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.
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.
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,
(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
(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
(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
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
The information on the application and other questionnaires must be
compared with data from the inspection report and any differences should
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
(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 "...to 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
(5) Inspection reports
(7) Fire departments
(8) Community or neighborhood groups
(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.