Auto Insurance Fraud
Every year, individuals and businesses try to game the insurance industry by submitting fraudulent claims. Car insurance fraud costs insurance companies billions of dollars every year. It includes incidents where customers exaggerate damages from a car crash to get extra money for repairs.
These crimes also include car service providers who trick consumers into purchasing parts they don't need. Sometimes, it involves an insurance agent who sneaks in additional coverages that a driver doesn't want or need.
These aren't victimless crimes. Insurance fraud cost the insurance industry almost $29 billion last year. It also led to spikes in premium rates. In this article, you'll learn the different types of insurance fraud and how they can affect you.
What Is Auto Insurance Fraud?
The National Insurance Crime Bureau released its latest edition of the NICB Informer which provides insurance industry experts with information about emerging threats on the internet. Its recent study found that auto insurance crime spiked in 2020 due to the economic downtown.
Auto insurance fraud is a serious crime that involves an individual or organization who deceives a carrier about a personal or commercial motor vehicle claim. They commit these acts for financial gain.
The Insurance Information Institute states that auto insurance fraud entails the following situations:
- Organized criminals that steal large sums of money through fraudulent business activities
- Technicians who charge for services they didn't perform
- Professionals who inflate service costs
- Regular people who see automotive insurance fraud as a quick way to make money
- Individuals who use fraudulent methods to cover a deductible
According to the organization, some lines of insurance are more susceptible to fraud than others. These sectors include healthcare, workers' compensation and auto insurance.
What Does Car Insurance Fraud Cost?
Car insurance fraud is illegal. The Insurance Research Council (IRC) accounted for $5.6 to $7.7 billion in fraudulent claims during 2012. The FBI estimates that automotive insurance fraud costs average Americans between $400 and $700 each year. It also made up 15 to 17 percent of auto insurance bodily injury claims.
The ways automotive insurance fraud is handled by states varies. Many states have established insurance fraud bureaus to fight these crimes. These organizations investigate suspected cases of car insurance fraud.
Unfortunately, many insurance fraud agencies don't receive enough funding to properly investigate these crimes. Because of limited financial resources, their bureaus may examine a fraction of the insurance fraud cases referred to them.
Two Classes of Auto Insurance Fraud
Automotive insurance fraud includes acts like misrepresenting facts on insurance applications. It can also include staging accidents and submitting claims forms for injuries that never took place. Others provide false reports about stolen vehicles.
1.) Hard Insurance Fraud
Insurers can detect hard insurance fraud easier than its counterpart. Hard insurance fraud is an organized, deliberate act of staging an auto accident to scam a carrier out of money. A criminal may stage injuries, arson or theft to push through a false claim for money.
Staged Auto Accidents – These incidents occur when a driver forces another person into a collision. They use a planted witness to tell the police that the victim is to blame.
Planned Vehicle Theft – It occurs when a driver has a partner steal a vehicle. Afterward, the pair sells the vehicle. They may also destroy or strip it for parts and file a claim with the insurance carrier.
2.) Soft Insurance Fraud
Soft insurance fraud is a common criminal act where individuals exaggerate parts of a legitimate claim. An insurer underwriting your car insurance policy uses personal data to calculate rates.
An applicant submits false information about their residence or other information to get a lower rate on their auto insurance policy. Soft fraud increases premiums on policyholders more than hard fraud does. Some examples of soft fraud include:
Missing drivers – A person may neglect to tell their issuing insurance carrier about all of the drivers in their household. An insurer may find out about the excluded driver when an accident occurs.
Over-reporting – A driver may inflate the value of stolen equipment. Other factors may include previously damaged equipment or dents as part of the new insurance claim.
Providing false documentation for lower premiums – Providing false information to an insurance carrier is another form of fraud. A person may use another driver's address to register and insure their cars to get lower rates. This misleading information can cause a loss of money to an insurance company. It can also include submitting false grades to qualify for good student discounts.
Back-dating car insurance – This situation occurs when a person buys car insurance after an accident has happened.
National Insurance Crime Bureau: Eight Top Car Insurance Fraud Schemes
Some people believe that insurance fraud is a victimless crime, but false claims cost insurers and their customers billions per year. An FBI study found that insurance fraud, excluding health care insurance, totals more than $40 billion per year.
