INSURANCE FRAUD

WHAT IS INSURANCE FRAUD?

Insurance fraud occurs when someone tries to make money from insurance
transactions by deceiving others. Insurance fraud – including selling insurance without a
license, filing fake or padded claims, and making or possessing counterfeit proof-ofinsurance
cards – is a criminal offense.

WHAT ARE THE MOST COMMON KINDS OF INSURANCE FRAUD?

Agent Fraud

Some examples of this kind of fraud are:
􀂃 A couple pays an agent $500 in cash for a car insurance policy. The agent provides
the couple with fake proof-of-insurance cards and pockets their premium, leaving
them unprotected.
􀂃 An agent persuades a couple in their 80s to invest $47,000 in a "savings plan"
paying 11.25 percent interest. Interest payments stop after three months, and the
agent ignores their requests for their money back.
􀂃 A customer pays a full years $800 homeowners insurance premium to an agent,
who keeps the premium instead of sending it to the insurance company. The
company later cancels the policy for nonpayment of premium. The customer
telephones the agent, who says not to worry because the cancellation was "just a
mistake."

Unauthorized Insurance

In this kind of fraud, the unlicensed insurance companies and insurance agents sell
their insurance policies to the clients. Some examples of this kind of fraud are:
􀂃 A physician pays $14,000 for medical malpractice insurance before discovering that
the insurer, based on a tiny Caribbean island, is doing business illegally in Texas
and has no reserves for paying claims.
􀂃 A small business pays an employee leasing company for workers´ compensation
and health insurance for its "leased" employees. The employee leasing company
never buys an insurance policy, choosing instead to pay the employees´ medical
bills from its cash flow. Eventually, the leasing company stops paying the workers´
claims, leaving the workers or their employers responsible for their hospital and
doctor bills.

Fraudulent Insurance Claims

In this type of fraud persons and other service providers like: hospitals, doctors, stores,
workshops etc., send the false bills to insurance companies. Some examples of this
type of fraud are:
􀂃 A hospital bills patients´ insurance companies for procedures not performed.
􀂃 A criminal ring buys automobile liability insurance, fills two cars with passengers,
then stages an accident in which all claim injuries.

WHY IS AN INSURANCE LICENSE SO IMPORTANT?
• WHAT DOES THE DEPARTMENT OF INSURANCE DO ABOUT INSURANCE
FRAUD?
o PYRAMID SCHEMES

WHY IS A LICENSE SO IMPORTANT?

A license helps protect the consumer from unscrupulous agents and companies. Selling
insurance without a license is a felony in many states. To receive and keep a license:
􀂃 An insurance company must satisfy The Department of Insurance that it is
financially sound and competently and honestly managed.
􀂃 Many states require an agent to be fingerprinted, undergo a criminal
background check and, in most cases, pass an examination on the kind of
insurance that will be sold. The Department of Insurance can revoke an
agent’s license for committing fraudulent and dishonest acts.
In addition, claims against unlicensed insurance companies could go unpaid if the
company fails. Guaranty associations, which pay claims of insurance companies that
fail, cover only licensed companies.

WHAT DOES THE DEPARTMENT OF INSURANCE DO ABOUT INSURANCE
FRAUD?

The Department of Insurance’s Insurance Fraud, Legal and Compliance, and
Financial programs investigate insurance fraud cases. The Fraud Unit helps federal,
state and local criminal justice agencies prosecute the perpetrators. The Commissioner
of Insurance revokes the licenses of agents and adjusters who commit fraudulent acts
and issues cease-and-desist orders to halt unlicensed insurance operations and
deceptive trade practices. The Department of Insurance informs the public of these
actions through news releases. In many instances, the Department of Insurance works
through the State Office of the Attorney General to secure court injunctions against
fraudulent companies and restitution for their victims.

Pyramid Schemes

Fraudulent products involving insurance sometimes are sold through multi-level
marketing or "pyramid" schemes that usually are promoted through low-budget means
like fliers, word of mouth, and grocery store bulletin board notices.
At the heart of all pyramid schemes is the recruitment of salespeople who share their
commissions with the recruiter. Theoretically, a super recruiter can sit back and collect
commission checks without selling anything. These grandiose dreams seldom, if ever,
come true.
Multi-level marketing is legal when commissions and other payments are tied to the
actual sale of goods. It is usually illegal, however, when one’s income depends solely
on recruiting new salespeople. Pyramid schemes in the sale of insurance are illegal
because licensed agents cannot legally share commissions with someone who is not
licensed.
Here is another scenario from a Department of Insurance’s files:
For a $99 "membership fee," one pyramid operation promised to buy life
insurance policies for members, borrow against the policies and use the loan
proceeds to get credit cards and certificates of deposits for the members. In
addition, members could become sales representatives and receive $3,000 for
each new member they recruited. The promoters didn’t tell their victims that you
can borrow only up to a policy’s cash value, which usually is $0 in the first year
and takes years to reach a significant amount. The promoters would have
needed millions of dollars to buy policies big enough to generate sufficient early
cash value to make good on their promises. A $99 membership fee would not
produce that kind of money. The Department of Insurance´s Insurance Fraud
Unit investigated this operation and obtained a cease-and-desist order, shutting it
down.