Insurance fraud occurs when a person or entity makes false insurance claims in order to obtain compensation or benefits to which they are not entitled. Insurance fraud is committed in many forms, but regardless of the type, it is considered a serious crime in all jurisdictions. To explore this concept, consider the following insurance fraud definition.
Definition of Insurance Fraud
- The wrongful or criminal deception of an insurance company for the purpose of wrongfully receiving compensation or benefits.
1300-1350 Middle English fraude
What is Insurance Fraud
The term insurance fraud refers to the commission of any act with the intent to obtain an outcome that is favorable, but fraudulent during an insurance claim. Insurance fraud may entail a person filing a false insurance claim altogether, or exaggerating their damages, injuries or other losses in order to receive benefits. Many people fail to consider that insurance fraud can also apply to an insurance company knowingly denying benefits that are, in fact, due.
The primary reason that people commit insurance fraud is to gain financially. Many people who maintain an insurance policy year after year come to believe that, because they have paid premiums for so long, they deserve to be compensated in the form of an insurance claim. Sometimes the claim is legitimate, but the person will tries to increase the amount of compensation by claiming more severe injuries or greater losses than actually occurred. In some instances, people even destroy their own property, if the payment they expect to receive from their insurance company holds a greater value to them.
Types of Insurance Fraud
There are many types of insurance fraud, but the judicial system often categorizes them as either hard fraud or soft fraud. Hard fraud occurs when a person intentionally fakes an accident, theft, or injury to collect money from an insurance company.
For example, Tom has been unemployed for several months, when his old clunker car breaks down. Desperate for money to replace his car, Tom decides to make it look like someone broke into his house, then made a police report claiming theft of several expensive items. This type of hard insurance fraud is common, and is one reason insurance companies employ an insurance fraud investigator. Hard fraud cases almost always results in felony charges.
Soft fraud occurs when a person has a valid insurance claim, but falsifies part of the claim, or exaggerates damages in order to obtain the maximum benefits. Many people do not consider this to be as serious as hard fraud, but it is still a crime, and can result in increased insurance costs for clients.
For example, Elizabeth is involved in a minor collision when someone backs into her car in a parking lot. There is substantial damage to one part of her car, and she is uninjured. When it comes to filing the insurance claim, however, Elizabeth reports having neck and back pain, and even seeks treatment by a chiropractor to support her claim of injury. In this type of soft fraud, Elizabeth has a valid claim for damages to her vehicle, but she claims personal injury in an attempt to receive a higher payout.
Losses Due to Fraud
The exact amount of money lost due to insurance fraud cases is hard to determine, as the crime often goes unnoticed. The number of fraud cases that are actually caught is believed to be much lower than what actually occurs. Some organizations estimate that over $80 billion are lost each year to fraudulent insurance claims in the United States alone. It is estimated that approximately 10 percent of the insurance industry’s total annual losses are due to fraudulent claims. The high cost of fraudulent cases is passed down to insurance customers in the form of higher premiums, as the insurance companies try to recoup some of those losses.
Life Insurance Fraud
Life insurance fraud occurs when a person fakes their own death, or the death of another person, in order to receive life insurance payments from the insurance company. This type of fraud usually involves two or more people. When the life insurance company is notified of a death, the named beneficiary receives the insurance settlement. Many people committing life insurance fraud resurface years after the assumed death took place. If the person is caught, the person who aided in the life insurance fraud scheme is charged with the crime as well. Life insurance fraud would be considered hard fraud and, because of the dollar amounts involved, is a felony.
Health Insurance Fraud
Another common form of insurance fraud occurs in the health care industry. Health insurance fraud is the act of deceiving, misrepresenting information, or concealing information with the intent to receive benefits. Both patients and providers can commit health insurance fraud. When patients commit health insurance fraud, it is usually by falsifying or altering forms, concealing pre-existing conditions, or failing to report information.
