Auto insurers missed out on $15.9 billion in uncollected premiums in 2008 as a result of premium rating errors, according to a 2010 report by the Quality Planning Corp., which provides rating information to the auto insurance industry.
One of the most common forms of premium rating errors occurs when drivers misrepresent their residency and the parking address of the insured vehicle. Some drivers may not realize that this constitutes insurance fraud -- and while it may save drivers money upfront, the consequences can be more severe than expected.
Out-of-state rate evasion
In terms of auto insurance premiums, a lot of money can be saved by registering and insuring your car in another state. From state to state, accident rates and insurance coverage minimums create large premium cost differences. According to the Insurance Information Institute, the average annual premium for auto insurance in 2008 (the most recent year for which data is available) was $503 in North Dakota and $1,126 in Washington, D.C., the two extremes. But even neighboring states may see a big difference, such as Alabama ($667) and Florida ($1,055).
Therefore, a resident of Florida would have an incentive to register a car in Alabama -- and then insure it for a much cheaper rate. In fact, such incentives have led to organized fraud rings, according to a February 2011 Independent Democratic Conference paper about rate evasion. Some will register dozens of cars at a single out-of-state address -- in some cases, criminals buy cheaper out-of-state policies and then sell them along with used cars.
In-state auto insurance fraud
In some cases, drivers may realize they can save money by simply lying about the vehicle's parking address even within the same state. Auto insurance companies base their premium rates on the county or ZIP code where a driver lives, as population density and accident rates are strongly correlated.
A vehicle parked and used in rural upstate New York, for example, does not create anywhere near the same insurance risk as it would parked and used in New York City. In fact, according to the Quality Planning Corp. report, this scheme was especially prevalent in large urban areas where a vehicle's garage location makes a substantial difference when it comes to crime rates. In some cases, according to the report, a young driver may continue to list his residence as his parents' houses in the suburbs, long after he's moved into the city.
Rate evasion fraud is notoriously difficult to discover because American drivers constantly experience life and insurance changes. Every hour, 25,608 vehicles are registered (including 6,402 new vehicles) and 3,453 Americans move to a new residence, according to the Quality Planning Corp. report. In addition, 52 percent of household auto insurance policies undergo vehicle or driver changes every year.
Rather than sink a bunch of resources into rooting out this kind of insurance fraud, some states and insurance companies take a more passive approach in combination with legal penalties. If an insurance consumer lies about a vehicle's parking address, that consumer may simply find his or her insurance policy is essentially worthless when it comes time to file a claim.
All states allow insurance fraud to be punished by a fine or jail time, although some states' penalties are stiffer than others.
Even honest drivers deal with the consequences of rate evasion fraud. Rate evaders aren't paying their fair share -- and that means higher auto insurance premiums for all drivers.
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