Car insurance fraud is an umbrella term that includes several different types of fraud. It happens when someone deliberately deceives a car insurance company for personal gain.
Perpetrators of car insurance fraud can be policyholders, other drivers, insurance agents or companies, car repair shops, towing companies, windshield repair companies, and medical providers who treat accident victims.
The FBI reports that insurance fraud costs the average U.S. family between $400 and $700 annually in increased premiums.
Understanding how car insurance fraud works can help you avoid falling victim to a scam. Here’s what you need to know.
Every instance of car insurance fraud is a serious crime, and it’s generally broken into two main categories: soft fraud and hard fraud.
Soft insurance fraud is the most common, according to the National Association of Insurance Commissioners (NAIC). It typically happens when a policyholder takes a legitimate insurance claim and exaggerates the situation to receive a higher payout. For example:
Soft fraud can also happen if a policyholder lies or omits key information in order to get a better insurance rate. For example, when applying for coverage, someone might falsely claim that they’ve had no prior accidents. They could also lie about having garage access or anti-theft features.
Hard car insurance fraud is premeditated and happens when someone intentionally damages or destroys their car to collect a payout from their insurance company. That might involve someone doing the following:
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Deliberately causing an accident
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Setting their car on fire or taking other steps to total their vehicle
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Coordinating a phony car theft
Policyholders aren’t the only ones who may do shady things for insurance money. Below are some other car insurance fraud examples.
Unfortunately, not every repair shop is running an honest operation. After your car is damaged in an accident, they could bill your insurance company for premium parts but actually use low-quality parts. It’s also possible for them to overinflate the damage and claim that your car needs more extensive repairs than it really does. In some cases, a deceitful repair shop might even fail to replace your airbag following an accident or install a used one.
This is when scam artists intentionally bait you into a collision. For example, someone might pull out in front of you and slam on the brakes or wave you to make a turn, then accelerate forward and cause an accident that appears to be your fault. Fraudsters often work together, and it isn’t uncommon for accomplices to flee the scene afterward. The accident “victim” then cashes in on the insurance proceeds.
Learn more: How much does car insurance increase after an accident?
3. Shifty bystanders
These people might coordinate with other scammers who stage an accident or simply swoop in after seeing an accident occur. The bystander may appear like a Good Samaritan who recommends a less-than-honest repair shop or medical provider. Or they might represent a windshield repair company that accepts your insurance. In some cases, they could even show up in a tow truck and offer to take your car to the nearest mechanic.
Learn more: Does insurance cover windshield replacement?
Even if you do everything right as a policyholder and pay your premiums on time, an underhanded “insurance agent” could sell you a fake policy and make off with your money. Even if you’re working with a legit insurance company, it’s still possible for an agent to pocket your premium payments and never activate your policy.
While it isn’t always possible to avoid a car insurance scam, there are ways to reduce the odds. Here are some tried-and-true tips to consider:
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Avoid erratic drivers. If you notice any odd behavior while driving, like extreme tailgating or sudden braking from another vehicle, proceed with caution and try to keep your distance. It could be the precursor to a staged accident.
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Take pictures right away. If you’re involved in an accident, take photos of the damage right away. That can ensure you have an accurate record of the damage.
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Be wary of unsolicited help. Avoid any unsolicited help from tow truck companies or bystanders who could be colluding with the fraudulent party.
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Prioritize reputation. Only work with reputable and licensed insurance companies and agents, and be sure that the policy you’re paying for is aligned with what you’ve verbally agreed to.
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Research repair shops ahead of time. If your car is damaged in an accident, you may not have the time or clarity of mind to start researching car repair shops. That’s why it’s a good idea to have a trusted local shop on your radar beforehand. Apps like RepairPal and Openbay could make this part easier.
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Seek out recommendations. You can also ask around among friends and family or reach out to your car insurance company for recommendations. The same goes for windshield repair companies and towing services.
Learn more: Here’s what to do if you’re involved in a hit-and-run crash
There’s always the chance you’ll experience an accident while out of town. In this case, you can research nearby repair shops on sites like Kelley Blue Book or AAA. Just be sure to read online reviews before making a decision. Asking locals for recommendations could also point you in the right direction.
If you think you’ve been victimized, you’ll want to take action right away to set things right. Here’s how to report car insurance fraud:
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Contact your insurer so they know what’s going on. Getting them on the same page could help remedy the situation faster.
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Report the situation to the National Insurance Crime Bureau online or by calling 1-800-TEL-NICB.
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Loop in your state’s insurance fraud bureau, which may pursue its own investigation.
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File a police report if you suspect fraudulent activity, whether that’s from a repair shop or another driver.
Unfortunately, car insurance fraud is all too real. The best way to protect yourself is to remain an upstanding policyholder who’s aware of common ways scam artists prey on consumers. That could help you stay safe as a driver and prevent your premiums from increasing.
