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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 investigation.

Insured - 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 of insurance.

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 fraud.

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 investigated.

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.

Appurtenant Structures / 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 to 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 those circumstances.

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 below.

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 filed.

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.

Mortgagee/Loss Payee 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 without delay.

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 insured.

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 questions.
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 financial information.
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 information.

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.

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