Fraud exists in every insurance industry, causing insurance companies to pay out more money than they should for the risks that they are insuring. Because car insurance quotes are based on the odds that a company will need to pay out a claim, more claims result in higher car insurance quotes for everyone - including honest customers. Even worse, there have been a number of cases in which innocent people were hurt or killed by someone attempting to commit general auto insurance fraud.
Long Island conviction
In a recent case highlighting this dirty practice, a Long Island man was convicted of stealing $150,000 by staging no-fault accidents, according to CBS New York. He faces 20 years in federal prison for organizing crash "rings" - which work together to stage fake accidents - and arranging for the "victims" to receive fake treatment from corrupt medical practitioners.
A common fraud tactic, used by criminals like this Long Island man, is taking advantage of tail-gaters, or drivers that follow too closely, Dennis Jay of the New York Alliance Against Insurance Fraud told CBS New York. A criminal will needlessly and purposefully slams on their brakes, letting the tailgater crash into them.
This tends to be an effective fraud technique, as the rear driver is typically held responsible for a rear-end collision. In normal scenarios, this law makes sense; drivers are expected to be aware of what's in front of them. But, drivers who aren't expecting to be taken advantage of can be exploited by this law.
Other types of fraud
Staged accidents aren't the only type of car insurance fraud. One of the most common types of general auto insurance fraud is the filing of bogus bodily injury claims, according to The Coalition Against Insurance Fraud. By billing insurance companies for unnecessary treatment of phantom injuries, scammers steal billions of dollars every year. Usually the "injuries" come in the form of lower back pain or whiplash, as these conditions are very difficult or impossible for a doctor to detect - meaning they are also difficult to dispute. The Insurance Research Council found that fraudulent and excess payments for bodily injury claims added $4.8 billion to $6.8 billion to payments in 2007.
Underwriting fraud is another common tactic, though generally considered less serious. Dishonest drivers attempt to lower their auto insurance quotes by misrepresenting their driving habits: they register their automobiles in the wrong area (in an attempt to exploit differences in regional rates), report a lower rate of usage for their cars, or report that a commercial vehicle is for private use. While many of these misrepresentations may not have been intentional, they cost car insurance companies $15.9 billion in premium rating errors in 2008 according to the Quality Planning Corporation.
Car insurance companies make their money in the small margin between total premiums and claims. A higher rate of claims, inflated by fraud, means that premiums need to be raised as well. This means higher car insurance quotes for average customers, not to mention a countless number of dangerous and intentional fraudulent car accidents.