Auto Insurance Fraud: What It Costs You

Auto insurance fraud adds $200-$300 a year to your individual insurance premium, according to estimates from the National Insurance Crime Bureau (NICB). But that's a paltry sum compared to its overall impact, because every business has to pay for insurance as well.

When fraud boosts their insurance rates, businesses have to charge you more for goods and services, according to the NICB. That means that not only consumer goods and insurance premiums, but taxes and anything else with a dollar sign in front of it are affected by insurance fraud.

Forms of Fraud

Auto insurance fraud is generally classified as "hard" or "soft." Hard fraud, which involves staging or inventing an event that would be covered by insurance, includes:

• Staged accidents, such as an intentional rear-end collision
• Phony injury claims, where criminals lie about trauma sustained in an accident
• "Jump-Ins" — inventing injuries to people who were not in the vehicle at the time of the accident
• Claiming a one-car accident was a hit-and-run

An increasingly common scam that has proliferated along with the number of people who are upside down on their car loans is "owner give-up." A policy holder secretly abandons their car, possibly by dumping it in a lake or even paying an arsonist to torch it, and then reports it stolen. If the insurer pays out, the policy holder can pay off their car loan without damaging their credit rating.

Staged accidents are the most harmful type of insurance fraud for the average driver, as a victim of a staged accident could be injured or killed. Even if the victim was not at fault, their premiums may rise or their policy could be cancelled. They can also lose wages and be bogged down in an endless chain of claims paperwork and vehicle repairs.

Soft fraud, also known as "build up," is more opportunistic, involving policy holders who pad an otherwise legitimate claim. They may:

• Add previous damage to a current claim
• Conspire with a body shop and/or claims adjuster to pad a repair estimate
• Conspire with doctors to obtain unnecessary medical treatments

So it's not just the policy holders who participate in auto insurance fraud. Organized fraud rings have become a major national problem, and can include dishonest doctors and lawyers, auto mechanics, even insurance salespeople.

Funding the Fight

The nation's property/casualty insurers have created special investigative units (SIUs) to fight insurance fraud, and many states have dedicated bureaus and specific laws and regulations to combat fraud. While this all sounds good, the sophisticated systems designed to protect insurance companies (and their customers) from fraud can also take a toll on the policy holder who's filing a claim.

"We don't want to go out with the attitude that our policy holder is lying," says Peter Van Patten, a director for Nationwide Insurance's Claims SIU. "But if there's a red flag that comes up — like the law enforcement agency thinks it's not legitimate, or there's reasonable cause to believe that it's not, we'll get an opinion from legal...and if things build up, we have to make a referral to the state insurance fraud bureau."

A claim flagged as potentially fraudulent takes longer to settle because it has to be investigated, according to Victoria Kilgore, director of research at the Insurance Research Council. While a claim is under investigation, an insurance company can request medical or police records. Meanwhile, the policy holder, who could be facing expensive medical and vehicle repair bills, waits for the insurer to reimburse him or his doctors. If the policy holder gets fed up waiting or is wrongly denied, Patten says, he can file a suit or take legal action. That's a heavy financial and emotional burden, if you happen to be wrongly accused.

Ironically, insurance companies can be so vigilant concerning fraud that they occasionally victimize the victims. We've seen stories of honest drivers whose cars were stolen, only to be accused by both insurers and police of dumping their car and filing a fraudulent claim. This occurred particularly when the so-called "undefeatable" anti-theft transponder chips first became available in vehicle key fobs. Insurance companies assumed — incorrectly — that anyone who filed a vehicle theft claim but still possessed all their keys must be lying.

Cost to Consumers

Fraud is the second most costly white-collar crime in America after tax evasion. And the specific problem of auto insurance fraud is so widespread that almost a quarter of bodily injury claims resulting from vehicle crashes, and at least a tenth of property/casualty insurance claims, are fraudulent, according to industry studies.

That cost adds up. The Insurance Research Council estimates that excess payments made by auto insurers due to fraud totaled as much as $6.8 billion in 2007. But any statistic involving auto fraud dramatically understates the problem, because it relates only to claims already paid, not to claims dropped by the filer or dismissed due to suspicion of fraud.

And none of these estimates incorporate the "soft" labor costs involved in dealing with fraud, including the drain on businesses, law enforcement, the civil justice system, regulatory agencies and local emergency services. While auto insurance fraud seems to most people like an "invisible" crime, its true cost to the consumer is far higher than we may ever know.