Insurance Fraud: The Crime We All Pay For

Insurance fraud is a crime, and honest consumers and businesses pay the price.

Insurance fraud occurs every day and in every state. People of all races, incomes and ages are victimized. Insurance fraud costs Americans at least $80 billion a year, or nearly $950 for each family, the Coalition Against Insurance Fraud estimates.

But look beyond the high dollar costs… you’ll also see honest, hardworking Americans whose lives, businesses, careers and families are damaged or even ruined by insurance fraud crimes.

• People lose their savings. Trusting citizens are bilked out of thousands of dollars, often their entire life savings, by insurance investment schemes. The elderly are especially vulnerable.
• Health is endangered. People’s health and lives are endangered by swindlers who sell nonexistent health policies or perform quack medical care to illegally inflate health insurance claims.
• Premiums stay high. Auto and homeowner insurance prices stay high because insurance companies must pass the large costs of insurance fraud to policyholders.
• Consumer goods cost more. Prices of goods at your department or grocery store keep rising when businesses pass higher costs of their health and commercial insurance onto customers.
• Honest businesses lose money. Businesses lose millions in income annually because fraud increases their costs for employee health coverage and business insurance.
• Innocent people are killed and maimed. People die from insurance schemes such as staged auto accidents and arson — including children and entire families. People and even animals also are murdered for life insurance money.
• Employees lose jobs. People lose jobs, careers and health coverage when insurance companies go bankrupt after being looted by fraud thieves.

What is Fraud?

Insurance fraud occurs when people deceive an insurance company or agent to collect money to which they aren’t entitled. Similarly, insurers and agents also can defraud consumers, or even each other. Insurance fraud can be "hard" or "soft."

Hard Fraud. Someone deliberately fakes an accident, injury, theft, arson or other loss to collect money illegally from insurance companies. Crooks often act alone, but increasingly, organized crime rings stage large schemes that steal millions of dollars.

Soft Fraud. Normally honest people often tell "little white lies" to their insurance company. Many people think it’s just harmless fudging. But soft fraud is a crime, and raises everyone’s insurance costs. Consider…

A car owner inflates a fender bender claim to cover the deductible, or they understate how many miles they drive annually to lower their auto premium… A homeowner inflates the value of stereo equipment stolen during a robbery… Or a printing business lists fewer employees than it really has in order to pay lower workers compensation premiums.

Fraud is Big

Insurance fraud is hard to measure because so much goes undetected, and complete research has yet to be done. Still, we have enough evidence to know that fraud is widespread -- and expensive.

Healthcare fraud alone costs Americans $54 billion a year, the Coalition Against Insurance Fraud estimates.

More than one third of people hurt in auto accidents exaggerate their injuries. This adds $13-$18 billion to America’s annual insurance bill, notes a study by the Rand Institute for Civil Justice.

Nearly one third of doctors exaggerate the severity of a patient’s illness to help the patient avoid early discharge from a hospital, according to the Journal of the American Medical Association.

Why Is Fraud So Big?

Low-Risk Crime. Insurance cheaters view insurance fraud as a low-risk, high-reward game, and far safer than drug trafficking or armed robbery. Consider:

• Six states still don’t have specific insurance fraud laws, thus discouraging many prosecutors from tackling tough fraud cases.
• Courts are getting tougher on convicted schemers, but too often jail sentences still are light, with courts often reserving space in overcrowded prisons for people convicted of more-violent crimes.
• Professional societies overseeing doctors and lawyers often are reluctant to discipline peers convicted of insurance fraud.

Low Legal Priority. Prosecutors often give top priority to combating drugs, violence and other high-profile crimes. Though prosecutors are tackling more fraud cases than in the early 1990s, too many prosecutors still believe insurance crimes often are too complex and technical to successfully prosecute.

People Tolerate Fraud. Too many consumers believe insurance fraud is justified. This environment of tolerance makes it much easier for con artists to operate safely. Research by the Coalition Against Insurance Fraud reveals:

• Two of three Americans tolerate insurance fraud to varying degrees;
• Two of five Americans want little or no punishment for insurance cheats; they blame the insurance industry for its fraud problems because they believe insurers are unfair.

Fighting Back - Insurance Companies Respond

Fraud-busting units. Most insurers have made fighting fraud a priority, more than tripling anti-fraud spending in recent years. Most insurers have created special fraud-busting units, often staffed by former detectives and police officers.

Educate consumers. Many insurers actively educate consumers how to detect and protect against fraud, and often sponsor active fraud hotlines so people can phone in tips.

Train employees. Most insurers train employees and alert insurance agents to spot fraud.

Track down cheaters. Insurers also sponsor the National Insurance Crime Bureau (NICB). The NICB is increasing the number of fraud convictions by gathering detailed data about suspected fraud crimes, and referring them for prosecution. The NICB also runs a national consumer fraud hotline.

