The True Cost of Car Insurance Fraud

Insurance policies exist to protect you, but sometimes criminals try to use them against you. Sadly, car insurance scams and fraud exist across the insurance landscape, and auto insurance is considered to be the most vulnerable with fraud costing the industry at least $29 billion annually, according to the National Association of Insurance Commissioners (NAIC). From fake insurance agents to dishonest drivers who stage accidents, here are some examples of car insurance fraud to watch out for and a few tips to help you avoid becoming a victim.

What's the definition of car insurance fraud?

The Insurance Information Institute (III) defines insurance fraud as "a deliberate deception perpetrated against or by an insurance company or agent for the purpose of financial gain." In simpler terms, it's when someone intentionally does or says something wrong in order to gain a benefit from an insurance company (like a lower premium or a claim payment) or the other way around, like a dishonest agent deceiving a policyholder.

The III notes that there are two types of fraud: hard fraud and soft fraud.

What is hard fraud?

Hard fraud is an intentional attempt to stage or invent an accident, injury, theft, arson, or other type of loss that would be covered under the insurance policy. For example, if a policyholder lies and reports their vehicle as stolen in order to collect the insurance money, this is an example of hard fraud.

What is soft fraud?

Soft fraud is sometimes called opportunity fraud. It occurs when a policyholder or claimant exaggerates a legitimate claim or conceals important facts for personal gain. For example, if a father knows his teenage driver will be regularly driving one of the family vehicles but doesn’t share this information with the insurer, it’s an example of soft fraud

5 Car Insurance Scams to Watch Out For

1. Robocalls & Cyber Thieves

According to a 2021 Truecaller report, nearly 60 million Americans reported losing money (totaling an estimated $9.8 billion) to a phone scam in the last year and roughly one-third of Americans reported being a victim of a phone scam at some point. In other words, scammers will almost certainly target your phone or email address. Vehicle owners should watch out for scammers pretending to be auto dealers, manufacturers, or insurance representatives claiming a vehicle’s warranty or insurance is about to expire, according to the Federal Communications Commission (FCC).

Never give out personal information over email or text. Only do so over the phone if you’re the one who started the call and know the person on the other end of the phone is legitimate. You don’t want to be out any money or become a victim of identity theft.

2. Unethical or Fake Car Insurance Agents

There are plenty of legitimate insurance companies and agents committed to getting you great coverage at an affordable rate (like Direct Auto Insurance). But sadly, some dishonest people only pretend to have your best interest at heart. Fraudulent companies or individuals might try to collect premiums for fake policies that offer no protection, or unlicensed individuals will try to sell you fake protection using shady marketing techniques, according to the NAIC.

The NAIC recommends calling your state’s insurance department before purchasing a policy from an insurer or agent you’re unfamiliar with. This will ensure you are doing business with a real company or a properly licensed agent. These are some warning signs the NAIC says can help you identify potential scammers:

• Intense pressure to purchase a policy right now
• Premiums that are 15-20% lower than comparable coverage at other companies
• Tough-to-locate company contact information

It’s also a good idea to find an agent you trust. For example, Direct Auto has friendly, knowledgeable agents in more than 500 stores around the country, meaning you can get to know them in a face-to-face setting.

3. Staged Accidents

When it comes to auto insurance scams, it’s also essential you remain 100% attentive when you’re behind the wheel. Why? Because dishonest drivers might try to stage an accident and set you up as the at-fault individual. According to the National Insurance Crime Bureau (NICB), here are a few different kinds of accidents you should watch out for. All of these situations could lead to claims filed against you, particularly if the person scamming you has witnesses.

Panic stops or swoop & squats:
While they’re slightly different, both of these staged accidents lead to you rear-ending another vehicle. A panic stop occurs when a car in front of you slams on the brakes when you’re not expecting it. If you’re not paying close enough attention, there’s a good chance you’ll rear-end their vehicle.

A swoop and squat is similar, but it involves two drivers working in tandem to take advantage of you and your insurer. When you’re driving behind one of the vehicles (the squat vehicle), the other dishonest individual (in the swoop vehicle) will suddenly swerve in front of his partner. The driver in the squat vehicle slams the brakes. You rear-end them, and the driver of the swoop vehicle drives away because they didn’t crash into anyone.

