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Arson from A to Z:
Detecting, Handling and Defending Arson Claims

by Guy E. Burnette, Jr., Esquire

Arson continues to be one of the most substantial problems facing the insurance industry. The intentional destruction of property for insurance gain has plagued the field of insurance since the first fire policy was written. It will continue to challenge the industry so long as policies are written. The arson problem can never be eliminated. However, arson claims can be resisted and payment avoided when an insurer makes the commitment to develop a strategy against arson. This paper will review the three key elements of a successful approach to the arson problem: recognizing, investigating and defending against arson.

Contents


Recognizing Arson Claims

The first hurdle in combating arson is learning to recognize a potential case of arson in a fire loss claim. Obviously, without the detection of potential fraud a claim will never receive the necessary investigation and scrutiny to determine whether the insured is, in fact, responsible for the fire loss. However, it is not enough to simply recognize these claims after they are presented. A potential arson claim must be quickly recognized so that an investigation can be immediately undertaken. The physical evidence establishing the corpus delecti of arson will rapidly dissipate. Once that happens, an arson defense may be forever lost. While other policy defenses may be available to combat a fraudulent claim, an arson defense can never be successfully raised once the physical evidence of the cause of the fire is lost. When a fire does not have an immediate cause identified, it is time to hire a qualified cause and origin investigator. Certainly, if there is any suspicion on the part of the responding firefighters that the fire may have been intentionally set, it is time to bring in an expert investigator. However, the claims representative cannot rely on the responding firefighters to discover evidence of arson. They are simply not trained to do so. Instead, the claims representative must take the initiative in ordering an investigation of fires of undetermined origin whenever that is appropriate under the circumstances.

Those circumstances which warrant an investigation are the traditional "red flags" of arson. While the particular surrounding circumstances of any fire loss may give rise to suspicions of an insured's involvement, there are several generally recognized criteria for considering a fire to be "suspicious". Those include:

  1. Over-insured property
  2. New coverage or coverage about to lapse
  3. Recently increased or additional coverage
  4. Duplicate insurance
  5. Substantial personal property claimed to be destroyed, inconsistent with the insured's lifestyle or available documentation of ownership
  6. Property offered for sale at the time of the fire
  7. Vacant or abandoned property
  8. Property subject to adverse changes in the neighborhood
  9. Property recently sold or purchased
  10. Unfurnished or sparsely furnished dwellings
  11. Property subject to multiple liens or judgments
  12. Property being renovated or remodeled
  13. Fires occurring in the middle of the night
  14. Fires occurring when the insured is not home and has a "perfect alibi"
  15. Very cooperative/very hostile insured
  16. Insured undergoing marital separation/divorce
  17. Unemployed or recently fired insured
  18. Self-employed insured with a failing business
  19. Extensive claims history or prior fire losses
  20. No forcible entry

While this list is by no means complete, these are some of the "red flags" which should always be recognized by the trained claims representative. These circumstances do not necessarily prove the involvement of the insured. However, they clearly justify a full-scale investigation of the claim in order to determine whether there is any evidence of the insured's involvement.

Investigating Arson Claims

Once a claim has been identified as "suspicious" and appropriate for further investigation, the claims representative must employ a systematic approach to the investigation. That is not just a matter of common sense, it is a requirement of law. The model unfair claims practices act on which most states' claims handling regulations is based defines improper claims practices giving rise to administrative action by the department of insurance as including the failure "to adopt and implement reasonable standards for the prompt investigation and settlement of claims", and denying claims "without conducting a reasonable investigation based on all available information". When an insurer is found to be acting in this way knowingly or with such frequency to indicate a "business practice" or "persistent tendency", it will be subject to administrative action for improper claims practices.

If you do not have a claims manual for the handling of fire claims, it should be implemented immediately. Once that manual is in effect, it must be strictly followed. Only in that way can an insurer avoid allegations of "unfair claims practices" as set forth above.

An investigation into a potential arson claim should always include an examination of the following areas:

1. Loss site

Upon receiving the initial report of loss, the loss site should be inspected in any claim of consequence. If there is any indication the cause of loss may be questionable or fraudulent, a visit to the site is indispensable. At trial, an admission that the claims representative has never even looked at the site can be damaging.

