Auto insurance can be expensive and usually represents a large proportion of the overall cost to own a vehicle. According to a company called Quality Planning Corp., based in San Francisco, California, auto insurers had a loss of $15.9 billion worth of insurance premiums due to "premium leakage." Policyholders either intentionally or unintentionally provide inaccurate information to insurance companies, undermining the calculation of proper premiums. Purchasing car insurance from another state contributes to this problem.
State vehicle registration policies vary, although most states require a car to be registered and insured in the same state the car resides in. Arizona, for example, requires vehicles registered in the state to have insurance from a company that is licensed to do business in Arizona. If a driver leaves the state temporarily, such as someone in the military, he must file a de-insurance certificate. This allows the vehicle to remain registered in Arizona without insurance. Arizona's Department of Motor Vehicles tracks active auto insurance and suspends a driver's car registration and license plates if the insurance is not from an approved company, or has lapsed.
Some people may tell their insurance company a car is garaged at a different address, either within their state or another state, especially when living in a large city with expensive car insurance. People also underestimate the number of miles driven, or legitimately forget to update their vehicle's policy if they change jobs and start commuting more miles. Both of these scenarios may be considered deceptive by an insurance company, whether intentional or not.
When a vehicle owner needs to make an insurance claim for damages to her vehicle, the insurance company verifies the accident information against the data provided when the policy was issued. Any inconsistencies, such as the zip code the car was kept in, the driver's home address or the current odometer reading may cause the insurance company to deny the claim.
Soft Insurance Fraud
If an individual knowingly registers a car in one state while keeping it in another, this could fall under what the insurance industry calls soft insurance fraud. In this case, any accident claim may be denied if the car is involved in a crash in a different state, and the insurance company discovers that the car's daily-use location is different from what is stated on the policy. If an insurer catches a policyholder providing false information, it will assume the information was provided intentionally and may cancel the policy and refuse to pay any outstanding claims.
Soft fraud, sometimes called opportunity fraud, happens when an individual deliberately provides false information to an insurer to receive a lower rate or increase his chances of getting an application accepted. Soft fraud also happens when consumers exaggerate an accident claim, or under-report the actual amount of miles driven. Soft fraud happens much more than hard fraud, or deliberately staged or invented accidents. Soft fraud costs consumers money by increasing the overall premiums for auto insurance.
Cynthia Gaffney has spent over 20 years in finance with experience in valuation, corporate financial planning, mergers & acquisitions consulting and small business ownership. She has worked as a financial writer for online finance publications since 2011, including eHow Money, The Motley Fool, and Sapling.com. She has also edited for several online finance publications, including The Balance, Opposing Views:Money, Synonym:Money, and Zacks.com. A Southern California native, Cynthia received her Bachelor of Science degree in finance and business economics from USC.