Soft Fraud — The Crime You Pay For

Insurance fraud is a multi-billion dollar problem that effects everyone; insurance companies, policyholders and consumers. Most people associate these crimes with headline-grabbing schemes of staged auto accidents, workers comp fraud or even arson. Even in Idaho, examples of such “hard” insurance fraud isn’t uncommon. The term “hard fraud” describes an organized and deliberate attempt to stage or invent an act such as an accident, injury, theft or arson to collect money from insurance companies. “Insurance fraud is a serious crime,” Idaho Attorney General Lawrence Wasden says. “It harms all Idahoans and causes the cost of insurance to increase. My office works very closely with the Idaho Department of Insurance to see that insurance fraud crimes are thoroughly investigated and vigorously prosecuted.” Insurance fraud is a felony in Idaho.

With the fight against hard fraud well underway in Idaho, it’s easy to lose sight of another type of fraud known as “soft fraud”. Soft fraud, which is sometimes called opportunity fraud, occurs when a policyholder or claimant exaggerates a legitimate claim. One example of soft fraud is the policyholder who exaggerates the number and value of items stolen from a home or business. Another type of soft fraud occurs when people deliberately give false information to an insurance company in order to lower insurance premiums or increase the likelihood an application will be accepted. An example of this is the policyholder who underreports the number of miles driven. According to the Insurance Research Council, soft fraud “is more frequent than hard fraud… Because of the frequency of soft fraud, it adds more to overall claims cost than hard fraud does.”

Here are a few common examples of car insurance soft fraud:

  • Grade faking. A parent or student lies about high grades to get a good-student discount.
  • Location lies. A policyholder tries to get a premium cut by using an address in a less-traveled rural area. He also tells his insurer that he drives half the miles he really does.
  • Missing drivers. A family fails to inform their insurer that there are two teen drivers in the household, not just mom and dad.

So why does soft fraud occur so frequently? Robert Hoyt, a professor of risk management and insurance at the University of Georgia, states, “The biggest problem is that many people view insurance fraud as a victimless crime. They rationalize that insurance companies have lots of money and if they get some they are not hurting anybody.” David Russell, a professor of finance and insurance at California State University in Northridge says, “People believe they are owed something, especially if they’ve been paying over time.” Other experts believe these attitudes exist because of the failure to punish soft fraud. If penalties were enforced, they argue, responses to the surveys would be different and behavior would be different.

While most people have a moral objection against hard fraud, recent surveys show that 24% of respondents thought it was acceptable to increase the amount of a claim to make up for a deductible, and 10% of the respondents believe “insurance fraud doesn’t hurt anyone.” (The Insurance Research Council, 2013)

Elizabeth Sprinkel, senior vice president of The Insurance Research Council said “The [recent] decline in the public acceptance of fraud is encouraging, however, the fact remains that nearly one in four Americans are tolerant of claim padding behavior that has direct implications for claim costs and the cost of insurance for consumers.”

But is soft fraud really a victimless crime without penalties? It’s not when you consider that the cost of soft fraud is passed on to the consumer in the form of higher premiums. And when the consumer is a department or grocery store, they will also pass along their higher costs to you.

Insurance fraud costs Americans at least $96 billion a year, or nearly $950 for each family, according to estimates by the Coalition Against Insurance Fraud. Insurance fraud is hard to measure because so much goes undetected.

But you don’t have to pay for insurance fraud. There are things you can do to help win the fight against this growing problem. Tell your family and neighbors about soft fraud and how it affects everyone in the form of higher premiums. If you know of insurance fraud, report it to the Idaho Department of Insurance’s Fraud Hotline at 1-866-939-7226. You can also contact your legislators and request new laws to fight insurance fraud. If enough people take action, we can win the fight against soft fraud.