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Insurance Fraud: Everything You Need To Know

Last modified: Jul 25, 2023

Read up on insurance fraud – top targets, legal regulative, and penalties, all the way to celebrity involvement – for a better grasp on this crime.

Insurance is a vital part of everyday life, especially in today’s modern society. But with our need for insurance protection comes the risk of people taking advantage. And this particular crime is much too common. Put simply, any individual’s involvement with insurance policies and companies with the goal of obtaining a profit undeservingly is classified as insurance fraud. As you will see soon enough, the legal definition of this punishable act is much more precise, but that’s the essence of it.

There isn’t necessarily much that regular people can do to directly fight fraud. However, a realistic overview of the most common forms of fraud, their detrimental effects, and possible solutions are a good starting point in the fight to eliminate this social, economic, and alarmingly frequent malice.

What Is Insurance Fraud?

There are several ways to define insurance fraud, especially since it can manifest in different forms. Some would go to claim that nearly any dishonest act with the intent of profiting at the expense of an insurer is considered fraudulent. This could involve providing false information for insurance policies, faking certain maladies covered by insurance, or submitting wrongful insurance claims, to name a few. Other definitions, however, go so far as to say that basically any lie told to the insurer for personal gain classifies as insurance fraud.

Still, regardless of the insurance fraud definition you choose to acknowledge, understanding insurance fraud, and learning how to identify and ultimately prevent it, is a key factor when trying to end this ill-minded behavior.

The common misconception behind this act is that it’s an innocuous lie, i.e., there’s no harm inflicted on any individual person except for the massive insurance companies. And it’s no secret that these corporations aren’t typically in the public’s favor. This makes insurance scams all the easier, but understanding the “domino effect” of their aftermath should put things into perspective.

In line with defining insurance fraud, legislators have taken to identifying some key elements, making it easier to identify. The following qualify as insurance fraud:

  • A false statement related in some way to an insurance claim or payment is made in full awareness.
  • The statement brings about some material effect or result.

Based on the specific fraudulent action committed, there are two basic types of fraud:

Hard Fraud

This refers to a fraudulent action on behalf of someone looking to rip off insurance companies by claiming the payout amount without actually going through the reported detrimental experience. Those committing this type of insurance fraud have been known to get wildly creative. They might try to hide their possessions (a car, a boat, or other valuable objects) and report them as stolen. They may even sell them or cause deliberate damage via an “accident,” arson, or an injury. This is all done with the purpose of fabricating a claim to the insurance payout, which is otherwise out of their reach.

Soft Fraud

Contrary to situations where people cause or allow all kinds of accidents and malicious events to happen to themselves, others, or their belongings, this type of fraud is mellower. Also known as opportunistic fraud, this type of scam generally just involves a few “little white lies.” No matter whether the perpetrator distorts the facts on an insurance application or pads an insurance claim to get a bigger payment, it is still just as illegal.

What Are the Common Types of Insurance Frauds?

Types of insurance frauds vary but we will show you some of the most common types.

The above provides a general way to categorize frauds, mainly depending on the gravity of the act or the extent to which people will go to in order to scam their companies out of some cash. Still, considering the largely diverse range of insurance policies offered on the market nowadays, the potential for these scammers is that much greater. The following list just skims the surface of the many different frauds people engage in, which are more than enough to convince you to take out fraud insurance:

Application Fraud

This is one of the soft frauds mentioned above, but don’t be fooled—this could turn into quite a mess down the line. Application fraud generally refers to filling out insurance applications while omitting or distorting certain facts. It’s quite common among business owners looking to hide certain risk factors that may increase the price of their insurance policy, or private individuals providing false information for a better deal.

Claims Fraud

Insurance claims frauds are just as common as application frauds, the difference being that they refer to the tail end of the process. More specifically, claims fraud often occurs when people damage their belongings themselves and still file a claim to have the insurance company compensate them.

Examples range from arson to bodily injury (the famous “slip and fall”) but also include car accidents, theft, and more. Other times, this could simply be a case of inflated claims, where a person asks their insurance to cover something that wasn’t damaged. It may not have even existed when they said it was damaged. Repairs also fit in with this kind of insurance fraud—people skim on the repairs and parts and ask for a payout according to a higher bill.

