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excerpted from "Motive, Means, and Opportunity, A Guide to Fire Investigation."
American Re-Insurance Company, Claims Division, 1996.

Underwriters, whose function involves risk evaluation should be trained to detect the signs of an arson-prone risk before a policy is underwritten. First and foremost, it is necessary to collect reliable information about the property and the applicant. The Insurance Committee for Arson Control (ICAC) has developed a two-tiered insurance application to assist in arson prevention. If a property reveals known arson-prone characteristics in the answers to the general, first-tier questions, more specific, second-tier questions are asked to determine the ownership history of the property and the identities of all persons with financial interest in the building. The application will track the building's history of losses, tax liens, judgments and citations for building and fire code violations as well.

If a property is not assessed properly by an underwriter, all kinds of problems could ensue. For example, "actual cash value" is a term that is defined differently by various jurisdictions. It is important to be aware of the distinctions if you want to write policies that will deter an arsonist. "Valued policy laws," which have been enacted in several states, may create problems too. Under these laws, insurers must pay the full policy limits in the event of total loss regardless of the actual valued policy laws and be prepared to write defensively.

The most effective method of eliminating or reducing arson-for-profit losses is to identify the arson-prone risk at the outset and either refuse to insure the property or insure it in a manner that will lessen or eliminate the incentives for arson.

An underwriter's primary sources of information include:

  • The application
  • A corporate questionnaire
  • A vacancy questionnaire
  • The inspection form
  • In-house indexes
  • The producer
  • Public records

The application and additional questionnaires must disclose the insurable interests of the individual( s), partnership or corporation to be insured. Data regarding the property's insurable value and whether or not there is compliance with all applicable underwriting standards also should be recorded.

Anti-Arson Underwriter's Guide

American Re's Anti-Arson Underwriter's Guide is intended to assist underwriters in the preparation and evaluation of property files. The forms and reports of an underwriter should disclose, at a minimum, the following data:

1. The Application

a. Full name of applicant

b. If a partnership or corporation:

(1) The complete title

(2) Full names and addresses of current partners or officers and shareholders

(3) A listing of properties in which the corporation or partners have a financial interest

(4) The interest, if any, of partners or officers in lending institutions providing mortgages or personal property loans on the property being insured

(5) Identification of partner(s) or officer(s) who are under indictment or who have been convicted of arson or any other crime involving an insurable loss on any property

(6) Description of the property to be insured

(7) Names and addresses of mortgagee(s) or loss payee(s)

(8) Amount of outstanding mortgage(s) (real or chattel)

(9) Amount of insurance requested

(10) Amount of any other insurance

c. If real property:

(1) Most recent purchase price and cost of subsequent improvements, if any

(2) Date of purchase

(3) Year built

(4) Present market value (exclusive of land)

(5) If income producing---amount of annual rents

d. Present use and occupancy:

(1) Use, if occupied

(2) Vacancy, including date on which building became vacant and reason

(3) If risk is to be rehabilitated-when will work commence-be complete

(4) Occupied

(5) Description of any unrepaired damage

(6) Listing of dates and amounts of previous losses on this or any other property in which the applicant has or had an insurable interest

e. Comments on:

(1) Delinquent mortgage payments or information relating to any pending foreclosure

(2) Any unpaid taxes

(3) The status of utilities (heat, water, electricity)

(4) The applicability or codes or ordinances

(5) Other insurance

2. The Inspection Report

The inspection report should provide, at a minimum, the following information to aid in the identification of the suspected risk:

a. Comments regarding physical condition, including remarks on any structural deterioration

b. Observations of unusual or suspicious condition either as they relate to the physical condition or the housekeeping of the risk

c. An explanation of the removal of items or fixtures, such as built-in cabinets, interior doors, plumbing, heating or lighting fixtures

d. Remarks concerning unrepaired damage

e. Comments on the use or occupancy of the premises

f. Mention of any "posted" code violation notice(s)

g. Estimates of the risk's:

(1) Replacement cost

(2) Replacement cost less depreciation

(3) Market value

3. Analysis

The information on the application and other questionnaires must be compared with data from the inspection report and any differences should be resolved.

To substantiate the data being assembled, the underwriter should not hesitate to contact the producer. Frequently, the producer will have significant information regarding individuals and/or properties to be insured.

The underwriter, when determining if an individual risk qualifies for coverage, may find it necessary to contact public agencies. These agencies are particularly useful where information from various sources (the application, inspection, producer) reveal differences.

Consider the following contacts:

a. The building department to determine if there are existing orders to vacate or demolish

b. The public utilities department to determine if the insured is maintaining heat, water, and electricity

c. The office of the Registrar of Deeds to verify the present tax assessment and to determine if tax payments are delinquent

Significant information can be obtained from public safety departments. Therefore, the underwriter should communicate with either the local police or fire chiefs.

