A recent study showed that more than 30% of those who responded lie about their driving record when applying for auto insurance. Close to another 30% lie about their address. Twenty-six percent lie about use of the vehicle, and another 26% lie about the number of drivers of the vehicle, ticket history, and 18% lie about who is the car's primary driver.
Survey respondents indicated that they lied on insurance applications in order to get a cheaper premium. But lying on an application may have deeper implications than merely giving the insured a break on insurance premiums. Individuals that lie on an application and get away with it only increase the premiums for all other insureds. Let's follow an application through the process.
All insurance applications carry a fraud statement that declares that any misrepresentations made with the intent to defraud the company will void the policy. These statements may vary by company and state, but insurance fraud is such a large issue that such statements should be expected on any application. Fraud costs the industry $40 billion a year, and misrepresentations on auto applications accounts for $29 billion of that. Insureds pay between $400 to $700 in additional premium per year because of insurance fraud.
Let's say an insured omits information on the application – either the driving record or number of people in the household. Even if a policy is purchased online, the insurer is likely to run a motor vehicle report (MVR) and a Comprehensive Loss Underwiting Exchange, or CLUE report, to verify that information. CLUE reports are industry reports that provide information on past claims – what type of claim it was, what was paid out, and who the driver was. The insurer will then modify the policy by adding these accidents and violations to the record, and the premium will be adjusted accordingly. So those lies simply delay the premium charge; the insured who lied on the application isn't getting a lower premium.
What about addresses? If the MVR address doesn't match what's on the application, the insurer may ask for verification. Note that the CLUE report also indicates relevant addresses. If the insured's office is a significant distance from home it used to be a red flag, prior to the pandemic, although now that is not as much of an issue with people working from home. However, underwriting may still ask for verification if they suspect something is amiss.
The correct address can significantly affect the premium. More congested urban areas with more traffic generate a higher premium than suburban or rural areas. It's not unusual for those trying to avoid an expensive premium to use a relative's or friend's address.
The CLUE report will list other members of the household. f the insured hasn't disclosed all of the drivers living at the domicile, those other drivers may show up on the CLUE report. Underwriting will then ask about those drivers and where they live and how often those people drive the insured vehicles.
The application contains its own clues for fraudulent activity Ifan application lists six vehicles but only two drivers, underwriting is apt to look a little harder at possible other drivers. While there are plenty of individuals with several cars, that does not describe the majority of households. Likewise, if an insured with six vehicles is living in an apartment complex, many complexes do not have parking available for a tenant's six vehicles. Underwriting may very well suspect others are driving the vehicles or that the vehicles are garaged elsewhere.
If underwriting cannot verify the information themselves they may refer the application or the claim to the Special Investigative Unit (SIU). The SIU investigates fraudulent information that would affect the premium of a policy and fraudulent claims. SIU uses a variety of methods to determine who lives at the house, where the car is garaged, and even if the address is a legitimate address. Using the street address of the post office where the insured's post office box is located is a common attempt at rate evasion.
So what happens when underwriting or the SIU determines that an insured lied on an application or that fraud was committed? If the insured lied on the application, then the policy will most likely be corrected and the proper premium will be charged. Alternately, the policy could be canceled.
If claim fraud was committed, that is far more serious than people realize. Many states consider insurance fraud a felony. Most state insurance departments have an insurance fraud bureau, and insurers are asked to report all fraud to the bureau. Once convicted, someone who has tried to perpetuate claim fraud may be put on supervised probation but is often sentenced to jail time and fines. Some states impose a fine of $50,000 or twice the amount of the fraud, whichever is greater. The Coalition Against Insurance Fraud has a daily email listing only a few of those recently caught perpetrating insurance fraud.
Insurance fraud is a serious problem from all angles. By trying to get a cheaper premium, those committing fraud only increase premiums for everyone, and cost the industry and the public billions of dollars a year. Like it or not, it's been proven time and time again that the number of violations and accidents on someone's driving record is an accurate predictor of future accidents. It's better to give up a few lattes, obey the speed limit, and pay attention while driving than to lie on an application in hopes of getting a lower premium.