What is Insurance Fraud?


Do you know what insurance Fraud is?

This seems like a silly question, most of us should know what the word Fraud means–after all it was one of the basic skills we learned way back in grade school. Only at that time we called it cheating, or lying.

The standard dictionary definitions all say just about the same things, fraud is the intentional perversion of truth (a lie) to induce another to part with something of value or to surrender a legal right. (To get something we want which usually has some value)

In the business of insurance fraud falls into two categories:

Hard fraud: is a situation where a person deliberately and intentionally creates a situation resulting in a claim or completely makes the claim up in the first place.

  • Ordinary people commit hard fraud when for example they report a hit-and-run accident when in truth they purposely backed into something because they wanted a new car.
  • A person might commit hard fraud when they decide they would like a new floor in their upstairs bathroom and ‘claim’ they accidentally overfilled the bathtub and didn’t notice for 3-hours that the water was still running.
  • Criminals have organized and may use a variety of schemes to defraud the insurance companies including electronic methods, road accident set-ups and in the medical community often work with professionals in order to defraud insurance companies.

Soft fraud is the kind of opportunistic situations where people who are generally honest people fall into temptation to pad legitimate claims.

  • This is the most common kind of insurance fraud.
  • Soft Fraud also happens when someone intentionally understate the number of miles they drive each year. Or fails to report a major change in the terms or their insurance for example sending the college student back to the dorm with the full time use of a car and not notifying the company the student has the car.
  • Business owners commit soft fraud when the list fewer employees or misrepresent the work the employees do in order to pay a lower premium.

Insurance fraud is committed by people from all walks of life:

  • From the organized criminal groups working together in order attain large financial gains by conducting fraudulent business activities and creating false insurance claims.
  • Professionals and technicians may be drawn into defrauding the insurance companies when they inflate the cost of a service or charge for services that were not rendered.
  • Everyday ordinary people may not think twice before padding a claim in order to cover the deductible cost or by filing a claim as a means of making a few bucks.

Most insurance fraud takes place in the areas of insurance such as Health care, workers compensation and auto insurance. This leads to these lines of insurance being more expensive every year in order to cover the costs of fraud and investigating the fraud. Insurance fraud accounts for a great deal of the increases we pay when our policies renew.

In the next Blog learn about some of the ways Insurance Companies are attempting to help keep our premiums down by investigating insurance fraud.

Photo credit for this blog entry: sxc (standard restrictions for this photo)

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