Understanding the Policy of Insurance
by Guy E. Burnette, Jr., Esquire
For the civil and criminal investigator alike,
any meaningful investigation of insurance issues first requires an understanding
of the concept of insurance as it relates to fire investigation. There are
many types of insurance products available in the market today covering
almost any type of insurable property or event. The terms and concepts associated
with those products are unique to the field of insurance, often understood
only by an experienced insurance professional.
An insurance policy is a complex legal instrument.
It is considered to be a contract between the insurance company and the
insured party. As a contract, there are specific rights and obligations
of the parties which are governed by the terms of the contract and applicable
law. In the investigation of an arson-for-profit, the terms of the contract
of insurance take on particular significance. The following terms and concepts
are relevant to any arson-for-profit investigation and must be understood.
Declarations Page - The basic information about the policy coverages can
be found on the face of the policy or the "declarations page".
This is also called the "dec page" or "cover sheet"
of the policy. While the main body of the policy is usually a series of
printed forms which are compiled to make the complete policy, the declarations
page is specially prepared with the specific information about the coverage
under that particular policy. See How to Analyze Insurance Documents in a Fire Investigation: Declarations
Page for information on how to use declarations page information in
- the insured in an insurance policy is, of course, the party whose interests
are protected by the coverages provided. There are three types of insureds
under any policy of insurance.
First, there is the "named insured". The "declarations page"
or cover sheet on a policy of insurance identifies the named insured. In
a personal insurance policy such as a homeowner's policy, it may be a particular
individual, group of individuals or a married couple. In a commercial policy
it will be the insured business and/or the principal or owner of the business.
The named insured has all of the rights and responsibilities under the contract
In the main body of the policy, there is usually
a definitions section which covers the term "insured". In a homeowner's
policy, the term "insured" is defined to include the named insured
on the declarations page of the policy, as well as any other family members
and relatives residing in the household. They are considered to be "definitional
insureds", regardless of whether they are specifically named on the
face of the policy. In commercial policies, the term is usually defined
to include the owner(s), partner(s), director(s) and employees of the business.
While this broad group may be included in the definition of an insured under
a commercial policy, particular provisions of the policy may or may not
apply to all definitional insureds. Some commercial policies exclude coverage
for arson committed by any definitional insured, while others only prohibit
arson by the owner(s) or principal(s) of the business. The statutes and
case law in a particular jurisdiction may limit the individuals whose actions
can be imputed to the business for the purpose of excluding coverage in
the event of arson.
Many insurance policies, particularly commercial
insurance policies, show an Additional Insured on the declarations page
or on a "change endorsement". This creates something of a hybrid
relationship for purposes of coverage under the policy. Although there may
be multiple parties shown as the named insureds, the concept of an additional
insured is a different issue. This issue is usually found where another
party has a distinct legal interest in the insured property or business
which needs to be protected. A landlord may be shown as an additional insured
to protect his ownership interest in the building. A named insured who is
a tenant and does not own the property cannot insure the full value of the
structure because he does not have an "insurable interest" in
the full value of the property, only his legal interest in using the property
which is leased or rented to him. Many leases or rental agreements require
the tenant to obtain insurance for the benefit of the owner as a condition
of the lease. In that case, the landlord/owner will be shown as an additional
insured on the policy. The landlord/owner may also be shown as an additional
insured for other purposes under the policy, such as liability protection
in the event of a person injured while on the premises or damaged by the
business. Goods and property sold to a business may be under consignment
or held for the account of others while awaiting sale or shipment. Those
individuals may be listed on the policy as additional insureds to protect
their property. There are a number of situations where an additional insured
may be shown on a policy. The significance of an additional insured is that
they have a recognized interest under the policy of insurance in the event
of a loss. Their status may be similar to that of a mortgagee with an independent
right of recovery regardless of the actions of the named insured or they
may be considered similar to a loss payee whose coverage is dependent upon
the underlying claim of the named insured being covered. It will depend
upon the language of the policy of insurance in case of an intentional loss
or fraudulent claim by the named insured. The case law of a particular jurisdiction
may treat the interests of an additional insured one way or the other, as
well. Under most insurance policies issued today, an additional insured
is subject to the defenses which may be asserted against the named insured,
such as arson or fraud.
Mortgagee - The mortgagee under a policy of insurance may be an
individual, corporation or financial institution. To qualify as a mortgagee,
they must have a secured interest in the insured structure in the form of
a mortgage or similar security instrument recorded against the land and
its improvements (buildings). A secured interest in the personal property,
furnishings, fixtures or equipment of an insured property is generally inappropriate
for insurance coverage as a mortgagee.
A mortgagee has a special relationship under the
policy of insurance with the insurer. Most insurance policies specifically
state the rights of a mortgagee cannot be invalidated by any act of the
named insured, such as arson. For this reason, a mortgagee's interests will
be paid in most cases, even when it is proved the named insured was responsible
for the arson.
