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  • Dean Smith

America’s Fraud Epidemic: Breakdown of the Cost of Insurance Fraud

Working in the claims investigation industry, we have pretty much seen it all. The creativity of the modern day professional claimant is certainly a sight to see, but not much shocks us anymore, right? Except maybe how much fraud costs the American consumers ($80 billion per year). How does one even begin to break the number down into some sort of understandable itemized list? Christopher Tidball, executive claims consultant, the author of multiple books, and columnist for PropertyCasualty360, gives us a rather conservative (but certainly not complete) idea of where our money actually goes. First, Tidball notes two fraud classifications: hard fraud and soft fraud. “Hard fraud involves the staging of an accident or other form of a claim. It is intentional and well planned, often with connections to organized crime. Soft fraud, also known as ‘build up,’ is more opportunistic, involving insureds or claimants who will pad an otherwise legitimate claim. This can be anything from burying a deductible to running up medical bills in hopes of inflating pain and suffering awards. In some cases, claimants will go so far as to obtain needless surgeries in order to maximize the value of their claim,” writes Tidball. Next, a conservative list of insurance scams responsible for raising premium costs for the public (as well as creating dangerous situations for all involved): Vehicle Air Bag Scams: Vehicle air bags save thousands of lives as approximately 1.5 million of them inflate yearly. After an air bag is deployed, it must be repaired. And according to Tidball, “a small percentage are replaced with counterfeit airbags or in the most severe cases, trash is used to fill the void where the bag would otherwise be, putting unsuspecting consumers at risk.” Staged Accidents: Organized and orchestrated, these scams involve participants split into two groups; the bullet car and the target car. The bullet car will collide with the target car, and in turn, the participants in the target car will claim injuries. There are several other dangerous, orchestrated accidents involving unsuspecting motorists, such as the “drive down,” “wave down,” and the “swoop and squat” (which we discussed in last month’s article). Vehicle “Thefts”: According to Tidball, “In the ‘owner give up,’ policyholders will intentionally ditch and sometimes burn their vehicles to get out from loans where they are upside down. In other scenarios, vehicles are sold to a body shop. This is a cash transaction and there is no paperwork or record of the sale. The shop in turn will cut the car up and either use or sell the parts. Yet another form involves the owner selling the car to an overseas buyer, again a cash transaction with no paperwork. When the car is out of the country, it is reported as stolen.” Life Insurance Scams: We’ve all heard of the infamous murder-for-life-insurance-policy scams. A much less dangerous form includes policyholders providing an address in an area with lower premium costs, instead of their actual physical address. Even more, let’s not forget workers’ compensation scams that plague our country, along with slip and falls and arson, just to name a few. Shocking Statistics: Tidball notes that, “After narcotics trafficking, insurance fraud is the largest criminal enterprise in the United States. Not surprisingly, the two are often interrelated.” According to the National Insurance Crime Bureau, from 2001 to 2008, insurers reported a 102% increase in suspected forms of staged accidents. Nearly 700,000 vehicles were reported stolen in 2013 in the United States (imagine the percentage of claims that are fake). According to the Insurance Information Institute, approximately 10% of property and casualty claims are fraud. The FBI puts healthcare fraud at 3% to 10% of healthcare expenditures (or up to $259 million dollars per year). The Insurance Research Council estimated in a multi-state study that anywhere from 21% to 36% of auto-insurance claims contained elements of suspected fraud or buildup. In a report by Bloomberg, it is estimated that Americans pay $180 billion per year as the result of our tort system, of which only 20 cents on the dollar is returned to a victim. Tidball notes, “While some of this monetary transference is the result of legitimate injuries, a portion is the result of frivolous lawsuits. This figure is likely very conservative given many businesses and service providers take costly steps to avoid litigation, often making monetary payments to avoid the costs of trial, which some experts have equated to legalized extortion.” According to the Chamber of Commerce, the American tort system’s embedded litigation tax costs every American an estimated $1,200 per year (in addition to the $400 to $700 that consumers are paying in higher insurance premiums due to insurance fraud). Source

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