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Auto insurance fraud explained
What counts as auto insurance fraud, the difference between hard and soft fraud, who commits it, what it costs drivers and how it is investigated and reported.
Auto insurance fraud is any deliberate deception aimed at getting money from an insurance transaction that you are not entitled to, whether by a driver, a passenger, a repair shop, a medical provider, a tow operator or a fake agent. It ranges from padding a real claim or giving a false address to get a lower rate, to organized rings that stage crashes. Fraud raises premiums for everyone, and even small lies on an application or claim can lead to a denied claim, a canceled policy or criminal charges.
Hard fraud and soft fraud
Regulators split insurance fraud into two broad kinds. The National Association of Insurance Commissioners describes hard fraud as deliberately destroying property to collect on a policy, and soft fraud, the more common kind, as exaggerating an otherwise legitimate claim or lying about or leaving out information on an application to get a lower premium.
| Hard fraud | Soft fraud | |
|---|---|---|
| What it is | Deliberately creating or faking a loss | Exaggerating a real loss or misstating facts |
| Auto examples | Staged crashes, false theft reports, burning or dumping a car | Adding old damage to a new claim, inflating injuries, listing a cheaper ZIP code, leaving a driver off the policy |
| Who commits it | Often planned, sometimes by organized groups | Often ordinary policyholders seizing an opportunity |
| Guide | staged car accident scams | premium fraud: garaging address and driver misrepresentation |
Who commits auto insurance fraud
Drivers and claimants. The Texas Department of Insurance lists schemes such as the "owner give-up," a false theft report filed to escape loan payments or costly repairs, and the "vehicle switch," where photos of a newer car are used to buy insurance on an older, damaged one that is later reported stolen. Soft fraud, such as padding a real claim with unrelated damage, is more common than either, according to the NAIC.
Organized rings. Staged and caused crashes, including the swoop and squat, often involve groups that recruit drivers and passengers and work with complicit clinics and lawyers, according to the National Insurance Crime Bureau.
Repair shops, tow operators and medical providers. NICB describes shops that bill for new parts but install used ones, inflate damage estimates, or "bury" your deductible in the bill, and tow operators who steer crash victims to dishonest shops, clinics and attorneys. See predatory towing and body shop scams.
Agents and fake sellers. The NAIC calls premium diversion, in which an agent or broker keeps premium payments instead of sending them to the insurer, the most common fraud scheme among insurance producers. Ghost brokers sell fake or doomed policies through social media; see ghost broking and fake car insurance policies.
What fraud costs
Estimates vary by what they measure, so read them carefully:
- All insurance fraud: at least $308.6 billion a year in costs to U.S. consumers, according to the Coalition Against Insurance Fraud. Its 2022 study, as summarized by the Insurance Information Institute, attributes $45 billion to property and casualty insurance and $7.4 billion to auto theft fraud. This total covers every line of insurance, including health and life, not just auto.
- Cost to households: the NAIC cites an FBI estimate that insurance fraud costs the average family $4,000 to $7,000 in higher premiums over a 10-year period.
- Premium leakage in auto: a 2017 Verisk study cited by the Insurance Information Institute found auto insurers lose at least $29 billion a year to omitted or misstated underwriting information, such as unlisted drivers, understated mileage and false garaging addresses.
How fraud is fought
- Insurer investigators. Most insurers run special investigations units that review suspicious claims and applications; how insurers investigate fraud explains what they look at.
- The NICB. The National Insurance Crime Bureau is a nonprofit supported by more than 1,200 property and casualty insurers and other organizations. It analyzes claims data, assists law enforcement and runs a public tip line.
- State fraud bureaus. According to the NAIC, 42 states and the District of Columbia operate insurance fraud bureaus whose investigators work with federal, state and local law enforcement; see state insurance fraud bureaus: who investigates and how to reach them.
- Immunity laws. The Insurance Information Institute notes that immunity laws in all states let insurers report suspected fraud without fear of civil or criminal prosecution.
Fraud warnings on forms
Some states require a fraud warning on claim and application forms. Florida's statute 817.234, for example, requires forms to state that anyone who knowingly, and with intent to injure, defraud or deceive an insurer, files a claim or application with false, incomplete or misleading information is guilty of a third-degree felony. The same statute defines giving false information in an application for the issuance or rating of a policy as insurance fraud.
Where honest drivers slip into fraud
Most people would never stage a crash, but these common shortcuts can cross the line:
- Agreeing when a shop offers to "waive" or absorb your deductible by inflating the bill. The Coalition Against Insurance Fraud says this is insurance fraud.
- Listing a relative's address in a cheaper area as where your car is kept, or leaving a household driver off the policy.
- Adding earlier damage to a claim for a new accident.
- Buying a policy after an accident and claiming the crash happened after the start date.
- Overstating the value of stolen items or the extent of an injury.
The consequences range from a denied claim or rescinded policy to criminal charges, and a fraud finding can make coverage harder to get later.
How to report suspected fraud
- Tell your insurer, especially if the fraud involves your claim or policy.
- Report to your state insurance department through the NAIC's Online Fraud Reporting System at ofrs.naic.org.
- Call the NICB at 800-TEL-NICB (800-835-6422) or use its online form.
- Call the police for crimes in progress, such as a staged crash or a predatory tow.
how to report insurance fraud covers what information to include.
Key takeaways
- Auto insurance fraud includes everything from padding a claim or misstating your address to staged crashes and fake policies.
- Soft fraud, such as exaggerating a claim or lying on an application, is more common than hard fraud.
- The Coalition Against Insurance Fraud puts the cost of all insurance fraud at $308.6 billion a year, and the FBI estimates $4,000 to $7,000 per family over 10 years.
- Insurers' investigators, the NICB and state fraud bureaus in 42 states and D.C. work cases together.
- Report suspected fraud to your insurer, your state through the NAIC's online system, or the NICB.