The amount of coverage for a mortgagee under the
policy is not a fixed amount, but is the amount of the outstanding balance
owing under the mortgage note or other security instrument as of the date
of the fire. It is, of course, capped by the limits of coverage under the
policy. When a fire loss occurs and a mortgagee is named on the policy,
they will be paid the balance owing on the mortgage or other security instrument
up to the full policy limits of coverage. Ironically, although the insured's
inability to pay the mortgage obligation may be the primary motive for setting
the fire, the mortgage will be paid-off by the insurance company. In some
cases, the insurance company is faced with the realization there is little
to gain by fighting an arson claim when the mortgagee is going to receive
most or even all of the insurance coverage.
There is, however, one strategy for confronting
such a situation. Most insurance policies provide the insurance company
has the right to take a full assignment or transfer of the mortgage note
when the mortgagee's claim is paid. The insurance company can then seek
to recover the money back from the named insured or foreclose upon the property
to recover the mortgagee payment after it is proved the named insured set
the fire. For this to be an effective strategy, there must be some significant
value in the property and land after the fire, or the named insured must
have some financial assets to pursue.
However, the special protection afforded a mortgagee
will only apply when the mortgagee is named on the policy. If they were
not named on the policy as a mortgagee, for any reason other than an error
or oversight by the insurance company, they are generally treated as an
equitable claimant to the insurance proceeds and will only be paid in the
event the claim of the named insured is paid.
Loss Payees / Lienholders - A loss payee or lienholder named on a policy typically
holds some type of secured interest in the personal property, furnishings,
fixtures and equipment of the insured property. A consumer finance company
may have a security interest in the furnishings and personal property of
a residence. A vendor or supplier of an insured business may have a security
interest in the equipment and inventory of the business. When they are named
on the policy as a loss payee or lienholder, they have the right to be paid
the amount of the outstanding balance owed to them up to the policy limits
of coverage - provided, however, the named insured is not proved to be responsible
for the loss.
A loss payee or lienholder is said to "stand in the shoes" of
the named insured, meaning their claim is treated just as the claim of the
named insured. If the claim of the named insured is denied because of arson
or fraud, the claim of the loss payee or lienholder will be similarly denied.
While this is true under the terms of most insurance policies, there are
some policy forms which provide the same level of protection to a loss payee
or lienholder as a mortgagee. Under those policies, the loss payee or lienholder
will be paid even if it is proved the named insured set the fire or committed
Policy Term - On the declarations page of the policy, there is a "policy
term" of coverage. This shows the "inception date" of the
policy when coverage first begins and the "termination date" when
coverage ends, usually a one year period. Many automobile policies are issued
for six month terms and some commercial policies are issued for three year
terms. A loss occurring shortly after the policy was taken out or right
before it is about to end may be a significant fact in the investigation.
However, the investigator should always confirm through the agent and/or
underwriter whether a policy newly issued was about to be canceled or may
have already been under a cancellation notice. Similarly, a policy about
to expire may have already been renewed or was in the process of being renewed
for another term.
Policy Limits - The policy limits under a policy of insurance represent
the maximum benefits payable in the event of a loss. When a loss occurs,
it is adjusted and the actual damages for a covered loss will be paid in
that amount, up to the policy limits. An insured who has damages which exceed
the policy limits of coverage can recover no more than the maximum amount
stated in the policy.
The policy limits are usually stated on the declarations page of the policy,
but there may be special limits stated in the main body of the policy for
certain property or certain types of loss. There are different types of
insurance coverage provided under every policy and, in most cases, each
type of coverage has a specific policy limit. Each type of damage claimed
as a result of the fire will be adjusted and determined, up to the policy
limits of that particular coverage. An insured may have a loss in excess
of the policy limits for one type of coverage, but have damages for another
type of coverage in an amount less than the policy limits. Any "unused"
or excess coverage amount from one section of the policy cannot be used
to cover the damages under another section of the policy in most cases.
The amount of insurance coverage on a property
is frequently misunderstood by those unfamiliar with insurance matters.
When determining the amount of insurance coverage available for a fire loss,
it is NOT a matter of simply adding up all the coverages shown. Certain
of those coverages may not apply to a fire loss at all. For example, homeowner's
policies and automobile policies (and most commercial policies) provide
substantial liability coverage for the insured in the event of a claim such
as a slip and fall, dog bite or other such incident. When calculating the
amount of insurance coverage the insured has on a property when a fire loss
occurs, the liability coverage should not be considered part of the available
insurance the insured stands to recover. This may apply to other coverages
under the policy, as well. In most fire cases, the true amount of insurance
which an insured has on the property is the total of the coverage for the
structure (building or residence) and the personal property (including inventory,
fixtures and equipment in commercial properties). The investigator is cautioned
to be sure of the actual amount of insurance coverage available when investigating
a fire loss.
