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What Is Premium Diversion?

When you buy insurance, you're paying for the coverage in your policy. This is the business of insurance. The policyholder pays premiums, and the insurer provides insurance coverage.

Paying your insurance premiums also brings peace of mind. If something happens, those insurance benefits will be there to help. As a claimant, you expect a payout when you have a valid claim. What if those premium payments never make it to the insurer? What happens if an insurance fraud scheme diverts your premiums and they aren't available when you file an insurance claim?

Insurance fraud is a significant problem for the insurance industry and the individual policyholder. The FBI estimates that insurance fraud costs more than $40 billion every year.

Premium diversion is a serious offense and the most common type of insurance fraud. The following article defines premium diversion and how this diversion scheme can affect your insurance coverage.

What Is Premium Diversion?

Premium diversion is a severe and widespread type of insurance fraud that can affect policyholders. It can leave you without coverage. Premium fraud occurs when either an insurance professional or someone posing as an insurance professional embezzles policyholders' insurance premiums.

Premium diversion is a serious offense with real ramifications. For example, the National Insurance Crime Bureau reports on the consequences of premium diversion by an insurance professional.

Common Types of Premium Diversion

When you purchase insurance, you often buy it through an insurance agent. An underwriter provides the insurance policy. The underwriter receives your premiums through the agent.

Embezzlement in the form of premium diversion occurs when the insurance agent retains premium payments rather than giving them to the underwriter. When premium diversion occurs, you pay premiums. The agent takes the payments for personal financial gain instead of sending the funds to the underwriter. You don't have insurance coverage if the underwriter never receives the premium payments.

One prominent case involved the owner of an insurance agency who engaged in asset diversion, which violated federal law. The United States charged the defendant with federal crimes. The owner diverted premiums for financial gain to fund his successful congressional campaign. He later served three years in prison for this fraud case.

State insurance regulators in each state attempt to regulate the insurance industry to protect consumers. For this reason, one regulatory requirement provides that insurance agents obtain a license to sell insurance.

Another type of premium diversion scam occurs when someone sells insurance without a license, collects the premium payments, and fails to pay claims.

Other Types of Insurance Fraud

In addition to premium diversion, there are other types of insurance fraud. Typical insurance schemes also include the following:

  • Fee churning: Intermediaries take commissions through reinsurance agreements. Repeated commissions reduce the initial premium until there is no money to pay the claims.
  • Asset diversion: This is the theft of insurance company assets. It involves acquiring control of an insurance company with borrowed funds and using acquired company assets to pay off the debt.
  • Workers' compensation fraud: This occurs when an entity purports to provide workers' compensation insurance but misappropriates the premium funds without providing insurance
  • Healthcare fraud: This occurs when medical providers and/or patients deceive the system to receive unlawful insurance benefits or payments. The FBI is the primary law enforcement agency investigating healthcare fraud for both federal and private health insurance programs.
  • Disaster fraud schemes: These involve false or exaggerated claims by policyholders. Homeowners may falsify claims after a disaster, or contractors may inflate the costs of repairs.

Insurance fraud can result in heavy fines, license revocation, and even prison time for offenders. Insurance fraud drives up everyone's insurance costs.

How Does Insurance Fraud Affect Policyholders?

Insurance fraud impacts all policyholders. It costs insurance companies money. They recoup their losses through higher rates and premiums. Insurance fraud raises premiums for all insurance consumers. Without insurance fraud, policyholders would have lower premiums.

How To Avoid and Report Premium Diversion

Making wise insurance purchasing decisions can help you avoid premium diversion. Avoiding the following can help you avoid premium diversion:

  • Companies you've never heard of or cannot verify through independent sources
  • Aggressive agents
  • Agents who promise rates far below competitor pricing
  • Companies that you cannot contact with ease

To determine whether the insurance company you're evaluating is legitimate, it's wise to do the following:

  • Contact your state insurance department
  • Maintain records of payments you've submitted
  • Confirm that the insurer receives your payments

You can report the company or individual to your state's fraud bureau or state regulatory agency. There are also several national organizations dedicated to fighting insurance fraud. These entities include the Coalition Against Insurance Fraud and the National Association of Insurance Commissioners.

Don't Fight Insurance Fraud Alone

By paying your insurance premiums on time, you expect your insurer to cover legitimate claims. If the insurance company fails to receive your payments, you could be left with overwhelming expenses. Those who commit premium diversion should be held accountable for their actions.

If you suspect premium diversion or other misconduct concerning your insurance plan, contact an experienced insurance attorney. They can advise you of your rights and help defend your interests.

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