Fraud and Abuse In No-Fault Auto Insurance System Results In a Substantial 'Fraud Tax' for Florida’s Drivers, I.I.I. Finds

NEW YORK, December 7, 2011 — Florida drivers are expected to pay a cumulative “fraud tax” of more than $650 million this year because of the widespread criminal activity in, and abuse of, the state’s no-fault insurance system, according to Dr. Robert Hartwig, CPCU, an economist and president of the Insurance Information Institute (I.I.I.). 

 

Florida’s fraud tax will reach a record $658 million in 2011, according to I.I.I. estimates, a 7 percent increase over the $617 million fraud tax levied on the state’s drivers in 2010.

 

In spite of aggressive law enforcement and insurance industry efforts to investigate and prosecute fraud in Florida’s no-fault auto insurance system, criminals continue to take advantage of loopholes in the state’s laws and regulations.

 

The I.I.I. has for years tracked trends in no-fault severity (the dollars needed to pay a claim arising out of a single accident) and frequency (the number of times a loss occurs) because auto insurers use both criteria when calculating premium rates. The I.I.I.’s periodic analysis is based on ISO/PCI Fast Track data, and the latest Florida number was derived from industry information compiled through June 30, 2011.

 

The I.I.I.’s fraud tax number signifies the dollars auto insurers in Florida paid to their policyholders beyond what the ISO/PCI data indicate should have been expended, based on the industry’s claim severity and accident frequency reports.

 

“The premium an auto insurer needed to cover the expected cost of a no-fault claim in Florida soared between the beginning of 2008 and the second quarter of 2011, hitting a new record high earlier this year,” Dr. Hartwig stated. “Fraud is driving claims frequency and severity generally upward, forcing up the premium needed to cover expected losses.” 

 

“On a per vehicle basis that $658 million boils down to a fraud tax of nearly $58 per vehicle in Florida,” added Dr. Hartwig.

 

The average cost of a no-fault auto insurance claim in Florida stands at an estimated $8,529 in 2011, whereas that same figure stood at $6,674 in 2004, constituting a 28 percent increase over a seven-year period, according to the I.I.I.’s analysis.

 

Since 2009, no-fault fraud in Florida has cost the state’s drivers and their insurers nearly $1.3 billion.

 

“Given the fraud and abuse that permeates the Florida no-fault system, it comes as no surprise that the Sunshine State is also among the costliest places to purchase auto insurance,” Dr. Hartwig concluded. 

 

Common frauds include padding, or inflating, actual claims; misrepresenting facts on an insurance application; submitting claims for injuries or damage that never occurred, services never rendered or equipment never delivered; and staging accidents. Many of these activities take place at so-called medical mills, establishments that purport to be providing healthcare services but are in fact created for the sole purpose of committing fraud.

 

No-fault auto insurance is a system that allows policyholders to recover financial losses from their own insurance company, regardless of who was at fault in an accident. The goal of no-fault auto insurance is to facilitate the quick payment of an insurance loss related to personal injuries, and to reduce the number of accident disputes that go to court. Unfortunately, in many no-fault states, unscrupulous medical providers, unethical attorneys and others often join forces to perpetrate fraud, or to pad the costs associated with an otherwise legitimate claim, for example by billing an insurer for a medical procedure that was not undertaken.

The National Insurance Crime Bureau (NICB) released a study in June 2011 that found questionable claims (QCs) had risen 23 percent nationwide between 2008 and 2010, with five states accounting for much of the problem: California, Florida, Michigan, New York and Texas. “Personal automobile was the policy type with the most QCs for all three years while faked/exaggerated injury and questionable vehicle theft were the QC referral reasons most cited for all three years,” the NICB stated.

 

Florida drivers paid $1,055 annually to insure a private-passenger vehicle in 2008, the most recent year for which there is definitive data from the National Association of Insurance Commissioners (NAIC). Florida ranked at the time as the fourth costliest place in the nation to purchase auto insurance. Washington, D.C., Louisiana and New Jersey, in that order, were the top three most expensive places to buy an auto insurance policy in the United States, according to the NAIC.

 

Besides Florida, 11 other states (Hawaii, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Pennsylvania and Utah) have mandatory no-fault auto insurance systems. 

I.I.I. RESOURCES

Issues Update: No-Fault Auto Insurance

Facts and Statistics: Auto Insurance