Property Insurance Coverage Law Blog : Florida Insurance Lawyer & Attorney : Merlin Law Group Law Firm : Tampa, Houston, Coral Gables, Gulfport

In State Farm v. Vandiver, 970 S.W.2d 731, 736 (Tex.App.—Waco 1998, no writ), the Court succinctly laid out “The Arson Defense:”

A. THE ARSON DEFENSE . . . To establish the affirmative defense of arson, an insurer bears the burden of proving by a preponderance of the evidence that the insured set the fire or caused it to be set. The crime of arson, being in defiance of law, is ordinarily conceived in secrecy and executed in such a manner as to avoid detection and exposure; and proof of such an unlawful enterprise must, in the very nature of things, be made by circumstances which tends to cast light upon the incident is legitimate and proper. In order to establish the affirmative defense, the insurer must offer evidence: (1) the fire had an incendiary origin; (2) the insured had a motive to set the fire or cause it to be set; and (3) the insured had an opportunity to set the fire or other circumstances linking the insured to the fire.

Id. (internal citations omitted). In Vandiver, the policyholder brought suit against State Farm to recover for damages that resulted from the destruction of her home by a fire for which State Farm denied coverage. As one of their defenses, State Farm asserted “The Arson Defense,” claiming that the policyholder set the fire in order to recover the insurance money. In support of its argument, State Farm noted that the parties agreed that the fire had an incendiary origin, which met the first requirement of “The Arson Defense.”

Next, State Farm argued that the policyholder had a motive for setting the fire. State Farm submitted records showing that: (1) the policyholder was experiencing financial stress at the time of the fire; (2) the policyholder’s monthly expenses exceeded her income at the time of the fire; (3) the policyholder lived with a man who did not have steady employment and she assisted him in his child support obligations; and (4) the policyholder’s sister had accrued almost $5,000 in unauthorized charges on one of the policyholder’s credit cards. The Court concluded that “[t]he totality of the reasonable inferences arising from these circumstances constitutes some probative evidence that Vandiver had a motive to set her house on fire or cause it to be set on fire.” Id. at 737.

Last, the Court turned its attention to whether the policyholder had an opportunity to set the fire or other circumstances linking the policyholder to the fire. In support of their allegations, State Farm noted among other things that: (1) there were several inconsistencies in witnesses’ testimony; (2) only the policyholder’s sister could testify to the policyholder’s whereabouts at the time of the fire; (3) the policyholder had seven dogs on her property and two neighbors testified that the dogs typically barked at strangers who came around but neither of them heard the dogs barking the night of the fire, although both were outside that evening; (4) one of the neighbors found the house to be secured when he came over to investigate the fire; and State Farm had previously paid a claim of loss for a barn on the policyholder’s property which had been consumed by a fire, the cause of which remained undetermined. The Court concluded that “[t]he other circumstances recited all combine with these factors to justify a conclusion that Vandiver was the person who set the house on fire.”

In Vandiver, the evidence was sufficient to support “The Arson Defense.” However, in my experience, insurers assert “The Arson Defense,” regardless of whether there is sufficient evidence, to delay valid claims. In the end, my only real advice to any of you reading this post is the following: Don’t be shady. Seriously. There’s nothing I detest more than people who bring fraudulent insurance claims to try and make a dishonest buck. In the end, those fraudsters are hurting insurance companies and policyholders who have valid claims. Oh, and they risk going to jail, too. It’s just not worth it.

Regarding the ”insured person” issue, the policy precludes coverage if “any insured person” under the parties' insurance policy engaged in or directed an intentional or criminal act in setting the fire or concealed or misrepresented any material fact or circumstance to Allstate during the claim investigation. Allstate argued that the Shoopmans’ son, Michael, resided in their home at the time of the fire and is an “insured person” as a matter of law. The Shoopmans argued that Michael was staying in the house temporarily to recover from injuries from a motorcycle accident, so he is not an “insured person” under the Policy. The Court concluded that the evidence supports more than one reasonable inference, so summary judgment was not appropriate on that issue.

