Why Insurance Fraud Is Costing You & Your Neighbors

Honest People Pay to Fund the Criminal Conduct of Insurance Fraudsters


Insurance fraud continually takes more money each year than it did the last from the insurance buying public. There is no certain number. No one knows the amount that is taken by insurance fraud because most attempts at insurance fraud succeed. Estimates of the extent of insurance fraud in the United States was estimated by the Coalition Against Insurance fraud to be $308 billion every year and that is a low estimate. Insurance fraud is a serious crime that bleeds the insurance industry sufficiently to have states compel insurers to create special investigative units (SIU’s) to investigate, deter and defeat insurance fraud to assist the state in its efforts to prosecute the crime.

Insurers and government backed pseudo-insurers can only estimate the extent they lose to fraudulent claims. Lack of sufficient investigation and prosecution of insurance criminals is endemic. Most insurance fraud criminals are not detected. Those that are detected do so because they became greedy, sloppy and unprofessional so that the attempted fraud becomes so obvious it cannot be ignored.

The National Insurance Crime Bureau (NICB) estimated that almost 25% of the bodily injury claims related to auto crashes are bogus. Property and casualty claims against auto insurance are not much better, coming in at around a 10% fraud rate.

The National Association of Insurance Commissioners (NAIC) reports that insurance fraud occurs when an insurance company, agent, adjuster or consumer commits a deliberate deception in order to obtain an illegitimate gain. It can occur during the process of buying, using, selling, or underwriting insurance. Insurance fraud may fall into different categories from individuals committing fraud against consumers, individuals committing fraud against insurance companies and insurance companies defrauding those it insures.

Fraud not only inflicts extra costs on insurance companies, but it also financially impacts consumers, costing the average U.S. family an effect estimated to be between $400 and $700 per year in premiums needed to cover the investigation and payment of fraudulent claims.

When insurers and governments put on a serious effort to reduce the amount of insurance fraud the number of claims presented to insurers and the pseudo-government-based or funded insurers drops logarithmically.

Insurance fraud is not limited to the US. In Britain fraud costs the British economy amounts estimated in billions of British pounds. Since the amount of fraud actually detected is a small portion of what was actually found, the estimates published are little more than an educated guess.

As the industry attempts to keep pace with fraudsters’ varied, ever-shifting tactics, it must deploy more innovative, effective anti-fraud technologies or risk dire losses.

Vendors and organizations include the Coalition Against Insurance Fraud (CAIF), CSC, Experian, FICO, IBM, Innovation Group, Insurance Bureau of Canada (IBC), ISO/Verisk, KPMG, LexisNexis, FastCase, Mattersight, Mitchell, the National Insurance Crime Bureau (NICB), SAP, SAS, and TransUnion.

Insurers must also generate a close relationship with the state insurance department’s fraud division or fraud bureau, local police agencies, the FBI, the ATF, Homeland Security, the Postal Investigation Service, the local fire department’s arson unit, local prosecutors, and the local U.S. Attorneys if they are to have any chance to reduce the effect of insurance fraud. Insurers should also work to make the general public, state legislators, state governors, congress members and U.S. Senators, and the Attorney General of the United States aware of the effect insurance fraud has on the public at large and the insurance industry.

Wherever insurance is written insurance fraud exists. It is an equal opportunity fraud committed by people of every race, religion or national origin.

Insurers who do not exercise serious anti-fraud efforts often complain that the local district attorneys and police agencies give a low priority to the crime of insurance fraud. The complaints are well founded. Insurance fraud prosecutions are document heavy and prosecutors are loathe to get involved in a complicated case.

No matter how seriously the insurers work to prove fraud the authorities often ignore them. In response, police and prosecutors complain that the insurers do nothing that police and prosecutors can use to prosecute the crime of insurance fraud while insurers complain that prosecutors ignore them when they present evidence of a fraud.

There is some truth in both complaints. Insurers, although compelled by statute to investigate potential insurance fraud and to present the results of their investigations to prosecutors, they are not trained as police officers. Insurance company employees, whether claims adjusters or Special Investigative Unit (SIU) investigators are not police offers, have no right to arrest, and can only conduct investigations with the permission and consent of those persons being investigated. The SIU investigator is capable, however,  to present evidence of a either a tort or a crime to a court.

The SIU investigator can only advise professional insurance fraud investigators at the state departments of insurance or state police agencies who must then investigate further to obtain evidence that is sufficient for a charge of insurance fraud or to convince a Grand Jury to issue an indictment.

