This is clearly a case of insurance fraud, but it's very hard to prove the case legally. The hedge fund that bought the CDS on the corporate bonds went to cour

This is clearly a case of insurance fraud, but it's very hard to prove the case legally. The hedge fund that bought the CDS on the corporate bonds went to court, and successfully argued that the company issuing the bonds was in default. The company went bankrupt, and the hedge fund was refunded 100% by the insurer. How could you prove that the hedge fund acted fraudulently? They won a case in court. Evil, yes, but hard to prove. But to answer your question directly, I think insurance works because most policy holders don't cheat. If this kind of cheating becomes more frequent, CDS premiums will definitely go up.