Hard fraud involves criminal activity and includes scams such as auto insurance crash rings, arson for profit, the illegal funneling of insurance company assets, and falsifying medical bills. However, it is not only this clearly illegal activity that is costing insurers and policyholders millions of dollars every year. There is a more insidious form of fraud about which the general public may have a more ambivalent view.

Soft fraud, also known as opportunistic fraud, refers to claim exaggeration or embellishment. It is generally harder to detect and problematic to investigate. The perpetrators are often indistinguishable from honest policyholders, and they usually consider their behavior to be morally acceptable. A study commissioned by the Insurance Research Council (IRC) found that a quarter of respondents thought padding their insurance claim to cover a deductible was reasonable. Twenty percent thought padding a claim to recoup past premiums was acceptable behavior.

Soft fraud can also happen at the outset of a policy. The insureds may deliberately misrepresent the facts to the underwriter in the hope of reducing their premiums. They may omit details from their medical history or underreport the miles they regularly drive their car. In 2008, Quality Planning estimated that insurers lost $15.9 billion in auto insurance premiums as a direct result of underwriting rating errors.