Disaster Fraud

Hurricanes, earthquakes, tornados, tsunamis, and other natural disasters are opportune for fraudsters looking to profit from their insurance company. In the chaos that ensues afterward, many people try to take advantage. Most of the time, it’s in the form of claim inflation, but due to the fact that it’s most commonly found after such disasters, it’s recognized as a separate category.

Fake Death

If you think medical insurance fraud is morbid, what about faking your own death for money? What’s been a famous plot point in popular entertainment is nowadays a real-life occurrence. People will simply take out large life insurance policies, and shortly after paying the first few increments, they fake their own death. Their listed beneficiaries collect the premium and disappear to a different life with the supposedly dead loved one—or, more commonly, they start a new life on their own.

Insurance Company Fraud

Just a reminder: the policyholder isn’t always the bad guy in these insurance fraud cases. Very often, prospective policyholders can actually become victims of scams by nonexistent “insurance company reps.” These scammers can act like agents selling insurance, and after a couple of payments from their victims, they’ll run off with the cash instead of providing them with coverage. Worst-case scenario, this isn’t discovered until you really need insurance coverage.

Fraud Among Different Insurance Products

Health Insurance Fraud

Your health coverage isn’t something you should play with, so make sure to keep a lookout for any scams that could potentially threaten your health insurance. In most cases, it’s the actual medical care provider that attempts to scam their way to some extra cash by billing all sorts of activities, even though the policyholders themselves are just as likely to attempt something similar.

One fairly common insurance fraud in health care includes billing for services that haven’t been provided or were only scarcely administered. A continuation of this is billing for services that aren’t covered or providing a completely incorrect diagnosis just to collect a bigger reimbursement. Health providers may also prescribe unnecessary medications. And misrepresenting dates or the health service location or provider are other forms of fraud.

Car Insurance Fraud

Cars are a big responsibility, and having the proper car insurance to cover for some of the major expenses is quite a relief. However, it’s completely wrong to abuse these benefits by intentionally damaging your vehicle, hiding it, or even selling it just to claim you’ve been a victim of theft, vandalism, or something else. Policyholders may also falsely register a vehicle—they lie about the place of registration or go miles away to register it in a better state, county, or neighborhood.

This type of fraud crime is all the more notable among repair shops. They’re often known to exaggerate the price for fixing a car, often by billing parts and services that weren’t even included in the process. Other times, they use cheaper, lower-quality, or second-hand parts, all the while billing for high-cost ones. A faulty airbag or a windshield replacement are common examples, with mechanics risking people’s lives just to get a higher profit margin.

Life Insurance Fraud

Life insurance providers have been known to research potential policyholders’ lifestyles in order to precisely optimize their premiums. This is not at all surprising considering the nature of the policy and the diverse potential for fraud.

After all, policyholders and even their beneficiaries abuse life insurance companies by faking their death—or even premeditating the murder of the insured in order to collect. And the insurance companies are just as malicious. Agents are often known to up-sell you a specific policy just so they can get a higher commission. Meanwhile, you could have gotten off much cheaper with a different provider, under the same terms and circumstances. Other times, these agents may collect your payments for themselves, leaving unsuspecting “policyholders” without any insurance at all.

Renters’ Insurance Fraud

When leasing a specific space, many people will also get renters insurance. However, this is abused more often than people realize. Policyholders definitely have a handle on this one, with insurance companies and other entities experiencing the consequences.

Very often, renters perform deductible fraud: they have their handyman charge more than what a service costs, leaving their insurance to pay the extra. Other times, they may lie about the value of something stolen, broken, or otherwise damaged, or simply make false insurance claims so the damage will be covered by the policy. Intentional self-affliction of injuries is also a form of renter’s insurance fraud, as well as damaging the rented property. In these cases, policyholders often stage injuries covered by the policy. They’ve also been known to enact entire thefts or set fires in order to collect their insurance money.

Dental Insurance Fraud

Dental insurance is a specific type of health care insurance. In this case, dentists and other medical staff are known to be at fault in most cases of fraud. They tend to up-charge services, change dates and patient identities, and waive copayments and deductibles. The latter is quite crucial to the insurance cost structure and can have very detrimental effects on policyholders. Claiming coverage for services that don’t qualify, or are covered by other primary insurance, is yet another common type of dental insurance fraud.

