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.

Arson and fire science is ever evolving. Initially considered to be just a property crime, Firehouse noted in 1996 that arson had evolved into an “economic crime used to extort money from insurance companies.” In 1979, the United States Senate conducted a study on the role of the insurance industry in dealing with arson for profit, which was considered to cost about $1.6 billion at that time. A year later, the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) ranked arson for profit among the nation’s fastest-growing crimes. By 1998, property loss resulting from arson exceeded $3 billion. From 2014 to 2023, dollar-value losses due to residential arson increased by 26%. In 2023, ATF estimated that 25% of all fires reported are due to arson. And it does not only impact structures; the Coalition Against Insurance Fraud reports that in 2020, nearly 9,000 car fires in the U.S. were determined to be arson. Finding that arson was not only a serious economic crime but also a blight on society, the recommendations that came out of the 1979 congressional investigation included a focus on underwriting practices, urging insurance carriers to develop systems to detect suspicious fires and encouraging the modification of privacy and fair claims practices laws. 

Not much has changed since then. It remains important for insurance carriers to develop resources to protect themselves from this pervasive economic crime with prompt investigations, good faith claim handling and a vigorous defense. Insurance carriers and their experts must stay up to date on the latest tools and technology available, including the use of artificial intelligence (AI), 3D scanning, mapping software, drone imaging and accelerant detection, alongside the tried-and-true methodologies such as canine alerts from trained arson dogs.  

Establishing Arson Fraud 

Typically, insurance companies do not file suit against their insureds for arson, instead choosing to deny and defend the claim without taking an affirmative action. If an insured files suit and the insurance company asserts an arson defense, East Park, Inc. v. Federal Insurance Co. established that the defense must provide evidence that: (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, based on Blackwell v. American Southern Ins. 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.  

Key elements for success in an arson fraud case include 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. Insurance carriers should not rely on responding firefighters to establish that the fire was incendiary. Instead, once red flags are identified, insurance carriers should retain a qualified and independent origin and cause investigator to conduct a scene inspection and be prepared to testify and present evidence of their findings in court. Just as insurance carriers need to utilize new technology, origin and cause experts must as well. The NFPA 921 Guide for Fire and Explosion Investigations, widely recognized as the fire investigation “bible,” now includes updates on fire patterns, arc mapping and fire classification. Photographs and video tell a compelling story.  

Claim representatives should also conduct prompt witness interviews, including of the insureds, but certainly should not leave out a thorough examination under oath (EUO) of the insured(s). An EUO is typically taken by legal counsel and is critical because unlike a recorded statement, an EUO can be useful as impeachment evidence should the matter go to trial. An EUO also gives insurance carriers earlier and broader access to information than a deposition. One example of the benefits of an EUO is that an insured may not invoke legal privileges, even the fifth amendment right against self-incrimination. Harary v. Allstate Ins. Co., 988 F. Supp. 93, 103 (E.D.N.Y. 1997), aff’d, 162 F.3d 1147 (2d Cir. 1998) (an insured may not use her Fifth Amendment privilege as a sword against her fire insurer); Pervis v. State Farm Fire and Cas. Co., 901 F.2d 944 (11th Cir. 1998) (holding that the fifth amendment privilege against self-incrimination did not excuse the insured from fulfilling his contractual obligation to answer questions that were material to insurer’s investigation during examination under oath). 

Utilizing the resources of the policy’s cooperation requirements, insurance carriers should also demand that the insured fully cooperate and produce critical and relevant records and documents. This evidence can then be used to establish that the insured had both the motive and the opportunity to set the fire. Collected items should include 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. It is important to keep in mind that if an insured fails to cooperate, that in and of itself can provide the insurance carrier with an affirmative defense. Halcome v. Cincinnati Ins. Co., 254 Ga. 742, 344 S.E.2d 155 (1985); Allstate Ins. Co. v. Hamler, 247 Ga. App. 574, 545 S.E.2d 12 (2001); Diamonds & Denims v. First of Ga. Ins. Co., 203 Ga. App. 681, 417 S.E.2d 440 (1992).  

Lawsuits and Bad Faith 

If an insured files suit after a claim is denied for arson, pretrial discovery plays a critical role in uncovering fraud since the determination of whether an insurer’s decision was made in bad faith depends upon the sufficiency of its evidence in court, not the information it had at the time the claim was denied. Attorneys should seek legally credible and reliable copies of all documents used for the arson and fraud defense to ensure the records will be admissible in litigation. This includes getting certified copies of those phone records and bank statements secured in the preliminary investigation. It is important to document the claim file thoroughly with as much information as possible but also to understand that certain information may require a subpoena to be obtained from other sources if the claim progresses into litigation.  

