Insurance fraud occurs when either the purchaser or the seller engages in illegal activities. Also, it’s an improper or illegal use of insurance policies or applications with the intent to obtain unauthorized benefits or financial advantage. Moreover, it typically involves an effort to use an insurance agreement for financial profit.
The issuer may commit fraud by selling policies from non-existing companies, neglecting to submit premiums, or manipulating policies to generate additional commissions. However, buyer fraud may involve overstating claims and fabricating medical records. Also, backdating policies, engaging in fraud, staging false deaths or abductions, and committing murder.
How Does Work?
Insurance fraud involves using an insurance contract. The primary purpose of insurance is to reduce risks, not to be used as a means to enrich the policyholder.
While events of insurance fraud by the insurer do happen, the majority of events involve policyholders attempting to inflate claims for financial gain. Although more extreme cases, such as faking one’s death or committing murder for insurance payouts, do occur, they are relatively uncommon.
One of the disadvantages of insurance fraud is that the increased expenses associated with such issues are passed on to customers by insurers through elevated premiums.
Types of Insurance Fraud
Insurance fraud can be categorized into two main types: hard fraud and soft fraud. Despite both being illegal, they differ significantly:
Hard Fraud
Hard fraud involves premeditated actions. Individuals fulfilling the fraud intentionally execute fraudulent schemes to file illegitimate insurance claims.
For instance, a hard fraud could involve setting fire to one’s residence to claim insurance compensation for the damages. Such a deliberate act is recognized as hard fraud.
Soft Fraud
Soft fraud typically arises suddenly and involves policyholders making their claims for significant compensation. This form of insurance fraud originates from legitimate claims, making it more challenging to detect this type of insurance deception.
For instance, for car insurance fraud, a policyholder might exaggerate the extent of their injuries sustained in a car accident to secure a larger financial settlement. Such actions are considered soft fraud.
Common Insurance Frauds
The insurance industry is expansive, with over 7,000 companies acquiring over $1 trillion in premiums each year. Various companies are victims of common insurance scams, which may involve:
False Theft Fraud
This fraudulent act involves filing a fabricated police report claiming property theft during a staged burglary. This is all done to receive an insurance payout. For instance, falsely reporting valuable materials as stolen after removing them from your home is known as fraudulent theft.
False Claims Fraud
When a policyholder fabricates or creates a claim that did not occur, it is known as fraudulent activity. Examples of fraudulent claims include creating a car accident, acting on a slip-and-fall incident, or faking death to receive a life insurance payout.
For instance, forging a death certificate to fraudulently obtain funds from a life insurance policy exemplifies a form of life insurance fraud.
Identify theft to Secure Health Benefits
As the term suggests, identity theft in healthcare involves one individual utilizing another person’s identity to access and receive healthcare benefits.
For instance, an individual might use stolen insurance details to obtain medical services or acquire prescription medications under pretenses.
Inflation or Exaggerated Claims Fraud
Increasing the first claim to secure a larger payout is known as inflation fraud, a deceptive practice that manifests in various scenarios. This can range from overstating injuries following a minor car accident to exaggerating the extent of damage caused by a natural disaster.
For instance, inflated claims frequently occur in the aftermath of natural disasters due to the difficulty of accurately assessing the full extent of the damage.
Types of Insurance Fraud Schemes Sellers
According to the Federal Bureau of Investigation (FBI), three fraudulent schemes commonly used by sellers include:
Premium Diversion
Premium diversion occurs when an enterprise or person engages in the sale of insurance without a legal license and subsequently fails to fulfill claims. However, it leads to misappropriating the premiums paid by policyholders.
Fee
When mediators, such as reinsurers, are part of the process, each entity takes a commission, which gradually reduces the initial premium. However, there may be insufficient funds remaining to cover claims effectively.
Asset Diversion
Theft of insurance company assets can take various forms, such as using borrowed funds to acquire an insurance provider and utilizing the provider’s assets to settle the debt.
Who can Commit Insurance Fraud?
Individuals applying for insurance, policyholders, and third-party claimants can engage in insurance fraud during transactions to receive benefits to which they are not legitimately entitled.
While insurance fraud can occur across various sectors, it is often most common within the healthcare, workers’ compensation and auto insurance industries.
What is the Penalty for Insurance Fraud?
The penalty or consequences for insurance fraud vary depending on the type and gravity of the offense, leading to a range of potential penalties.
Conclusion
Insurance fraud happens when an insurance provider, agent, adjuster, or consumer deliberately engages in deception to get an unjustified benefit.