Each year, trucking insurance fraud is estimated to make up billions of the FBI’s $40 billion per year estimate of all insurance fraud (excluding health insurance).
We know that commercial trucking insurance is one of the biggest costs for fleets that has been on the rise for several years.
Throughout the pandemic, companies have been trying to cut costs, run leaner, and increase efficiency to get them through hard times. A raised premium can be tough, especially for a small business.
The problem is when companies or owner operators try to cut corners to lower costs, and insurance is not immune to this fraud.
Common frauds include “padding” or inflating claims, misrepresenting facts on an insurance application, submitting claims for injuries or damage that never occurred, and staging accidents which we covered in a recent article.
However, a large loss from an accident can be much worse than trying to save money by lying to your insurance provider.
Let’s look at what material misrepresentation means, look at other examples of insurance fraud, and understand the consequences of fraud.
What Constitutes Material Misrepresentation?
It is common to think that the insurance application for your commercial vehicle policy is not very important, so you decide to not be totally accurate with hopes of getting a lower quote.
This is far from the truth.
If you get in an accident and submit a claim, your insurance company will look at the original application for accuracy. If there is any false information found, your insurer may be unable to approve your claim when you need it most.
Material misrepresentation can be described in two ways:
- The misrepresentation, omission, or statement is fraudulent or material to the risk assumed by the insurer in issuing the policy; or
- Had the insurance company known the true facts as part of a policy or other requirement, it would not in good faith have issued the policy or issued it in the amount it did with the misrepresentation or covered a particular hazard.
Material misrepresentation could include:
- Misrepresenting prior loss history to a new insurance carrier
- Failing to disclose criminal convictions or bankruptcies
- Misrepresenting the type of operation (local box truck hauler versus long hauler with tractors)
- Failing to disclose all sources of income for the business
- Downplaying certain claims or activities
- Misrepresenting the information about the drivers of the covered commercial vehicle
For example, an underwriter caught a company trying to renew their policy that claims they run a local box truck company. However, they also run a tractor trailer long haul operation. This nearly doubled the cost of their insurance at renewal.
Additionally, underwriters see driver fraud where several unlisted employees may operate the vehicle used for the company, try to conceal a bad driving record, or try to hide a driver with a non-valid license.
Lastly, a common type of insurance fraud is a company misrepresenting the address of the company or the location where the vehicle is typically stored.
Last week we heard news of this exact situation that was caught in New Jersey.
Example: Phillipsburg, NJ truck stop at center of $20 Million insurance scheme
An investigation into a Phillipsburg, NJ truck stop has uncovered an insurance fraud scheme, with 12 individuals charged in connection with the case.
The charges cover about $2.7 million in 2021 underpaid insurance premiums and a total of about $20 million in underpaid premiums since 2018.
The fraud was caught after AIPSO’s New Jersey Automotive Insurance Plan representatives noticed a surge of 400 trucks representing 170 companies in commercial trucking insurance applications that showed they were garaged at a truck stop that could only hold about 30 trucks.
The location of the truck stop is important as the state is divided into approximately 40 regions, each with a different premium rate. The difference between the least and most expensive region can be as high as $40,000 per truck, per year, according to the investigation.
During this time, the truck stop was in the least expensive rated region, and the scheme allegedly began at the insurance agent level in three main steps.
- If the insurance agent came back with a high premium quote, they would offer the vehicle owner the option to park at Phillipsburg & Easton Heavy Duty Truck Repair, where the rates are some of the lowest in the state.
- The agents would allegedly assure truck owners that they do not even need to physically park their vehicles at the location, and that the information is just for the insurance company.
- In exchange for payment, the truck stop owner allegedly would provide false confirmation that the vehicle was parking there and provide a receipt.
All involved are charged with racketeering, insurance fraud, theft by deception and misconduct by a corporate official.
These are all second-degree charges that each could result in up to 10 years in prison, if convicted.
The consequences of fraud
Trucking insurance fraud is estimated to cost billions of dollars each year within the FBI’s estimate of more than $40 billion total cost of insurance fraud per year (excluding health insurance).
There are four main consequences to misrepresentation fraud:
- It is a criminal act in all 50 states that may result in fines and/or imprisonment, and civil penalties in some states.
- Insurance carriers may decline to cover expensive claims when you need the insurance the most.
- Insurance carriers will increase your insurance rates to meet your company’s risk more accurately, and possible increase it further if they catch you lying to them.
- Insurance carriers may cancel your policy, making it nearly impossible to get insurance elsewhere or the rates will be so high, it will likely close your business.
It is important to note that not reading your policy is not a defense for material misrepresentation.
Even if a preparer or an employee created your application, it is your responsibility as the named policyholder to be certain that everything is correct since courts do not differentiate between unintentional and intentional misrepresentation.
Key State Laws Against Insurance Fraud (As of July 2021)
The best way to avoid having your claims denied is to be completely honest on your application.
Be sure to maintain an organized record of all your property, their value, have well maintained driver files, and stay on top of all DOT regulation compliance and safety standards.
If you need help, Compliance Navigation Specialists have complete proactive safety management programs that will keep you in compliance.
If you are interested in a Commercial Truck Insurance quote, please call CNS Insurance at 717.625.0066 or email us at firstname.lastname@example.org.
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