Car insurance fraud occurs when someone deceives an auto insurance company in order to benefit financially. Some car insurance fraud cases are more severe than others, but fraud is by no means a victimless crime.

The total cost of insurance fraud is approximately $40 billion annually, according to the FBI. This means the average family pays between $400 and $700 extra per year on insurance premiums to make up fraud costs.

Here's a look at types of insurance fraud and how to avoid getting caught up in a scam.

Hard vs. soft insurance fraud

"Hard fraud" involves intentionally creating a fake situation in order to receive an insurance settlement. If caught, individuals committing hard fraud can face steep fines and jail time.

"Soft fraud" is more common than hard fraud, perhaps because it is harder to detect. While soft fraud has less severe punishment, penalties still include fines, community service or probation. Exaggerating injuries or damages after an accident or providing misinformation to an insurer are forms of soft fraud.

Common types of insurance fraud

If you get into an accident with someone who wants to commit insurance fraud, you'll want to know the warning signs so you can report it to your insurer. Here are some ways people try to bilk insurance companies.

Jump-ins: People who were not in a car during an accident pretend they were injured. They hope to receive a settlement from their insurer or the other driver involved.

False injury claims: Someone reports injuries that did not actually occur. Following a minor accident, a person might make a claim against you for medical bills for injuries. If you believe these injuries didn't occur, tip off your insurer. It can refer the incident to your state's insurance fraud bureau.

Owner give-up: A policyholder abandons or sets fire to their car, then reports it stolen in order to make a claim. Some people even conspire with professional con artists, paying them to dispose of cars.

Claims padding: A policyholder adds more problems to an insurance claim than what actually occurred. Claiming more pain/injuries than you actually suffered after an accident falls under this category. Working with a mechanic to add to repair costs to a claim, or having a mechanic fix pre-existing damage as part of a claim, are other examples.

Misrepresentations on insurance applications

Here is information that is often misrepresented on auto insurance applications in the hopes of saving money.

Missing drivers: This occurs when a policyholder fails to tell the insurer that other drivers regularly use the vehicle. For example, if two parents neglect to include their licensed teenagers on an insurance policy, it's a form of fraud.

Under-reported mileage: If you misrepresent the approximate number of miles you drive, you are being dishonest to the insurance company.

Location lies: When a policyholder uses a different address to register and insure a car, they are committing auto insurance fraud. Usually, registering/insuring a vehicle in a rural area results in lower rates than insuring it in a city. For example, if you say your car is "garaged" at your parents' home in the suburbs, but you actually live in the city, you are committing insurance fraud.

Grade faking: This occurs when a parent or student lies about good grades to qualify for a good-student insurance discount.

Auto insurance fraud scams

Insurance con artists make money by wreaking havoc on others.

Staged accidents: This occurs when someone intentionally causes an accident in order to make a claim against your insurance or their own. Intentionally rear-ending another driver or purposely sideswiping a car are common schemes. This type of fraud is often committed by organized crime rings that profit from unsuspecting victims.

Auto repair scams: Most auto repair shops are honest, but fraudulent body shops take advantage of both you and your insurance company. These are typical scams committed by repair shops:

  • Padding charges: When a repair shop makes a reasonable initial estimate but presents you with an inflated final bill. Some mechanics leave the estimated cost blank, then fill in a higher amount after you've already approved it.
  • Counterfeit/used parts: Some auto body shops charge the cost of quality, new parts, but use replacement parts that are used or aftermarket -- not sourced from the vehicle's manufacturer. You might think the body shop installed brand new parts until the parts give out on you in the future.
  • Poor work: Some body shops cut corners, not caring if the resulting work is substandard.
  • Unnecessary repairs: This is a form of padding in which the shop "repairs" problems that never existed. If a repair shop offers to replace a part that you believe has been working properly, you have a right to decline or take your business elsewhere.
  • Air bag scams: Some auto shops replace air bags with an aftermarket bag, then bill you for an original equipment manufacturer (OEM) bag. Mechanics might even "replace" an air bag with cardboard or other material, but bill for a new part.

Fake insurers and agents

It's not just drivers and repair shops committing fraud. Fake insurance companies and illegitimate agents also commit insurance fraud. Fake insurers will take premium payments but don't provide real coverage. The documentation they provide may even look real. You'll be driving uninsured without realizing it. To attract customers, they will offer rates that are significantly lower than others.

Premium diversion is the most common way agents commit fraud. This occurs when an agent embezzles insurance premiums. Rather than sending the premiums you make to a legitimate insurer, the agent keeps the money, leaving you without coverage.

Stay on the lookout for signs that may indicate a fake insurance company or agent:

  • If an agent pressures you into signing up for a policy immediately, maybe threatening that the premiums will rise if you don't sign up for it today.
  • If the premiums at one company seem too good to be true.
  • If you can't find a listed phone number to contact an insurer.

How to report insurance fraud

  • If you're suspicious of an agent or company, call your state insurance department to verify that an insurance company exists or that an agent is licensed to sell insurance in your state. Many state insurance departments have investigators who work with law enforcement officials to fight insurance fraud.
  • You can report suspicious behavior anonymously to the National Insurance Crime Bureau (NICB). Call the NICB at 1-800-TEL-NICB or fill out an online form.
  • If you're involved in an accident, call the police. Take pictures of the accident scene and call your insurer if you're worried the other driver is committing fraud.

Seeking help and staying on the defensive will help you spot suspicious activity and avoid becoming a victim of fraud.

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