According to the National Insurance Crime Bureau, there are a few typical scenarios for auto insurance fraud schemes. Here is a brief summary of the most common types of car insurance fraud.
1. Staged Accidents
A stage accident occurs when criminals manipulate an unsuspecting motorist into car crashes so they can submit false claims against the driver's insurance policy.
According to the NICB, fraudulent auto accidents occur more frequently in urban areas where there are greater volumes of vehicles. It also occurs in wealthier communities where individuals are perceived to have better auto insurance coverage.
The organization says that criminals target new, rental, or commercial vehicles because they are usually well insured. Fraudsters also target women driving alone and senior citizens, since they are perceived to be less confrontational.
Here is a brief summary of the different types of staged accidents.
1.) The Swoop and Squat
This staged accident occurs when two cars work together to maneuver another car into a rear-end collision.
City street swoop and squat – It typically involves three cars. Criminals drive the first two cars: the swoop and squat vehicles, while the victim operates the third one. The driver of the swoop vehicle maneuvers in front of their partner's squat vehicle. It causes the driver of the squat car to brake fast in front of the victim's vehicle.
Since the victim can't stop in time, it causes a rear-end collision. The first vehicle swoops away after the accident happened. A third car may block a victim from changing lanes to avoid the crash. Without proof the swoop car caused the crash, the victim is blamed for the accident.
Highway swoop and squat – Four vehicles are involved, with three belonging to the criminals. In this scenario, a third criminal boxes the victim in so they cannot change lanes when the swoop vehicle cuts off the squat vehicle. After the crash, the swoop and box vehicles speed off. It forces the victim's insurer to pay the claims.
2.) The Drive Down
This phony accident occurs when a criminal lulls the victim into thinking they can safely make a left or right turn, then collides with them.
Left-hand drive down - This situation may occur when a victim rides down a four-lane road and prepares to make a left-hand turn. As you stop to make a turn, the driver headed the other way slows down to a stop. They wave at you to go ahead and turn. As you move to complete the turn, the driver who waved you through moves forward to block your entrance to the parking lot.
You try to avoid an accident, so you stop. Another car coming down the road slams into the side of your car. The vehicle that clocked the entrance leaves the scene and makes it appear as if you're at fault for pulling into oncoming traffic.
The driver and passengers of the car claim you pulled into traffic when it wasn't clear and claim injuries. The claim will be filed against the insurance company to pay the criminals unless someone suspects fraud and investigates the case.
Right-hand drive down – This scam takes place when a victim pulls up to an intersection and prepares to make a right-hand turn. When the person makes the turn, another vehicle suddenly runs into the back-left side of your car.
The driver and the passengers of the car that crashed into the victim say you pulled into traffic when it wasn't clear. All of them claim injuries. The criminals file a claim against your insurer to pay them unless an investigator suspects fraud.
Curb drive down – You prepare to pull away from a curb, then merge into traffic. When it's clear, you drive straight ahead. A car crosses from the left lane, then crashes into you on purpose. The driver and passengers of the vehicle that crashed into your car claim you pulled into traffic when it wasn't clear. All claim to have injuries so they can receive compensation. The insurer will pay unless a claims representative suspects fraud.
Wave down – A pair of criminals set up a crash with a victim. The first one waves at a victim, telling them it's safe to pull out from a parking lot or side street. Then, another vehicle hits them intentionally.
3.) Other Types of Staged Accidents
Panic Stop - A driver watches for the person behind them to become distracted, then slams down on their brakes. It causes the tailing vehicle to cause an accident by rear-ending them.
Sideswipe - This situation takes place when the borders of a road's inner and outer lanes are not clear. A criminal will occupy the outer lane and sideswipe the victim's car as they turn. The perpetrator will claim that the victim caused the accident because of the ambiguous lanes.
4.) Tips to Avoid Stage Accidents
- To avoid becoming a victim of a staged accident, don't tailgate another car.
- Immediately call law enforcement to the accident scene, then file a police report.
- Use the camera function or carry a disposable camera to document all damage and the number of occupants in other vehicles.
