 The Arson Claim
excerpted from "Motive, Means, and Opportunity, A Guide
to Fire Investigation."
American Re-Insurance Company, Claims Division, 1996.
Table of Contents
A. The Time Factor*
During the investigation of a fire, law enforcement officers need to
make decisions about documentary evidence, or how to obtain cooperation
of witnesses, etc. Once the evidence is collected, the investigator then
turns it over to a prosecutor who will make the decision whether there is
sufficient evidence to justify an indictment. While involved in many of
the same investigative procedures as law officers, insurance investigators
must also concern themselves with additional considerations. One major factor
facing an insurance investigator of a suspected fraudulent claim is time.
For example, the policy (the contract between the insured and the insurer)
may stipulate that the claim be paid within 60 days of the submission by
the insured of a proof of loss and the agreement (between the insured and
insurer) as to the extent of the loss or an appraisal or court award. That
means an insurance company is working under a time deadline to gather enough
information to decide whether to pay or deny a claim.
Therefore, the claims staff must be trained to:
- Recognize arson indicators, motives, etc.
- Be aware of legal requirements in conducting investigations of suspicious
or incendiary losses and your state's arson laws
- Be aware of the essential elements of proof required (criminal and
civil)
Additional duties of the claims staff include:
- Review policy underwriting reports and claim history.
- Gather and evaluate police and fire department reports, noting their
determination of the fire's cause.
- Assign an adjuster (either company or independent) to the case right
away.
The adjuster is one of the most important people in the insurer's decision-making
process and he/she must be knowledgeable in handling fire losses. Adjusters
aren't experts in cause and origin, however. That's why the hiring of an
experienced cause and origin investigator is important.
Key points-
- It's extremely valuable to have an independent fire investigator establish
cause and origin.
- This expert is key in all litigation.
- It's important to know who you'll use in advance by interviewing independent
fire investigators about their qualifications and knowledge before you
need them.
- Review all the information you've gathered with the investigator.
- Have the expert inspect the fire scene and report to you by telephone
as soon as possible.
- If the signs point to arson, investigate motive and opportunity.
B. Decisions, Decisions, Decisions
As mentioned, the ultimate decision an insurer faces is whether to pay
or deny a claim. Other major decisions an insurer faces include-
1.Who will investigate?
a. Suspicious losses where denial is possible are the most sensitive.
(1) An experienced claims representative should be assigned to the file.
(If an inexperienced claim representative must handle the case, constant
supervision is a must.)
(2) Telephone interviews with the insured are not advisable.
(3) Refrain from making assurances to the insured that the claim will
be paid quickly.
(4) Considerably more reporting to the file or to the supervisor is
required.
b. Special considerations if the insurance company is going to assign
the investigation to an outside detective or other investigative agency:
(1) Be certain the agency understands the sensitive nature of the claim
and the need to avoid unnecessary intrusion upon the privacy of the insured.
(2) The agency must also avoid making derogatory comments about the
insured to law enforcement officials or during interviews with other witnesses.
2. Is the insurance company going to pay an advance to the insured?
a. If the claim turns out to be fraudulent, the insurer has no duty
to the insured to make any payments. However, a failure to make an advance
will frequently cause the insured financial distress and may encourage
him to be hostile toward the insurer throughout the investigation. In addition,
refusing to give the insured an advance could damage the insurer's public
image if the insured communicates his plight to a receptive public. This
is why some insurers pay advances while a claim is being investigated.
b. Any payment must be accompanied by a reservation of rights statement
or preceded by a non-waiver agreement!
A Non-Waiver Agreement is an agreement between insurer and insured where
the insurer reserves every right not previously waived under the policy,
and the insured reserves every right which has not been forfeited.
3. Should the insurance company reject the proof of loss?
a. A supervisor should participate in the decision to reject a proof
of loss.
b. Rejection of a proof of loss, if properly phrased, is not a denial
of the claim. The insured is given an opportunity to resubmit the proof
of loss in a corrected form.
c. A decision to reject or accept the proof should be made as soon as
possible after receipt of the proof of loss.
d. A failure to promptly reject a proof of loss could result in the
following:
(1) The insured could claim (in subsequent litigation) that the insurer's
failure to act upon the proof promptly was an acceptance of the proof of
loss.