Binder - Insurance coverage which has been newly issued may be
under a "binder". A binder is temporary insurance pending approval
of an application and is usually effective only for a limited period of
time, such as thirty or sixty days. A binder will be issued by the agent
- if he has "binding authority" - immediately upon submission
of the application to protect the interests of the insured while the policy
is being evaluated through the underwriting process. A binder is usually
a single sheet stating only the basic information about the named insured,
the property insured, and the coverage amounts. It is issued before the
policy itself is issued, although it is considered subject to the terms
and conditions of the policy which is scheduled to be issued. A loss occurring
under a binder may be entirely coincidental or it may be a factor to be
considered in the investigation. See How to Analyze Insurance Documents in a Fire Investigation: Binder
for information on how to use binder information in the investigation.
Endorsement - An endorsement or "change endorsement" is
an addition or modification of the coverage provided under a policy, usually
after it has been issued. The most common type of endorsement is a change
in the coverage limits, increasing or sometimes decreasing the amount of
coverage stated in the policy limits. An endorsement is used to add a party
to the policy, such as when a new mortgage is taken out on the property
or the mortgage is refinanced with another company. A particular type of
coverage which was not originally contained in the policy may be added by
an endorsement. Almost anything in the policy can be modified using an endorsement.
Although an endorsement should be issued as soon as the change is effective,
there is sometimes a delay in processing the paperwork. When examining the
coverage provided under a policy, it may be necessary to contact the producing
agent and underwriter to be sure there are no pending endorsements which
have recently been issued or are about to be issued. Certainly, changes
made to a policy immediately before a fire loss should always be closely
There are many types of coverage available under different homeowner's and
commercial policies, each with their own purpose. A particular policy may
contain any number of these coverages as part of the policy "package"
issued to an insured.
A sample of an endorsements page can be found in
How to Analyze Insurance Documents
in a Fire Investigation: Declarations Page (Declarations Sheet).
Structure or Building - This is the amount of coverage on the actual building
or residence insured under the policy. It includes the building itself,
as well as installed appliances, plumbing fixtures, installed heating and
air conditioning systems, lighting fixtures, wall-to-wall carpeting, installed
blinds and window treatments, disposers, compactors, and similar items which
are a permanent part of the building or residence.
Personal Property - Under a homeowner's policy, the coverage for personal
property includes the furniture, paintings and artwork, lamps, books, clothing,
personal effects, jewelry, guns, collectibles, linens and almost anything
else which is considered movable.
Business Personal Property - In a commercial policy, this covers the furnishings,
office equipment, inventory and stock, business books and papers, uninstalled
shelving and display counters, manufacturing/production equipment and most
other movable items. Some of these items may be separately insured under
a particular coverage of the policy.
/ Other Structures - Most homeowner's policies
and many commercial policies provide coverage for "appurtenant structures"
or "other structures" located on the property apart from the principal
building or residence. This may cover storage buildings, tool sheds, barns,
gatehouses, or swimming pools (usually considered to be "structures").
The amount of such coverage is typically a percentage (ten percent to twenty
percent) of the coverage for the principal structure. Some insurance companies
will allow this coverage to be added to the coverage on the principal structure
when the property is underinsured after a loss, an exception to the general
rule against transferring coverage limits.
ALE / Loss of Rents - Most homeowner's policies provide coverage for Additional
Living Expenses after a loss such as a fire, when the residence is uninhabitable.
This pays for the "additional" cost of living expenses such as
a motel, apartment or rental house which an insured faces immediately after
the fire and while the property is being repaired. It covers related additional
expenses during the pendency of the claim, but only to the extent they exceed
the insured's ordinary living expenses for those same items, such as housing,
food, laundry, etc. It does not include the replacement of furniture, clothing
and personal effects needed after a fire, as they are considered part of
the claim for personal property and not additional living expenses. An insurance
company will often provide an "advance" payment to the insured
to assist with those type of expenses not covered by ALE, later "repaid"
by deducting it from the final settlement of the claim. Even if the claim
is under investigation, this will usually be done as a "good faith"
gesture by the insurance company during the investigation.
Loss Of Rents coverage applies to the loss of rental income after a property
has been damaged or destroyed in a fire. Rental properties are expected
to be insured with this type of coverage. Some homeowner's policies allow
the insured to select payment for the "fair rental value" of a
residence after a fire, in lieu of claiming additional living expenses.
When this is permitted, the insured may claim the rental value of the residence
even though it had never actually been used as a rental property. An insured
with a second residence or vacation home could choose to live in the other
residence during the pendency of the claim and still receive the fair rental
value of the fire-damaged residence whether or not the insured ever incurred
any "additional" expenses from the move. This coverage can provide
a financial gain to the insured under those circumstances, contrary to the
fundamental principle of indemnity which underlies the business of insurance
- that an insured will be paid for the actual loss suffered, but not anything
more than that.
