On the surface, it may appear the insurance company is the victim of insurance fraud. Only the insurance company is out money when insurance fraud is committed, right? Wrong. The Coalition Against Insurance Fraud estimates that the average American family pays nearly $950 annually in increased premiums to cover the costs of insurance fraud. Also, the cost businesses pay for insurance is increased and that additional expense is passed onto the consumer in the form of higher prices. Therefore, the cost of fraudulent claims is not left with the insurance company; it is passed onto the consumer in higher premiums and in the price of consumer goods.
So what exactly constitutes insurance fraud? Is it simply just the hardened criminal that is out plotting elaborate schemes to bilk insurance companies out of millions? Or can insurance fraud be committed by the average citizen just telling a little white lie to get a little more paid on their insurance claim than they actually deserve? The answer – both.
The hardened criminal example above would be considered hard fraud. Hard fraud is committed by an individual or a group of individuals that deliberately set out to scheme money from an insurance company. The schemes can include staged auto accidents, filing fraudulent medical bills, murder for insurance, and so on. These are blatant attempts by someone to deceive insurance companies out of money they are not entitled to.
On the other hand, soft fraud is when a normally honest person decides to mislead an insurance company to either reduce their premium costs or increase their claim settlement. A simple lie such as not disclosing a speeding ticket to reduce the cost of insurance is considered soft fraud. The price of insurance is calculated based on the risk being insured. If the risk of someone being in an auto accident is higher because of their driving record, they should pay the premium associated with their risk.
Another example of soft insurance fraud is exaggerating a claim. For example, if someone exaggerates the cost of a claim in hopes of making money off of it, that is considered soft fraud. Insurance was designed to indemnify people. To indemnify someone is to bring them back to where they would have been had the claim not happened. Insurance policies are not designed to increase someone’s wealth simply because they were involved in a loss.
Unfortunately, it is all too common for people to think soft insurance fraud is justified. Many people do so based on the assumption that the insurance company is just making millions in profit off of people, so it is justified in that they are just getting their “fair share”. But that logic is flawed. The cost of fraudulent claims isn’t left with the insurance company – it is passed back onto the consumer in the form of higher insurance premiums. Therefore, the real victim of insurance fraud is the consumer.