Your budget gets tighter by the month. You need to earn extra income — fast. So you sit down to think up some side hustles you feel like you’d be good at.
- Freelance graphic design
- Thrift store flipping
- Driving for DoorDash
- Throwing yourself in front of a moving car
Wait, what?
It’s not legal, it’s not advisable, and you shouldn’t do it — but you can earn serious money if you’re willing to put your body and reputation on the line. You just have to be willing to commit insurance fraud. But before you jump off the curb, there are a few things you should know.
What Is Insurance Fraud?
First things first: Did I mention insurance fraud is illegal? You shouldn’t do it, no matter how tempting the potential payout. Depending on the scheme and the amount of money involved, penalties can range from denied claims and higher premiums to felony convictions and possible prison time.
And the definition of insurance fraud is really broad, so it’s possible to commit it without realizing it.
Insurance fraud is any insurance-related deception undertaken for financial gain. Virtually anyone involved in the purchase or sale of insurance can commit it:
- Insurance consumers, including applicants and policyholders
- Insurance agents and brokers
- Insurance companies and their employees, including claims adjusters, underwriters, and salespeople
- Third-party claimants, such as a pedestrian who steps in front of a moving vehicle and then makes a claim on the driver’s insurance
- Contractors, health care providers, and other third parties that receive income from insurance companies
Insurance fraud is a big business. The FBI estimates it costs the insurance industry some $40 billion per year, not counting health insurance fraud. It adds between $400 and $700 to the average family’s annual insurance premiums.
Hard Fraud vs. Soft Fraud
Most instances of insurance fraud fall into one of two categories: hard fraud and soft fraud. The primary difference is that one is usually an intentional, planned crime, while the other is often a crime of opportunity.
Hard Insurance Fraud
Hard insurance fraud occurs when a policyholder or third-party claimant fabricates a claim. Examples of hard insurance fraud include:
- Deliberately damaging or destroying insured property
- Falsely reporting property as stolen
- Engineering a scenario that allows you to file a claim on someone else’s insurance policy, such as stepping in front of their car
- Otherwise fabricating an insurance claim, such as helping a loved one fake their own death to collect on their life insurance policy
Hard insurance fraud is more complicated, costly, and higher risk for the perpetrator. It’s therefore not as common as the other main type of insurance fraud — soft fraud.
Soft Insurance Fraud
Soft insurance fraud occurs when a policyholder or claimant manipulates an otherwise valid policy or claim for their own benefit. Common examples include:
- Intentionally omitting important information in an insurance application, usually to get a lower premium
- Overvaluing insured property to get a higher coverage amount
- Exaggerating or misrepresenting the circumstances of a claim, usually to get a higher payout
Common Types of Insurance Fraud
People who work for and with insurance companies understand the inner workings of the insurance industry, so their schemes are often more complicated and can go undetected for long periods. But that doesn’t mean policyholders and claimants can’t commit insurance fraud too. But the type of fraud each group commits is different.
Types of Fraud Committed by Policyholders & Claimants
Just because someone doesn’t work for an insurance company doesn’t mean they can’t commit insurance fraud. Insurance fraud committed by policyholders and claimants falls into three categories, some more serious than others.
Application Fraud
Insurance application fraud includes any omission or misrepresentation that occurs during the insurance application process. Classic examples include:
- Omitting known health issues from your life insurance application
- Intentionally leaving drivers off an auto insurance application
- Falsely claiming your vehicle has built-in safety systems
Also considered insurance application fraud are fraudulent policy changes that occur after the policy goes into effect. Examples include removing a driver who still lives in your household from your auto policy or claiming you installed a home security system when you didn’t.
Claims Fraud
Claims fraud is any omission or misrepresentation that occurs during the claims process. Common examples include:
- Filing an insurance claim on property you don’t own — for example, telling your renters insurance company that a nonexistent laptop was stolen from your apartment
- Adding coverage to cover something that’s already happened to an existing policy, then filing a claim under that coverage — for example, adding collision insurance to the auto policy covering your already-damaged vehicle so you can hit up your insurer for the cost
- Not being truthful with insurance company representatives, such as claims adjusters
- Exaggerating the value of items covered by a property or auto insurance claim
- Inaccurate or fraudulent medical billing, such as billing for services not performed — usually done by medical providers and their employees
- Changing beneficiary information on a life insurance policy after the insured person’s death
- Faking a death to collect a life insurance death benefit
Disaster Fraud
Disaster fraud is a narrower type of insurance fraud that occurs around officially declared natural disasters, such as hurricanes, floods, earthquakes, and wildfires.