Business Interruption /
Loss of Income - Under a commercial policy,
an insured business may have coverage for Business Interruption or Loss
of Income. This provides benefits for the financial loss caused by the "interruption"
of business operations after a loss. It is intended to replace the income
of the business when it is no longer able to operate or can only operate
on a limited basis. In most policies, it replaces the "net income"
of the business after its ordinary expenses are taken into account. However,
there may be certain "continuing expenses" which remain even though
the business is unable to operate - such as rent to the landlord, payments
for financed equipment, payroll costs of employees (even though they may
be unable to work, to keep them from seeking employment elsewhere and leaving
the business), franchise fees, warehouse storage charges and similar expenses.
In some cases, these continuing expenses - as well as the formula for determining
the business interruption or loss of income claim specified in the particular
policy - can result in a business receiving payment for "lost profits"
when the business was never actually operating at a profit before the loss
and was even losing money. However, it is seldom an actual gain for the
business even under those circumstances. The methods for determining the
business interruption or loss of income claim vary significantly from policy
Cash and Securities - Many commercial policies provide coverage for the loss
of cash and securities kept on the premises which are destroyed in a fire.
The amount of coverage will depend upon the nature of the business, but
is usually $10,000 or less.
Electronic Data - With the advent of computers, coverage for the loss
of electronic data is an important protection for businesses. This type
of coverage pays the cost of restoring or recreating the electronic data
of the business. Although the coverage is usually in the range of $10,000
or so, it can be substantially higher and a claim for the loss of electronic
data can be significant.
Goods in Transit - As the name implies, this coverage protects the goods
and products of a business while in transit to customers or storage destinations.
A fire to a truck or container with a shipment of goods inside will lead
to a claim under this type of coverage. Depending upon the nature of the
goods being shipped by the business, there can be substantial coverage against
this type of loss. It generally provides coverage only during the actual
shipment of the goods.
Inland Marine - Inland Marine is a separate type of insurance coverage
for a business. It covers the personal property, equipment, goods and products
of a business which are movable and usually located off-premises. Most commercial
policies do not cover property away from the main business location and
this type of coverage is needed. It may be a separate policy or just a separate
coverage added to the basic policy by endorsement.
Boiler and Machinery - This is one of the oldest forms of insurance coverage
which remains available and widely used today. Traditionally, it covered
steam boilers and manufacturing equipment used in a business facility. It
now typically includes other mechanical equipment related to the operation
of a business or manufacturing facility. It may be a separate coverage added
by endorsement to a commercial policy or it may be a completely separate
policy insuring those items. Property insured under Boiler and Machinery
coverage is usually of a kind not covered under most traditional commercial
policies and the type of protection provided by this form of insurance is
essential to many businesses.
Builder's Risk - A special type of insurance coverage which is sometimes
encountered is Builder's Risk insurance. What is unique about this type
of coverage is that it is specifically designed to insure property which
is under construction. It protects the builder and/or owner of the property
under construction against loss or damage occurring during the construction
process. It is limited coverage which does not include any of the other
coverages usually found in an insurance policy, such as personal property
coverage, additional living expenses / loss of rent, business interruption
and other such coverages. It is basic coverage on the structure under construction
and may be provided on a "named peril" basis only. Another distinctive
feature of Builder's Risk insurance is the amount of coverage typically
changes as the construction process proceeds. It is intended to track the
progress of the construction to provide appropriate coverage reflecting
the current stage of construction. Claims under a Builder's Risk policy
may need to be investigated along a number of lines. It is well-known a
construction site is a prime target for vandalism. A dispute between the
contractor and a sub-contractor may result in a fire set by the sub-contractor.
An employee or laborer fired from the job may set a fire out of spite. A
contractor in charge of the project may realize the job has been improperly
bid or is facing significant cost overruns which cannot be reimbursed and
will wipe out any profit from the project. An owner may realize the project
is costing him more money than anticipated and now represents a financial
disaster. There may be unanticipated issues with the soil, foundation, sewer,
utilities and other aspects of the construction project which create serious
problems for some or all of the parties There are a number of other factors
which may come into play when investigating a fire under a Builder's Risk
policy and those factors should be carefully investigated.
All Risk / Named Perils - As everyone knows, insurance policies only insure against
certain kinds of events or "perils" which might cause a loss.
Originally, insurance policies would list the specific perils to be insured
under the policy. This was referred to as "named peril" coverage.
Unless the event causing the loss was one of the perils specifically named
and insured against, it would not be covered under the policy. Today, most
insurance policies provide "all risk" coverage. In many respects,
it is the opposite of named peril coverage. While a named peril policy only
covers a loss caused by a peril specifically named in the policy, an all
risk policy covers every kind of loss except those which are specifically
named in the policy (as excluded perils).
