Long Term Effects of Insurance Fraud

Posted on Feb 24, 2017

People working in the insurance industry will be quick to tell you any number of insurance fraud tales. From arson and staged car wrecks to bogus slip and falls, fraudsters have a lot of creativity when it comes to insurance fraud — and this is seriously costing the American consumers a great deal of money.

There are over 7,000 companies in the insurance industry that are paid more than a trillion in yearly premiums, reports the FBI. Since the large size of this industry offers bigger incentives and more opportunities for fraud, it also contributes to insurance fraud costs significantly. As well, fraud schemes are involving more than one industry and are getting much more complex. For instance, an insurance investigation could bring back evidence of financial fraud.

Many contractors are honest and ethical. However, there are those contractors who are dishonest and unlicensed and try to con homeowners who are traumatized after a storm. There are also fraudsters who scam auto insurance companies for billions of dollars every year for staged crashes and billing them for the treatment of unneeded phantom injuries. Things like whiplash, sore backs, and soft-tissue injuries are often claimed, which are hard to medically diagnose and dispute. On top of that, you have the tricky arson insurance scams as well where scammers burn down businesses and homes illegally in order to collect the insurance payouts.

Financial Costs of Insurance Fraud

Each year in the United States, there is a minimum of $80 billion in fraudulent claims, according to an estimate by the Coalition Against Insurance Fraud. This includes the entire insurance industry. And, since a lot of insurance fraud goes unreported and undetected, this figure is conservative.

Let’s look at some statistics of the costs to insurance companies and consumers because of fraud:

  • Non-health related insurance fraud is approximately $40 billion annually with the average U.S. family paying out up to $700 a year in increased premiums.
  • Each year, around 10 percent of insurance fraud is made up of losses and loss adjustment costs for property-casualty insurance
  • Around 84 percent of insurers claim that their investigated fraud cases involve several industries
  • Around 32 percent of insurers claim that out of all claims costs, up to 20 percent involved some kind of fraud
  • Around 36 percent of a homeowner’s main concern with hiring a contractor is fraud contractors
  • The FBI estimates that up to 10 percent of all healthcare expenditures is both public and private healthcare fraud
  • In 2012, there was over $7 billion in auto claim buildup and fraud payments due to auto-injury claims in the U.S.
  • Around 8 percent of all intentional fires was suspected to be insurance fraud

Combating insurance fraud is a huge expense for local, state and federal governments. And, although the efforts are completely necessary, they can consume the resources of the government that is needed to fight other types of crime.

How Insurance Fraud Affects Society and its Victims

Serious personal and financial costs are imposed on businesses, consumers, our society, and the government due to fraud. Insurance schemes affect all people of every age, income level, ethnic background, and education level in the U.S.

The costs associated with bogus claims as well as fighting fraud are generally passed to policyholders. Businesses that are victimized have to pass these increased insurance premium costs onto their customers by increasing the costs of their products and services. And because of bogus slip and fall claims and false workers compensation injuries, many of the bigger corporations are spending millions of dollars each year investigating and preventing fraud.

Botched and unnecessary surgeries for insurance gain lead to individuals being disfigured or in chronic pain, resulting in increased healthcare costs. Medical identity fraud can ruin a victim’s credit, thereby jeopardizing their ability to get a car or educational loans and mortgages. Victims can also spend hours upon hours and hundreds of thousands of dollars restoring their credit and medical identity.

Perhaps what is worse is that staged automobile crashes or fires in homes can cause lives to be lost when the staged car crash involves another car or pedestrian or the arson causes a firefighter to lose his life.

It’s unfortunate, but it’s the victims who are paying the deep personal price. They feel humiliated, embarrassed and violated. In some cases, they face debilitating and serious depression. Their families and lives are disrupted; they lose jobs and savings accounts and may have to recover from other fraud-inflicted injuries. Many of them also must spend a great deal of time helping prosecutors and law enforcement as material witnesses.

Workers compensation, healthcare, and auto insurance are thought to be the insurance industry’s most susceptible to insurance fraud; however, fraud itself is continuously evolving.

Talk to us here at Otterstedt Insurance Agency today by completing our online form or calling 201-227-1800 to discuss your personal insurance or business insurance needs for business. We’ve been helping homeowners and businesses in New Jersey and beyond for more than 100 years and we can help you too.

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