Auto Insurance Fraud: What are the Consequences?
Auto insurance fraud has become an increasingly serious problem in the US. In fact, car insurance fraud costs insurance agencies billions of dollars every year. The bad news is that they compensate for those losses for by charging high premiums to their members. That makes it very likely that a portion of your premiums is or has been used to pay for the cost of someone else’s insurance fraud—even if you’ve never committed any fraud yourself!
To keep your auto insurance policy rates affordable, you need to know exactly what constitutes fraud—especially because some of it may come as a surprise. Stay with us as we take a look at common types of car insurance fraud—as well as the financial and legal consequences of each.
What Constitutes Car Insurance Fraud?
Auto insurance fraud is an illegal act in which someone lies or intentionally misrepresents facts related to a claim for the purpose of financial gain. Because it’s so common within the insurance industry, providers work hard to investigate and expose fraudulent insurance claims. The exaggeration of injuries after an accident is the most common type of auto insurance fraud. However, there are two main categories for car insurance fraud—hard and soft:
- Hard insurance fraud: This refers to the most serious type of auto insurance fraud. In this scenario, an individual intentionally devises a situation that will result in a claim on a car insurance policy. Hard insurance fraud is less common than soft insurance fraud, but it has still cost insurance providers millions of dollars. Hard fraud crimes can result in severe fines, as well as jail time. Specific examples of hard fraud include:
- Vehicle destruction: This occurs when a car is intentionally damaged or destroyed. The goal here is to have the insurance company pay for a new one.
- Falsely reported stolen vehicle: This type of fraud occurs when an owner disposes of the vehicle or sells it, and then claims it was stolen. This type of fraud is intended to pay in two ways: 1) through collecting the insurance payout for a stolen vehicle and 2) through the sale of the original car.
- Staged car accidents: In this type of a fraud, a driver plans an intentional collision, with the intention of benefitting from the claim payout.
- Soft insurance fraud: Unlike hard fraud, which involves the planning of claim-worthy events, soft fraud usually takes advantage of a situation that has already occurred. This type of fraud results in less severe consequences than hard fraud, but it’s also more common because it’s easier to commit and can be difficult to detect. Some common examples of soft insurance fraud include:
- Exaggerating injuries: This occurs when a person who was legitimately injured in an accident exaggerates the extent of those injuries in order to receive extra compensation. It’s often difficult to determine the true extent of the damage, especially in cases where neck and back injuries are involved.
- Providing false information: Car insurance premiums can cost more or less depending on factors such as location and driving habits. As a result, this type of fraud occurs when someone makes false claims on their application with the goal of getting a lower rate. However, it can often occur without malicious intention. For example, if you move to an area with lower premium rates and forget to update your insurance company, you may be committing soft insurance fraud.
- Over-reporting: This occurs when a driver inflates the value of stolen property or includes old damage as part of a new claim.
- Omitting drivers: When an individual fails to inform his or her insurance company of all the drivers in the household, it may count as soft fraud.
Common Convictions for Car Insurance Fraud
When you file a claim, your insurance agent will assign a claims adjuster to follow up on your case. The adjuster’s job is to investigate your claim and ensure that nothing about it is fraudulent. If any fraud is found in your claim, it will be immediately denied. Depending on the severity of the fraud, your insurer may drop you from your insurance, or even pursue legal action against you.
The penalties for insurance fraud vary widely depending on the state where it occurred, the amount of money fraudulently sought or obtained, and the criminal history of the defendant. In the eyes of the law, it will be categorized as either a misdemeanor or felony, depending on the severity of the fraud. Here are the consequences of each penalty:
- Misdemeanor penalty: The majority of auto insurance fraud convictions are misdemeanors, which applies to cases of soft fraud. As explained above, this can mean exaggerating the details of a claim or being deceptive on an insurance application. A misdemeanor for car insurance fraud can result in a fine or probation. The fine will vary, depending on the seriousness of the offense, but with a misdemeanor it won’t exceed $15,000. In more extreme cases, this type of insurance fraud may result in a jail term, although it will never exceed 5 years.
- Felony penalty: This type of insurance penalty applies to instances of hard auto insurance fraud, such as willful destruction of property or the fabrication of a loss. However, the cost of a felony conviction for car insurance fraud is much more severe than for a misdemeanor. Instead of probation, individuals charged with felony fraud will likely serve time in jail—usually between 5 and 10 years, although terms vary from state to state. Steep fines are also common, ranging from tens to hundreds of thousands of dollars.
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If your car insurance provider finds that a person made a fraudulent claim on their auto insurance – they will most likely cancel the coverage policy and no longer insure them in the future. If the fake claim is severe enough, the insurance company may even issue a lawsuit or get law enforcement involved to handle the issue.
Michael Giusti is a senior insurance analyst, business journalist, and university professor with over 20 years of experience. He serves as department chair at Loyola University New Orleans and contributes to Insurance Thought Leadership, U.S. News, and other leading financial outlets.