(2) The insured may gain extra time to bring suit.
(3) It could "fuel the fire" of an insured's claim that the
insurance company was vexatious and unreasonable in its claims handling.
e. Minor errors or omissions in a proof of loss should generally not
result in the automatic rejection of the proof of loss unless there is
some other compelling reason.
f. Before rejecting the proof of loss, be sure no one is adding conditions
to the policy. Frequently, the proof of loss form used by the company requires
more information from the insured than the policy conditions actually require.
g. It may be permissible to reject a proof of loss claiming replacement
cost when the investigation reveals property hasn't yet been replaced and
the insured only has a right to claim Actual Cash Value (ACV) until replacement.
h. A rejection letter must:
(1) Clearly describe what was wrong with the proof of loss
(2) Give the insured an opportunity to resubmit it to comply with the
policy.
C. Preliminary Indicators of Arson Associated
with the Claims Process**
What are some of the findings that indicate arson?
Loss Discrepancies:
The insured-
- Submits a loss inventory that differs significantly from the police
department's crime report.
- Submits a loss inventory that indicates an unusually high number of
recent purchases.
- Over-documents losses with a receipt for every loss and/or receipts
for older items of property.
- Provides numerous receipts for inexpensive items, but no receipts for
items of significant value.
- Cannot provide receipts, canceled checks, credit card records or other
proof of ownership for recently purchased high-priced items.
- Cannot recall the place and/or date, of purchase for newer items of
significant value.
Receipt Discrepancies:
The insured-
- Provides receipt(s) with incorrect or no sales tax figures.
- Provides receipt(s) with no store logo (i.e. blank receipt).
- Provides receipts/invoices from same supplier that are numbered in
sequence.
- Provides receipts from same supplier with sequence numbers in reverse
order of purchase date.
- Provides two different receipts with same handwriting or typeface.
- Provides single receipt with different handwriting or typefaces.
- Provides credit card receipts with incorrect or no approval code.
Other:
The insured-
- Indicates distress over prospect of an examination under oath.
Arson investigators should review the original receipts and documents
concerning the reported lost inventory, machinery, or property. Then, confirm
with all of the parties involved, (banker, tenants, mortgagee, business
partners, etc.). They should be aware of the loss and can confirm the accura-cy
of the information submitted on behalf of the claim.
The Claim Examination Process in Detail***
Assign the damage part of the investigation to one claim representative
and the fraud investigation to another claim rep or private investigator.
The claim rep and supervisor must avoid any communication to the insured
or his representative that might invoke a waiver of any of the policy provisions
or conditions. Avoid any actions that might later stop the company from
exercising a right under the policy.
1. Review the Insurance Policy and History
a. What insurance policies (including endorsements) are properly in
place? Include insurance by co-tenant or building owner and liability policies
for insured or others.
b. Examine the underwriting file and the agent/broker's file looking
for ambiguities or any thing unusual that would create more coverage than
anticipated.
c. Determine whether the underwriting file and agent file coincide.
d. Is the insurance application attached to the policy? (May be relevant
regarding fraudulent misrepresentation.) If there is misrepresentation
in the application, is it "material," i.e., would it have affected
the underwriting of the insurance and/or premium?
e. Was the application taken in person or over the phone?
f. To what extent did the policyholder contribute to material misrepresentations?
g. Identify all parties with potential rights under the policy or against
the property. This includes: insured, mortgagees, lien holders, co-payees
and additional insureds.
h. Determine policy age and prior claim history.
i. Become familiar with insurance policy endorsements and provisions.
Know the insured's duties and insurer's requirements and reconcile with
any state Fair Claims Practice Act requirements.
2. Begin Investigation and Obtain Non-Waiver From Insured, if Possible.
a. Confirm non-waiver when possible.
(1) The non-waiver agreement doesn't provide unlimited security. It
can be waived by the acts of the insurer.
(2) Obtain preliminary tape recorded statement from insured. (Develop
a checklist of questions beforehand. Have a purpose for each question.
Listen to answers when questioning.)
