The insurance industry consists of more than 7,000 companies who collect more than $1 trillion in premiums every year. According to the FBI, the total cost of insurance fraud is estimated at about $40 billion per year, costing the average U.S. family between $400 and $700 per year in increased premiums.

With such a large industry and with many ways that insurance fraud can be committed, law enforcement officials dedicate significant resources to aggressively seek out possible cases of insurance fraud.

Common forms of insurance fraud

The most common form of insurance fraud is premium diversion which is the embezzlement of insurance premiums. This might take place when an insurance agent does not send premiums to an underwriter, keeps the money for themselves, or a person sells insurance even though they are not licensed to do so, again collecting premiums but then not paying claims.

Fee churning is also common and involves taking commissions through a series of intermediaries who create reinsurance agreements. The initial premium is reduced from repeated payment of commissions until there is no more money left to pay claims. This is difficult to spot by law enforcement agencies, because each transaction appears legitimate and insurance fraud only emerges after the cumulative effect is taken into account.

Asset diversion involves siphoning off the assets of an insurance company and is most common when the acquisition or merger of an existing insurance company takes place.

Disaster fraud schemes also crop up after major natural disasters take place, and can involve false or exaggerated claims by policyholders, or the misclassification of how damages took place. It can also involve bid rigging by contractors, or collecting payments up front but then never performing the work.

Insurance fraud defenses

There are many types of defensive strategies that can be employed in insurance fraud cases. Some of these include:

  • A lack of knowledge in knowing what you were saying or writing was false.
  • A lack of intention can take place if you accidentally misstate the facts of a claim.
  • Duress can be used if you can prove that you were forced to do something against your will that resulted in possible insurance fraud.
  • Entrapment is less common but can be used if you can prove that the criminal idea originated with law enforcement and that you were not otherwise inclined to commit an act of insurance fraud.
  • Making an ambiguous statement can be claimed if what you said was truthful but misinterpreted.

The Law Office of Ginger Kelley serves clients in Newport Beach, Santa Ana and communities throughout Orange County, California.