Insurance Handbook

The topic

Insurance fraud is a deliberate deception perpetrated against or by an insurance company or agent for financial gain. Fraud may be committed at different points by applicants, policyholders, third-party claimants, or professionals who provide services to claimants. Insurance agents and company employees may also commit insurance fraud. Common frauds include "padding" (inflating claims), misrepresenting facts on an insurance application, submitting claims for injuries or damage that never occurred, and staging accidents.

People who commit insurance fraud include:

• organized criminals who steal large sums through fraudulent business activities,
• professionals and technicians who inflate service costs or charge for services not rendered, and
• ordinary people who want to cover their deductible or view filing a claim as an opportunity to make a little money.

Some insurance lines are more vulnerable to fraud than others. Healthcare, workers' compensation, and auto are generally considered the most affected insurance sectors.

Cost of insurance fraud

For decades, estimates of annual insurance fraud costs may have been too low, lacking updates for inflation and other essential data components. A 2022 study by The Coalition Against Insurance Fraud (CAIF) indicates that insurance fraud can cost U.S. consumers $308.6 billion yearly. That amount includes estimates of annual fraud costs across several liability areas, including Life Insurance ($74.7 billion), Property and Casualty ($45 billion), Workers Compensation ($34 billion), and Auto Theft ($7.4 billion).

Auto insurance fraud

Auto insurers lose at least $29 billion a year, according to a 2017 study by Verisk, to premium leakage, the "omitted or misstated underwriting information that leads to inaccurate rates." Several types of information failures and fraudulent practices drive costs up, such as unrecognized drivers ($10.3 billion), underestimated mileage ($5.4 billion), violations/accidents ($3.4 billion), and false garaging to lower premiums ($2.9 billion). While not always a result of malicious or conscious actions, premium leakage creates problems for consumers, too—as much as 14 percent of all personal auto premiums can be attributed to the cost of covering premium leakage.

No-fault auto insurance is a system that lets policyholders recover financial losses from their own insurance company, regardless of who was at fault in a motor vehicle accident. However, in many no-fault states, unscrupulous medical providers, attorneys, and others pad costs associated with legitimate claims – for example, by billing an insurer for a medical procedure never performed.

Salvage fraud

Another common auto fraud involves vehicles damaged by storm flooding that later appear in used car lots and auction sales. Some states require "salvage only" on the titles of flooded vehicles, usually if the damage amounts to 75 percent of the car's value. Unscrupulous sellers may switch or clone the manufacturers' serial number plates and put them on a flooded but repaired vehicle. Or, they may resell a car with a salvage-only title in a state with more lax title standards. This practice is called "title washing."

Standardized state rules for titling vehicles are necessary to combat salvage fraud. In recent years, some states in hurricane-prone parts of the United States have adopted rules requiring the words "flood vehicle" on the titles of vehicles that have been water damaged and rebuilt. Before such a vehicle can be sold, the buyer must be notified in writing of the vehicle's past flood damage. However, if a state in the region does not have such strict laws, it can become a dumping ground for undeclared flooded vehicles.

After the hurricane season of 2005, the National Insurance Crime Bureau (NICB) created a database that stores vehicle identification numbers (VINs) and boat hull identification numbers (HINs) from flooded vehicles and boats. This information is available to law enforcers, state fraud bureaus, insurers, and state motor vehicle departments. The general public can access VINCheck®, an online lookup service, to determine if a vehicle may have been reported as a "salvage."

Another attempt to solve the problem of title washing is the National Motor Vehicle Title Information System (NMVTIS), a database that requires junk and salvage yard operators and insurance companies to file monthly reports on vehicles declared total losses. The program operates under the auspices of the U.S. Department of Justice and is administered by the American Association of Motor Vehicle Administrators. By 2019, this system included information on 99 percent of the U.S. vehicle population (based on 2019 Federal Highway Administration data), and 49 states were reporting data to the system.

Another form of salvage fraud can involve counterfeit parts, such as airbags. Industry observers say counterfeit airbags are produced for nearly every vehicle model. Unscrupulous auto body repair shops use these less expensive airbags and obtain reimbursement from insurance companies for legitimate airbags.

Healthcare fraud

Although healthcare insurance is generally outside the purview of property/casualty insurance, healthcare fraud affects all types of property/casualty insurance coverage that include a medical care component, such as medical payments for auto accident victims or workers injured in the workplace.

Fraud and abuse take place at many points in the healthcare system. Doctors, hospitals, nursing homes, diagnostic facilities, medical equipment suppliers, and attorneys have been cited in scams to defraud the system. The National Health Care Anti-Fraud Association (NHCAA) estimates that the financial losses due to health care fraud are $68 billion, or as high as $300 billion.

