Insurance Fraud and Its Ramifications

Insurance Fraud and Its Ramifications

March 9, 2020 0 By Anthony Ekanem

Insurance fraud is any act committed by a policyholder, insured or policy beneficiary with the sole purposes of fraudulently obtaining money from an insurance company. Insurance fraud has been in existence since the beginning of insurance as a commercial enterprise. Fraudulent claims account for a significant portion of all claims received by insurance companies and cost huge amounts of money yearly, worldwide.

There are many types of insurance fraud, and they occur in all areas of insurance; from slightly exaggerated claims to deliberately causing accidents or destruction to the subject matter of insurance. Fraudulent activities also have an impact on the lives of innocent people, both directly through accidental or purposeful damage or harm, and indirectly as these crimes cause insurance premiums to go up.  Insurance fraud poses a lot of problems to the society, and governments and organizations the world over are making efforts to fight such activities.


The main motive in every insurance crime is financial gain.  Insurance contracts provide both the insured and the insurer opportunities for exploitation.  A good example of such an opportunity is when there is over-insurance, whereby the sum insured is greater than the actual value of the property at risk.  This problem can be very difficult to avoid, especially since an insurance provider might sometimes encourage it to be able to earn higher premiums. This enables fraudsters to make gains from the insurance contract by destroying their property because the payment they will receive from the insurance company is of greater value than the real value of the property they destroy.

Insurance companies are also susceptible to fraud because false insurance claims can be made to appear like genuine claims. This enables fraudsters to make claims for loss or damage that never occurred, and so obtain payment with little or no cost to them. The most common form of insurance fraud is the inflation of loss amounts.


It is virtually impossible to find out an exact value for the amount of money lost through insurance fraud.  Insurance fraud is not easily detectable, unlike noticeable offences such as armed robbery or murder.  Therefore, the number of insurance fraud that has been discovered is much less than the number of acts that are in fact committed.  The best that can be done is to estimate the losses that insurance companies suffer from insurance frauds.  The Coalition against Insurance Frauds estimated that in 2006, estimated that about $80 billion was lost in the United States to insurance fraud. Also according to estimates by the Insurance Information Institute, insurance fraud accounted for about 10% of property and casualty insurance incurred losses and loss adjustment expenses. 

The National Health Care Anti-Fraud Association estimated that about 3% of the healthcare industry’s expenditures in the United States were due to fraudulent activities, amounting to a cost of about $51 billion.  Other estimates attribute as much as 10% of the total healthcare spending in the United States to fraud – about $115 billion annually. In the United Kingdom, the Insurance Fraud Bureau estimates that the loss due to insurance fraud in the United Kingdom is about £1.5 billion, causing a 5% increase in insurance premiums.  In Nigeria, and many other developing countries, there are no reliable statistics on how much is lost by insurers as a result of fraudulent claims, but it is generally believed that such losses would be very huge.


Insurance frauds are classified as “hard fraud” or “soft fraud”. Hard fraud occurs when someone intentionally causes a loss, such as a collision, auto robbery, or fire that is covered by their insurance policy in order to receive payment for the destruction. Criminal cartels are occasionally involved in hard fraud that can steal a huge amount of money.

Soft fraud, which is a lot more common than hard fraud, is sometimes generally referred to as opportunistic fraud. This type of fraud involves policyholders exaggerating what is otherwise legitimate claims.  For instance, when involved in a collision, an insured person might claim more damage than what was really done to his or her car.  Soft fraud can also occur when, while obtaining a new insurance policy, a person misreports earlier or existing conditions to be able to secure a lower premium on their insurance policy.


A good example of life assurance fraud is the disappearance case of John Darwin, a former British teacher and prison officer who was reported “missing” in a boat accident on March 21, 2002, when he failed to report back to work after the incident.  However, he reappeared alive on 1st December 2007, five years after he was thought to have died. When he was arrested and charged to court by his insurers for fraud, Darwin claimed to have had no memory of what happened in the past five years.


The most common perpetrators of healthcare insurance fraud are the healthcare providers themselves. According to Prof. David Hyman of the University of Maryland School of Law, the historically prevailing attitude in the medical profession is that of “fidelity to patients”. This incentive can lead to fraudulent practices such as billing insurers for treatments that are not covered by the patient’s insurance policy. To achieve this, physicians bill for different services, which are covered by the policy, than the services actually rendered.

Another motivation for insurance fraud in the healthcare industry, as in all other forms of insurance scams, is the desire for financial gain.  Medical professionals use several deceptive techniques to achieve this end. These can include “up-coding” or “upgrading,” involve billing for more expensive treatments than those actually provided; providing and eventually billing for treatments that are not medically necessary; scheduling extra sessions for patients; referring patients to another physician when no further treatment is really necessary; “phantom billing,” or billing for services not rendered; and “ganging,” or billing for services to members of the family or those who are accompanying the patient but who did not personally obtain any services.


It is estimated that about 21% to 36% of auto-insurance claims contains elements of suspected fraud.  There’s a wide variety of techniques used to defraud vehicle insurance providers. These ploys may vary greatly in complexity and severity.

Examples of soft auto-insurance fraud include:

  • filing several claims for the same injury,
  • filing claims for accidents not related to a car accident,
  • misreporting wage losses due to injuries,
  • reporting higher costs for car repairs than what was actually paid.

Hard auto-insurance claims can include activities such as:

  • staging vehicle collisions,
  • filing claims when the claimant was not actually involved in an accident,
  • submitting claims for treatments that were not received,
  • inventing injury. 
  • when claimants falsely report their vehicle as stolen.


This can include obtaining payment that is worth more than the value of the property destroyed or to destroy and subsequently receive payment for goods that could not otherwise be sold. According to Alfred Manes, the majority of property insurance crimes involve arson.  One reason for this is that any evidence that a fire was started by arson is often destroyed by the fire itself.