Even if the site is being examined by a specialist such as a cause and origin expert, the claims representative must still ensure the scene is documented properly with photographs and diagrams. Diagrams drawn by the insured at the scene are particularly useful. The use of videotape cameras to record the scene is both effective and easily accomplished.

Additionally, detailed notes should be taken of the claims representative's observations of the conditions at the scene and any significant items found there. In a fire loss, the contents can be inventoried as to type and amount in most situations. This can be done quite easily by dictating findings and observations into a recorder while inspecting the site.

2. Witness statements

It is, of course, essential to conduct witness interviews as part of the investigation process. What is equally essential, however, is the need to conduct those interviews without delay. Witnesses can move away, die or forget details with the passage of time. They can also be influenced to change their statement or lose their memory by intimidation or coercion. They key is to contact witnesses before any of these things can happen.

Statements must be documented, if at all possible. When properly approached, most witnesses will provide recorded interviews. A handwritten statement is an acceptable alternative. If a witness will only provide an oral statement, bring in an outside person to witness the oral statement.

Always determine the existence of bias or prejudice in a favorable witness. That is not something you want to find out at trial! Moreover, it may even be bad faith claims handling to overlook or ignore the possibility of such factors.

There are two precautions to observe in taking statements from witnesses. First, permission must be given for the recording of a statement. That permission should be stated at the outset of the recording. Second, suspicions, opinions and accusations should never be expressed to a witness or outside party. It could be viewed as an attempt to influence the witness' statement and could even provoke litigation for libel and slander.

3. Company and industry sources

Some of the most important information in the investigation of a claim can be found -- literally -- down the hall. Underwriting records (particularly policy applications), loss control reports and premium payment histories can provide significant information in the evaluation of a claim. These should always be examined.

Industry sources such as pilr, nicb and claims index services can also be invaluable in the investigation of a claim. These are readily and easily available to the claims representative and should be regularly utilized.

4. Public authorities

In most fire claims, a public authority will be involved such as a police or fire department. These agencies compile reports of their activities and observations at the loss site. More importantly, they will initiate investigations which often develop information which would be otherwise unavailable without the resources and legal authority of those agencies. All of this is invaluable to the claims representative investigating a loss.

A problem arises with respect to the accessibility to these records. As a general rule, reports of an "ongoing criminal investigation" are protected from disclosure to outside parties. Basic incident reports detailing the initial response of the agency are not exempt from disclosure. Once an investigation has ceased or become inactive with no prospect of resuming in the near future, the reports are no longer privileged and can be obtained.

An interesting source of information now available in most states is a criminal history report showing arrest and conviction records, which can usually be obtained for a nominal fee.

Beyond the problem of access to agency records, a discreet inquiry with the investigators involved will often be enough to point you in the right direction or lead you to the source of needed information. This is discussed further in the following section.

A word of caution: it remains a common practice to delay acting upon a claim until the investigation of the public authorities is completed or even tie the decision of payment or denial to the outcome of the investigation by law enforcement authorities. This is not only inappropriate -- it is almost certainly bad faith claims handling.

5. Statutory considerations

One of the recurrent problems insurers have had to face over the last decade in the handling of suspected fraudulent claims is the tactic that the insured will claim his insurer defamed him or maliciously promoted a criminal prosecution. The insured often points to the discussions between the insurer and state or federal authorities which led to a criminal prosecution of the insured or in some manner defamed him. Such suits have the obvious effect of deterring or intimidating claims personnel from freely discussing their investigative findings with the state investigators.

In response, statutory immunities have been established to allow insurers and their agents to discuss their investigation with state authorities. These acts provide immunity to insurance companies and their agents for the release of any information in the possession of the insurance company or its agents regarding a fire loss. The statutes also encourage a two-way exchange of information, thereby allowing the insurer access to the information in the files of investigating authorities.

The failure to report suspicious claims to authorities may present legal problems, as well as practical ones. In assessing punitive damages, a federal court specifically noted the failure of an insurer to report to authorities in accordance with virginia's arson reporting immunity statute. A & e supply company, inc. V. Nationwide mutual insurance company, 612 f. Supp. 760 (w.d. va. 1985).

Additionally, the immunity acts in most states compel the cooperation of insurers in the investigation of suspected fraudulent claims by the department of insurance and provide immunity from civil liability for libel or other civil actions by virtue of furnishing information and cooperating with investigations by the department of insurance. In the absence of malice, insurers and their representatives furnishing information and cooperating with the department of insurance are immune from civil liability for any civil action arising out of the furnishing of information and cooperation with the department of insurance in investigating claims.