According to the FBI, common types of healthcare fraud include:

• Providers billing for services not rendered;
• Upcoding services and medical items (the provider submits a bill using a code that yields a higher payment than for the service or item that was actually rendered);
• Filing duplicate claims;
• Unbundling (billing in a fragmented fashion for tests or procedures that are required to be billed together at reduced cost);
• Performing excessive or unnecessary services and potentially offering kickbacks; and
• Abuse and resale of legal narcotics and other prescription drugs.

Medical identity theft, also on the FBI’s list, happens when criminals steal victims’ names, health insurance numbers, and other personal data, or when someone permits another person to use their identity and insurance to get treatment. Ultimately, these activities defraud insurers by making false claims. To combat the problem, some medical facilities have limited employee access to data and require photo IDs for people seeking treatment.

The Affordable Care Act of 2010 included fraud-fighting efforts, such as allowing the U.S. Department of Health and Human Services (HHS) to exclude providers who lie on their applications from enrolling in Medicare and Medicaid. In the same year, federal lawmakers enacted The Improper Payments Elimination and Recovery Act, which requires agencies to conduct recovery audits for programs every three years and develop corrective action plans for preventing future fraud and waste.

Other federal-level efforts against healthcare fraud include:

• Implementing an Automated Provider Screening system to review enrollment applications;
• Allowing HHS to impose a temporary moratorium on newly enrolled providers or suppliers, as necessary, to combat fraud;
• Authorizing the Centers for Medicare and Medicaid Services, in conjunction with the Office of the Inspector General, to suspend payments to providers or suppliers during the investigation of a credible allegation of fraud; and
• Ensuring that providers and suppliers found guilty of fraud in one of the Centers’ systems, such as Medicare, cannot have service privileges in another area, such as Medicaid, or within state programs.

Additionally, in 2012, HHS and the Department of Justice formed the National Fraud Prevention Partnership to combat health care fraud. The group also consists of private and public groups such as health care companies, organizations, and agencies, such as the National Association of Insurance Commissioners, the National Insurance Crime Bureau, and the National Health Care Anti-Fraud Association. This coalition shares information on Medicare, Medicaid, and private insurance claims.

Workers compensation fraud

Employers who misrepresent their payroll or the type of work carried out by their workers to pay lower premiums are committing workers’ compensation fraud. Some employers also apply for coverage under different names to foil attempts to recover monies owed on previous policies or to avoid detection of their poor claim record.

Workers compensation fraud by medical care providers can include upcoding or billing for procedures that were never performed. Examples of claimant fraud include over-utilizing medical care to keep receiving lost income (indemnity) benefits, exaggeration of symptoms, working while allegedly disabled and not reporting income, claiming a job-related injury that never occurred, or claiming a non-work-related injury as a work-related injury.

Catastrophe-related property fraud

When disasters strike, some individuals or groups see an opportunity to file claims that are either exaggerated or false. Some claimants may even intentionally damage property after a disaster to receive a higher payout. Another example of opportunistic fraud following natural catastrophes is contractor fraud. A handful of states have attempted to protect homeowners from contractor fraud by enacting laws that provide for notices and contract termination rights and prohibiting rebating or other compensation to induce homeowners to sign contracts.

How insurers fight fraud

The legal options of an insurance company that suspects fraud are limited. An insurer can inform law enforcement agencies of suspicious claims, withhold payment, and collect evidence for use in court. The success of the battle against insurance fraud, therefore, depends on two elements:

• The level of priority assigned by legislators, regulators, law enforcement agencies, and society
• The resources devoted by the insurance industry itself

However, a federal law, Racketeer Influenced and Corrupt Organizations Act (RICO) enables insurers to file civil lawsuits, which have evidence requirements that are less strict than criminal proceedings. This law also allows for triple damages. Since the late 1990s, some of the largest insurers in the country—especially auto insurers—have been filing and winning lawsuits concerning insurance fraud against individuals and organized rings.

Most insurers have established special investigation units (SIUs) to help identify and investigate suspicious claims. These units include small teams that primarily train claim representatives to deal with routine fraud activity and teams of trained investigators, including former law enforcement officers, attorneys, accountants, and claim experts.

More complex cases, such as large-scale criminal operations or individuals that repeatedly stage accidents, may be turned over to the NICB, which specializes in preparing fraud cases for trial and serves as a liaison between the insurance industry and law enforcement agencies.

In recent years, the increases in billion-dollar weather catastrophes and the propensity of claimants to commit opportunistic fraud have resulted in some insurers turning to forensic meteorologists. These experts can accurately verify weather conditions for an exact location and time, allowing claims adjusters to validate claims and determine whether more than one type of weather element is responsible for the damage. Since they use certifiable weather records, their findings are admissible in court.

