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Every first party property adjuster in their career will face attempts to defraud the insurer for whom the adjuster works. It is imperative that the adjuster is aware of every type of property insurance fraud he or she may encounter. Some, but certainly not all, types of scams follow:
Arson for profit.
Arson is the intentional burning of property. It is no longer limited to specific types of property. Although perhaps the most dangerous of all methods of insurance fraud, people continue to attempt insurance fraud by burning their homes, vehicles and business structures. The FBI recommends that:
In 2010, 15,475 law enforcement agencies provided 1-12 months of arson data and reported 56,825 arson incidents. Of the participating agencies, 14,747 provided extended crime data on 48,619 arsons.
Landscaped facilities involving structures (eg, residential, warehouse, public, etc.) accounted for 45.5 percent of the total arson. Mobile property was involved in 26.0 percent of arsons, and other types of property (such as crops, timber, fences, etc.) accounted for 28.5 percent of reported arsons.
- The average dollar loss due to arson was $17,612.
- Arsons of industrial/manufacturing structures resulted in the highest average dollar losses (an average of $133,717 per arson).
- Committed crimes decreased by 7.6 percent in 2010 compared to arson data reported in 2009…
- In the whole country, there were 19.6 arsons for every 100,000 inhabitants.
By using technological devices, chemical analysis and even trained dogs, it has become more difficult for the arsonist to cause a fire that appears to a trained investigator to be accidental.
Arson is not excluded in any first party fire policy. It is, in fact, a specifically covered peril: fire. There is no arson cover available to an insurer. The defense to arson caused by an insured to defraud an insurer is misrepresentation, concealment or fraud, an exclusion in every fire policy.
If an insured sets fire to his furniture or car to deceive the insurer, the insurer’s defense is fraud: not arson. To defend a claim based on fraud by arson, the insurer must prove the following:
- The property was insured according to an insurance contract.
- The insurance contract contained a provision that allowed the insurer to void the policy on the grounds of misrepresentation, concealment, false swearing, fraud.
- An exception for intentional acts of the insured similar to that in the New York Standard Fire Insurance Policy.
- The fire was not accidental.
- The fire was caused by the actions of one or more people.
- The fire was started by the insured or someone acting on behalf of the insured.
- The fire was started with the aim of deceiving the insurance company.
Under Michigan law, however, the insurer only needs to show that the fire was of inflammable origin and that the insured had both the motive and opportunity to start it in order to establish arson protection. Each element can be established by circumstantial evidence.
There is rarely direct evidence that a fire was started by an insured. Without eyewitness or other direct evidence, the insurer can prove that the insured was involved in an arson for profit by presenting evidence of the insured’s motive, opportunity and ability to cause the fire. Motive is not required to prove arson, although it is easier for the person proving arson to believe that the insured caused the fire to deceive the insurer.
For example, showing an insured’s financial hardship or anger toward a spouse or someone else can establish motive. An insured who has access to a building shortly before a fire also has “opportunity”. If opportunity and motive are combined and all accidental causes are eliminated, fraud by arson or arson can be proved.
IN Fitzgerald v. Great Central Insurance Co., 842 F.2d 157 (6th Cir. 03/18/1988) following a fire, plaintiffs’ claims for benefits were challenged. The insurers claimed that Gerald Fitzgerald started or procured the fire. The plaintiffs then filed a complaint against Aetna and Great Central for breach of contract.
On the night of the fire, Gerald Fitzgerald, his son and the family dog, who lived in the apartment above the tavern, were all absent from the building. Gerald Fitzgerald spent the night at the Coho Club in Traverse City, leaving his son and dog with a friend. Michael Husby, who also lived in Fitzgerald’s flat and had recently bought into the business, visited the bar during the evening but spent the rest of the night at his girlfriend’s house.
The bar closed at 10:30 that night. Nothing unusual was noted in or around the building until flames and smoke were discovered at 1:30 a.m. The doors to the bar were locked but the separate entrance to the upstairs apartment was unlocked. There were no signs of breaking and entering.
