How Does Auto Insurance Fraud Affect Everyone?

Although you’d likely have to rely on an auto insurance fraud investigation to determine whether a driver, body shop or towing company had violated the law, it’s not difficult to figure out who ends up footing the bill for fraud – everyone. Insurance fraud is widespread, so costs to combat it are baked into the premiums of all policy holders.

But how can you know if you’ve been the victim of fraud and what steps should you take if you’re involved in a crash to avoid fraudulent behavior? AAA has put together a list of some of the most widely practiced types of auto insurance fraud as well as information on laws to combat scams, fraud penalties and various methods of protecting yourself from being a victim.

What is auto insurance fraud?

Auto insurance fraud affects all drivers because insurance companies determine their rates, at least partially, based on losses. So, the more losses – or claims – filed in a specific city or state, the higher premium rates are likely to be. Additionally, fraud can slow legitimate claims and, in some cases, present the possibility of physical danger.

In any given year, auto insurance fraud can cost drivers billions of dollars and, in New York City alone, fraud factors into approximately one in three claims. According to the National Insurance Crime Bureau, New York ranks in the top five states in the U.S. for fraudulent claims.

“We’ve been part of various coalitions over the years with insurance companies,” said John Corlett of AAA Northeast. “New Yorkers pay some of the highest auto insurance premiums in the U.S. And fraud is built into the premiums of every honest policy holder.”

Corlett said he’d seen a number of scams over the years.

“Fraudsters inflate the claims,” he said. “They also sometimes recruit runners to stage crashes and fake injuries.”

In some cases, residents from the five boroughs would register their cars in cheaper coverage areas.

“The New York State inspector general found an address where something like 200 vehicles were registered in the Poconos,” he said. “There have been bills to criminalize that, but the problem is very widespread. Some legislators are reluctant to criminalize it because it’s so prevalent. This practice raises the rates for everyone because some people are not paying the true costs.”

Chris Wukovits, of AAA Northeast, said that a percentage of every premium dollar is used to offset insurance fraud.

“There are certain geographic areas where it’s more prevalent – such as the five boroughs or Buffalo – and there are rackets or medical mills,” Wukovits said.

“Within minutes of a minor accident, someone will be on the scene telling a driver, ‘I can get you paid.’ Someone else will show up and say they were in the back seat of the car and it goes from there. These are the kinds of concerns that auto insurers have to guard against.”

Examples of Car Insurance Fraud

There are numerous types of auto insurance fraud schemes and some of the most common types include:

Counterfeit airbags. In these cases, repair shops replace legitimate air bags with cheap knockoffs to save themselves money or, in more extreme cases, fill the air bag area with other materials.

Parking lot scams. If a stranger approaches you in a parking lot, claims to be with an auto repair shop and offers to provide services, whether it’s fixing a windshield or repairing a dent, don’t fall for it. This is nearly always a scam. Once the person obtains your insurance information, they can submit false claims under your policy, which you’ll later have to clear. All the while, these false claims will raise your premium.

Agent fraud. There are several common scams that involve unscrupulous agents. On some occasions, agents have been known to steal premiums outright, pocketing the money and not actually setting up the coverage. Another common fraudulent practice is known as “sliding,” in which an agent slips extra coverage that you didn’t ask for into your policy. This can add a few hundred dollars to your premium, all the while padding the agent’s commission. As always, you can avoid such scams by speaking with AAA about your auto insurance needs.

Staged accidents. Of course, some examples of fraud come from the drivers themselves. In some incidents, known as “swoop and squats,” two drivers collaborate to trap a victim. One person drives alongside the victim, while the second swoops in front of them, stops and causes a rear-end crash.

Another type of staged accident known as a “panic stop” requires two merging traffic lanes. When one driver attempts to merge into the next lane, he is waved forward by a driver who then crashes into the victim and later claims they didn’t know the victim was going to merge.

Some scams are pulled at the scenes of legitimate accidents. Drivers involved in the crash, but who are not at fault, might cause additional damage to their own vehicle to increase the claim. Lastly, be wary if you are in a legitimate crash and someone at the scene attempts to advertise the services of specific repair shops or lawyers. If you give them your information, they could submit fraudulent claims using your name.

