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.