While insurance fraud is an industry problem not everyone is aware that this crime actually affects U.S. families directly – to the tune of $400 to $700 per year in the form of increased premiums, according to FBI statistics.

Annually, the insurance industry collects more than $1 trillion in premiums but the actual toll of insurance fraud – not including health insurance fraud – is estimated at $40 billion per year, the U.S. government reports.

The most common types of insurance fraud include:

  • Premium diversion: This is when an agent or company embezzles insurance premium and it is the most common type of fraud, according to the FBI. This happens usually when an insurance agent keeps the premium for his or her own personal use. Sometimes the insurance agent is not licensed at all and may be selling policies without authorization.
  • Fee churning: This practice uses a series of intermediaries who all take commissions through reinsurance agreements, the FBI says. Eventually, there is no money left to pay claims. The company that pays the claims is usually set up by the conspirators to fail when you need them most.
  • Asset diversion: This is the theft of insurance company assets usually during an acquisition or merger of an existing company. The asset diversion occurs when someone in the new company illegally converts the acquired company’s assets for illegal purposes, usually embezzlement or theft.
  • Workers Compensation Fraud: When an agent or company purports to provide workers compensation insurance at reduced premium and then misappropriates the money without ever providing coverage.

Many customers engage in fraud too. False and exaggerated insurance claims happen, especially during major disasters.

In 2005, Hurricane Katrina led to 1.6 million filed insurance claims, totaling $34.4 billion in insurance losses. The U.S. government paid $80 billion in claims and now estimates about $6 billion of which may have been paid out from fraudulent claims, according to government estimates.

So how do you avoid being a victim of insurance fraud? It’s not hard if you look for warning signs. Here are some questions and warning signs:

  • Is the insurance broker providing you with enough information? You should get the name of the carrier, address, and phone number for its customer service department. Check that the insurance company is licensed with your state’s insurance department and review the company’s financial stability through Standard & Poor’s, Moody’s, A.M. Best; or Duff & Phelps.
  • Does my agent or broker want me to write a check personally to him? You should always make out your payment directly to the insurance company or carrier directly, never the agent. The company should bill you directly at your home or business.
  • Did you receive your policy in the mail after you paid the premium? You should receive a copy of your policy either by mail or e-mail.
  • If you renewed your policy with your agent, did you receive a cancellation notice? This could be a sign that the premium payment wasn’t recorded.
  • Is your agent hard to reach? Your agent should be accessible to you, especially during regular business hours. If he or she is rarely in the office, or may work part-time, there may be an issue. Moreover, your insurance agent should be licensed or registered with your state so make sure you’re dealing with someone legitimate.
  • Is your broker using high-pressure tactics? If your broker is too pushy or telling you to replace your existing coverage immediately then you should be wary. If a broker tells you that you need to purchase additional products in order to purchase a policy then it’s worth checking out.
  • Does your agent or broker talk “above” you? Remember, you are a paying customer and insurance can be difficult to fully understand. An agent or broker should explain your policy and coverages in detail. If you can’t get a direct answer or you feel the agent is not being forthright, talk to someone else in the company or consider taking your business elsewhere.
  • Check and double check your policy: Your policy should reflect what your agent told you about coverages. If there is a mistake, call them on it and ask why the information is different than what you were explained. Mistakes do happen, so does fraud, so be sure that your policy reflects your coverage needs. Unfortunately, most people don’t take the time to read their policies closely.

Finally, if you suspect that your agent or broker is engaging in insurance fraud, report the incident to local authorities immediately.  You may also call your local FBI office or the National insurance Crime Bureau at (800) 835-6422.

Other sources used in this article: