What are the expected penalties for car insurance fraud?

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Here's what you need to know...
  • No-fault car insurance states have a higher incidence of fraud
  • Those who participate in insurance fraud could face state and federal penalties
  • You need to be careful not to inadvertently participate in insurance fraud

Car insurance fraud is a type of crime that seems to be growing across the country primarily due to the false perception that it’s easy to get away with.

The contrary is true; insurance companies are quite adept at identifying and prosecuting fraud.

Even though it may take a few years after a claim is paid to actually catch the perpetrators, once caught, those who are found guilty can expect very severe penalties including fines and possible jail time.

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It’s estimated by industry experts that insurance fraud across all its various forms costs insurance companies some $80 billion every year. That’s a substantial amount of money. To make up for that loss, insurance companies must raise premiums for all drivers.

Reducing the amount of fraud that exists is extremely important if reducing premiums is the goal.

Fraud Greatest in No-Fault States

New York City

States like New York are at greater risk for fraud involving car insurance because of their no-fault laws.

In a no-fault state, insurance companies are required to cover the claims of their own customers regardless of who causes an accident.

The only exception is in some personal injury cases where claims exceed a certain dollar amount.

No-fault laws were originally put in place as a means of reducing the number of civil lawsuits tying up the courts. They have been successful in that regard, yet they have greatly contributed to the increase of insurance fraud.

By taking most of the litigation out of the car insurance process, insurance companies are more likely to settle because it is harder to win a fraud case. In states where every accident is open to litigation, it’s much harder for scammers to gain the upper hand.

State and Federal Penalties

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Insurance fraud is one of those areas that can be prosecuted on multiple levels.

State Level – First, since the states have legal jurisdiction over car insurance, all cases of fraud are guilty under individual state laws.

According to CriminalDefenseLawyer.com, it’s possible at the state level to prosecute cases of insurance fraud both in criminal and civil courts.

In criminal court, the defendant would be prosecuted for crimes committed, receiving the appropriate punishments if found guilty. In the civil case, the insurance company will sue the defendant to recover the costs paid out because of the accident.

This is one of the greatest tools car insurance companies have to fight against fraud. That’s one of the reasons why they invest so many resources in their auditing and investigation operations.

Federal Level – At the federal level, some types of car insurance fraud are also prosecutable. To help facilitate such prosecutions New York Sen. Charles Schumer introduced a bill in 2010 that would give the federal laws against insurance fraud more teeth.

Cheaper Car Insurance Act of 2010

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Sen. Schumer’s bill, known as the Cheaper Car Insurance Act of 2010, was designed primarily to target organized crime rings who defrauded car insurance companies by staging fake accidents so they could file injury claims.

His legislation called for fines of up to $100,000 or the actual cost of losses, whichever is greater.

For the masterminds of such frauds, a federal prison sentence is also possible.

One of the provisions of Schumer’s bill gave insurance companies the authority to inspect vehicles prior to agreeing to write a policy for them.

Organized crime rings will sometimes use certain types of vehicles that have been modified to be used for staged crashes while reducing the potential for real injuries to the driver.

If insurance companies know what to look for, this provision gives them the opportunity to head-off a fraud by simply not agreeing to cover the vehicle.

One other important provision of the Schumer bill is that it divides the guilt for car insurance fraud into three types of participants: masterminds, organizers, and steerers.

The masterminds are obviously the most important people involved in these crimes and, as such, face the stiffest fines and most jail time. The steerers are more or less the foot soldiers engaged by the crime rings to actually stage the accidents.

Different State Laws

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Federal laws regarding car insurance fraud are uniform across the country. State laws, on the other hand, will differ. The New York senate, for example, passed three pieces of legislation to combat the insurance fraud there.

The senate’s efforts were bolstered by the breakup of a New York-based crime ring – including lawyers, doctors, and accident-stagers – that stole nearly $280 million over five years.

  1. Senate Bill S.4507B allows insurance companies to cancel a policy retroactively if an act of fraud has been committed. A retroactive cancellation means if the claim was paid and then discovered to be fraudulent later on, the insurance company would then have cause to pursue civil litigation to recover their money.
  2. Senate Bill S.1685 elevates the crime of staging a car accident to a class D felony which is punishable by up to seven years in prison.
  3. The third bill, S.2004, makes it a crime for scammers to employ runners to recruit people willing to participate in staged accidents. Doing so would be considered a class E felony, which could result in up to four years in prison.

Other states will have varying laws according to what their legislatures and governors have enacted.

Suffice it to say a guilty conviction for car insurance fraud will most certainly land you severe financial penalties if nothing else. In all likelihood, those convicted will also receive some amount of prison time.

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Different Types of Insurance Fraud

Most of what we’ve discussed so far involves staging accidents and filing bogus injury claims, however, there are other ways to commit insurance fraud.

Interestingly, though most of those who defraud insurance companies know what they’re doing, there are a good number of Americans who, out of their own ignorance, unknowingly participate in fraudulent schemes.

For example, one type of car insurance fraud that often flies under the radar is that of inflating repair costs in order to get a higher payout from an insurance company. This type of fraud isn’t talked about much because the amount of money involved in single cases is not extreme.

Nonetheless, if a car repair shop inflates 100 claims by $1,000 apiece, that’s $100,000 in losses suffered by insurance companies. Car owners can be ignorant participants by signing off on estimates without knowing what repairs should actually cost.

Personal Injury Claims

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Another area of concern for insurance companies is that of personal injury claims. This is one area where drivers can be roped into participating in fraud without ever knowing they’re doing anything wrong.

For example, consider any one of the personal injury lawyers whose TV commercials you’ve seen promising you “all the money you deserve.” Lawyers are required by both the law and their professional fiduciary oaths to present cases truthfully and factually.

But that’s not always what happens.

If a lawyer directs a client to a specific doctor who is willing to overstate the extent of injuries caused by an accident, he is potentially committing fraud.

That physician may report and testify that injuries are greater than they are, or that the potential for future pain and suffering is greater than it is, in order to manipulate the emotions of civil juries for the purpose of achieving a greater award.

We’ve all seen or heard about such cases through the news outlets. When claims are inflated in order to get multi-million dollar awards, that is fraud.

Investigating Cases of Fraud

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To combat car insurance fraud in regards to personal injury claims, insurance companies have hired investigators who make a point of paying attention to claimants during and after the process.

If an auto accident victim sues for devastating injuries that won’t allow him to return to work, yet an insurance company investigator records video of him playing tennis and golf, it’s quite likely that individual will be charged with fraud.

If found guilty, he could face jail time and the requirement that restitution be paid to the insurance company.

Despite the fact that car insurance fraud is growing across the country, enforcement efforts are being stepped up as well.

It’s becoming increasingly more difficult to get away with fraudulent claims due to the diligent efforts of insurance companies, police agencies, and state legislatures. Thankfully, enforcement efforts are helping to keep our insurance premiums in check.

Your best chance at a great auto insurance policy at a great price is to enter your ZIP code into our FREE search tool on this page!

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