Ever since insurance was invented, so was insurance fraud. There are many types of fraud, from life insurance fraud to auto fraud. This article will provide an overview, while looking at the impact of fraud on society.
Most of the time, when someone commits fraud, it is for financial gain. Due to the nature of insurance policies, they are fraught with the potential for exploitation. Insurance policies are commonly exploited by people who claim more losses than actually occurred, or who inflate the value of the lost item.
Insurance fraud is generally divided into two classifications: soft fraud or hard fraud. Soft fraud is the more common of the two and is also called opportunistic fraud. This type of fraud occurs when an insured inflates an already legitimate claim. Petty fraud, for example, occurs when an insured person is involved in a car accident and claims that the vehicle sustained more damage than is true. Petty fraud can occur at the start of a new insurance policy, when a person buying a policy misrepresents the actual situation of the policy in order to obtain a lower premium. An example of this is if someone is buying a car insurance policy but lies about the number of miles on the vehicle to get a lower premium.
Hard fraud is when someone plans a loss in order to receive an insurance payment. This type of fraud is usually executed with a fire, “stolen” car, or the like that the individual himself plans. Sometimes entire criminal gangs are engaged in hard insurance fraud.
An example of life insurance fraud occurred in 2002 when a man named John Darwin disappeared during a canoe trip. His family collected his life insurance and he reappeared in 2007 with reported memory loss.
Auto insurance fraud is one of the most common types of fraud. It is estimated that in 1996 up to 36 percent of auto insurance claims were fraudulent in some way. Mild fraud in auto insurance fraud includes the above, but also situations where a person claims an injury that did not actually occur during the accident in question, or if someone registers their car at a place where insurance is less expensive. For example, if a person lives in a major city, it is more expensive to insure the car, so they will register it with a suburban address for a lower premium.
Hard insurance fraud is typically executed in a “collision for cash” scenario, which has several different varieties of staged collisions. One is the “classic rear bypass” in which a driver slams on the brakes, causing the car behind them to crash into them. Many times the brake lights will go out, but come back on before an investigation is done. Another common “crash for cash” scenario is one called a “paywave bypass,” where a driver flags down another car ahead of them in a line of traffic, then crashes into them and denies doing so.
Insurance fraud is a very real problem in the US, with estimated losses in 2006 approaching $80 billion. It is estimated that between 3% and 10% of all medical claims contain some element of fraud, resulting in billions of dollars in losses.