Insurance fraud can be defined as any attempt to gain a financial benefit by deceiving an insurance company and it is usually, though not always, a criminal offense. And while you may not be out to commit such fraud, it’s important to be aware of what constitutes as fraud and what you can do to avoid it.

Examples of Insurance Fraud

Insurance fraud comes in many forms including:

  • Struggling business owner burning down his or her own property in order to make an insurance claim.
  • Burgled householder who falsely claims for non-existent possessions or inflates the value of those that were stolen.
  • Auto repair shop that adds a premium to its invoice in the knowledge that the vehicle owner will pass it straight to their insurance company with no questions asked.

People have been known to take such drastic measures as faking their own death to get a life insurance payout, or make claims for phantom but difficult to disprove medical conditions – whiplash as result of auto accidents being the classic example.

More sophisticated frauds include identity theft, often involving medical claims, cyber-crime and scams perpetrated by industry insiders such as agents and loss-adjusters.

The Cost of Fraud

Fraudsters may attempt to justify their actions on the grounds that “everyone does it,” or that it’s a victimless crime that only affects large, faceless and immensely rich corporations. But insurance fraud is, in fact, an offense against all other policyholders who are inevitably compelled to pay higher premiums for the coverages they need.

As a direct consequence of insurance fraud, the FBI has estimated that the average American family now has to pay between $400 and $700 more for its essential insurances each year (a figure that does not include healthcare, one of the market sectors most seriously affected).1 

The costs to businesses and the wider economy are even more severe.

Around $80 billion a year is currently lost to fraudulent claims, a figure that represents some five to ten percent of the value of all United States and Canadian claims. Around one-third of insurers, however, report fraudulent claims running at a staggering 20 percent of their total payouts.2  

But as shocking as these figures are, they are only a part of the picture. Insurance costs for the majority of honest policy-holders are also inflated by insurers recouping the expense of the anti-fraud measures and technologies they have to put in place. There’s also a cost to wider society in the resources of the criminal justice system that are devoted to the detection and prosecution of offenders.

It’s also important to be aware that while no sector of the insurance industry is immune to fraud, there are some that generate a disproportionate share of the overall cost.

Medical Billing Fraud

The National Health Care Anti-Fraud Association (NHCAA) has estimated that some three percent of the nation’s $3.6 trillion+ healthcare spend is lost to fraud.3  

Some medical fraud is committed by medical professionals whose positions provide them with ample opportunity and temptation. Common scams include billing for treatments that were not carried out and “upcoding” – simple procedures are billed as related but more complex and therefore expensive variations.

In other instances, practitioners may even carry out unnecessary procedures on unsuspecting patients purely for the purpose of generating an insurance payout. A variation of this fraud, common in the field of cosmetic surgery, is the misrepresenting of purely elective procedures, which are not usually covered by insurance, as medically necessary treatments for which a payout can be claimed. 

Medicare and Medicaid Fraud

Fraud is an expensive drain on the resources of private insurers, which is passed on to individuals and businesses in the form of higher premiums.

But Medicare and Medicaid, backed by the federal government, are subject to fraud by individuals and organized groups as well.

Medical billing fraud can be carried out against these programs, but they are also vulnerable to claims from individuals who are not entitled to payments. Medical identity theft, in which a person who is not covered takes on the identity of an insured person, is an increasing occurrence and may also involve the obtaining of prescription drugs for illegal sale.

No one knows for sure how much these frauds are costing the taxpayer, but the U.S. Government Accountability Office has estimated that in 2017 Medicare alone made improper payments of around $52 billion.4 

So serious is the problem that all 50 states now have Medicaid Fraud Control Units (MFCUs), usually operating out of the Attorney General’s office.

Auto Insurance Fraud

Less striking in financial terms, but still a significant additional burden for millions of American drivers, is the problem of auto insurance fraud.

According to the Insurance Research Council, fraudulent claims amount to between 15 and 17 percent of the total, a figure partly explained by the practice in some states of allowing “no-fault” claims.5 When insurers are required to pay out for damage or injury – no matter who was to blame for an accident – it can be tempting for claimants or their attorneys to inflate their demands.

Life insurance, homeowners or renters and workers’ compensation schemes are some of the other more notable sectors for this fraudulent activity. Industry bodies and law enforcement wage a never-ending battle against this type of criminal behavior, but the vigilance of individual consumers may be in the end the best defense.