Testimony at trial as to why the insurer denied the insurance claim meets the standard of relevance. The insurer testified that it was the insurer’s belief that the insured planned to defraud the insurer from the beginning, when they first obtained their homeowner’s insurance even though they did not live in the property. This is significant because a requirement for valid home insurance is that the homeowner lives on the premises and was part of the insurer’s arson for profit protection. [Banks-Williams v. Allstate Vehicle & Prop. Ins. Co. (6th Cir., 2019)]
The staged or fake residential theft where the insured reports the theft of property from a residence or business when none actually occurred. IN US v. Tam, 240 F.3d 797, 2001 Daily Journal DAR 885, three defendants were convicted of conspiracy to commit mail fraud and to transport stolen automobiles in foreign commerce, mail fraud, and transportation of stolen automobiles in foreign commerce, and two of them were also convicted of conspiracy for money laundering, after a jury trial. The Court of Appeal concluded that evidence was sufficient to support a defendant’s conviction.
Given the fact that the plaintiff was arrested and cited for making a false insurance claim and that the person he identified in a photo lineup as having stolen his car later testified to the police that he had been contacted by a woman connected to the plaintiff who paid him $200 for participating in a staged theft of the plaintiff’s vehicle, the dismissal of the claim was appropriate.
In New Hampshire, a defendant participated in a staged theft of his wife’s jewelry from a restaurant in Brockton, Massachusetts to fraudulently collect $1,500 in insurance proceeds. Joseph Butler, an off-duty police officer who eats at the restaurant, observed the activities of the defendant, his wife, his daughter, and a friend surrounding the staged robbery. The evidence was sufficient to support a conviction. [State v. Matiyosus, 134 N.H. 686, 597 A.2d 1068 (N.H., 1991)]
Staged water damage or mold claim
Where the insured intentionally promotes damage by wetting the home or business property with a hose or disconnecting a plumbing fixture to generate water damage and encourage mold growth.
An incremental loss, regardless of type, is fraud. Even if no claim is filed, an insured can be charged with attempted fraud and face criminal penalties. For example, in a case in New York, a man gave his car keys to a third party who would sell or otherwise dispose of the car. The insured was encouraged by the third party to make a fraudulent claim against his own insurance claiming that the car was stolen. After reporting the theft, the insured got scared and did not proceed with the claim.
Regardless, the insured was arrested and the court found him guilty of insurance fraud because he took active steps to commit the fraud. The insured could not escape criminal liability by failing to meet all the requirements of a false claim.
Staged mold claim
The most famous staged mold claims occurred in Texas in 2002. The seven conspirators were arrested on June 27, 2002 by federal investigators, working in conjunction with the Texas Department of Insurance. The defendants were accused of making insurance claims for water and mold damage on a series of homes they purchased, purchasing insurance for, and then intentionally flooding the homes with water hoses or by damaging water lines. At least one house was “boiled” to accelerate mold.
Other members of the ring, posing as salespeople and contractors, filed false claims to repair the damage and sold the houses to each other to repeat the process. Six of the conspirators were found guilty. The remaining conspirator, Ramnatah Ramcharan, was found guilty by a federal jury in October of conspiracy, four counts of mail fraud and ten counts of money laundering.
As insureds and public adjusters become “mold savvy,” the temptation to create a covered loss scenario where none would otherwise exist became almost irresistible.
This article is adapted from my book The Compact Book of Adjusting Property Claims, Third Edition” available on amazon.com and available as a Kindle book or as a paperback.
(c) 2023 Barry Zalma & ClaimSchool, Inc.
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Barry Zalma, Esq., CFE, now limits his practice to serving as an insurance consultant specializing in insurance coverage, insurance claims management, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims attorney and more than 54 years in the insurance industry. He can be reached at http://www.zalma.com and firstname.lastname@example.org
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