How Much Do These Insurance Frauds Cost the Industry?

Insurance fraud is a sort of cancer to the industry. With these scams passing through cross-industry trajectories nowadays, there’s no saying who will take the hit next. Still, as things stand so far, it seems that insurance policyholders, as well as companies, are the ones most affected by the phenomenon.

One of the most detrimental consequences of fraud, other than the risk it poses to human life and property, is the cost. The estimated cost provided by the Coalition Against Insurance Fraud amounts to a staggering $80 billion, with property/casualty fraud alone accounting for about $34 billion of the total amount. People will see this cost reflected in their credit reports, insurance prices, and ultimately, their quality of life, as well as the insurance they’re provided.

On a lighter note, the insurance fraud report provided by the Federal Bureau of Investigation shows a lighter picture, with only about half the cost estimated to affect individuals. Of the $40 billion in annual costs, the FBI claims that an average US family would experience $400 to $700 in increased expenses per year. The fact that households are subjected to these additional costs due to another profiting in the millions has gotten many legislators looking for a solution.

Legal Ramifications of Committing Insurance Fraud

The US legal system’s structure is complex and unique, as each of the states has the autonomy to act based on their specific laws. Hence, it is only natural that the laws and penalties for insurance fraud would vary across all 50 states and the District of Columbia.

However, there’s one unifying factor that brings them together, and that’s the illegal status of insurance fraud. While fraud penalties may differ in terms of the total fine or the length of time spent incarcerated, it’s good to know that anyone attempting to commit these scams anywhere on US soil is punishable under state and federal law.

On average, fines tend to reach about $50,000, although many felons can get by with less than that depending on the state where they’re prosecuted. As for the average insurance fraud jail time, criminals across the US should expect no more than five-year terms, with probation or house arrest also being an option.

Just with health care fraud, the US DOJ has been able to recover millions of dollars, bringing the money back into the state insurance structures that function for the people’s benefit. This fact alone demonstrates the impact specific legislation has had, as well as the clear ramifications of insurance fraud.

Insurance Fraud by State

According to statistics from the Federal Bureau of Investigation, the total worth of the US insurance industry is estimated at about $1 trillion in premiums annually. As such, it’s definitely an extremely lucrative industry, making it all the more compelling for illegal activities, driving both insurance companies and policyholders to commit fraud. In line with the profits, and knowing the total cost it has on the industry, this has led to significant repercussions in certain states.

Insurance fraud in California alone costs residents over $15 billion a year, with harsh penalties enforced in response to it. After all, the result of these fraudulent activities ultimately results in higher taxes, premiums, and prices. In fact, it’s second only to tax evasion when it comes to the most costly crimes in the entire country, as the National Insurance Crime Bureau’s analyses show.

Studies in the Keystone State, on the other hand, showed that the toll of these scams costs about $2 billion a year. A notable case of insurance fraud in PA even involved an off-duty police officer who drove off after being involved in a three-vehicle crash and later falsely reporting that his car had been stolen. In fact, auto insurance has been the most common target of such scams in the state, with a recent 34% rise in rates. Auto insurance fraud now accounts for 55% of all fraud complaints—and counting.

What’s more, significant data has been discovered thanks to a recent report by the Federal Trade Commission (FTC), showing Florida to be home to 18 of the top 50 cities with the highest fraud rates. Insurance fraud in Florida is most common in Miami, while Tampa, Jacksonville, and Orlando ranked just a bit lower on the scale. The greatest scams are directed toward the most vulnerable portion of residents in the state—seniors and elderly people who can be tricked into believing the false investment possibilities.

Other than Florida, the NICB’s report found that California, New York, and Michigan have the highest percentages of questionable insurance claims. Insurance fraud in NJ is less common, though still a major threat for residents, impacting both private budgets as well as the states. Bear in mind that under the New Jersey Insurance Fraud Prevention Act, there’s no difference between the soft and hard variants. In this state, most frauds occur in the area of auto and health insurance, as well as workers’ compensation, unemployment, disability, and application fraud.

