The True Cost of Car Insurance Fraud

Many drivers don't realize it, but car insurance fraud can hurt everyone on the road. Industry experts say that it slows legitimate insurance claims, increases premiums, and in some cases, puts innocent victims in danger, reports Bankrate. Unfortunately, the National Insurance Crime Bureau (NICB) reports that auto insurance fraud is on the rise nationally by almost 13%.

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." Sounds pretty official, doesn't it? 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) that he or she is not entitled to.

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

Example: A policyholder reports their vehicle as stolen in order to collect the insurance money, when in fact the car has not been stolen.

Soft fraud is when a policyholder or claimant exaggerates a legitimate claim (also called opportunity fraud) or conceals facts, like failing to disclose a driver, which causes their premium to be lower.

Example: A policyholder's vehicle is broken into and only a GPS device is stolen. The owner exaggerates the number of items stolen and claims that a laptop computer was also taken from their vehicle.

Watch Out! Staged Accidents on the Rise

Staged accidents fall into the "hard fraud" category and are one of the most dangerous types of car insurance fraud. They put innocent people's lives at risk, and, unfortunately, they're rising at an alarming rate, says the NICB. While driving, watch out for the following scenarios. Intentional accidents like these could be the work of some crafty criminals.

  • Swoop and Squat: A car suddenly pulls out in front of you and stops. Another car pulls up alongside your car, making it impossible for you to swerve and avoid hitting the car in front of you.

  • Left Turn, Drive Down: You're ready to make a left hand turn, and everything looks clear. The oncoming fraudster waits for you to turn and then proceeds, just in time for a collision.

  • The Wave: You're trying to switch lanes and another driver waves you ahead. As you move into the lane, they accelerate and collide with your car. When the police arrive, the fraudster claims they never waved you on in the first place, placing you at fault.

Visit the NICB's website to watch videos of these staged accidents and others to better avoid being victimized, and even injured, by someone attempting to commit insurance fraud.

How Car Insurance Fraud Impacts 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, but it could also be costing you money...even right now.

On average, reports the NICB, consumers end up paying an extra $200 to $300 a year in insurance premiums to offset the cost of fraud. "Because car insurance quotes are based on the odds that an insurer will need to pay out a claim, more claims result in higher car insurance quotes for everyone—including honest customers," says NerdWallet. When you think about it, if car insurance fraud didn't exist, you could have an additional $200 to $300 in your pocket each year.

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, consider it a felony, and violators can spend up to seven years in prison and be slapped with up to $15,000 in fines. What's more, those found guilty of insurance fraud then have to live with the limitations of being a convicted felon for the rest of their lives.

You Can Help! How to Prevent Car Insurance Fraud and Protect Yourself

If you're involved in an auto accident, one of the best things you can do to protect yourself from fraud is to stay calm and document everything.

"Take lots and lots of photographs," says AAA spokesman Robert Sinclair Jr., "of the other vehicle, the registration and inspection stickers, of the scene, the damage, the license plate, and, if you can, take a photograph of the other driver."  

Use your camera to take pictures of the scene of the crash, any surrounding road signs or landmarks, and anything that could be used to identify where the accident took place. Take notes and write down the name, address, phone number, driver's license number, and auto insurance information of the other driver. Record the names and contact information for any witnesses.  Don't leave the scene without filing a police report, too, as this could help protect you from fraudsters who further damage their car following the accident in order to "plump up" their claim.

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 via phone (1-800-835-6422), email, and even text message. 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.