Truth or consequences: Lying to insurers is costly

Everyone knows that torching a car and lying about it to your insurer to get a payout is fraud - and that you'll pay dearly if you're convicted. But fibbing to your insurer about less explosive things -- your marital status, your child's grades, where you garage your car -- for financial gain is also fraud and can have serious consequences.

Take the recent case of Maria Demeter, a Hillsborough, N.J., woman who prosecutors say falsely claimed that she lived by herself since 1999 to save almost $35,000 on her auto insurance policy. She'd actually been living with her husband, whose lousy driving record would have raised her premiums, according to news reports.

Demeter pleaded guilty this week to insurance fraud and may be ordered to pay about $39,000 in restitution, plus about $4,000 for a phony claim made more than two years ago. The court also tacked on 50 hours of community service. She will be sentenced Feb. 1. (See: "8 ways to get busted for auto insurance fraud.")

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Everyone pays for your car insurance fibs

Pete Moraga, spokesperson for the Insurance Information Network of California (IINC), says the media usually focus on more sensational incidents of "hard" fraud like accident scams run by crime rings.

"Most people think of insurance fraud as the headline-grabbing crimes of staged auto accidents and workers comp fraud, but soft fraud is the hardest type for the industry to deal with because it's harder to detect," he explains. "'Claims padding'" is an example. You get rear-ended and claim more pain or injuries than you actually suffered. Your car is damaged, but you urge the body shop to fix dents that never happened.

"These may seem innocent enough -- and perpetrators may think it's a victimless crime. But it really is a crime that everyone with an insurance policy pays for in higher rates. Consequences could be jail time, paying back the fraud costs and the humiliation of going through the legal system," says Moraga.

Soft fraud "is far more common" than hard fraud and contributes significantly to the $30 billion a year all fraud costs insurers, according to Allstate. The company says insurers report "some degree of fraud" in as much as 15 percent of all their claims, and "questionable claims" have climbed by about 20 percent since 2009. (See: "6 shady ways to kill a car insurance claim.")

Here are a few common examples of car insurance soft fraud, as described by Allstate and the auto buying and research site, CarsDirect.com:

• Grade faking: A parent or student lies about high grades to get a good-student discount.
• Location lies: A policy-holder tries to get a premium cut by using a parent's address in a rural, less-traveled area to register and insure a car that's usually driven in a more accident-prone city. He also tells his insurer that he drives half the miles he really does.
• Missing drivers: A family fails to inform their insurer that there are two teen drivers in the household, not just mom and dad.

Soft fraud is usually seen as a misdemeanor and, depending on the seriousness of the offense, can carry a fine of up to $15,000.

Beyond a canceled policy, Allstate says anyone convicted of soft fraud could face the following penalties:

• Community service
• Probation
• Fines and restitution
• Time in jail or prison