A staged insurance loss is a fictitious loss created for the sole purpose of defrauding an insurer. Wherever insurance exists in the world there is insurance fraud. It is an equal opportunity crime performed by every race, religion, language spoken or national origin.

The number of variations on types of staged losses is limited only by the imagination of the insurance criminals. This article describes some of the variations and how an insurer should deal with a fraudulent claim when it is discovered.

Staged auto theft

A staged theft occurs when the owner contracts with an intermediary to dispose of a vehicle. The owner ‘gives up’ the vehicle and then reports it to the insurer as stolen. The person to whom the vehicle is given up will pass it to a salvor, also known as a “chop-shop,” because it breaks the vehicle up into its component parts and sells them.

[Related: Counting the cost of America's insurance fraud epidemic]

The staged theft is difficult to detect unless the perpetrator is sloppy, aggressive or forgets his prepared script as to the loss facts. A staged theft of an automobile performed to defraud an insurer is a crime in almost every jurisdiction in the world and can be punished in both criminal and civil courts.


The owner abandons a vehicle upon which he or she hopes to make a fraudulent claim unlocked with the key in the ignition on a city street or in a parking lot. Doing so creates what insurers describe as a morale hazard. The temptation is too great for people with an inclination to crime and the vehicle will be taken. The insured reports the vehicle stolen and collects from an insurer before the vehicle is recovered.

burning car

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Some creative insurance fraud perpetrators cannot rely on the dishonesty of their neighbors and dispose of a vehicle by dumping it into a lake or other body of water. Some cars have even been found buried underground, while others have changed the level of some ponds and lakes where hundreds of allegedly stolen automobiles were found underwater.

Fires to avoid auto lease penalties

Rather than purchase an automobile, many people will lease one because the monthly payments are lower than a vehicle loan. What the purchasers don’t recognize until near the end of the lease is that the lessor puts a limit on the amount of miles on the odometer. If the vehicle is driven more than the limit set by the lease — usually 10,000 to 15,000 miles a year — the lease will include penalties of $0.10 to $0.15 per mile over a pre-set limit. That amount grows rapidly as the vehicle is driven. I have seen some very expensive cars with a penalty of $2.00 per mile lease payment over a pre-set limit.

Upon learning that at the end of the lease that he will have to pay a considerable sum, the owner will consider fraud as his only way to avoid the payment. The insured-lessee will often take the vehicle to a remote location, set it afire so that it is totally destroyed, and then report it stolen to avoid payment of the excess charges. The lessor will get the market value of the vehicle at the time of the fire and the insured/lessee will walk free with no expense if he can convince the insurer that the theft and fire were true.

damaged car

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The staged auto accident

A typical scenario for a staged accident involves an insured, in collusion with others, who will drive his vehicle into the rear of a car occupied by four co-conspirators. The insured reports the “accident” to his insurer as his fault. The occupants of the other car all claim to suffer soft tissue injuries (strains, sprains, sore backs, necks, headaches) and make claims against the insured. Since there is no physical evidence of soft tissue injuries, there are no effective tests available to a physician to accurately determine whether a person is being honest when he or she complains of pain. Quick settlement is reached with the “victims” of the “accident” who share the money received with the insured.

A variant of this is the short-stop accident, sometimes called the “swoop and squat.” The claimant, driving an old and dented automobile, deliberately stops suddenly in front of an expensive automobile. The driver cannot stop in time and has no choice but to rear-end the old vehicle. A claim is presented for extensive injuries.

[Related: Swoop & squat: Beware of these insurance fraudsters]

In the typical swoop and squat setup, at least two conspirators drive through the streets looking for an expensive vehicle that is obviously insured. Once the victim is observed, the car driven by these co-conspirators is a car with little value. The target is usually a lone driver with no passengers. The fraudsters usually concentrate on city roads with two lanes traveling in each direction. When they spot a victim driving alone in an area with no potential eyewitnesses, one “swoops” — pulling in front of the other car and then “squats” — hitting the brakes so that the scam victim rear-ends their vehicle.

mold on the wall of a house

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Staged water damage or mold claim

Not all staged losses deal with automobiles. Real and personal property can be the victim of a staged loss.

Mold and fungi can be destructive and unhealthy. It can also create a major insurance claim for a person anxious to defraud an insurer. The fraud perpetrator first acquires an old, inexpensive dwelling which is then insured for full replacement cost. They turn the heat up to maximum and then soak the interior with hoses or interior water sources. The high humidity and heat are sufficient to start the growth of mold and fungi. The insureds wait a week or two, allowing the mold to grow and then report a claim to the insurer saying they returned from a short two-week holiday to find the mess. The house is usually extensive and can result in a total loss. The insurer repairs or replaces the dwelling and the fraud perpetrators sell the house at a profit.

[Related: What every adjuster should know about fungi/bacteria exclusions]

The most famous staged mold claims occurred in Texas in 2002. The seven conspirators were arrested on June 27, 2002, by federal investigators working in conjunction with the Texas Department of Insurance. The defendants were charged with presenting insurance claims for water and mold damage to a succession of homes that they purchased, bought policies for and then intentionally flooded with water hoses or by damaging water pipes. At least one house was overheated (cooked) to speed up mold growth.

Other members of the ring, posing as vendors and contractors, filed false claims to repair the damage and sold the homes to each other to repeat the process. Six of the conspirators were found guilty.

Public hysteria about mold

When the 21st century began, public hysteria about mold grew. As insureds and their representatives became knowledgeable about mold, the temptation to create a covered loss scenario where none would otherwise exist became almost irresistible.

It is important, therefore, for an adjuster to confirm the actual existence of the broken pipe, ruptured hot water tank or other covered cause of loss before adjusting a mold damage claim. Furthermore, during this early adjustment period, corroborating information should be obtained from plumbers, repairmen and dry-out companies that the loss occurred as claimed, and that the water intrusion appeared in areas that are now claimed to be ruined by mold.

Fraud stamp

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Insurance fraud is a serious crime

Fraud perpetrators should face prosecution and jail and, at the least, an inability to recover from the insurers. Insurance adjusters and insurer fraud investigators must conduct a thorough investigation, recognizing that most police agencies are not interested in insurance fraud. The thorough investigation, conducted to defeat the fraudulent claim, can then be packaged for the police and prosecutors who will prosecute, since much of their work has been completed. If convinced that fraud has been perpetrated, the insurer should seriously consider presenting their cases to the local prosecutor. Staged accident perpetrators who in the past understood that if they were caught faced no more than an order of restitution and probation, must be convinced that they will face hard time in prison if caught.

No matter how the loss is staged, if it was done to deceive and defraud an insurer it is a crime in almost every jurisdiction in the world where insurance is sold. When the fraud is prosecuted successfully, those tempted to commit fraud will be deterred.

Insurance fraud is a serious crime taking billions from the insurance industry every year. Everyone who buys insurance must understand that if fraud is defeated or reduced they could save from 10 to 30 percent of the premiums they pay.