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The Many Colors of Insurance Fraud – And How to Prevent It

According to the Coalition Against Insurance Fraud, a division of the Insurance Resource Council, one in five Americans or 45 million people say it is okay to defraud an insurance company in certain circumstances.  Furthermore, according to a 2008 Four Faces study by the IRC, consumer tolerance of of specific insurance schemes has increased over the past ten years. To be more specific, the study says there is a decline in the number of Americans who believe it is unethical to:

  • misrepresent facts on an insurance application to lower their premiums (82 percent today, down from 91 percent in 1997);
  • file a claim for damage that occurred before the damage was covered (85 percent, down from 91 percent);
  • inflate a claim to cover the deductible (84 percent, down from 91 percent); and
  • misrepresent an incident in order to be paid for an uncovered loss (84 percent, down from 92 percent).

Insurance fraud comes in many different shapes, colors and sizes.  The one common denominator is that, regardless of the form it takes, it costs insurers, and ultimately you, the consumer, billions of dollars per year.  What are some of the different types of fraud that take place and what can be done to prevent it?

Insurance fraud cuts a broad swath through the insurance industry and can occur anywhere in the insurance transaction from fraudulent applications for coverage to fraudulent filing of claims.  Insurance fraud is not only committed by the insurance buyer, but by attorneys, physicians, and other third parties to the insurance transaction.  Even insurance company employees have been caught bilking their employers. Following are some sobering statistics:

  • Fraudulent and abusive auto-injury claims are a costly problem. Fraud and “buildup” added $4.8 billion to $6.8 billion in excess payments to auto injury claims in 2007. That means 13-percent to 18-percent increases in payments under private-passenger auto policies from 2002. (Insurance Research Council, Nov. 2008)
  • Auto insurers lost $16.1 billion due to premium rating errors in private-passenger premiums in 2007. Premium rating errors account for 10 percent of the $166 billion in personal auto premiums. Fraud accounts for a portion of these losses. Some drivers will seek to lower their premiums by schemes such as deliberately misrepresenting mileage driven, how the vehicle is used and where it’s registered. (Quality Planning Corporation, 2008)
  • More than $2.4 billion in recoveries for fraud, waste and abuse in federal healthcare programs are expected for the first half of FY 2009 (October 2008 through March 2009). Some 1,415 individuals and organizations also were excluded from federal programs for fraud abuse; 293 criminal actions were brought, as were 243 civil actions. (Semiannual Report to Congress, Office of Inspector General, Department of Health and Human Services, Office, 2009)
  • Medicare and Medicaid lose an estimated $60 billion or more annually to fraud, including $2.5 billion in South Florida. (Miami Herald, August 11, 2008)
  • Medical identity theft comprises about 3 percent (249,000) of 8.3 million overall victims of identity theft. (Federal Trade Commission, Identity Theft Survey Report, 2007)

With the advent of the Internet, an aging population, and other trends making insurance fraud a lucrative business, it will be difficult to completely eradicate the problem. Federal and state authorities, insurers, and consumer watchdog groups are all working diligently to stem the tide of insurance fraud.  Here’s what you can do:

  1. First, and most obvious is to not commit fraud.  The temptation to lie on an insurance application to get a better rate, an example of what is called soft fraud, should be tempered by the fact that it increases the risk of insurers canceling or even rescinding coverage upon evidence of the fraud, not to mention the legal implications.
  2. Ask for detailed medical and repair bills and examine closely for unusual or suspicious charges.
  3. If you are involved in or witness an accident that appears to be of a suspicious nature, and you feel that it may have been staged, report the incident to local law enforcement.
  4. Report fraud when you become aware of it.   If your state does not have a hotline, your insurance company probably does.  So does the National Insurance Crime Bureau.  A hotline exists for Medicare and Medicaid, and you can go on the Coalition Against Insurance Fraud’s website for further information on reporting fraud (www.insurancefraud.org).
  5. As with credit card and social security numbers, guard your insurance identification card numbers and report any theft.

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