If you are seriously injured in an automobile accident and are reaping the benefits of cheaper auto insurance because you lied about your residence, you may very likely have to pay for all your medical expenses and property damage out of your own pocket. Why? The short answer is that you were technically committing a crime. The longer explanation is that you are part of a growing scourge within the insurance industry, resulting in ramifications that will not only harm yourself, but also everyone you know who lawfully insures an automobile. I will be discussing several issues associated with rate-jumping in a three-part series of articles intended to educate insurance holders on the law, to discourage the activity in its entirety, and to detail how this practice is not only detrimental to society as a whole, but potentially fatal to any insurance claims that you file.

What Exactly Is Rate-Jumping?

Rate-jumping” is a term used within the auto insurance industry to describe those applying for auto insurance who list their home address on the insurance application as a location where insurance premiums are significantly lower than where the insured actually resides. This is particularly common in New York City and its surrounding suburbs. New York City is a great place to try and pull off this type of fraud, as it is quite common to see cars with out-of–state plates, whether it’s visiting tourists, long distance commuters, or people actively rate-jumping. Insurance premiums are considerably higher in the greater New York City metro-area for a number of reasons. But in the very nearby neighboring states of Pennsylvania and Connecticut, applicants can obtain considerably cheaper premiums. Regardless of whether you own property in that neighboring state, if the vehicle at issue is principally garaged” or kept at night” in the State of New York, then your insurance application must identify your New York address.

Rate-jumping is a misrepresentation of material facts on an insurance application, and this is a form of insurance fraud. It is rare that the insurance companies pursue criminal prosecution, but it is not outside the realm of possibility. It is a relatively straightforward crime to prove, as we all leave a large and indisputable footprint of where we reside, whether we realize it or not. Dispel the notion entirely that you can beat the insurance companies’ system of investigation into rate-jumping activities. Mistake of law, claiming that you didn’t know better, is not a defense. You will not defeat an investigation into rate-jumping activity; all you can do is hope your vehicle is never involved in any type of incident requiring you to make an insurance claim.

Caught Rate-Jumping? The Consequences Are not Good

Insurance companies more commonly pursue civil penalties than criminal prosecution. The most common remedy for the insurance companies is to disclaim all the benefits arising from being a policyholder. This includes disclaiming No-Fault benefits, which encompasses the payment of property damage to your vehicle and any medical treatment sought in connection to injuries sustained in an accident. In some cases, they may disclaim prior benefits received as far back as when you first obtained the policy, causing you to owe them for any prior claims. Likely, the best outcome for being labeled a rate-jumper is that the insurance company simply readjusts your insurance premium (potentially charging you for the backdated windfall you received as a result of your misrepresentation, called a holdback”; something akin to paying back taxes to the IRS). Another possible outcome is that your insurance policy is cancelled outright, requiring you to obtain a new policy with a different company. This does not sound too bad, right? Wrong. Insurance companies exchange this type of information with each other, placing a big red flag on you, making it very difficult to obtain a new insurance policy without paying an extremely high premium, much higher than you’d pay if you just did everything truthfully in the first place. The reality is that every insurance company handles rate-jumpers in their own way, and none of it is good. These penalties are all disclosed in your policy agreement (maybe in the fine print, but fine print still counts), so remember, I didn’t know” is not getting you off the hook.

With Rate-Jumping, the Law Sides with Insurance Companies

Most of the civil remedies available to insurance companies have been upheld by the New York State courts. While the Vehicle and Traffic Law does not allow an insurer to cancel an automobile policy retroactively on the grounds of fraud or misrepresentation, the Appellate Term, First Department states that an insurer may use that misrepresentation or fraud as an affirmative defense in an action by an insured to recover your benefits [1]. This is a major hot-button issue being addressed by the politicians in Albany and judges in the New York State courts. Even though deceitful drivers posing to be out-of-state drivers may pay less, all of the honest drivers out there paying into the system end up paying more than they should for registering and insuring their vehicles. Law-abiding New York residents pay the windfall with higher rates. Besides being illegal, rate-jumping is simply not worth the headache; no one can predict an auto accident, an act of vandalism, or even the vicious propensities of Mother Nature. If it happens and you need to make an insurance claim, and you are rate-jumping, you will get caught.

