The 7 Most Common Types of Car Insurance Fraud

According to studies performed by the National Insurance Crime Bureau (NICB), 10% or more of property and casualty insurance claims are fraudulent and insurance fraud is second only to tax evasion as the most costly of white-collar crimes.

Insurance fraud can be perpetrated in a number of ways. One of the more established methods is vehicle theft fraud and there are a number of ways a deceitful auto body shop can cheat an insurance company with collision repair fraud and in particular the growing practice of airbag fraud.

Motorcycle riders may want read up on motorcycle theft and fraud and everyone will want understand what cloned vehicle fraud is all about.

For those who are looking for a well-priced previously owned vehicle, please take a look at how to avoid flooded vehicle fraud and if you’re looking to enhance or soup-up or your current ride, you should have a look at how performance speed shop fraud is an increasingly familiar occurrence.

Auto insurance fraudsters can originate from many sources such as organized criminal operations, dishonest lawyers and doctors, or even your neighbors. As a result, various agencies and groups have combined forces to battle this growing problem.

Many insurers have created special investigative units comprised of trained experts who can look into suspicious claims as well as work in conjunction with law enforcement agencies and the NICB.

In addition, many states have enacted laws and statutes to combat and deter fraud. They also have special fraud bureaus and task forces to fight it firsthand.

Finally, the insurance industry has also put its full support behind the NICB, which has gone to great lengths in combating fraud through analysis, forecasting, support for criminal investigations, as well as training and public awareness.

#1. Vehicle Theft Fraud

Over the years, thieves have gotten far more sophisticated about their approaches to stealing cars and trucks. Today, they have developed complex schemes and techniques that don’t involve smashing in windows or hot-wiring ignitions.

Some of the more common theft fraud schemes are as follows:

  • An “Owner Give-Up” is when a vehicle owner will lie about its theft and then destroy it such as through burning, submerging, or burying it. Once it is located, the owner collects the vehicle’s replacement cost.
  • A “30-Day Special” is when an owner claims the vehicle was stolen and then hides the vehicle for 30 days, long enough for the insurance company to pay the claim. Once the owner collects the money, the vehicle is typically found abandoned.
  • The owner buys a car and then reports the vehicle stolen when in fact he or she has it shipped it overseas to sell it on the black market. The owner then collects on the insurance policy and earns money selling the vehicle as well. This is known as “Export Fraud”.
  • A person creates a false title and/or registration and insures what amounts to a phantom vehicle. The “owner” then reports the phony car or “Phantom Vehicle” as stolen and files an insurance claim.

#2. Collision Repair Fraud

There are many ways in which unscrupulous repair shops can commit collision repair fraud. Some of the more popular methods are as follows:

  • Airbag Fraud: Airbag fraud is when a dishonest repair shop gets the insurance company to pay for a new airbag by replacing a non-deployed airbag with a previously deployed one or pulling the non-deployed airbag out and then replacing it with a cheap black market airbag. In either event, the repair shop makes a significant profit. Further information on Airbag Fraud can be found here.
  • Bandit Tow Trucks: A tow truck driver persuades an owner to let them transport their vehicle to a supposedly legitimate repair shop. Thereafter, the vehicle is essentially held hostage while the tow truck driver attempts to extract payment from the insurance company. They may also try to refer the owner to doctors and attorneys who will also attempt to defraud the insurance company.
  • Burying the Deductible: When a vehicle owner and repair shop owner conspire to “bury” the deductible, it means the cost of the deductible is hidden in the estimate. This is typically accomplished by charging the insurance company for new parts and repairing the vehicle with cheap aftermarket parts, or repaired/junk parts.
  • Inflating Estimates: This is a simple method of fraud wherein costs to repair a vehicle are inflated either by exaggerating the damage to the vehicle or billing the insurance company for parts that are not installed or repairs that are never completed.

Here are some handy tips for identifying and avoiding fraud:

  • Only use a reputable vehicle repair facility with ASE-certified body mechanics.
  • Use a repair facility that has been recommended by your insurance company.
  • Make sure the repair facility is clean and uses modern, well-maintained equipment.
  • Obtain a written damage report in lieu of an estimate so you have a detailed idea of what needs to be repaired.
  • Make sure the work done to your vehicle is warranted.

#3. Airbag Fraud

Airbags can be bought for $50 to $200 on the black market versus $1000 from an auto parts dealer so they represent a potentially large windfall for thieves and fraudsters.

There are two methods of airbag fraud.

  • The first method is where an auto repair facility replaces a non-deployed airbag with a deployed one. Once the estimate is completed, the repair facility will reinstall the original airbag and keep the money for the replacement. This fraud method is called “he Switch” and results in a 100% profit for the dishonest repair facility.
  • They will also attempt a move known as a “he Pullout” scheme. In this, the repairperson cuts open the airbag’strim cover and pulls out the airbag to make it appear like it has deployed. Once the estimate has been finished, the airbag is simply replaced with one from the black market. Again, the repair facility in question makes a sizable profit.

You can spot airbag fraud in a number of ways.

