When an insurance company commits fraud, you may file a claim or lawsuit against the offending insurer. However, it’s important to know what constitutes fraud in these cases before you open a case. Here you’ll learn what insurance fraud is, including some examples of fraud, and find out what steps to take if you discover that your insurer has acted fraudulently.
What Is Insurance Fraud?
Insurance fraud occurs when an insurance company intentionally hides or misrepresents facts from policyholders, defrauding them in the process. An insurer may engage in fraud for numerous reasons, but companies do this primarily to avoid making large payouts.
There are different types of insurance fraud that insurance carriers may commit, depending on the circumstances, the type of insurance involved, and other factors.
Policyholders and other parties could also commit insurance fraud. For example, if you file a claim for an accident that you caused in an attempt to profit. Insurance fraud involving any party can come with serious repercussions for those who commit fraud.
The Legality of Insurance Fraud
Insurance fraud is criminal activity, but federal law doesn’t cover this type of fraud directly in its legislature. Instead, insurance fraud falls under The Violent Crime Control and Law Enforcement Act of 1994. This act provides the federal government with limited jurisdiction over this type of fraud.
To combat insurance fraud in the U.S., anti-fraud and criminal investigators work under various fraud bureaus present in the majority of states. These agents work with different levels of law enforcement to identify and address instances of insurance fraud.
Examples of Insurance Fraud
There are several types of insurance fraud that insurers may commit, either to deprive victims of their rights or to defraud them. According to the Federal Bureau of Investigation (FBI), insurance fraud examples include:
Premium Diversion
This type of insurance fraud involves insurers embezzling premiums. It’s the most common form of insurance fraud that insurers commit.
Specifically, premium diversion entails insurance agents neglecting to send premiums to underwriters. In turn, the agent withholds the premium for personal gain. Unlicensed individuals may also engage in premium diversion by attempting to sell people insurance, leading them to charge these people premiums without ever honoring their claims.
Fee Churning
In some cases, insurance companies or rogue agents may encourage people to renew their existing policy or open a new one under the guise of benefitting the policyholder. However, the real motive for this is to provide the agent or insurer with more money from fees or commissions.
In the process of fee churning, the premium may lower through repeated commissions, ultimately depriving the policy of funds to cover insurance claims. The goal for fraudsters here is to create superficially valid transactions that won’t look suspicious at a glance, only for fraud to become apparent later after the conspirators have succeeded in their attempts.
Misrepresentation of Terms
Insurance agents may engage in misrepresentation of terms, which involves agents lying about or hiding details about coverage when communicating with policyholders. If the policyholder decides to file a claim, he or she may discover that the policy doesn’t cover what the agent stated it would.
Workers’ Comp Fraud
Some entities may claim that they offer workers’ compensation insurance, often at a lower price than what the victim would find with a valid provider. The entity would then engage in premium diversion, collecting funds while neglecting to pay out workers’ comp insurance claims.
What’s the Difference Between Insurance Fraud and Bad Faith?
The concepts of insurance fraud and bad faith are similar, but there are key differences between them. Both involve insurance companies engaging in behavior that puts policyholders and others at a disadvantage, but they involve different motives and methods.
While insurance fraud involves insurers acting fraudulently to gain benefits, often for financial gain, bad faith tends to involve insurance companies either failing to meet contractual obligations or misleading individuals to avoid paying out insurance claims. As a result, a victim of bad faith insurance can lose out on compensation, even when they have a valid claim.
Examples of bad faith insurance practices include:
Bad Faith in First-Party Insurance Claims
In many cases, policyholders file a claim with their own insurance company following an accident. The claimant’s insurance company investigates the claim by reviewing details about the accident, including the cause of the accident and the damage resulting from it. Upon approving the claim, the insurer would pay compensation to cover the damages.
If you file a first-party claim with your insurer, your company may engage in bad faith in several ways. For example, your insurer may make a lowball settlement offer that falls far below what your case is truly worth, with the hope that you’ll accept the offer and be unable to request a larger sum in the future. Sometimes insurers also deny claims that are valid, or they may ignore claims entirely in the hope that claimants won’t follow up with their claims.
