Homeowners insurance fraud: what it is and how it's caught

Homeowners insurance fraud is knowingly lying to an insurer to get a payment or a lower premium you are not entitled to. The two familiar forms are hard fraud, which means causing or inventing a loss (a fire set on purpose, a burglary that never happened), and soft fraud, which means exaggerating a real loss or misstating facts on an application. Insurers catch it through claim-pattern software, adjuster inspections, outside investigators and, in doubtful cases, a sworn examination. Most flagged claims turn out to be honest ones that looked odd.

The definitions that matter

The NAIC separates the categories on its insurance fraud page. Hard fraud is deliberately destroying property to collect on a policy. Soft fraud is exaggerating a legitimate claim or misstating application information to obtain a lower premium. The same page lists premium diversion by agents and bogus insurers as fraud committed against consumers, which is the subject of fake agents and phony home insurance policies, not this guide.

What this means in practice for a homeowner:

The line between a mistake and fraud is intent. A wrong date, an honest guess at what a TV cost or a forgotten earlier claim is an error, and insurers see them constantly. Fraud requires a knowing false statement about a material fact, and "material" means it would have affected the insurer's decision to pay or to write the policy at that price.

How big is the problem? Be careful with the figures

The most-quoted number is $308.6 billion a year, from the Coalition Against Insurance Fraud's 2022 study, which covers all lines of insurance, including health. It is a widely repeated estimate and a disputed one. The Rutgers Center for Risk and Responsibility has criticized it, arguing that it relies on a property and casualty fraud percentage more than 25 years old and disregards data from state anti-fraud agencies suggesting a much lower amount. The same critique says fraud "happens, it is wrong, and it should be prevented, investigated, and punished." Neither side can offer a precise measure of homeowners fraud specifically, and this guide does not either. What can be said is that insurers invest heavily in detection, and that the legal framework treats the problem as serious: the NAIC reports that insurance fraud is a crime in 48 states and that 42 states plus the District of Columbia run insurance fraud bureaus.

How insurers catch it

Investigators work with a handful of tools, and most are ordinary.

• The adjuster's inspection. An adjuster compares the damage with the cause you reported. Burn patterns that do not match a reported electrical fire, hail "bruises" on shingles that are old and weathered, or a pipe that shows signs of being cut all prompt questions.
• Documents. Receipts, bank statements, photographs with metadata, purchase records for the items in a contents inventory, and contractor invoices. Claims for items without any supporting record, or for recently bought items with no receipts, get a second look.
• Claims-history databases. The CLUE database records prior losses at your address and in your name, so an item or damage claimed twice with two insurers shows up. See CLUE reports: how claims history follows you and your house.
• Red-flag screens. Insurers run claims through software that scores them on features such as a loss soon after a policy starts or a coverage increase, a claim just after a financial setback, or a contractor who appears across many claims.
• A special investigations unit (SIU). Many insurers have one, and a number of states require insurers to maintain anti-fraud programs. The Insurance Information Institute's background on insurance fraud says almost two dozen states and D.C. require them.
• Recorded statements and examinations under oath. An insurer can ask you questions about the loss, and for a serious dispute it can require a sworn examination under oath under the policy's duties-after-loss condition. See recorded statements and examinations under oath for how to handle both, including when to bring a lawyer.
• Outside help. The Insurance Information Institute notes that immunity laws now exist in all states, which let insurers report suspected fraud without fear of criminal or civil liability, though the scope of that protection varies.

What the policy says

The ISO homeowners form (HO 00 03 05 11, the 2011 edition hosted by the Maine Bureau of Insurance) has a condition titled Concealment Or Fraud. In that edition, the insurer provides no coverage to an insured who, whether before or after a loss, has intentionally concealed or misrepresented any material fact, engaged in fraudulent conduct, or made false statements relating to the insurance. Separately, the intentional loss exclusion removes coverage for a loss arising from an act an insured commits or conspires to commit with the intent to cause a loss. Newer editions and your insurer's own form may differ, and some states modify these conditions by endorsement or statute; read your policy and your state's amendatory endorsement.

The consequence is larger than the lie. A claim with one fraudulent item can be denied in full, not only for that item. The policy can be treated as voided, which affects the mortgage lender's interest too (see mortgagee clause). The insurer can also sue to recover what it paid.

Criminal exposure

State laws vary. Florida is a clear example: under Fla. Stat. 817.234, knowingly presenting an insurance claim with false, incomplete or misleading information about a material fact, with intent to defraud, is a third-degree felony when the value is under $20,000, a second-degree felony from $20,000 to under $100,000, and a first-degree felony at $100,000 or more. Claim forms must carry a warning to that effect. Federally, the Insurance Information Institute notes that a 1994 law makes insurance fraud a federal crime when it affects interstate commerce. Your state's penalty ladder will differ.

If the insurer says it suspects fraud

An honest policyholder can still face an investigation. If that is you:

1. Cooperate with reasonable requests, in writing where you can. Failing to cooperate is a policy violation of its own.
2. Do not guess. If you do not remember a detail, say so. An estimate presented as certain, later contradicted by a record, looks like a lie.
3. Correct errors you notice as soon as you notice them, in writing.
4. Ask for a written explanation of any reservation of rights, and for the basis of any denial. Insurers must deny in writing in most states.
5. Consult an attorney before a sworn examination or if you receive a denial alleging fraud. If you believe the insurer is stalling or accusing you without a basis, bad faith claim handling: what it means and what it doesn't explains the legal standard and how to file a complaint with your state insurance department explains the regulator route.

Key takeaways

• Hard fraud is causing or inventing a loss; soft fraud is exaggerating a real one or misstating application facts. Both can void a claim.
• The line between an error and fraud is intent to deceive about a material fact, but insurers investigate first and ask later.
• Dollar estimates of national insurance fraud are disputed; treat the $308.6 billion figure as the Coalition Against Insurance Fraud's 2022 estimate, not as established fact.
• The HO-3 form's Concealment Or Fraud condition can eliminate coverage for an insured who lies, even about one item.
• If you are investigated, cooperate in writing, do not guess, and get a lawyer before a sworn examination.