3. Retain investigative experts and counsel.
a. Have a roster of the following authorities on file:
(1) Adjusters
(2) Police
(3) Fire officials
(4) Federal agents
(5) Independent fire investigators
(6) Attorneys
b. Retain an origin and cause expert immediately.
c. Supplemental experts may be needed quickly, including accelerant
canines or electrical and mechanical experts to investigate potential accidental
causes.
d. Determine if electrical wiring or appliances could be a cause.
e. Work closely with an impartial expert with no understanding of the
case as to litigation and evidence.
f. Consider retaining defense counsel immediately to assist in securing
evidence and legal analysis.
(1) Visit the scene to obtain a full understanding of the investigation.
(2) Counsel shouldn't direct the investigation or engage in any conduct
that might result in his/her becoming a potential witness.
g. Consider taking initial/recorded statement of insured as soon as
possible.
(1) Topics to cover aren't as broad as examination under oath.
(2) Cover important insurance policy issues concerning waiver/estoppel,
if applicable.
(3) Confirm non-waiver agreement in the statement.
(4) Cover the opportunity issue in detail and any conversations insured
has had with public officials, his broker/agent, the underwriting department
and the claims department concerning the occurrence, the insurance, or
the premises.
(5) Cover financial issues generally for broad statements concerning
financial condition - personally and in business.
4. Determine Status Of Securing The Scene - Whether by Public Officials
or by the Insured.
a. Is excavation and/or demolition necessary for the origin and cause
investigation?
(1) If so, arrange as soon as possible with the insured and his public
adjuster and/or attorney.
(2) Be sure the property is secured and preserve the chain of custody
of evidence.
(3) Determine whether some other party (insured, other insurance carrier,
the municipality) share in the cost of initial excavation/demolition.
(4) Determine what part of excavation costs is investigative expense,
rather than debris removal, which may be covered under the policy.
(5) Determine the policy limits for debris removal coverage.
b. Decide how to best avoid allegations of waiver in necessary advance
payments.
(1) Weigh the advantage of using a "loan receipt" or non-waiver
for any "advance" payments to the insured for securing the property,
as opposed to waiting for the insured to properly secure the premises and
possibly exposing liability policy to claims.
(2) Remind insured, in writing, of the duty to safeguard and secure
the premises as soon as practicable.
c. Document contents of structure as to quantity, quality and condition.
(1) Verify ages, serial numbers and brand names on major items that
can be identified.
(2) Look for items missing that should normally be in the structure.
(3) Compare the inventory listed by the insured with the list and photos
obtained during your investigation to identify inconsistencies.
d. Be mindful of potential third party exposure as a result of the insured's
failure to secure the scene with fences or guards or other protection.
e. Determine whether preliminary demolition is necessary to prevent
further collapse that could damage surrounding property and/or people.
f. Establish contact with key government people to determine their concerns
about securing the premises.
g. Identify potential claimants for property damage and regulate your
dealings with them accordingly.
5. Documenting the Claim File
a. Only facts should be documented - not hunches or suppositions.
(1) Assume that the entire file may be discoverable and read to a jury.
(2) Act consistently with any claims handling procedures that exist
in your company.
b. Is the claim file discoverable?
(1) In most jurisdictions purely factual information obtained is discoverable.
The strength of the work product doctrine varies by state, so check with
legal counsel.
(2) The adjuster's notes leading up to denial may be relevant to the
bad faith issue.
(3) Retaining counsel early on "in anticipation of litigation"
may protect the claim file or portions of it from discovery.
c. All significant correspondence with the insured should be made in
writing.
(1) Certified mail and/or restricted delivery are worth consideration.
(2) Be especially careful with any letter that confirms agreements or
conversations with the insured that are vital to corroborating the claim
file with regard to coverage or bad faith issues.
(3) Be cautious with any correspondence that publishes that there's
an investigation or arson, as it relates to the insured.
(4) Immediately react, in writing, to letters from the insured or others:
(a) confirming understandings or agreements that you aren't in agreement
with
(b) alleging improper conduct
(c) alleging unreasonable delays
(d) alleging financial or social pressure
(5) Be non-committal in conversations with the media or other third
parties about the status of the uncompleted investigation, to prevent harming
the insured's reputation and/or creating exposure to civil liability.