These large-scale events produce a flurry of property and auto insurance claims that overwhelm insurance companies’ claims departments. In many cases, claims adjusters are unable to visit affected properties or review damage photos as closely as they normally would. They’re more likely to approve fraudulent claims as a result.
Examples of disaster fraud include:
- Homeowners exaggerating the extent of storm or fire damage
- Homeowners misclassifying damage as disaster-related
- Homeowners concealing or destroying personal property or vehicles and blaming post-disaster looting or vandalism
- Contractors inflating the cost of repairs
- Contractors billing insurance companies for repair work they never completed
During officially declared disasters, homeowners and contractors can (and do) also defraud the Federal Emergency Management Agency and other U.S. government agencies that distribute aid to disaster victims. Since this aid doesn’t qualify as an insurance payout, it’s technically not disaster insurance fraud. But it’s still illegal.
Types of Fraud Committed by Insurance Agents, Brokers, & Company Employees
Insurance fraud committed by people who work for and with insurance companies is almost guaranteed to be more serious. Some of their fraud types can negatively affect insurance buyers as well as companies.
Premium Diversion
Premium diversion occurs when authorized insurance sellers like insurance agents and brokers keep a portion of the premiums they collect from customers instead of sending the entire amount to the insurance company.
In effect, they’re stealing from both the policyholder and the insurance company. They typically conceal the theft by creating two different versions of a policy: one for the insurance company and one for the policyholder. They might also charge policyholders for bogus add-ons that don’t actually add value to the policy and keep the difference.
Unauthorized Sales (Insurance Sales Scams)
This type of fraud occurs when an agent, broker, or company representative sells insurance without authorization. They might:
- Claim they’re affiliated with a particular insurance company when they’re not
- Claim to have a license to sell insurance in a particular state when they don’t
- Claim that a financial product they’re selling is insurance when it’s not
- Represent a fake insurance company that doesn’t sell anything real
Insurance sales scams primarily disadvantage consumers who think they’re buying valid insurance policies when they’re not. But when scammers claim to represent real, legitimate insurance companies, they harm those companies’ reputations by extension.
Fee Churning
This type of fraud occurs between insurance companies and resellers like agents and brokers. Usually, it’s a conspiracy among multiple insurance industry professionals working for a company set up specifically for the scheme.
Typically, participants repeatedly sell reinsurance — insurance for insurers — on a package of legitimate insurance policies. They collect commissions on each sale, using policy premiums as their commission piggy bank. Eventually, there’s not enough money left to pay out on legitimate claims and the scheme collapses, potentially taking down the insurance company with it.
But it can also be simpler. For example, an agent can convince clients to cash out their life insurance policy and replace it with another similar policy, sometimes repeatedly, collecting a commission each time.
Denying Legitimate Claims
This is a grayer area than insurance sales scams or premium diversion. After all, insurance companies deny seemingly legitimate claims all the time, and those denials are often defensible.
But insurance companies and their representatives can deny claims for no good reason, known as a bad-faith denial.
Penalties for Insurance Fraud
Insurance fraud penalties depend on multiple factors, including the type of fraud and the amount of money involved. Though every state has laws defining insurance fraud, precise definitions and penalties vary by location.
That said, many instances of insurance fraud, including seemingly trivial ones, can be charged as felonies.
On the consumer side, fines for insurance fraud can range into the thousands or tens of thousands of dollars per infraction. Prison time is also a possibility — up to several years, depending on the state and infraction. First-time offenders generally don’t spend significant amounts of time in prison, though.
On the industry side, insurance sales scammers and premium diverters face significant fines and may be required to pay restitution (financial compensation) to those directly affected by their activities. Prison time is a possibility for them as well. Conspiracies involving company executives, such as fee churning schemes, may generate bigger fines and settlements with state and federal regulators.
