As gas prices continue to soar, the economy barely gets rolling, and all of those great deals we saw over the past few years for buying new cars begin to dwindle, Americans are calculating and refinancing, budgeting and saving wherever and whenever possible. And yet, there are some costs that just can't be avoided: rents or mortgages, health care, gasoline -- and car insurance. It seems there is little to nothing the average consumer can do, beyond some basic comparison-shopping, to substantially reduce the cost of their car insurance.

While it's true that there are certain factors to consider -- your driving record, of course, the type of car you drive and how many miles you put on it annually, your age, where you live, and the type and amount of coverage you're getting -- why is it that if none of that changes, the cost of your auto insurance continues to rise? And why does it fluctuate depending on where you live? Are some areas of the country more prone to accidents and theft?

The Problem: Fraud

Automobile insurance fraud is often conducted in rings, sometimes with ties to organized crime. From fabricated losses to staged accidents, superfluous repairs and medical treatments, there has been a huge rise in fraudulent auto insurance claims that is costing consumers millions of dollars in premiums, with certain states including New York, California, New Jersey, Florida, and Massachusetts carrying the brunt of those costs, according to the National Association of Insurance Commissioners (NAIC).

One might think that in states like California and New York, states with the most insured cars in the country, costs would be substantially lower due to the amount of people paying into the system (8.6 million in New York alone). However, they are not. One of the biggest drains on the system is the no-fault laws that are on the books in about a dozen states. These laws require insurers to automatically pay for personal injury claims, sometimes up to $250,000, regardless of who may be found at fault. While originally designed to reduce the litigious nature of car accidents, they have increased the rates of fraud and contributed to rising rates.

How Does it Work?

Designed to simplify the process of settling medical claims, for example, in no-fault states, each insurer pays the medical bills for the person carrying their policy. Unfortunately, between staged accidents, unnecessary and expensive medical testing, and unnecessary visits to doctors and chiropractors, these laws have made it much easier for corruption to grow. The numbers of claims as well as their costs point directly to a sophisticated, deliberate effort rather than crimes of opportunity and normal inflation.

Over the past year, the cost of claims for medical no-fault (PIP) in New York state rose by 32%, more than twice that of Florida, which follows in second place for rising claim costs. This means that it's getting more expensive to treat bodily injury by medical professionals. However, the cost of medical services rose only 4.1% last year, according to the U.S. Bureau of Labor Statistics, thus showing hard evidence of fraud. In addition to the cost of claims, the frequency of claims has tripled in recent years. The National Insurance Crime Board reports that 90% of its fraud reports in New York involve auto insurance. The Insurance Information Institute (III) also states that for every $100 insurers took in over a period in 2000, they paid out $177 in claims.

Who's Doing It?

Another kind of fraud that is equally pervasive is the hidden cost trick. Certain body shops and mechanics may pad the invoice they present to a customer's insurance company, so that their customer does not have to pay their deductible. A chiropractor may require a patient who has soft tissue damage to come for far more treatment than medically necessary, charging more for incidentals like ice and electrical stimulation. A doctor may bill for services never rendered (this is a huge burden on the system, called "medical mills"). A small number of unethical doctors and lawyers, and a few shady middlemen, are making money from these increasingly sophisticated, seemingly "victimless" crimes. Fraud in New York state's medical no-fault system, according to the III, is a billion dollar industry. Unfortunately, it's the insured drivers that have to make up the costs to cover these schemes.

What's Being Done

In California, a fraud ring that was said to have staged over 100 collisions in Los Angeles over a 9-year period defrauded the insurance industry out of $2.5 million. Twelve men were arrested in connection with this crime. In Florida, Miami Dade County has made over 500 arrests related to auto insurance fraud and, as noted by the state regulator, many have shown links to organized rings. In addition, most states have made auto insurance fraud a felony and have begun prosecuting criminals involved in these crimes.

Insurers are also working on the problem, trying to recoup millions of dollars from these crime networks, using the Racketeer Influence and Corrupt Organization (RICO) Act. However, it is an incredibly expensive and arduous process. One example, from January 2000, shows a group of insurers who joined together to file a civil suit to try to recoup $2.6 million in fraudulent claims. They recovered less than half that amount and their expenses ran upwards $500,000 (a cost that will rise as defendants refuse to settle).

Good News

There is some good news, though. While the cost of insurance is expected to rise this year, it is the smallest increase (3.5%) in four years, according to III. Perhaps the awareness of states, prosecutors, and insurance companies of the size and scope of this problem is having real effects on changing the way business and legislation is being done. Consumers, by maintaining vigilance in doing business only with ethical service providers, can also do their part. Not participating in the system of corruption does pay.

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