Insurance fraud does not only cost insurance companies. It also affects consumers and businesses financially, according to the National Association of Insurance Commissioners (NAIC). This guide explains what insurance fraud is, the main types, what it is estimated to cost, and who works to stop it.
What is insurance fraud?
The NAIC says insurance fraud occurs when an insurance company, agent, adjuster or consumer commits a deliberate deception to obtain an illegitimate gain. It can happen while insurance is bought, used, sold or underwritten.
Insurance fraud is both a civil wrong and a crime, according to Cornell Law School's Legal Information Institute.
Hard fraud and soft fraud
Police and prosecutors typically describe an insurance fraud scheme as either hard fraud or soft fraud, the Legal Information Institute explains.
- Hard fraud is deliberately destroying property in order to collect on the insurance policy. The Legal Information Institute calls it the rarer of the two.
- Soft fraud is exaggerating an otherwise legitimate claim, or lying about or leaving out information on an application to get a lower premium. The NAIC says soft fraud is more common and is often considered a crime of opportunity.
Common types of insurance fraud
The Insurance Information Institute (Triple-I) names the usual forms: making a real claim look bigger than it is, lying on a policy application, claiming for an injury or damage that never happened, and setting up a crash on purpose.
Fraud also targets the people who buy insurance. The NAIC describes illegitimate companies and dishonest agents that collect premiums for bogus policies with no intention or ability to pay claims. It says the most common scheme among insurance agents and brokers is premium diversion, where an agent or broker keeps policyholders' premium payments instead of sending them to the insurance company.
Who commits insurance fraud
According to Triple-I, fraud is committed by organized criminals who steal large sums through fraudulent business activities, by professionals and technicians who inflate service costs or charge for services not rendered, and by ordinary people who want to cover their deductible or see filing a claim as a chance to make a little money. Insurance agents and company employees can commit fraud too.
In health care, the National Health Care Anti-Fraud Association (NHCAA) describes schemes such as billing for services that were never provided, billing for a more expensive service than the one actually performed, known as upcoding, and performing medically unnecessary services just to generate insurance payments.
How insurance fraud affects you and the industry
What it costs
In 2022 the Coalition Against Insurance Fraud estimated that insurance fraud costs the United States $308.6 billion a year. The Coalition is a network of more than 320 organizations that brings together government agencies, regulators, insurers and consumers.
Here is how the Coalition's 2022 estimate breaks down:
| Line of insurance | Estimated yearly cost |
|---|---|
| Life insurance | $74.7 billion |
| Medicare and Medicaid | $68.7 billion |
| Property and casualty | $45 billion |
| Health care | $36.3 billion |
| Premium avoidance or misclassification | $35.1 billion |
| Workers' compensation | $34 billion |
| Disability | $7.4 billion |
| Auto theft | $7.4 billion |
| Total | $308.6 billion |
Source: The Impact of Insurance Fraud on the U.S. Economy, Coalition Against Insurance Fraud, 2022.
Treat these numbers as estimates. The report itself says the actual cost of insurance fraud is impossible to measure accurately. A November 2024 paper from the Rutgers Center for Risk and Responsibility went further, arguing that the method behind the $308.6 billion figure is unsound and that the report ignores fraud committed by insurers.
Higher premiums and other harms
Honest customers pay for fraud. The NAIC says fraud costs businesses billions of dollars each year, an expense passed on to consumers in higher premiums, and calls it a criminal act that leads to higher rates for all consumers.
In health care, the harm goes beyond money. The FBI says health care fraud can raise health insurance premiums, expose patients to unnecessary medical procedures and increase taxes.
The NHCAA estimates that health care fraud costs tens of billions of dollars a year. Its conservative estimate is 3 percent of total health care spending, and it notes that some government and law enforcement agencies put the loss as high as 10 percent, which could mean more than $300 billion.
How insurers respond
Most insurers have set up special investigation units to help identify and investigate suspicious claims. Their teams of trained investigators include former law enforcement officers, attorneys, accountants and claim experts.
Insurers are also relying more on technology, such as predictive modeling, link analysis and artificial intelligence, the NAIC says.
What are the consequences of committing insurance fraud?
Insurance fraud is a crime in most of the United States. As of March 2020, 48 states made insurance fraud a specific crime, according to the Coalition Against Insurance Fraud. Federal law can apply too: the Violent Crime Control and Law Enforcement Act of 1994 makes insurance fraud a federal crime when it affects interstate commerce, Triple-I notes.
