Insurance fraud: who am I hurting?

• Published date: 03 August 2020
• Subject Matter: Insurance, Criminal Law, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: Wynn Williams Lawyers
• Author: Ms Sarah Harris

Insurance fraud has been around since insurance began. It is often perceived as a 'victimless crime', where the only 'losers' are big insurance companies that can afford the loss.

In reality, insurance fraud has severe and wide-spread consequences for everyone, particularly in the aftermath of a disaster, such as Covid-19. This article explores this and the causes and consequences of insurance fraud.

What is insurance fraud?

Insurance fraud occurs when an insured lies to an insurer to gain a benefit. An insured's claim is not fraudulent if he or she has provided an incorrect statement through mere negligence The insured must have acted dishonestly or, at least recklessly.

Insurance fraud predominantly occurs at the time the insured makes a claim and is usually for:

• Deliberately inflicted loss (for example, arson).
• Events or loss that did not happen.
• Exaggerated loss - where genuine loss has been suffered but the claimed loss is greater than that suffered.

Why does insurance fraud occur?

Insurance fraud occurs for a variety of reasons. It is particularly prevalent following a natural disaster, recession, or some other event that puts economic pressure on individuals.

To help understand why this occurs we can refer to the fraud triangle hypothesis. This hypothesis was developed by Dr Donald Cressey in 1953 and provides a framework to explain the motivation behind a person's decision to commit fraud.

The fraud triangle outlines the three enablers of fraud, which are:

• Rationalisation: justification of the fraud to fit the insured's morals and values i.e. "insurers make a lot of money, they can afford it", or "I've been paying premiums for years, it's about time I get something back for it".
• Incentive: such as financial pressure, whether that be personal (gambling, debts) or professional (fall in company revenue).
• Opportunity: this may happen where there is perceived to be relatively low risk of being caught or a loophole in a process.

The fraud triangle hypothesis in action

A practical example of the fraud triangle hypothesis can be seen from the aftermath of the 2010 - 2011 Christchurch earthquakes. It was reported that some Christchurch property owners set fire to their homes to claim insurance. Applying the fraud triangle theory, these property owners' motivation to commit fraud could be considered as follows:

• Rationalisation: the insured may consider that they have just been through a traumatic event and/or lost their home. They can then...