What Is Insurance Fraud?

Insurance fraud is an illegal act on the part of either the buyer or seller of an insurance contract. Insurance fraud from the issuer (seller) includes selling policies from non-existent companies, failing to submit premiums, and churning policies to create more commissions. Buyer fraud can consist of exaggerated claims, falsified medical history, post-dated policies, viatical fraud, faked death or kidnapping, and murder.

Key Takeaways Insurance fraud involves any misuse of insurance policies or applications in order to illegally gain or benefit.

Insurance fraud is usually an attempt to exploit an insurance contract for financial gain.

The majority of insurance fraud cases involve exaggerated or false claims.

How Insurance Fraud Works

Insurance fraud is an attempt to exploit an insurance contract. Insurance is meant to protect against risks, not serve as a vehicle to enrich the insured. Although insurance fraud by the policy issuer does occur, the majority of cases have to do with the policyholder attempting to receive more money by exaggerating a claim. More sensational instances, such as faking a death or committing murder for the insurance money, are comparatively rare.

One of the downsides of insurance fraud is that the heightened cost of dealing with such problems is passed along by insurers to their customers in the form of higher premiums.

$40 billion The amount of money lost each year to non-health insurance fraud, according to the FBI.

Types of Insurance Fraud Schemes

Three fraudulent schemes that occur on the seller side, according to the Federal Bureau of Investigation (FBI) are:

premium diversion; fee churning; and asset diversion.

An example of premium diversion is when a business or individual sells insurance without a license and then does not pay claims. Fee churning us when intermediaries such as reinsurers are involved. Each takes a commission that dilutes the initial premium so that there is no longer any money left to pay for claims. Asset diversion is the theft of insurance company assets, for example, using borrowed funds to buy an insurance company and then using the acquired company's assets to pay off the debt.

Attempts to illegally reap funds from insurance policies by buyers can take on a variety of forms and methods. Insurance fraud with automobiles, for instance, may include disposing of a vehicle and then claiming it was stolen in order to receive a settlement payment or a replacement vehicle. The original vehicle could be secretly sold to a third party, abandoned in a remote location, intentionally destroyed by fire, or pushed into a river or lake. In particular, if the owner sells the vehicle, they would seek to profit by pocketing the cash, and then claim the vehicle was stolen in order to receive further compensation.

Both buyers and sellers of insurance can, and do, commit fraud.

Example of Insurance Fraud

The owner of a vehicle, for example, might attempt to cut the costs of insurance premiums by using a false registration. If the vehicle owner lives in an area with high rate premiums because of recurring car theft in the neighborhood or other reasons, the owner might try to register the vehicle in a different area to lower their premiums.

Repair work on a vehicle could also become a source of insurance fraud. For example, a repair shop that is expecting payment from the insurer might charge for extensive work but then use cheap or even fake replacements. They might also overcharge the insurer by overstating the extent of the repairs needed.