What Is Homeowners Insurance Fraud?

Homeowners insurance fraud involves filing a false insurance claim to profit from the subsequent claim payout. These fraudulent claims may include the policyholder staging a burglary on their own home, inflating the value of losses in a legitimate accident or increasing a contractor’s invoice to “cover” the homeowner’s deductible.

According to the FBI, the cost of non-health insurance fraud is estimated at $40 billion-plus each year. However, it’s not only the insurance companies that are losing money — rampant fraud has increased insurance premiums for all consumers by $400 to $700 annually.

Common Types of Home Insurance Fraud

Homeowners insurance fraud commonly looks like misrepresenting the actual value of your losses in a covered accident, staging burglaries, hiding home-based commercial activity from your insurance company and more.

1. Overstating Your Losses in a Burglary

Theft and vandalism are covered in a standard home insurance policy but you should only claim reimbursement for your actual losses. Reporting stolen items you never owned or overstating the value of stolen property is a form of home insurance fraud.

Example: While on a family vacation, Rachel’s home was burglarized and several items were stolen. When filing an insurance claim, Rachel reported a necklace she never owned was stolen. The insurance company agreed to reimburse Rachel for the stolen necklace for up to the jewelry sublimit of $2,500.

2. Staged Burglaries or Vehicle Break-ins

Dishonest homeowners may stage a break-in into their home or vehicle to profit from the subsequent insurance claim. A standard home policy would cover items stolen from your car or home and damages to your property, including furniture, electronics and clothes. (Note: auto insurance would pay for damages to your car window).

Example: Neighbors Bob and Samantha create plans to “burglarize” Samantha’s home and split the insurance payout. Bob “breaks into” Samantha’s home, and she files a homeowners insurance claim receives undeserved compensation for “stolen” property.

3. Inflating the Repair Bill to Cover Your Deductible

You are committing fraud if you have your repair contractor increase the repair bill to cover your deductible — what you pay before your home insurance coverage kicks in. In some cases, the homeowner may initiate the fraudulent activity or the contractor may agree to “cover” the deductible to secure the homeowner’s business. Either way, inflating the cost of repairs is fraud.

Example: During a rainstorm, lightning strikes James’ roof and he files an insurance claim. James finds a contractor who will charge $2,500 to complete the roof repairs but James doesn’t want to pay his $500 deductible. He convinces the roofing contractor to bill the insurance company for $3,000. James “pays” his $500 deductible but makes it back in the $3,000 check the insurance company issues to him.

Filing an insurance claim but failing to disclose that the losses occurred due to commercial activity is fraud.

4. Inflating Your Losses

An insurance claim can be legitimate but it turns fraudulent when the homeowner inflates their losses to squeeze out a higher settlement from their insurer.

Example: A kitchen fire consumed John’s kitchen and part of the living room. John thought this was a good opportunity to purchase a new television using his insurance settlement. However, his TV was unaffected by the fire. John burned his current TV’s electrical cords to claim it as one of the personal belongings lost in the kitchen fire.

5. Hiding Commercial Activity From Your Insurer

Home-based commercial activity, like operating a consulting firm or bakery from your home, is not covered unless you purchase the appropriate coverage. Filing an insurance claim but failing to disclose that the losses occurred due to commercial activity is fraud.

Similarly, your homeowners insurance policy should not cover losses from renters. You will need to purchase an insurance endorsement for short-term rentals or a formal landlord policy for long-term rental arrangements.

Example: Sally runs a bakery business from her home and an industrial oven caused a kitchen fire while fulfilling a customer order. Normally, commercial activity would not be considered by a standard home policy. However, Sally never informed her homeowners insurance company of her bakery business. She files an insurance claim, claiming the damages were an ordinary kitchen fire while making dinner.

6. Intentional Damages

Wilfully damaging your property to profit from the insurance company is fraudulent activity. Whether it’s burning down your own house or staging a break-in, you should not be filing an insurance claim.

7. Including Pre-Existing Damages in a Claim

Filing an insurance claim and including damages from an earlier and unrelated event is considered fraud. You can only claim reimbursement for damages directly related to the event for which you are filing a homeowners insurance claim.

Example: Jane’s neighborhood experienced a strong windstorm, causing stray branches to dislodge from trees and break one of her windows. When filing a claim, Jane decided to include some damages to the side of her house that was already present when she purchased the house.

Fraud has increased insurance premiums for all consumers by $400 to $700 annually.

8. Agent Fraud

A fraudulent agent may sell you a fake policy and pocket your premiums or sell you a legitimate policy and embezzle the premiums. If you work with an insurance agent or broker, always request their license number and cross-check it with your state’s Department of Insurance database.

9. Not Disclosing Your Pool or Trampoline

If you purchase a trampoline or install a swimming pool, you must tell your home insurance company because these amenities increase your liability exposure. Say you never told your insurers about your pool or trampoline. If you file a liability claim because somebody slipped and fell on wet concrete or fell off the trampoline onto cement, your insurer may deny your claim or cancel your policy outright.

Your insurance company needs to factor additional liability risks and increase your premium accordingly.

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How Can I Protect Myself Against Homeowners Insurance Fraud?

Being honest in how you represent yourself to your insurance company and watching for unscrupulous contractors and insurance agents can help you avoid homeowners insurance fraud. Keep the tips below in mind:

• Double-check your insurance application form for mistakes.
• Notify your insurance company before purchasing a trampoline or installing a pool.
• Do not work with any contractors who agree to cover your deductible.
• Be honest in declaring the value of your losses when reporting an insurance claim.
• Check an insurance agent’s or broker’s credentials before working with them.

You are committing fraud if you have your repair contractor increase the repair bill to cover your deductible.

How To Report Suspected Home Insurance Fraud

Each state will have its protocol for reporting insurance fraud. In California, for example, you would need to obtain a Suspected Fraudulent Claim Referral Form (FD-1) and then submit it to their state’s fraud division office.

Reporting insurance fraud is more often related to auto policies.In addition to committing some forms of fraud, drivers can also fall victim to car insurance fraud committed by unscrupulous brokers and repair shops.

What Are the Penalties for Committing Home Insurance Fraud?

In some states, an insurance fraud conviction is a serious crime and can result in imprisonment and a fine. For example, home insurance fraud in California is a felony punishable by up to five years in state prison and a $50,000 fine.

Your insurance company may deny your claim or cancel your policy. If you submit a claim and it was denied, you are financially responsible for your losses, especially if they were self-perpetuated. In more severe cases, your insurer may terminate your policy or report you. A lapse in coverage will lead to higher insurance premiums when you purchase a new policy.

Dishonest homeowners may stage a break-in into their home or vehicle to profit from the subsequent insurance claim.

Key Takeaways Homeowners insurance fraud can take many forms, including inflating your losses in a covered accident, staging a burglary and causing intentional damages to your property. Always be honest in how you represent your risk to your insurance company to avoid committing home insurance fraud. Committing home insurance fraud is a felony in some states and can result in fines and imprisonment.

It’s time to find a home insurance policy at a better price. SmartFinancial’s free online comparison tool helps homeowners like you shop for home insurance smarter and faster. Just enter your zip code below or call 855.214.2291 to receive your free homeowners insurance quotes.