Bad Faith in Third-Party Claims
Some cases involve third-party claims, where claimants file against another party’s insurance company to recover compensation when that party is liable for damages. Insurance companies may practice bad faith insurance in third-party claims in various ways.
Instances of bad faith insurance in third-party claims include:
- Refusing to reach a fair settlement with claimants
- Holding off the claims process, resulting in unnecessary delays
- Insufficient or poorly conducted investigations into claims
- Refusal to defend the policyholder
- Misinterpreting the terms of a policy
If you suspect that your insurance company has acted in bad faith, you can file a claim as you would with insurance fraud to recover compensation from insurers and agents engaging in this behavior.
Steps to Take When an Insurance Company Commits Fraud
The process of filing and negotiating a claim follows nearly the same pattern as filing a bad faith insurance claim.
Steps you’ll need to take to successfully file an insurance fraud claim include:
Reviewing the Details of Your Contract
The first step is to look at the details in your insurance contract. Consider the terms of your policy and every deadline, exclusion, and other item in your contract to confirm whether you have a successful claim. If you notice that items aren’t excluded from the contract, they may count as inclusions.
You only have a limited amount of time to file an insurance fraud or bad faith claim. Ensure you file as soon as possible to avoid running out of time and voiding the opportunity to recover compensation for bad faith insurance or fraudulent behavior.
An attorney can help you review your contract and policy to further determine whether you have a valid claim against your insurance company.
Collect Sufficient Evidence
Like other types of cases involving fraud, you need ample evidence to show how the offending insurer caused damages to you. For instance, you need to show how the insurer violated the terms of your contract and policy. You also need evidence of your losses, including medical bills and quotes for repairs or replacements of damaged belongings. Keep any communications with insurance adjusters regarding your claim.
A lawyer with experience handling fraud cases can help you gather the necessary evidence to successfully build a case. You may not have access to all critical documents, or you may not know which documents to obtain, but an attorney can provide guidance in these matters.
Do Not Submit an Appeal for a Claim Denial
Insurance fraud may sometimes result in a claim denial. When insurers deny coverage for necessary medical treatment and other damages, this can leave you to foot the bill, even when you warrant coverage under your policy.
If your insurer denies your claim, the law allows you to submit a request for an internal appeal. Since an internal appeal involves the insurance company reviewing its own decision, policyholders rarely benefit at this stage. Additionally, an internal review that agrees with the insurer’s initial decision can be damaging to your case.
Reach Out to an Experienced Attorney
Before you file a claim for insurance fraud, speak with an attorney who has experience handling these types of claims. Your lawyer can help you solve your insurance dispute, and advise whether your case involves insurance fraud or bad faith insurance.
An attorney can review the details of your case to determine what options you have regarding a claim or lawsuit against fraudulent insurers. He or she can gather evidence to build a successful claim or lawsuit for insurance fraud, and negotiate a claim or prepare your lawsuit while you focus on recovering from your losses.
Attorneys in this practice area understand the types of maneuvers that insurers and agents pull in an attempt to get out of trouble. Lawyers can also work to negotiate a fair settlement and have a current understanding of the law to help prove that their clients’ claims are valid.
Types of Damages in Insurance Fraud Claims
If an insurer or agent acts fraudulently in your case, you may qualify for damages to make up for lost benefits and coverage.
For instance, you may recover compensation for all medical expenses, lost income, lost earning capacity, and other economic damages involved in your case. These are expenses that you pay for directly as a result of an accident or another type of incident.
You may also recover non-economic damages in these instances, including pain and suffering for injuries, trauma, or other difficulties faced.
In some cases, the courts may award punitive damages in addition to compensatory damages, with the goal of preventing similar instances of insurance fraud in the future.
By taking the right steps when your insurance company commits fraud, you can recover compensation and ensure insurers don’t get away with this behavior.
