5 Common Types of Insurance Fraud

Even before Hurricane Katrina hit the U.S. Gulf Coast in August 2005, the storm was wreaking havoc off the coast in the ocean. It continued to do so after making landfall, leading to about 1,833 human deaths as well as about $100 billion in damage. According to the FBI, people filed about 1.6 million insurance claims, resulting in covered losses of about $34.4 billion. However, some insurance companies tried to bury claims to avoid paying, thus committing crimes against the government. Some people also committed insurance fraud by making up claims to send to insurance companies.

In a nutshell, insurance fraud occurs when a person cheats an insurance company with the intent of getting funds to which they would otherwise not have access. The insurance industry, with its more than 7,000 companies collecting more than $1 trillion in premiums yearly, is ripe for fraud. Given the large scale of the industry, people think that a few thousand dollars may slip under the radar unnoticed, leading to fraudulent claims.

Policyholders and people who are involved with the companies themselves both can be guilty of fraud. To ensure a fair claim without the risk of unintentionally committing insurance fraud or wrongdoing from the insurer, it is best to consult with an injury attorney who also handles insurance claims.

Disaster Scams
Disaster scams are one of the most common scenarios in which policyholder fraud occurs. The fraud can be as simple as saying wind or fire caused damage to an insured item when it was really flood that did it, or claiming an item was stolen when, in fact, it was damaged or destroyed in a flood. One reason people commit this type of fraud is because they don’t have flood insurance, or not enough flood insurance to cover their overwhelming damages.

Other types of disaster fraud occur when people file claims even though they live way outside the disaster area. Contractors also might mandate payment for their work before it starts, collect the payment and then don’t do the work. This fraud is much easier to commit in times of disaster because so many people are affected and need repairs. Demand for contractors is high, and many predatory or false contractors swoop onto the scene. Some people also set up false charities in the hopes of getting money that was donated for disaster aid.

Premium Diversion
Diverting premiums is the top insurance-fraud occurrence. It usually happens when insurance agents collect premiums and keep them for themselves instead of sending them to underwriters. Another example of diverting premiums is when an unlicensed person sells insurance, collects premiums and then does not pay claims.

Fee Churning
In fee churning, a group of people set up a company that they know will eventually fail. The business gets involved in reinsurance agreements, and people in different steps of the process pocket commissions. The amount of a premium is cut by each repeated commission until the money to pay claims runs out. This scheme lasts as long as it does because each individual move looks normal as it occurs. The full picture emerges only after the damage is already done.

Asset Diversion
When people divert an insurance company’s assets, that essentially means they’re stealing the assets. This often happens when people borrow money to buy or merge with an insurance company. After this transaction is complete, the buyers collect the assets of their new company to eliminate debt. They then keep the rest of the assets for themselves.

Workers’ Compensation Fraud
Another common type of insurance fraud is worker’s compensation fraud, where some groups offer to cover worker’s compensation claims at a low cost. They take the premium money and never actually cover the insurance they promised.

Insurance fraud takes its toll regardless of who commits it and harsh penalties are assessed for those convicted. There are many ways that people and companies have found to game the system over the years. Since everyone is required to have some type of insurance, this industry is unfortunately very susceptible to these fraudulent acts.

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