Medical providers can commit health insurance fraud by making false claims, billing for services not provided or supplies not used, or altering existing claims. It is believed that most healthcare providers that commit health insurance fraud do so in order to receive greater compensation that they normally would from Medicare or Medicaid. This can be done in several ways, including:
- Billing for procedures not actually performed
- Billing for a higher-rated exam, when a minor exam was performed
- Billing for 1-hour psych exam when a 15-minute med check was performed
- Referring patients to specialists when it is not necessary
- Billing a family member’s insurance from which the patient has no benefits
- Scheduling unneeded follow-up visits for patients
- Ordering tests that are not needed
Health care fraud does not end with individuals and healthcare providers however, as health insurance companies themselves are known to have committed fraud. They do this by deleting claims from their system, not paying claims, and denying coverage even if the person meets the criteria.
Due to the amount of healthcare fraud that exists in the United States, Congress enacted the Health Insurance Portability and Accountability Act, more commonly known as “HIPPA,” which makes healthcare fraud a federal offense with serious penalties, to discourage people, providers, and insurance companies from committing fraud.
Auto Insurance Fraud
Auto insurance fraud is a commonly perpetrated fraud in the U.S., occurring when people fake traffic accidents, inflate claims, and even fake auto-related deaths in order to receive auto insurance payouts. Insurance investigators have even discovered some insurance adjusters getting in on the act for a fee. Perpetrators of auto insurance fraud use a variety of tactic, such as braking sharply in traffic to intentionally cause the car behind them to hit them in the rear. These fraudsters then claim that the other driver was at fault, and make a claim for damages to their vehicle, as well as to injuries that don’t exist.
Another tactic used by those who engage in insurance fraud is jumping in front of a moving car and claiming that the car hit them. Often, when unintentional accidents occur, and the victim will exaggerate their injuries to receive more money. They may even claim that the accident caused injuries that were in fact, caused by something else, in order to get their treatment paid for by the auto insurance company.
For example, Armando waits in a busy parking lot for someone who is obviously distracted to back out of a parking space. While the individual is backing up, Armando slips in behind the car, banging loudly on the rear, then falling down to the ground. Armando claims the driver did not look before backing, and pretends to have several serious injuries which require medical care. This type of claim for injury caused by negligence could bring a large payout in this type of fraud.
Property Insurance Fraud
Property insurance fraud occurs when an individual either destroys, or makes a false report of theft of, personal property items, a structure, or even a vehicle, in order to obtain benefits from the insurance company. This is usually done because the individual is strapped for cash, and the insurance payout is often greater than what the property would be worth to simply sell it. Additionally, when someone reports property loss or damage, they too inflate the claim, reporting property they never had, or reporting items as being a better brand, and newer than they actually were. The most common type of property insurance is a loss of a home due to arson. This may be because the insurance covers, not only the structure, but all of the property contained inside.
How to Report Insurance Fraud
A person who suspects another person is committing insurance fraud may wonder how to report insurance fraud. The person desiring to make a fraud report should gather all of the information available, including the suspect’s name, the names of any organizations or insurance companies involved, and the dates of the suspected fraud. Insurance fraud can be reported by contacting one or more of the following entities:
- The State’s Fraud Bureau
- The Insurance Company being defrauded
- Medicaid or Medicare if they were the agency involved
- The State’s Medical Board, if a provider or insurance company committed the fraud
- The National Insurance Crime Bureau at 1-800-TEL-NICB (1-800-835-6422)
Insurance Fraud Investigator
An insurance fraud investigator may be employed by insurance companies or other agencies, such as the fire department or local police. Some private investigators also investigate insurance fraud, and can be hired by individuals. Insurance fraud investigators are trained to look for specific signs that indicate fraud has occurred. Insurance adjusters who have some suspicion that a claim is fraudulent often have the company’s insurance fraud investigator look into the circumstances of the claim before making a payout. Investigation may continue, or even begin, after an individual has received compensation from the insurance company.
Penalties for Insurance Fraud
Penalties for insurance fraud cases vary, depending on several factors of the claim, including the amount of loss due to the fraudulent act, and the laws of the state in which it was perpetrated. Soft fraud is classified as a misdemeanor in most states, and may be punishable by a year or less in jail, fines, community service, and probation. Hard fraud, on the other hand, is a felony, with more severe punishments, such as more than one year in the state prison, large fines, and restitution. Many fraud causes contain elements of other crimes which can result in multiple criminal charges.
