Types of Auto Insurance Fraud

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Insurance fraud occurs when someone tricks their insurance provider for financial gain, either to get a cheaper premium or to receive a higher payment for a claim. No matter how big the lie, insurance fraud is illegal in all 50 states.

Here’s what you need to know about auto insurance fraud:

What is car insurance fraud?

Auto insurance fraud can take many forms, such as faking a car accident, filing multiple claims for the same accident, or lying to get an insurance policy.

Insurance (non-medical insurance) fraud costs the industry more than $40 billion each year, according to the Federal Bureau of Investigation, and insurers typically cover the shortfall by raising customer rates.

Did you know? The average American family pays between $400 and $700 in extra car insurance premiums each year to cover the costs of fraud, according to the FBI.

There are two main types of insurance fraud: soft fraud and hard fraud.

Check: How long do you have to report an accident to your insurer?

Soft fraud

Soft insurance fraud is when you file a legitimate claim but exaggerate certain aspects of it — such as the extent of your injuries or damage to the vehicle — to get a higher payout.

Soft fraud can also refer to lying to an auto insurer to get a lower premium. This type of fraud is more common than hardware fraud, and you may not realize you are being deceptive in some cases.

Here are some examples of soft car insurance fraud:

  • Register the car at someone else’s address to get a lower rate
  • Over-reporting damage to your car to get a higher payment
  • Exclude drivers from the household, such as a teenager, to avoid a fare increase

Hard fraud

Hard fraud involves planning fraudulent insurance claims for payment. This type of premeditated offense is more serious and can lead to fines or imprisonment.

Here are some examples of serious car insurance fraud:

  • Abandon or destroy your car and report it as stolen
  • Have someone steal your car or tear it apart for parts, and report it as stolen
  • Staging an accident and filing a claim
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How does auto insurance fraud happen?

Auto insurance fraud can happen in many ways. Some of the most common scams include:

  • False registration: Your zip code can affect how much you pay for car insurance. For example, drivers tend to pay more in high-cost counties or in neighborhoods with higher theft rates. Some drivers lie and register the car at someone else’s address to get a lower rate.
  • Lie on an app: Some drivers are honest about major details, like their address and driving history, but fake small details. However, stating that you are married, saying that you have graduated from college, or significantly understating your annual mileage can be considered fraud if it is untrue.
  • Exaggerated repair costs: This type of car insurance fraud is committed by body shops and can happen even when you file a legitimate car accident claim. For example, dishonest mechanics may exaggerate the time it takes to repair your car, add bogus services, charge for new parts when they are actually using used parts, or inflate the cost of necessary vehicle repairs.
  • Vehicle deposit: This type of fraud involves a car owner destroying or abandoning their own car and reporting it as stolen. In some situations, the car owner sells the car and then files a police report for a stolen vehicle, hoping to receive money through the sale and again through an insurance settlement.
  • Defective airbag replacement: When you bring your car in for repair after an accident, a dishonest mechanic may either replace your airbags with counterfeit ones or not replace the airbags at all. Or, in some reported cases, the body shop may deploy the airbag to increase insurance claim payout.
  • Replacement of defective windshield: Another popular scheme involves a scammer pretending to be a windshield repairman. They may approach you in public and claim that your perfectly good windshield is damaged and needs to be replaced – and that your insurance will cover it. But these bogus repair specialists will replace your windshield with an inferior one, putting you at risk, and submit an inflated fraudulent claim using your information.

Auto insurance fraud is a serious and potentially dangerous offense that can result in severe penalties. This can take many forms, from giving false information to staging an accident, and it can even happen in a body repair shop without your knowledge. But knowing how car insurance fraud happens can help you identify red flags and avoid it altogether.

If you think you have been the victim of fraud, contact your insurer immediately. Then contact your state’s Department of Insurance to report it.

You can also prevent fraud by calling the police when you suspect you are involved in a staged accident. If someone approaches you about repairs to your car, do some independent research to make sure that person has a legitimate business. And when you submit a claim, stay in touch with the insurance agency. They may be able to recommend reputable auto repair shops and keep you updated on the status of your claim.

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About the Author

Kim Porter

Kim Porter is an expert in credit, mortgages, student loans and debt management. She has been featured in US News & World Report, Reviewed.com, Bankrate, Credit Karma, and more.

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