First and foremost, it can be very hard to pinpoint the type of businesses that fall prey to fake business insurance because insurance fraud are diverse, and tend to occur in almost every business industry, as long proper care and due diligence are not taken.
Insurance fraud more or less happens when an insurance company, agent, adjuster or consumer commits a deliberate deception in order to obtain an illegitimate gain. This can happen during the process of buying, using, selling or underwriting insurance.
These frauds may fall into different categories from individuals committing fraud against consumers to individuals committing fraud against insurance companies. Insurance fraud not only imposes costs on insurance companies and threatens their competitiveness and future viability, but it is also financially damaging to consumers and detrimental to the economy and society as a whole.
Fake insurance companies and dishonest insurance agents for donkey years have been defrauding consumers by collecting premiums for bogus policies with no intention or ability to pay claims. These “companies” may offer policies at costs that are significantly lower than the traditional market price in order to woo consumers who are trying to save money.
Note that in many cases, a fake insurance company will provide consumers with documents that look real. In other instances, these policies may even be represented by legitimate insurance agents who themselves have been misled by fraudulent companies.
Also note that employees of legitimate insurance companies can also deceive consumers for personal gain. For example, a dubious agent could collect premiums from a customer without delivering the insurance policy to the company.
Then the insurance company could cancel or refuse to renew the policy. Signs of fraud with reputable companies include the failure to receive an insurance identification card or a copy of your policy in a timely manner. In the United States, FBI estimates that the total cost of insurance fraud (excluding Health insurance) is more than $40 billion per year. Insurance fraud costs the average U.S. family between $400 and $700 per year.
In virtually all states, insurance fraud is classified as a crime. Also, most states have established a fraud bureau that is part of the state insurance department. While their specific functions tend to differ, most fraud bureaus are tasked with investigating insurance fraud and prosecuting the offenders.
Also note that some states have enacted a law mandating insurers to establish a fraud plan. In these states, insurers are expected to establish written procedures for identifying and responding to fraud. Insurers may also be required to file an annual report summarizing the actions they have taken to prevent and fight fraud.
Nonetheless, just like it was stated above, it can be very hard to pinpoint the type of businesses that often buy fake business insurance because insurance fraud are encompassing, and occur in almost any industry and at any time along the insurance process, as long proper care and due diligence are not taken. However, according to the FBI, the most common schemes include:
4 Types of Business Insurance Fraud?
1. Premium Diversion
Premium diversion refers to the embezzlement of insurance premiums. It is the most common type of insurance fraud. Generally, an insurance agent fails to send premiums to the underwriter and instead keeps the money for personal use.
2. Phony insurance policies
Also note that an agent or insurance company representative may attempt to sell you fake coverage through a phony insurance company or try to sell fake coverage using a legitimate insurance company’s name.
3. Fee Churning
Fee churning refers to when intermediaries, or middlemen, take commission from several different companies during a reinsurance agreement. This scam is one of the hardest for bureaus to detect because at first each payout to the intermediary seems legitimate. It is after the funds to pay claims are extinguished that the fraud can be identified.
4. Selling coverage you don’t need
In the United, agents have been known to use several tactics to try to sell consumers coverage they don’t need. Some fraudsters use a sliding tactic, which is when an agent may add on additional coverage and claim that it is part of the policy. Some additional coverage options fraudsters try to sell include motor club memberships, accidental death coverage and guaranteed renewable life insurance.
10 Key Signs of a Dishonest Insurance Agent
Insurance fraud doesn’t always come from policyholders or others trying to take advantage of the insurance company. Sometimes, insurance companies try to take advantage of consumers. While most insurance agents and brokers are honest, trustworthy individuals, the industry has a few bad apples. Here are signs that your agent or broker may be doing something illegal or trying to sale you fake business insurance.
1. Agent Represents a Company You have Never Heard Of
Note that some fraudsters make money by collecting premiums for policies from nonexistent insurers. The agent may even provide fake documents that look like real policies. But if an agent recommends buying coverage from an unfamiliar insurer, take your time to research the company before making any payments. Check with your state insurance department to make sure the company is valid and properly licensed.
2. Agent Lies on Your Application
Have it in mind that an unscrupulous agent may lie on an insurance application to make a business look acceptable to an underwriter. For example, your agent might show “no previous losses” on the application when you have actually had two prior claims. When the insurer discovers the truth, both you and your agent’s credibility will be destroyed. The agent’s lie may even void your policy.
3. Agent Misclassifies Your Business Operation
In the United States, some agents or brokers will intentionally misclassify a business to avoid underwriter scrutiny or help a client save money on premiums. For instance, suppose you are seeking a general liability policy for a small motel you own. Your agent submits an application on your behalf to the XYZ Insurance Company.
The agent knows that XYZ demands more information and charges a higher premium for a motel with a grilling spot than for one without. Accordingly, they include the wrong classification in the application, describing your business as a motel with no grilling spot.
4. High-Pressure Sales Tactics
Always beware of any agent who pushes you to acquire a policy right away. This agent might claim that “this deal won’t last long” or that a rate hike is imminent. An ethical agent will allow you adequate time to analyze and consider your coverage options so you can make an informed decision.
5. Lacks Credentials or a Valid Physical Address
A legitimate agent has a genuine physical address (not a post office box), a business phone number, and an email address. So, always avoid any agent who communicates only via his personal email or cell phone. Always remember to ask the agent for his insurance license number and then check with your state insurance department to verify that the license is valid.
6. They Ask You to Pay Them Directly
No good agent will ask you to make checks payable to them. If your agent asks you to pay them directly, find another agent. Premium payments should be sent to your insurer. If you must leave a check or any other type of payment with the agent, be sure to get a receipt.
7. Agent Quotes a Very Low Premium
Once a premium quoted by an agent seems too good to be true, it probably is. Note that the cost of insurance varies from one insurer to another. However, a quote that’s dramatically lower than others you have received should make you suspicious. The agent may be trying to sell you a nonexistent policy or one that affords very little coverage.
8. You Don’t Receive Any Policy Documents
If after you must have paid your premium but haven’t received your policy or renewal documents within 30 days or so, ask your insurer for copies. Some unscrupulous agents will collect a premium for one type of policy, send the insurer a premium for a cheaper policy, and then pocket the difference.
9. Agent Adds Coverage You Didn’t Request or Need
Agents and brokers notably always earn commissions on the premiums you pay. Commissions are calculated as a percentage of the premium so the agent earns more if you pay more. Therefore, an unethical agent might try to generate more commission by padding your policy with extra coverage.
Once you receive your policies, make sure they contain only the coverage you want. Take your time to analyze any requests you receive for additional premiums after the policy has been issued.
10. Agent Ask You to Inflate the Value of Your Claim
Note that any agent who encourages you to lie on claim forms is asking you to commit insurance fraud, which is a criminal act. Don’t risk prosecution and (possibly) a prison sentence. Report the agent to your state’s insurance department or fraud bureau.
Insurance fraud is everywhere, and can be devastating to its victims. So before signing an application for an insurance policy or writing a check to an insurance company, take your time to confirm that the company you are about to do business with is legitimate. Your state insurance department – easily reached by phone – can quickly verify whether an insurance company exists and is authorized to sell insurance in the state.