Allstate also alleged that Michael misrepresented facts and concealed pertinent information about his father's mandolin, his criminal background and his activities on the day of the fire which were “material” to the investigation. As the jury could find Michael was not an “insured person,” the Court declined to consider that argument.

Allstate also argued that the Shoopmans included a Gibson mandolin on the Proof of Loss but did not tell Allstate that the mandolin had been pawned and did not notify Allstate that the mandolin had been recovered until months later. The Shoopmans argued that Michael pawned the mandolin and they did not know of it until after Michael was arrested, well after they filed the Proof of Loss. The Shoopmans further contended that any alleged “misstatements” on the Proof of Loss related to the mandolin did not affect Allstate's investigation. The Court held that whether the Shoopmans actually misrepresented or concealed information, and whether that information was material to the investigation, are questions for a jury and denied summary judgment.

As for the Shoopmans’ bad faith claim, the Court granted summary judgment in favor of Allstate. The Shoopmans argued that Allstate’s predisposition to blame Michael for setting the fire, failure to comply with its corporate adjusting requirements, and rude behavior towards them constituted more than “mere negligence” and were deliberate acts and reckless disregard for their rights as insured persons. The Court disagreed. “The Shoopmans' assertions simply do not amount to outrageous conduct absent some affirmative act of harassment or deception.” The Court held that to prove a bad faith claim regarding a delay in claims handling, there must be proof or a reasonable inference that that the purpose of the delay was to extort a more favorable settlement or to deceive the insured regarding coverage. Allstate’s adjuster’s and investigator’s bad manners or errors in judgment were not sufficient to support a bad faith claim, nor were its technical violations of its procedures and rules.

Read the full opinion here.

First, the key element of fraud is the intent to deceive. Obviously, intentionally setting one’s property ablaze for the purposes of duping the insurance company demonstrates a clear intent to deceive. The problem is 999 times out of 1,000 there will be no Hollywood-film moment with the dastardly perpetuator of the fraud breaking down in an EUO, admitting the fraud, and begging forgiveness. It just rarely, if ever happens. In fact, out of all the fraudulent fires I investigated this happened once. And the woman did not admit the fraud, she merely asked for a break to use the rest room… never to return to the examination.

But I think it is very important for me to stress this next point to public adjusters and attorneys who handle first party property claims alike: look at your claims with a skeptical eye. If it looks like a duck and quacks like a duck, it’s probably a duck. That is, if you have a fire claim about which you have suspicions, you do not have to represent that person. In this industry the players on both sides of the ball need to weed out fraudulent claims. There are enough legitimate claims to go around, and advancing fraud just gives our industry a huge black eye. For example, raise your hand if you have seen this scenario: “Well, I was cooking fish with a huge pan of hot oil on the stove, when [insert weak excuse here: the doorbell rang, someone called, I fell asleep, I needed an ingredient and went to the store] and I forgot I was cooking and left the stove on.” Twenty minutes later the oil ignited and started a fire in the kitchen. But it was a controlled burn, with smoke damage throughout the house. Ever hear that before?

Well, a few years back there was such an epidemic of this type of claim in Dade County a task force was created. Am I saying this fact-pattern never happens legitimately? Of course not. Unattended cooking is covered under most policies. But I am saying these types of claims occur few and far between without fraud. Certainly attorneys and public adjusters who accept any claim that comes their way, all the while turning into the proverbial three monkeys, “I don’t want to see fraud, hear about fraud, or talk about fraud.” should be ashamed of themselves.

