Last Updated on: 28th July 2023, 07:20 pm

The entire system of insurance – for life, homeowners, car, health care and many other type of policies – relies on a key promise between issuer and consumer: the amount of money paid to the insurer as premiums ensures that they will receive the coverage they are entitled to should they need it.
Insurance companies are free to invest the premiums they receive in a number of financial vehicles – although these are regulated by state and federal authorities – in order to earn profits. However, the insurance company is always responsible for paying out all the legitimate claims that are made on its policies.
Consumers typically buy policies through insurance agents. Whether at a storefront, over the phone, or online, consumers expect that the agent will submit their premium in exchange for a policy.
In some cases, however, unscrupulous market participants sell the promise of insurance policies to consumers but keep the premium income for themselves. This is known as premium diversion.
Premium diversion schemes typically take one of two common forms.
In the first type, an agent – or the broker who serves as a middleman between agent and insurer – take money from consumers for policies. Instead of submitting the money to an underwriter or insurance company in exchange for a policy, the broker or agent pockets the funds for their own account.
Since consumers expect at least minimal documentation of their insurance coverage, this type of premium diversion scheme typically results in the creation of phony paperwork that leads consumers to believe they are covered, even when they are not.
This type of scheme can take years to fall apart, because a small amount of the premium income may be retained to pay back benefits. However, at the end of the day, the removal of the premiums from the agent’s accounts ultimately leads to the collapse of the entire scheme and major losses for individuals and firms who thought they had coverage.
The second type of premium diversion scheme is similar, but turns on a critical distinction. In these, a fake insurance company is set up and collects premiums from unwitting consumers with fraudulent documentation.
Typically conducted by agents without licenses, this scheme relies entirely on phony information and the ability to dupe consumers into believing that they have purchased coverage from a hitherto unknown company. In this case, the perpetrators have no intention of doing anything but pocketing the money and then shuttering the “company.”
While they are slightly different, both forms of premium diversion create serious problems for the financial and insurance system. By shaking the faith of market participants, premium diversion schemes threaten to destabilize insurance markets.
At the same time, individuals losses can amount to hundreds of thousands of dollars when someone discovers – after a tragic event – that their homeowners’ insurance did not actually exist.
To discourage premium diversion and encourage responsible insurance brokerage, state administration and the federal government have set harsh penalties for these schemes.
In New York State, premium diversion is considered a form of grand larceny. Depending on the amount diverted, prison sentences can range up to 25 years and fines can be in the millions of dollars.
There is no specific federal offense for premium diversion, but those involved in these schemes typically are charged with wire fraud, mail fraud, falsifying records, and money laundering.
Once again, the penalties are harsh. Conviction on a single count of wire fraud can lead to sentence of up to 30 years imprisonment. Fines and restitution at the federal level can also be in the millions of dollars.
If you or a loved one is being investigated or has been charged in a premium diversion, you should contact an experienced criminal defense attorney immediately. In particular, Knowledge of the ins and outs of insurance regulation is critical for attorneys in premium diversion cases.
A criminal lawyer can help you prepare a strong and smart response to investigators and ensure that your legal rights are protected as the investigation unfolds. If you are charged with a criminal offense, a defense attorney can work with prosecutors to prepare a plea agreement or – if necessary – present a vigorous case on your behalf before a judge and jury.

The Disturbing Reality of Premium Diversion

An Unfathomable Betrayal of Trust in the Insurance Industry

The entire structure of the insurance industry – encompassing life, homeowners, car, health care, and countless other varieties of policies – hinges upon a crucial and sacred promise shared between issuer and consumer: by diligently paying their premiums to the insurer, they are guaranteed the coverage they are entitled to when they desperately need it.

Insurance companies are, of course, at liberty to invest these received premiums in various financial ventures – albeit under the watchful eye of state and federal regulators – with the ultimate goal of generating substantial profits. Regardless, the responsibility of settling all legitimate claims made on their policies never ceases to rest squarely on the insurers’ shoulders.

Acquiring Policies through Agents – A Sinister Possibility Lurking in the Shadows

Ordinarily, insurance policies are purchased by consumers through agents. Be it in person, via telephone, or even online, consumers trustingly expect the agent to submit their hard-earned premium in exchange for the promised policy.

In certain exceptional cases, however, malevolent forces within the market seize the opportunity to sell consumers the illusion of insurance policies, all the while pocketing the precious premium income for themselves. This malicious practice is ominously referred to as premium diversion.

The Two Sinister Faces of Premium Diversion Schemes

Misleading and potentially devastating premium diversion schemes generally manifest in one of two common forms:

1. The Agent’s Deceitful Diversion
In this variation, an agent – or the broker assuming the role of intermediary between agent and insurer – receives money from consumers for policies. Instead of dutifully submitting the money to an insurance company in exchange for a policy, they greedily retain the funds for their own personal use.

Since deceived consumers unavoidably expect some form of documentation to verify their coverage, these agents resort to concocting fraudulent paperwork to convince them of their nonexistent protection. This type of scheme can persist for years, with a minor portion of the premium income occasionally retained to feign the payment of benefits. Nevertheless, the eventual depletion of the agent’s accounts will inevitably lead to the scheme’s collapse, leaving victims utterly devastated in the wake of their loss.

2. The Creation of a Bogus Insurance Company
Resembling the first type but bearing a crucial distinction, in this scenario, a fictitious insurance company is established, collecting premiums from unsuspecting victims using fabricated documentation.

Usually orchestrated by unlicensed agents, this insidious scheme relies heavily on fabricating convincing misinformation to dupe consumers into believing that they are purchasing coverage from a previously unknown, but seemingly legitimate company. In these cases, the perpetrators’ sole intention is to deceitfully horde the money before abruptly dissolving the “company.”

The Far-Reaching Consequences of These Deceptive Practices

Though they may differ slightly, both variants of premium diversion schemes create serious, far-reaching issues within the financial and insurance landscapes. By undermining the trust of market participants, premium diversion schemes pose a dire threat to the stability of insurance markets.

Moreover, the personal losses incurred by individual victims can amount to astronomical sums when they tragically discover – often in their darkest hour – that their vital insurance is nothing more than a cruel illusion.

Deterring Premium Diversion through Severe Penalties

As a means to discourage the insidious crime of premium diversion and to promote responsible insurance brokerage, state and federal governments have imposed severe penalties for such sinister schemes.

For example, in New York State, premium diversion is tantamount to grand larceny. Depending on the extent of funds diverted, the penalties can range from extensive prison sentences of up to 25 years to colossal fines reaching millions of dollars.

While no specific federal offense exists for premium diversion, participants in these schemes are typically charged with wire fraud, mail fraud, falsifying records, and money laundering – all of which can lead to harsh penalties, including up to 30 years of imprisonment and fines reaching into the millions.

When Facing Premium Diversion Charges, Seek Professional Help

If you or someone you care about is being investigated or charged in connection with premium diversion, it is essential that you consult with an experienced criminal defense attorney immediately. Navigating the intricacies of insurance regulation is a vital component of handling premium diversion cases.

A skilled criminal lawyer can guide you in crafting a robust and intelligent response to investigators, safeguarding your legal rights throughout the process. Should you face criminal charges, a dedicated defense attorney can negotiate a plea agreement with prosecutors, or, when necessary, vehemently defend your case before a judge and jury.