Penalties depend on the law and the facts of the case. Two examples show the range:
- California: knowingly presenting a false or fraudulent claim for a loss or injury is a felony punishable by imprisonment for two, three or five years and a fine of up to $50,000 or double the amount of the fraud, whichever is greater, and the court must order restitution. Some health care claim offenses of $950 or less are punishable by up to six months in county jail, a fine of up to $1,000, or both (California Penal Code section 550).
- Federal health care fraud: fines and up to 10 years in prison, up to 20 years if the fraud results in serious bodily injury, and up to life if it results in death (18 U.S.C. section 1347).
This is general information, not legal advice about any specific case.
Who fights insurance fraud?
State fraud bureaus
Fraud bureaus are state agencies that detect, investigate and prevent insurance scams, and all of them invite citizens to phone in tips, according to the NHCAA. As of March 2020, 42 states and the District of Columbia had an insurance fraud bureau, the Coalition Against Insurance Fraud reports. Their investigators work closely with federal, state and local law enforcement officials to prosecute insurance fraud, the NAIC says.
The National Insurance Crime Bureau
The National Insurance Crime Bureau (NICB) is a not-for-profit organization dedicated to fighting insurance fraud and crime. It was formed in 1992. Its membership includes more than 1,200 property and casualty insurance companies, vehicle rental companies, auto auctions, vehicle finance companies and other organizations, and its staff work with law enforcement agencies, prosecutors and the public.
Bigger cases, such as organized fraud rings or people who stage crash after crash, can go over to the NICB. Its people build those cases so prosecutors can take them to court, and they connect insurers with the police (Triple-I).
Federal agencies
The FBI says it is the primary agency for investigating health care fraud in both federal and private insurance programs. It works with federal, state and local agencies and with insurance groups such as the NHCAA, the NICB and insurance investigative units.
The HHS Office of Inspector General takes tips about fraud in Medicare, Medicaid and other HHS programs. State Medicaid Fraud Control Units, usually part of the state attorney general's office, investigate and prosecute Medicaid provider fraud.
Industry and consumer groups
The Coalition Against Insurance Fraud, founded in 1993, brings together government agencies, regulators, insurers and consumers. It advocates for strong anti-fraud laws, produces research and educates consumers on how to recognize and report insurance fraud.
Is insurance fraud more common in some types of insurance?
Triple-I says health care, workers' compensation and auto are generally considered the most affected insurance sectors, and the NAIC says the most common forms of fraud by policyholders involve auto insurance and workers' compensation.
Auto insurance fraud
Examples listed by Cornell's Legal Information Institute include claims for accidents that never happened, multiple claims for a single accident, claims for injuries not related to a car accident, and reporting higher repair costs than were actually paid.
Problems can also start when a policy is bought. A 2017 Verisk study cited by Triple-I found that auto insurers lose at least $29 billion a year to premium leakage, meaning omitted or misstated underwriting information that leads to inaccurate rates, such as unrecognized drivers or underestimated mileage. Triple-I notes that premium leakage is not always the result of malicious or conscious actions.
Workers' compensation fraud
Workers' compensation fraud can be committed by workers, employers or medical providers. Triple-I lists examples such as claiming a job-related injury that never occurred, exaggerating symptoms, working while allegedly disabled, providers billing for procedures that were never performed, and employers misrepresenting their payroll or the type of work their employees do to pay lower premiums.
The Coalition's 2022 report estimated workers' compensation fraud at $34 billion a year (Coalition Against Insurance Fraud).
Property and casualty fraud
Property fraud includes deliberately destroying property to collect on a policy, which the NAIC calls hard fraud, and exaggerating an otherwise legitimate claim, which it calls soft fraud. The Coalition Against Insurance Fraud says fraud occurs in about 10 percent of property and casualty insurance losses.
After disasters, Triple-I notes, some people file exaggerated or false claims or even intentionally damage property to get a higher payout, and contractor fraud is another example.
Life insurance fraud
The NICB says the most common forms of life insurance fraud include lying on an application, faking a death, altering beneficiaries to divert benefits from other intended heirs, diverting premium payments instead of forwarding them to the insurer, and stranger-originated life insurance, where investors with no personal or financial relationship to the insured person arrange a policy on that person's life.
How to report suspected insurance fraud
If you suspect fraud, you can report it to the insurance company, to your state insurance department or fraud bureau (the NAIC keeps a map of every state insurance department), or to the National Insurance Crime Bureau. Fraud in Medicare or Medicaid goes to the HHS Office of Inspector General.