Types of insurance fraud are very diverse, and occur in all areas of insurance. Insurance crimes also range in severity, from slightly exaggerating claims to deliberately causing accidents or damage. Fraudulent activities also affect the lives of innocent people, both directly through accidental or purposeful injury or damage, and indirectly as these crimes cause insurance premiums to be higher. Insurance fraud poses a very significant problem, and governments and other organizations are making efforts to deter such activities.
What is Fraud?
Fraud is best described as theft by deception. Fraud takes place in the insurance business when an insured knowingly makes a claim but has not suffered a loss or the loss suffered is less than claimed. Some examples include:
• a loss that did not take place
• a manufactured loss
• a deliberate loss
• a genuine but exaggerated loss
Anyone making a claim knowing it is false or fraudulent in amount or any other respect commits insurance fraud. Those who commit insurance fraud challenge the positive aspects and function of insurance by taking advantage of opportunities to obtain undeserved benefits from their policies. Insurance fraud is also committed by those within the industry.
Types of Insurance Fraud
Each state defines insurance fraud differently, but fraud generally takes place when one party intentionally deceives another about an insurance matter in order to receive money or other benefits not rightfully his or hers. Insurance fraud is generally categorized as hard or soft, internal or external.
Hard and Soft Insurance Fraud
Hard insurance fraud takes place when a person deliberately fabricates a claim or fakes an accident. Hard insurance fraud is an intentional attempt to stage or invent an insurance claim that would be covered under an insurance policy-- for example, an auto accident, a slip and fall injury, theft, arson, or other type of loss. These types of fraud often involve a person acting alone, but they can also include multiple players and sophisticated conspiracies of medical professionals and lawyers. Hard fraud is pervasive and one of the most costly forms of insurance fraud.
Another type of hard fraud is committed from within the insurance industry. For example, a claims department employee may defraud an insurer by accepting bribes from doctors who provide medical services to insureds or claimants. Another employee may accept kickbacks from body shops that repair damaged vehicles.
Soft insurance fraud, on the other hand, occurs when someone pads or adds to a legitimate claim. A victim of theft who exaggerates a loss under a homeowners’ policy by overstating the value of the stolen electronics in order to cover the $1,000 deductible is committing soft fraud. Another example is a driver involved in a fender bender who claims damages resulting from a different accident that occurred months earlier. Soft fraud is much more pervasive than hard fraud.
Other types of soft fraud occur when the extent of injuries is exaggerated. For instance, perhaps a worker sprains an ankle after a fall on a wet floor but claims continuing back pain in order to stay home from work and further collect under a workers’ compensation claim. Soft fraud also occurs during the underwriting process when applicants or insureds apply for new or renewal coverage. They may provide false information to obtain lower insurance premiums or increase the likelihood that the application for coverage will be accepted.
In the business world, an example of soft fraud is an employer who lists fewer employees than he or she actually has or misrepresents the type of work they do in order to obtain lower workers’ compensation premiums. Soft insurance fraud is also known as opportunistic fraud.
Insurance fraud is one of the most costly white-collar crimes in America today, and it affects all of us. The very size of the insurance industry contributes to the cost of insurance fraud by providing opportunities and incentives for committing illegal activities. Insurance fraud is typically categorized as “hard” (an intentional attempt to stage or invent an insurance claim) or “soft” (padding or adding to a legitimate claim). Insurance fraud is also categorized as internal or external. Internal fraud is committed by industry insiders; external fraud is committed by policyholders, medical providers, beneficiaries, and others. A national problem, insurance fraud ultimately leads to higher prices for consumers.