Arson - Arson levels rise

According to the Arson Prevention Bureau, there are over 2,200 incidences of arson in the UK every week, with an average of 262 homes and 380 businesses, public buildings and schools destroyed. The Axa Crimes Against Business report states that cases of arson were up 18.7% from January to June of this year compared to the same time in 2007. With the average claims settlement sitting at over £39,000, Axa believes that insurers are taking the hit.

Mortgages

Peter Unsworth, partner in the commercial litigation team at Keoghs, believed that the economy is largely to blame for the rising figures: "As the mortgage crisis takes its toll in the United States, insurers across the pond have witnessed an increase in suspicious fires in homes and businesses. There are now rising concerns that the UK's gloomy economic outlook could lead to a similar situation here."

This month's PB Sentiment Survey (pp. 41-48) seems to lend credence to Unsworth's view, as 87% of respondents believed that the industry will see a rise in fraudulent claims as a result of present economic conditions. Other factors may also bear part of the blame. "There has been a large influx of inexperienced buy-to-let landlords in the UK property market over the last few years," highlighted Doug Barnett, head of customer risk management at Axa. "With current economic difficulties making it hard for landlords to find tenants, a lot of inexperienced investors are taking on anyone rather than spending time on their selection processes."

Arson has been highlighted as a problem for insurers for several years and many attempted to combat the problem by making use of techniques such as crime mapping technology. However, arson not only affects the claims rates of insurers, it also has a profound effect on brokers.

"By their nature, fire claims tend to be relatively high value," noted Unsworth. "Such claims can have a significant impact on overall account performance with an insurer and hence prejudice benefits received from any special or club status that a broker has."

Insurers are also adjusting their underwriting philosophies to reflect the rising levels of the crime. Unsworth stated: "It is unlikely an insurer would use a single incident to change its approach to an individual broker. If, however, it starts to see a number of suspect claims from the same portfolio, there is the possibility that it may adopt a stricter underwriting and control approach, which could affect the broker's ability to attract and retain business."

Proving that an arson-based claims fraud has occured is problematic as evidence in suspected arson cases is usually circumstantial, meaning that an insurer has to be certain of its position before alleging fraudulent behaviour. In such circumstances, insurers may apply a no-tolerance technical application of the policy wording, which could result in the policy being voided for misrepresentation, or the claim being rejected on the basis that policy conditions have not been met, leaving the broker with a heavy burden of responsibility.

Caution

Unsworth warned: "Unless the broker has been rigorous in all dealings with its customer and in communicating the terms and restrictions on the policy, there is a real danger of a claim being presented to it for professional negligence by an even more desperate policyholder."

Barnett believed that things will worsen before improving: "Darker nights bring out the kids and we will see increasing incidences of arson. Brokers need to ensure their customers and clients have effective measures to combat arson in place if they are to avoid a rise in time-consuming claims."

What brokers can do

- "Know your customer," said Peter Unsworth, partner in the commercial litigation team at Keoghs. "Be on the look out for any obvious signs of potential risk: an inability to provide documentation to evidence values; failure to provide turnover and other financial figures on time; redundancies; contract losses and so on."

- Pass on all material information to insurers. Should you have any doubts regarding a client then consider the impact on your insurer relationships should they come to fruition.

- Ensure that your clients understand fully the provisions of their policies and keep evidence that you have done this in writing to them. Make sure that you record this on your systems.

- "Not enough property owners are aware of the risks of arson, so always ensure that arson is at the top of your clients' minds," advised Allister Smith, property risk manager at Norwich Union. Implement an arson profile on every property. Specialist solutions for vacant buildings can be put in place within 24 hours.