More importantly the SIU investigation can gather enough evidence to determine, beyond a preponderance of the evidence available, to allow an insurer to conclude a fraud is being attempted and allow the insurer to disclaim coverage on a fraudulent claim based on exclusions and conditions in the policy of insurance.

If you are a person who has paid premium to be insured against certain risks of loss it is important that you recognize some of the more common insurance fraud schemes.


  • Premium Diversion — the embezzlement of insurance premiums.
  • Fee Churning —In fee churning, a series of intermediaries take commissions through reinsurance agreements.
  • Workers’ Compensation Fraud
  • Health Insurance Fraud —Health insurance companies as well as Medicare and Medicaid are serious targets of crooked health care providers who make claim for services never rendered
  • Property Fraud — Arson for profit, fake thefts, false water damage claims, intentional mold infestation, and construction defects that do not exist, among other types of property fraud.
  • Liability Claims Fraud — The staged auto accident, the swoop and squat accident, the false injury after a low impact accident, false chiropractic or medical treatment after a collision are auto related casualty or liability claims fraud.


The logarithmic growth of fraud against insurers and government based programs like Medicare and Medicaid, will eat away any chance insurers – and their shareholders – can operate profitably. In addition, medical fraud perpetrated on federal and state agencies, will increase the tax burden of those who pay taxes to support Medicare, Medicaid and the so-called “Affordable Care Act” or Obamacare, will be insufferable.

The cure for insurance fraud is a vigilant insurance buying public who can work with their insurers to defeat fraud.

If prosecution of insurance fraud is to be successful it is necessary that insurers, prosecutors, police agencies and the insurance buying public must work together as a team dedicated to defeat the crime of insurance fraud. To do so the insurers must train their staff to recognize the elements of both the crime of insurance fraud and the elements of the civil tort of insurance fraud. If well trained, insurance personnel collecting information about a potential insurance fraud, will know the type and quality of information that either a prosecutor or a civil defense lawyer will need to prove fraud was attempted. Police, prosecutors and judges must recognize that insurance fraud is a felony crime and cannot be ignored. Most importantly, the insurance buying public must become angry about the excessive premiums they must pay to allow the insurers to cover the cost of dealing with insurance fraud.

Where a handler having an actual suspicion of fraud (e.g., manual fraud indicator(s), tip off, system generated “high risk” referral etc.) challenges the applicant/claimant by letter, telephone call or instruction of an investigator etc., to clarify key information, provide additional information or documentation etc., and the applicant/claimant subsequently:

  • fails to co-operate or provide further documentation; and/or
  • formally withdraws the application/claim (by phone, e-mail or letter) without a credible explanation; and/or
  • allows all communication with the insurer to lapse despite the insurer’s reasonable attempts to re-establish contact; and/or
  • accepts (without a credible explanation) either a substantially reduced settlement offer in respect of a claim, or a substantially increased premium in respect of an application/renewal (other than in cases where there has been a careless misrepresentation).

All other ‘gone away’ claims/applications arising in the course of normal business do not represent suspected fraud under this definition.

What Insurance People Must Do to Change the Statistics

It is the obligation of all whose work in the business of insurance or are insured is to protect insurers against insurance fraud to do something to change the situation. Methods that are available and that should be exercised by every person who wants to reduce the effect of insurance fraud include:

  • Lobby local, state and federal police agencies to change the system so that:
    • All the insurance tax money must go to all kinds of insurance fraud at the discretion of the Commissioner of Insurance.
      • Prosecutors must be assigned to the Fraud Bureau or Fraud Division whose only job must be to prosecute insurance fraud.
      • When the local D.A. does not file a criminal complaint, the fraud investigator or lawyer for the insurer, must complain, loudly.
      • Insurers and their staff should work within the system to:
    • Report every suspected fraudulent claim to the Fraud Division
    • Follow-up with the Fraud Division after you get the letter saying they won’t investigate.
    • Supplement the Suspected Fraudulent Claim (“SFC”) report with investigation results and transcripts of examinations under oath.
    • Develop a personal relationship with investigators at the Fraud Division.
    • Develop a personal relationship with supervising investigators at the Fraud Division.
    • When the Fraud Division refers a case to a prosecutor, determine the identity of the prosecutor and establish a relationship with the prosecutor.
    • Make it clear to the prosecutor that you represent an interested and proactive victim.
    • Make it clear to the prosecutor that your insurance company is upset that it is the victim of a crime.
    • Make it clear to the prosecutor that you will make available to him or her anything needed or required.
    • Make it clear to the prosecutor that you, and other employees of the insurance company, will be available to testify at the trial of the insurance criminal.

(c) 2023, Barry Zalma & ClaimSchool, Inc.

About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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