Insurance fraud covers a wide range of criminal activity, from overstating the value of a cracked brake light to a claims adjuster to orchestrating a fraudulent health care insurance reimbursement ring. In most states, insurance fraud can be charged as either a felony or a misdemeanor, depending on the extent of the crime. Certain types of insurance fraud, such as Medicare fraud, can be charged as a felony under federal laws.
In the United States, all types of insurance fraud fall into one of two categories: soft fraud or hard fraud. Soft fraud, also known as opportunity fraud, involves the exaggeration of a legitimate insurance claim. For example, overstating the value of property destroyed in a fire or inflating the repair costs from a fender bender is usually considered soft fraud and results in a misdemeanor charge. However, if the amount of money involved surpasses a certain limit, the charge may be elevated to a Class D felony.
Hard fraud occurs when a person either causes or stages a loss for the deliberate purpose of claiming insurance payments. Hard fraud is automatically charged as a felony, usually Class B or Class C. Examples of hard fraud that would be charged as a felony include staging an accident, setting fire to a vehicle, creating a situation where a car could easily be stolen, inventing false claims to secure payments or benefits and orchestrating Medicare fraud to submit false claims for insurance reimbursement.
Reporting Insurance Fraud
All 50 states classify insurance fraud as a crime and have some type of immunity statute for individuals or insurance companies who report the fraud. These statutes mean to protect the whistle-blowing parties from being sued for defamation. However, state laws differ on which type of reporting they protect. For example, the New Jersey immunity statute only covers communications with the state's fraud bureau, while Maine's statute only protects communications with law enforcement.
Due to the high volume of claims, insurers often input claims into a computer for statistical analysis. By comparing each claim against a vast body of historical data, insurers can determine whether the size of the claim is excessive for the geographic location and nature of the loss. Commonly used criteria include frequency and clustering of claims. For example, hip replacement surgery is a common procedure. However, if an insurer received claims for three hip replacements from a single policyholder, the computer would detect that this frequency was well outside the norm. Similarly, if a dermatologist submitted claims for pregnancy ultrasounds to Medicare, it would send up red flags.
Penalties for Fraud
For both soft and hard fraud, penalties can include fines and jail time. Depending on the circumstances, offenders may be able to settle out of court with the insurer. In some cases, defense attorneys can negotiate probation or community service in lieu of jail time. The penalties for hard fraud are stiffer but vary more widely between states. The federal penalties for hard fraud tend to be the stiffest on the books.