Insurance fraud has a much longer history that one might suspect. It can be traced back to 300 B.C., when a Greek merchant named Hegestratos took out a large policy, at the time called bottomry, against his ship. Bottomry is when the master of a ship borrows money on the bottom of the ship, with the agreement that the ship will be forfeited to the creditor if the interest is not paid upon the ship's return. Hegestratos' plan was to sink his ship when it was empty, and sell the cargo that was supposed to be on the ship on the side and also keep the loan. Unfortunately for Hegestratos he drowned trying to escape when passengers and crew caught him in the act of trying to sink the ship. Insurance fraud has been around for a long time.

Topics covered:
Definition
Anti-fraud statements
Statistics
Industry actions
Commission of fraud
Hard fraud
False swearing
Soft fraud
Padding
Summary

Definition

In simple language, “fraud” can be defined as the crime of using dishonest methods to take something valuable from another person (Merriam Webster Online). Insurance fraud is when someone deceives an insurance company in order to collect money to which he is not entitled. Insurance fraud is a criminal act and can be prosecuted. Civil insurance fraud exists if an insured

·makes a misrepresentation on which the insurer relies in issuing the policy that results in the insurer granting coverage it would not have granted otherwise;

·makes a representation to the insurer that the insured knows is false;

·conceals from the insurer a fact he or she knows is material to the insurer;

·makes a promise he does not intend to keep;

·exaggerates statements of loss; and

·intentionally causes loss with the intent of financial gain.

Black's Law Dictionary, 6th Edition, defines “fraud” as

An intentional perversion of the truth for the purpose of inducing another in reliance upon it to part with some valuable thing belonging to him or to surrender a legal right; a false representation of a matter of fact, whether by words or by conduct, by false or misleading allegations or by concealment of that which should have been disclosed, which deceives and is intended to deceive another so that he shall act upon it to his legal injury.

Defining fraud is only the beginning. Insurance fraud has been around for ages, affects all types of insurance, and has been costing the industry trillions of dollars over time. The general consensus among the industry is that fraud is increasing and fraudsters are becoming more sophisticated. While insurers increase their investigations and investigative tools, the battle continues. Since fraud is designed to go undetected, it is impossible to put an exact dollar amount on it; estimates range from $87 to $300 billion every year, and these are just estimates. Nonhealth insurance fraud alone accounts for more than $40 billion per year, costing an average family between $400-$700 per year in premium increases.

Anti-fraud Statements

To protect insurers against fraud, most insurance applications contain, in clear and unambiguous language, a clause similar to the following (statement applicable in MA, NE, OR, VT):

Any person who knowingly and with intent to defraud any insurance company or another person files an application for insurance or statement of claim containing any materially false information, or conceals for the purpose of misleading information concerning any fact material thereto, may be committing a fraudulent insurance act, which may be a crime and may subject the person to criminal and civil penalties.

These statements vary by state but generally contain similar language. These statements are advising applicants that fraud is considered a crime and may be penalized. Other statements highlight that the policy may be voided if fraud is found and that claims may be denied. The language is generally similar but does vary by state.

Insurance policies also often contain statements similar to that found on the ISO HO 00 03:

J. Concealment Or Fraud

We do not provide coverage to an “insured” who, whether before or after a loss, has:

1. Intentionally concealed or misrepresented any material fact or circumstance;

2. Engaged in fraudulent conduct; or

3. Made false statements;

relating to this insurance.

Or that found on the ISO PP 00 01: