Personal Insurance Blog

What is premium fraud?  Or, is garaging location important for insurance?

Premium fraud refers to misstatements on an insurance application to reduce the cost of insurance.  When premium fraud is discovered by an insurance carrier, they may not pay a claim.

We understand that everyone wants to reduce the cost of their insurance, but making intentional misstatements to manage the cost is risky, and defeats the purpose of the whole effort.

Here's how it might play out, innocently:  Young adult from the suburbs gets a place in town with a friend or two, buys a car, then hears that insurance in the city is a lot more expensive.  "Just say you're still living at home!"   The problem is the "Just say..."

Remember that an insurance policy is a contract. Parties enter into contracts with assumptions that relevant information is available prior to each party entering.  If one party (the insurance buyer) makes a "material misrepresentation" while entering the contract, the other party (the insurance company) has grounds for not having to be held to their obligations. (reminder / disclosure - we are not attorneys; do not construe this as legal advice or opinion). What does this mean for insurance?

The most common occurrence of "material misrepresentation" in retail insurance is the scenario described above with the young adult - garaging location, or where your car spends the night.  Everyone knows that it costs more to insure the same car with the same driver in an urban environment like Boston than it costs in a suburban one. The difference is significant; up to twice as costly from Cape Cod, for example, to Boston.

Here's the rub:  let's assume you are living in Boston and have a collision or comprehensive (vandalism, theft, or other non-moving damage) claim.   If the claim occurs in Boston, but the policy shows a less expensive garaging address, the insurance company will often investigate. After all, if they can show that the owner is living in the city, they might not have to pay the claim.

Every insurance company has an investigation team, commonly called the SIU (Special Investigation Unit).  They are good at what they do, and with big data, their job is getting easier. Initial efforts may begin with a quick Google name search: we have seen reports where participants in athletic events, such as a road race, show their hometown as Boston. There are plenty of other publicly available places online providing clues or outright evidence of where you are living. Then the real investigation begins to prove premium fraud…. which may allow the insurance company to walk.

If an insurance company can demonstrate the contract was entered into fraudulently, for example, by saying you live in the 'burbs when you live in town, their obligation is limited to provide compulsory coverage only: state minimum limits for property damage ($5,000), bodily injury, ($20,000/$40,000), and no collision or comprehensive coverage.  

Providing false information to manage your insurance costs can be not only risky, but extremely counterproductive.

There are plenty of other ways to reduce the cost of your insurance. Just give our office a call toll free at 800-649-3252 and we'll work with you to lower the cost of your insurance while making sure it will be there when you need it.  Prefer to type versus talk?  Click on the top left of this blog.

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