Real Life Insurance Fraud Cases
Fake Surgeries and Narcotics
In the early 2000s, Dr. David Wexler, a dermatologist practicing in New York City, paid drug addicts to allow him to use their names for fake insurance claims. The doctor billed insurance companies to the tune of over $400,000 for minor surgeries he never performed. In addition to small monthly kickbacks, the doctor provided a large amount of narcotic medications to the addicts to keep them coming back. Wexler was convicted and sentenced to 20 years in prison, and faced a fine of up to $1 million.
Insurance Fraud, Arson, and Murder
In 2007, Chicago grain-futures mogul, Marc Thompson, found himself in debt to the tune of nearly $680,000. Thompson decided to burn down his house and collect the insurance money. To make the fire seem more plausible, Thompson carried his 90-year old mother down to the basement, splashed an accelerant around the walls, and set the fire. Thompson’s mother died in the fire, after which he claimed she had committed suicide by torching the house.
When investigators looked into Thompson’s finances, they discovered the debts, which were not completely covered by the $600,000 insurance payout. They then found that Thompson had stashed the insurance money in an offshore bank account, then filed bankruptcy, wiping out that debt, leaving him with the proceeds of his fraud. Thompson was eventually charged with arson, fraud, and a host of other serious crimes. After conviction, Thompson was sentenced to 190 years in federal prison.
In May 2004, Carla Patterson and her son went to the Cracker Barrel restaurant in Newport News, Virginia, for Mother’s Day lunch. After being served soup, Patterson screamed loudly, saying she had found a dead mouse in her bowl of vegetable soup. Her son quickly snapped several pictures of the dead mouse, and alerted the news media, whose reports led to such a drop in the restaurant’s patrons that it nearly went out of business.
Patterson filed a lawsuit against the restaurant, attempting to get a $500,000 payout. Investigators, through extensive investigation and testing, proved that the rodent had been placed in the soup after it had been cooked, leading to charges of insurance fraud, among others. Although the Patterson’s scam deeply affected the restaurant’s employees, many of whom had their hours cut, or lost their jobs altogether, Patterson was sentenced only to a year in prison.
6 Things You Need to Know About Insurance Fraud Investigations
Insurance fraud is a thriving multi-billion dollar industry, costing the American economy over $ 80 billion in 2006 alone. It’s not just a few bad consumers hurting a few big insurance companies either. Insurance fraud can involve falsely denied payouts and lost paperwork by insurance companies, organized crime rings crashing cars, contractors over-billing, and your average Joe simply overestimating the value of his 1996 Ford Mustang. Insurance fraud increases premiums for consumers and makes whole system more costly – all thanks to a few dishonest actors. That’s where trained insurance fraud investigators (like those in the Trustify network) come in.
Here’s 5 things you need to know about insurance fraud investigation tactics, methods, and trends:
1. Insurance Fraud is Common
Fraud is more common than people think. This is in part because when people think of insurance fraud, they think of “hard” insurance fraud, which actually represents the minority of cases. Burning down a building or crashing a car on-purpose is what’s called hard insurance fraud because the source of the claim was entirely manufactured. On the other hand, soft insurance fraud is far more common because it consists of simply inflating the value of a legitimate claim. This type of fraud takes up the majority of an insurance fraud investigators’ time.
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We’ve Provided Private Investigators for 500+ Lawyers
We’ve uncovered corruption, vetted partners, tracked down witnesses, and searched the dark web for our clients. Find out what we can do for you:
2. Data Analysis Can Flag Cases – but it Can’t Prove Fraud
While statistical analysis and machine learning might be making the job of flagging potential fraudulent claims easier for medical, automotive, and general insurers, but the job of actually investigating insurance fraud still falls to specialized professionals like private investigators. When a potentially fraudulent claim comes across an insurance investigator’s desk they have a variety of tactics they can employ, from old school stakeouts to advanced web research to gather evidence to justify denying a claim, or even bringing legal action against a claimaint.
