Chapter 6 – Property Claims

Introduction

· Company guidelines, and the experience of assigned adjusters and examiners, direct the handling of claims

· These factors help to ensure that fraudulent claims receive proper attention from the earliest possible moment

Fire scene investigation

· Before approaching a fire scene adjusters should know the insurance coverage in force, the u/w history, and as much background info about the insured or the insured’s business as possible

· Insurance coverage-related indicators:

o Coverage was arranged shortly b4 the loss (eg 1 or 2 months)

o Coverage was increased or added shortly b4 the loss

o Property is heavily over-insured

o The loss occurred shortly b4 the policy expired or cancellation was to become effective

o The property was owned for quite some time b4 coverage was arranged, and then soon after, a loss occurred

o Many documents and records were destroyed in the fire but the insurance policy was left intact

o Duplicate or multiple policies were arranged through different agents/brokers

o Facts were misrepresented in the application

o Info provided to u/ws was misleading

o The insured has an extensive claims record

o The insured called the broker, shortly b4 the loss, to check coverage

· Personal indicators:

o The insured was recently separated or divorced and disputes have arisen over property

o The insured has onerous alimony or child support obligations

o The insured has recently encountered an employment problem: strike, layoff, or business closing

o The insured has a gambling problem

o The bank has threatened to foreclose on the property

o The insured has an oppressive debt load

o There are clues to suggest that the insured is involved in some other criminal activities (eg extortion, drugs)

· Policy statutory conditions provide for access to the property but do not allow the insurer to exercise any control over the property

· The law is evolving concerning the need to obtain search warrants during an arson investigation

· Although cooperation among the various crime fighting agencies and other support groups is considered to be a key element in fighting fraud, care must be taken to gather and exchange info legally

· Arson indicators:

o Timing: fire occurs,

§ Late at night

§ In the early morning hours (at commercial premises)

§ When business is closed

§ On weekends or holidays

§ When the insured is out of town or inexplicably miles away

§ Shortly after the insured has left the premises

o The removal of special articles, sentimental value, irreplaceable property or pets just prior to the fire

o Premises indicators: premises are,

§ Vacant or unoccupied

§ Under renovation

§ Located in a deteriorating neighbourhood

§ Located in an improving neighbourhood

§ In need of expensive repairs

§ In need of substantial maintenance and new equipment

§ Listed for sale, but w/out activity for an extended period

o Other possible indicators of arson fraud:

§ Reports and witness accounts are inconsistent

§ The insured has a carefully planned alibi

§ The values claimed are inconsistent w/ the insured’s reported income

§ The insured’s lifestyle does not correspond to the types of items claimed

§ The insured carries multiple mortgages on the property

§ The insured discovers the fire and also notifies the authorities

§ The insured hires a public adjuster

· A policyholder advancing a fraudulent claim may use a public adjuster as a screen and also as a resource

· Public adjusters represent the insured for a fee (usually % of claim settlement) which encourage inflated claims

· If the point of origin (the most heavily damaged area) appears to be in a closet or if more than one point of origin is apparent, suspicion of arson is more than justified

· Burn pattern – the shape of the charred areas

· A vee burn pattern usually indicates a normal burn w/out accelerants

· An inverted vee pattern usually suggests that chemicals were used to accelerate or propagate the fire

· Irregular burn patterns may suggest that chemical accelerants were used

· When arson is suspected, the Fire Marshall’s Office (FMO) is called to investigate

· Fire scene indicators:

o Multiple points of origin exists

o Some evidence of flammable liquids is present’

o Trailers (the link intentionally established to distribute fire from one area to another) leave evidence usually in the form of elongated burn patterns

o An explosion or series of expulsions occurred

o Timing devices were connected to electrical appliances near the point of origin

o Contents were removed from the building b4 the fire occurred

o Contents are of uncharacteristically inferior quality

o Signs of tampering w/ gas, electricity or sprinkler systems exists

o Artificial draft conditions exist, such as open windows or holes in walls or combustion boosters

o The fire spread was unusually rapid

o Flames of an unusual colour were observed

o No obvious potential source of ignition exists in the area of the fire (eg fire starts in a closet)

o Thing are out of place (eg propane tank in the kitchen)

Arson and the criminal code

· Arson is a crime against society. Numerous sections of the criminal code deal w/ fire or explosions:

· Arson – disregard for human life: every person who intentionally or recklessly causes damage by fire or explosion to property, whether or not that person owns the property is guilty of an indictable offence and liable to imprisonment for life where

o The person knows that or is reckless w/ respect to whether the property is inhabited or occupied

o The fire or explosion causes bodily harm

· Arson – damage to property: every person who intentionally or recklessly causes damage by fire or explosion to property that is not wholly owned by that person is guilty of an indictable offence and liable to imprisonment for a term not exceeding 14 yrs

