Hard fraud involves criminal activity and includes scams such asauto insurance crash rings, arson for profit, the illegal funnelingof insurance company assets, and falsifying medical bills. However,it is not only this clearly illegal activity that is costinginsurers and policyholders millions of dollars every year. There isa more insidious form of fraud about which the general public mayhave a more ambivalent view.

Soft fraud, also known as opportunistic fraud, refers to claimexaggeration or embellishment. It is generally harder to detect andproblematic to investigate. The perpetrators are oftenindistinguishable from honest policyholders, and they usuallyconsider their behavior to be morally acceptable. A studycommissioned by the Insurance Research Council (IRC) found that a quarter ofrespondents thought padding their insurance claim to cover adeductible was reasonable. Twenty percent thought padding a claimto recoup past premiums was acceptable behavior.

Soft fraud can also happen at the outset of a policy. Theinsureds may deliberately misrepresent the facts to the underwriterin the hope of reducing their premiums. They may omit details fromtheir medical history or underreport the miles they regularly drivetheir car. In 2008, Quality Planning estimated that insurers lost $15.9 billion inauto insurance premiums as a direct result of underwriting ratingerrors.

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