Understanding and Preventing Insurance Fraud: How to Protect Yourself

Some insurance fraud is aimed at insurance companies, and some is aimed at the people who buy coverage. The National Association of Insurance Commissioners (NAIC) says fraud ranges from individuals committing fraud against consumers to individuals committing fraud against insurance companies, and that it financially affects consumers and businesses as well as insurers. This guide explains the main kinds of insurance fraud, what they cost, how insurers and regulators work to stop them, and the steps you can take to protect yourself.

Understanding insurance fraud and its types

Triple-I, the Insurance Information Institute, describes insurance fraud as lying to an insurance company, or by one, to get money. Anyone in the chain can do it: the person applying for a policy, the policyholder, someone else making a claim, or a business paid to help a claimant, such as a repair shop or a clinic. Insurance agents and company employees can commit it too.

Hard fraud and soft fraud

The NAIC recognizes two categories. Hard fraud occurs when a policyholder deliberately destroys property in order to collect on the insurance policy. Soft fraud, which is more common, occurs when a policyholder exaggerates an otherwise legitimate claim, or lies about or leaves out information on an application to get a lower premium.

Fraud that targets buyers

Some fraud is aimed at the customer. The NAIC says the most common fraud scheme among insurance agents and brokers is premium diversion, where the agent or broker keeps policyholders' premium payments instead of sending them to the insurance company. Other schemes include selling insurance without a license and collecting premiums without paying claims.

The NICB warns about ghost brokers: people or organizations that pose as legitimate insurance agents but are not licensed or authorized to sell insurance. They advertise cheap premiums through social media, fictitious websites and word of mouth. Their schemes range from issuing fake policy documents to buying a real policy in the victim's name, then canceling it without the victim's knowledge and keeping the refund.

The NICB says common victims include first-time policyholders such as students, the elderly and non-English speakers.

Fraud by providers and organized groups

The FBI lists common health care schemes by medical providers, including double billing, phantom billing for a visit or supplies the patient never received, unbundling, and upcoding, which means billing for a more expensive service than the patient actually received. Triple-I adds that organized criminals steal large sums through fraudulent business activities.

What insurance fraud costs

• $308.6 billion a year. That is the Coalition Against Insurance Fraud's 2022 estimate of what insurance fraud costs the United States. The report itself says the actual cost is impossible to measure accurately.
• About 10 percent of property and casualty losses. The Coalition says fraud occurs in about 10 percent of property and casualty insurance losses.
• Tens of billions of dollars in health care. The National Health Care Anti-Fraud Association estimates health care fraud losses in the tens of billions of dollars each year, with a conservative estimate of 3 percent of total health care spending.
• $74.7 billion in life insurance. Life insurance was the largest line in the Coalition's 2022 estimate. Medicare and Medicaid fraud came next at $68.7 billion, and workers' compensation fraud was put at $34 billion (Coalition report).

Estimates like these are debated. A November 2024 paper from the Rutgers Center for Risk and Responsibility argued that the $308.6 billion figure rests on an unsound method.

Consequences of property, workers' compensation and other insurance fraud

Property fraud can mean deliberately destroying property to collect on a policy, which the NAIC calls hard fraud, or exaggerating a real claim, which it calls soft fraud. After disasters, Triple-I notes, some claimants file exaggerated or false claims, and some even intentionally damage property to get a higher payout.

Workers' compensation fraud can mean claiming a job-related injury that never occurred, working while allegedly disabled, an employer misrepresenting payroll to pay lower premiums, or a provider billing for procedures that were never performed (Triple-I).

The consequences can be serious:

• Imprisonment and fines. In 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 (California Penal Code section 550).
• Restitution. The same California law requires the court to order restitution from anyone convicted under it.
• Federal charges. Federal health care fraud carries fines and up to 10 years in prison, or more if the fraud results in serious bodily injury or death (18 U.S.C. section 1347).
• Civil lawsuits. A federal law, the Racketeer Influenced and Corrupt Organizations Act, lets insurers file civil lawsuits and allows triple damages. Since the late 1990s, some of the largest insurers have filed and won insurance fraud lawsuits against individuals and organized rings (Triple-I).

California is one example. Most other states have their own insurance fraud laws, so the details differ from state to state. This is general information, not legal advice.

How technology helps insurers detect fraud

Insurers are relying less on traditional methods, such as business rules and red flags, and more on technology, such as predictive modeling, link analysis and artificial intelligence, according to the NAIC. The NAIC says the cost of fraud to consumers is expected to decrease as a result.

In a 2021 white paper by the Coalition Against Insurance Fraud and SAS, nearly all respondents said they used anti-fraud technology to flag potentially fraudulent claims, the NAIC reports.

Insurers also rely on human investigators. Most have set up special investigation units to help identify and investigate suspicious claims, with teams of trained investigators that include former law enforcement officers, attorneys, accountants and claim experts (Triple-I).

From detection to legal action

The legal options of an insurer that suspects fraud are limited: it can inform law enforcement agencies, withhold payment and collect evidence for use in court (Triple-I).

Most states require insurers to report suspected fraud. As of March 2020, 43 states and the District of Columbia had that requirement, according to the Coalition Against Insurance Fraud. Almost two dozen states and the District of Columbia also require insurers to create and implement programs to reduce insurance fraud, Triple-I says.

State fraud bureaus employ investigators who work closely with federal, state and local law enforcement officials to prosecute insurance fraud (NAIC). The NICB specializes in preparing fraud cases for trial (Triple-I), and the FBI investigates health care fraud in both federal and private insurance programs.

How to protect yourself from insurance fraud

• Stop, call, confirm. If you are unsure about an insurance company or agent, the NAIC suggests you stop before signing any paperwork or making a payment, call your state insurance department, and confirm that the company or agent is legitimate and licensed to sell insurance in your state.
• Pay the insurer, not a person. The NICB advises paying by credit card directly to the insurance company, not to an individual, and not with cash or a wire transfer.
• Question prices that look too good. The NAIC lists premiums 15 to 20 percent lower than other companies' comparable coverage as a warning sign, and the NICB warns against too-good-to-be-true premiums and offers made through social media apps.
• Confirm that your coverage exists. If your ID card or policy does not arrive in a timely manner, check with the insurance company that your premiums were applied (NAIC). The NICB also suggests checking your policy documents by contacting the insurance company listed on them.
• Tell the truth on applications and claims. Knowingly giving false information on an application, or exaggerating a legitimate claim, is itself insurance fraud (NAIC).
• Guard your insurance information. The FBI suggests treating your health insurance information like a credit card. Medicare says it will never call you to sell you anything or visit you at your home.
• Read your statements. Check each explanation of benefits or Medicare statement against the care you actually received, including the dates and services (FBI; Medicare.gov).
• Review your life insurance beneficiaries. The NICB suggests regularly checking your policy's beneficiary and contact information through your online account.
• Report what you see. Your insurer (most insurers take reports online), your state insurance department and the National Insurance Crime Bureau all take reports of suspected fraud.

Getting legal help

This guide is general information, not legal advice. If you are accused of insurance fraud, or you need advice about your own situation, talk to a lawyer licensed in your state.

If your concern is how an insurer handled your claim, set your rates or treated you, that is usually a complaint rather than fraud. The NAIC's insurance department map shows where to file a complaint in your state, and the NICB says it does not address concerns about an insurance company's service or rates.