Is that new client looking to defraud you?
Whether it is a false claim or one with exaggerated damages or injuries, insurance fraud is rampant. It’s enough to turn even a newbie insurance producer into a cynic of human nature. It slows legitimate insurance claims, increases premiums and, in some cases, puts innocent victims in danger, such as when a crooked body shop refills the airbag compartment with foam peanuts instead of a life-saving airbag.
Over $80 billion is lost each year to fraudulent insurance claims in the United States alone. That equals the total receipts for the motion picture and video industry last year, according to the Census Bureau. It also accounts for approximately 10 percent of the insurance industry’s total annual losses.
Insurance fraud: hard vs. soft
Sometimes the potential fraudster is easy to spot: they have a criminal background, they’ve filed a large number of claims in the past, they try to insure a vehicle for far more than it’s worth, they try to buy a policy after the damage was done, as the smoke is still clearing, hoping to now claim the loss. That’s termed hard fraud, when someone deliberately manufactures a claim.
Other times it’s not so easy to spot. Take, for instance, a long-time client who’s paid his premiums on time for years. When he has a legitimate claim, he may decide the insurance company owes him for all those on-time payments made, and inflate his claim. Or she may fudge on the date of the accident or exactly how it occurred. This is soft fraud: it starts out as a legitimate claim, but then the claimant adds an element of fraud. According to the Insurance Information Institute, soft fraud costs insurers roughly $32 billion a year.
Sometimes insurance fraud occurs as would-be insureds are applying for a policy: They misrepresent themselves on their application, stating all cars are housed at the residence, when one is actually housed in a more urban or higher crime area. They neglect to add a teen driver to a policy. Or they underreport the number of miles driven annually, to keep premiums lower.
Particularly when soft fraud occurs at the application phase, it’s hard for both the agent and the insurer to uncover. As you know, typically it comes to light when a claim is made.
A study commissioned by the Insurance Research Council (as reported in PropertyCasualty360) found that a quarter of respondents thought it was OK to pad their insurance claim to cover a deductible. Twenty percent thought padding a claim to recoup past premiums was also acceptable.
Insurance fraud alerting factors
Here are a few red flags you probably know to look for, while some are simply beyond your ability as a producer to discover:
- A history of filing claims
- A new claim filed shortly after the policy is in force, similar to a claim they filed before cancelling their last policy
- An insured who increases their homeowners or auto coverage just before submitting a new claim
- An insured who’s unemotional and unflustered when submitting a sizeable claim
- No police report
- Damage or theft of family heirlooms, for which it’s nearly impossible to establish accurate value
- Handwritten or otherwise suspicious receipts provided for repairs or replacement of damaged property
- An applicant who already has coverage, but wants another policy
- Delayed reporting of a claim
None of the indicators above immediately prove insurance fraud. Instead, they flag a claim, saying “This one deserves a deeper look.”
Fighting insurance fraud between a rock and a hard place
While the role of a special investigations unit of a carrier or claims management group is to uncover claim fraud and ensure claimants receive the right amount, it can be extremely difficult to investigate the possibility of soft fraud without alienating clients. It puts them between the proverbial rock and hard place, says a recent PropertyCasualty360 article: Do SIUs “risk devoting time and resources to a claim, and possibly losing a customer, just to save a few hundred dollars?”
Fraud investigations can potentially have a “devastating impact on customer loyalty. Asking insureds too many questions about their claim may prompt them to choose a new company even if the claim is genuine and uninflated,” said PropertyCasualty360. “Consumer websites such as badfaithinsurance.org highlight insurers identified as acting in bad faith, and feed the erroneous notion that insurers will go to great lengths to avoid paying reasonable claims. This only adds to the perception that it is okay for policyholders to abuse the system. Applying too rigid or intrusive an investigation process could send the wrong message about an honorable and fair insurer.”
We agree that there’s a fine line between telling clients that you as an agent, along with the insurer, take their claims seriously while at the same time underscoring to them the fact that the company takes a hard line on insurance fraud. Your conversation upfront during the application period should include a statement about how claims are investigated to prevent fraud to the company and to protect everyone’s premiums, yet at the same time assuring them that that the insurer values all claims and works with insureds to ensure they are treated fairly. This can help reduce the temptation to engage in soft fraud.
10 Ways Insurance Agents Spot Fraudulent Claims | HowStuffWorks
Expert FAQ: How Do Insurance Investigators Fight Fraud? – NerdWallet
5 Examples of Car Insurance Fraud | Esurance
6 Shadiest Auto Insurance Fraud Schemes | Bankrate.com
Insurance Fraud Definition, Examples, Cases, Processes