Interestingly, the issue of an excluded peril has
created the motive for many arson cases. Fires have been set to properties
after they have been damaged by flood when there was no flood insurance
coverage on the property. Similarly, homes and businesses damaged by earthquake
have been torched when it was discovered there was no earthquake coverage
on the property. Homes severely damaged by termites or pests and deteriorated
properties in need of repairs (for which there is no insurance coverage)
have often served as motivating factors in setting a fire. An awareness
of those coverage issues is necessary to properly investigate a fire under
In addition to the basic information shown on the
declarations page of a policy or on a binder, there is important information
in the body of the insurance policy which must be understood and evaluated
in the investigation. These are some of the terms and provisions of a policy
which may relate to an investigation.
Insurable Interest - Virtually all policies have a provision about "insurable
interest". Most jurisdictions have specific statutes and/or sections
of the Insurance Code relating to insurable interest. There is a substantial
body of case law addressing the issue of insurable interest, as well. It
is a significant concept in insurance law.
Insurable interest means the recognized legal interest
of an individual or business which may be insured under a policy of insurance.
For obvious reasons, one cannot insure something which is not subject to
an ownership interest or some other legal "interest" of the insured
party. This is because the underwriting process evaluates the risk of loss
from the perspective of both the property and the applicant. Where one does
not have an ownership interest or legal interest in property, the concern
for protecting the property may not be present. Even more importantly, one
who has no reason to protect the property has nothing to lose, but everything
to gain, from an insurance claim - a temptation to cause a loss to occur.
For that reason, one seeking to recover a claim for damaged property must
prove an insurable interest in the property.
Under the terms of the policy of insurance and
the law of most jurisdictions, there can be no recovery without an insurable
interest. A full ownership interest may not be required, but there must
be some legal interest which an insured party would want to protect against
loss. A tenant may not own the property, but wants to preserve it against
loss in order to continue to reside there or operate a business there. Conversely,
a landlord may not have an interest in an individual's personal property
or the business insured under a commercial policy, but does want to preserve
the building which is owned by the landlord. Insurable interest is generally
defined as any substantial economic interest in the preservation of the
property. Stated another way, it means the individual or business would
suffer an actual economic loss from damage or destruction of the insured
property. If this can be shown, an insurable interest is established.
Increase of Hazard - In the earlier forms of insurance policies, this was
the only specific policy language which could be cited to deny coverage
for an intentional loss, such as arson. Today, most insurance policies have
specific language against intentional loss, as will be discussed below.
The increase of hazard language remains a viable issue when something has
been done to increase the likelihood of a loss. An individual who begins
operating a drug lab in a home or a business which starts using dangerous
chemicals or materials in its operation may involve an increase of hazard
for which the policy excludes coverage. The policy may also require the
insured to take necessary steps to prevent a loss before it happens when
circumstances indicate that something should be done to protect the property
against an imminent loss.
Duties After Loss - This is one of the most important provisions of an insurance
policy. It imposes specific requirements for the presentation of a claim
in the event of a loss. There are a number of requirements under the Duties
After Loss, including the duty to promptly report the loss when it occurs,
the duty to report the loss to the appropriate public authorities in case
of fire or theft, the duty to take steps to protect the property against
further loss or damage when a fire occurs, the duty to submit a Sworn Proof
of Loss, the duty to prepare a detailed itemization of the damaged property,
the duty to permit inspection of the damaged property, the duty to provide
records and documents substantiating the loss claimed, the duty to cooperate
and the duty to answer questions at an Examination Under Oath. All of these
are considered "conditions precedent" to recovery for a loss,
meaning the insured must satisfy those requirements before the claim is
legally required to be paid. These duties are discussed in greater detail
Duty To Cooperate - The duty to cooperate is found in almost every insurance
policy. It imposes a broad duty on the insured to cooperate with the insurance
company in the investigation and adjustment of a loss. This is understood
to require the insured to not only do what is asked of the insured, but
to assist in securing the cooperation of others such as family members,
relatives, employees, suppliers, creditors, and others. This is usually
accomplished by having the insured sign an authorization form allowing the
insurance company to contact others and obtain records from them. It requires
the insured to meet with the adjuster and others investigating the claim
to answer questions or provide needed information.
Duty to Permit Inspection - There may be three separate duties to permit inspection
under the policy. The first requires the insured to permit inspection of
the damaged property site where the loss occurred. This includes a requirement
to permit access to the fire scene for origin and cause determination and
related activities. The second includes a duty to permit inspection of the
damaged personal property, equipment, inventory and other items from the
fire scene - especially anything which may have been removed from the fire
scene afterward by the insured. The third type of duty to permit inspection
relates to the insured's "books and records". Many insurance policies
impose the duty to permit inspection of the books and records of a business
after a loss and even for several years after the policy term has ended.
This may be a separately stated duty of the insured.
