How Insurance Companies Commit Fraud and Try to Cheat You
In a life plagued by emergencies, you have only one option: to prepare for the unexpected. As is the common practice in America, you prepare by insuring the things most important to you. You insure what you need (your health, home, and life) and the things you love (your pets, travel plans, and cars). Each insurance company seeks to show you that they are the one worthy of being trusted with the things that are important to you. They exude confidence in assuring you they are like “good neighbors” who are on your side, and that they’ll keep you “in good hands”.
The Philadelphia bad faith insurance lawyers at Reiff Law Firm discuss fraudulent activities by insurance companies.
Methods Used by Insurance Companies to Scam Customers
Unfortunately, many insurance companies may be cheating you or could eventually cheat you out of your money. Being aware of the methods insurance agents and companies use to commit fraud is the best way to prevent it from happening to you. The methods used can be divided into three categories: fake companies, dishonest agents, and unfair practices.
Fake Insurance Companies
Fake businesses posing as insurance companies attract people looking for a good deal. They operate by reaching out to customers and offering premiums at rates substantially lower than the standard industry rate. After they sell you this nonexistent policy and offer proof in the form of official-looking documents, they keep the money, and you do not have real insurance. The National Association of Insurance Commissioners (NAIC) reports that between 2000 and 2002, the government identified at least 144 fake insurance companies selling health insurance to more than 200,000 people. This resulted in more than $252 million in unpaid claims.
Similarly, there are real businesses that are not licensed or regulated by the state that may try to sell you plans that will not actually contain insurance. Because these “policies” are not regulated, when you purchase a policy from them, you end up with a noninsurance product and they pocket your money.
The following are a few red flags which indicate that the insurance company you are dealing with is phony:
- They sell premiums that are 20%-50% lower than other company’s premiums for similar policies.
- They pressure clients to sign policies immediately and threaten that premiums will increase if they hold off.
- Their agents require cash-only payments.
The best way to protect yourself is to verify the legitimacy of the company you are considering purchasing a policy from. You can do this by contacting your state’s insurance department to confirm the company is legitimate and properly licensed. The NAIC puts it this way: to avoid falling into this deceitful scheme, you should “Stop. Call. Confirm.”
Dishonest Insurance Agents and Brokers
Even after you have verified the legitimacy of the company you are working with, the potential to be conned still exists. The most common kind of insurance fraud is committed by insurance agents and brokers. Many times, these agents represent well-known companies, making them more credible. However, these agents still steal money paid for premiums, often through a practice known as “premium diversion.” This tactic is as straightforward as agents taking the money paid for a premium for themselves instead of sending it to the company. Agents will create a policy and let it lapse, or they cancel it without your knowledge or never create the policy to begin with. The worst part of this kind of embezzlement is that you don’t usually find out about it until you file a claim, only to learn there is no policy.
Another way that insurance agents commit fraud is through a technique called “churning.” Churning occurs when the agent persuades a customer to replace their existing policy for another one within the same company with the intent to receive extra commissions on the new policy. For example, an agent might convince someone with a whole life policy to use the built-up cash value of the policy to purchase a new policy. The new policy will be substantially similar to the one that’s being replaced, so the policyholder doesn’t get much benefit. The agent receives the commission from a new policy and the customer must start rebuilding their cash value. A new policy could require higher premiums due to age or decrease in health, not include the same options or advantages, and cause the cash value and dividends to grow at a slower rate
Similarly, an agent may replace an existing policy for another policy with a different company. This kind of replacement is called “twisting.” The key factor in both “churning” and “twisting” is that you are misled into replacing your policy and gain no benefit from the exchange – but the agent makes a commission anyway.
There are a few steps that you can take to certify that your premiums are actually paying for your policy and not going into the agent’s pocket. You should always make payments to the company directly rather than paying an agent. Nearly every insurance company allows you to make premium payments online. If you prefer to mail your payment, make the check out to the insurance company directly and double-check the company’s address.
You can also monitor the status of your policy to make sure your policy is active and has not lapsed or been cancelled without your permission. You should receive a copy of your policy terms when you purchase it as well as annual statements at every renewal. This process is facilitated by online access to policies, which is available with most companies. Some states also have required disclosures that the insurance company must give you at renewal. If you do not receive these disclosures, it may be because your policy has lapsed or been cancelled.
If your agent suggests that you should replace your policy, ask about the details of the exchange. Ask for a comparison of both policies with a focus on the proposed policy’s benefits to you. In some states, such as Pennsylvania, agents replacing a policy must provide a disclosure statement or a ledger comparing the proposed policy to the old one. Be sure you receive these and understand them. If you are still unsure, get a second opinion.
Lastly, insurance companies themselves can commit fraud by engaging in unfair practices. This often involves delaying payment for your claim, not completing a thorough investigation into your claim, offering to pay less than what the claim is worth, or unreasonably denying payment for your claim.
When insurance companies engage in these kinds of acts, they breach the duty of good faith that they owe you. A breach of this duty can give rise to a “bad faith” lawsuit. In Pennsylvania, a bad faith insurance injury lawsuit requires the insured to show the insurer unreasonably denied benefits under the policy and that they did this knowingly or recklessly. It is crucial for you to know the details of your policy and the insurance company’s obligation to you in order for you to identify this type of fraud.
Philadelphia Personal Injury Lawyers Fighting Against Insurance Fraud
Insurance fraud can happen to anyone, even to those who have taken the proper precautions. If you believe you have been a victim of any of these schemes, it is important to know that there are remedies at your disposal. Contact our Philadelphia personal injury lawyers today to discuss your options. You can obtain justice for yourself and prevent others from falling prey to the same problems.