· Arson – own property: every person who intentionally or recklessly causes damage by fire or explosion to property that is owned in whole or in part by that person is guilty of an indictable offence and liable to imprisonment for a term not exceeding 14 yrs where the fire or explosion seriously threatens the health, safety or property of another person

· Arson for fraudulent purposes: every person who w/ intent to defraud any other person, causes damage by fire or explosion to property, whether or not that person owns in whole or in part, the property, is guilty of an indictable offence and liable to imprisonment for a term not exceeding 10 yrs

· Holder or beneficiary of fire insurance policy: where a person is charged w/ an offence under the above, the fact that the person was the holder of or was named as a beneficiary under a policy of fire insurance relating to the property in respect of which the offence is alleged to have been committed is a fact from which intent to defraud may be inferred by the court

· Arson by negligence: every person who owns, in whole or in part, or controls property is guilty of an indictable offence and liable to imprisonment for a term not exceeding 5 yrs where, as a result of a marked departure from the standard of care that a reasonable prudent person would use to prevent or control the spread of fires or to prevent explosions, that person is a cause of a fire or explosion in that property that causes bodily harm to another person or damage to property

· Non-compliance w/ prevention laws: where a person is charged w/ an offence under the above the fact that the person has failed to comply w/ any law respecting the prevention or control of fires or explosions in the property is a fact from which a marked departure from the standard of care referred to in that subsection may be inferred by the court

· Possession of incendiary material: every person who possesses any incendiary material, incendiary device or explosive substance for the purpose of committing an offence under any of the above sections is guilty of an indictable offence and liable to imprisonment for a term not exceeding 5 yrs

Defending against arson

· A court does not necessarily require an eyewitness account to find an insured guilty of arson

· Since arson is a serious charge, commanding, convincing evidence must be presented rather than merely suspicious circumstances

· The key elements of an arson defence must show evidence that the:

o Fire was set

o Insured had a motive to set the fire

o Insured had the opportunity to set the fire

Set fire

· Evidence that a fire was set is reinforced when other plausible causes are eliminated

· An expert in fire causation could rebut any argument that is not valid

Motive

· Motive in an arson case often relates to financial problems

· Evidence of motive strengthens the insurer’s case

· Checklist for deceptive financial practices:

o Financial statements cannot be produced

o Invoices submitted by related companies could be fictitious

o Sales were actually made after the fiscal year-end but they were included in the financial statements to show stronger financial position

o The year-end cut off is being manipulated

o Expenses are understated

o Many creditors have not been paid

o Purchase invoices have been suppressed

· Financial statements offer important info but it is also essential to confirm transactions through source documents (sales and purchase invoices, other book of account) when necessary

· Financial health is closely tied to the status of sales

· Sales indicators:

o Although sales are falling, the insured claims they are increasing

o Fictitious sales are being recorded

o The sales recorded are out of proportion to prior period’s results

o There have been alterations made to purchase or sales invoices

· Inventory-related indicators:

o The inventory is obsolete. Perhaps the insured could not sell the product during the designated selling period

o The inventory is overvalued. The type of product purchased may depreciate rapidly or the insured may be manipulating financial statements

o Large purchases of stock were made for cash just b4 the claim. This could indicate that the stock did not even exist

o New and better products are readily available at comparable cost. This might seriously affect the value of existing stock

o The acceptable rate of turnover for the inventory should be determined to measure the insured’s current performance

o Large quantities of stock were purchased draining the company’s cash standing

· Some analysis must be made of the productivity of assets or operations

· Monthly income must be compared to monthly obligations. When an insured has provided a personal guarantee for a business debt it may provide a strong motivation to commit insurance fraud should the business begin to fail

· Legal problems are a drain on company resources

· Business-related indicators:

o The area is subject to an economic recession

o A new highway has significantly reduce traffic to the insured’s retail operation

o Competition in the insured’s line of business is ruthless

o The insured’s product is no longer viable or competitive

o The insured wants to get out of business quickly b/c of

§ Disputes w/ partners or shareholders

§ Labour problems

§ Health problems

§ A decision to emigrate

o The insured cannot fulfill contracts b/c

§ Of inadequate equipment

§ Qualified help cannot be hired

§ Material are unavailable

o Seasonal business has been adversely affected by

§ Location

§ Poor weather

§ Zoning – loss occurs at the end of unsuccessful selling season eg ski equipment destroyed in the spring or farm machinery destroyed in the fall

Opportunity

· Does the insured have the only key to the premises?