Fighting Back - States Increase Pressure

More fraud bureaus. State insurance regulators have created 37 fraud bureaus in 45 states, whose job is to investigate and hunt down fraud.

Closer scrutiny of companies. State regulators have created a model law that makes it harder for con artists to set up fake insurance companies. Many states also are scrutinizing insurance company finances and market practices more closely.

Tougher fraud laws. Increased crackdowns in the 1990s uncovered far more insurance fraud than anyone realized existed. To give prosecutors better legal tools to convict crooks, the Coalition Against Insurance Fraud developed a tough model state fraud law. Some 15 states have adopted or strengthened their insurance fraud laws based on the coalition’s model. Among other provisions, this model:

• Creates state fraud bureaus that help hunt down fraud artists and build strong cases against them. Many fraud bureaus even have power to subpoena and fine crooks.
• Requires insurance companies to develop thorough plans for preventing and detecting fraud.
• Requires insurance applications and claim forms to warn that fraud is a serious crime.
• Provides immunity to insurers when sharing fraud information with other insurers, investigators and law enforcement.
• The State of New Jersey requires signing a fraud statement as part of the application process.

Fighting Back - Feds Tighten Up

Tougher health fraud penalties. Stopping widespread Medicare and Medicaid fraud is a special focus of federal efforts. Congress has enacted tougher penalties and expanded current federal health insurance fraud laws to cover all payers.

More pressure on white-collar crooks. Federal law imposes stiff prison terms and fines for white-collar criminals who loot insurance companies. The law also heavily penalizes anyone who gives false financial information to state insurance regulators, and forbids convicted insurance felons from returning to insurance without permission.

Information sharing. The federal government and health insurers share fraud info on a large scale, thus helping them discover hundreds of hidden schemes and build stronger cases for prosecution. The Justice Department began sharing with health insurers its own field intelligence about health frauds with health insurance companies in 2000. The federal government further tightens the net by collecting and sharing vast amounts of data covering convictions and other actions against health providers under a landmark 1996 federal law.

Report Card: Progress?

The nation’s improved fraud-fighting efforts are working. More insurance crooks are being convicted every year, and billions of dollars stolen from honest citizens and businesses are being recovered. Precise figures aren’t available, but growing evidence shows real progress on many fronts. Consider:

• State fraud prosecutions have tripled over the last three years, according to a new study of state fraud bureaus by the coalition.
• Nearly nine of 10 fraud cases lead to convictions in Massachusetts.
• Healthcare insurers have saved policyholders more than $11 for every dollar spent fighting fraud, a 50-percent increase over 1995, notes the Health Insurance Association of America.
• Fewer people believe it’s ok to inflate insurance claims by small amounts to recoup their deductible or premiums, according to the Insurance Research Council.

The Future: Still Dangerous

Despite the encouraging progress, insurance fraud will remain a vast and dangerous criminal enterprise. Here are several fraud trends consumers should know about:

The Internet will hatch new insurance swindles as computer-savvy consumers buy from online insurance companies that may be virtually untraceable. Young people raised on the Internet will be the vanguard of this crime wave.

The global economy is igniting huge insurance money-laundering schemes, often involving fake insurers that bilk people out of millions. Tracking them across international borders will pose a big problem for U.S. law enforcement.

The large population bulge of aging Boomers needing more medical attention will keep health fraud near the forefront of the largest and costliest fraud crimes.

The elderly will remain one of the largest targets of insurance swindles. Investment schemes are among the newest approaches: Thousands of seniors are investing in bogus life insurance policies that don’t exist or were obtained illegally. Many seniors also are investing in fake promissory notes sold by insurance agents and guaranteed by non-existent insurance companies.

Everyone’s Solution

Everyone pays for insurance fraud, and so everyone must join in stamping out these swindles. Consumers, lawmakers, insurance companies, doctors, lawyers and many more must be part of the answer. Insurance fraud will disappear only when criminals realize fraud is a fast highway to jail, not an easy road to riches.

Protect Yourself: Stay Alert

You can protect yourself against insurance scams: Stay alert, ask questions, and go slow or back out if an insurance transaction seems suspicious.

• Never sign blank insurance claim forms.
• Demand detailed bills for repair and medical services. Check closely for accuracy.
• Make sure "free services" aren’t actually hidden in your insurance bill.
• Be wary of buying insurance from door-to-door or telephone sales people.
• Be suspicious if the price of insurance seems too low to be true.
• Contact your state insurance department to make sure the agent and company are licensed.
• Keep your insurance identification number secret; insurance crooks can steal it and involve you in scams.
• Be wary if a car suddenly pulls in front of you, forcing you to follow dangerously close. You may be set up for a staged accident.
• After an auto accident, be careful of strangers who offer you quick cash or urge you to see a specific medical clinic, doctor or attorney. They could be part of a fraud ring.

Source: Provided by Coalition Against Insurance Fraud, 1012 14th St., NW., Suite 200, Washington DC 20005

(back to top)