DEFINITION of Insurance Fraud

Insurance fraud is an illegal act on the part of either the buyer or seller of an insurance contract. Insurance fraud from the issuer (seller) includes selling policies from non-existent companies, failing to submit premiums and churning policies to create more commissions. Buyer fraud can include exaggerated claims, falsified medical history, post-dated policies, viatical fraud, faked death or kidnapping, and murder.

BREAKING DOWN Insurance Fraud

Insurance fraud is an attempt to exploit an insurance contract. Insurance is meant to protect against risks, not to serve as a vehicle to enrich the insured. Although insurance fraud by the policy issuer does occur, the majority of cases have to do with the policyholder attempting to receive more money by exaggerating a claim. More sensational instances, such as faking one's death or committing murder for the insurance money, are comparatively rare.

Types of Insurance Fraud Schemes

Attempts to illegally reap funds from insurance policies can take on a variety of forms and methods. Insurance fraud with automobiles, for instance, may include disposing of a vehicle and then claiming it was stolen in order to receive a settlement payment or a replacement vehicle. The original vehicle could be secretly sold to a third party, abandoned in a remote location, intentionally destroyed by fire, or pushed into a river or lake in order to dispose of it. In particular, if the owner sells the vehicle, they would seek to profit by pocketing the cash, and then claim the vehicle was stolen in order to receive further compensation.

The owner of a vehicle might attempt to cut the costs of insurance premiums by using a false registration. If the vehicle owner lives in an area designated with a high rate on premiums, because of recurring car theft in the neighborhood or other reasons, they might try to register the vehicle in a different area in order to lower their premiums.

Repair work on a vehicle could also become a source of insurance fraud. For example, a repair shop that is expecting payment from the insurer might charge for extensive work, but then use cheap or even fake replacements. They might also overcharge the insurer by overstating the extent of the repairs that are needed.

One of the downsides of insurance fraud is that the heightened cost of dealing with such problems is passed along by insurers to their customers. According to the Federal Bureau of Investigation, more than $40 billion annually is lost to non-health insurance fraud.