Arson continues to be a concern for insurers

Arson continues to be a serious economic crime in the U.S. In 2023, the Bureau of Alcohol, Tobacco, Firearms and Explosives estimated that 25% of all fires reported are due to arson. As a result, insurers must be nimble in considering using the latest technology while continuing with prompt investigations, good faith claim handling and a vigorous defense.

Insurers and the experts they rely on should use the latest tools available, including artificial intelligence, 3D scanning, mapping software, drone imaging and accelerant detection, alongside tried-and-true methodologies such as canine alerts from trained arson dogs. NFPA 921 Guide for Fire and Explosion Investigations—widely viewed as the fire investigative “bible”— was revised in 2021 with scientific analysis updates related to fire patterns, arc mapping and fire classification.

Insurers typically do not pursue fraudulent claims with affirmative actions. Instead, they investigate coverage and, if necessary, deny claims for arson and then defend the claim if an insured files a lawsuit. Based on case law established in the 1986 case East Park Inc. v. Federal Insurance Co., to rely on the defense of arson or an intentional act, the insurance carrier must prove: (1) the fire was of incendiary origin, (2) the insured had the motive to have the fire set, and (3) either the insured had the opportunity to have the fire set or unexplained surrounding circumstantial evidence implicate the insured. Essentially, “evidence of incendiary origin and motive by themselves are not sufficient to establish an arson defense; there must be in addition some evidence which would link the suspect to the arson."

Georgia case law established in the 1970 case Blackwell v. American Southern Insurance Co. also will not permit an insured to recover under a policy if a preponderance of credible evidence (direct or circumstantial) establishes that a loss was intentional and that an insured was involved in causing or procuring a loss.

A successful defense on an arson fraud case includes a prompt and thorough on-site investigation to establish that the fire was the result of an intentional human act, detailed witness interviews, and gathering admissible evidence to establish motive and opportunity. Insurers should not rely on the responding firefighters to establish that the fire was incendiary. Instead, insurers should retain a qualified and independent origin and cause investigator to conduct a scene inspection and to testify and present evidence of their findings in court.

Additionally, insurers should rely on the policy language to help with a successful investigation, including a thorough examination under oath of the insured(s) taken by legal counsel. An EUO can be useful as impeachment evidence at trial and provides insurers with earlier and broader access to information than a deposition. Harary v. Allstate Ins. Co. and Pervis v. State Farm Fire and Casualty Co. established that in an EUO, an insured may not invoke legal privileges, even the fifth amendment right against self-incrimination.

Insurers should also demand that the insured fully cooperate and produce critical and relevant records and documents, including activity records such as phone records and social media posts, financial records showing income and expenditures, and documentation to support ownership of the items claimed. Several cases have established that an insured’s failure to cooperate is its own affirmative defense.

If an insured files suit after a claim is denied for arson, pretrial discovery plays a critical role in establishing sufficient evidence to vindicate the insurer’s decision. Your legal counsel should be seeking certified copies of all records relied upon in the preliminary investigation and relying on all the discovery tools to ensure the evidence is admissible in support of its defenses.

Although certainly not a new problem, arson continues to be an ongoing concern for insurance companies. Diligent claim handling means using all resources that the policy and applicable law provides while allowing inherent curiosity to lead to the proper legal and ethical conclusion.

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Melissa A. Segel, a partner at law firm Swift Currie, focuses her practice on insurance coverage matters with an emphasis on defending against bad faith and fraudulent claims, including those related to arson; automobile accidents; and theft in homeowner, business and auto insurance policies. Contact her at [email protected].