6. Eliminate Other Potential Causes in a Fire Determined Incendiary
As part of any investigative procedure, it is as important to rule out
alternative explanations as it is to document the actual cause of the fire.
Key points-
a. An insurer's arson defense is weakened when accidental causes haven't
been ruled out.
b. Do not rely on the public investigator to do this.
c. Do not rely on an arson investigator to rule out accidental causes
- further experts are probably needed.
d. Consider which experts, under licensure statutes, may testify about
scientific principles.
e. When arson evidence is inconclusive, continue investigating accidental
causes of loss.
f. Investigate subrogation causes of action while the evidence is available.
g. The claim file must reflect an open mind toward accidental as opposed
to intentional loss.
D. Requesting Documents from the Insured
Requesting documents is a critical part of the claims process. Ask investigative
experts what documents or information they need to perform their investigations.
Advise the insured, in writing, of what is needed and that his/her cooperation
is necessary for the claim investigation to proceed.
TIP: Don't request documents that aren't clearly germane to the
investigation. Doing so diminishes the strength of your demand for essential
records. It also may expose the insurer to a potential bad faith claim.
Here are some guidelines for the types of documents to request:
1. Signed releases for:
a. Financial records
(1) Credit card statements
(2) Bank statements
(3) Books and records from a bookkeeper or accountant
(4) Billing and expense records from vendors and suppliers
(5) State and Federal tax returns for personal and corporate/partnership/proprietorship
(6) Other financial records
b. Employment records
c. Insurance records of other insurance companies & agents/brokers
(1) Application
(2) Declaration page
(3) All policy forms and endorsements
(4) Information on prior claims of any kind
d. Other records
(1) Medical records, to determine if there's been a burn injury
(2) Utility records
(a) Look for lapse in service and billing amounts to investigate financial
condition
(b) Determine amount of natural or propane used, if relevant to cause
and origin
(3) Telephone records (home, business, cellular, portable) to investigate
opportunity and motive.
2. All insurance records, including policies and any correspondence
concerning purchase, renewal or modification of the coverage.
3. Correspondence among all insureds and any of the insured's other
insurers regarding the property subject to the fire loss and any damages
or losses resulting.
4. Photos and videotapes of the building and contents, taken before
and after the loss, even if not taken for the purpose of inventory or documenting
condition.
5. All documents reflecting the building's condition, including city
code inspection reports and citations and correspondence, notes and repair
records for same.
6. Plans, blueprints, drawings, sketches and other documentation illustrating
the floor plan and contents of the premises where the fire occurred.
7. All receipts, original bills, invoices, canceled checks and other
vouchers reflecting the original purchase and replacement/renovations of
the items claimed.
8. All estimates for repair or replacement of lost items.
9. Copies of receipts and documentation establishing a claimed loss
of rents or business.
10. All records, receipts, repair orders, invoices, canceled checks
and correspondence regarding the inspection, repair and/or condition of
any sprinkler system within one year of the occurrence.
11. All records, receipts, repair orders, invoices, canceled checks
and correspondence regarding any electronic data processing systems up
to and including the date and time of the occurrence.
12. All reports, receipts, correspondence, notices and canceled checks
regarding operation, condition and activation of any security system within
one year of the fire.
13. Any receipts, invoices reports, contracts, notes and correspondence
on the repair to equipment and/or fixtures within three years of the occurrence.
14. Receipts, invoices, plans, specifications and contracts on remodeling
of the premises, building or equipment within the past 10 years.
15. Personnel records and files for everyone employed by the insured
within six months of the fire.
16. Any official investigative reports relating to the fire, including
ATF, State Fire Marshal and fire department.
17. Written reports by all experts who investigated on behalf of other
insurers or entities (if possible).
18. Court and official records (federal, state, local, UCC) regarding:
(1) Judgments
(2) Mechanic liens
(3) Deeds
(4) Tax records
(5) Evidence of transfer of property
(6) Divorce
(7) Bankruptcy
Proof of Loss
Here are some guidelines with respect to the proof of loss:
Decide when to send proof of loss form to insured.
