Insurance Fraud: How Policyholders Pay the Price

JUNE 3, 2025

Millions of insurance claims are processed in the U.S. annually — and approximately 20% of them are fraudulent, leading to higher premiums for policyholders, increased taxes, and inflation on consumer goods.¹ The U.S. loses approximately $308.6 billion to insurance fraud each year, which translates to about $900 more per policyholder annually in increased premiums.² In this article, we explore various types of insurance fraud and offer tips on how to protect yourself.

Hard Fraud vs. Soft Fraud

Depending on the type of fraud committed, individuals may face jail time. For instance, hard fraud involves deliberately fabricating a loss to receive a payout from an insurance company. Examples of hard fraud include arson, staged car accidents, or fake injuries. This type of fraud is typically classified as a felony and can result in prison time.³ 

Soft fraud occurs when a policyholder exaggerates a claim to receive a larger payout. Unlike hard fraud, it involves no premeditation and is more challenging to prove. Examples include overstating the severity of injuries or falsely claiming ownership of expensive jewelry after a burglary. Soft fraud is typically classified as a misdemeanor, with penalties that may include fines, less than a year in jail, probation, or community service.³

Property and Casualty Fraud

Property and casualty insurance not only protects the insured's belongings but also provides liability coverage. This type of fraud typically occurs when individuals make false claims related to property damage or personal injuries to obtain an insurance payout.

Fraudulent claims can involve arson, property destruction, or car repair shops performing unnecessary repairs. The most common types of property and casualty fraudulent claims include auto theft and workers’ compensation. It's estimated that around 10% or more of property and casualty claims may be fraudulent.⁴

Auto Insurance Fraud

Auto insurance fraud results in $7.4 billion in losses annually.⁵ Criminals continue to develop new and sophisticated methods to carry out their crimes, using tools like smart keys and vehicle cloning to avoid detection. Fraudulent auto theft involves a vehicle owner falsely reporting their car as stolen. Another form of auto fraud occurs when individuals not present in the vehicle at the time of an accident submit claims to receive funds from the insurance company. These practices affect insurers and can lead to nationwide rate increases for auto insurance policyholders.

Auto premium fraud results in $35.1 billion in insurance losses annually. With the rise of online insurance purchases, many individuals provide false information to secure lower premiums. Common misrepresentations include the number of drivers, vehicle use, garaging location, moving to higher premium areas, and mileage on the vehicle.⁵ Unrecognized drivers are the largest contributors to auto premium fraud, followed by underestimated mileage and violations/accidents.⁶

Disaster-Related Fraud

During natural disasters, some individuals take advantage of survivors by posing as legitimate disaster aid workers and offering to help with applications.⁷ Disaster fraud schemes can include false or exaggerated claims, misclassification of damage, claims from outside the coverage zone, contractors inflating repair costs, upfront payments without work, and charity fraud scams to misappropriate funds.⁸ In 2023, the U.S. faced over $93 billion in catastrophe losses due to natural disasters, as reported by the National Insurance Crime Bureau. It estimates approximately 10% of these funds — $9.3 billion — were lost to fraud following these disasters.⁹

Detecting Insurance Fraud

As insurance fraud continues to cause significant losses, insurance companies and government agencies are working to find effective solutions. Leveraging technology and advanced analytics is crucial in combating increasingly sophisticated criminals, and insurers are enhancing their fraud detection programs by integrating various tools.

According to The Coalition Against Insurance Fraud, nearly all insurers (96%) use anti-fraud technologies. These tools include red flag detection, predictive modeling, case management, exception reporting, and data visualization/link analysis. Anti-fraud technologies are particularly effective at identifying potential fraudulent claims in property and personal auto insurance.¹⁰                          

How to Prevent Insurance Fraud

Insurance fraud is a pervasive problem impacting individuals, businesses, and insurance companies. Here are some tips to help you avoid becoming a victim of insurance fraud¹¹:

• Look out for vehicles that pull in front of you and force you to follow close — they may be setting you up for an accident
• Take pictures of the damage after an accident
• Get detailed information on the parties involved in an accident, including injuries and how many people are present
• Always report suspected fraud to an authority
• Be aware of what information you disclose on the phone unless you can positively identify the caller