Insurance Fraud Costs Consumers Billions of Dollars a Year
Insurance fraud has become a major financial problem for both insurance companies and consumers. The National Insurance Crime Bureau reports that insurance fraud costs the insurance industry an estimated $30 billion each year. Insurance fraud and accident staging costs the average American household approximately $300 each year in extra insurance premiums. Every time an insurance company pays a fraudulent claim, it passes that loss to its customers by raising their rates.
According to an Insurance Research Council (IRC) study, approximately 90 percent of the costs of insurance fraud are the result of claims padding. Claimants add damage, injuries, and fictitious passengers to their insurance claims. The other 10 percent are the result of organized accident staging rings. Because of the sheer number of offenders, and the light sentences received by the few that are convicted, pursuing these crimes has not a priority for law-enforcement. Most insurance companies consider it a necessary part of doing business, and just pass the costs on to the consumer. We review some of the most popular insurance scams below.
Public tolerant of false claims - Thirty-five percent of Americans surveyed believe that it all right to exaggerate insurance claims under certain circumstances, according to a recent Insurance Research Council (IRC) survey.
- Deductible - Most respondents agreed that it is acceptable to increase the amount of an insurance claim by a small amount to make up for a deductible. And nearly 24 percent said that it is acceptable to increase the amount of a claim to make up for insurance premiums paid when no claims were made.
- Pre-existing damage - Many people see a new accident as a good opportunity to repair old problems at the insurance company's expense. Many body shops share responsibility for this problem, and often suggest it as a benefit of doing business with them. As in padding to cover a deductible, the shop artificially inflates the estimate, this time doing additional work for the customer rather than splitting the difference with them. Most people are eager to go along with this scam, as it offer them free body and paintwork.
- False Address - Claiming an address in a location where insurance rates are cheaper is another common act of fraud perpetrated by ordinary citizens. A New York City resident claims that his primary residence is in another state or city, one with substantially lower premiums. The vehicle owner claims to be "visiting" NYC if a claim needs to be filed.
"Insurers have been making significant efforts to fight fraud," according to Elizabeth A. Sprinkel, senior vice president who heads the IRC. "While we have seen some improvement in recent years, it is still disappointing that so many Americans still see this type of insurance fraud as acceptable."
Accident Frequency is down, but injury claims are up - Another recent Insurance Research Council (IRC) study, Trends in Auto Injury Claims, found that while there has been a dramatic drop in the frequency of auto accidents over the past two decades, people are now more likely to claim injuries as a result of auto accidents. Auto accidents, as measured by property damage claims, decreased 17 percent from 1980 to 1998. During the same period, bodily injury claims resulting from those accidents soared 33 percent.
'The good news is that we are seeing improvement in accident frequencies as a result of a variety of safety measures, such as safer designs of cars and roadways and active campaigns against drinking and driving, said Elizabeth A. Sprinkel, senior vice president of the IRC. However, the increased propensity of people to claim injuries remains a serious concern.'
The study also found that accident and injury rates, as well as claim costs, varied broadly among and within the states. Massachusetts had the highest accident frequency in 1998 at 7.06 property damage claims per 100 insured cars, compared with Wyoming which had the lowest rate of 3.05. Massachusetts also had the highest bodily injury claim frequency at 2.29 per 100 insured cars compared with North Dakota's 0.20 rate. Fraudulent medical claims may account for 40% of all auto-related medical bills according to a recent report issued by the RAND Institute.
Fraudulent vehicle theft and damage - A study by the Insurance Research Council (IRC) found that up to 40 percent of all auto-theft claims are bogus. Vehicle owners and/or body shops make fraudulent claims stating that parts of their vehicles have been damaged, lost, or stolen when in fact they are not. Another scam involves a vehicle owner who gives his car to a chop shop and then reports it stolen. He receives a settlement from the insurance company, as well as a kickback from the chop shop which takes apart the car in order to sell its parts. The disassembled parts of a used vehicle are worth substantially more than a similar vehicle in drivable condition.
The next step, organized criminal activity - Insurance fraud comes in all shapes and sizes from staged automobile accidents to fictitious vehicle thefts to arson for profit. Scam artists will do almost anything to try to extort money from insurance companies. Some sophisticated rings of insurance fraud criminals even hire people to cause car accidents and line up lawyers and doctors to help file large claims for their phony injuries.
In Los Angeles County, over 65% of auto-insurance claims "involve some sort of fraud", making it "the insurance-fraud capital of the country". According to the President/CEO of the Auto Club of Southern California, auto insurance fraud costs consumers in California over $500 million annually. The area's substantial non-English speaking Asian and Hispanic population are especially vulnerable to fraud, from both fly-by-night insurance companies, as well as accident staging scam-artists. Affluent LA County is also the car capital of the world. Its over-saturated freeway system combines with the nation's highest percentage of exotic and luxury vehicles resulting in the highest insurance premiums in the country.
The overworked California Department of Insurance's Fraud Division received reports of more than 14,000 suspected fraudulent claims last year but was only able to open 300 investigations. Due to budgetary limitations, their primary focus is to attack the scam artists and fraud rings, those responsible for most of the problem. Crimes perpetrated by organized criminal rings can be prosecuted under anti-racketeering (RICO) laws that carry significantly stiffer penalties than convictions for fraud. RICO convictions keep scam artists behind bars for years and include stiff financial penalties and confiscation of property.
