Soft Fraud

How Most Get Away With Insurance Fraud

Barry Zalma

Mar 28, 2024

PADDING

Padding is found when injuries or damages are exaggerated to increase a claim’s value. It is what has been called an insidious type of fraud difficult to detect and often considered harmless by insureds, claimants, police, and prosecutors.

Padding can come in a variety of forms. In first party claims, an insured is generally considered to be in the best position to know the value of property for which he or she is making a claim. An insurer depends upon the insured to provide an honest description and estimate of the value of the property, and most courts hold an insured to a high level of honesty when reporting a loss to an insurer.

Padding is found in property insurance when insureds inflate the number of items lost or destroyed or exaggerate the value of the items claimed damaged, destroyed, or stolen. This can be as simple as increasing the size of a stolen television from 32 inches to 42 inches; from a cathode ray tube to flat screen; from $100 cash to $500 cash; or from two pairs of jeans to five pair.

According to an Insurance Research Council (IRC) study, approximately 90 percent of the costs of insurance fraud are the result of claims padding. Claimants add damage, injuries, and fictitious passengers to their insurance claims. The other 10 percent are the result of organized accident staging rings. Because of the sheer number of offenders, and the light sentences received by the few that are convicted, pursuing these crimes has not a priority for law-enforcement or insurers. [Whyen v. Summers, 58 Misc.3d 1223(A), 97 N.Y.S.3d 57 (Table) (N.Y. Sup. Ct., 2018)]

On third party claims the padding can be as simple as adding a week of lost earnings that, in fact, was not lost; allowing the doctor to bill for three visits not made; or going to a chiropractor who charges for x-rays not taken.

Standard fire insurance, all-risk property insurance, package first party property policies and most third party liability policies state that the policy is void if the insured intentionally conceals or misrepresents any material fact or circumstance about the insurance or a claim, whether before or after the loss.

When an insured submits fraudulent invoices to inflate a claim the insurer has the right, under the policy wording, to void the entire policy. The insured’s argument that he was entitled to recover that part of his claim not supported by fraudulent documents should be dismissed out of hand. One cannot commit a small fraud any more than a person can be just a little dead.

A slight misstatement of value normally will not be sufficient to allow an insurer to void an insurance policy for fraud unless the insured knew at the time the misstatement was made that the statement was false and the insurer can prove that the misstatement was made with the intent to deceive it. Misrepresentation, concealment, and fraud are not limited by the amount of the fraud but by the intent of the person making the claim. An insured who presents, with the intent to defraud, $1,000 in false invoices is as culpable as an insured who presents, with the intent to defraud, $1,000,000 in false claims. In both cases, if proved, the policy of insurance, by its terms and conditions, is void and the claim is forfeited.

If the differences in numbers between those presented by the insured and those presented by the insurer are honest differences of opinion or calculation errors a policy cannot, and should not, be declared void. The insured must intend to deceive and the insurer must be in a position to prove that intent and that it was deceived before it can void the policy.

Honest people deceive their insurers. They think the deception is just harmless fudging. “Soft fraud” wrongfully takes money from an insurer and is also a crime. Soft fraud, like hard fraud, raises everyone’s insurance costs. The greatest amount of money lost to fraud is lost to schemes designated as “soft fraud.” Since most soft fraud succeeds the amount it costs the insurance industry is difficult, if not impossible, to determine. Prosecuting some “soft fraud” perpetrators can put the fear of prison in the minds of the general public and save more money, in the long run, than prosecuting and convicting a single major fraud perpetrator. Unfortunately, police and prosecutors are often unwilling to prosecute cases of so-called “soft fraud” even when the evidence is damning.

Years ago, the author took the Examination Under Oath of an insurance broker who inflated a claim for damage to personal property by creating, with the use of white out paint and a photocopy machine, fake invoices for the replacement of property never replaced to collect the difference between actual cash value and replacement cost value. At Examination Under Oath the insured admitted to faking the receipts and was eventually convicted of insurance fraud and served a few months in jail for her crime.

ZALMA OPINION

Insurance fraud is working to destroy the economy and the ability of insurers to service their clients properly. States attempt to deter it by enacting statutes making it a crime to defraud an insurer and make the insurers, by statute, to investigate and enforce the crime. Yet prosecutors don't like insurance fraud cases because they are document heavy and no person has been physically injured. Prosecution of insurance fraud is anemic and prosecution of soft fraud is non-existent. Learn from this and defeat fraudulent claims by refusing to pay. You will have no help from police or prosecutors but you can deter the attempts to defraud a proactive insurer.

This blog was adapted from my book "Insurance Fraud - Volume One available on Amazon.com