The insurance industry consists of over 7,000 companies providing benefits to hundreds of millions of customers. Unfortunately, not everyone who has insurance coverage operates lawfully. The FBI estimates that insurance fraud costs $40 billion each year, meaning the average U.S. family is stuck paying between $400 and $700 per year in the form of increased premiums. Car insurance fraud is a serious and potentially dangerous criminal offense. This guide will dive into everything you need to know about auto insurance fraud, from how to spot scams to the impact this behavior can have on your premium.
What is car insurance fraud?
Car or auto insurance fraud occurs when an insured party unjustly takes advantage of their insurance company to obtain benefits that do not belong to them. For example, a policyholder providing false information to obtain a lower premium is auto premium fraud, and according to Forbes, accounts for $35.1 billion dollars in losses annually. There are many ways to commit or be a victim of car insurance fraud. Educate yourself on the claims process and the most common fraud schemes. Be aware that some companies commit fraud by selling fake policies, or through the theft of insurance premiums by a dishonest agent.
Examples of auto insurance fraud
Unfortunately, today there are many ways to commit auto insurance fraud.
From staging hit-and-run accidents to towing scams, these deceitful practices run the gamut:
- Application fraud - sometimes referred to as ‘soft fraud’ or material misrepresentation, is when a policyholder lies, omits, or exaggerates information on their car insurance application to receive a lower rate. False registration is a common type of application fraud where a policyholder lies about where they live and registers their cars in other neighborhoods or states to lock in lower premiums.
- Claims fraud - many dishonest tactics fall under the umbrella of claims fraud. Claims fraud can be classified as everything from reporting a false theft to exaggerating medical injuries from a real accident.
- Crash for cash schemes - is when fraudsters purposefully engage in behavior such as slamming on the brakes or encouraging drivers to pull out to cause an accident. Scammers can utilize a variety of creative methods to stage accidents, all to make fraudulent claims and collect profit.
- Towing scams - after a hit and run or any type of accident, it is common to require towing services. Be wary of unethical and unauthorized towing practices as these could signal a scam. If a vehicle is towed without your consent or a tow shows up quickly after an accident without being contacted this could be considered ‘predatory towing.’
Hard fraud v. soft fraud
While all states consider insurance fraud a crime, there is a difference between hard and soft fraud. Hard fraud involves an individual or group inventing or creating a plan to receive a fraudulent payout. This type of criminal activity can involve jail time, including staging an auto accident or planning a vehicle theft. An extreme example of hard fraud would be setting fire to your vehicle and then filing a claim with your insurance company.
On the other hand, soft fraud or material misrepresentation is categorized as intentionally exaggerating or lying about your insurance policy or claim to receive a lower rate. The policy owner may be reporting a legit occurrence but misrepresenting certain facts for financial gain. Soft fraud is far more common and is a major contributing factor to raised premiums for policyholders. Examples of soft fraud would be failing to document all vehicle drivers or including old auto accident damage as part of a new claim.
Impact of car insurance fraud
Car insurance fraud does not just affect the insurance companies. Fraudulent insurance practices are one of the main contributors to rising insurance rates every year. While fraudulent claims only make up about 20% of total claims, insured policyholders are left footing the bill of dishonest consumers. Remember that insurance companies can also commit fraud. Fake car insurance policies are not that uncommon nowadays. To avoid these types of scams, make sure you do your research and seek out reputable car insurance companies with real websites, reviews, and clients.
Car insurance fraud punishments
Due to the serious nature of auto insurance, it is considered an illegal act. Depending on the severity of the fraud, perpetrators can face raised premiums, hefty fines, or even jail time. If the car insurance fraud caused injury or even death to an individual, the sentence will be even harsher.
How to protect yourself from car insurance fraud
The first step to protecting yourself from future car insurance fraud is to become knowledgeable about the claims process. Knowing what to do and what to look for in a law-abiding insurance agency may help you spot a fake policy or scheme.
As a driver, you can use the following tips to increase your fraud protection:
- Familiarize yourself with the different types of car insurance fraud schemes from unethical towing to staged accidents.
- Be wary of any individuals who suddenly appear at the scene of the accident without being called, or individuals who try to dissuade you from calling the police or filing a claim.
- Avoid tailgating - fraudsters will sometimes take advantage of this behavior to stage a crash.
- If you are involved in an accident, always call the police and report the incident however minor.
- Obtain a police report and record all details of the accident including license plate numbers, witnesses, and photos of damage.
- Report the accident to your insurance company as soon as possible.
How to report car insurance fraud
If you believe you have witnessed or been victim of insurance fraud, call the National Insurance Crime Bureau at 1-800-TEL-NICB to report it. Also, reach out to your insurance agency and alert them to the situation. Remember, reporting fraud and keeping policyholders’ accountable lowers premiums and keeps all drivers safe.
All auto insurance fraud, from overreporting the damage of a fender bender to vehicle dumping is deceptive and illegal behavior. While car insurance fraud may be a pervasive and costly problem, we now have the tools and knowledge to better spot this activity.
Don’t leave yourself vulnerable to fraud. Stay aware of suspicious insurance behavior and call an IIA agent at 1-855-478-3705 to help you discover the coverage that is right for you!