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2005 Insurance Reference Manual

Personal Insurance Federation of California Insurance Reference Book

INSURANCE FRAUD:
AN $80 BILLION A YEAR INDUSTRY AND GROWING

Every family in California pays approximately $200 in additional insurance premiums to cover the cost of fraudulent insurance claims annually. Insurance fraud is one of the fastest growing problems of the insurance industry, and each year the perpetrators become more sophisticated. According to the Coalition Against Insurance Fraud, the nation's insurance fraud watchdog representing consumers, regulators, legislators, insurers, prosecutors and investigators, insurance fraud is hard to measure because so much of it goes undetected.

What is Fraud?

The Coalition defines fraud as occurring when people deceive an insurance company or agent to collect money to which they are not entitled. Similarly, insurers and agents can also defraud consumers or even each other. Insurance fraud can be hard or soft.

Hard Fraud is when someone deliberately fakes an accident, injury, theft, arson or other loss to collect money illegally from insurance companies.

Soft Fraud is when a normally honest person tells "little white lies" to their insurance company. Many people think it's just harmless fudging, but soft fraud is a crime, and all insurance fraud is a federal offense punishable by jail sentences and/or fines. Plus, insurance fraud, no matter how small, raises everyone's insurance costs.

The Coalition has gathered enough evidence to know that fraud is widespread - and expensive. The Coalition compiled the following information in 2003:

  • Healthcare fraud costs Americans $54 billion a year.

  • According to the Rand Institute for Civil Justice , more than one-third of people injured in auto accidents exaggerate their injuries. This adds $13-$18 billion to America 's annual insurance bill.

  • The American Medical Association found nearly one-third of doctors exaggerate the severity of a patient's illness to help the patient avoid early discharge from the hospital.

  • A national study by the Insurance Research Council conducted in 2002 found that one in three U.S. adults - 33 percent - say that it is acceptable for a person to cheat on his/her insurance claims under certain circumstances. However, the study also found that even though many Americans continue to tolerate opportunistic fraudulent claim padding, the data suggest that Americans are also becoming increasingly concerned about the impact of insurance fraud on the cost and availability of insurance. They are now willing to support strict measures to prevent and prosecute fraud.

  • The National Insurance Crime Bureau (NICB) estimates that fraud against property and casualty insurers costs Americans $30 billion per year which translates into an extra $250 per year per household for insurance premiums. NICB estimates that auto insurance fraud costs over $15 billion a year, business/commercial fraud reaches more than $11 billion a year and workers' compensation fraud costs more than $2 billion.

The California Chamber of Commerce has noted many times that court awards involving dollars obtained fraudulently, coupled with unusually high punitive damage awards, does not just destroy individuals, but also has a debilitating effect on businesses, small and large. Increased liability exposure, litigation-encouraging rules for resolving damage disputes and exorbitant punitive damage awards are also adding costs to California 's goods and services and making the state less competitive.

In recent years insurance companies have made fighting fraud a priority, and have more than tripled anti-fraud spending to bring down perpetrators as well as educate consumers on how to detect and protect against fraud.

State insurance regulators have created 37 fraud bureaus in 45 states - California included - to investigate and hunt down fraud perpetrators.

In 2004, California insurance company special investigative units, in conjunction with the California Department of Insurance Fraud Unit, the District Attorney's office, prosecutors and crime fighting units from national insurance trade associations, will continue their vigorous fight against insurance fraud activities.

You can protect yourself against fraud by staying alert. The Coalition Against Insurance Fraud urges that you protect yourself by:

  • Never signing blank insurance claim forms.

  • Demanding detailed bills for repair and medical services.

  • Making sure "free services" aren't actually hidden in your insurance bill.

  • Being wary of buying insurance from door-to-door or telephone sales people.

  • Being suspicious if the price of insurance seems to low.

  • Making sure you deal with a licensed insurance company and agent. Check with the California Insurance Department.

  • Keeping your insurance ID number secret.

  • If you think you're being scammed, contact the National Insurance Crime Bureau (1-800-835-6422) or the California Department of Insurance Fraud Bureau at 1-800-297-HELP.

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