- Send form by cover letter (certified mail/return receipt) citing the
"Insured's Duties After Loss" from the policy.
- Reconcile difference in time requirement between policy and Fair Claims
Protection Act or other state laws.
- Return proof if not complete, by cover letter, citing all deficiencies
and enclosing a copy of the deficient proof and a new blank proof form.
- Once completed proof is received, reserve right, in writing, to hold
proof in abeyance pending completion of investigation.
Part and parcel with the demand for submission of Proof of Loss should
be the request for information and documents which support and document
the claim.
The Examination Under Oath (EUO)
Most decisions regarding the examination under oath should be reviewed
with the insurer's attorney. Take an examination under oath, if warranted.
See the policy for who may be examined under oath. Determine whether the
investigation is occurring in a jurisdiction that allows a delay in the
insured's duty to submit to EUO questioning pending the resolution of other
criminal charges.
Here are some guidelines for EUO topics-
1. On the record, confirm non-waiver (and reservation of rights if applicable),
and confirm agreement to sign EUO when completed.
2. Background of insured
a. Personal
(1) Date of birth
(2) Social security number (green card number)
(3) Driver's license number
(4) Marital status
(5) Names and birth dates of family members
(6) Names and addresses of prior spouses, if any
b. Education
c. Employment history and business ventures
d. Rate of pay and financial gains and losses from prior business dealings
e. Current and prior residences and dates and with whom resided
f. Civil suits of any kind, including bankruptcy
g. Criminal arrests/charges/convictions with dates, locations
h. Workers' compensation claims
i. All prior insurance and claims, of any kind
3. Preliminary Insurance Issues
a. Insurable interest (and innocent co-insured if applicable)
(1) Who owns the building and the business?
(2) Who is the named insured?
(3) Potential third party claimants
(4) Are there mortgagee or other third party rights/potential claims?
(a) Loss payees
(b) Mortgagees
(c) Liens against the property
(d) If there Is a Land Trust (Review Land Trust documents with insured
to confirm the identity of the beneficiary of the trust and the chain of
title and beneficial interest)
b. Check the application for potential "material" fraud. Be
sure the application is attached to the policy (some states require this
for use as basis of denial for fraud).
c. Address issues raised in the files of agent/broker, underwriter and
claim department regarding what coverage exists, including endorsements
(potential waiver/estoppel issues?).
d. Under what circumstances was the policy of insurance obtained?
e. Has there been an increased hazard without notification to the insurance
company?
f. Have there been any modifications to the building affecting its value
without notice to the insurer?
g. Confirm oral and written communication between insured and insurer
to address compliance with policy provisions by the insured and insurer
with applicable Fair Claims Practices Act.
h. Review compliance under the policy regarding the production of records,
the Proof of Loss (is it complete?), and providing past and additional
releases of records.
i. Identify:
(1) Documents produced to date
(2) Documents requested but not yet produced
(3) Additional documents requested
4. The Premises
a. Establish layout of premises with a diagram, marked as an exhibit.
b. Use plans, photos, sketches from the fire department or insurance
investigator.
c. Identify all entrances and windows. (This establishes contents and
fire load and deter-mines consistency with public and insurance investigation
as to origin and cause.)
d. Confirm that alarm system was engaged and working at the time of
occurrence.
e. Identify all doors last locked by the insured.
f. Identify all who had keys to doors and access to the alarm system
to explore whether there was forced entry.
g. Identify any flammables and combustibles on the property.
h. Identify property of others.
i. Identify wiring and outlet problems or recent electrical work for
rewiring.
j. Identify all appliances, and prior problems or repairs to each.
k. Identify extent, age, value and origin of contents, stock or other
personal property.
5. Events Surrounding the Fire Loss
a. Determine if the insured was a witness. If so, determine:
(1) When the insured made his/her observations.
(2) The nature, color, location, intensity, and duration of the fire
and smoke that he/she observed.
(3) What other people can the insured identify as being on the scene
when he or she was there.