[1] AA Acupuncture Service, P.C. v. Safeco Insurance Company of America, 25 Misc. 30, 31 (App. Term 1st Dept. 2009).

So what are the realistic chances of getting caught for rate-jumping? The reality is that you are unlikely to get caught, unless you actually need to invoke the benefits that your policy provides. Most rate-jumpers do not come under the scrutiny of their insurance company until the policyholder needs to file a claim. This can be a claim for property damage, theft/vandalism, or bodily injury to name a few. Every time a claim is filed, there is a process of due diligence performed by the insurance companies. This is to assess the validity of the claims through a fact-finding process. During this informal discovery phase, policyholders can easily get red-flagged as rate-jumpers.

If They Suspect Rate-Jumping, They Will Investigate

It does not take much evidence to piece together rate-jumping activities. A Pennsylvania policyholder who gets into an accident in Brooklyn and works on a daily basis in Manhattan is most likely a rate-jumper. The insurance companies have the financial means to undertake a detailed and thorough investigation into your life. They retain private investigators who will dig up everything your insurance company needs to expose your fraudulent activities. In addition to hiring an investigator to track your movements and perform surveillance on your home, your insurance company is entitled to employment records, utilities bills, Federal and State income taxes, etc. All of these items make your true” residence very easy to determine. Additionally, as part of almost everyone’s policy, we agree to participate in an Examination Under Oath (EUO) if demanded by the insurance company. An EUO is a sworn statement under oath. Lying at an EUO is tantamount to committing perjury. While the insurance companies rarely proceed with criminal prosecution, the rate-jumping itself amounts to insurance fraud and attempting to cover it up by lying at an EUO is perjury. The easiest way to spare yourself these indignities is to never get involved in the fraudulent activity in the first place. It is not worth the few thousand dollars you may save obtaining a cheaper out-of-state policy.

If You Are Caught, They Can Easily Disclaim Your Coverage

The Courts, who traditionally protect insurance holders from the inequitable power of the insurance companies, are now consistently upholding the punitive tactics of the insurance companies. In an effort to deter insurance fraud, the Appellate Term, First Department made their clearest and most important rate-jumping decision in AA Acupuncture Serv., P.C. v. Safeco Ins. Co. of Amer., 887 NYS.2d 739, 25 Misc. 3d 30 (App. Term 1st Dept. 2009). That decision explicitly states that rate-jumping is a complete defense to ALL first party claims, even those of innocent victims” (i.e. occupants of a vehicle involved in an accident, who had nothing to do with the insurance fraud). The Court established that it is not necessary for the insurance policy be cancelled under the State where it was issued, making it irrelevant for the insurance company to retroactively cancel the insurance policy at issue. All the insurance company has to do in order to lawfully disclaim all coverage for a case is provide proof that the address on the insured’s application is different from where the insured actually resides and/or garages” their car.

Worst of All – You Will not Have Coverage for Damages

Once insurance coverage is disclaimed, there is no obligation by the insurance company to pay for any benefits obtained from the outset of any insurance claim. The disclaimer in some instances can happen months to years after the claim was initially filed, meaning the accumulated cost of benefits can be immense by the time of the disclaimer. In the case of an automobile accident, the claimant may have incurred thousands and thousands of dollars in medical bills. Instead of being paid by the insurance company, the claimant is now personally liable for those bills (or the bills act as a lien on any potential settlement). It is a huge financial burden and punishment to merely save a couple thousand dollars per year by fraudulently obtaining a lower out-of-state premium. This does not even factor the debt to society for committing insurance fraud. It costs everyone that lawfully obtains insurance in higher premiums and vehicle registrations, in essence causing honest policyholders to subsidize the dishonest ones. Protect yourself, your freedom, and your financial well-being; give yourself peace of mind by being honest when applying for automobile insurance.

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