What Is Insurance Fraud?

Put simply, insurance fraud occurs when someone defrauds the insurance process. This could be either due to someone lying to an insurance agency to collect money for something they aren’t entitled to, an insurer knowingly denying a benefit that is due, or a professional service provider improperly billing insurance companies.

Insurance fraud most often occurs when someone makes a false or exaggerated insurance claim, seeking compensation for an injury that wasn’t sustained or a loss that wasn’t suffered. This crime can also be committed against customers through the sale of fake coverage, or theft of a customer’s premium by a broker.

When someone commits insurance fraud, it makes everyone’s insurance rates go up. Insurance companies will raise premiums after a year in which they have a large spike in insurance payouts. This helps them to recover unexpected payouts, which could be due to significant natural disasters, such as hurricanes or tornadoes.

According to the FBI, the total cost of insurance fraud is estimated to be more than $40 billion per year. This costs the average U.S. family between $400 and $700 per year in increased premiums.

Minnesota prohibits offenses related to insurance fraud. If you suspect someone of committing insurance fraud, you can submit a report to the National Insurance Crime Bureau.

Common Types Of Insurance Fraud

The FBI recognizes these types of fraud as the most common:

Premium Diversion

Premium diversion is the most common type of insurance fraud. It involves the embezzlement of insurance premiums. Often, an insurance agent fails to send premiums to the underwriter and instead keeps the money for personal use. This can also occur when someone sells insurance without a license, collects premiums, and then fails to pay claims.\

Fee Churning

Fee churning is the practice of a broker conducting reinsurance agreements, or trading in a client’s account, in order to generate commissions. The initial premium amount is reduced by repeated commissions until there isn’t any money to pay claims. Because each transaction appears to be legitimate, this scheme isn’t considered fraud until the cumulative effect is seen.

Asset Diversion

Asset diversion is the theft of insurance company assets. This almost always happens in the event of an acquisition or merger of an existing insurance company. It involves borrowing funds to acquire an insurance agency, then using the assets of the acquired company to pay off the debt.

Workers’ Compensation Fraud

This type of fraud occurs when someone offers to provide workers’ compensation insurance at a reduced cost and then doesn’t actually use the premium funds to provide insurance.

Fraud can also be classified as either “hard fraud” or “soft fraud”.

Are There Penalties for Insurance Fraud?

Most insurance fraud charges are felonies, unless the amount of the loss is less than $1,000. However, there is a seven-year cap from the date the fraud occurred until charges must be commenced. The statute of limitations doesn’t begin to run until the insurance company or law enforcement is aware of the fraud.

The state of Minnesota penalizes insurance fraud based on whichever is greater:

Once this value is calculated, it is used to issue the penalty based on the theft statute sentences:

Defendants charged with fraud will be ordered to pay back persons harmed by the fraud, this process is called restitution. Restitution is usually ordered in addition to fines and imprisonment.

If you have an insurance fraud case against you, contact a defense lawyer to discuss your options.