Melody S. Mosley is a partner at Cummins & White, LLP. She focuses on insurance law with a specialization in providing advice on concerns arising from commercial, homeowners’, renters, and auto policies. Mosley has 25 years’ experience taking examinations under oath in arson fraud, and all other types of claims. She also teaches a class for firefighters about how to testify in the courtroom at the annual California Conference of Arson Investigators. For more information, visit www.cumminsandwhite.com.
It was a New Year’s Eve weekend that many residents of Los Angeles, Calif. and West Hollywood will not likely forget. Over the course of three days, a single suspect was tied to as many as 50 car fires, causing an estimated $2 million in damages.
This case is an example of the staggering toll arson takes on both people and property. As claims professionals well know, arson is a serious crime. The recent fires in Southern California serve to illustrate that blazes can often spread to surrounding homes or commercial properties, producing devastating results.
Intent To Defraud
According to the U.S. Fire Administration, in 2010 (the most recent year for which final data is published), 16,200 residential fires were intentionally set, killing 260 people and injuring 750 others. These fires caused nearly $500 million in damages. [2011, U.S. Fire Administration]
In addition, approximately 8,500 non-residential arson cases caused nearly $370 million in damages that same year. Moreover, according to a study by the Insurance Research Council (IRC), 14 percent of arson suspects evidently seem to be motivated by a desire to defraud an insurance company. [2009, U.S. Fire Administration]
Obviously insurers have an interest in preventing and detecting arson fires that cause loss of life and property, as well as increase costs for us all. When examining a case of suspected arson, investigators must assess all pertinent information and evidence in order to pinpoint the fire’s origin and cause, as well as the circumstances surrounding the claim filed with the insurer. Claims professionals use a variety of tools and techniques, including examinations under oath (EUOs), which play a key role by obtaining information that will lead to more informed coverage decisions.
Before we proceed with the fundamentals of claims investigation when arson is suspected, let’s review a snapshot of the impact on the P&C industry, as well as the public’s safety and health:
- Arson is the second leading cause of fire losses in non-residential commercial buildings. It is the fourth largest cause of residential fires. According to insurance industry experts and national fire-incident data, one in every 10 fires in the United States today is intentionally set. [2011, U.S. Fire Administration]
- The average dollar loss for all types of arson was $17,289. Arson damages average $32,364 and $7,890 for motor vehicles. Arsons of industrial and manufacturing structures resulted in the highest average dollar losses—$114,699 per arson. [2009. U.S. Fire Administration]
- Offenders are hard to apprehend and convict. According to recent Federal Bureau of Investigation (FBI) statistics, only 18 percent of arson offenses were cleared by arrest or exceptional means; 47 percent of arrestees were under the age of 18; and 3 percent of arrestees were under the age of 10. [2010, NFPA]
People intentionally start fires for any number of reasons, including financial difficulties, anger/revenge, or mental illness. The issue of fraud comes into play when property owners deliberately destroy or damage their home, business, or automobile by fire for the purpose of collecting from their insurance companies. Arson fraud is typically committed by individuals (mostly male) facing financial hardship such as foreclosure, divorce, or bankruptcy. In some instances, homeowners use arson as a creative way to remodel or rebuild their home.
Business owners also commit arson fraud for similar reasons. However, business owners are often more savvy than individuals when it comes to arson fraud, and the monetary impact is generally greater (fraudulent inventory claims for items that didn’t exist or were removed from the building before the fire was set.)
Claims Investigations & EUOs
If arson fraud is suspected, then claims professionals conduct thorough investigations, which are separate from the fire department. They look at a variety of factors, including origin and cause of the fire, coverage and subrogation issues, witness interviews, and possible motives.
Typically this will involve hiring an attorney to conduct the EUO—one of the most important parts of an insurance investigation—to obtain information from the insured and address specific questions and concerns about a claim. The named insured (or others as dictated by the policy) is required to submit to an examination under oath upon rquest pursuant to the loss conditions of the policy under which the claim is being presented.
