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Second Most Practiced Crime In The World: Insurance Fraud
By Barry Zalma, CFE, Attorney At Law - April 15, 2015

Next to tax fraud, insurance fraud is the most practiced crime in the world. It is perpetrated by members of every race, religion, and nationality. It is found in every profession. The possibility of a tax-free profit, when coupled with the commonly held belief that criminal prosecution will probably not occur, is sometimes too difficult for normally honest people to resist.

As those in the insurance industry are aware, many insurance fraud cases go unreported, because the victimized organizations do not recognize that they have been defrauded, because they choose not to report the crimes for fear of bad publicity, or simply because they do not want to deal with the repercussions and expenses attendant on insurers who report fraud to the appropriate authorities. If each insurer recognized that at least three percent of its gross premium goes to perpetrators of fraud the insurer might be willing to invest more money in its special fraud investigation units. Those who believe they can pass the cost of fraud on to the customers are mistaken. The truth is that fraud reduces the profit an insurer can make. Those who own stock in insurers should be complaining to the insurer about the lack of effort to protect the profits of the insurer and the dividends the shareholders are entitled to receive.

Insurance fraud is a tort, a civil wrong. Black’s Law Dictionary, 6th Edition, defines fraud as:

  • An intentional perversion of the truth for the purpose of inducing another in reliance upon it to part with some valuable thing belonging to him or to surrender a legal right; a false representation of a matter of fact, whether by words or by conduct, by false or misleading allegations or by concealment of that which should have been disclosed, which deceives and is intended to deceive another so that he shall act upon it to his legal injury.

In simple language, fraud can be defined as a lie told for the purpose of obtaining money from another who believes the lie to be true. Civil insurance fraud exists if an insured:

  • makes a representation to the insurer that the insured knows is false;
  • conceals from the insurer a fact he or she knows is material to the insurer;
  • makes a promise he or she does not intend to keep; makes a misrepresentation on which the insurer relies in issuing the policy, that results in the insurer incurring damage.

To protect insurers against fraud, most insurance policies contain, in clear and unambiguous language, a clause similar to the following from the New York Standard Fire Policy:

  • This entire policy shall be void if, whether before or after a loss, the insured has willfully concealed or misrepresented any material fact or circumstance concerning this insurance or the subject thereof, or the interest of the insured therein...

Fraud may be committed at different stages in the insurance transaction by:

  • applicants for insurance,
  • policyholders,
  • third-party claimants and
  • professionals who provide services to claimants.

Those who commit insurance fraud range from:

  • organized criminals who steal large sums through fraudulent business activities;
  • insurance claim mills;
  • professionals and technicians who inflate the cost of services or charge for services not rendered;
  • people in need of cash who are recruited, for a fee, to be “victims” in an auto accident;
  • ordinary people who want to cover their deductible; or
  • ordinary people who view filing a claim as an opportunity to make a little money.

Hard Fraud vs. Soft Fraud

When someone deliberately fakes an accident, injury, theft, or intentionally commits arson or other loss to collect money without right from insurance companies, it is considered a hard fraud. Insurance criminals often act alone. Increasingly, organized crime rings stage large schemes that steal millions of dollars. When a legitimate loss occurs and an insured adds a single television, an I-Pod or a cellular phone to the loss to cover the deductible, it is considered a soft fraud.

Both frauds, regardless of the appellation, are both civil and criminal fraud. Both soft fraud and hard fraud are crimes in almost every state and both deserve to be prosecuted to the fullest extent of the law.

A “soft fraud” is no less a crime than a “hard fraud.” The difference is premeditation. Both, if proved, are absolute defenses to an insurance claim. Both, if proved beyond a reasonable doubt are crimes.

Soft Fraud

For reasons known only to governmental entities some insist on categorizing fraud into both “hard” and “soft” fraud. By so doing the governmental entities that so categorize fraud make one type of fraud less heinous than the other. Fraud, whether categorized “soft” or “hard,” both are criminal and if tried and convicted both can be sent to jail for the same amount of time.

The types of insurance fraud some call “soft fraud” are found in every type of claim presented to an insurer.

Soft fraud, which is sometimes called opportunity fraud, occurs when a policyholder or claimant exaggerates a legitimate claim.... According to the Insurance Research Council, soft fraud “Is far more frequent than hard fraud… Because of the frequency of soft fraud, it adds more to overall claims cost than hard fraud does.” [Article by the Idaho Fraud Bureau at; report of the Coalition Against Insurance Fraud at; article by Arkansas Department of Insurance at]

Soft fraud occurs when a policyholder exaggerates an otherwise legitimate claim or when an individual applies for an insurance policy and lies about certain conditions or circumstances to lower the policy’s premium.

The reality is that Soft Fraud is a criminal violation and a breach of a material condition of the policy. It contributes to increased insurance costs. As a result of increased insurance costs, millions of Americans cannot afford sufficient insurance coverage. One cannot commit an innocent or partial fraud any more than one can be partially dead. Once fraud is committed the contract of insurance is violated and voidable and the crime has been committed.  

Barry Zalma is an attorney, a CFE (Certified Fraud Examiner), and an expert witness for myriad types of insurance fraud. His website is at   To read his blog, go to   

copyright © Barry Zalma; published with permission by adjustercom. 



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