Auto Insurance Fraud : An Illegal Cottage Industry Affecting Everyone

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In tough economic times, everyone is looking for innovative ways to make an extra buck.   Some people get lucky and hit the lottery or get a great spin on the roulette wheel, some find a legitimate product or service that they can market part time, and others look for risky and illegal ways to cash in.   It’s no wonder that auto insurance fraud has become a multi-billion dollar racket for those in the third category.

Auto insurance fraud impacts every policy holder.   Some industry groups estimate that as much as 20 percent of accident claims are fraudulent in one way or another.   As the cost of fraud losses increase, insurance companies are forced to pass along those losses to every insured driver.   So, even though you may have a great driving record, auto insurance fraud schemes can be a significant contributor to premium increases when your policy renews.

States Regulators Respond

Several states have recently enacted, or are considering, legislation to combat increasing instances of auto insurance fraud.

At a recent hearing before the New York State Insurance Committee, representatives from the insurance industry testified that auto insurance fraud has hit “crisis proportions” in the state.   Committee members were urged to find ways to curb an explosion of no-fault auto insurance fraud cases that cost policy holders in excess of $200 million in 2010.

In Florida, legislation is advancing that would give insurance companies more time to investigate accident and medical claims arising from accidents.   The Florida State Senate Banking and Insurance committee passed a bill that would allow insurers up to 90 days for claims investigation, citing a 28 percent increase in PIP-related claims between 2006 and 2010.   Reform advocates say that PIP auto insurance fraud is costing every policy holder in the state an extra $80 per year in rates.

How Auto Insurance Fraud Happens

Staged accidents represent the bulk of auto insurance fraud cases.   According to the National Insurance Crime Bureau, fraudsters target vehicles that have a high likelihood of significant payoffs when staging an accident.   Drivers of new cars, rental vehicles, and commercial vehicles are among the most likely to be victims of a staged accident auto insurance fraud scheme.   In general, these staged accidents are scripted in advance, and are set up so that the victim appears to be at fault.   The fraudsters then file false medical claims or suits, and generally work with attorneys and physicians who are (knowingly or unknowingly) part of the scheme.

As auto insurance fraud schemes have become more sophisticated, investigation and loss prevention have become vital components of every insurance provider’s claims arsenal.   If you are involved in an accident, and have a legitimate claim, a little knowledge about auto insurance fraud makes it easier to understand why the claims process can be so frustrating and time consuming.   On the other hand, having that knowledge might not make you feel any better the next time your policy renews, and your rates have gone up again.