How to Underwrite Arson Coverage
The dictionary defines Arson as - the willful or malicious burning of property especially with criminal or fraudulent intent. Yet, this happens quite often in the insurance world when a building does not sell so an owner can dispose of their property quickly to gain from an insurance windfall.
Statistics show that revenge in its various forms accounts for about 50% of the incendiary fires' fraud accounts for about 40%, juveniles 9%, and pyromania 1%. Arson personalities cannot be stereotyped. Their characteristics are as varied as the motives behind the fires. Intentionally set fires fall into at least eight categories:
1. Fraud fires - usually set to collect insurance (often the amount of insurance is greater than the value of the structure and/or its contents). As an Underwriter, be vigilant about not insuring a building too much above the proper insurance to value.
2. Spite fires - set out of revenge, jealousy or anger; often the action of a disgruntled employee, angry customer, unfair business competitor, unhappy neighbor, or jealous spouse.
3. Vandalism fire - set without premeditated motives by individuals or groups looking for excitement.
4. Political fires - set to dramatize an issue, event, or other such occurrences (fires during riots and acts of terrorism fall into this category).
5. Pyromaniac fires - set for thrills, usually by someone with a pathological problem.
6. Crime concealment fires - attempt by criminals such as burglars or embezzlers to cover up a crime by setting a fire to destroy evidence. ·
7. Vanity fire - set to provide an individual with the opportunity to play hero.
8. "Psycho" fires - committed without any rational motive.
Arson is a Crime
Underwriting Common Sense
While the main underwriting thrust is against arson for profit involving the insured, the underwriter should also consider other types of fires where the insured is simply a victim. These potential fires, falling into categories 2 through 8 above, are more difficult to spot and control. A key is to look for external factors which might have an effect on a particular insured. A well-run business with conscientious, ethical management is, however, less likely to generate spiteful or vengeful reactions and is more likely to utilize security measures to deter burglary, theft and
Arson for Profit
In arson for profit, the owner does not always set the fire. It's easy to hire professional or amateur "torches" for varying amounts of money. Professionals operate in arson rings or individually and use sophisticated techniques. Complicated, organized arson conspiracies are becoming more prevalent. They may involve phony insureds and mortgagees, public officials, claim adjusters or members of organized crime.
Typical Arson Scenario
In a typical scenario, someone sets up a holding company to front the purchase of properties in bad financial or structural condition. Sufficient repairs are made to obtain insurance, often in amounts substantially higher than market value. False changes in ownership are made and increases In insurance obtained to increase the "paper" value of the property. Additionally, mortgagees are added with inflated mortgage values. Mortgagees, often in collusion with the original insured, overstate their insurable interests, again adding to the "paper" value of the
property. An arson fire completes the cycle.
Because of the preferential treatment afforded mortgagees in the fire contract, the mortgage lender is the first party to be paid off in an insurance claim. This can occur even if the insured is convicted of arson. Multiple mortgages might also result in overly high settlements and payment redundancies.
Arson Affects More than Just the Building Owner
Consistent Pattern to Arson Fires
The following characteristics are common to risks involved with arson fires based on surveys by Fraud Units. The characteristics appear in the order of the frequency with which they are present in the risks which suffer arson fires:
- Poor financial condition
- Poor building maintenance
- Previous fire and for theft losses
- Recent increase in coverage
- Absentee landlord or vacant building
- Building for sale
- Policy new to the Company
- Second mortgagees
- High amount of insurance in excess of market value
- Previous criminal record
Other Characteristics Associated with Arson
- Evidence of premium payment problems
- Noncompliance with engineering recommendations (may indicate lack of funds and/or knowledge that building is to be burned)
- Fires shortly after closing of seasonal operations
- Mortgages to other than accredited financial institutions
- Personal items and readily salable items removed from premises just prior to fire
- Heavy personal financial burden, particularly from gambling, drinking, drugs, or marital difficulties
- Unpaid taxes
- Building code violations
- "Fad" type business operations
- Obsolescence of location, products or processes
- Outdated or unsalable merchandise
- Unavailability of raw materials
- Shutoff of sprinkler systems or other protective devices
- Poor building security allowing easy access
- Insureds conducting all transactions (i.e., paying premiums or negotiating coverage) on a "face-to-face" basis with Agent (this avoids federal mail fraud charges)
- Named insured has intentionally established an alibi
- Reluctance to divulge information or allow Inspection of the premises
Arson Attach Caught on Video
Arson and Underwriting; New Accounts
The most effective way of controlling arson-for-profit losses is to identify the arson prone risk and to refuse issuance, or to insure in a manner which lessens incentives. The first line of defense is the agent. Agents should know their clients and the condition of the property to be insured. Courteous, reasonable inquiry of obviously pertinent, practical data should offend no one. Knowledge of the agent's operations is extremely Important. The underwriter must know which agents typically screen their clients and see the property to be insured. Applications and binders must provide sufficient detail on who and what the company is being asked to insure, as underwriters must be given time to underwrite properly.
Common Arson Characteristics
The underwriting review should emphasize:
1. Financial information, including account history and any antecedent information to satisfy the need (and right) to know who we are insuring.
2. If available information is insufficient, the willingness of the agent and the insured to provide needed information.
3. Prior loss history.
4. Multiple mortgagees/loss payees.
5. Confirmation that limits requested are in line with ACV/replacement costs, and relativities to market value and mortgage principal.
Particular attention should be given to "fad" risks, vacant properties, seasonal risks, restaurants, bars and taverns because of high failure rates and unusual exposures. The more information available to the underwriter during the underwriting process, the less likelihood there is to insure an arson-prone risk. Full use should be made of automated construction cost and financial information. If preliminary sources of information such as required or warranted surveys leave unanswered questions, the agent should be consulted.
Underwriting Mid-Term Changes and Arson
Curiosity is the key to evaluating mid-term activity and requests. The following questions should be asked before making mid-term changes:
- Does the request make sense and track with data currently available on the risk?
- Are current line treatments and other aspects of the original approval still appropriate?
- Question significant increases or decreases in limits, especially If unexplained. Increases are frequently requested prior to arson losses. Decreases may Indicate a downward trend in the business or operation signalling potential financial difficulty.
- Note any changes in the Named Insured, Mortgagees or Loss Payees. If such changes occur, check the current financial condition of the risk, including the new entities involved.
- If the risk was previously surveyed, are there any recommendations pending or is a resurvey in order?
- Have underwriting controls been established for any reason which would preclude approval of a given request?
- Also, carefully review any loss activity, particularly small fire or theft losses, during the policy term and at the time of mid-term requests. When mid-term activity takes place, look for arson signs and underwrite accordingly. In many states, statutory requirements prevent mid-term retirement from an account. however, increased limits, additional named insureds or mortgagees may be refused.
Underwriting Renewals and Arson
At renewal time, the opportunity exists to review account activity during the prior time period. Since there is generally more time available to underwrite at renewal time than when underwriting new business, there is greater opportunity to look for a buildup of any of the previously mentioned trends or warning signals. Consider further exploration of any indications from those listed under new business and mid-term changes. Careful, thorough screening will help avoid renewing an arson-prone risk.
Underwriting is about judgement. If your gut tells you something differently than what you see on paper then don't offer a quote or bind the risk. It's better to forgo the premium than to incur a loss.
© 2015 Randi Glazer