How Insurance Fraud Costs You Money

Insurance fraud adds an extra $400 to $700 to your premiums every year and costs the industry more than $300 billion.
Doug Sibor
By Doug Sibor 
Edited by Lisa Green

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Insurance fraud costs the insurance industry an estimated $308.6 billion per year, according to the Coalition Against Insurance Fraud, or CAIF

Coalition Against Insurance Fraud. Fraud Stats. Accessed Jan 31, 2024.
. To put that number in perspective, it's more than the annual national defense budget of the United States.

Insurance fraud is a widespread and continuous problem, according to David Glawe, president and CEO of the National Insurance Crime Bureau. He and other industry experts say fraud is a factor in about 10% of property and casualty claims, a category that includes auto and homeowners insurance.

How does insurance fraud affect premiums?

If you think insurance companies are content to pay the $308 billion annual bill for fraud out of their own pockets, you’re mistaken. The massive deficit caused by fraud “is directly translated to increased premiums for you and [me],” Glawe says.

The average American family spends an extra $400 to $700 on premiums every year because of insurance fraud, according to the FBI

FBI. Insurance Fraud. Accessed Jan 31, 2024.

What is insurance fraud?

Fraud takes many forms and isn't limited to serious and obvious acts of deception. All of these are examples of insurance fraud:

  • Intentionally setting your own home on fire and then filing an insurance claim for the damage.

  • Claiming that your stolen television was newer and larger than it actually was.

  • Registering your car at a friend’s address to get lower auto insurance rates.

  • Not disclosing all the drivers in your household on your auto policy (to avoid paying more for a young driver, for instance).

Bottom line: If you knowingly mislead your insurance company for the purpose of making money or avoiding higher premiums, you're committing insurance fraud. Penalties may include fines, prison time and a conviction on your permanent record.

You might even be involved in insurance fraud without realizing it. Here are some examples:

  • After an auto accident, your repair shop replaces your air bags with salvaged ones but bills your insurance company as if they're brand-new.

  • An agent collects insurance premiums from you but then keeps the money for himself.

Generally speaking, you wouldn't be held liable in situations where someone else committed the actual fraud, Glawe says.

Fighting insurance fraud

Insurance companies are using digital technology to fight back. Nearly all insurers use some kind of anti-fraud technology, according to a 2021 study from the CAIF

Coalition Against Insurance Fraud. State of Insurance Fraud Technology Study. Accessed Jan 31, 2024.

Artificial intelligence technology can detect possible insurance fraud in several ways. For example, it can scan hundreds of thousands of claims to find duplicates, or alert the insurer if someone claiming to be injured posts a beach volleyball selfie online.

It’s not just insurance companies fighting fraud. Along with local and federal law enforcement, many states have insurance departments or attorney general offices that are responsible for investigating insurance fraud.

How to prevent insurance fraud

So how can consumers help prevent insurance fraud?

One way is to stay in close contact with your insurer after you file an insurance claim. Most can recommend auto repair shops, home contractors and other vetted service providers.

Vigilance will also help you avoid fraud. If someone calls looking for sensitive information or is using a number you haven’t seen, don’t take the call. Do the research yourself to ensure you aren’t falling victim to a fraud scheme.

If you suspect a scam, you can report it to your insurer, consumer-focused organizations such as CAIF or NICB, law enforcement such as the FBI, or insurance industry organizations such as the National Association of Insurance Commissioners.

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