In 2001, the House of Lords stated that "there seems to be a widespread belief that insurance companies are fair game, and that defrauding them is not morally reprehensible". This has never rung truer than in times of financial turbulence.
Broadly speaking, insurance fraud can be divided into three categories:
- Fabrication of an insured loss;
- Exaggeration of an insured loss; and
- Manipulation of evidence to support an otherwise valid insurance claim.
Types of insured fraud
Sometimes the insured may not have actually suffered any loss at all, and fraudulently represents the existence of the insured loss to insurers. Other times, the insured may have suffered a loss, but it is not an insured loss under the policy because it was not caused by an insured event, or did not take place within the terms of the policy. The loss may have taken place outside the policy period or be subject to a specific exclusion. The insured fraudulently represents to insurers that the loss was caused by an insured peril. In these circumstances, the insured fraudulently fabricates the existence of an insured loss.
In other cases, the insured might suffer an insured loss, but the insured fraudulently exaggerates the quantum of the loss to receive a larger indemnity under the policy. For example, an insured with a household contents insurance policy suffers a loss caused by a burglary. When the insured submits a claim to insurers, they fraudulently claim for more insured items than were actually stolen. The insured might consider that they paid premiums on their insurance policy for years, never suffered any loss, and that this is their opportunity to receive a payout. In this sense, the insured might feel that their conduct is not morally reprehensible. Exaggerated insured losses may be the most common type of insurance fraud.
Manipulating evidence is equally common. Here, the insured has suffered an insured loss, and has a valid claim under the policy. However, to ensure that they expeditiously receive a payout, they manipulate the evidence to support their valid claim.
Risks of fradulent claims is rising
The motive for insurance fraud varies. Some people may be motivated by poor health or financial distress. Others may be white collar fraudsters motivated purely by financial gain. The motive does not matter. The effect is the same.
The insurance industry is a risk-sharing enterprise. As a result of fraud, insurers end up paying more claims than their risk assessment indicated as likely to occur. The inevitable result is that insurers’ losses are passed onto the consumer through increased premiums. As financial pressures are increasing for both commercial operations and households, the risk of fraudulent insurance claims is rising.
What can be done to mitigate this situation?
Apart from rejecting the fraudulent claim and refusing future insurance, insurers can also invoke another civil remedy: the forfeiture clause. This clause has a penal element because it enables insurers to refuse liability for otherwise valid claims if they are tainted by fraud. It means the insured even forfeits payouts to which they would have been entitled if it were not for the fraud.
Fraud is a crime. Addressing crime does not only require effective police and prosecutorial services, but a change in the mindset and moral framework of the general population. Criminal activity, at every level, needs to be dealt with and eradicated swiftly through zero-tolerance policies. This should be the primary focus, as it is a “top down” change. Unless there is a different mindset, fraud will persist.
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