Insurance Fraud
| Insurance Fraud | |
|---|---|
| Statute: | 18 U.S.C. § 1033 |
| Code: | Title 18, Chapter 47 |
| Max Prison: | 15 years |
| Max Fine: | $250,000 |
| Guidelines: | USSG §2B1.1 |
| Base Level: | 7 |
| Agencies: | FBI, DOJ, State Insurance Commissioners |
| Related: | Wire Fraud, Mail Fraud, Healthcare Fraud, Bank Fraud |
Insurance fraud is a federal crime under 18 U.S.C. § 1033 that prohibits fraudulent conduct by individuals or entities engaged in the business of insurance whose activities affect interstate commerce. The statute specifically targets insurance company insiders, officers, directors, and employees who engage in deceptive practices that undermine the integrity of the insurance industry.
Elements of the Offense
To secure a conviction under 18 U.S.C. § 1033, federal prosecutors must prove each of the following elements beyond a reasonable doubt:
Subsection (a)(1) - False Statements
- The defendant was engaged in the business of insurance whose activities affect interstate commerce
- The defendant knowingly made a false material statement or report
- The statement was made with the intent to deceive
- The statement was made in connection with a financial report, application, or document
Subsection (a)(2) - Embezzlement and Theft
- The defendant was engaged in the business of insurance
- The defendant willfully embezzled, abstracted, purloined, or misappropriated funds or property
- The funds or property had a value of $5,000 or more
- The conduct affected interstate commerce
Subsection (b) - Jeopardizing Insurer Viability
- All elements of subsection (a) are met
- The conduct jeopardized the safety and soundness of the insurer
- The conduct caused the insurer to be placed in conservation, rehabilitation, or liquidation
Statutory Penalties
| Category | Maximum Imprisonment | Maximum Fine |
|---|---|---|
| Standard violation (§1033(a)) | 10 years | $250,000 |
| Jeopardizing insurer viability (§1033(b)) | 15 years | $250,000 |
| Organization | 10-15 years | $500,000 |
Federal Sentencing Guidelines
Insurance fraud is sentenced under USSG §2B1.1, the same guideline section used for other fraud offenses.
Base Offense Level
The base offense level for insurance fraud is 7.
Loss Amount Enhancements
| Loss Amount | Level Increase |
|---|---|
| More than $6,500 | +2 |
| More than $15,000 | +4 |
| More than $40,000 | +6 |
| More than $95,000 | +8 |
| More than $150,000 | +10 |
| More than $250,000 | +12 |
| More than $550,000 | +14 |
| More than $1,500,000 | +16 |
| More than $3,500,000 | +18 |
| More than $9,500,000 | +20 |
| More than $25,000,000 | +22 |
| More than $65,000,000 | +24 |
| More than $150,000,000 | +26 |
| More than $250,000,000 | +28 |
| More than $550,000,000 | +30 |
Other Common Enhancements
- +2 levels - 10 or more victims
- +4 levels - 50 or more victims
- +6 levels - 250 or more victims
- +2 levels - Sophisticated means
- +2 levels - Violation of prior judicial order
- +4 levels - Defendant was in the business of receiving and selling stolen property
- +2 levels - Abuse of position of trust
Role Adjustments
- +4 levels - Organizer or leader of criminal activity involving five or more participants
- +3 levels - Manager or supervisor
- +2 levels - Organizer, leader, manager, or supervisor in any other case
- -2 levels - Minor participant
- -4 levels - Minimal participant
Acceptance of Responsibility
- -2 levels - Clearly demonstrates acceptance of responsibility
- -1 additional level - Timely notification of intent to plead guilty (if offense level is 16 or greater)
Types of Insurance Fraud Schemes
Premium Diversion
Premium diversion occurs when an insurance agent or broker collects premiums from policyholders but fails to remit those funds to the insurance company. This is one of the most common forms of insurance fraud and can result in policyholders believing they have coverage when they do not.
Fee Churning
Fee churning involves insurance agents repeatedly inducing policyholders to replace existing policies with new ones, generating commissions for the agent while providing no benefit—and often causing harm—to the policyholder.