Duty to File Proof of Loss - Another important requirement an insured has after a
loss is the filing of a Sworn Proof of Loss. This is an important document
for many reasons. First, it requires the insured to provide an array of
information about the claim, including the identity of the insured(s) making
the claim, the identity and legal interest in the property of all who may
be entitled to assert a claim, the date and time of the loss, the cause
of the loss, any changes in the title and occupancy of the premises since
the policy was issued and a statement of the specific amount being claimed
as a result of the loss. Second, it requires the insured to provide this
information in a sworn document under oath. This not only requires the insured
to swear to the truth of all of the information on the Proof of Loss, but
commits the insured to a statement of what happened and how much is being
claimed as a result of the loss. Third, it requires the insured to swear
that the loss did not originate by any act or design of the insured and
nothing has been done to deceive the insurance company about the loss or
the claim presented to it. Finally, it establishes the time frame for a
decision on the claim. This is set out in the Loss Payable provision of
the policy as discussed below, as well as the statutes and insurance regulations
in most jurisdictions. Although an insured may have reported a loss and
provided information about the extent of his loss, the claim is usually
not considered formally presented until the Sworn Proof of Loss has been
Duty to Provide Records - It is the insured's duty to provide records and documents
in support of the claim presented on the Sworn Proof of Loss. This includes
those records and documents directly related to the damages claimed, such
as the proof of ownership of the property (title, registration, sales invoice,
etc.), estimates of contractors and others verifying the cost of repairs,
appraisals of the property (before and after the loss), as well as other
records and documents relating to the investigation of the loss such as
verification of the insured's alibi at the time of the fire (hotel records,
gas card records, credit card receipts, cellular telephone records, etc.),
financial records, tax returns, balance sheets and any other such records.
Almost anything reasonably related to the investigation of the claim can
be required to be produced under this duty of the policy.
Loss Payable Clause - This provision of the policy establishes the time when
the claim must be paid or denied. In most homeowner's policies, it is sixty
days after the submission of the Sworn Proof of Loss and all other duties
have been met. In most commercial policies, it is sixty days after the Proof
of Loss has been presented and those duties have been met, but can be as
short as thirty or even twenty days. Many state statutes and insurance code
regulations establish the date when a claim must be paid or denied. In case
the deadline is different from the time under the policy, the shorter time
period will apply.
Clause - This determines the legal relationship
between the mortgagee or loss payee (lienholder) and the insurance company,
especially as to the effect of arson or fraud by the insured. However, it
also has significance for the processing of the claim of the mortgagee or
loss payee. For a mortgagee whose claim is not affected by the potential
arson or fraud of the named insured, it will establish any conditions which
still must be met by the mortgagee in order to be paid. Usually, this requires
the mortgagee to have notified the insurance company of any change in the
use and occupancy of the premises or any increase in the risk of loss which
the mortgagee knew about. It may require the mortgagee to file a Sworn Proof
of Loss if the named insured has failed to do so. In the event the named
insured may have failed to pay a premium which was due, the mortgagee may
be required to have paid the premium. Otherwise, however, there are few
duties imposed upon the mortgagee and the mortgagee's claim generally must
be acted upon without regard for the duties of the named insured and the
corresponding time periods for the handling of the insured's claim.
In most cases, the claim of a mortgagee must be
paid promptly after the loss or the insurance company is subject to the
payment of interest and additional penalties. For this reason, many times
an insurance company will pay the mortgagee even as there is an active investigation
of suspected arson and fraud by the named insured. Many public investigators
take this as a sign the insurance company has dropped the investigation
of the named insured or is going to pay the claim in the face of highly
suspicious circumstances. That is not the case and it must be understood
the insurance company has no choice but to act upon the claim of the mortgagee
The mortgagee clause allows an insurance company
to demand an assignment of the mortgage note when the full balance is paid
off. As noted before, this may provide a means for the insurance company
to recover some or all of the mortgagee payment from the named insured if
arson or fraud can be proved. However, this is usually only effective when
the named insured has some identifiable financial assets or the property
itself has some significant remaining value after the fire. It generally
requires the insurance company to first prove the insured's arson by obtaining
a judgment on the issue at trial.
In the case of a loss payee or lienholder, this clause establishes the rights
and responsibilities of the loss payee or lienholder. Under some policies,
they have the same rights as a mortgagee and will be paid regardless of
the fact of arson or fraud by the named insured. In most policies, however,
it makes the claim of the loss payee or lienholder dependent upon the decision
on the claim of the named insured. The loss payee or lienholder is subject
to all available defenses to the claim of the named insured in those policies.
In terms of a loss payee's or lienholder's responsibilities under the policy,
they have few - if any - responsibilities other than to present and establish
the amount of their claim.
Intentional Loss Exclusion - Most of the modern policy forms have a specific exclusion
for a loss intentionally caused by the named insured. This is the contractual
basis of an arson defense and has only been contained in most policies since
about 1984. While arson by the insured is generally considered by the courts
to be an absolute bar to recovery under an insurance policy, this exclusion
spells it out in concrete language.
The intentional loss exclusion may also limit those
circumstances where an intentional loss will be excluded from coverage.