How Does Insurance Fraud Affect You?
Insurance fraud is never a victimless crime, even if it seems like no one got hurt. It can affect you as a policyholder or would-be policyholder either directly or indirectly.
Indirect Effects of Insurance Fraud
For policyholders, the indirect effects of insurance fraud are primarily financial. The FBI estimates that insurance fraud adds several hundred dollars to the typical family’s insurance premiums each year.
Direct Effects of Insurance Fraud
Many people go through life without ever being directly affected by insurance fraud. That’s a good thing because insurance fraud costs a lot more for people directly affected by it.
Depending on the circumstances, insurance fraud that directly targets you can result in:
- A worthless policy or coverage you can’t make a claim on
- Direct financial losses through diverted premiums
- Denial of a legitimate claim
- Higher premiums on a legitimate policy due to a fraudulent third-party claim
Insurance Fraud FAQs
Like insurance itself, insurance fraud is a complicated topic. As you learn more about it, you’re sure to have questions like these.
Who Commits Insurance Fraud?
Virtually anyone can commit insurance fraud. Potential perpetrators include:
- Insurance applicants — consumers and business owners
- Insurance policyholders
- People filing insurance claims, including policyholders and third-party claimants
- People who sell insurance, including insurance agents, brokers, and company salespeople
- Other insurance company employees, including claims adjusters
How Do I Report a Suspected Insurance Fraud Scheme?
It depends on the situation.
If you believe you’re being targeted by an unscrupulous or unlicensed insurance agent or broker, first report it to the insurance company they claim to represent. Most insurance companies have a process for reporting suspected fraud.
Likewise, if you believe a third party is making a fraudulent claim on your policy, report it to your insurer.
You don’t have to stop there — and in many fraud cases, you shouldn’t. Once you’ve reported the issue to the insurance company, file another report with the National Insurance Crime Bureau, the primary insurance fraud bureau in the United States.
You can also report insurance fraud to your state insurance commission or department of insurance and other agencies that regulate insurance companies or enforce insurance law. For example, if you suspect that a health insurance company doing business with your state’s health insurance exchange is breaking the law, file a complaint with the state agency that oversees it.
What’s the Most Common Type of Insurance Fraud?
Of the two broad categories of insurance fraud, soft fraud is more common than hard fraud. Among the various types of insurance, auto insurance fraud is probably the most common, though lots of insurance fraud goes unreported.
Generally, straightforward and opportunistic forms of insurance fraud are more common than complicated schemes and rackets. It’s much more common for an auto insurance policyholder to underestimate how much they drive or keep a problematic driver off the policy than to torch their own car and claim a vandal did it.
How Do I Appeal if My Legitimate Claim Is Called a False Claim?
It depends on the type of claim you’re filing and your insurance company’s procedures for appeals. But in general, you must submit additional documentation and evidence to address the specific reasons the insurer denied your claim.
If you don’t get anywhere on your own, you can hire a public claims adjuster or insurance attorney. If you win, your claim payout covers their contingency fees, so you don’t pay a lot if you don’t win, though you may have to pay for hard costs like court-filing or document fees upfront.
To learn more about the nuances of appealing a denied insurance claim, read our guides to:
- Appealing denied auto insurance claims
- Appealing denied health insurance claims
- Appealing denied life insurance claims
What if My Insurance Company or Insurance Agent Is Involved in Insurance Fraud?
Report the suspected fraud to your insurance company’s fraud reporting hotline if it has one. Even if you do that, file a separate complaint with the National Insurance Crime Bureau and your state insurance regulator to ensure some measure of external accountability.
Final Word
Like death and taxes, insurance fraud is a fact of life. It’s not going away. All you can do to protect yourself is learn how to spot suspected fraud, know when and where to report your suspicions, and steer clear of insurance “professionals” who don’t seem to have your best interests at heart.
Oh, and avoid perpetrating fraud yourself. You probably don’t plan to step in front of a moving car anytime soon, but think twice before omitting anything from your next insurance application. That’s technically fraud too.
