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It's Not Harmless - It's Insurance Fraud

By Michelle Martin, InsWeb, February 2002
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It may seem like a small matter - bumping up the value of the stereo that was stolen from your car, for example, or claiming that old damage you caused to your car just happened in a new accident - but it has a serious name: Insurance fraud.

Not only that, but it's a felony. And it contributes to how much we all pay for insurance.

According to the Insurance Information Institute (III), property and casualty insurance fraud accounted for $24 billion in illegal claims - about 10 percent of all claims in 1999. The III also said that figure is likely to increase, since fraud occurs more frequently during times of economic downturn.

The stakes are high - the penalties for committing fraud include jail time and stiff restitution fees. But that is apparently not stopping an increasing number of people from committing various types of fraud. Also, public attitudes are changing. The III found in a recent survey that 40 percent of respondents thought it was okay to overstate the dollar amount of their insurance claims to make up for the money they had paid in premiums. The findings represented a sizable increase over the past eight years in the number of people who deemed such behavior acceptable.

Fraud is prevalent partly because there are so many ways to commit it. Among the most common: Inflating claims; lying or misrepresenting on insurance forms or applications; submitting false claims for damage or injuries that never occurred; and staging fake accidents or thefts.

The multitude of possible ways for fraud to occur means there are many people at points along the way who have the opportunity to be dishonest.

A few examples:

  • Repair shops can defraud insurance companies by inflating the dollar amount of parts or labor in repairs.
  • Doctors can overbill for medical treatment received by accident victims.
  • "Ambulance chasers" can solicit business for medical facilities or lawyers by contacting accident victims and urging them to sue or to see specific medical treatment.
  • Claims adjusters or appraisers can misrepresent a car's value or the amount of damage to it.
  • Passengers and witnesses can provide false testimony about what occurred in the event of a theft or accident.

The problem is, everyone pays for fraud, even though it's committed by only a small percentage of people. When insurance companies pay fraudulent claims, their total expenditures go up. The rates they charge their customers are based in part on how much they must pay out in claims - so when their payout goes up, so do rates. (It may seem frustrating, but the fact is that insurance companies are businesses, and they exist to make money. If they don't make enough profits to stay in business, they cannot exist.)

As the incidence of fraud rises and profits decrease, companies struggle - and respond in very noticeable ways that affect the innocent as well as the guilty.

Last month, Allstate raised its auto insurance rates in New York an average of 10.5 percent to combat what it called "skyrocketing" fraud resulting from the state's no-fault insurance law. That law gives people 90 days to report an accident, and gives health care providers six months to file paperwork after treating accident victims. The large window allows people more time to make fraudulent claims, and makes researching them long after the fact more difficult, insurance officials said.

In Florida, auto insurance fraud costs an estimated $1 billion each year. The state department of insurance says that personal injury protection fraud costs every auto insurance consumer in Florida an extra $240 annually.

Two new state laws there are designed to reform the current system and improve those numbers. One requires clinics that treat accident victims to get a state license and charge state-approved fees for treating victims. Another new Florida law requires that police accident reports be available only to those personally involved in an accident immediately after the accident (previously, ambulance chasers were obtaining reports to solicit business).

In California last year, Allstate Insurance Company won an $8.2 million settlement against three doctors and nine clinics found to have inflated bills and charged the insurer for services they didn't perform. The judgment was the first under a law passed in 1995 under which the penalty for a fraudulent medial insurance claim is three times what the medical bills were under the alleged fraud, plus $5,000-$10,000 per violation.

Other states are addressing the topic as well. As a consumer, are you stuck with footing the bill for those who commit fraud? Unfortunately, yes - but you can help reduce fraud by reporting any activity you suspect to be fraudulent. Contact your state department of insurance or go to to learn how to make complaints or file reports.

A Resource That Will Work for You

The National Association of Insurance Commissioners, NAIC, recently launched a Web site designed to give consumers a user-friendly resource for researching insurance companies, learning about industry news and making complaints.

The NAIC is made up of insurance regulatory officials from all 50 states, Washington D.C. and four U.S, territories. Its objective is to protect consumers and contribute to the financial stability of the insurance industry through its legal, actuarial, financial, computer and research services as well as its economic expertise.

That all adds up to a lot of experts with your best interest in mind. Visit the site at

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