- Avoid runners and cappers that suddenly appear at an accident who try to direct you to certain attorneys.
- Don't allow physicians to insist that you file a claim for medical treatment, especially when you're not hurt.
- You shouldn't use tow trucks (aka cappers) when you haven't called for towing service or else your car may get stolen.
2. Counterfeit Airbags and Auto Insurance Fraud
Airbags protect drivers and their passengers from serious injuries resulting from an accident. During a crash, frontal and side-impact airbags may deploy. These supplemental restraint systems help people's heads and upper bodies from hitting against the vehicle's interior.
The National Highway Traffic Safety Administration says that frontal airbags have saved 50,457 lives between 1987 and 2017. In 2017, it saved an estimated 2,790 lives of occupants 13 years and older.
According to the National Insurance Crime Bureau, most vehicles have 10 or more airbags within their vehicle's cabin. These include devices located in the rear curtain, center and knee sections. Some repair shops are using counterfeit airbags to cut corners and increase their profits.
When a consumer must have their airbag replaced, they don't know that a mechanic may cut corners by installing a fake airbag. Mechanics can obtain these online on sites like eBay. Cheap, fake airbags represent less than 0.1 percent of airbags installed in the United States. They are illegal in most states.
The installation of fake airbags is one of the most insidious forms of insurance fraud, according to the Coalition Against Insurance Fraud. These dangerous devices can kill drivers or their passengers when an accident occurs. Consumers can protect themselves from being scammed by following these tips:
Look for the airbag dashboard light after you turn on your car's ignition.
Have a certified mechanic look at your car whenever you purchase a used vehicle. Ask them to check the airbags to see if they function properly.
If your airbags deploy in a crash, consider having them replaced at an authorized car dealership repair shop.
Support legislation in your state that outlaws the sale, manufacturing and installation of fake airbags.
3. Windshield Replacement Scams
Another insurance fraud scam is the phony windshield replacement. This scheme is prevalent in Florida and Arizona, two states which don't have windshield damage deductibles. Unfortunately, this insurance fraud can occur anywhere in the nation.
Many auto insurers offer windshield glass replacement coverage without a deductible. Here are several common insurance scams:
Freebies and cash rebates – Some questionable glass shops try to force incentives like free car washes, movie tickets and gift cars in exchange for windshield replacements. These "gifts" entice you to get the replacement so they can pocket money from your insurance company.
Replacing undamaged windshields - Unscrupulous auto shops try to replace undamaged windshields or ones that have minor glass damage. They may try to profit off your policy by filing claims with your insurance company for repairs you didn't need. Insurance companies will typically pass these costs off to you in the form of higher premiums. Ethical shops will only replace your windshield when it has physical damage.
Unscrupulous repair shops – Some technicians will ask you to sign documents that award your insurance benefits to their shop. These businesses may take advantage of their new insurance policy powers to inflate your claim. A few shops may even sue the insurance company under your name to get financial benefits from your policy.
4. Insurance Company and Agent Fraud
Another form of auto insurance fraud can come in the form of unscrupulous agents. If you purchase a policy through a shady insurance carrier, the insurer may steal your money, but won't provide any coverage. Individuals believe the insurance products advertised at the company are available; however, they are phony policies.
You'll only find out about the agent's actions when an accident takes place. Once you file a claim, you learn you don't have any car insurance coverage and must pay for the claim out-of-pocket.
Sliding is another unethical practice that some agents practice. It's including extra coverage in insurance products that you don't want. This unwanted coverage can add up to higher insurance premiums. This practice increases your agent's profits.
There are several things that you can do to avoid premium theft. You should only work with reputable agents. When you purchase a new insurance product, verify this coverage independently through the insurance carrier. Here are several tips to find a trusted agent:
Research the agent's reputation – Before you purchase premiums from an insurance company, ensure it's legitimate. Check into the agent's professional reputation and ask for references.
Find out whether the agent's license number is valid – Customers can verify an insurance agent's license by looking it up on their state's license database or the National Association of Insurance Commissioners (NAIC) Consumer Information Source.
Get a second opinion – If you speak with an agent whose advice doesn't seem right, get an opinion from other insurance agencies. You can learn whether the information they gave you is correct.
