Four common sources of underwriting fraud

A change in the status of the insured property. Let's say a couple decides to purchase a second home. They then choose to turn their first home into a rental property, but they don't tell the insurance company. Maybe they knew it would cost more to insure a rental property. Maybe it was an oversight. Regardless, this type of fraud undermines the underwriting process because the insurer is still rating it as if it was an owner-occupied dwelling.
A meaningful change to a home structure that affects its level of risk. Throughout the pandemic homeowners across the U.S. modified their homes to accommodate a new way of living. However, what if they failed to notify their insurance company of a significant change to the home's structure? The improvement is an underwriting risk because many policies dictate that homeowners must notify their insurer of any changes in a property that affects more than 5% of its structure. When a homeowner crosses the 5% threshold, it typically triggers a change in risk. This means the homeowner will likely need to purchase more coverage to protect against potential repair or replacement costs.
A change in the risk mitigation systems inside a property. Items like cameras and home security systems that automatically notify the authorities in case of a break-in often provide insurance discounts to homeowners. However, if a homeowner disables the system those discounts should not apply. While this doesn't exactly meet the textbook definition of fraud, it does represent a form of premium leakage, as the property owner isn't paying the appropriate rate for their coverage.
Unscrupulous and opportunistic contractors. The sad reality is that, after a storm, some contractors and repair businesses see an opportunity to defraud insurers and homeowners. They go door-to-door looking to take advantage of vulnerable homeowners, some even go to the trouble of damaging a homeowners' roof to make it look like hail damage so they can provide the repairs, often at an inflated price. A strong storm blew through my neighborhood late last year. Within days, I had three or four roofing contractors pounding on my door to see if I had hail damage from the storm. Because of my experience in the industry, I knew I didn't, so I sent them away, but not all homeowners can spot this type of devious behavior, especially if they are in crisis mode after a devastating storm.

Tips for mitigating underwriting fraud

While underwriting fraud isn't always easy to spot, paying attention to the details can help underwriters protect themselves and their insureds. Here are six ways to reduce the risk of fraud:

Validate the details of occupancy. Ask for proof that the property owner lives at their address. Inquire about their long-term plans for the property. If an insured is purchasing a second home, for example, ask them what they are doing with the first home and validate their answers.
Don't gloss over application questions. Make sure a property owner reads the application and can attest to answering all questions accurately. Be sure to ask key questions such as "Do you operate a business from your home?"
Look for potential red flags. Consider:
- Is a homeowner's new property a considerable distance from his or her current property?
- Does the property have a walkout basement or other space that could be finished and rented out?
- Does the mail your company sends to an insured's address get returned?
Rely on third-party data. Falling credit scores for an insured could signal the start of foreclosure actions.
Focus on risk mitigation, not exclusively low-cost coverage. An inexpensive premium will close the sale, but if the policy is rated improperly due to intentional or unintentional underwriting fraud, it will not only adversely affect the policies of others, but it can also cost an agent his or her license.

The real-world realities of underwriting fraud

In every state, intentional underwriting fraud is grounds for policy cancellation. In addition, agents may need to work with their insureds to revise a policy that carries acceptable exposure limits. In extreme cases, underwriting fraud may be criminal. Check your state laws if you have any questions.

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How to find and mitigate underwriting fraud

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