October 2014, CIPR Newsletter
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Last Updated 3/19/2018
Insurance fraud occurs when an insurance company, agent, adjuster or consumer commits a deliberate deception in order to obtain an illegitimate gain. It can occur during the process of buying, using, selling or underwriting insurance. Insurance fraud may fall into different categories from individuals committing fraud against consumers to individuals committing fraud against insurance companies. Insurance fraud, estimated at over a hundred billion dollars per year, not only imposes costs on insurance companies and threatens their competitiveness and future viability, but it is also financially damaging to consumers and detrimental to the economy and society as a whole.
While fraud is constantly evolving and affects all types of insurance, the most common in terms of frequency and average cost are: automobile insurance, which is widely believed to be most affected by fraud; workers’ compensation committed by both employees and employers especially during economic downturns and in high-risk industries; and health insurance and medical fraud which can be particularly costly, both financially and in actual loss of lives, due to the complexity and massiveness of the healthcare system.
Types of Fraud
Fake insurance companies and dishonest insurance agents can defraud consumers by collecting premiums for bogus policies with no intention or ability to pay claims. These “companies” may offer policies at costs that are significantly lower than the traditional market price in order to woo consumers who are trying to save money. In many cases, a fake insurance company will provide consumers with documents that look real. In other instances, these policies may even be represented by legitimate insurance agents who themselves have been misled by fraudulent companies.
Between the years 2000-2002, the General Accounting Office of the federal government identified 144 fake insurers nationwide that sold bogus health insurance to more than 200,000 policyholders, resulting in more than $252 million in unpaid claims. Similarly, there are many fake companies selling auto, homeowners, renters, life, disability, prescription drug and long-term care policies.
Legitimate companies that are not licensed by the state to sell insurance might lead consumers to think they are selling “insurance” while evading state insurance regulations. For example, a company selling a health discount plan might call the plan insurance when it is actually an unregulated, non-insurance product.
Employees of legitimate insurance companies can also deceive consumers for personal gain. For instance, an unscrupulous agent could collect premiums from a customer without delivering the insurance policy to the company. The insurance company could cancel or refuse to renew the policy. Signs of fraud with reputable companies include the failure to receive an insurance identification card or a copy of your policy in a timely manner.
Consumers can also be guilty of insurance fraud. Deliberate attempts to stage an accident, injury, theft, arson or other type of loss that would be covered under an insurance policy; exaggerating a legitimate claim; and/or knowingly omitting or providing false information on an application are all examples of insurance fraud.
Consumers should be on the lookout for the following warning signs, as they may indicate that an insurance company is fake:
Before signing an application for an insurance policy or writing a check to an insurance company, consumers should stop and take the time to confirm that the company they are about to do business with is legitimate. Their state insurance department – easily reached by phone – can quickly verify whether an insurance company exists and is authorized to sell insurance in their state. The NAIC’s “Fight Fake Insurance” program seeks to protect consumers from insurance fraud by encouraging them to Stop. Call. Confirm. before buying coverage.
Consumers should call their state insurance department if they suspect illegal activity or if they have questions before purchasing an insurance policy. To deal with specific issues involving criminal activity, many state insurance departments have antifraud and criminal investigators, who work closely with federal, state and local law enforcement officials to prosecute insurance fraud.
Fighting fraud is an important aspect of state regulation. To help fight the growing problem of insurance fraud, the NAIC created a uniform fraud reporting system through which consumers and insurance departments can electronically report suspected fraud to the appropriate insurance department. In 2010, state fraud bureaus received more than 132,000 case referrals from insurance companies, consumers and other law enforcement agencies. About 45,000 cases were opened for investigation resulting into more than 4,200 arrests and 2,000 civil actions. In addition, the NAIC maintains the Special Activities Database (SAD) to capture market activities and legal actions involving entities engaged in the business of insurance.
The NAIC Antifraud (D) Task Force monitors all aspects of antifraud activities. The Task Force mission is to serve the public interest by assisting the state insurance supervisory officials, individually and collectively, to promote the public interest through the detection, monitoring and appropriate referral for investigation of insurance crime, both by and against consumers.