· While motive and opportunity can serve to connect the insured to the setting of the fire, the elements of proof depend on the circumstances of each case, and no rigid rules apply

Credible witnesses

· A court listens to and watches the witnesses closely in order to judge their sincerity and truthfulness

· Any apparent misrepresentation or non-disclosure on the insured’s part prior to the loss is normally cited in pleadings on behalf of the insurer. This has 2 important effects:

o Claims may be declined if the policy is found to be void

o Even if insufficient to void the policy, they may expose the insured as unreliable or lacking in credibility

Damage claims

· Physical damage to property may motivate an insured to commit insurance fraud

· Adjusters must be able to discern when an engineer must be called upon

· To reduce the margin of discrepancy it is important to clearly set out the scope of repairs and the quality of materials

· Estimates must be well organized and detailed – anything less invites fraud

· Estimates:

o Scope of the damage that relates to the claim

o Establish the ACV of the claim, even when it is a total loss or when a replacement cost settlement is anticipated

o Complete a detailed itemization of the claim

o Lump sum estimates from contractors should not be accepted, especially for large losses

o Determine who must authorize repairs

o Ask about other insurance, if applicable calculate the apportionment

· Property damage appraisals:

o Material to be used in repair must be equivalent in value to the original

o Although prices fluctuate for materials, a reasonable range must be determined based on the quality of the item and the appropriate labour factor

o Collusion b/w an insured and a service provider (a contractor) is a possibility that should not be ignored

Assessment of claims

· The value of a claim should be established whether it is suspected of being fraudulent or not

· A damaged building should be inspected by experienced contractors or an engineer to check the structure of the building or a market value appraiser in the case of a total loss

Formal appraisal process

· The appraisal process is prescribed by the Statutory Conditions when the damage or the value of the property is in dispute

· Quantum can then be established, leaving only the issue of coverage to be decided by the courts

· There shall be no right too an appraisal until a specific demand therefore is made in writing and until after proof of loss has been delivered

· An appraisal can be demanded by either the insured or insurer

· The procedure outlined in the insurance act provides that:

o The insured and insurer shall each appoint an appraise and the two appraisers so appointed shall appoint an umpire

o The appraisers shall determine the matters in disagreement and if they fail to agree, they shall submit their differences to the umpire and the finding in writing of any two determines the matters

o Each party to the appraisal shall pay the appraise appointed by him and shall bear equally the expense of the appraisal and the umpire

o Where,

§ A party fails to appoint an appraiser w/in 7 clear days after being served w/ written notice to do so,

§ The appraiser fail to agree upon an umpire w/in 15 days after their appointment or

§ An appraiser or umpire refuses to act or is incapable of acting or dies a judge of the country or district court of the country or district in which the appraisal is to be made may appoint an appraiser or umpire, as the case may be, upon the application of the insured or of the insurer

· The umpire alone is not empowered to impose a settlement on the parties

· The umpire may suggest compromises or suggest a settlement figure which is then agreed to by at least one of the appraisers

· The appraisal procedure is flexible, in that the legislation does not prescribe rules of conduct

Theft claims

· After arson, theft claims are the most costly source of insurance fraud

· Reasonable proof must be submitted that establishes the:

o Value of items

o Existence of items

o Ownership of items

· Contents theft indicators:

o Analysis of receipts:

§ The insured does not have any receipts, cancelled cheques or credit card slips

§ Receipts w/ the following characteristics may be suspicious:

· Photocopies or duplicates

· All appear written by the same hand or in the same typescript

· From the same store

· Consecutively numbered

· In whole dollars

· Show no tax, or the tax is incorrect

§ Receipts are presented immediately after the loss in neatly arranged dossier

§ The receipt and appraisal are from the same store and for the same amount

§ The store has no record to match receipt submitted

§ The store does not carry the item shown on the receipt

§ The item sells for much less than the amount shown on the receipt

§ Many expensive items were purchased w/in a short time frame

§ Receipts for items available locally show a distant supplier or retailer

§ Items stolen were just purchased

o Personal theft indicators: the insured,

§ Is aggressively pushing for settlement, threatening to complain to regulators or the media or threatens to sue the company

§ Is unusually knowledgeable about the claims process

§ Is eager to settle quickly even at a discount

§ Is anxious to receive cash settlement

§ Has a significant loss record

§ Is unfamiliar w/ the source, the price, or the operation of equipment items claimed

o General theft loss-related indicators:

§ The insured has not reported the incident to the police

§ The items reported stolen to the police do not match the items claimed under the insurance policy

§ The insured reports the claim to the insurer b4 notifying the police

§ A supplemental list submitted to the police is much longer than the original one

