Insurance generally refers to the exchange of risk for money. A consumer pays a premium to an insurance company, which issues a policy that identifies certain risks it will assume. Under a typical automobile insurance policy, for instance, the insurer will pay for the insured driver’s damages in an accident up to a certain amount and under certain circumstances. The insurance company receives money in the form of premium payments, and the driver receives the peace of mind that an accident will not financially ruin him or her.
Insurance fraud occurs when someone engages in a course of action intended to obtain money or something else of value from an insurance company, or an insured individual or business, through false pretenses, misrepresentation of material facts, or other fraudulent conduct. Like other fraud offenses, the term “insurance fraud” covers a wide range of schemes. State laws often target specific forms of insurance fraud. The federal government may investigate and prosecute insurance fraud under the mail and wire fraud statutes.
Fraud by or Within Insurance Companies
Many insurance fraud schemes occur within or among insurance companies. Insured individuals or businesses often suffer the consequences of this type of fraud through higher premiums and other costs. An overview of insurance fraud from the FBI states that “premium diversion,” the direct embezzlement of premium payments by insurance agents, is the most common insurance fraud scheme. Consumers usually purchase insurance through an agent who acts as a broker. The actual insurance comes from an underwriter who splits the premium with the agent. Since the agent never sends payments to the underwriter in a premium diversion scheme, the customer never actually has insurance coverage.
Fraud by Consumers
Insurance fraud by consumers falls into two categories. The first is “opportunistic fraud,” or “soft fraud,” in which an insured person misrepresents important facts or exaggerates amounts in an insurance claim. The other type is “hard fraud,” in which an insured person intentionally creates a loss in order to make a claim.
Fraudulent schemes involving automobile insurance may simply consist of exaggerating the extent of injuries or property damage sustained in a car accident. More complicated schemes may involve making claims for accidents that never actually occurred, as well as staging real automobile accidents.
Property insurance includes broad policies, such as homeowner’s insurance, and specialized policies, such as one that covers a specific item of valuable personal property. These policies insure property against damage and theft, which means that fraudulent schemes frequently involve misrepresentations regarding the insured property’s value. The most serious forms of property insurance fraud involve actual destruction of property, such as if a person sets fire to a building that he or she owns to get the insurance money.
The purpose of most life insurance policies is to provide a benefit to one or more beneficiaries, such as children or other dependents, in the event of the insured person’s death. Life insurance premiums and an insurer’s willingness to issue a policy may vary depending on the insured person’s health and other risk factors. Withholding material information relevant to these areas may constitute life insurance fraud. The most common cases of life insurance fraud, however, are much more dramatic, involving faking a person’s death or causing a person’s death for the insurance payment.
Insurance Fraud Under Federal and State Law
Federal law does not address insurance fraud as a distinct offense, but it is covered by the mail fraud and wire fraud statutes, which give the federal government jurisdiction over insurance fraud that affects interstate commerce.
State statutes often include specific prohibitions on different types of insurance fraud. In Florida, false and fraudulent insurance claims are considered a felony, with the level of offense depending on the value of the property or claim involved. Florida also specifically prohibits setting fire to a building with the intent to defraud an insurer.