Insurance Related Fire Investigation Issues[dagger]

FDCC Quarterly, Summer 2005 by Pavlisin, Michael J, Williams, H Evan, Seidler, Jennifer Anne

I.

INTRODUCTION

Insurance companies often rely upon attorneys at the inception of a fire claim to "quarterback" the file-to ensure that the proper investigative and legal steps are taken. This is particularly true when insurers seek to rule out the insured as the arsonist, as the applicable law and insurance policies can vary widely.

Once the insurance carrier's retained experts have provided a preliminary opinion as to the cause of the fire, there are a number of critical legal considerations and potential pitfalls of which the insurer and its counsel must be completely aware. In this article, we will outline some of these "hot button" legal issues to be considered in the handling of fire claims.

In every claim, and in every jurisdiction, attorneys and insurers must be acutely aware of the elements of proof, degree of proof and the tools for developing the arson denial. These tools may include timely and focused investigation, examinations under oath, and expert consultation. The circumstantial nature of evidence in most arson denials creates challenges that must be met head-on and proactively throughout the investigation.

A number of key considerations in handling these claims can make or break the arson denial. These include, but are not limited to, those considerations discussed within this paper: (1) the arson denial elements and degrees of proof; (2) the misrepresentation denial; (3) examinations under oath; (4) cooperation; (5) the use of and admissibility of expert testimony; (6) preservation of evidence and prevention of spoliation; (7) innocent co-insureds; (8) defamation considerations; and (9) reporting to public authorities.

While most of the focus of this article will be geared toward the challenges posed by arson claims, these principles very often apply to liability and subrogation losses as well.

II.

TOOLS IN THE INSURANCE ARSON DENIAL

A. Policy Provisions Establishing the Arson Denial

The initial fire investigation may yield one or more "red flags" that require the insured to be ruled out as having intentionally set the fire. Some examples of these "red flags" include: a suspicious fire origin or cause, unexplained fire findings, inconsistencies regarding alibis or opportunity, suspicious burn patterns, financial difficulties on the part of the insured (i.e., bankruptcies, double mortgages, foreclosures, or high unpaid bills), and the removal of valuable or sentimental property or pets from the building before the fire.

The presence of one or more "red flags" often sparks the insurance company to reserve its rights in payment of the claim and to investigate further. The reservation of rights, and if supported, the denial of the claim, often ultimately rest upon two main portions of the insurance policy: 1) an exclusion for dishonest, intentional, or criminal acts by the insured; and 2) a condition requiring denial in the case of concealment, misrepresentation, or fraud on the part of the insured. Examples of commercial and personal lines policy language from these two provisions are found in Appendix A.

B. Proof Needed for Arson Denial Varies State by State

In many states, to support arson denial based on the intentional act and fraud exclusions in arson cases, an insurance company must generally show the following three elements: 1) the insured had the opportunity to set the fire; 2) the insured had a motive to set the fire; and 3) the fire was intentionally set.1 However, the elements of proof necessary for arson denial vary from state to state.

Furthermore, the civil standard or degree of proof for the arson denial is usually substantially less than the criminal "beyond a reasonable doubt" standard. In the majority of jurisdictions, the standard is a "preponderance of the evidence."2 However, some jurisdictions have a middle-range "clear and convincing" evidence standard.3

Whatever the standard, the majority of courts uphold an arson denial, even if it is based entirely upon circumstantial evidence.4

Given the variances between the states as to the degree of proof required, when an investigation is begun one of the tasks on the top of the list should be a legal review to confirm: 1) the elements to be proven; 2) the standard or degree of proof required in the jurisdiction where the fire occurred; and 3) whether the court in that jurisdiction will allow circumstantial evidence or evidence that is otherwise inadmissible, such as hearsay or police reports, with regard to the issue of bad faith.

A minority of jurisdictions do not require proof of motive, financial or otherwise, to set the fire; instead these jurisdictions merely require that the fire was intentionally set and that the insured was circumstantially responsible for it.5 Furthermore, many jurisdictions hold that, with regard to opportunity, the actual arsonist need not be specifically identified in cases where the proof shows that someone committed the arson on the insured's behalf.5

Because there are so many variances between the states, the requirements for the jurisdiction where the fire occurred should provide guidance for conducting the investigation. Attention should also be paid in each jurisdiction to the dichotomy between the breach of contract action and the often statutory cause of action for the insurer's alleged bad faith in handling the claim.7 Depending upon the jurisdiction, these are often two separate causes of action brought within the same complaint that require different standards of proofs and evidence.