Many states statutorily compel good faith adjustment by enacting statutes which regulate claims settlement practices. Such statutes specifically enumerate improper claims practices. While these acts usually only provide for administrative penalties by the department of insurance, the consequences of violations can lead to severe administrative penalties. Many state acts, however, specifically recognize a cause of action by insureds for vexatious and unreasonable conduct or delay in claims handling, providing for the recovery of attorney fees and penalties, even punitive damages in some cases. Adjusters should be thoroughly aware of the relevant state statutes and supervisors should strictly adhere to such statutes. The plaintiff's bar is certainly aware of regulations placed upon the insurance companies and will use them to their advantage. An awareness of the exposures to damages for failure to comply with such statutes will serve to minimize the errors and oversights which lead to such litigation.

6. Examination under oath

The right of examination under oath granted to an insurer under the terms of its policy is unquestionably the most important investigative tool in the handling of arson claims. It is much more than a mere statement from the insured as to the circumstances of the fire. It is the opportunity for an insurer to question its insured, under oath, about all matters material to the investigation of the claim. It is the opportunity to compel the production of books and records for inspection by the insurer. Certainly, it is the opportunity for an insurer to evaluate its insured as to his or her appearance and credibility as a witness.

The right of examination under oath must be carefully preserved. Initial recorded statements taken from an insured can waive the right to a later examination under oath if they are viewed as a "sworn statement". If the time provided under the policy for a decision on the claim, typically thirty or sixty days, has already lapsed, then an insured may not be compelled to appear for examination under oath. There must be adequate notice of the scheduling of the examination, it must be conducted at an appropriate location and in the presence of the appropriate parties. The mechanics of an examination under oath can become complicated -- and controversial -- all too often.

It is recommended that legal counsel familiar with the handling of arson claims be involved in the investigation early on. In this way, your counsel can provide guidance and assistance in the early investigation of the claim. Certainly, at the point of the examination under oath legal counsel must be involved. Because of their training and experience in questioning witnesses, and with the probable representation of the insured by legal counsel at the examination, the examination under oath should be conducted on behalf of the company by its defense counsel.

The examination under oath is typically one of the final steps in the investigation of an arson claim. By that point, most of the background investigation should be complete. At the examination, additional books and records will be reviewed. Follow-up investigation will probably be required into a few areas, but the final decision on the claim should be forthcoming shortly afterward. Once the initial investigation is complete, the follow-up investigation finished, and the statement of the insured taken under oath, the company should be in a position to make that decision.

Apart from these areas of investigation, there are many others that will be suggested in any fire loss. A routine check of the courthouse for a civil and criminal history on the insured is always appropriate. Documentation of the property claimed by the insured, as to value and ownership, is always a necessary step in the investigation of a potential arson claim. The use of a "checklist" is a helpful way to make sure all of the necessary investigation is completed -- and completed on time. Attached as appendix "a" to this paper is a fire loss checklist which can be used in the handling of fire claims. It should be kept on the inside of your file for easy reference at all times.

Defending an Arson Claim

Once the investigation is complete and it is determined that the evidence supports a defense of the claim, the final phase of handling the arson claim begins. This is the denial and litigation phase. Even at this point, there are significant tactical considerations in these final steps.

The denial of the claim should be timely made, within the time period provided under the policy. The denial should always be in writing and should specifically set forth the basis of denial in clear and direct terms. Denial letters should be sent out by a company representative, under his or her signature in that capacity. It should be sent by certified mail, return receipt requested and marked personal and confidential. If an insured is represented by legal counsel, the original of the denial letter should be sent to the attorney's attention with a copy to the insured.

In almost every case, an insured will not accept the denial of his or her claim without litigation. Therefore, it is recommended that an insurer file a complaint for declaratory judgment soon after the claim is denied. In this way, the insurer becomes the plaintiff in the lawsuit with all of the attendant advantages of being plaintiff. Moreover, it will demonstrate a "good faith" posture by showing that the company was not seeking to simply "run and hide" after denying the claim but was willing to come forward in court. This also provides the opportunity for a selection of forum. In most cases, the preferred forum for litigating arson claims is federal district court. There are several reasons for this.

