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What Is Insurance Fraud?

Put simply, insurance fraud occurs when someone deliberately defrauds the insurance process for their benefit or financial gain. 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.


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


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 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 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.


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”.

Hard Fraud: Someone deliberately fakes an accident, injury, theft, arson or other loss to collect money illegally from insurance companies. Soft Fraud: Someone telling a little white lie to their insurance company in order to maximize a claim, or to reduce the amount of the premium. Though many people think this is harmless, it’s a crime and results in an increase in everyone’s insurance costs.


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:

The value of the property, services, or other benefits wrongfully obtained. The economic loss suffered by any person. Once this value is calculated, it is used to issue the penalty based on the theft statute sentences:

More than $35,000 in defrauded value:


As stated by 18 U.S. Code § 1033, insurance fraud is a federal crime when an individual who “is engaged in the business of insurance whose activities affect interstate commerce and knowingly, with the intent to deceive, makes any false material statement or report willfully and materially overvalues any land property or security in connection with any financial reports or documents presented to any insurance regulatory official or agency or an agent or examiner appointed by such official or agency to examine the affairs of such person, and for the purpose of influencing the actions of such official or agency or such an appointed agent or examiner.”

In addition, anyone employed by the insurance industry who “willfully embezzles, abstracts, purloins, or misappropriates any of the moneys, funds, premiums, credits, or other property” or uses threats or force in writing or any other form of communication in an attempt to “impede the due and proper administration of the law” has also committed a federal crime.


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. The Coalition Against Insurance Fraud also offers a number of resources for reporting insurance fraud.

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