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Jun 19, 2017

What Is Insurance Fraud?

According to the FBI, insurance fraud costs U.S. citizens over $40 billion in increased premiums every year, and this amount does not account for medical insurance. The sum is huge, and taking this into consideration, the federal and state law enforcement authorities take action in order to combat related crimes. Let’s dive into the topic. Our insurance fraud attorneys will explain what common types of fraud are and why people commit it, what consequences it might have and what penalties an accusee might face if found guilty of the crime.

Insurance Fraud: Definition And Common Forms

Basically, it is an act of illegally exploiting an insurance contract either by the insurer or by the policyholder.

Some commons types of fraud committed by insurers include:

• Premium diversion. It is the most common type, and it is constituted by the failure to pass a premium to the company or selling policies without authorization and later failing to pay claims.
• Fee churning is set of reinsurance agreements transactions aimed at making an insurer going bankrupt by wasting premiums on commission payments.
• Asset diversion is buying an insurance company’s shares with borrowed funds and later paying off the debt with the company’s assets.
• Workers’ compensation fraud is selling policies illegally, sometimes at a lower cost, and later failing to pay claims.

Case Study

We represented an appraiser who was charged with manipulating the value of the damage done to an automobile in a car accident in order to reduce the amount of payment. Our insurance attorneys managed to convince the prosecutors that the miscalculation was fully unintentional, thus reducing the sentence down to a $1,000 fine and no prison time.

Common examples of insurance scams committed by policyholders are the following:

• falsification of data at the time of applying for insurance;
• exaggeration of claims in order to receive a larger claim;
• staging events, for example, car accidents or vehicle theft, and faking injuries in order to obtain a claim;
• arson of one’s own house or other property with the purpose of obtaining profit.

Case example from our own practice

Our firm defended a client charged with setting on fire his own cafe with the purpose of receiving a compensation. We were able to convince the prosecutors that the property owner did think that this was an accident, making his claim fully legitimate, though later during the prosecution process it was discovered that a frustrated employee committed the arson.

Why do people commit insurance fraud?

According to the FBI, the U.S. insurance industry is a highly profitable business – the amount of premiums collected by providers totals $1 trillion per year. Such a big sum makes it very alluring for some individuals to seize a piece of the pie – illegally. Some people don’t see anything criminal in trying to inflate the value of the damages inflicted in the course of an insured event. Others deliberately and in full knowledge of the possible consequences of their doings elaborate cunning plans to defraud either providers or beneficiaries.

Whatever the motive and the nature of the crime, each specific fraudulent activity ultimately takes money from payers of premiums. And therefore the government actively prosecutes such crimes and applies severe penalties to the indicted in order to discourage others from committing them.

Consequences and penalties

The penalties vary greatly depending on the severity of a crime. It might be a $500 fine for a $50 false claim, and as you see, in this case the amount of a fine applied exceeds the averted damage almost 10 times.

Falsification of data on an insurance application is also a serious crime that may lead to up to 2 years of prison time and/or a fine of up to $10,000.

For other cases, where the crime is defined as a Class C felony, for example, depending on the value of the damage and the legislature of a specific state the sentence may include up to ninety-nine years of imprisonment and a fine of no more than $10,000, as well as full restitution.

As you see, the consequences of committing an insurance-related crime can be extremely harsh and therefore each individual case requires expert help of an insurance fraud lawyer.