Fraud

Reviewed by Stefan Tirschler

Updated September 2, 2022

Noun

fraud | frôd

Definition: Deliberate deception committed for the purpose of financial gain.

Insurance fraud costs insurance customers upwards of $1 billion annually.

What is insurance fraud?

Fraud is an intentional deception, committed to secure some kind of financial gain. Fraud is unlawful; depending on the severity of the case, it can be a serious criminal offence.

Insurance fraud is one well-known type of fraud. When someone defrauds any part of the insurance process, it’s known as insurance fraud.

Insurance fraud calls to mind some serious offenses, like burning down a failing restaurant for the insurance payout. But it’s not always such a high-profile event.

Insurance fraud comes in two basic forms: opportunistic fraud, and premeditated fraud.

Opportunistic fraud

Opportunistic fraud is when an insured has suffered a legitimate loss but attempts to claim a settlement greater than the actual value of the loss.

Example

Ron recently had a fire at his house. Most of the damage was contained within the kitchen.

However, when he goes to start a claim with his home insurer, Ron sees an opportunity: why not claim that his countertops and cabinets were more expensive than they really were? If the kitchen has to be rebuilt anyway, why not have the insurance company foot the bill for an upgrade?

So, Ron tells the insurance company his cabinets were of the finest cherrywood and his countertops solid marble (they were really made of particle board and linoleum).

In this example, Ron legitimately suffered a loss that would have been covered by his insurance policy. However, he took the opportunity to try and squeeze a free kitchen upgrade out of his insurer.

Purposefully exaggerating a claim in this manner is opportunistic insurance fraud. Ron’s example is an extreme one; his insurance company would almost definitely notice something was up, particularly if an adjuster actually visited his home.

Premeditated fraud

Premeditated insurance fraud can be a little more dramatic—like the “burning down a failing restaurant” example. This form of fraud involves someone intentionally causing a loss in order to collect the claim settlement.

But it’s not the only form of premeditated fraud.

Another method involves intentionally providing false information to an insurance provider (or withholding important information). The goal here is to pay lower insurance premiums, or to secure insurance coverage for something that would normally be uninsurable.

Example

Leroy has a very old house, and he doesn’t take very good care of it. There are missing shingles, rotting steps, and a history of leaky plumbing. Naturally, he has a hard time finding an insurance company to sell him a home insurance policy. Those that are willing to do so want him to pay an arm and a leg.

Leroy figures he can beat the system. Every time he applies for insurance, the application asks questions about the condition of his home. If he simply fails to mention the dilapidated condition of his home, how would the insurance company ever know?

In this example, Leroy is considering premeditated insurance fraud—which is, of course, a crime. By withholding information that the insurance company specifically asks for, Leroy might be able to trick them into insuring his home when they otherwise wouldn’t. This is known as misrepresentation.

And of course, the insurance company would likely figure out eventually that his application was untruthful. Which brings us to the next topic:

Penalties for insurance fraud

Insurance fraud is a crime. Naturally, serious cases of fraud can lead to heavy fines and even jail time.

If an insurance company discovers a fraudulent claim, they will at the very least not pay the claim (obviously). They may also cancel the policy. They can also sue the fraudster to recover any administrative costs or payouts they incurred from the fraudulent claim. And finally, they might refer the case to law enforcement for criminal prosecution.

Ultimately, the penalty for insurance fraud depends on how severe the fraud is. Someone trying to squeeze an extra $100 out of a legitimate claim may not find themselves in prison (though they could still have their claim denied).

Fraud over $5,000, on the other hand, is an indictable offense that can come with a prison sentence of 14 years.

Once someone has been proven to be involved with fraudulent insurance claims, they may find it difficult to find insurance in the future, too.

The penalties for insurance fraud may seem a bit heavy-handed. After all, many people think of it as a victimless crime, or at least a crime against a big insurance company that won’t feel the pain. But, most of the money that insurance companies have on hand is earmarked for paying claims. If an insurer pays out for fraudulent claims, they will need to increase premiums for all their customers—including the honest ones—to cover the additional cost.

Depending on the type of insurance, as much as 15% of customers’ premiums are going towards covering fraud costs. So, it’s certainly not a victimless crime—the main victims are typical insurance customers.

The important points

  • Insurance fraud is intentional deception meant to gain financial benefit through the insurance process.
  • Insurance fraud can be opportunistic or premeditated.
  • Insurance fraud is a crime; penalties range from denied claims to fines to jail time.

Looking for another insurance definition? Look it up in The Insurance Glossary, home to dozens of easy-to-follow definitions for the most common insurance terms. Or, get an online quote in under 5 minutes and find out how affordable personalized home insurance can be.

About the expert: Stefan Tirschler

Stefan is responsible for underwriting leadership, market expansion, and product research and development for Square One's operations. Stefan has earned his Fellow Chartered Insurance Professional designation, and maintains a level 2 general insurance license in British Columbia, Alberta, Saskatchewan, Manitoba and Ontario. Stefan is also an Education Committee member and CIP/GIE instructor for the Insurance Institute of Canada.

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