Insurance fraud occurs when people lie or misrepresent facts to extract money from insurance companies. The FBI estimates that insurance fraud (excluding health insurance fraud) costs over $40 billion annually, leading the average American family to pay an extra $400 to $700 per year in premiums.

What is insurance fraud?

Insurance fraud is when someone lies or misrepresents insurance information for financial gain. For example, a homeowner might exaggerate the damage caused by a fire to receive a higher insurance claim.

Types of insurance vulnerable to fraud include:

Auto insurance

Homeowners insurance

Life insurance

Workers' compensation insurance

Insurance fraud is not something only policyholders commit. For instance, an insurance broker or agent might:

Keep a policyholder's premium instead of forwarding it to the insurance company

Sell insurance without a license

Collect premiums but not pay claims

Here are some common types of insurance fraud.

Soft Fraud

According to the National Association of Insurance Commissioners (NAIC), soft fraud occurs when a policyholder exaggerates or intentionally omits or misrepresents information on an application to lower their premium. Soft fraud is more common than hard fraud.

Examples of soft fraud include:

Faking an auto repair claim

Failing to list all household members as drivers on an auto insurance policy

Exaggerating the extent of injuries from a car accident

Intentionally underestimating annual mileage to lower insurance premiums

Lying about a student's grades to receive a "good student" discount

Exaggerating the extent of damage to a home

Fabricating a slip-and-fall accident at someone's home

Reporting a burglary that never occurred

Submitting a false life insurance death claim

Faking an injury to file a workers' compensation claim

Working while receiving workers' compensation benefits

Stealing a policyholder's premium

Selling fake insurance policies

Hard Fraud

The NAIC reports that hard fraud occurs when a policyholder intentionally destroys property in order to file an insurance claim.

Examples of hard fraud include:

Arson to collect a property loss insurance claim

Causing a car accident to collect property damage compensation

Arranging for a car to be stolen to file a theft claim, then destroying the vehicle or stripping it for parts to sell

How to Avoid Insurance Fraud

To avoid committing insurance fraud:

Be honest when filling out insurance applications. For example, don't lie about where you typically park your car to lower your premium.

Don't exaggerate financial losses to receive a larger claim. For example, don't tell your insurer your TV was damaged in a thunderstorm when it simply stopped working.

Do not work while receiving workers' compensation benefits. Once your healthcare provider clears you to return to work, you should stop receiving workers' compensation benefits. Even working a part-time job in a different industry while receiving benefits could be considered fraud.

Do not double-dip on claims. If your home was damaged in a natural disaster, do not add damage from a previous disaster to a new claim.

Make sure you have insurance for your car. Nearly every state requires drivers to have auto insurance. Buying insurance after your car has been damaged in an accident or you have been injured in an accident, then filing a claim for that accident, is considered fraud.

To avoid becoming a victim of insurance fraud:

Shop around for the right insurance. Don't just automatically choose the first policy you come across. Compare quotes from several insurers, ask for references, and read customer reviews to ensure you are choosing a reputable company.

Only buy insurance from licensed agents, brokers, and companies. Contact your state's insurance department to verify that an agent, broker, or company is licensed to operate in your state.

Check the insurer's track record. Read online reviews to learn about the company's reputation.

Do not sign blank applications or forms. These could be filled out later to commit fraud, and your signature could implicate you in a scam.

Do not pay premiums with cash. Use methods like automatic payments or paper checks.

Keep your insurance documents in a safe place. This prevents them from being stolen and used for fraud.

Take photos of your vehicle's damage after an accident. This evidence can be used to ensure your claim only covers the actual damage from the accident and nothing else.

Be cautious when sharing insurance information, such as policy details. Criminals may steal your insurance information and pair it with other identifying information (like your full name and address) to commit insurance fraud.

Choose repair companies carefully. Insurance fraud can originate from various sources, including unethical auto repair shops, roofing companies, or general contractors. Choosing a company that is properly licensed by the state, experienced, and has good customer reviews is the best way to prevent problems. Be wary if someone contacts you after an accident or natural disaster offering to help you file an insurance claim and secure repairs.