In order to avoid bad faith and potential extra-contractual penalties in this current litigious environment, insurance claim professionals must conduct their claim investigations while considering regulatory requirements, case law and industry standards, along with the potential legal ramifications for failing to adequately investigate suspicious claims. Most states have an unfair claims practices act or similar statute that penalizes insurance carriers who unreasonably fail to settle covered claims. See e.g. Georgia statutes O.C.G.A. §§ 33-4-6, 33-4-7. It is important to stay up to date on relevant state laws, both statutory and common law, to ensure compliance with processes and time limits. 

Keep in mind that most states require an insurer to satisfy not only the bad faith statute’s procedural requirements but also its substantive requirements. For example, under Georgia law, there can be no finding of bad faith under O.C.G.A. § 33-4-6 if “it can be said as a matter of law that there was a reasonable defense which vindicates the good faith of the insurer,” and that “the insurer had reasonable and probable cause for making a defense to the claim.” Colonial Life & Accident Ins. Co. v. McClain, 243 Ga. 263, 265 (1979). Additionally, with no statutory definition of “bad faith,” Georgia courts have defined it as a “frivolous and unfounded refusal in law or in fact” to provide coverage according to the terms of the policy. See e.g. Interstate Life & Accident Ins. Co. v. Williamson, 220 Ga. 323 (1964). Furthermore, whether the insurer’s denial was “frivolous or unfounded” is determined based on the evidence presented at trial, not at the time the claim decision was made. Hudson v. State Farm Mut. Auto. Ins. Co., 201 Ga App. 351 (1991). 

Investigating and Reporting Arson Fraud  

While conducting thorough investigations to root out arson, carriers also must consider the potential exposure for failing to investigate claims, whether based upon a cost-benefit analysis or upon some urgency in processing claims, such as during a catastrophe. Arson and insurance fraud are crimes in every state. Many states have insurance fraud bureaus or departments that investigate illegal insurance activities (whether by carriers or by policyholders). Several states require insurance carriers to have mandatory fraud plans and report insurance fraud when discovered. Many states have enacted legislation requiring insurance companies to notify law enforcement authorities when arson or fraud is suspected and to cooperate in third-party governmental investigations of arson and fraud claims while giving immunity from criminal or civil prosecution for such cooperation. See e.g. Georgia: O.C.G.A. §§ 25-2-33, 33-1-16; Florida: Fla. Stat. §§ 633.126, 626.989; Illinois: 215 ILCS 145/1, 215 ILCS 5/155.24; Michigan: MCLS §§ 29.4, 500.4509. However, such immunity from criminal and civil liability is often limited to insurance carriers who cooperate and report in good faith in the investigation of suspected arson and fraud. 

Investigating arson and fraud is, in many states, an insurer’s obligation. “An insurance company has a ‘responsibility to marshal all … facts’ necessary to make a determination as to coverage ‘before its refusal to pay.’” Jones v. Alfa Mut. Ins. Co., 1 So. 3d 23, 36 (Ala. 2008) quoting Aetna Life Insurance Co. v. Lavoie, 505 So.2d 1050, (Ala.1987) (finding the question of bad faith could go to a jury when the evidence showed that the carrier failed to investigate the pre-loss condition of the house). 

Insurance carriers should then follow the requirements of their respective state laws in releasing information to the authorized official, whether the state fire marshal, insurance commissioner or other law enforcement agency. For example, in Georgia, O.C.G.A. § 33-1-16 requires an insurer to comply with requests for information from the insurance commissioner and the commissioner’s investigative agents but does not provide a specific definition identifying the appropriate law enforcement authorities to whom an insurer may release information. Instead, the statute generally identifies qualified law enforcement agencies as any federal, state, county or consolidated police or law enforcement departments and any prosecutors or district attorneys. Thus, the list of individuals to whom insurance carriers may or are obligated to release information appears very broad. Consequently, there is seemingly no limit on the number of governmental investigative agencies to which an insurer should produce its claims file. As such, for those insurance carriers who wish to rely upon the statute in reporting suspected arson or fraud to law enforcement authorities, it would probably be beneficial to narrowly construe the statute when providing information voluntarily. In other words, if there is a question as to the propriety of voluntarily releasing information to a particular public authority not listed in the statute, the insurer should err on the side of caution and not voluntarily release that information. 

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.