7 Types of Car Insurance Fraud and How to Avoid Them

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Written by Christy Rakoczy Edited by Nick Versaw

Updated March 12, 2024

Insurance fraud costs companies an estimated $40 billion annually, with the average family paying between $400 and $700 more in premiums as a result of fraudulent behavior, according to the FBI. But what exactly is insurance fraud, and how can you protect yourself against it?

This guide will explain some common types of auto insurance fraud so you can easily spot the different kinds of unlawful activity that far too many drivers come across.

What Is Car Insurance Fraud?

Car insurance fraud happens when scammers lie about auto insurance for some sort of financial gain. It can take many forms — from scammers selling an unlicensed insurance policy to drivers lying on applications for coverage, making phony claims, or exaggerating their damages.

Below are some of the most common car insurance scams you might encounter.

Common Types of Car Insurance Fraud

Common types of insurance fraud can range from filing fraudulent insurance claims to lying on your insurance application. Here are some more details about some of the most common insurance scams that happen every day.

1. Staging an accident

Staged car accidents happen when scammers purposefully set up innocent victims to “cause” a crash. Examples include:

• Swoop and squat: One car — the “swooper” — cuts off the car in front of you, forcing them to hit the brakes and you to rear-end them. The car you hit — the “squatter” — is full of passengers who fake their injuries.
• The drive down: A car waves you forward as you’re trying to merge, then slams into you on purpose but denies telling you to go.
• The sideswipe: If you drift slightly at an intersection with multiple turn lanes, the driver next to you purposefully sideswipes you.
• The T-bone: As you cross an intersection, a driver coming from a side street speeds up to get in front of you. Staged witnesses claim you ran a light or stop sign and caused the car accident.

2. Claiming fake or exaggerated injuries

Claiming fake or exaggerated injuries is also called “padding.” Scammers pretend to be injured or hurt worse than they are. They exaggerate to get a larger insurance payout by making a false claim. They may work with crooked chiropractors, physical therapists, or physicians who submit false information to help them exaggerate the extent of their injuries.

3. Deliberately damaging a car or claiming it’s stolen

Insurance is supposed to cover only accidental losses. Deliberately vandalizing or otherwise damaging a car and then making a property damage claim under false pretenses is a form of insurance fraud.

So is filing a claim for a stolen car that isn’t stolen by chance — for example, if the owner dumps the vehicle or encourages the theft (such as by leaving the car running with the keys inside in a dangerous area).

4. Exaggerating repair costs

Consumers or auto repair shops might engage in “bill-padding.” This involves lying about or exaggerating the cost to repair covered damage. The policyholder or body shop might bill for unnecessary repairs or damage that the accident didn’t actually cause. Sometimes, body shops will even intentionally cause more damage to get a bigger payout from an insurer.

5. Using a stand-in

Scammers sometimes use “stand-ins” to try to collect more money from an insurance company. A stand-in will make false statements and pretend they were in the car when a motor vehicle accident happened, even though they weren’t. They make these false statements to claim they were injured and are entitled to a payout from an insurer.

6. Misrepresenting personal information

Being dishonest when filling out an application for auto insurance is also a form of fraud. That’s because insurers can’t price policies accurately or fairly if you provide the wrong information. Some common misrepresentations include lying about your accident history, who will be driving the car, or where you live.

7. Using a fake insurance card

Most states require drivers to carry proof of insurance and provide it to law enforcement if they’re pulled over or in an accident. Using a fake insurance card that includes untrue information about your insurance — or if you’re insured at all — is a form of insurance fraud.

Other Types of Car Insurance Fraud

The list above explains some common types of insurance fraud, but it doesn’t cover every type of criminal activity scammers might use to improperly get money or other benefits from an insurance company under false pretenses. Here are a few other common scams.

Towing scams

Towing scams happen when tow truck drivers show up after an accident and want to tow your vehicle, but they don’t charge honest fees or take it to a legitimate repair shop. Instead, the scammers bill huge amounts for towing and often charge extra fees, such as administrative, recovery, or storage fees.

Premium evasion

Insurance agents and other insurance professionals may engage in premium evasion if they take the money you’re sending to an insurance company and keep it for themselves instead of forwarding it to the insurer.

Soft fraud vs. hard fraud

Auto insurance fraud can be grouped into two categories:

• Hard fraud: With hard fraud, a policyholder destroys property covered by insurance on purpose in order to make a claim and get a payout. Vandalizing your own car is a good example.
• Soft fraud: This occurs when a policyholder has a legitimate claim but exaggerates to get more money or when a potential customer lies on an insurance application to try to reduce their premiums.

Most areas consider both soft and hard fraud to be criminal offenses and can result in serious consequences, including jail time.

