What is car insurance fraud?
Auto insurance fraud is defined as deliberately misleading an insurance company in order to save money on premiums or to seek an excessive payout through a falsified claim. According to the FBI, non-health-related insurance fraud is responsible for tens of billions in losses each year. These losses are unfortunately passed on to consumers, raising the insurance premiums of the average American family by $400 to $700 per year.
Auto insurance fraud can be perpetrated by and against the policyholder. We’ll go over some common types of car insurance fraud so that you can steer clear of problems and stay protected.
Non-health-related insurance fraud is responsible for tens of billions in losses each year.
Common types of insurance fraud
Car insurance fraud encompasses a wide range of illicit behaviors, from illegally staging an auto accident to leaving a driver off your policy. Some insurance scams carry stiff penalties, while others may only result in a denied claim or being dropped by your insurer. Still, to avoid such reactions from your insurer and to protect yourself against scammers, it’s important to know the distinctions between common types of insurance fraud as discussed below.
Hard fraud involves the use of overtly illegal behavior to secure money from an insurance company. These types of fraud can lead to jail time and include the following behaviors:
- False report of a stolen vehicle: This involves making a falsified stolen vehicle claim on your comprehensive coverage in order to receive a payout. Policyholders who intentionally abandon, sell or destroy their vehicle to make such a claim can face serious penalties including jail time.
- Staged accident: Drivers often will devise ways of staging a car accident in order to make an insurance claim. This could include a driver slamming on the brakes so that you will rear-end them in an unavoidable collision. It could also include planting a witness at the scene who may give false information stating that you were at fault. They may file both property and injury claims in an effort to receive a payout.
This type of fraud is often the result of withholding information or exaggerating claims in an effort to save money or increase the amount of a payout. While it is perhaps less overt in its deception, soft fraud nonetheless results in substantial losses for insurers and is far more common than hard fraud.
- Over-valuing: Overstating the value of your car, property or equipment to receive a higher property damage payout.
- Exaggerating claims: Claiming damage that is not attributable to a covered accident. This can include previous injuries or vehicle damage not sustained in an accident in order to get a larger payout.
- Misrepresentation/omission: Leaving pertinent information off of your insurance application in an effort to get cheaper rates. This could include leaving certain drivers off your policy or even claiming that you live in a neighborhood where rates are cheaper.
Some types of fraud may be linked to body shops or others trying to make money off your claim. Replacement fraud, for example, can occur when a repair shop claims to have replaced damaged parts with new ones but has actually made the repairs with second-hand or cheap parts. The garage charges your insurance company extra and simply pockets the rest.
How to report insurance fraud
If red flags appear while trying to make a claim after an accident, it’s best to inform your insurance agent or the claims adjuster assigned to your claim. Your insurer is likely to have an internal division that is adept at spotting false claims or other questionable behavior.
Furthermore, the National Insurance Crime Bureau (NICB) is an organization that partners with insurers and law enforcement to help investigate instances of insurance fraud. Contact the NICB at 1-800-TEL-NICB (1-800-835-6422) or report suspicious activity online by using this form on their website.
Consequences of insurance fraud
Insurance fraud consequences depend on the nature of your actions. Leaving a teen driver off of your policy isn’t likely to land you in prison, but it’s certainly possible that it could lead to denied claims or having the policy dropped. If you are not dropped, it’s likely that you will have to retroactively pay premiums as they would have been.
More serious cases of fraud are most certainly going to lead to stiff penalties. This can mean thousands of dollars in fines and legal fees as well as jail time. In general, be honest and open when filling out an insurance application or making a claim.
Serious cases of fraud can lead to stiff penalties such as thousands of dollars in fines and legal fees, as well as jail time.
How to avoid auto insurance fraud
Fraud is wide-ranging in the insurance industry, but here are a few ways that you can avoid it:
If you were in an accident, it’s a good idea to notify law enforcement so that the accident is properly documented. This is especially true if another driver was involved and if fault is disputed. While some scammers may be able to stage a believable accident, having a corresponding police report may help a claims adjuster more accurately determine fault or spot fraudulent insurance claims.
Insurance underwriters and claims adjusters are highly skilled at spotting fraudsters. They’ve seen enough shady claims that they’re likely to see through even subtle exaggerations. Be upfront and honest with your insurance provider to avoid having your claim — or your whole policy — dropped.
A few states actually require photo inspection in an effort to reduce insurance scams and fraud. In these states, drivers must have the vehicle inspected by a third party to ensure an accurate representation of the vehicle’s condition. The company CARCO operates in these states:
How to get better insurance rates without falsifying information
If someone in your household has a bad driving record, it might be tempting to conveniently leave them off your policy. Similarly, thinking that a claim for a recent fender bender could also take care of some dents you sustained after backing into a pole in a completely unrelated event may also sound appealing.
But lying to your car insurance company is a surefire way to run into trouble down the line. Plus, it could result in having claims denied, having the policy dropped or — in more serious cases — even prosecution. This could leave you on the hook for far more money than what you would have saved by lying.
Below are some of the ways that you could save by being upfront with your auto insurer:
You may be able to exclude a roommate or family member with a checkered driving history from your policy. However, the insurance company you choose may have stipulations regarding exclusions. Furthermore, it’s not likely that you will be able to exclude a spouse from your policy.
It’s advisable to avoid filing claims if you can. However, sometimes the cost of repairs makes a claim necessary. In general, try paying for damages out-of-pocket if you caused damage to your own vehicle and the costs are not too high. If the damage was to another driver’s vehicle, it’s best to use your insurance coverage to avoid being taken advantage of.
Some companies just aren’t the right fit. The good thing is that there are a number of options that may be more open to your particular profile and offer better rates. It’s always best to shop around for multiple quotes to see what coverage options are best.
Scams and fraudulent schemes end up costing the insurance industry millions of dollars each year. Policyholders can do their part by being upfront and as accurate as possible when purchasing a policy or making a claim. It may be more difficult to avoid insurance scams perpetrated against you, but notifying law enforcement and working with your insurer can certainly help keep you protected.
While fraudulent claims have certainly increased rates for drivers across the board, it’s still possible to find an affordable car insurance policy. Start by entering your ZIP code to compare insurance quotes quickly and easily.
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About The Zebra
The Zebra is not an insurance company. We publish data-backed, expert-reviewed resources to help consumers make more informed insurance decisions.
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