After many years of increasing arson losses from a variety of sources in the early 1990s, the number of reported arson fires decreased annually from 85,500 in 1996 to only 31,500 in 2005. Many of these were church fires, and hardly a month passes without one suspected arson fire of a church, synagogue, or school being reported in the Firehouse magazine's Fire Wire column, which lists the month's major fires. Another increasing area of arson is the forest and wildfire arena, which can cause the destruction of homes and businesses in surrounding areas.
In his annual arson survey, Firehouse* contributing editor Cliff Karchmer reviewed the FBI's Annual Preliminary Uniform Crime Report and found a continuing downward trend of reported arson fires, a drop of more than two percent between 2004 and 2005 alone. Leaving out the $33.4 billion loss of the World Trade Center fires in 2001, the losses have decreased from $1.4 billion in 1996 to a reported $664 million in 2005. Those figures include both costs of death and injury and damage to property.
"Arson is such a destructive and deadly crime that we search for encouragement that the problem is improving when the overall incidents dip even slightly," says Karchmer, who also is director of federal programs for the Public Safety Technology Center. But he adds, "When researchers look at local problems the way arson investigators see them, it is easy to grow concerned about the direction of the trend lines. First of all, there is not one nationwide trend line, but many–regional versus local changes, others based on the size of the reporting jurisdictions (from large urban areas to suburbs and farmlands); and finally, shifts in the economic, psychological and other motivations behind arson. So far, the trend lines move in a number of different directions at once, and thus are a bit puzzling."
For example, he notes that in 2005 the National Fire Protection Association (NFPA) reported the lowest rate of incendiary crime that it has ever recorded. At the same time, the FBI report shows increases of arson in several large cities and towns, as much as 3.5 percent in cities with more than a million in population. In Los Angeles alone, the increase was 16 percent. Another factor in the statistical decrease may be that, for several years, three large cities (New York, Boston, and Philadelphia) did not report any arson data to the FBI. But reporting cities like Phoenix, Detroit, Dallas, and Chicago all reported a decrease in arson (as much as 50 percent in Detroit). The Midwest had the highest level of arson decrease, down 9.3 percent, compared to a drop of only 2.8 percent in the Northeast and 0.7 percent in the West.
Blame the Kids
Karchmer reports that "half of all arson arrests are juveniles," citing U.S. Fire Administration (USFA) statistics. The USFA says, "Poorer neighborhoods experienced 14 times the number of arsons as higher-income neighborhoods." Karchmer adds, "The current surge in violent urban crime is due to a demographic bulge among teenagers. Five years ago, one criminologist predicted the rise of these new 'super-predators.' Organized-gang activity swells the ranks of those youth who seek anti-social outlets."
He also cites USFA statistics that 50 percent of arson fires occur outdoors, 30 percent in structures, and 20 percent in vehicles. Additionally, 61 percent of school structure fires are arson, as are 70 percent of high school fires. "We tend to forget that another dimension of youthful fire settings are school fires," says Karchmer, adding that most are intentional.
Did the Devil Make 'Em Do It?
A quarter of all church and other religious structure fires are caused by arson, says Karchmer. "For more than a decade, there has been one steady stream of headlines capturing hate-inspired church fires." Despite federal ATF attempts to keep pressure on the cases, he says, "youth-inspired pranks that quickly spiral out of control are growing as a cause of church arson, adding to presumed-hateful motives. A developing trend appears to be [a growing number of] church fires set in rural and small-town areas."
A few years ago the insurance press was full of arson-for-profit articles and ads for arson investigation, with insurers spending millions addressing the problem. Either the ads were successful (evidenced by the drop in arson losses) or the money and emphasis was misplaced. Juvenile arson, as pointed out by an Iconoclast column a number of years ago, has been and obviously remains the leading cause of arson losses, but what has the insurance industry done to stem that?
Bob Marihugh, a certified fire investigator in Raleigh, N.C., wrote this in the Sept. 2005 issue of Claims: "Many insurance companies have developed minimum guidelines that require origin-and-cause investigations by independent investigative agencies or certified private fire/explosion investigators. Established minimum guidelines may include property losses of $10,000 or more, reported injuries or deaths, possible issues of subrogation, third-party negligence, third-party claims, and incendiary or undetermined fire causes." That is probably a good guideline, as the industry has notoriously neglected possible subrogation recovery in many areas, and a cause-and-origin investigation is most helpful in pinpointing potential subrogation targets.
