How to Protect Your Agency from Insurance Fraud

Michael Miller | September 28, 2018

File organizer with formal tabs for "Insurance" and "Claims," and a makeshift tab for "Under Investigation"Insurance fraud costs you, me, and the rest of the United States approximately $80 billion every year. It’s a big problem, not only for insurance carriers but insurance agents, too.

Agents are on the front lines of the battle against insurance fraud. We’ve all encountered suspicious auto accidents and dubious health or worker’s compensation claims at our agencies. We have also heard stories of unscrupulous agents who have pocketed insurance premiums without issuing policies. And the old adage that if it’s too good to be true, it probably is? Insurance companies offering very low premiums for comprehensive coverage may be acting nefariously.

These are all examples of insurance fraud. According to the National Association of Insurance Commissioners, insurance fraud happens when an insurance consumer, agent, underwriter, adjuster, or company deliberately deceives another party for illegitimate gain. Insurance fraud can occur at any point in the insurance transaction, from selling and purchasing a policy to making a claim.

Spotting Customer Fraud

Fraud committed at the hands of insurance customers can take many forms. On the P&C side of your business, insurance fraud may occur as staged auto accidents (especially in states with no-fault laws) and inflated homeowner’s insurance claims after a storm or other disaster. For example, the FBI estimates that $6 billion of the assistance homeowners received after Hurricane Katrina was related to fraudulent claims. 

Fraud can affect the commercial and health insurance side of your business, too. Both employees and employers may fib on a workers’ compensation claim to tip the payout in their favor. Customers may also lie on applications to obtain life and health insurance that age or a health condition may otherwise disqualify them from.

Spotting Fraud within Your Agency

It’s sad but true—sometimes, producers and CSRs commit insurance fraud. Underwriters and adjusters can commit fraud, too. Fraud within your agency can be difficult to spot. Perhaps you’ve noticed a producer is writing a lot of policies from low-ball quotes, and you’re not seeing any proof that the policies have been bound. That could be evidence that they’re pocketing the premium without writing the coverage. Or, maybe you’ve noticed a producer is writing a lot of policies with large premiums. In this case, they may be fraudulently over-insuring customers to pocket extra commission dollars.

Smart Choice® only partners with highly reputable carriers that we have vigorously vetted. But fly-by-night carriers do exist in the marketplace. Often, these fraudsters offer incredibly low rates on policies. Once customers pay their premiums, the company becomes impossible to contact, and policies are never actually issued. Not only does this cost customers real dollars, it also leaves them at risk in the event of an accident or other incident.

Your Responsibilities as an Agent

As an insurance agent, you have a responsibility to your customers, your employees, and your carriers to be alert to possible cases of fraud. If you suspect fraud, you have the duty to report it. In Minnesota, agents who suspect a fraud will be, is being, or has been committed must report it to the state’s Commerce Fraud Bureau. If a report is made in good faith, by Minnesota law, agents cannot be held liable for the information they report. At a federal level, the FBI handles insurance fraud cases.

You know the saying, “It’s not the crime, it’s the coverup?” Mistakes happen to all of us. We might mis-transcribe a Social Security number or add a zero at the end of a customer’s income. That’s what E&O coverage protects against. The key is to own up to and correct your mistake as soon as you encounter it. If you realize you’ve made a mistake on a policy or claim and don’t let your customer and the carrier know about it and take steps to fix it, the situation could devolve into a case of insurance fraud.

How You Can Prevent Fraud at Your Agency

Preventing fraud at your agency starts with protecting yourself in the event you make an error or omission on a policy. You can purchase E&O insurance at a discount through Smart Choice®; contact your State Director to learn more. If you do make an error, let your customer and carrier know right away and take steps to fix it. If you suspect a customer is committing or has committed insurance fraud, report it to your state fraud bureau. Then, work with your carriers’ anti-fraud units to resolve the issue. Perform background checks on potential employees to ensure they haven’t been convicted of insurance fraud in the past.

Insurance fraud can be costly. As agents, we have the power to stop it in its tracks. Your State Director can help you recognize the signs of insurance fraud and guide you through the reporting process in your state. As always, we’re here to help you and your agency succeed.

What to Do if You Suspect Insurance Fraud

  • Document everything in writing as soon as you suspect fraud.
  • Contact your state’s fraud bureau to report the suspected fraudulent activity.
  • If applicable, contact the anti-fraud department of the carrier affected by the suspected fraud. 
  • If you suspect a carrier of fraud, contact your state’s fraud bureau and the FBI.

Insurance Fraud: How to Protect Your Agency

Consumers and agents are increasingly adept and creative when it comes to finding ways to commit fraud. Our job as agents is two-fold – as we owe a duty to both customer and carrier. Check out the 2018 Issue 5 of Smart Choice Magazine to arm yourself for protecting your agency from the immense number of illegal acts committed in the insurance industry.

Read the Magazine