(4) Other conditions of the scene the insured noticed, including signs
of forced entry and unusual smells, such as an accelerant.
b. Document insured's account of the time and cause of the fire and
the basis for the claim.
c. Explore insured's theories, if any, as to why the fire would occur
including motives of others.
d. Make determinations about the insured at the time of the fire:
(1) Where was the insured during the fire and the 24 hours prior?
(2) Who was he/she with?
(3) Did he/she use the telephone?
(4) What clothing was he/she wearing?
(5) Identify vehicle color, make and license plate of the insured's
vehicle.
e. Document the insured's conversations concerning the loss, with the
authorities or anyone else, other than his/her attorney, to commit insured
to his/her account of those conversations.
6. Financial Condition
a. Personal
(1) Income (annual/gross/net)
(2) Debts
(3) Creditors
(a) Mortgages
(b) Banks
(c) Financial institutions
(d) Personal loans
(e) Auto loans
(f) Credit cards
(g) Gasoline cards
(h) Promissory notes
(i) Others
(4) NSF (Non-Sufficient Funds) checks
(5) Late on bills
(6) Threats from creditors
(7) Collection action
(8) Savings accounts
(9) Checking accounts
(a) Names/banks
(10) CDs/stocks/bonds
(11) Property owned
(a) Real estate
(b) Vehicles
(12) Expenses
(a) Household
(b) Monthly
(c) Health care/physicians
(13) Taxes
(a) State
(b) Federal
(c) Property - auto/real estate
b. Business
(1) Income (annual/gross/net)
(2) Sales
(3) Revenues
(4) Profits/losses
(5) Creditors
(a) Suppliers
(b) Contractors
(c) Labor
(6) Expenses
(a) Operating
(b) Inventory
(7) Taxes
(a) Federal income
(b) Federal withholding
(c) 941/FICA
(d) Tax liens
(e) Tax debts
(f) State income/sales
(g) County
(h) Property
1) Auto
2) Sales
(8) Bank accounts
(a) Loans
(b) Notes
(c) NSF checks
(9) Accounting records/financial statements
7. Observe the insured's demeanor and nature of responses during the
questioning. Observe emotional responses.
Failure of the Insured to Produce Documents
Most Insurance policies require that insureds produce documents requested
by the insurer. Insureds are sometimes slow in producing the documents.
The insured should be notified that an examination under oath will be conducted
as soon as the documents have been produced.
Request documents as early as possible in the claim review process in
order to speed the processing of the claim. Avoid the common mistake of
waiting to request information from the insured until right before the examination
under oath.
Work Independently of the Public Investigation
Consult with your attorney regarding applicable arson reporting immunity
statutes. Avoid conduct that may be construed to be intentional or malicious
and might revoke protection provided under the immunity laws. Provide notice
to appropriate government entity of potentially fraudulent claims, as may
be required by statute.
Key points to discuss with your attorney-
- The applicability of arson reporting immunity laws, which provide certain
protection to insurance companies that provide information to public authorities,
under appropriate request.
- The applicability of state arson reporting immunity laws to federal
investigative agencies.
- Each state immunity statute is different and must be strictly complied
with to ensure protection.
- The extent of the protection afforded by these statutes, from exposure
to libel and slander actions, which can usually be avoided absent malicious
or willful activity.
- Avoid off-color and/or conclusive comments.
- If the insurer initiates unsuccessful prosecution of a criminal arson
charge against the insured, there's the potential exposure to civil malicious
prosecution action by the insured against the insurer for civil punitive
damages.
Circumstantial Proof and Denying Coverage
It's critical that you understand the circumstantial elements of proof
when deciding whether to deny coverage. A successful arson defense based
on circumstantial evidence must begin with three fundamental elements, called
the Arson Triangle-intentionally set fire, motive and opportunity.
Key points-
- Incendiary fire. Are you and your experts comfortable with the basis
of the opinions as well as the opinions themselves? Anticipate cross-examination
by developing a "devil's advocate" analysis.
- Opportunity. Circumstantial evidence is often crucial to tie the insured
to the fire.
- Look for direct and indirect evidence of opportunity by the insured.
- Investigate opportunity of others to set the fire.
- Probe alibis given by insured and others.
