nsurance fraud is no joke, with often high stakes and a hefty price tag for all involved in the crime. Yet, day after day, we read news stories involving unsuccessful attempts to “beat the system” to get a benefit payout from an insurance company.
Or on the flip side, a rogue insurance agent pockets a client’s premiums. Fraud stories also range from consumers being cheated out of their hard-earned money to more-sinister schemes that involve death and wrecked lives.
But thankfully, these these conviction news stories normally end with scammers rightfully sentenced to permanent criminal records, fines and often lengthy jail terms.
What is insurance fraud and why does it happen?
So what gives? Why do people commit insurance fraud if they face a risk of being caught and convicted? Before jumping down the rabbit hole of “why,” we should know what insurance fraud is.
Simply, insurance fraud is any act committed to defraud an insurance process to secure unfair or unlawful gain. Fraud can occur at any stage of an insurance transaction by any of the following:
• Individuals applying for insurance
• Policyholders
• Third-party claimants
• Insurance professionals such as agents and adjusters<
Fraud Triangle
Now that we know what insurance fraud is, let’s talk about why it happens. There are many reasons people commit fraud. But the core of the “why” people turn to insurance fraud can be explained using the fraud triangle.
The fraud triangle was first introduced by criminological researchers Donald Cressy and Edwin Sutherland. It is considered one of the formative and influential methods to analyze fraudulent issues. The fraud triangle is based on this idea expressed by Cressy:
“Trusted persons become trust violators when they conceive of themselves as having a financial problem which is non-shareable, are aware this problem can be secretly resolved by violation of the position of financial trust, and are able to apply to their own conduct in that situation.”
The fraud triangle illustrates the three basic reasons why people commit insurance fraud. They are:
• Opportunity
• Pressure
• Rationalization
Pressure. The pressure, or incentive, to commit fraud typically comes in the form of financial difficulty. This side of the triangle explains why insurance fraud happens in the first place. When someone is faced with financial pressure and realizes their problem can’t be resolved using legitimate methods, they start to feel their back is against the wall and begin to explore alternatives. Thus fraud becomes a viable and real option.
Rationalization. “I am just borrowing the money” … “I need to do this for my family. Besides, the insurance company is rich and won’t miss it.” … “How would they know? I’ll never get caught, and if I do — insurance fraud isn’t that serious. They’ll never press charges against me.”
Rationalization focuses on how potential and future fraudsters justify committing fraud to make themselves feel better. It is important to note that many who commit fraud are ordinary people. They may have no criminal history. They’re first-time offenders. They usually view themselves as honest and hardworking people who’ve unfortunately fallen on hard times. Almost all fraud incidents involve some form of rationalization.
Opportunity. The opportunity refers to the specific way a fraudulent act can be committed. Unfortunately, within the world of insurance, the opportunity can present itself in the form of numerous types of insurance fraud schemes. Some of the most-common types include:
• Agent and broker scams, such as premium theft.
• Property and vehicle scams, such as arson.
• Life insurance scams, such as a faked death.
• Health insurance scams, such as billing for services that weren’t rendered.
• Workers compensation scams, such as faking injuries on the job.
And the list of fraudulent schemes goes on and on. A person will weigh risk and reward when assessing the opportunity, and then act accordingly. However, the risk always outweighs the reward because, as noted previously, scammers who are caught often serve prison time and ruin their lives. Still, people take advantage of the opportunity and decide to commit insurance fraud anyway.
Just don’t do it
Due to the COVID-19 pandemic and economic decline, the likelihood of a sharp increase in fraudulent insurance acts is a valid concern in these unprecedented and uncertain times. There is an increase both in pressures and opportunities. This increases the likelihood that normal people may rationalize their thoughts and act to commit fraud.
The best advice you can give to anyone who is feeling the pressure and wrestling with those thoughts is, “Just don’t do it. It is not worth it. And it will never be worth it.” Insurance fraud is a crime nationally. The majority of states also have fraud bureaus to identify and investigate fraud incidents. In most states, fraudulent claims can be either a felony or a misdemeanor, depending on the nature and extent of the fraud. Certain types of fraud, such as healthcare fraud, are also crimes under federal law.
What to do instead
Remember, insurance fraud damages everyone and is an estimated $80-billion enterprise annually. The FBI says insurance fraud costs everybody between $400 and $700 a year — just think of it as someone stealing from your bank account.
You can help fight back. Learn more about insurance fraud and help identify and report it — the Coalition provides many learning resources. If someone you know is thinking about committing insurance fraud, let them know the risk isn’t worth it. And if you suspect someone is already committing insurance fraud, contact your state fraud bureau and report it.
Insurance fraud is the crime we all pay for.
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