Drive down or wave:
There are several places and situations a drive down or wave can occur, but they typically happen when you’re trying to make a turn without the right of way or attempting to merge into traffic. If you’re waiting to turn, a driver with the right of way may motion for you to go ahead. However, when you start to turn, they speed up and crash into your vehicle. Then, when the police arrive, they deny they ever waved to you. This type of situation can also occur when you’re trying to merge into traffic from a parked position. A dishonest driver might swerve into the lane you’re merging into, and if they have witnesses, they can lie and say the coast was never clear for you to merge.

Side swipe:
If an intersection has multiple turn lanes, a criminal might wait for you to drift a little too wide from your inside lane position. If you cross into the outside turning lane at all, they will intentionally side swipe your vehicle to create a crash.

You never know what the road will throw at you or what other drivers will do, so it’s always important to exercise caution. Avoid becoming a victim by eliminating distractions and maintaining a safe following distance.

4. False Claims from Legitimate Accidents

Someone doesn’t have to stage an accident to make false claims. Sometimes, a person will lie to insurers after a legitimate car crash. Here are some ways criminals take advantage of accidents.

Exaggerated Claims:
Someone can overstate damage caused by a crash. Perhaps they recently backed into a mailbox and dented their car, but they try to pass it off as a result of the accident.

Fake Injury Claims:
Even a minor fender bender can cause serious injuries and can cost a lot of money. Criminals know that, and they may attempt to claim injuries they do not have or say an injury they suffered elsewhere is a product of the crash.

Fake Passenger:
Occasionally, a phantom passenger will show up in a claim. Essentially, this mystery person will say they were in the car during the accident to try to score a payday, even though they were nowhere near the scene. 

While you can’t stop people from stretching the truth or lying entirely, you can take steps to prevent a false claim from being successfully filed against you. Follow these steps after an accident to make sure you have everything documented and witnesses to back you up.

5. Repair Scams

After an accident, drivers are often stressed, shaken, and injured. In these times of need, the last thing you want to worry about is a dishonest repair shop taking advantage of your situation. Unfortunately, there are some repair shop owners who will do exactly that, according to the NICB. They might replace a deployed airbag with a salvaged airbag that won’t work properly when you need it. If your airbag didn’t deploy, they might even attach a deployed airbag to your vehicle to drive up repair costs. They could claim your windshield or windows are damaged and need to be replaced when they’re in working order. The NICB recommends following these tips to avoid getting scammed by repair shops:

• Work with reputable shops
• Get recommendations from friends, family members, and your insurer
• Get a detailed, written-out damage report with all repairs listed out
• Ask about warranties for replacement parts, paint, or glass

How Car Insurance Scams Impact You

Even if you've never directly encountered insurance fraud or been involved in a staged accident, you've likely already been impacted. Insurance fraud costs insurance companies money, and it could also be costing you money, even right now. The FBI notes that because fraud costs insurers billions each year, they offset their losses with increased premiums. In other words, there’s a good chance you’re paying hundreds of dollars extra each year that you wouldn’t be paying in a fraud-free world.

Consequences of Insurance Fraud

Car insurance fraud is a crime in every state, though punishments vary. In some places, it's a felony. In others, it's a misdemeanor. Some states, like Pennsylvania, have worked hard to make it a serious crime with steep fines and potentially long prison sentences. What's more, those found guilty of insurance fraud must live with it being on their record.

How to Prevent Car Insurance Fraud and Protect Yourself

One of the best ways to prevent yourself from becoming a victim of fraud is to exercise caution and document everything. If you get a robocall or think you’re dealing with a dishonest agent or repair shop, take the time to investigate before giving out any information or paying any money. Don’t be pressured into acting or spending quickly. If you're involved in an auto accident, request a police presence, exchange information, talk to witnesses, and take plenty of photos and videos. A detailed record of the accident can help prevent false claims from being filed against you. 

If you think you may have been a victim of car insurance fraud, been involved in a staged accident, or have a general tip related to insurance fraud, contact your state’s Department of Insurance. You can also report the matter to your local law enforcement and the National Insurance Crime Bureau. Or, give one of our friendly agents a call at 1-877-GO-DIRECT (1-877-463-4732) or visit a Direct Auto Insurance location near you. We'll help connect you with resources and the right people.