Whether or not he will ultimately "get away with this" depends hugely on the insurance company. As you alluded to, there is no doubt that he could be charged with fraud for having cashed the checks and refusing to return the proceeds. My speculation is that the insurance company will put a bit more effort into getting him to return the proceeds.
If they contain to receive no response, they would likely then take legal action against him. While this may not be a huge sum of money, it is certainly worth pursuing. And yes, if they do pursue the matter, it certainly could lead to your friend being jailed.
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In my opinion, the easiest way for them to handle it would be to have him criminally prosecuted. He would then be placed on probation and, as a condition of probation, he would be ordered to pay restitution. Then, if he fails to pay, his probation would be revoked and he would go to jail. In other words, it could well come down to either making payment or going to jail
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