What public adjusters and attorneys should be doing is looking at these types of claims through a filter of skepticism. Ask your client the questions they would be asked at an EUO by defense counsel, not to prepare them for how to lie and get away with the fraud, but to ferret out the fraud before you sign and perpetuate it. First, discuss the facts and circumstances of the claim. For example, I once investigated a kitchen fire claim identical to the facts above where the policyholder stated in a recorded statement after the fire that she was cooking, suddenly remembered she had to pick up her daughter from school, and left the house in a rush, failing to turn off the stove. That could happen, right? Well… the problems were the date of loss was in July after school was out for the summer and further investigation showed that the daughter was not even in the country at the time. That’s pretty damning evidence. Second, you can bet dollars to doughnuts that the carrier is going to delve into the policyholder’s finances attempting to prove economic hardship facilitated a fraudulent fire claim, so ask the policyholder those hard questions during your assessment of the claim’s viability. Hence, perform your due diligence, investigate the facts of a suspicious fire and if the circumstances do not add up, walk away.

Additionally, pay close attention to the rest of the claim. That is, ALE (additional living expenses) and contents, specifically. Greed is inherent to all people. Even Ghandi probably had to fight off urges to take an extra spoonful of rice. This is important when regarding suspicious fire claims, as people who will commit fraud for money are all too often overcome by greed. They very often will make demand for additional living expenses (ALE) which are drastically over-inflated or outright phantom. I cringe when I am meeting a potential new client and I see those little paper receipt booklets for alleged rent payments. For example, I once investigated a claim where a young woman had a kitchen fire and stated under oath that the house was uninhabitable and she had to move in with her grandmother until repairs were made. How nice. Family helping family. Of course, she also produced a lease and little paper receipts claiming Granny was charging her $2000 per month. Unfortunately, she could provide no evidence as to where that money came from (re: cancelled checks, ATM receipt, etc.) and it was plainly obvious she was outright lying. In most jurisdictions if the policyholder is fraudulent with ALE the whole claim may be denied. In Florida, Wong Ken vs. State Farm, 685 so2d 1002 (3rd DCA 1997) holds that very premise.

The other area that must be scrutinized very closely is contents. Fraudulent policyholders will typically include every item they own –and then some—to their contents claim. Review that contents claim with a fine-tooth comb. Be reasonable, that is, if the policyholder is a working-class person making $40,000 per year chances are they do not own three gold Rolexes. And for that matter, how are three gold Rolexes allegedly located in a bedroom on the other side of the house from the kitchen damaged by fire? Much like fraudulent ALE, in most jurisdictions a fraudulent contents portion may lead to the entire claim’s denial. In Florida, see Schneer vs. Allstate, 767 so2d 485 (3rd DCA 2000).

So the moral to this blog: look hard at suspicious fire claims before agreeing to advance them. Ask your potential client the questions posed above, not to prepare them on how to commit fraud, but so potential fraud claims may be unmasked well in advance of EUO where, I promise, any competent defense counsel will unveil any ill intent.

Tune in next week insurance fans when we discuss Typical Questions Asked During an EUO of a Suspicious Theft Loss.

Let’s start with your analogy to 17th century witch-hunts. Suggesting that the investigation of suspected fraud by insurance companies is a “witch-hunt” is, to me, almost laughable. I realize your knowledge and experience with fraud investigators is limited to taking their depositions and challenging their findings, so I could hardly expect you to be objective about the individuals you make a living opposing, but your assessment of their abilities and their motivations is more than wrong, it is entirely unfounded.

The SIU investigators, private investigators and law enforcement investigators I have worked with for over 30 years are, with rare exception, among the finest, most ethical and most dedicated professionals I have ever met. (You might want to compare the number of fraud investigators implicated in corruption/dishonesty last year with the number of attorneys implicated in corruption/dishonesty. The numbers run about 100 to 1 for corrupt lawyers!) They work long hours under difficult—and sometimes dangerous—conditions to uncover the truth. When they do, their findings are challenged by the criminals they expose (and their lawyers) as being “biased”, “slanted”, ‘improper”, “incomplete” and even “untruthful.” When they testify in court, they will be called everything but an honest child. But for nearly all of them (Yes, there are always some bad apples in every barrel) they do it because they believe in their work and because they want to expose fraud in the interests of all of society. They don’t do it for the money, Chip. You have secretaries making more money than some of the fraud investigators I know. They don’t do it because they have some perverse interest in making false accusations to ruin the lives of innocent people, either. Most of them have more principle than the clergy I have met. They do it because they feel their work has a purpose and a value—to all of us. Ask yourself if what we have recently seen from the likes of Enron and Bernie Madoff suggests the uncovering of fraud is a worthwhile mission. I know how I feel about that.