How to Protect Yourself from Car Insurance Fraud

Protecting yourself from car insurance fraud is important because fraudulent claims on your policy could raise your rates. Here are a few key steps you can take to try to ensure you don’t become a victim of fraud:

• Call the police immediately after any accident.
• Notify your insurer after any accident instead of settling with the alleged victims.
• Keep your personal information private to avoid identity theft.
• Take photos of each car and its passengers after an accident.
• Write down the names, addresses, and phone numbers of anyone involved in or witnessing an accident.
• Work only with legal, medical, and repair professionals you know and trust.
• Drive safely and avoid higher-risk behaviors, like tailgating.

How to Report Car Insurance Fraud

Insurance fraud is most often addressed at the state level. If you believe you’ve been a victim, you’ll need to follow the reporting process for where you live. Usually, this means you should report the fraud to your state’s attorney general or department of insurance.

You can usually report insurance fraud online or over the phone. Some states may have a system to make an anonymous report, but they may take your case more seriously if you disclose your identity. You should also provide as much supporting information as you can, including specific details about the alleged unlawful behavior.

Consequences of Auto Insurance Fraud

Insurance fraud is a type of criminal activity. State laws apply, so the rules can differ depending on where you live. In many states, the consequences are also affected by how much money the alleged fraudster gained.

For example, in Minnesota, you could face a maximum fine of $1,000 and up to 90 days in jail for fraud involving less than $500 — but up to a $100,000 fine and up to 20 years imprisonment for fraud involving more than $35,000.

Many states consider insurance fraud a felony offense. For example, in Pennsylvania, you could face a felony charge and severe penalties. You could be fined up to $15,000 and imprisoned for up to seven years. It’s a crime in Pennsylvania both to commit insurance fraud and to conspire with someone else who’s committing fraud.

How to Get Affordable Coverage Without Committing Fraud

The good news is you don’t need to commit insurance fraud to get affordable auto insurance coverage. You can take several steps to ensure you’re paying the most affordable premiums, including:

• Driving safely. A clean driving record can reduce your coverage costs.
• Completing a defensive driving course. You can save on insurance premiums by taking an approved defensive driving class or having your teen driver take a driver’s education course.
• Bundling coverage. If you buy home and auto coverage from the same insurer, you can reduce the premiums you pay for both policies.
• Shopping around. Comparison shopping for affordable coverage can help you find the best prices since premiums vary from one insurer to another.

Car Insurance Fraud FAQs

Still have more questions about car insurance fraud? Here’s what you need to know.

What’s the legal definition of car insurance fraud?

Car insurance fraud is usually governed under state law, and different states have different definitions. In general, though, car insurance fraud involves engaging in dishonest behavior to gain a benefit or advantage from an insurance company.

What are the red flags of auto insurance fraud?

A few auto insurance fraud red flags include:

• Low impact accidents with multiple people claiming injuries (a sign of a staged accident)
• Adding a new type of insurance coverage right before an accident happens
• A policyholder who is difficult to reach by phone or mail
• Extensive medical bills for minor or difficult-to-prove injuries

What triggers an insurance fraud investigation?

An unusually high number of claims or suspicious conduct could trigger an insurance fraud investigation, as could unusually high medical bills for hard-to-prove injuries.

Is insurance fraud a felony in NC?

Yes, insurance fraud is a felony in North Carolina. You could be imprisoned or fined for committing insurance fraud.

Sources

1. Federal Bureau of Investigation, “Insurance Fraud,” Accessed February 14, 2024.
2. National Association of Insurance Commissioners, “Insurance Fraud,” Accessed February 14, 2024.
3. Federal Bureau of Investigation, “A Cautionary Tale,” Accessed February 14, 2024.
4. U.S. Government Publishing Office, “Insurance Fraud In America: Current Issues Facing Industry And Consumers,” Accessed February 14, 2024.
5. CBS News, “Pennsylvania insurance fraud agency warns of “wreck chasers” charging thousands after towing cars,” Accessed February 14, 2024.
6. Pennsylvania Insurance Department, “Reporting Insurance Fraud in Pennsylvania,” Accessed February 14, 2024.
7. Michigan Department of Insurance and Financial Services, “How can I report auto insurance fraud?,” Accessed February 14, 2024.
8. North Carolina Department of Insurance, “Recognizing Fraud,” Accessed February 14, 2024.

Christy Rakoczy Insurance Writer

Christy Rakoczy has been a personal finance and insurance writer for over a decade. Her work has been published on USA Today, MSN, Yahoo Finance, Credit Karma, Forbes Advisor, Insurify, and more. Christy previously worked as a data analyst for Blue Cross and as a paralegal studies instructor before transitioning to writing full-time.