What is insurance fraud?
Insurance fraud is intentional deception (or scamming) to get a benefit from an insurance policy. It may be a criminal offence to defraud an insurance company, but insurers are not the only victim of this crime. Both a policyholder and an insurance provider can be a target of fraud. Its negative effects can also be felt by the community and general public.
What are the different types of insurance fraud?
Insurance fraud can happen in more than one way. You may have heard about claims fraud before, which takes place when an insurance policy is already active. In this case, fraudsters cause real or fake accidents, fake injuries, use shady service providers and more to cash in on insurance policies. They may plan out their actions ahead of time or take advantage of a current claim to pay for past damages.
Claims fraud targets insurance companies, but it also impacts insurance rates for everyone. This is because false claims drive up insurance costs. For example, auto insurance fraud is estimated to cost Ontarians up to $236 per year per policy*. But claims fraud doesn’t just hurt your wallet, it can also result in innocent people getting injured.
What may not be talked about as much, but is just as serious, is seller fraud. This kind of fraud takes place when purchasing a policy. Here, fraudsters offer discounted prices in return for policy documents that are invalid or forged. This leaves you open to a high degree of personal risk – or in other words, you may not have any coverage when you need it the most. Under this type of fraud, top scams include “ghost brokers” and “fake brokers:”
- Ghost brokers take money for insurance upfront, provide proof of insurance and then disappear. Simply put, they “ghost” the customer. Sometimes the policy documents are forgeries. Other times the fraudster will set up an actual policy, download the documents and give them to the customer. Then the ghost broker will cancel the policy without the customer’s knowledge.
What this scam looks like: Someone shopping for insurance sees an ad online for low priced insurance and agrees to meet the ghost broker in a coffee shop to pay a full year's premiums in cash. The ghost broker exchanges the cash for forged insurance documents and pockets the money. The victim thinks the coverage is real until an accident requires the client to provide proof of insurance. At that time, the insurance policy, along with the ghost broker, can't be found.
- Fake brokers have a fixed office address and may actually do some legitimate business, such as selling or financing cars. Fake brokers will buy an insurance policy with your name to secure an insurance slip. However, the policy will include incorrect information, such as unlisted high-risk drivers or the wrong address, in order to obtain a more favourable price.
As a part of the scam, many fake brokers also make money by charging a “broker fee” (while others are trying to secure a car sale). In contrast, a certified broker makes commission from insurance companies and, in most provinces, never charges you directly for their services.
What this scam looks like: An individual with a bad driving record has been quoted a high premium and sees an ad offering cheap insurance for high-risk drivers. The driver visits the fake broker and pays a lower premium in return for a pink slip. The driver gets into another accident and discovers that the insurance policy contains misrepresented information. This leads to their policy being cancelled and their claim being denied. After paying for damages out of pocket, the driver is unable to get standard insurance and opts to give up driving.
In comparison, legitimate brokers are regulated by their respective province. You can make sure that any purported broker is properly licensed through their provincial regulator. Also, it’s important to know that not all insurers sell insurance through brokers. For example, although other insurance companies may use brokers, Sonnet does not.