Beyer, John A. Why Insurance Companies Settle Arson Claims. The National
Fire and Arson Report. Vol. No. 3. 1989.
Abstract: This article examines the question of why insurance
companies settle arson cases. A fictional scenario is provided to illustrate
the point of view of insurance companies. The article then discusses the
five important factors that influence an insurance company's decision to
settle a claim.
The effect of time greatly influences the decision of an insurance company.
The investigation of a claim can take 30 - 90 days. If the insurance company
decides to deny the claim, the insured has the right to sue the insurer
and has one year to file the suit. During that year, the defense of the
insurance company is weakened. The memory of the fire investigator will
not be as accurate. Witnesses will also forget details, or may become inaccessible
due to death, or change of address. The passage of time will also allow
the insured to prepare explanations consistent with the collected evidence.
The standard mortgage clause also prevents insurance companies from going
to court. This clause basically states that the insurance company must pay
the mortgage on the damaged property. This will usually result in a foreclosure.
Unless the insured has outside assets other than the house in question,
the insurance companies do not profit by taking the insured to court.
The innocent co-insured laws also affect an insurance company's decision
to deny a claim. If the investigation has a solid case against one insured
party, the other person covered on the insurance will be allowed to recover
unless the investigation proves her to be an accomplice. This means insurance
companies lose half of the claim and pay investigation and court fees. The
total costs will either equal or be more expensive than the entire claim.
This sometimes force insurance companies to settle in the first place.
Replacement cost coverage forces insurance companies to reconsider claim
denial. If the insurance company decides to settle the claim, they will
usually pay a depreciated amount for the property. If the company denies
the claim and loses in court, the jury will most likely grant the inured
the amount to replace the property. The insurance company loses more money
and pays court fees.
Extra-contractual damages also dissuade insurance companies from going
to court. If the insured wins the case, the jury might grant compensatory
damages. The court might find the company violated its duty of good faith
and award punitive damages.
Overall, there are many circumstances working against insurance companies.
The decision to deny a claim is sometimes too risky for insurance companies.
Most insurance companies prefer to cut their losses and settle the claim.