March 28, 2012

How Fraud Raises The Cost Of Auto Insurance Coverage

Insurance companies frequently cite fraud as one of the major contributors to high auto insurance coverage costs. In some states, premiums have risen dramatically due to insurance fraud, as providers pay false claims totaling tens of thousands of dollars each month. In order to keep a profit, insurance companies raise rates for all drivers, many of whom are forced to look for a high deductible or lower coverage limits in order to avoid excessively high premiums. Drivers are effectively penalized for the fraudulent claims, and without strong regulation and insurance reform, fraud can account for a significant percentage of insurance rate increases.

The effect is particularly pronounced in no fault states, where auto insurance companies cannot consider fault when paying certain types of claims. States like Florida and New York require no-fault personal injury protection (PIP) coverage. In those states, insurance providers claim that fraudsters have taken advantage of no fault law by working with disreputable independent medical clinics to make fake claims. Some of the claims are as large as $50,000, depending on the laws in the state. Federal agents and New York police recently broke up a large fraud ring in the state that might have submitted hundreds of false claims, potentially driving up the cost of auto insurance coverage for every driver in the state. Florida is considering several legal reforms that would change the way that PIP coverage works in the state, partially due to the state's higher-than-average fraud rates.

Drivers can cut the cost of their auto insurance coverage in several ways. Many drivers choose a high deductible, as this will quickly allow for lower premiums. However, raising deductibles or lowering policy limits also damages coverage, and drivers who take these actions might find themselves in tough situations after accidents. Another option is to look for discounts. Most insurance companies offer special discounts to drivers that can prove a lower-than-average claim risk, especially in no fault states. Drivers who own homes and teen drivers who keep good GPAs can often receive significant discounts on their rates, and these discounts are usually sufficient to counteract the effects of auto insurance fraud. Drivers can also compare insurance rates online to make sure that they are getting the best possible premiums for their policies.

Many states are looking for ways to decrease insurance rates by eliminating fraud. Insurance companies typically recommend legal reforms along with police intervention to break up fraud rings; however, since it is difficult to estimate the extent of insurance fraud, it is also difficult to design legal policies that will work effectively. In the meantime, drivers should take advantage of discounts and comparison tools to avoid high premiums.