When you call for “unshakable proof” of insurance fraud, are you suggesting some heightened standard of proof to uncover fraud? (Isn’t true proof “unshakable” by definition? I mean, is there such a thing as “shakable” proof?) Is there some social purpose in affording such protection to those who perpetrate insurance fraud? Should we give them greater protection than murderers and rapists, as if they merit some type of special protection? I would hope not!

Nobody wants to see an innocent person wrongly accused. Believe it or not, some of the people who feel most strongly about that are the same people you accuse of engaging in a “witch-hunt”. I have worked with many investigators who have gone out of their way to look for evidence which casts doubt on the suspicions of fraud, to pursue truth rather than seek evidence to support an accusation. But the sad truth is that insurance fraud in this country is not some “rare occurrence of fraud to justify an open season on policyholders” as you suggest, but is an epidemic of staggering proportions. When a national survey just a few years ago revealed that over 50% of the people in this country—the majority, for God’s sake!--think it is “okay” to pad an insurance claim to get back your deductible or recover some of the premium that has been paid “all these years,” we have a moral crisis on our hands. And after handling perhaps 5,000 fraud cases in my career, I can offer some first-hand testimony that the problem is real and the prevalence is rampant. Just from my own cases, I have proved fraud committed by persons from every walk of life—including CEOs, legislators, judges, clergy, accountants, lawyers, entertainers and professional athletes. Not to mention insurance contractors, adjusters and public adjusters in numbers which leave me shaking my head. Chip, insurance fraud is no “rare occurrence” in this country, it is a true epidemic.

When you say that “If all you concentrate upon in life is uncovering fraud, you may start seeing signs of it everywhere,” I beg to differ. When we go to a doctor, we want a specialist. When policyholders come to your firm, they want somebody who only concentrates upon your type of practice. (You wouldn’t want your law firm described as a place where “all they concentrate upon in life is uncovering bad faith, so that they see signs of it everywhere!”) And when insurance fraud is being investigated, I sure don’t want somebody doing it on a part-time basis, do you?

Your reference to the recent scientific developments in fire investigation and the suggestion “many innocent people were accused of arson” is a popular refrain in recent years, but it lacks any statistical basis in fact. Issues such as concrete spalling, depth of char analysis and flashover have certainly changed the way we look at a fire and the basis for determining the cause of a fire. But there were only a small number of cases where those issues were the determining basis for concluding a fire was arson. In almost all of the arson cases prosecuted over the past 50 years, they were only one small part of the proof. Those “bad cases” have drawn a lot of attention and deservedly so for the individuals wrongfully convicted. (Perhaps you saw me on CNN’s “Anderson Cooper 360” last year discussing this very point.) But to suggest there was some widespread misapplication of fire science so that hundreds or thousands of innocent people were wrongfully convicted of arson is just wrong, way wrong. There is absolutely no evidence of that on such a scale.

Chip, we all run the risk of developing “tunnel vision” from the work we do. I’m sure you and many others who visit your website feel that way about me. But after reading your blog, I have to tell you I fear you may have developed that affliction yourself when it comes to this issue. Insurance fraud is a threat to all of us. It drives up indemnity payments on claims, it causes tens of millions of dollars to be spent trying to uncover it, and in the end it hurts everybody when they go to pay their insurance premiums. And lest we forget, it is both legally and morally wrong. Rather than disparaging insurance fraud investigation, we should all be promoting and supporting it. I’ve spent my life doing just that and I plan to continue to do so. I would welcome your assistance, my friend.

--Sandy Burnette