Arkansas Insurance Adjuster Practice Exam

Arlene's house suffered structural damage in an earthquake last year. When a tornado later causes some roof damage, Arlene files a claim for both the new roof damage and the old earthquake damage as if both were caused by the tornado. This is an example of:

1. Creating a morale hazard

2. Creating a physical hazard

3. Committing hard fraud

4. Committing soft fraud

The correct answer is: Committing soft fraud

The correct choice indicates that Arlene's actions are an example of committing soft fraud. Soft fraud, often referred to as "opportunistic fraud," occurs when a policyholder exaggerates their claim or presents information in a misleading way to receive a benefit they may not actually be entitled to. In this scenario, Arlene is attempting to combine two separate incidents—earthquake damage and tornado damage—as though they were part of a single loss event to increase her claim payout. Soft fraud commonly arises in situations where there is some truth to the claim, but the claim is inflated or misrepresented. In Arlene's case, she is not outright lying about the existence of both the earthquake and tornado damages; however, she is inaccurately attributing the old earthquake damage to the tornado, seeking compensation for damage that should be covered by a separate claim or may not be covered at all under her insurance policy. This behavior exemplifies the nature of soft fraud, where the intent is to obtain more from the insurer than what is justified by the actual loss.