As Michael Harvey and Thomas J. Hulse noted in the May 2006 issue of Claims, "There has been a disturbing increase in the number of fires where the investigator is listing the cause as 'undetermined.' This means that insurance companies may be missing out on opportunities to pursue subrogation against third parties whose product or services may have been faulty." The writers add, "An additional reason [for undetermined-cause findings] is that fire investigators sometimes tell insurers what they think they want to hear. If the investigators cannot support their cause determination, they may opt for the easy solution of 'undetermined.' Other investigators who have long-term relationships with insurance companies may make a finding of 'incendiary' when they think that best suits the immediate needs of the company with regards to possibilities for subrogation."
Cooking the Books, Literally
One wonders why, if the dollar amount and number of arson losses has so dramatically decreased, the Insurance Information Institute (I.I.I.) has increased its estimate of property/casualty fraud from $21 billion in 1998 to $29 billion in 2003. If the NFPA reported direct dollar losses due to U.S. arson fires in 1998 as $1.249 billion and arson losses in 2003 as only $692 million (just slightly more than half the 1998 amount), then non-arson fraud losses must be accounting for more than $28.3 billion in 2003. And considering that only a small percentage of the NFPA arson loss figure is arson for profit, it must be the casualty side of the industry where the fraud is occurring. Apparently the insurance industry is doing zilch about that!
Back in the early 1970s, when this writer was a field adjuster in Miami, one almost could predict which restaurant would be the next to burn. New restaurants would open with a flash of ads and a famous chef. Within months the food quality would start to deteriorate and word would get out that the famous chef had departed. Then employees would begin complaining about slow payment of their wages. Bang! In the middle of the night the fire sirens would blow. The problem is in the proof. Even if a fire investigator can prove the fire was incendiary, proving that the insured was the culprit is the more difficult part.
Motive, Opportunity, Incendiary Origin
What happens when an insurer suspects that a policyholder has committed arson? What must the insurer prove as specific elements in order to legally deny coverage? These questions were addressed by Hartford, Conn., attorneys Calum B. Anderson and Frank H. Santoro in their article, "Debunking the Arson Triangle," published in the Dec. 2001 issue of For The Defense.* The authors suggest that "the so-called 'arson triangle' is an ill-conceived rule that could lead to absurd and unjustified results."
They continued by writing, "While proof of motive, incendiary origin, and opportunity are clearly relevant factors to be considered when determining whether a policyholder has intentionally caused a loss by means of fire, they are neither self-sufficient nor all necessary. Strict adherence to the arson triangle can cause guilty policyholders to collect insurance proceeds (where motive, particularly economic motive, is difficult to prove), and innocent policyholders to be denied coverage. The only true elements of civil arson are that the fire loss arose out of an act committed: (1) by or at the direction of the policyholder, [or] (2) with the intent to cause a loss."
The two attorneys point out that even with all three elements of the triangle present, there still is not a case to prove the two factors of action and intent to cause loss. As in a fidelity bond claim, the element that the insured must prove was the "manifest intent" of the employee to both cause loss and have financial gain.
"In matters of suspected arson by a policyholder," wrote Anderson and Santoro, "an insurer has several vehicles at its disposal to justify denial of coverage. First, there is the language of the policy that may, either in the insuring agreement or the exclusions, provide grounds to deny coverage. For example, the fire loss may not be covered because it was not caused by an 'accident,' or it was 'expected or intended on the part of the insured,' or it arose out of an 'act committed by or at the direction of an insured and with the intent to cause a loss.' Second, apart from the specific language of the policy, the insurer may deny coverage based on public policy."
Key Fraud and Arson Element
They discuss a number of court decisions regarding arson cases, and note that many do not involve discussion of policy language. Their point is that in insurance loss, the key is the policy contract. While arson investigators and SIU operatives may provide evidence fitting the so-called triangle of fraud and arson, it also must be shown to fit the policy exclusions, insuring agreements, and conditions. As this writer has stated many times in previous columns, the three most important factors in any claim adjustment are "coverage, coverage, and coverage." In every suspect claim, the coverage must be investigated, it must be evaluated, and it must, to some degree, be negotiated. Insurers may lose because the fact and liability and damage investigation has taken precedent over the coverage investigation.
"In a civil arson case," said Anderson and Santoro, "the primary facts that need to be determined are whether the policyholder caused the fire [or any type of fraudulent loss] with the intent to cause a loss. These are the only true 'elements' of arson. If this is proved, everything else is academic."
If insurers are wasting their time and money intending to curb fraud and arson by mishandling the elements of proof needed, then they are wasting policyholder premium dollars.
* Firehouse is available from Cygnus Business Media, P.O. Box 820, Ft. Atkinson, Wisconsin, 53538-9932 (1-800-825-8577). For the Defense is available from the Defense Research Institute, 150 No. Michigan Ave., #300, Chicago, Ill. 60601, (312) 795-1101.
Ken Brownlee, CPCU, is a former adjuster and risk manager, based in Atlanta, Ga. He now authors and edits claim-adjusting textbooks.
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