05 Aug Fraud: The Multi-Billion Dollar Disaster
At its core, fraud is an act of deliberate deception intended to secure an unfair or unlawful gain. It occurs when applicants, policyholders, third-party claimants, insurance brokers, and providers conceal information or manipulate circumstances to benefit themselves, often at the direct expense of others. No matter the method, all forms of fraud erode trust, damage reputations, and can lead to devastating losses for individuals and businesses.
Insurance fraud has existed since the beginning of insurance as a commercial enterprise. Billions of dollars are picked from consumers’ pockets yearly by what many people consider a victimless crime. But is it?
Insurance fraud can be classified in two different ways:
- Hard Fraud: Deliberately faking an accident, injury, theft, arson, or other loss to collect money illegally from insurance companies.
- Soft Fraud: Far more common than hard fraud, sometimes called opportunistic fraud. Typically, policyholders exaggerate otherwise legitimate claims or misrepresent information on applications. They “just fudge a little.”
So, let’s dig a little deeper.
Hard Fraud
Criminal rings may be involved in hard fraud schemes that can steal millions of dollars through fraudulent business activities. Yes, many of these organizations view this as a business.
One of my favorite stories was a 20-year fraud stint in New York involving a man who recruited drivers and passengers to stage minor collisions and collect payments for fake injuries. One lady’s resume said, “She likes to ride in ambulances, she looks real in a neck brace, she can walk, stand, or sit without moving her neck or making her back do much, and she is always looking for insurance investigators. In addition, she can make a face like she is in real pain, can faint or cry, and can moan when she moves her arm or leg.” She got the job.
These rings may fake traffic deaths or stage collisions to make false or exaggerated insurance claims. They may engineer a deliberate collision with an innocent driver of another vehicle. Of course, property crimes often involve arson. Remember, it is not just about money. Botched staged accidents and arson have cost lives.
Soft Fraud
Ordinary people who want to cover their deductible or view filing a claim as an opportunity to make a little money by claiming more damage than was done. It can also occur while obtaining a new insurance policy by misreporting previous or existing conditions to obtain a lower premium on their insurance policy.
Of course, I can’t describe a hard fraud and not mention a soft fraud. One of my all-time favorites involves a cash-strapped farmer and his eight-ton cotton picker. Falling behind on payments, he reported that thieves had stolen it. You would think someone might have seen a 12-foot-high and 18-foot-long bright green farm machine. That is what the insurance company thought. But try as they might, they couldn’t prove the insured lied. One day, a neighbor noticed a patch of distinctive green poking from the soil. The carrier started digging. The discovery was a big event in the small rural community, so when the word spread, neighbors set up lawn chairs and coolers to watch the backhoes at work.
It is not that hard. It could involve padded or exaggerated claims, concealing facts, falsifying or altering records, lying, increasing the value of destroyed property, overstating the value of salvage, adding medical charges, upcoding services, billing for brand-name drugs when generics were given, malingering, faking claims, and so on.
So, is it a victimless crime? According to the Coalition Against Insurance Fraud, fraud costs the U.S. billions of dollars annually, which is thousands of dollars per year for the average family. It doesn’t seem so victimless to me.
The Insurance Fraud Hall of Shame is posted each year. It recaps America’s worst insurance fraud crimes. I have been reviewing this list for decades, and the 2024 list did not disappoint.
When you consider the ripple effects of these deceptions, the picture becomes even bleaker. Faced with mounting fraudulent claims, insurance companies are forced to raise premiums for everyone and may implement stricter underwriting practices or deny legitimate claims out of caution, leaving those in genuine need entangled in red tape. Investigators are under constant pressure to identify fraudulent patterns and develop sophisticated tools and databases, but even these advancements cannot fully stem the tide.
Honest policyholders who have never filed a questionable claim end up subsidizing the dishonesty of others, often without even realizing it.
Investigators and law enforcement have dedicated significant resources to detecting and prosecuting fraud. Medical professionals and auto repair shops may be pressured or tempted to participate. The cumulative effect is a culture where small lies seem harmless. In reality, they fuel a cycle that drains collective resources and undermines the concept of insurance as a safety net.
Ultimately, insurance fraud is not just a matter of dollars and cents. Every inflated claim, every staged accident, and every misreported fact chips away at the foundation of a system built on trust, leaving everyone to pay the price—one way or another.
The annual tally of hard and soft insurance fraud paints a sobering picture of a system under siege, with each false claim corroding the collective trust on which insurance is founded.
What can we do to assist the industry? Inspect risk and examine autos or property to be insured, complete and concise application information, inform the underwriter if anything seems unusual, and require all applications to be signed. Watch for the “red flags.” You can help prevent fraud.