Honesty is the best policy when it comes to your car insurance policy. Unfortunately, not everyone tells the truth. Car insurance fraud is a widespread problem in America, and can actually affect everyday drivers like yourself.
We’ll break down what insurance fraud is, how it affects drivers, and what you can do to protect yourself.
What is car insurance fraud?
Insurance fraud is any activity where someone isn’t honest to their insurer about themselves, their driving history, and how their car was used. Deception can range anywhere from misstating information on your application to intentionally setting your car on fire. Drivers will commit fraud to get lower premiums or receive a higher claim payout.
Insurance fraud isn’t just a cause for cancellation—it’s also illegal. In some situations, your insurer may launch an investigation and pursue criminal charges against you.
It’s also pretty expensive. Fraud costs auto insurers billions of dollars each year, a cost they pass onto their customers through charging higher premiums over time.
The average family in the United States spends an extra $400 to $700 on premiums each year thanks to insurance fraud.
Types of car insurance fraud
Car insurance fraud takes many different forms, and not all of them are obvious. Car insurance fraud examples that are more evident and serious include:
- Staging a car accident and claiming injury for medical payments or money for car repairs, also known as ghost accidents.
- Reporting your car stolen when it hasn’t been stolen.
- Exaggerating the extent of the damage on a claim.
- Filing any other false or inaccurate claim.
- Filing multiple claims for one accident.
- Buying a car insurance policy on the same day or same week after experiencing a car accident (also known as a “crash and buy”).
A lesser-known form of insurance fraud is “premium leakage,” or leaving out or mistaking information in your insurance application to get lower rates, like:
- Having missing or inaccurate information in your insurance application, including your address, age, or type of car you drive.
- Registering your car at a different address to get lower rates.
- Leaving a driver off of your application.
- Using your car for business purposes, as most personal car insurance policies don’t cover business use.
- Not disclosing that you’re an Uber or Lyft driver.
- Underreporting or lying about your annual mileage.
- Replacing a deployed car part (like an airbag) with a cheaper, counterfeit one, and reporting it as new.
While this isn’t always done on purpose, premium leakage costs auto insurers $29 billion each year. This type of fraud causes companies to raise rates for all customers, even the ones that are honest. As much as 14% of your premium costs are attributed to covering premium leakage from other policyholders.
Car insurance fraud can make it harder for car insurers to do their job. Not only does it cost them a lot of money, but also can make it harder for them to accurately price rates, making it riskier to cover their drivers.
Fake Car Part Fraud
A common type of car insurance fraud is replacing car parts with used or counterfeit options and claiming they’re new. In some cases, the repair shop may do this without you even knowing. Not only is this illegal, it’s dangerous, leading to system malfunctions, accidents, or fires.
To avoid this, purchase car parts from reputable stores. Your insurer may have a list of reliable suppliers to work with, which will also ensure you’re not unintentionally committing fraud when you go to file a claim.
Car Insurance Scams
Fraud can also involve scammers targeting you and attempting to steal your money.
For example, a fraudster may call you pretending to be an insurance agent and ask for account details or to pay a premium payment over the phone. Or they may be a robocaller contacting you about your car’s extended warranty (this also happens through physical mail). Or they may advertise a car insurance policy that’s completely fake.
To avoid getting scammed, be aware of the signs. Don’t give personal financial information over the phone. If someone calls you from a number you don’t recognize, don’t take the call and reach out to your car insurance company yourself.
You can verify an agent’s license via your state’s license database or the National Association of Insurance Commissioners’ Consumer Information Source.
If you’re looking for a policy, shop around and compare rates across different companies. If one company’s prices are much lower than others, that may be a red flag.
When purchasing a policy, read all paperwork thoroughly, be suspicious of any overly aggressive offers from insurers, and report any abnormal activity from an insurer directly to your state's Department of Insurance.
What happens if you commit insurance Fraud?
Insurance fraud is illegal. Consequences vary depending on the seriousness of the fraud, but can include your policy getting canceled, receiving hefty fines, or even jail time, depending on your state.
When you file a car insurance claim, your insurer will ask you for lots of information about the incident. This includes photo evidence of the damage, car repair receipts, accident reports, or medical bills. While it may feel harmless to lie about certain aspects of an incident, understand you—and innocent people around you—may be footing the bill.
Avoiding car insurance fraud
As long as you are transparent with your insurer and don’t intentionally withhold information or lie, you probably don’t have anything to worry about. In most cases, you can avoid car insurance fraud by being open and honest with your car insurance company.
When buying insurance, carefully review your application for mistakes. Once you receive your policy, review it again to verify all the information is correct.
If you get into an accident and need to file a claim, document and hold onto any information you can, even if it feels like too much information. This includes taking pictures and providing a detailed record of what happened. Keep copies of all your insurance records in a safe place.
Everyone makes mistakes—and being aware of how car insurance works can help you avoid a costly one.