4. The Issue of Insurable Interest

a. It is well established that the "arson-for-profit" fire will not occur until both sufficient insurance is obtained to provide for an unjust enrichment and the interest of the culprit is insured.

b. In order to be a "named insured" on a policy, it is necessary for the party seeking the insurance to establish an "insurable interest" in the property being insured. In simple terms, "insurable interest" may be defined as that interest (right, claim or legal share) which an individual (person(s), partnership or corporate entity) possesses in real or personal property.

c. To establish an insurable interest, it is not necessary to hold title or possession of the property or to have a lien on the property. It is sufficient to demonstrate that the damage or destruction of the property would produce a monetary loss to the party claiming the interest.

d. To avoid being an unwilling victim of a fraud fire, the underwriter's investigation should, among other things:

(1) Identify the true ownership and mortgagee interests

(2) Seek particulars relative to the nature and extent of any party (individual, partners, corporate officers, trustees, mortgagees, etc.) seeking to be named as an insured

(3) Examine to the degree indicated by other facts, the background and prior loss history of those claiming an insurable interest

e. In short, the underwriter's inquiry should establish, at a minimum, the "existence" and "value" of an insurable interest. Information relative to both may be secured from:

(1) Applications and/or supplemental questionnaires

(2) Public records, i.e., those of tax, health, fire, police and building departments

(3) The Registry of Deeds

(4) Realtors, insurance producers

The nature and scope of this area in an inquiry will be dependent upon other factors, e.g., value and physical condition of risk; prior loss history, etc., revealed in the underwriting investigation. Where the underwriter has concern, he or she should not be reluctant to pursue the issues of insurable interest. Even though a negative underwriting result seems remote, the information gathered may prove significant should a loss ensue.

5. The Issue of Actual Cash Value

Generally the standard fire insurance policy provides for payment in the event of loss " the extent of the actual cash value of the property at the time of loss."

The key words in this insuring agreement phrase are "actual cash value." These words are not defined in the policy and have not been uniformly interpreted by all jurisdictions. Thus, these words must be considered in accordance with local statutes and case law.

Although the interpretation of "actual cash value" has generally been made after a loss, the same interpretation should serve as the basis for the underwriter's determination of a "reasonable insurable value" at the time of policy issue. A property limitation of the amount of insurance available to an applicant will discourage attempts to over insure and establish the basis of higher value at the time of loss.

Generally, the courts have agreed that the fire insurance contract is a contract of indemnity, and that its intent is to reimburse the insured to the extent of the loss, without enrichment in any way.

The term "actual cash value," similarly, is viewed by law as limiting the insurance to the amount necessary to indemnify the insured, although various states have defined the term differently, e.g.,

a. Broad evidence rules

b. Replacement cost less depreciation

c. Fair market value

6. Broad Evidence Rules

a. A rule has evolved in some states which does not adhere to the principle that replacement cost less depreciation is the sole measure of value at the time of loss. This rule, known as the Broad Evidence Rule, provides for the examination of every standard of value having a bearing on the property under consideration. Ultimately, it calls for the selection of that "value," which, in the event of a total loss, will provide for full indemnification and no more.

b. In those states which apply the Broad Evidence Rule, the underwriter should examine numerous standards of value in his quest to verify a reasonable insurable value. The factors that follow, among others, should be considered by the underwriter; the standard of value which provides indemnification should be selected and established as the reasonable insurance value:

(1) Date and price of purchase by applicant

(2) Present market value, i.e., as determined by an analysis of comparable sales or by the capitalization of income

(3) Replacement or reproduction cost

(4) Replacement or reproduction cost less physical and functional depreciation

(5) Assessed value

(6) Demolition of salvage value

(7) Owner's opinion of value

c. The underwriter can develop valuation information from:

(1) The Registry of Deeds

(2) Tax records

(3) Building departments

(4) Mortgages

(5) Inspection reports

(6) Adjusters

(7) Fire departments

(8) Community or neighborhood groups

(9) Realtors

(10) Insurance agents or brokers

(11) Qualified property appraisers

Basic valuation data should be secured from the application and from questionnaires. In instances where the underwriter is concerned about the potential of over insurance, he should fully document the file, and where possible, procure from the applicant, in writing, justification for the requested amount of insurance.

7. Replacement Value

Replacement Cost Less Deprecation and Fair Market Value

In those states which have by statute, case law or regulation, established the interpretation of "actual cash value" to a specific standard, the underwriter of course is guided by that designated measure. For instance, one state may measure the "actual cash value" by its "fair market value," while another state may use the standard as "replacement cost less depreciation." All this serves to underscore the importance that the underwriter have knowledge of the statutes, local case law, and the regulations, which determine the standard(s) utilized in his jurisdiction.

In the valued policy states, a building's value is agreed to by the applicant and insurer, at the time of the policy's issuance. As a result, the insurer is deprived of contending that overinsurance was a contributing motive in the instance of fraud fire. Therefore, in these states, the underwriter must be all the more careful in examining matters associated with "value," and in establishing a reasonable amount of insurance. Amounts of insurance established to properly reflect the property's insurable value will provide for indemnification; eliminate overinsurance and reduce the probability of the arson-for-profit fire.

*American Re-Insurance Anti-Arson Underwriters Guide, 1989.

Reprinted with permission.

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