Following Hurricane Katrina in 2005, the National Center for Disaster Fraud (NCDF) was created to combat fraud relating to natural and man-made disasters. In addition to insurance fraud, the NCDF targets charity scams, identity theft, and contract and procurement fraud.

Insurers have created a national fraud academy.

A joint initiative of the American Property Casualty Insurance Association (APCIA), the FBI, the NICB, and the International Association of Special Investigating Units, this academy is designed to fight insurance claims fraud by educating and training fraud investigators. This venture also offers online classes under the leadership of the NICB.

Use of technology to combat fraud

One of the most effective means of combating fraud is adopting data technologies that cut the time needed to recognize fraud. Advances in analytical technology are crucial in the fight against fraud to keep pace with sophisticated rings that constantly develop new scams. In search of refinement, insurers are blending tools to improve their fraud detection programs.

Traditional approaches, such as using automated red flags and business rules, have been augmented by predictive modeling and link analysis—which examines the relationships between items like people, places, and events. Artificial intelligence can be used, among other tools, to uncover fraud before a payment. These newer strategies are employed when claims are initially filed. Suspicious claims are flagged for further review, while those with no apparent questionable elements are processed normally.

Insurance claim scanning programs have been improved by consolidating industry claims databases, such as ISO's ClaimSearch ®, the world's largest comprehensive database of claims information. Systems that identify anomalies in a database can develop algorithms that automatically enable insurers to stop claim payments.

In 2019, the Coalition Against Insurance Fraud and the SAS Institute published a report entitled, State of Insurance Fraud Technology. The study was based on an online survey of 84 mostly property/casualty insurers conducted in late 2018. Nearly three-quarters of the survey participants said fraud increased significantly or slightly in the past three years, an 11-point increase since 2014. No insurer has said that fraud has decreased significantly in the last six years.

About 40 percent of insurers polled said their technology budgets for 2019 will be larger, with predictive modeling and link or social network analysis the two most likely types of programs considered for investment. About 90 percent of respondents said they use technology primarily to detect claims fraud, a significant increase from 2016, and about half said they use it to combat underwriting fraud, up from 27 percent in 2016. The top challenge for insurers is limited IT resources, which affects about three-quarters of insurers, about the same as in 2016. This hurdle is followed by problems in data integration, with 76 percent reporting the issue, up from 64 percent in 2016.

State antifraud legislation

Insurance fraud received little attention until the 1980s, when the rising cost of insurance and organized crime rings' growing involvement in fraud spurred efforts to pass stronger anti-fraud laws. The industry and other stakeholders have encouraged all states to enact these laws to some degree, particularly because it can be easier to prosecute insurance fraud cases in states with penal codes that:

• specify fraud as a crime
• define fraud
• specify the penalties

By 2016, every state and the District of Columbia had enacted laws that classify fraud as a crime, at least for some lines of insurance, and have instituted immunity for reporting insurance fraud. Most states and the District of Columbia have set up fraud bureaus or units (though some have limited powers, and some states have more than one bureau to address fraud in different lines of insurance). Almost two dozen states and the District of Columbia require insurers to create and implement programs to reduce insurance fraud.

Insurers, to successfully bring a fraud case to trial, must be able to provide information to prosecutors on individuals suspected of fraud. Immunity laws, which allow insurance companies to report information without fear of criminal or civil prosecution, now exist in all states. However, some of these laws do not cover insurance fraud specifically, and some do not allow reporting of all types of relevant information to law enforcement agencies or state insurance departments. Many of these laws are limited in other ways, such as restricting protection to only against libel suits or violating unfair claims practices acts in auto insurance fraud. Some experts believe immunity laws should be expanded to include good faith exchanges of certain claims-related information among insurance companies. See chart below, Key State Laws Against Insurance Fraud.

Federal antifraud legislation

The Violent Crime Control and Law Enforcement Act (1994) makes insurance fraud a federal crime when it affects interstate commerce. Insurance company employees, including agents, can be punished similarly for embezzling or misappropriating any company funds if their actions adversely affect the solvency of any insurance company.

The Health Insurance Portability and Accountability Act of 1996 made "knowingly and willfully" defrauding any healthcare benefit program a federal crime and established a comprehensive program to combat fraud committed against all health plans, both public and private.

Additional resources

National Insurance Crime Bureau

Coalition Against Insurance Fraud

Insurance Research Council

NerdWallet, 2017 Driving in America Report: The Costs and Risks

Versik, The Challenge of Auto Insurance Premium Leakage

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