According to the Coalition Against Insurance Fraud, insurance fraud costs American consumers more than $80 billion a year in higher premiums. This does not include the $60 billion a year in Medicare fraud that steals benefits from those programs. A typical insurance fraud case involves an insured individual or entity filing a false or exaggerated insurance claim to get compensation for losses they did not actually suffer. This article discusses the crime of insurance fraud, the different types of insurance fraud, the elements that compose the crime, and examples.
What Is Insurance Fraud: A Legal Definition
Fraud is a crime of deception for financial gain. There are many ways to commit fraud. Insurance fraud is just one way, but it is of growing concern because of pressure from the insurance industry. Forty-eight states now have specific criminal laws for insurance crime.
According to Texas law, insurance fraud is the act of preparing a false or misleading statement to present an insurer in support of either a claim or application for a policy. Misleading statements involve misrepresentation of fact. This is an essential element of the crime.
Insurance fraud could involve any kind of insurance. It could involve automobile insurance, for example. It might also involve defrauding health care providers. In that case, it would be treated as health insurance fraud. In other contexts, it could involve property insurance. Under such circumstances, someone might fake accidental property damage and file a false insurance claim. Regardless of the type of insurance involved, the offense will always involve the use of false information or the use of false insurance claims.
Depending on the jurisdiction where you're located or the nature of the offense, insurance fraud can result in either a felony or misdemeanor conviction. In Illinois and Michigan, for example, such a conviction can be either one of these two offense types. Under the California penal code, however, insurance fraud is typically treated as a felony.
Who Commits Insurance Fraud
Insurance fraud is pervasive and committed by individuals from all walks of life. Police have arrested doctors, lawyers, chiropractors, car salesmen, and people in positions of trust. Some types of insurance fraud crimes are committed by people within the insurance industry itself. Insurance agents have been arrested for premium diversion. Adjusters have been arrested for conspiring to commit insurance fraud by inflating estimates and getting a kickback.
Insurance fraud is often a solitary crime. But it can also be committed by several people conspiring together in a business. For example, members of a doctor's office might work together to commit Medicare fraud. In some high-profile cases, fraud schemes and scams may be perpetrated by organized crime rings.
Fraudulent Acts Related to Insurance
There are three basic varieties of insurance fraud:
- False statements on a policy application or renewal application: An applicant might lie on a policy application in order to get insurance coverage for which they do not qualify. Or they might do it to set the stage for an exaggerated or bogus claim later.
- False statements on a claim form: An insured person might lie on an insurance claim in order to qualify for reimbursement they are not eligible to receive. This would be a fraudulent insurance claim—one of the most common elements of insurance fraud. They may describe a loss happening in a way it did not happen. They may inflate the value of the items lost or damaged. They may claim property lost that was never owned or services provided that were never provided.
- Offering or accepting a bribe in connection with a bogus claim: This crime involves conspiring with another to enable or hide an incident of insurance fraud. Insurance fraud is most often charged under state law, but federal prosecution is also possible. When that happens, it's usually charged under statutes not specifically related to insurance. For example, the Hurricane Katrina Task Force investigated all types of fraud related to hurricane damage. Federal prosecutors sought convictions under mail fraud statutes in those instances.
Hard and Soft Insurance Fraud
Police and prosecutors refer to a fraudulent insurance scheme as either "hard fraud" or "soft fraud."
- Hard Fraud: In this case, someone deliberately fakes an accident, injury, theft, arson, or other loss to collect money illegally from an insurance company. The claim is entirely fabricated.
- Soft Fraud: When asked to provide lots of detailed information, many people sometimes find themselves exaggerating, guessing, or "fudging the truth" a bit. These little white lies work in their favor for filing or maximizing an insurance claim. But when the lie is discovered, it is still fraud. The legitimate claim is mixed with fraudulent information or embellishment.
Both hard fraud and soft fraud are criminal acts, and they are equally punishable under the law.