In some insurance policies, it must be an intentional loss caused for the
purpose of collecting insurance proceeds. Thus, a fire set as an act of
domestic violence or by a troubled child may be considered a covered loss
for the insured(s) under the terms of that policy, while it may be excluded
under the terms of a different policy. The intentional loss exclusion may
also determine the right of recovery of other insureds under the policy
where a loss has been caused by only one of the insureds. Some policies
state that an intentional loss caused by any insured will exclude coverage
for every insured. Other policy forms simply state an intentional loss is
excluded without further specifying whether it excludes coverage for all
other insureds. This raises the "innocent co-insured" issue.
Courts have held that where an insurance policy
fails to specifically exclude coverage for all insureds in the event of
a loss intentionally caused by any one insured, the claim of the other insured(s)
must be paid. In several jurisdictions, recent court rulings have held the
claim of an innocent co-insured must be paid regardless of the language
in the intentional loss exclusion as a matter of public policy by the courts
or because of insurance code provisions which prohibit such language in
policy forms used in that state. This has also arisen in the context of
insureds who have separated or are in the process of divorce when one of
the parties sets fire to the marital residence as an act of spite or revenge.
With the attention to domestic violence issues in recent years, courts have
been increasingly inclined to rule an innocent co-insured should be paid
under such circumstances, regardless of the wording of the policy. While
insurance companies recognize the public interest in paying the claim of
a truly innocent co-insured, there are many cases where the fire is planned
and carried out primarily by one of the insureds with the acquiescence and
approval of the other insured(s), providing little or no evidence directly
implicating the other insured(s). In those cases, the co-insured may not
be "innocent" at all and this issue may be a formidable challenge
in fighting arson claims.
In some commercial insurance policies, the intentional
loss exclusion has much broader language. In the case of a corporate insured,
the general rule is that arson may only be imputed to the corporation when
it is carried out by a person having control over the affairs of the corporation.
For arson to serve as the basis of denying a claim, the arson must be a
corporate decision. However, some of the recent policy forms have contained
more expansive language excluding an intentional loss caused by any officer,
director, partner or even any employee of the business. For most insurance
companies to successfully assert the intentional loss exclusion, however,
there will be some evidence indicating the loss was caused to benefit the
business or the principals/owners of the business.
Misrepresentation / Fraud
Exclusion - Since the advent of the earliest
policy forms, virtually all insurance policies have contained a clause voiding
coverage for a loss when the insured has misrepresented or concealed material
facts concerning the claim or has engaged in fraud, whether before or after
the loss. For many years, this was the primary tool in combating arson claims.
Arson is always a difficult case to prove. The
cause of the fire may be easily proved to be incendiary, but most insureds
committing arson plan the fire under circumstances where it is difficult
(if not impossible) to prove directly who set it. Invariably, the insured
who plans a fire establishes a careful alibi so that he cannot be placed
at the scene of the fire. Experience has shown that juries must truly be
convinced to find a person responsible for arson, even in a civil case with
a lesser burden of proof. The misrepresentation/fraud defense is always
easier to prove and the evidence is often convincing, indeed.
Fraud is a basic component of arson and the fraud
is seldom limited to the fire itself. An insured who has planned to set
a fire will often seek to maximize the insurance recovery by fraudulently
overstating the claim, both as to the amount and value of items allegedly
lost. Recognizing the insurance company's close scrutiny in the investigation
of an incendiary fire, an insured who has set the fire will try to misrepresent
or deny the existence of suspicious circumstances such as a failing business,
property up for sale which cannot be readily sold, an imminent mortgage
foreclosure, internal business conflicts and problems, a pending divorce
with a need to liquidate marital assets or any other circumstances which
would obviously raise the suspicions of the insurance company toward the
An insured who was not involved in a loss has no
valid reason to misrepresent the facts. However, an insured who is involved
in setting the fire will almost invariably misrepresent the facts to divert
suspicion and/or maximize the insurance recovery. The facts which may be
misrepresented by an insured seeking to perpetrate a fraud can usually be
uncovered with a thorough investigation and, unlike the proof of arson requiring
circumstantial evidence, it can usually be proved with irrefutable direct
evidence. Claiming items which were not owned or were not in the property
at the time of the fire can be conclusively proved. A false alibi can be
convincingly exposed. The true financial picture of an individual or business
can be undeniably shown with bank records, tax returns, mortgage payment
records and other objective evidence. The power of the misrepresentation
/ fraud exclusion lies in the ability to prove it directly, objectively
and conclusively. Faced with irrefutable proof, a jury will not hesitate
to return a verdict on this defense even if it is unable or unwilling to
find the insured is an arsonist.
For similar reasons, a criminal prosecution on
charges of insurance fraud can often be readily proved using such evidence.
In cases of arson-for-profit, the investigation of insurance fraud should
always be aggressively pursued.
Examination Under Oath - Perhaps the most important component in the investigation
of a suspected arson by an insurance company is the right to conduct an
Examination Under Oath. Almost every insurance policy requires an insured
to appear for an Examination Under Oath as one of the duties after loss.
