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.
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:
- Over-insured property
- New coverage or coverage about to lapse
- Recently increased or additional coverage
- Duplicate insurance
- Substantial personal property claimed to be destroyed, inconsistent
with the insured's lifestyle or available documentation of ownership
- Property offered for sale at the time of the fire
- Vacant or abandoned property
- Property subject to adverse changes in the neighborhood
- Property recently sold or purchased
- Unfurnished or sparsely furnished dwellings
- Property subject to multiple liens or judgments
- Property being renovated or remodeled
- Fires occurring in the middle of the night
- Fires occurring when the insured is not home and has a "perfect
- Very cooperative/very hostile insured
- Insured undergoing marital separation/divorce
- Unemployed or recently fired insured
- Self-employed insured with a failing business
- Extensive claims history or prior fire losses
- 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
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
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
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
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.
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
Date of loss: ________________________________ time: _____________________
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: _________________________________________
Reprinted with permission from the author.