Auto premium evasion. These scams involve customers purposefully misleading their insurance companies by providing a fake address from a lower premium area when they register their vehicles. In some other instances, drivers deliberately fail to add a new driver in their household – such as a teenager – to the family policy. These types of fraud are said to cost the auto industry billions of dollars every year.

Other scams. Some other types of fraud include filing more than one claim for a single injury, providing incorrect information while getting a quote, buying a policy after an accident has already occurred, filing a claim for injuries unrelated to an accident, misreporting wages lost due to accident-related injuries, reporting higher repair costs than those paid to the mechanic or falsely reporting a vehicle as stolen.

Auto insurance fraud laws

Making fraudulent car-related claims is a crime in all 50 states, although punishments vary state-to-state, and a majority of them have established bureaus to conduct auto insurance fraud investigations.

Fraudulent claims can be either a felony or misdemeanor, depending on the nature and extent of the scam. “Soft fraud” refers to scams when a person exaggerates an existing claim, such as overstating the damages caused by a crash. These types of scams are typically considered misdemeanors. Auto insurance fraud penalties for such scams often include fines, jail time of up to a year, community service or probation.

“Hard fraud” occurs when a person either causes or fabricates a loss for the deliberate purpose of receiving insurance payments. These cases are nearly always considered felonies and are punishable by stricter auto insurance fraud penalties, such as incarceration in prison for a number of years.

Although there are likely numerous types of behavior that could prompt an auto insurance fraud investigation, some of the most common include claimants appearing calm and unflustered after having submitted a large claim, persons submitting handwritten receipts for repairs on a covered item or a customer adding or increasing their insurance coverage and then shortly thereafter submitting a claim.

Auto insurance fraud statistics

A 2013 report by the National Insurance Crime Bureau found that auto insurance fraud was the greatest component of overall insurance fraud and that the number of incidents nationally was on the rise by approximately 12.7 percent.

In New York State, motor vehicle insurance fraud increased from 17,576 to 19,912 incidents – or 13.3 percent – between 2013 and 2014, according to a DFS Insurance Frauds Bureau study.  Of those incidents, a total 15,349 – or 77 percent – involved no-fault insurance, which is designed to promptly pay personal injury claims and lower litigation costs and often includes personal injury protection that pays for each insured person’s medical care after an accident, regardless of who was at fault.

During that same period of time, the number of suspected incidents of no-fault insurance fraud rose from 13,198 to 15,439, which represents a 17 percent increase.

Protect yourself

If you are involved in a crash, there are several important steps you should immediately take that can help prevent you from becoming a victim of fraud. AAA spokesman Robert Sinclair Jr. said one of the best defenses available to drivers is having a camera with them while driving.

“Take lots and lots of photographs – of the other vehicle, the registration and inspection stickers, of the scene, the damage, the license plate,” he said. “And, if you can, take a photograph of the other driver. Also, have as much insurance coverage as you can afford – and then some more. Get an umbrella policy in addition to your normal vehicle policy. Fraud costs. It’s rampant and everybody pays as a result.”

Also, at the scene of the crash, use your camera or smartphone to take photos of road signs or anything else that can identify the area where the incident took place.

Take notes at the scene and jot down the name, address, phone number, driver’s license number and auto insurance information of everyone involved in the crash.

A police report helps protect you against persons committing fraud who might further damage their own car following the accident to pump up their claim. So, be sure to call 911 from the scene of the crash.

And as mentioned before, be wary of those who immediately appear on the scene and attempt to be helpful by advising you to take a particular service provider, whether it’s a towing company, doctor, attorney or auto body shop. Never sign a blank claims form.

Lastly, contact your auto insurance carrier immediately after the crash, regardless of whether you believe you’re at fault. Also, don’t admit fault to anyone at the scene.

What are your thoughts on auto insurance fraud? Tell us in the comments below.

If you want to know more about insurance, visit AAA.com/Insurance.