It is an investigative tool without parallel.
When the right is invoked, it is usually near the end of the investigation
and is one of the final steps to be completed. With the information developed
from the earlier investigation, the insurance company is in a position to
know the key issues in the case and the questions which must be asked of
the insured. The Examination Under Oath is the setting for asking those
The Examination Under Oath is a formal proceeding taken before a court reporter
and recorded in a verbatim transcript. Every question which is asked and
every answer which is given is made a part of the record. Many insurance
companies now videotape the Examination Under Oath, as well. It is usually
conducted by an attorney hired by the insurance company for that purpose.
The insured has the right to be represented by an attorney and often appears
with counsel. Unlike a deposition or court proceeding, however, the attorney
for the insured has no right to raise evidentiary objections or ask questions
of the client. The attorney is only allowed to offer legal advice to the
insured when issues arise during the Examination Under Oath.
The scope of the Examination Under Oath is broad. The proceeding typically
lasts several hours and may last even longer. The insured will be asked
questions in a number of subject areas. Everything about the personal and
professional background of the insured will be covered: his legal name and
other names used, his date of birth and social security number, marital
status and marital history, the identity of children and other relatives,
his current place of residence and prior residences, his current employment
and prior employment history, his criminal arrest record, his civil litigation
involvement, his ownership history of the insured property or business,
the insurance history of the insured or the business (especially any prior
fire claims), the circumstances of obtaining the specific policy involved
in the claim and all related personal information.
On the issue of a possible financial motive, questions
will be asked about the insured or the business with respect to primary
income, other sources of income or earnings, the assets and liabilities
of the insured or business, the status of obligations with creditors and
suppliers, the financial trend in the time leading up to the fire, the status
of tax filings and tax obligations, liens and judgments recorded against
the property or business, recent loans or loan requests and all related
The claim itself is discussed in detail, including the particulars of the
claim presented, the method of calculating the claim, the basis for the
values claimed, the documents available to substantiate the claim, the physical
location of claimed items inside the insured property and all related claim
The circumstances of the fire will be discussed
at length. This will include the layout of the building, the type and location
of all doors and windows, the type and condition of all locks, the type
and location of security alarm or fire suppression systems, prior break-ins
or related security problems with the building, the general condition of
the building prior to the fire, known fire hazards such as faulty wiring
or malfunctioning equipment, the presence and location of any flammable
or combustible materials in the building, any unusual activities or conditions
noted before the fire, the presence of all individuals in the residence
or business throughout the day leading up to the fire, the specific location
and activities of all such persons, the presence and activities of the last
persons known to be in the building before the fire and the security of
the building when the last person left before the fire.
The activities and whereabouts of the insured(s) from the time the last
person left until the fire occurred will be covered in precise detail. Where
they were, where they later went, who they were with, what they did, the
vehicle they were in, any phone calls made or received throughout that time
(including cellular calls), any return to the insured property or near it
during that time, and the exact time and manner by which they learned of
the fire will be covered. They will be asked about their activities after
learning of the fire, their first visit to the fire scene and their observations,
anything unusual or out of place noted when they first entered the fire
scene, their own belief of the probable cause of the fire and any evidence
or information to support that belief, the identity of any suspects or persons
having a reason to set the fire, and whether the insured(s) were involved
in setting the fire, arranged for the fire to be set by others, had any
reason to know the fire would occur or had ever made a statement indicating
a plan or desire for a fire to occur.
Throughout all of this, the insurance company is evaluating the statement
of the insured from several perspectives. First, much of the information
will already be known. It will quickly be apparent if the insured is being
deceptive in his answers. Second, the willingness of the insured to cooperate
and provide information will be noted. Finally, the overall appearance of
the insured as a witness in his own behalf will be measured to see if he
is credible and believable. Evasive answers, hostile responses, claimed
lack of memory or knowledge about key facts and traditional kinesic interview
responses will all be considered. In the end, it is all about credibility
and whether the insured can be believed when he denies any involvement in
the loss and denies any fraud in the claim. An insured who testifies falsely
or deceptively about any issue during the Examination Under Oath probably
cannot be believed when later denying responsibility for the fire and a
jury will likely reach the same conclusion at trial.
For the public investigator, this information is
crucial. It may not otherwise be available to the investigator when the
insured is a suspect in the case. There is no Fifth Amendment right to remain
silent during an Examination Under Oath. The insured must answer all questions
reasonably related to the investigation of the claim. If the insured is
claiming an alibi or implicating another in setting the fire, it will be
disclosed in the transcript of the Examination Under Oath. In a criminal
case, the investigator seldom has an opportunity to learn about the alibi
of a suspect or the existence of alternative suspects before the case is
filed. It is a tremendous advantage for the public investigator to have
this information to assist in the investigation of the case.
Reprinted with permission from the author.