Insurance Fraud – Part 1

Fraud constantly plagues the insurance sector, while insurance consumers often view the problem far less seriously. There is a similarity in how individuals view tax fraud. Regardless of any justification, many feel that “cheating” on taxes or insurance claims may be acceptable because they consider both unnecessary and unwelcome financial burdens. However, insurance fraud victimizes both insurance companies and their customers, saddling both groups with substantial, measurable costs.

On the insurance company side, fraud drains time and resources. Every insurance company must commit a high level of its resources to combat fraud. It takes time and personnel to investigate suspicious claims. It must pay out losses on claims that it can’t prove invalid. It must often create and maintain special investigative units with related costs and invest in new ways to keep up with new schemes.

Customers are hurt by fraud in different ways, too. One cost is the increase in premiums caused by insurance company efforts to recoup their higher cost of business. Insurance claimants are harmed by the, sometimes, hostile approach that insurers use to flush out fraud. This aggressive posture creates tension and problems for those with legitimate claims. Insurance fraud refers to lying to or deceiving an insurer to make money or to illegally secure insurance.

Some common fraud schemes include:

• "padding" (inflating the true amount of) a claim
• lying or hiding (concealing) important information when applying for insurance
• lying or hiding (concealing) important information when reporting a loss
• submitting false claims
• "staging" accidents
• failing to report recovered property
• faking theft claims
• committing (home or vehicular) arson for profit

Because of the costs associated with fraud, consumers should be interested in their role in reducing the impact of fraud.

Please see part two of this article for information on fighting fraud.