Typical Elements for Insurance Fraud
In any criminal case, there are certain elements that must be proven beyond a reasonable doubt in order for a person to be found guilty of the crime. While each state may have a few different elements for specific types of insurance fraud, the core elements include:
- The accused knowingly made a false or misleading statement, and it was done with intent to deceive;
- The false statement was made in connection with an application, claim, or payment; and
- The false statement had an impact on the outcome of the application or claim
Not every false statement is "material" or relevant. A legitimate claim for a damaged appliance that includes a wrong model number is not material. It does not affect the payout on the claim. On the other hand, a claim that a broken old refrigerator stolen out of a garage was actually a state-of-the-art model in perfect condition would be a material misstatement of fact. There would be a significant difference in the value of the claim.
This could also arise in the area of workers' compensation fraud. If an employee injured himself playing football on Saturday, but then reported on Monday that he was injured on the job on Friday, that falsification could lead to a payout under worker's compensation insurance. Lying about the circumstances of an injury like this is classic workers' compensation fraud. Similarly, if an employee recovers from an injury but fails to accurately report medical improvement (and continues to draw full payments), that failure to provide accurate information is considered fraud.
Consequences of Insurance Fraud
Anyone seeking to benefit from insurance by making inaccurate applications or inflated or false claims of loss or injury can be prosecuted. Usually, fraud is detected by the insurance company. If the insurer finds a case of suspected fraud, it may choose to handle the problem internally by denying the application or claim. It may or may not report insurance fraud to law enforcement. If the crime is brought to law enforcement for prosecution, and the perpetrator is found guilty, punishment will include fines, imprisonment, or both. Restitution will also be ordered.
For insurance fraud, penalties typically scale directly with the dollar value of the fraud. Minnesota's statute specifies these fines and limits on jail time, for example:
|False Claim Amount
|| Maximum Fine
|Less than $500
||up to 90 days in jail
||up to $1,000
|$500 - $999
||up to 360 days in jail
||up to $3,000
|$1,000 - $4,999
||up to 5 years in prison
||up to $5,000
|$5,000 - $34,999
||up to 10 years in prison
||up to $20,000
|more than $35,000
||up to 20 years in prison
||up to $100,000
Examples of Insurance Fraud
Just as there are many types of insurance, there are many ways that insurance fraud can occur. For example, in the case of Logan v. State, a woman was convicted and sentenced to seven years in prison for homeowners insurance fraud. She took out a homeowners policy five days before her house burned down. On the claim forms she filed, she listed valuable personal property that was lost in the fire. Unfortunately for her, those items were found in another house she rented just before the fire. Common types of insurance fraud include:
- Auto insurance fraud committed by claiming damage from an auto accident with a "phantom vehicle" when, in fact, the policyholder caused the damage
- Intentionally causing a minor car accident in order to make a personal injury claim against another person's auto insurance
- Failing to report a pre-existing medical condition in order to get lower life insurance or health insurance premiums
- False claims against a business for a slip and fall accident
- False workers' compensation insurance claims for an injury that did not occur at work or as a result of work
- Health care fraud from inflated billing by a medical provider, billing for services not provided, or billing for services provided but not needed
- Making a life insurance policy out in someone else's name
- Changing the vehicle identification number (VIN) on a car to hide the fact that it was stolen or salvaged
If you need more help, review the following resources, as well:
Talk to an Attorney About Your Insurance Fraud Case
Fraud crimes can result in jail or prison sentences, fines, restitution — and a criminal record. If you have been charged with insurance fraud, contact a local criminal defense attorney. They can explain the charges against you and the defenses that may be available to you. Insurance fraud charges can tarnish a criminal record in serious ways. This type of white-collar crime can carry heavy penalties. You might end up in state prison. But it is also possible you could end up in a federal prison. It's possible you could face a felony conviction. Contact a lawyer today. An insurance fraud lawyer can help you secure the best possible outcome.