What Is Auto Insurance Fraud?

By Robert Vaux

  • Overview

    Auto insurance fraud typically involves insurance holders attempting to claim money they aren't due by staging accidents or injuries. There are often innocent victims, whose insurance company pays off the scamster as part of a settlement. Insurance companies may engage in fraud as well by knowingly denying benefits to customers who are entitled to them. In some cases, these efforts are very simple, but other examples of auto insurance fraud can be quite complex and involve sophisticated organized crime rings. As many as one in three auto insurance claims may involve some sort of fraud.
  • The Basics

    As a concept, auto insurance fraud is very simple. A driver takes out an insurance policy to cover damage or medical bills incurred in an accident. Then either he or someone hoping to exploit his policy stages an accident hoping to collect more money than he is entitled to. He may also use an actual crash with real bills to hide fraudulent claims, inflating or exaggerating repair bills far beyond the cost of fixing the vehicle.
  • Holder-Based Frauds

    Holder-based frauds are perpetrated by the insurance holder rather than an outside source. They include destroying a worthless car and then claiming it was valuable, filing multiple claims for a single injury, feigning injury where none exists, inflating loss-of-wage claims due to injury, and padding repair bills. Though they can be deliberate in many cases---and are prosecuted as such---they can also slide into a gray area of "soft fraud" where legitimate victims of an accident look to squeeze a little extra out of their policies.


  • Frauds by Outside Parties

    Unfortunately, auto insurance fraud is not limited to policyholders. Third parties can often cause automobile accidents with innocent drivers, then make outrageous claims against the victims' policies. These types of scams are among the most prevalent in the United States today. A typical example is known as the swoop-and-stop, which involves two cars working in tandem. The first car pulls up alongside the victim, preventing him from changing lanes. The second car then moves in front of the victim and makes a sudden stop, causing a collision. The driver and passengers in the second car can then claim damages on the victim's insurance. Similar scams involve waving a victim's car into traffic and then hitting him as he tries to merge, or simply pulling in front of the victim's car and hitting the brakes.
  • Bad-Faith Insurance

    Auto insurance fraud can also be perpetrated by the insurance companies themselves. Bad-faith insurance involves denying legitimate claims, often by fabricating reasons not stipulated in the policy or simply by failing to process the claims at all. Bad-faith insurance is difficult to fight because many insurance companies are so big: They have immense legal resources that individual policyholders lack and entrenched bureaucracies that can delay and deny claims for months. All insurance companies are legally obligated to negotiate with their customers in good faith, however, and you have a right to appeal any denied claim by filing suit if you feel it's warranted.
  • Prevention/Solution

    The best way to prevent insurance fraud is simply to stay alert. Always notify the police when you are involved in an auto accident and make sure a report is filed with them. (The details of a police report can help prevent a dinged fender from turning into a "destroyed rear end.") Get the names, addresses and insurance information of passengers as well as drivers, and make sure you record the license numbers of every involved vehicle (insurance companies can track car owners involved in multiple suspicious accidents). Always read your insurance policy carefully: Though policies can be quite byzantine, the effort will pay dividends if your claim is denied and you need to file suit.
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