Research complaints - Check the work history of every agent to evaluate their professional experience. Find out if anyone has filed complaints against these agents.
5. Towing Scams
Another form of insurance fraud you should be aware of is towing scams. During a towing scam, a tower will try to take advantage of a car after an accident occurs. They will also sweep in after a vehicle breaks down on the side of the road. They tow your car and charge you a significant amount of money to recover your vehicle from them.
Don't allow a tow truck to take your car unless you've called them directly. Additionally, only contact accredited tow companies. If you have roadside assistance, you can contact your insurance company.
6. False Reporting of Stolen Cars
The insurance company will consider your car a total loss if someone stole your car. Your comprehensive coverage will pay out the actual cash value (ACV) for your automobile. After you receive a settlement, you can use it to buy a new vehicle.
When a person falsely reports a vehicle was stolen, the owner disposes of a vehicle by abandoning it in a place. They may burn the vehicle, dump it in a lake or sell it.
The owner then files a claim with the insurance company saying it was stolen. Individuals use this fraud to receive a settlement from their insurer.
7. Exaggerating Insurance Claims
When you're at fault for an accident with another vehicle, your liability insurance will cover the other person's accident damage and injuries. These include their repairs and medical expenses.
A driver may exaggerate their claims. They may say an older dent was caused by the accident to get more money from your insurance company.
In a second scenario, they say they exaggerate the pain or injuries they received in the accident. If an unscrupulous repair shop or doctor substantiates these claims you could pay extra. It is another form of insurance fraud.
8. Misrepresenting Information on an Insurance Application
Car insurance companies require you to submit all of your personal information when purchasing a new policy. This data helps your insurer to calculate your quote and premium rates. It includes your driving record, zip code, traffic infractions, age, marital status and other demographics.
Some people omit details like recent speeding tickets or other information when they apply for insurance. Other applicants may claim to live in areas they don't actually reside in. A few might leave off drivers included in their household, like a teenager.
These are forms of insurance fraud. An insurer will find out about these details by checking your driving history or when an accident occurs. If they learn you omitted information, they could deny your claim. At worst you could get dropped. At best, your rate may go up considerably.
What are the Consequences Automotive Insurance Fraud May Have?
Most insurance carriers use claims adjusters to investigate claims to calculate your settlement. During their investigation, they will make personal visits to your body shop to ensure your claim is legitimate.
Major insurance carriers have systems that can identify suspicious behaviors. They have software that flags fraud.
The consequences of fraud can be serious. You most likely won't be arrested for insurance fraud cases where you omitted information on your application. After an insurer reviews your claim, they would deny your claim, but you wouldn't send an officer to arrest you.
Additionally, you may have a higher payment for your premium and retroactive fees to your insurance company. They could also cancel your policy. When this occurs, it could be your sole responsibility to pay off your accident-related claims.
In egregious insurance fraud cases, your insurance company will turn over the criminal case to law enforcement agencies. You could face fraud charges that earn you a misdemeanor or felony conviction.
If a criminal court finds you guilty, it can result in jail time and a prison sentence. Once you're a convicted felon, you could also pay expensive fines. You could asl be responsible for legal fees, court costs and many other associated expenses.
How to Avoid Insurance Fraud
There are several things you can do to avoid insurance fraud. These include:
Being as honest as possible on your insurance application and when filing claims. Contact your state's Secretary of State, Department of Insurance or law enforcement agencies if you believe you are an insurance fraud victim.
Don't omit information or lie when filing a car insurance claim – Insurers consider this fraud. Be as honest as possible. Submit your valid driver's license, all insurance numbers, photos, police reports, and contact information from yourself and the other driver. Only provide factual answers to your insurer before they speak to the other person's claims adjuster.
Always contact your insurance company after an accident – Even if the other person is at fault, contact your insurance company right away. Make sure to document all damage and get the person's information, just as if you were the at-fault party.
Do you need to purchase a policy from a reputable auto insurance agent? SmartFinancial has free online tools that can help you connect with an insurer in your area. Just enter your zip code and we will provide you with a list of insurers and coverage that fit your needs and budget.