What Is Insurance Fraud?

What Is Insurance Fraud?

Insurance fraud occurs when someone deceives an insurance company or agent, for example, to obtain money that isn't rightfully theirs. Generally, it happens when someone falsifies an insurance application, provides false or misleading information or leaves out important information.

In some cases, insurance fraud leads to criminal charges, fines or penalties for fraudsters.

Consumers also pay a price for insurance fraud. A 2022 study from the Coalition Against Insurance Fraud found the U.S. loses about $308.6 billion a year to insurance fraud. These financial losses have the side effect of triggering higher premiums for policyholders.

Learn more: Does Filing a Home Insurance Claim Raise Your Rates?

Types of Insurance Fraud

Insurance fraud is divided into two types: soft fraud and hard fraud.

Soft fraud, which is more common, typically involves inflating a claim or incident, such as reporting your car was damaged in a hit-and-run accident when you actually ran into your mailbox at home. Meanwhile, hard fraud is more serious, such as staging a car accident.

Soft Fraud

• Falsifying a car repair claim, such as including old damage as part of a new claim
• Failing to report all of the drivers in your household
• Using someone else's address to register and insure your car to score lower insurance premiums
• Lying about a student's grades to gain a good student discount
• Overstating injuries from a car accident to boost a claim payout
• Underreporting your car's mileage
• Exaggerating damage caused to your home by a natural disaster
• Listing false information on a home insurance application

Hard Fraud

• Staging a car accident to receive a claim payout
• Arranging for your car to be stolen to file a theft claim
• Abandoning or destroying your car and reporting it as stolen
• Filing a false police report for belongings that were supposedly stolen during a faked home burglary
• Setting a home on fire to collect money from an insurance claim
• Faking your own death to enable a beneficiary to profit from a life insurance policy

Learn more: What Happens if You Lie on Your Life Insurance Application?

How to Avoid Committing Insurance Fraud

Here are five ways to avoid committing insurance fraud:

1. Be honest. Don't lie on an insurance application or claim.
2. Don't inflate losses. Overstating the value of damage or losses could lead to rejection of an insurance claim or being charged with insurance fraud.
3. Don't count previous damage. If your home sustained water damage before a natural disaster, for example, but you report the damage happened during the disaster, that constitutes insurance fraud.
4. Make sure coverage is in place. If you try to purchase car insurance after an accident, you might be breaking the law.
5. Follow workers' compensation rules. Be sure your injury happened at work or as part of your work duties. Also, don't work while you're receiving workers' compensation benefits.

Learn more: What to Do When Your Car Insurance Claim Is Denied

How to Avoid Becoming a Victim of Insurance Fraud

Here are 10 ways to avoid becoming a victim of insurance fraud:

1. Check the background. Verify that an insurance agent, broker or company is licensed to do business in your state and that their record is clean.
2. Be suspicious of low rates. If you're quoted an insurance rate that seems to be too low, proceed carefully. Shopping around for coverage lets you compare car insurance rates, for example, to help avoid shady insurers.
3. Safeguard information. To protect your insurance information, put your policy in a safe place to prevent it being stolen and used to commit fraud. The same goes for insurance information stored on your computer.
4. Be careful on the phone. Don't volunteer information over the phone to a caller unless you know the caller is legitimate.
5. Look out for staged accidents. If a vehicle pulls in front of your car in traffic and forces you to follow closely, you could be targeted in a staged-accident scheme.
6. Get evidence. After an accident, take photos or video of damage to your car and obtain information about other people involved, such as what sorts of injuries they may have sustained.
7. Never sign blank insurance forms. Putting your signature on a blank insurance form could give a blank check to a fraudster.
8. File a fraud report. Tell the proper authorities, such as your state's consumer protection agency, if you suspect you're the victim of insurance fraud.
9. Submit an accident report. Even if you've been involved in a minor car accident, file a report with the local law enforcement agency.
10. Be selective about repairs. Insurance fraud can come from various sources, including dishonest car repair shops, roofing companies or general contractors. Hiring companies with proper state licensure, substantial experience and good customer reviews can help you steer clear of insurance fraud.

Learn more: Can You Choose the Repair Shop for a Car Insurance Claim?

How to Report Insurance Fraud Scams

Here are six steps to take when reporting an insurance fraud scam:

1. Gather Relevant Information

• Collect policy numbers, claim numbers, correspondence, receipts, bills, photos and any other documentation related to the suspected fraud.
• Write down a timeline of events, including dates, names and conversations.

2. Contact Your Insurance Company

Let your insurer know about the suspected fraud as soon as possible.

3. Report the Fraud to the Appropriate Authorities

• File a report with your state or national insurance fraud agency, insurance regulator or other designated authority.
• If your identity or financial information has been stolen, consider filing a police report and reporting the incident to the appropriate identity theft or consumer protection agency.

4. Secure Your Personal and Financial Information

• Change passwords and security questions for any affected online accounts.
• Monitor bank accounts, credit cards and insurance statements for unauthorized activity.
• You have the right to place a fraud alert or credit freeze with Experian or the two other major credit reporting agencies if your personal information has been compromised.

Learn more: Fraud Alert vs. Credit Freeze: Key Differences Explained

5. Cooperate With the Investigation

• Respond promptly to requests for additional information from your insurer or investigators.
• Keep copies of all correspondence and maintain records of phone calls, including dates and the names of representatives you speak with.

6. Follow Up on Your Case

After reporting insurance fraud, follow up to make sure the case is on track. For instance, check in with investigators if you think the case is dragging on.

Frequently Asked Questions

The Bottom Line

Insurance fraud drives up premiums for consumers and can leave victims with financial losses and a long recovery process. Protecting yourself starts with being proactive—verifying who you're dealing with, documenting the details and reporting suspicious activity quickly. Since insurance fraud is often tied to identity theft, checking your Experian credit report for free is an easy way to spot unfamiliar accounts or activity before serious damage happens.