Insurance Fraud Costs Us All

Ever wonder why you pay hundreds of dollars each year for automobile insurance when you've never had an accident, never had your vehicle stolen and never submitted a claim? One reason is an explosion in insurance fraud across the country. Of course, automobile insurance is complicated by various regulations that differ state-by-state, but there is no doubt that criminal activity is a big reason that insurance costs are high even for those of us with a good history in terms of accidents and claims. Some states instituted so-called "No-Fault" regulations in a effort to stem the rising tide of fraud and rampant litigation (which is also costly), but recent history indicates that no-fault is largely a bust when it comes to keeping costs down.

An example is the state of Florida where the state legislature has recently taken steps to overhaul the no-fault regulations instituted 30 years ago. The state's Department of Insurance (DOI) has estimated that auto insurance fraud cost Floridians $500 million a year in increased premiums, and DOI rate filings show that at least 35 companies have raised rates in Florida in the past 12 months.

Under the Florida no-fault system adopted statewide in 1971, medical bills and lost wages are paid regardless of fault through Personal Injury Protection (PIP) coverage. The system was designed to pay auto accident victims faster by avoiding the delays and expense of lawsuits, reduce the volume of lawsuits by eliminating minor injury cases from the court system and minimize overall motor vehicle insurance costs. But recent evidence indicates that instead of reducing overall auto insurance costs, it has caused them to skyrocket.

One difficulty is that the no-fault statutes, as they have been interpreted by the courts, make it very difficult to weed out fraudulent insurance claims, and insurance companies in Florida say, because of this, fraud plus litigation has skyrocketed. Recent case law and a provision in the PIP statute nearly guarantees attorney's fees for lawyers filing PIP-related lawsuits, regardless of the amount of the benefits recovered, fueling the surge. According to Progressive, Florida's third largest auto insurer, one Florida attorney recently filed suit to recover seven cents in interest for a medical provider in the state. In return for recovering the seven cents, the attorney was paid more than $1,000 in fees. Another attorney filed suit over a $4 reduction of benefits, and he received $1,000 in attorney's fees.

A recent Florida court decision makes it very difficult for insurance companies to weed out fraudulent claims, even when they are obvious. The Perez vs. State Farm decision dictates that insurance companies must pay all claims (fraudulent or legitimate) within 30 days of notification of services rendered. If the insurer is unable to conclude its investigation within the 30 days, the insurance company is deemed to have waived its right to refuse payment of the claim, even if it obtains proof on day 31 that the claim is fraudulent or otherwise not owed. Faced with this, you have to wonder why they investigate at all.

While not all states suffer from Florida's convoluted no-fault system, insurance fraud costs us all in a number of ways. Our premiums rise when fraudulent claims are paid, and they rise when fraudulent claims are investigated and go to litigation. And our premiums rise when litigation smothers our courts' abilities to sort out right from wrong. The solution is far from clear, but our auto insurance system does need scrutiny.

Tom Ripley observes the automotive scene and the human condition from his home in Villeperce, France.