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Fraud may be committed at different stages in the insurance transaction by different parties: applicants for insurance, policyholders, third-party claimants and professionals who provide services to claimants. Common frauds include "padding," or inflating actual claims; misrepresenting facts on an insurance application; submitting claims for injuries or damage that never occurred; and "staging" accidents. The majority of states have set up fraud bureaus, some funded by the insurance industry. Those who commit insurance fraud range from organized criminals who steal large sums through fraudulent business activities and insurance claim mills to professionals and technicians who inflate the cost of services or charge for services not rendered, to ordinary people who want to cover their deductible or view filing a claim as an opportunity to make a little money. Health care, workers compensation and auto insurance are believed to be the sectors most affected by insurance fraud.
Insurance fraud, like other types of fraud, is illegal in all states. Some state laws specifically identify insurance fraud in the penal code, which defines what constitutes insurance fraud, along with the penalties that can be imposed. Where insurance fraud is not specifically mentioned, it falls under general fraud provisions such as fraud by deception. The level of seriousness attached to the crime also varies by state. Some states classify insurance fraud or certain types of insurance fraud as a felony, others as a misdemeanor, a lower level of crime. Some classify insurance fraud as a felony when more than a certain dollar amount is involved.
The Health Insurance Portability and Accountability Act, signed by President Clinton in 1996, contains significant antifraud provisions focused on the health care system. The Act targets fraud in federal programs such as Medicare but also covers private health care, especially in defining the crime of health care fraud. The Act makes "knowingly and willfully" defrauding any health care benefit program a federal crime. It also includes making false statements "in any matter involving a health care benefit program," theft or embezzlement, obstruction of investigations and money laundering.
The Violent Crime Control and Law Enforcement Act (1994) makes insurance fraud a federal crime when it affects interstate commerce. It provides, among other things, that people engaged in insurance on an interstate basis who knowingly make false statements or intentionally overvalue any aspect of their business with the intent to deceive can be fined or imprisoned for up to 15 years. Insurance company employees, including agents, who embezzle or misappropriate any company funds, can be punished as well. The Act also expands the charge of federal mail fraud to cover any illegal actions that use private overnight delivery services (such as Federal Express) that have been used in an attempt to circumvent the federal mail fraud statutes.
Other laws dealing with insurance fraud are the federal mail fraud statute, which prohibits the use of the U.S. Postal Service to defraud or obtain money or property by means of false or fraudulent pretenses, representation or promises, and the federal Racketeer Influenced and Corrupt Organizations (RICO) statute and state laws patterned on the federal statute. RICO statutes are often used to prosecute insurance fraud cases, particularly those involving mail fraud. In addition to criminal penalties, RICO statutes may provide for civil actions (with triple damages) against those involved directly or indirectly in a "pattern" of criminal activity.