What Is Premium Diversion?
Created by FindLaw's team of legal writers and editors | Last reviewed June 22, 2017
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When you buy insurance, you’re paying for the coverage in your policy, but also the peace of mind that if something happens, those insurance benefits will be there to help you through.
But what if those premium payments never make it to the insurer, or aren’t available when it comes time to file a claim? Premium diversion is a serious and widespread type of insurance fraud that can have disastrous effects on you as a policyholder. The following article explains what premium diversion is and how it can affect your insurance coverage.
Premium Diversion Defined
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 per year. Premium diversion is the most common type of insurance fraud and occurs when an insurance professional (or someone posing as an insurance professional) embezzles insurance premiums paid by policyholders. It’s a serious offense with serious ramifications.
Common Types of Premium Diversion
When you purchase insurance, you usually buy it through an insurance agent. But the insurance policy is actually provided by an underwriter who receives your premiums through the agent. If the insurance agent retains those premium payments rather than passing them along to the insurance underwriter, they are committing premium diversion. One prominent case involved the owner of an insurance agency who diverted premiums in order to fund his successful congressional campaign (he later served three years in prison for his actions).
Each state attempts to regulate the insurance industry in part to protect consumers. For this reason, insurance agents are required to obtain a license in order to sell insurance. So, another type of premium diversion occurs when someone sells insurance without a license, collects the premium payments, and then fails to pay claims.
How Does Premium Diversion Affect the Policyholder?
When premium diversion occurs, you’re dutifully paying your premiums without realizing that someone is taking those payments for their own gain. But you will eventually realize the consequences of premium diversion. If the underwriter never receives the premium payments, then you, the policyholder, don’t actually have the insurance coverage you thought you had. And if someone sold you a phony insurance policy, then they never intended to provide the coverage in the first place.
How to Avoid and Report Premium Diversion?
First, be wary of companies you’ve never heard of, agents or representatives who are especially aggressive and promise rates far below competitor pricing, and companies who are especially difficult to get a hold of. You can contact your state insurance department to ensure you’re dealing with a legitimate agency and insurance company. Maintain records of payments you’ve submitted and contact the insurer directly to make sure they’ve been receiving those payments.
If you do suspect a legitimate or illegitimate company or agent is committing premium diversion, you can report the company or individual to your state’s insurance commissioner. There are also a number of national organizations dedicated to fighting insurance fraud, such as the Coalition Against Insurance Fraud and the National Association of Insurance Commissioners. Premium diversion is a serious offense. This and other types of insurance fraud can result in heavy fines, license revocation, and even prison time for offenders.
Don’t Fight Insurance Fraud Alone
By paying your insurance premiums on time, you rightfully expect your insurer to pay legitimate claims if and when the time comes. If they don’t, you could be saddled with overwhelming expenses. Those who commit premium diversion should be held accountable for their actions. If you suspect premium diversion or other misconduct is occurring, contact an experienced insurance attorney who can advise you of your rights and help defend your interests.
Next Steps
Contact a qualified attorney to assist with any issues related to insurance.