3. Stakeouts and Surveillance are Still Important Ways of Catching People
Why is surveillence so important? Surveillence can make sure someone’s claims are backed up by their behavior. If someone is claiming an injury, then their activities and lifestyle should be consistent with that. When it’s not (as it was in the case where we watched an individual claiming a back injury take a powerlifting class ), you most likely have a case of fraud – and surveillance can provide compelling evidence of that.
Often used to investigate workers compensation fraud or to look into medical claim stakeouts, surveillance is what it sounds like. An investigator watches and waits for someone to appear, and then follows them and observes them. Gathering evidence in this way is legal, but tricky. Follow your mark too closely and not only will you be “made”, but you could be charged with harassment. Private investigators know how to conduct this sort of surveillence safely and discreetly.
4. Social Media Can be Used to Catch Fraudsters More Often Than You Think
You’d think that people engaged in fraud would be careful – but you’d be wrong. From boasting about fraudulent claims to posting photos of themselves skiing while claiming a leg injury, you’d be shocked at how often people post incriminating evidence publicly on social media. This makes social media investigations an incredible valuable tool in an insurance investigator’s arsenal.
However, sometimes things get a little more complicated than simply screen-shotting some photos. For every person blithely uploading damning pictures and statuses, there are people with enough smarts to attempt to hide evidence of their wrongdoing. Fraudsters have been known to create alternate social media accounts to hide their actions, or up their privacy settings in the hopes of avoiding scrutiny.
Fortunately, private investigators are skilled at tracking down all social media accounts associated with an individual, and collecting usable evidence from them. Even when someone is attempting to hide activities or evidence of fraud, slip ups can still be found with careful analysis. For instance, friends or family could post photos of them they aren’t aware of, or the location metadata from a photo might provide evidence of travel that’s inconsistent with their claim.
5. Background Research Can Point Investigators in the Right Direction
Statistical analysis might raise some red flags , but getting into the nitty-gritty of someone’s particulars can reveal that an individual is worthy of further investigation. For instance, car crash rings operate in organized groups over extended periods of time. A routine check into the arrest and criminal record of an individual could reveal convictions for fraud in the past that might indicate that they are still an active member of one of these organizations.
Other parts of a suspected fraudster’s past can indicate a claim is likely to be false or inflated. Investigators can look into someone’s financial well-being, check credit scores, find past convictions, and even find out whether someone has a history of disputes with other insurance companies. This type of financial evidence can provide interesting insights into a case – for instance, financial distress is a major cause of insurance fraud, and a history of past disputes could indicate a propensity to fraud.
Information from background research may not provide absolute proof of fraud, but it almost always gives grounds for placing a claim under even greater scrutiny. Armed with this data, an insurance investigator can act decisively to determine whether a claim has merit.
6. Hands-on Investigations Get Answers in Difficult Cases
At the end of the day, an insurance investigation needs to prove that whatever is stated by all parties is complete and correct – and sometimes this means putting boots on the ground. Fortunately, this sort of field work is a private investigator’s speciality. Fieldwork can involve interviewing each person involved with the claim, from claimant to agent to contractors and more, making sure that their stories stack up.
This sort of work can uncover unexpected twists in a case. Sometimes the claimant is an unwitting victim of overbilling and other sorts of accounting fraud from a contractor like a doctor or an auto repair shop. Sometimes both contractor, claimant, and insurance company are being defrauded by an unscrupulous insurance agent who’s selling fake or falsified policies. By talking to each participant, it’s often possible to find discrepancies in their statements that can lead to the quick identification of the fraudster.
Sometimes physical evidence is important too. Private investigators are skilled at collecting and analysing all sorts of useful information from a scene, including photos, paperwork, and more.
Insurance fraud investigations are an important part of any insurance company’s risk management strategy. Fraudulent claims hurt both the finances of the insurance industry, as well as the general public by raising premiums. In extreme cases, insurance fraud can directly affect the lives of those involved through unnecessary (and dangerous) medical procedures, and staged (but still deadly) automobile crashes. Insurance fraud investigators can sort out truth from fiction, saving both unwitting consumers and the insurance industry millions of dollars.