Car insurance fraud red flagsAuto insurance fraud comes in all shapes and sizes, from organized rings that stage accidents and reap big bucks to repair shops that routinely help motorists inflate their claims.

Spotting those cases among the 10 million or so car accidents reported each year takes some detective work.

According to the Insurance Information Institute, there were more than 35,000 suspicious auto insurance claims in 2011, and 42 states and the District of Columbia have set up bureaus to investigate suspected fraud.

While it’s impossible to put an exact dollar value on the amount of auto insurance fraud that occurs each year, a study by the Insurance Research Council estimates that fraudulent and exaggerated claims cost insurers an extra $4.8 billion to $6.8 billion in 2007, or between 13% and 18% of total payouts. Inflated claims are more common than out-and-out fakes, the report states.

Those who get caught trip over red flags investigators have learned to watch for.

How fraud is investigated

Auto insurance companies may delve into cases of suspected fraud themselves. Still, when a case involving a sizeable claim or several claims appear to be fraudulent, insurers may call in the National Insurance Crime Bureau (NICB) to investigate.

The NICB “takes the thread and starts pulling on it,” NICB spokesperson Frank Scafidi says. “We can perhaps see similar acts by the same people in the same town.”

Like the NICB, the private company Detica works with auto insurance companies to detect fraud patterns. “Insurers pool data, which helps everyone,” says Joe Friscia, Detica’s past president for the Americas.

Consider the “swoop and squat,” where two drivers work in tandem to trap an innocent motorist. One slams on the brakes in front of the victim; the other blocks the victim in the other lane so the victim can’t swerve to avoid the wreck.

Instead, the victim rear-ends the car in front, which is filled with people. Everyone in that car will claim a hard-to-detect injury, like whiplash. The same people may be repeatedly involved in such wrecks.

“We detect them by looking at the relationships of people and see if there are other accidents in their history,” says Tim Rush, senior manager for sales for the U.S. insurance sector for Detica.

Using its software, Detica can look at the street addresses, phone numbers and email addresses of the suspected fraudsters, Rush says. Large, organized fraud rings could involve 20 or 30 people, Rush says.

Fraud rings

NICB investigators work with member insurance companies to uncover fraud rings. The organization has about 120 agents in the field investigating claims, Scafidi says. Another arm analyzes claims, looking for suspicious trends that can trigger investigations.

Investigators may notice things such as the same address, witness names or license plate numbers showing up repeatedly on claims.

Red flags go up if the organizer “has purchased 20 different policies for 20 different, unrelated individuals, and they think it won’t be detected,” Rush says.

What is soft fraud?

Investigators also keep an eye out for less obvious fraud, such as a claim for $3,000 after a vehicle is towed, when the real cost is $500, Rush says. Another example might be a medical provider saying someone’s arm is broken when it’s bruised.

Such “soft fraud” is particularly commonplace. “Soft fraud is pretty constant. It’s almost like a fact of life in the business,” Scafidi says.

Insurers can opt to pay the claim and then cancel the motorist’s policy, or they may decide to build a case and prosecute the person for fraud.

No-fault insurance means more fraud in no-fault states

The industry says fraud is a particular problem in no-fault auto insurance states, where policyholders can receive financial compensation for their losses in an auto accident — up to a set amount — regardless of who is at fault.

Scafidi says no-fault laws provide a temptation because “there’s a guaranteed payout without too much trouble.”

A dozen states, including Florida, New York and Michigan, have no-fault systems in place, and often motorists pay the price through hefty car insurance rates.

Susan Ladika contributed to this story.

Laura Longero

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Laura is an award-winning editor with experience in content and communications covering auto insurance and personal finance. She has written for several media outlets, including the USA Today Network. She most recently worked in the public sector for the Nevada Department of Transportation.

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Prachi is an insurance writer with a master’s degree in business administration. Through her writing, she hopes to help readers make smart and informed decisions about their finances. She loves to travel and write poetry.