Intriguing Insurance Fraud Cases

Three Real-Life Examples

As mentioned, medical and health care insurance are among the top policies targeted by fraudsters, with doctors, medical staff, and specialists representing the groups that most profit from it.

While ethics is considered to be their strong suit by default, the Hospital Corporation of America (HCA) seems to be quite a notable exception. In 2000 and 2002, the HCA pled guilty and accepted an insurance fraud penalty for committing up to 14 felonies. These included billing for treatment that wasn’t administered, giving kickbacks to doctors, overcharging for procedures, and more. Just the US government collected $631 million, and state Medicaid agencies took home $17.5 million. After all, was said and done, the HCA case was officially dubbed the largest insurance fraud settlement, with about $2 billion paid out as the total fraud punishment.

However, a much more notorious scam involved nothing more or less than an actual, real-life Black Widow. A former corrections officer from Florida, Janeene Lea Jones, committed life insurance fraud, which involved attempting to murder both her husband and her tenant. The former would have produced a hefty payout, while the latter murder would help her get rid of a tenant who had been suing her. Luckily for both of them, the hitman she “hired” was an undercover police officer.

However, if you’re looking for especially disturbing examples of insurance frauds, there is the sad story of the Wand brothers, Armin and Jeremy. In an attempt to get a “clean slate,” they burned Armin’s house down, with his children and pregnant wife in it, for life and health insurance payouts. The three sons, aged 3, 5, and 7, died, along with the unborn baby, while the wife suffered burns on 70% of her body. The 2-year-old daughter was rescued by the mother before a serious injury.

Celebrities and Insurance Fraud

In the world of fame and fortune, there’s hardly any possession you can’t put a price on, regardless if it’s an object or a body part, and Lloyd’s of London knows this best. The English insurance company has been in the industry of eccentric and unusual insurance policies for quite some time now, with Kanye West being one of their clients.

In fact, disagreements arose regarding Kanye’s Saint Pablo Tour a couple of years back. In the case of Kanye West and his insurance fraud attempts, no proof has been found. There was speculation regarding his intent to get a payout despite violating one of the clauses in the contract—specifically, drug abuse. What ultimately settled as a case dismissal with an undisclosed financial settlement was further sparked by the dubious jewelry robbery his wife, Kim Kardashian, experienced during Paris Fashion Week.

Not all celebrities are in the world of entertainment, and claims of Michelle Obama being involved in insurance fraud speak to this point. The fact that both she and her husband, former US president Barack Obama, voluntarily surrendered their licenses to practice law sparked quite some interest among the US public. According to allegations, they were forced to do so in order to avoid harsher repercussions, rather than acting voluntarily.

While on the topic of US presidents, there have been some stories pertaining to Obama’s successor, Donald Trump. A new line of accusations regarding insurance fraud committed by Trump has come from his former lawyer, Michael Cohen, in his line of testimonies. This caused a series of actions, leading to a 9-page-long subpoena on insurance documents from Trump’s long-standing insurer Aon, with the intent to get to the bottom of the matter.

Bottom Line

From average people to music stars and politicians to corporations, no one seems to be immune to the appeal that lucrative insurance deals seem to hold. Insurance fraud is associated with various misconceptions, and considering the economic consequences (not to mention the legal ones), an overview is more than welcome. After all, the more you’re informed on it, the less likely you are to fall prey, either to others or to the temptation of “easy, harmless” profit.


Is insurance fraud a felony?

Yes, insurance fraud is a felony, and anyone committing it is considered a criminal under the letter of the law in all 50 states, as well as the District of Columbia.

How do you report insurance fraud?

In terms of how to report insurance fraud, the best way involves relaying any suspicious activity right away to the respective fraud bureau in your state or to the National Insurance Crime Bureau. As for where to report insurance fraud with the NICB, the bureau has a phone number and an online report form.

Who investigates insurance fraud?

Along with the NICB, up to 41 states, as well as the District of Columbia, sponsor fraud bureaus that are specifically intended to investigate questionable claims and resolve any cases of insurance fraud. Others have privately owned establishments or NGOs that give legal advice and direction.


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