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Insurance Fraud Charges: What Happens If You Get Caught?

Insurance fraud is a serious offense, and the punishment can vary depending on the jurisdiction and the specifics of the case. In general, insurance fraud can be charged as either a misdemeanor or a felony, depending on the severity of the offense and the amount of money involved.
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C.L. Mike Schmidt Published by C.L. Mike Schmidt

What is Insurance Fraud?

According to California Department of Insurance, insurance fraud occurs when someone knowingly lies to obtain a benefit or advantage to which they are not otherwise entitled or someone knowingly denies a benefit that is due and to which someone is entitled [1].

To be prosecuted for insurance fraud, certain conditions must be met:

  • Intent to defraud: The suspect must have had the intention to defraud. This means the prosecution must prove that the person knowingly engaged in an act to deceive.
  • Completion of an act: Merely making a misrepresentation, whether in writing or orally, to an insurer is enough to constitute an act of fraud if the person knew the information was false.
  • Combination of act and intent: Both the act of fraud and the intention to deceive must be present. Committing the act without the intent, or having the intent without committing the act, does not constitute a crime.

It’s important to note that actual monetary loss is not required for a fraud charge, as long as the individual committed an act and had the intent to defraud.

Hard Fraud vs Soft Fraud

While both are illegal, they differ in nature:

Hard Fraud
This type of fraud is deliberate and planned. The individual commits an intentional act to make a fraudulent insurance claim.

Example: Intentionally setting fire to your home to claim insurance money would be considered hard fraud in the context of home or renters insurance.

Soft Fraud
Soft fraud is typically unplanned and occurs when a policyholder exaggerates a legitimate claim to receive a larger payout. This type of fraud is more challenging to detect as it originates from a genuine claim.

Example: Exaggerating the extent of injuries sustained in a car accident to claim a larger settlement would be an example of soft fraud in the context of car insurance.

Insurance Fraud Punishment

You may face imprisonment ranging from one to 15 years for federal insurance fraud, depending on the specific violation of federal law 18 U.S.C. § 1033.

Here’s how the prison time is determined:

  • A one-year sentence is possible if the misappropriated or embezzled amount is under $5,000. For amounts exceeding this, the penalty includes 5 to 10 years of imprisonment.
  • The maximum penalty of up to 15 years applies if the fraudulent conduct or statement, like overvaluing land, embezzlement, misappropriation, or false entry, significantly endangers an insurer’s safety, leading to the insurer being placed in liquidation or conservation by the court.

How Will the Insurance Company Know I Committed Fraud?

Fraud reportedly costs consumers and businesses $308.6 billion annually, as per the Coalition Against Insurance Fraud. Investigative approaches against fraud vary, so each insurance agency may have a unique process.

Here’s a typical protocol insurance agencies might follow when defending against insurance fraud:

  • Initial Report: The investigation begins when a victim or someone with relevant information contacts law enforcement. The initial report contains the information that initiated the investigation.
  • Evidence Collection: Investigators gather evidence by interviewing witnesses, conducting forensic analysis, examining bank records, reviewing digital evidence, and taking other necessary actions to establish fraud elements and identify potential offenders.
  • Suspect Identification: Using gathered evidence, detectives attempt to identify potential fraud suspects. This may involve examining financial transactions, tracing funds, and linking individuals to fraudulent activities.
  • Interviews and Statements: Investigators question witnesses, suspects, and others who can provide crucial information for the case. These interviews help gather more evidence, clarify details, and obtain statements that can be used as evidence.
  • Case Building: Throughout the investigation, investigators compile information, document their findings, and build a strong case against the suspects. This includes organizing evidence to demonstrate the accused’s criminal intent and support various fraud components.
  • Prosecutorial Review: After completing the investigation, the case is typically reviewed by the district attorney’s office or another relevant body. They assess the quality of evidence, the likelihood of conviction, and the overall advantages of pressing charges.
  • Criminal Charges: If the prosecuting authorities believe there is sufficient evidence, they may bring charges against the fraud suspects. This initiates the formal legal process and sets the stage for a court case.

California Insurance Fraud Examples

  • Insurance fraud amounts to over $15 billion annually, costing each resident an average of $500 per year. This leads to increased premiums, higher taxes, and elevated prices across the board.
  • According to the National Insurance Crime Bureau (NICB), insurance fraud ranks as the second most costly crime in the United States, after tax evasion.
  • Insurance fraud directly impacts innocent individuals, leading to staged accidents resulting in fatalities, driving legitimate businesses out of operation, and subjecting vulnerable individuals to unnecessary medical procedures.
  • Vulnerable groups such as seniors, recent immigrants, and small businesses are often targeted by fraudsters.
  • Despite its significant impact, many individuals fail to recognize the personal, moral, and economic threat posed by insurance fraud, contributing to a growing tolerance of fraudulent activities.

Source: California Department of Insurance [2].

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