Insurance Fraud Term Paper

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Insurance Fraud

After tax evasion, insurance fraud is considered the highest-ranked among white-collar crimes. The original concept of insurance, as a for-profit endeavor, was to collect funds from a large number of people to pay for damages and accidents that involved a small percentage of the population that paid premiums. Insurance fraud is an ever-growing problem. Solving or eliminating this problem requires the resources and knowledge of individuals or associations with expertise ranging from not only insurance, but also law enforcement, legal issues and the social sciences. The concept of insurance fraud, both, by an individual and a corporation, has become so pervasive in today's society that the general population has learned to tolerate and condone these crimes.

Various organizations, funded by state and federal governments, and supported by the insurance company, are trying to increase the awareness of this problem among the general population. Annually, an average American family spends approximately, an additional $1,000 in premiums for home, health and auto insurance because of fraudulent claims.

In addition to the individual, governments, employers and local businesses also pay the price in higher premiums for goods and services provided. Many small companies often are faced with insolvency due to this high business cost.


Insurance is not an investment where one cannot expect to get one's money back at the end of the term or period; nor is it a gamble with resources. Insurance offers protection against risks that already exist. Risks are events or incidents that can cause extensive loss and damage to both life and property. It is essentially a risk-sharing scheme. Insurance has existed in various forms for thousands of years. In ancient times, the Babylonian laws as part of Hammurabi's Code were a form of insurance-practice observed among the citizens of the land.

Fraud in the insurance industry has existed ever since insurance (as we know it today) as a concept was first introduced in the seventeenth century. Insurance fraud occurs when people deceive an insurance company or agent to collect money to which they are not entitled, as per terms of the insurer-insured agreement. Strictly defined, insurance fraud is: "the intentional misrepresentation of material facts and circumstances to an insurance company to obtain payment that would not otherwise be made."

The purpose of this thesis is to identify the different types of insurance fraud perpetrated today, and to evaluate their effect on the insurance industry and society at large. Evaluation of the preventive measures that can be taken to help prevent and reduce the number of fraudulent claims will also be discussed. The effect of fraud on both individuals as well as businesses in quantifiable and unquantifiable ways has a tremendous backlash on the individual, and consequently, on society.

History of Insurance:

One of the most famous insurance providers in the world today, Lloyd's of London came into existence in 1688. Edward Lloyd owned a coffeehouse in London where merchants and bankers evaluated the risk of the maritime operations of seafaring vessels used for trading among the various British colonies and those used for prospecting new lands. Financiers for the expensive endeavors and trips to far off lands invested huge amounts of money in the hope that the voyages would be successful. Ship captains required money for supplies and goods, and would offer to embark on these dangerous trips with the help of these financiers -- a potentially, mutually beneficial endeavor. The financiers would sign contracts with the captains of these marine vessels for specific sea-going risks that an ocean-worthy vessel would encounter. The financiers would specify the amount of monetary compensation that would be provided to the captain or his trustees for the ship and its cargo (if any) should the ship fail to return to port in good condition or if the ship was lost at sea.

In return for this 'security' that the financiers provided, the captains would pay an amount (now known as premium) to the financiers for this "insurance" service. Based on the stipulation of the document, both parties would agree on a specific amount prior to the trip. Voyages were not always successful and sometimes the financiers had to compensate the shipping company, captain or the company's trustees when the ship was lost or damaged. Later, financiers were called underwriters. In 1769, a group of financiers at Lloyd's coffeehouse formalized their association and became the first insurance company. This company operated in a manner similar to modern insurance companies. Lloyd's later diversified and widened their base of operations to include a wider variety of risks and ventures that were not all connected to the marine industry. (WatchTower, 2002)

The nature and type of rules governing the insurance industry vary from country to country depending on the purpose of insurance desired and the extent of its coverage. The basic operating principles for all insurance companies no matter what services they provide are the same: "collect from many so a few can get paid for calamities with which they are involved." While at a superficial level, all insurance companies advertise themselves as a kindler-gentler operation, trying to instill a sense that the company is really a charitable operation, it must be remembered that like any industry, the sole aim is making money. Thus, "from-many-to-few" is the only way by which insurance companies can stay in business and provide the services that they do. The term "insurer" includes anyone authorized to be in the business of selling insurance (insurance companies) as well as those authorized to do business (insurance agents) in a specific state.

Insurance coverage is generally classified into the following categories based on the risks they cover: property insurance, liability insurance, health insurance, disability insurance and personal life insurance. Property insurance covers the loss and damage to property, which may be either business or personal. Often a business property or a house is a person's biggest asset. In the absence of insurance, any loss or destruction to this property can cause serious financial problems. Liability insurance covers against injuries during an accident to either the insured or a third person. Health insurance offers coverage for health and illness that can occur to an individual or a family. Employers often offer health insurance as a major benefit to their employees and, in some cases, even the employee's family. Disability insurance is offered when individuals sustain serious harm that cannot preclude them from going about their daily routine. Disability insurance offers protection against a situation where the breadwinner of the family gets disabled and cannot work. Such insurance offers a fallback to the family and the individual till other options are available. Life insurance offers protection against the death of the policyholder and is generally paid to the deceased's next of kin or a person or association the deceased has named as the primary benefactor.

Insurance Fraud:

Insurance Fraud' is rated America's second highest white-collar crime after tax evasion. Fraud has become a major concern to the insurance industry in this century -- especially in the last forty years. Insurance fraud is a crime that is a perfect illustration of the snowball effect: it starts by affecting an individual or an organization, affects a community, society and even the country. Insurance fraud is not only committed by claimants: Broadly defined, there are three major categories of fraud in the insurance industry based on what side the perpetrator of the fraud is: claims fraud, applications fraud, and fraud committed by employees in the insurance industry. The last includes agents, adjusters, brokers or persons claiming to be in the business of insurance. Applications fraud is generally committed by the insured or customer and includes application for any insurance policy providing false information about the risk involved, the age of the insured, the geographical location or any other material evidence that can serious affect the insurance policy-rating. Fraud committed by the insurance industry includes solicitation of a fabricated and non-existent type of policy or service; requiring that the insured give the insurance company or agent a certificate of authority for personal and business insurance; and, misrepresenting the financial status of any insurer. The Coalition Against Insurance Fraud estimates: "Insurance fraud costs Americans at least $80 billion a year, or nearly $950 for each family." (CAIF, Insurance Fraud: The Crime You Pay For, 2002) fraudulent act is: an act based on a conscious intent to defraud someone of money, property or identity, and the act can be committed either against an individual, an insurance company or a consumer. The Unlawful Insurance Act requires a lower burden of proof (of fraud) and is designed to attack scams such as medical billing agencies and fraud rings in which the leaders and the brains behind the scam are often able to escape without prosecution due to the loopholes in the laws as they exist today. (AAA, 2002) year 2000 study by the Hartford, Connecticut-based Conning & Co., claimed that insurance fraud costs the American public $96 billion dollars annually in increased premiums. Honest consumers, business and governments pay the…[continue]

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