Asset Diversion
Asset diversion schemes involve the theft or misappropriation of insurance company assets by company insiders, including officers, directors, or employees. This may include siphoning funds through shell companies, inflated invoices, or fraudulent reinsurance arrangements.
Workers' Compensation Fraud
Employers may commit workers' compensation fraud by misclassifying employees to obtain lower premiums, underreporting payroll, or creating fictitious businesses to avoid premium obligations.
Reinsurance Fraud
Reinsurance fraud involves schemes where insurance companies fraudulently transfer risk to reinsurers or use reinsurance arrangements to artificially inflate financial statements or conceal losses.
Notable Cases
Martin Frankel (2002)
Martin Frankel orchestrated one of the largest insurance fraud schemes in U.S. history, embezzling over $200 million from insurance companies he controlled. He was sentenced to 200 months in federal prison after pleading guilty to 24 federal counts including racketeering, securities fraud, and wire fraud.
John Hancock Investigation (2004)
The John Hancock market-timing scandal resulted in significant regulatory penalties when company executives were found to have allowed improper trading in insurance products in exchange for increased assets under management.
Statistics
According to the Coalition Against Insurance Fraud:
- Insurance fraud costs Americans approximately $308 billion annually
- Workers' compensation fraud alone costs $7.2 billion per year
- Healthcare insurance fraud accounts for approximately $68 billion annually
- Property and casualty fraud costs $45 billion per year
Defenses
Lack of Intent
Because 18 U.S.C. § 1033 requires that the defendant act "knowingly" and "willfully," a defendant may argue that any false statement or misappropriation was the result of mistake, negligence, or inadvertence rather than intentional wrongdoing.
Good Faith
A defendant may argue they acted in good faith, believing their conduct was lawful based on advice from counsel, industry practice, or regulatory guidance.
No Materiality
The defendant may argue that any false statement was not material to the insurance transaction or did not affect the insurer's decision-making process.
Statute of Limitations
The general statute of limitations for insurance fraud under 18 U.S.C. § 1033 is five years from the date of the offense. However, if the fraud involves a financial institution, the limitations period may be extended to ten years under 18 U.S.C. § 3293.
Constitutional Challenges
Defendants may challenge the constitutionality of the prosecution, including arguments related to due process, vagueness, or overbreadth of the statute.
Relationship to Other Offenses
Wire Fraud (18 U.S.C. § 1343)
Insurance fraud schemes that involve the use of electronic communications may also be charged as wire fraud, which carries a maximum sentence of 20 years (or 30 years if affecting a financial institution).
Mail Fraud (18 U.S.C. § 1341)
When insurance fraud involves the use of the U.S. Postal Service or private carriers, prosecutors may also bring mail fraud charges.
Healthcare Fraud (18 U.S.C. § 1347)
Fraud involving health insurance benefit programs is specifically addressed under 18 U.S.C. § 1347, which carries penalties of up to 10 years (or 20 years if serious bodily injury results).
Money Laundering (18 U.S.C. § 1956)
Proceeds from insurance fraud schemes may give rise to money laundering charges if the defendant attempts to conceal the source of the fraudulently obtained funds.
Employment Restrictions
A unique aspect of 18 U.S.C. § 1033 is that it imposes permanent employment restrictions on individuals convicted of crimes involving dishonesty or breach of trust. Under subsection (e), a person convicted of such offenses is prohibited from engaging in the business of insurance unless they obtain written consent from the appropriate insurance regulatory official.
Civil Penalties
In addition to criminal prosecution, 18 U.S.C. § 1034 authorizes civil penalties and injunctive relief for violations of § 1033. Civil penalties can reach up to $50,000 per violation, and courts may enjoin individuals from participating in the insurance business.
See also
- Wire Fraud
- Mail Fraud
- Bank Fraud
- Healthcare Fraud
- Securities Fraud
- Money Laundering
- Federal Sentencing Guidelines
Frequently Asked Questions
References
- 18 U.S.C. § 1033 - Crimes by or affecting persons engaged in the business of insurance
- 18 U.S.C. § 1034 - Civil penalties and injunctions
- United States Sentencing Commission Guidelines Manual
- FBI Insurance Fraud Overview
- Coalition Against Insurance Fraud Statistics