§ There are no signs of forcible entry

§ Items reported stolen are all top-of-the-line products

§ Expensive items have been paid for in cash

§ The burglar alarm has been disconnected or is defective

§ Losses involving seasonal equipment or stock at the end of the selling season

· Detecting fraud depends on cross checking and confirming info gathered in an investigation

· Theft claims are subject to the Statutory Condition which provides that a willfully false statement vitiates the claim

Sample Review Questions - Fraud Awareness and Prevention

1. Coverage-related fraud indicators of particular interest to an adjuster are:

o Coverage was arranged shortly b4 the loss (eg 1 or 2 months)

o Coverage was increased or added shortly b4 the loss

o Property is heavily over-insured

o The loss occurred shortly b4 the policy expired or cancellation was to become effective

o The property was owned for quite some time b4 coverage was arranged, and then soon after, a loss occurred

o Many documents and records were destroyed in the fire but the insurance policy was left intact

o Duplicate or multiple policies were arranged through different agents/brokers

o Facts were misrepresented in the application

o Info provided to u/ws was misleading

o The insured has an extensive claims record

o The insured called the broker, shortly b4 the loss, to check coverage

2. Factors in the insured’s personal life that may motivate a crime of arson are:

o The insured was recently separated or divorced and disputes have arisen over property

o The insured has onerous alimony or child support obligations

o The insured has recently encountered an employment problem: strike, layoff, or business closing

o The insured has a gambling problem

o The bank has threatened to foreclose on the property

o The insured has an oppressive debt load

o There are clues to suggest that the insured is involved in some other criminal activities (eg extortion, drugs). A connection established b/w the insured an any criminal activity may foreshadow insurance fraud

3. Adjusters should be familiar w/ the law and how it relates to the right of access to property. Policy statutory conditions provide for access to the property but do not allow the insurer to exercise any control over the property. Nor do policy conditions put the insurer above the law. Officers of the law may limit access to the premises during an investigation to a crime and under certain other conditions.

4. In Regina v. Ouida (1996) it was decided that the Ontario fire marshal needed a search warrant to enter the scene b/c it was believed that the owner of the premises was engaged in the criminal act of arson.

5. Trailer – the link intentionally established to distribute fire from one area to another. Elongated burn patterns may be visible afterwards b/w burn areas, evidencing that a trailer was used. Any type of readily ignitable material may be used as a trailer.

6. Certain timing aspects that could indicate an arson crime are: the fire occurs,

§ Late at night

§ In the early morning hours (at commercial premises)

§ When business is closed

§ On weekends or holidays

§ When the insured is out of town or inexplicably miles away

§ Shortly after the insured has left the premises

7. A house listed for sale may be an arson flag if it has been listed for sale but there have been no activity for an extended period of time.

8. Coverage-related issues that would need close examination include: policy effective and expiry date – is coverage in force, the u/w history – recent increases in coverage or additions, and as much background info about the insured or the insured business as possible. This knowledge is useful to guide adjusters on what to investigate at the scene.

9. Business factors that may be signs of a fraudulent claim include:

· The area is subject to an economic recession

· A new highway has significantly reduce traffic to the insured’s retail operation

· Competition in the insured’s line of business is ruthless

· The insured’s product is no longer viable or competitive

· The insured wants to get out of business quickly b/c of

o Disputes w/ partners or shareholders

o Labour problems

o Health problems

o A decision to emigrate

· The insured cannot fulfill contracts b/c

o Of inadequate equipment

o Qualified help cannot be hired

o Material are unavailable

· Seasonal business has been adversely affected by

o Location

o Poor weather

o Zoning – loss occurs at the end of unsuccessful selling season eg ski equipment destroyed in the spring or farm machinery destroyed in the fall

10. Burn pattern – the shape of the charred areas. If it forms an inverted vee on a wall next to the point of origin it may suggest that chemicals were used to accelerate or propagate the fire. Ordinary burn patterns take the shape of an upright vee.

11. A vee burn pattern usually indicates a normal burn w/out accelerants. An inverted vee pattern usually suggests that chemicals were used to accelerate or propagate the fire.

12. When arson is suspected by the fire department, the Fire Marshal’s Office (FMO) will be called to investigate. People that may be involved in the investigation include: the FMO, the police, the ICPB, the SIU, an engineer, an adjuster, an examiner, and a lawyer.

13. The criminal code item that concerns arson for fraud covers:

o The person knows that or is reckless w/ respect to whether the property is inhabited or occupied

o The fire or explosion causes bodily harm

14. When sentencing an insured on an arson conviction, a judge may order the accused to make restitution (repay the insurance money to the insurer that were on the risk) if the insurer’s lawyer makes the necessary representation b4 sentencing.