First, this removes the action from the insured's "back yard". Instead of appearing in local circuit court where the jury panel will be drawn from a much smaller area around the insured's home base, the district court is likely to be in the nearest major metropolitan area, with a jury venire drawn from a much larger base. The chances of having relatives and acquaintances of the insured on the jury venire are less likely under those circumstances.

The body of law in federal district court is far more developed than the case law in state court. The persuasive precedent of other federal cases across the country is much more effective than the limited case precedents in state court. The federal district judges have likely handled more arson and insurance fraud cases than their counterparts in state court. The nature of federal practice is much more streamlined and does not require the actual appearance of the attorney at every motion hearing. Under all of these circumstances, it is clear that federal court is the preferred forum in most cases.

Once a claim is in litigation, the investigation is not completed. Indeed, it begins anew. With the availability of subpoena process and discovery pleadings, materials which were previously unavailable can be obtained. Witnesses can be compelled to give statements where they may have refused to talk before. Documents can be obtained from financial institutions, employers and other sources where those sources had refused to provide the records previously. Interrogatories can be served upon the insured requiring the disclosure of any alibi witnesses or other witnesses in support of the insured's case. Those witnesses can then be deposed to determine the source of their information and the nature of that information.

The aggressive approach to handling arson claims should continue in the litigation stage. It is a constant source of amazement that insured's attorneys feel there is nothing they need do to prepare their case for trial except demand a trial date. While there is an acknowledged prejudice against insurance carriers in court cases, a well prepared case that is presented in an orderly and professional manner can serve to persuade a jury or judge to uphold the denial of the claim and enter judgment in favor of the insurer.

Conclusions

A systematic and comprehensive approach to the investigation of arson claims can result in the successful defense of those claims. In recent years, there has been a noticeable trend toward defense verdicts in these cases. That trend can be continued using the procedures outlined above with a commitment to aggressively resist these fraudulent claims.

Appendix A: Fire Loss Checklist

Insured: ________________________________________________________________________

Location: _______________________________________________________________________

Date of loss: ________________________________ time: _____________________ a.m./p.m.

Cause and origin: _______________________________________________________________

State/local c&o - by: ___________________________________________________________

Independent c&o - by: ___________________________________________________________

Notice of loss - by: ______________________________ date/time: ____________________

Proof of loss forms sent - by: ____________________________ date: _______________

Proof of loss forms received - by: ____________________________________________

Date received: ________________________ date on proof: _________________________

Contents/business interruption/ale received - by: _____________________________

Date: __________________________ date on forms: _________________________________

Policy coverage - structure: ________________ contents: ______________________

App. Structure: ___________ ale: ____________ bus. Int.: ____________________

Amount claimed - structure: _________________ contents: ______________________

App. Structure: ___________ ale: ____________ bus. Int.: ____________________

Policy records received - certified policy: _____ app./underwriting file: _______

Agency file: ______________________ prior claims files: __________________

Investigative records received:

Fire dept. Report: ________ police/sheriff report: ________ ind. C&o: _______

Lab reports-sfm/local: ______ ind. C&o lab reports: ______ utilities: ______

Telephone - business: ____________________ home: _____________________

Personal financial records: _______ financial/credit reports: ______

Receipts verified: __________________ business records:___________________

Accountant/financial analysis - by: ___________________________________________

Report(s) received: _______________________________________________________

Courthouse records - civil actions and judgments: _________ criminal: ________

Traffic: ________ bankruptcy: ________ 10 year abstract of title: _________

10 year mortgages/liens: ____________ ucc: ____________ deed: _____________

 

Immunity act request - by: ______________________________________________________

Date: __________________________ response date: ______________________

Statements taken and transcribed:

Firefighters: _____ discoverers/observers of fire: _____ neighbors: _____

Sfm/local c&o: ________ producing agent: ________ mortgagee: ___________

Misc. Creditors: _______ realtor/broker: _______ prior owner: ____________

Pilr report - date filed: _____________________ by: _____________________________

Response received: _______________________________________________________

30/60 days end: __________________________________________________________________

Date claim denied: __________________ by: ___________________________________

Sent to: ___________________________________________________________________

Date suit filed: _____________________ by: ___________________________________

Date answer/counterclaim filed: _________________________________________

By: ________________________________________________________________________

 

Reprinted with permission from the author.

 
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