worth more than it actually is.
Impact on Victims
Both hard and soft fraud affect millions of people across the US every year, either because those people are direct victims of the fraudulent act (for example, the opposite party in a falsified car accident claim) or because – regardless of being involved in any such activity – they have to pay out considerably higher insurance premiums because of the general existence of extensive fraud across the country.
The additional cost burden for individuals alone is staggering. According to the FBI’s fraud division:
“The total cost of insurance fraud (non-health insurance) is estimated to be more than $40 billion per year. That means Insurance Fraud costs the average U.S. family between $400 and $700 per year in the form of increased premiums.”
Furthermore, it is not just premiums that cost more because of fraud. Business insurance costs are impacted by fraud just as much as individual insurance costs are, and most businesses have little other choice but to pass the additional costs onto their customers, else they face going out of business. This means that the cost of everything from food to handbags is more expensive than it ought to be, all because of insurance fraud.
The impacts, however, are not purely financial. Since the first use of ‘victim impact statements’ in the US in 1976, individual victims of insurance fraud have been able to detail the everyday familial, emotional, and other personal impacts that fraud has had on them in court. Common statements are that the victims experience a deep sense of loss, shame, and fear. If someone has been defrauded by a door-to-door insurance salesperson, for example, they may fear opening their door to visitors in the future, which can have a severe impact on their social life.
Effects on the Insurance Industry
4% of insurance industry profits are lost to insurance fraud every year, which is a staggering sum considering that insurance is a multi-billion dollar industry. But there are a number of other impacts affecting the industry negatively, and each has a knock-on effect on consumers. Other impacts include:
- Increased legal costs, owing to having to fight fraudsters in court
- Lengthier application and claims processes, owing to more checks being needed
- Job losses and salary cuts, owing to tighter margins on insurance products
While penalties for insurance fraud are severe (even ‘minor’ fraud of low economic value can attract high fines and prison sentences, and major fraud can attract seemingly infinite fines and life sentences), pending cases for various types of insurance fraud are still on the rise in the US. The criminal justice system is yet to deal with the problem effectively when it has occurred, and insurance companies appear unable to stop it from occurring in the first place. The impacts of insurance fraud, then, are likely to last for decades upon decades to come, and ultimately it is the everyday consumer who will pay for them.