Insurance fraud is a form of stealing, and it is illegal in every state. Occasionally such cases are prosecuted in federal court (where sentences tend to be much longer), such as when the losses are large and transactions occurred across state lines, like prepaid funeral scams, or fraud involving federal insurance programs like Medicare. But usually insurance fraud is prosecuted in state court, either as a misdemeanor (with a range of punishment of one year or less in jail) or as a felony (with prison time authorized).
An insurance company can commit insurance fraud too, such as when it systematically denies legitimate claims or when a fake insurer sells policies with no intention of paying claims. But most cases of insurance fraud involve a consumer, i.e., a person who purchased an insurance policy. A person commits insurance fraud by deliberately using deception to obtain an illegitimate gain from an insurance company, such as when an insured lies on a policy application or fabricates a claim.
Padding or exaggerating a legitimate claim is considered “soft insurance fraud.” For example, a driver may have a legitimate claim for property damage arising from a motor vehicle collision. But if the driver also makes a claim for non-existent injuries and medical expenses, then that is “soft insurance fraud.” Another example would be a legitimate property claim after a home invasion in which the homeowner exaggerates the value or number of items stolen. “Soft insurance fraud” is common and not considered to be as serious as “hard insurance fraud.” Sentences for soft insurance fraud might include restitution, community service, and probation. The value of the loss would determine whether it is a felony or misdemeanor.
On the other hand, “hard insurance fraud” is when the entire claim is fraudulent, and it is more serious. For example, a person might burn down his or her own house or business with the intention of collecting the insurance money – that would be “hard insurance fraud.” Other examples include staged motor vehicle collisions, false reports of stolen property, or feigned workplace injuries (for workers compensation). “Hard insurance fraud” is likely to be a felony with prison time authorized.
Some might consider it harmless to exaggerate an insurance claim, or even call it a “victimless” crime. But its costs are passed on to individual policyholders in the form of higher premiums. According to the FBI, insurance fraud in the United States totals $40 billion dollars per year and costs the average family an additional $400 to $700 dollars per year in increased premiums – not even including medical insurance fraud. The insurance industry estimates that 10% or more of property-casualty insurance claims may be fraudulent. States have created fraud bureaus to investigate insurance fraud, each insurance company has its own investigators, and insurance companies have banded together to create special investigative units.
As with any crime, penalties vary based on state law. Courts are also likely to consider the amount of the loss, victim impact statements (if any), and the defendant’s criminal history. But all insurance fraud is serious and should not be taken lightly, so sentences can include restitution, fines, community service, probation, and jail or prison.