Bumper Cars - Federal authorities recently charged 53 New Yorkers in a $1 million insurance scam that involved playing bumper cars with unsuspecting victims on the streets of New York City. The FBI alleges that recent immigrants were paid a few hundred dollars to be passengers in cars that were purposely crashed into vehicles driven by unsuspecting motorists. NYS no-fault insurance laws require that insurers cover anyone injured in an accident, regardless of who caused it. The immigrant stooges were directed to visit a specific physical therapy clinic whose managers submitted false medical claims to the insurance companies. Although no one was injured in the 27 accidents that make up the case, some of the fraudulent medical bill payments exceeded $20,000.
Don't think you're immune from these scams if you live in the country. In Fort Smith, Arkansas, 11 people were charged with staging accidents to collect insurance money. Children as young as 7 and 9 were coached to fake injuries in staged crashes. The older, coached child was often accompanied by younger victims who would follow instructions given by the older one at the accident scene. Insurance companies were easily convinced of a claim's legitimacy by the fact that children were the accident victims. The victim's parents would settle with the insurance companies and then fail to pay the hospitals for the treatment, a common occurrence in the South.
Paper Accident - Over the past several years, there has been a noticeable shift from staged collisions to paper accidents. Organized criminal rings actively solicit others in the auto repair and salvage community to participate in the creation of accidents that only exist on paper. Shady lawyers, doctors, and insurance agents are often involved as well. No innocent parties are involved in this type of staged accident, because no accident ever takes place. Many insurance companies do not send investigators to examine insured vehicles when the repair bill is less than $1000, so this type of scam is increasing in popularity. Since the risks are small, and no police are involved, there is a plentiful number of people willing to participate in these "paper accidents".
Hit & Run - A variation of the paper accident, this one is usually committed by a lone criminal and actually involves the police. The owner of a previously damaged car calls the police claiming to be the victim of a hit-and-run accident. The report generated by the investigating officer is used to file a new insurance claim. Another variation is when victims of unobserved single-car accidents allege that their accident was caused by a fictitious hit & run driver and give false testimony to the investigating officer.
Staged Accidents - Innocent victims (private motorists, truck drivers, business van, etc.) are targeted by organized auto accident rings. These rings orchestrate an accident by using preplanned maneuvers to set up an innocent party for a rear end collision.
Example: You're working your way through traffic on a busy four-lane thoroughfare and you're just beginning to pick up speed when all of a sudden a car cuts in front of you and slams on its brakes. Your immediate instinct is to hit the brake pedal and swerve out of the lane, but there are cars on both sides of you and there's nowhere to go. Your car smashes into the rear-end of the car that cut in front of you.
The example above was no accident. It was a staged event called a "Swoop and Squat" where the perpetrator intentionally "swoops" in front of your car and then "squats" or stops abruptly. Often an accomplice will help box you in so that you can't change lanes and avoid rear-ending the vehicle in front of you. When the police arrive, the driver and passengers of the squat car will all claim they are injured. Their claims will be validated later on by a doctor or nurse practitioner who's in on the scam and files a fraudulent medical report with your insurance company. Other witnesses may be available to contradict your testimony to the police, so you'll look like the guilty party. Additionally, well organized rings can arrange for their body shop's tow-truck to conveniently arrive on the scene before the police have time to call a legitimate one.
Other schemes - Here are some of the other most common staged schemes you could easily become a victim of:
- Sideswipe - The sideswipe occurs at busy intersections where there are multiple left-turn lanes. The perpetrator makes a left-hand turn over and over, waiting for a potential victim to drift out of its turning lane into his. When someone finally gets into their lane, the criminal steps on the gas, ramming into the side of the victim's vehicle. Witnesses and the police are welcomed by the perpetrator.
- T-bone - The perpetrator waits at an intersection for a lone car to cross in front of him in the absence of any hostile witnesses. He/she intentionally drives into the side of the car crossing in front of him. When the police arrive, bogus witnesses planted in advance, claim that the victim's car ran a red light or a stop sign.
- Wave - This drive-down accident can happen wherever traffic is merging. The perpetrator waves to the victim pretending to yield the right of way. When the victim begins to merge, the criminal accelerates into the side of the victim's car (much like the sideswipe scheme above). When the police arrive, the perpetrator denies ever waving to the victim. Because the victim did not have the right of way, they're legally at fault.
How to avoid being a victim if you're ever in an accident:
Always get a police report of any traffic accident, even if the damage is minor. The report will give you the name and address of the other driver, the number of passengers in the other vehicle, and other information important to your insurance company. It's much harder for criminals to file false claims if a police report doesn't back them up. It's a good idea to keep a disposable camera in your glove box as well so you can photograph the damage to all the vehicles involved.
Call your own tow-truck or flatbed. Don't allow your vehicle to be taken to a crooked repair shop. If the Police call the tow-truck or flatbed (sometime necessary), insist that your vehicle be taken to a garage that you trust, even if they don't do bodywork. Your mechanic can recommend someone who does. If you're traveling, have your car towed to a franchised dealer who specializes in your make of vehicle.