This policy language is standard across the nation and exists in almost all homeowners’ and commercial policies, and in many automobile policies. For example, in California, the EUO is included in the California Standard Fire Insurance Policy, which is set forth in Insurance Code Section 2071(a). Note that if an insured attends an EUO but fails to answer material questions, then the carrier can deny the claim. The insured also must attend the EUO even if he or she has previously provided a recorded statement.
So what is covered?
The EUO is a statement under oath (a court reporter is present to record the statement). It provides a viable opportunity to gather information significant to the investigation and to cross-examine the insured. The scope of questioning in an EUO is very broad and may include all aspects that are material to the insured’s claim. The critical questions tend to focus on where the insured was at the time of the fire. Additionally, the insured’s financial condition prior to the loss is explored in great detail.
This information is useful in establishing whether the insured had a motive to cause the fire and fraudulently overstate or completely falsify a claim. If criminal information is uncovered, then the attorney should follow insurance code sections that allow him or her to share information with authorities. The EUO (or portions thereof) also can be read as testimony during a criminal court trial.
The timing of an EUO is based on the initial results of the insurance investigation. If findings raise concerns about the claim, then the next step is to schedule an EUO. A follow-up EUO also could be scheduled, as most policies allow statements from the insured to be requested as often as reasonably necessary. If criminal proceedings are underway, then the insured can ask the insurance carrier to delay the EUO until the end of the criminal proceedings. The insurance company also has a right to wait until the end of criminal proceedings to make a decision about the claim.
The EUO is formally requested by the insurance company and may only be conducted upon reasonable notice, at a reasonably convenient place, and for a reasonable length of time. California Insurance Code Section 2071.1 sets forth some of an insured’s rights regarding EUOs. This law codifies existing preferred practices and could be followed by insurance companies in states without similar statutes.
Be sure to select a location that is convenient for the insured. I have conducted EUOs in a variety of unusual locations, such as jails, truck stops, and the loss site itself (a burned out house), which allowed the insured to explain and show the burned contents under discussion.
Production of Records
Part of the insurance code is a provision requiring the production of records—one of the most important aspects of an examination under oath.
The insured has a duty to cooperate and to provide what is reasonably requested during the course of the investigation. The documentation requested could include mortgage information, outstanding credit obligations, bank statements, phone records, and records pertaining to civil litigation and criminal histories. These records will help the insurer:
- Explore any concerns it may have about the insured’s financial status.
- Confirm where the insured was at the time of the fire.
- Confirm the insured’s testimony.
My work on a recent insurance fraud investigation following a suspicious residential fire provides an example of the vital role records play in corroborating or dispelling testimony from the insureds. This case was complicated by the fact that the homeowner’s handyman died as a result of being burned in the home fire. During the examinations under oath, the homeowners misrepresented and concealed information about the condition of the home, their financial situation, and their relationship and recent contact with the handyman. The homeowners changed their testimony when asked to produce cellphone bills but still failed to provide accurate dates for the phone calls.
Phone records later indicated a number of recent calls to and from the handyman to the insureds’ cellphones, including calls to the homeowner husband on the day of the fire. The facts showed that the husband had hired the handyman to set the fire, and based on all of the information, the claim was denied. Additionally, the police used information from the insurance inquiry to supplement the criminal investigation, which ended with considerable prison sentences for both homeowners.
Selecting the Right Attorney
Though there is no requirement that an attorney conduct an examination under oath, in practice, attorneys conduct the majority of them because they are trained in the examination and cross-examination of witnesses. Importantly, the attorney conducting the EUO should be experienced and familiar with arson claims. A familiarity with basic fire principles is also essential to understand the responses given about the circumstances of the fire. The insured has a right to representation by counsel at his or her own expense. Also, a public adjuster has no specified right to attend but often is allowed to do so.
An attorney with experience taking EUOs in fire cases and property claims is an invaluable asset to the investigation. Ask for referrals, and meet with the attorney to determine if he or she is the best possible representative for your company. Based on his or her expertise, a knowledgeable attorney can identify issues early on and then focus the examination under oath on issues pertinent to the arson fraud investigation.