- Motive. This is crucial to the arson defense based on circumstantial
evidence. v The initial statement of the insured doesn't need in-depth
details, but should include the insured's general rendition of his personal
and corporate financial status.
- Subsequent document requests to the insured and the examination under
oath can more thoroughly investigate financial motive, if appropriate.
- Look to financial motive of other interested parties.
- Use a forensic accountant when there's a complex financial condition
that can't be ascertained by simple review of tax returns and basic financial
information. Cash flow determines financial motive, not potentially artificial
figures that may be contained in tax returns or divorce records.
E. Denying the Claim*
The decision to deny a claim must take into account all the facts-both
favorable and unfavorable- gathered during the investigation. The decision
to deny the claim should be clearly communicated to the insured with all
known reasons stated. The communication should be restricted to the insured.
Correspondence may also be sent to the insured in care of counsel. Alternatively
a separate letter can be sent to the attorney advising that the claim has
been denied and that detailed reasons are contained in a letter sent directly
to the client.
Key procedures in denying a claim-
1. If the evidence shows that the insured committed arson and/or made
material misrepresentation( s), be sure all timely possible investigation
has been completed and all possible basis for denial have been documented,
so not to potentially waive policy defenses.
2. Identify any innocent co-insureds or third-party claimants/lien holders,
who may have a claim on policy proceeds.
3. Document the real value of the claim and who must be paid regardless
of the denial as to the insured arsonist.
4. State all possible reasons and policy defenses for denial and reserve
rights under other defenses which a further investigation might disclose.
5. Return proof of loss to the insured with the denial, being sure to
comply with that state's Claims Practices Act concerning the content of
the letter.
a. Send the denial letter via certified mail, personal and confidential,
restricted delivery and cite verbatim the policy conditions that are the
basis of denial. Be fact based.
b. Evaluate potential exposure to defamation action (you may want to
consult with your legal counsel) before copying any third party (even insured's
attorney) to the denial letter.
6. Protect the right of recovery against the policyholder when paying
innocent co-insureds, mortgagees, etc.
7. Determine whether there is any law requiring that the local government
sign off that taxes and demolition charges have been paid before payment
of any portion of the claim.
After a denial, the insured and/or his attorney may want to negotiate
a settlement or urge reconsideration. Reconsidering new evidence is always
advisable, but it should be clearly stated in writing that the claim remains
in a position of denial and the clock is ticking on the time period of limitations
for litigation.
Innocent Co-Insureds
Here's how the Innocent Co-Insured Rule works-
- Co-insureds may be allowed to collect if they did not personally participate
in the misrepresentation or the intentional act that causes the claim to
be denied.
- Some insurers are having success with newly-worded policy provisions
making it clear that the actions of one insured will bar recovery for that
insured and for all others as well. In making the decisions to deny the
claim of an innocent co-insured, the insurer must be sure the policy will
be so interpreted.
- The insurer may be able to offset some of the payment to the mortgagee
against the amount owed to the innocent co-insured.
F. Settlement Before Denial
Frequently an insurer will choose to shortcut the formal decision-making
process by attempting to negotiate a settlement of the claim with the insured.
As a business practice, this may seem eminently reasonable to the insurer.
It saves time, money, and allows more attention to be paid to those files
which are going to be defensible. However, this approach contains some serious
pitfalls and you should consult with your legal counsel when considering
settlement.
* This section is based upon, and contains excerpts and
quotes from - Beyer, John A., "Archeology, Psychology, Cognition ...
and Other Lofty Thoughts on Fire Investigation," The National Fire
& Arson Report, Vol. 12, No. 1, March 1994, and is used with the permission
of John A. Beyer.
**This excerpt is from "Insurance Fraud - Handbook
for Insurance Personnel," 2nd Edition, 1993, by the National Insurance
Crime Bureau, and is reprinted with their permission.
***This section is based upon, and contains excerpts and
quotes from - Pavlisin, Michael J. & Provencher, Gerald T., "Suggested
Methodology for Management of the Arson Claim," Insurance Advisory
Committee of the International Association of Arson Investigators, Inc.,
1994, and is used with permission.
 Reprinted with permission.
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