  • Note the airbag trim cover; it should match color of the original. Also, a deployed airbag’s trim cover will be have rough edges while a pulled airbag’s trim cover will be smooth from being sliced open.
  • Many times a pulled airbag will be cut when the trim cover is sliced open.
  • Normally, in a front-end collision, the vehicle will sustain damage and both airbags, not just one, will deploy.
  • Airbags will usually not deploy with side or rear-end damage.
  • You can also visually inspect the airbag to make sure its appearance matches that of a deployed airbag and its serial number is the same as that installed during the vehicle’s assembly.
  • Make sure that when you turn on your vehicle’s ignition system, the Supplemental Restraint System (SRS) indicator light comes on and flashes. If you do not see the SRS warning light then that could be a sign of trouble.

You can avoid airbag fraud by being informed and knowing a few things ahead of time.

  • Use a repair shop that has a good reputation or is recommended by your insurance company. Make sure the mechanics it employs are ASE-certified.
  • If possible, have a look at the airbag ahead of time and make sure it is packed in its original container from the manufacturer.
  • If you cannot physically inspect the new airbag, at the very least examine the invoice to verify its source is the manufacturer or parts dealer.

#4. Motorcycle Theft and Fraud

Motorcycle theft and fraud is much easier to perpetrate because motorcycles can easily be broken down and hidden making them significantly harder to recover than other types of stolen vehicles. In fact, the recovery rate for stolen motorcycles is an abysmal 25% to 30% compared to cars and trucks, which have a 60% to 65% recovery rate.

Many newer, higher-end motorcycles can cost upwards of $20,000 making them a very lucrative target of thieves.

In addition, motorcycle theft is a major issue because motorcycles can easily be assembled from replica parts and then sold as an original item. Motorcycle VINs are easy to obtain and apply to the cloned motorcycles after which, they are sold as new name-brand items.

There are several methods to safeguard against motorcycle theft and fraud.

  • Always lock your motorcycle even when storing it in a garage. If possible, you should install an alarm.
  • Try to avoid buying a used cycle that is registered as an “assembled vehicle” and verify that a cycle registered as a specific make and model is not a clone assembled from cheap used or aftermarket parts.
  • Examine a used cycle’s title for parts manufactured from different origins and pay special attention to cycles marketed as custom. Custom may mean the cycle was built from stolen or altered aftermarket parts.
  • Pay special attention to any parts reported to have been purchased at a swap meet.
  • If possible have an expert appraise the cycle before purchasing it.

#5. Cloned Vehicles

A cloned vehicle is a stolen vehicle with counterfeit documents.

This scheme is pulled off by copying a vehicle identification number (VIN) from a legally owned vehicle to create fake documents and tags for a stolen one.

A car similar in make and model is then stolen and the counterfeit VIN is applied thereby “cloning” the legitimate vehicle. Now the vehicle is hard to detect as stolen and can be sold as if it were the real thing.

Cloning is highly profitable because thieves can sell vehicles across state and international borders and state-licensing agencies don’t typically check out-of-state paperwork for duplicate ownership. Moreover, it is easy to insure the same VIN in multiple states.

Cloned vehicle fraud can be spotted in a number of ways:

  • The vehicle was purchased with Canadian documents
  • The purchase price was unusually low or the VIN doesn’t match
  • The vehicle is new and has no lien holder
  • The speedometer displays kilometers per hour

You can also enlist the help of a licensed expert or perhaps your insurance company to inspect the vehicle. They will best be able to determine if you have a cloned vehicle on your hands. If you have any doubts about the legitimacy of a vehicle you are buying, trust your instinct and walk away.

#6. Flooded Vehicle Fraud

A flooded vehicle is one that has been submerged or partially submerged so that its body, engine, and other mechanical parts are damaged. If a vehicle is damaged beyond repair, the insurance company will settle a claim by selling the vehicle as salvage.

Dishonest dealers will buy the car, dry and clean them and then sell them in a state unaffected by flooding. Though the car may appear dry and clean, there can be a lot of hidden damage. The dealer will then sell the vehicle and not disclose the damage on the title. This is a practice known as “title washing”.

Always make sure you purchase a vehicle from a well-known and respected dealership.

Flooded vehicles can be spotted in a number of ways:

  • Look for water stains, mold or mildew, sand or silt under the carpets, floor mats, behind the dashboard, under the hood, and other places where water can collect and damage a vehicle.
  • Check for signs of rust or oxidation. Pay attention to electrical connections. Copper wire oxidation will have a green patina while aluminum and other alloys will show pitting and flake off as a white powder.
  • Inquire about the vehicle’s history; inspect the title and papers for signs of counterfeiting.
  • Conduct a title search and ask about the vehicle’s history.

As always, if you have any doubts or feel things are too good to be true, you should walk away rather than take any risks.

#7. Performance Speed Shop Fraud

As the import-racing trend has grown over recent years, so have the number of insurance scams. In fact, 80% of individuals involved in import racing admit to scamming the insurance industry to fund their vehicles.

One type of scam involves a dishonest performance shop giving the insured driver receipts for parts they never purchased. The driver then makes a claim saying they were stolen and the driver pays for the parts with the claim money. Some unscrupulous shop owners will even give or sell blank receipts at street races.

Sometime shops will install stolen parts. By doing so, they can save a great deal of money and even more if they steal the parts themselves.

You may think performance speed shop fraud affects only a small niche of people but remember those who defraud their insurance company are stealing and this has an impact on an insurer’s other clients. This inevitably contributes to higher premiums as a company responds to preserve their bottom line.


If you are not sure if certain behavior is fraudulent, it is always best to consult with an attorney, or an agent at a bare minimum.