15. The type of proof needed in a civil court to dismiss a claim of arson is circumstantial. A court does not require an eyewitness account to find an insured guilty of arson. In civil court, the standard of “on a balance of probabilities” has been confirmed by the Supreme Court of Canada.

16. The 3 key elements of an arson defense must show evidence that the

a. Fire was set

b. Insured had a motive to set the fire

c. Insured had the opportunity to set the fire

17. A scenario that might be typical of an arson-for-profit: the insured’s business is doing bad and there is no hope of recovery. Financial statements are bad, sales are down and the insured is unable to pay any of his expenses.

18. When the cause of a fire cannot be directly ascertained, an expert might be called upon to eliminate other plausible causes. For example, an electrical engineer confirms that the electrical system and equipment in the area of the fire were not defective, electricity as a potential cause can be eliminated.

19. Some deceptive practices used to disguise the poof financial condition of a company include:

· Financial statements cannot be produced

· Invoices submitted by related companies could be fictitious

· Sales were actually made after the fiscal year-end but they were included in the financial statements to show stronger financial position

· The year-end cut off is being manipulated

· Expenses are understated

· Many creditors have not been paid

· Purchase invoices have been suppressed

20. Questions that may arise regarding inventory include:

· The inventory is obsolete. Perhaps the insured could not sell the product during the designated selling period

· The inventory is overvalued. The type of product purchased may depreciate rapidly or the insured may be manipulating financial statements

· Large purchases of stock were made for cash just b4 the claim. This could indicate that the stock did not even exist

· New and better products are readily available at comparable cost. This might seriously affect the value of existing stock

· The acceptable rate of turnover for the inventory should be determined to measure the insured’s current performance

· Large quantities of stock were purchased draining the company’s cash standing

21. When assessing the insured’s financial position, monthly income must be compared to monthly obligations. Monthly obligations and other amounts owed, balances due and payment methods, suits, liens, garnishees, and chattels must be reviewed. When incoming sales do not support the costs of running the operation, the business is doomed to fail.

22. Motive in an arson case often relates to financial problems. Aspects of establishing motive in an arson fraud include:

a. Checking for deceptive financial practices

b. Examining the status of sales

c. Examining the inventory

d. Examining the business as a whole

23. Credible witnesses affect a defense against an arson-for-profit crime b/c a court listens to and watches the witnesses closely in order to judge their sincerity and truthfulness. Inconsistencies, hesitations, and other examples of suspect behaviour can tip the scales of justice, especially when the ultimate decision is guided by so subjective a factor as a perception of the balance of probabilities.

24. The formal appraisal process for a claim:

· The insured and insurer shall each appoint an appraise and the two appraisers so appointed shall appoint an umpire

· The appraisers shall determine the matters in disagreement and if they fail to agree, they shall submit their differences to the umpire and the finding in writing of any two determines the matters

· Each party to the appraisal shall pay the appraise appointed by him and shall bear equally the expense of the appraisal and the umpire

· Where,

o A party fails to appoint an appraiser w/in 7 clear days after being served w/ written notice to do so,

o The appraiser fail to agree upon an umpire w/in 15 days after their appointment or

o An appraiser or umpire refuses to act or is incapable of acting or dies a judge of the country or district court of the country or district in which the appraisal is to be made may appoint an appraiser or umpire, as the case may be, upon the application of the insured or of the insurer

25. In D’Amico v. General Accident Assurance Co. of Canada (1997) sufficient evidence was presented to show motive and opportunity and for the judge to reasonably find the insured responsible for the fire. Some money had been paid out on the claim initially and the court ordered that the insured repay it.

26. The general type of information that an adjuster should generate on items stolen and claimed for are ones that establish the

a. Value of the items

b. Existence of the items

c. Ownership of items

27. Characteristic associated w/ receipts that would be deemed to be suspicious are:

o The insured does not have any receipts, cancelled cheques or credit card slips

o Receipts w/ the following characteristics may be suspicious:

§ Photocopies or duplicates

§ All appear written by the same hand or in the same typescript

§ From the same store

§ Consecutively numbered

§ In whole dollars

§ Show no tax, or the tax is incorrect

o Receipts are presented immediately after the loss in neatly arranged dossier

o The receipt and appraisal are from the same store and for the same amount

o The store has no record to match receipt submitted

o The store does not carry the item shown on the receipt

o The item sells for much less than the amount shown on the receipt

o Many expensive items were purchased w/in a short time frame

o Receipts for items available locally show a distant supplier or retailer

o Items stolen were just purchased

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