6 Types of Car Insurance Fraud to Look Out For

Car insurance fraud, or “premium leakage,” comes in many forms and costs insurance companies an estimated $31.6 billion each year as of 2022.¹ Here are six ways people commit fraudulent insurance activities via a car insurance company.

Rate Evasion

Rate evasion involves the misrepresentation of information on an insurance application in order to get a lower insurance rate for the same insurance coverage. Though many rate evasion cases involve intentional lies about mileage or omission of accident history, fraud also may involve unintentional errors during the application process. Regardless of the person’s intent, they’ll face consequences if they’re caught. Here’s a look at how much each category of misrepresented information represents of the total money lost each year:

False Claims

Exaggerated or false insurance claims, like those surrounding nonexistent damages or bodily injuries, are fraudulent. Individuals target insurance companies by filing false claims to receive insurance payouts. For example, scheming with repair shops and medical professionals to file claims for property damage or injuries that do not exist are common ways to create false claims. Individuals also may damage their own property intentionally to file false claims, but car insurance does not cover intentional damage.

Staged Accident

Those who stage accidents to create false claims aim to take advantage of their auto insurance policies, like personal injury protection plans. Often, people carry out staged accidents in populated and urban areas and affluent communities, where people are thought to have superior insurance.² People execute staged accident scams in many ways, including intentional collisions with moving and parked vehicles.

Car insurance fraud refers to situations that involve the deception of policyholders, insurance companies, or other parties for financial gain. Typically, policyholders who engage in fraud aim to receive payouts or better rates from their insurers by lying, omitting information, or filing false claims. Fraudulent agents, brokers, and repair shops can commit fraud by selling fraudulent policies, engaging in premium diversion, repairing vehicle damage with salvage parts, and contributing to false claim reports.

There are two distinct categories of fraud: soft fraud and hard fraud.

Soft Fraud

Soft fraud is the more common form of auto insurance fraud and is associated with less-severe consequences, like fines and legal fees. Examples include exaggerating a legitimate claim or lying during the application process to get a lower rate. For example, claiming your vehicle is worth more than your insurance company’s cash value of your car is a form of soft fraud. Agent and broker scams are also forms of soft fraud.

Hard Fraud

Hard fraud is less common and leads to more severe punishment, including jail time. Hard fraud examples include planning or inventing a loss for claim payout (e.g., staged auto accidents or theft).

Our goal is to familiarize you with the various types of auto insurance fraud so you can learn how to spot possible scams. However, it’s also important to be familiar with other forms of fraud that are prevalent throughout the auto industry. For more information, review our pages on auto warranty scams and auto loan refinancing scams.