Suspicious Fire: Arson Defense, EUO Refusal, and a Mortgagee Demand
A homeowners policy with $250,000 dwelling and $125,000 personal property limits, a $1,000 deductible, and a standard concealment-or-fraud condition insured a home that burned at 2:10 a.m. The insured had raised his personal property limit from $50,000 to $125,000 nineteen days earlier. The fire marshal lists the cause as 'undetermined,' noting no identifiable ignition source in the room of origin, and a neighbor reports the insured's car in the driveway at 11 p.m. although the insured says he was out of town. The insured's public adjuster submits a sworn proof of loss with a 14-page inventory including a $12,000 home theater system with no receipts and 40 pairs of designer shoes. The insured has declined two written requests for an examination under oath. The mortgagee has demanded payment of its $180,000 balance.
1. What must you be able to prove to deny for arson or fraud, and what investigation steps come before you take any position?
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The burdens. The insurer bears the burden of proving that an exclusion or a policy condition bars recovery. To deny for arson the carrier must prove both that the fire was intentionally set and that the insured was responsible - usually through circumstantial evidence of motive and opportunity. For concealment or fraud, the carrier must show a material misrepresentation made knowingly and with intent to deceive. Suspicion is not a defense.
Investigation before any position letter. Obtain the fire marshal's report and photographs and interview the investigator; retain an origin-and-cause expert if the marshal's work is thin. Pull financial records: mortgage arrears, bank statements, judgments, business losses. Verify the out-of-town account with phone records, card transactions, and hotel records. Take the neighbor's statement and canvass the street. Review the two prior claims and the reason for the 19-day coverage increase. Take the insured's recorded statement.
Current position. The recent increase, the 'undetermined' cause with no ignition source, and the car-in-driveway discrepancy each have an innocent explanation. Together they justify a reservation-of-rights letter and continued investigation - not a denial today. Say so in writing.
2. How do you handle the examination-under-oath refusal, and what are the limits on that tool?
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It is a condition precedent. The examination under oath is a policy condition to recovery, and an unjustified refusal can bar the claim. But it only works if the demand is clean: in writing, from the insurer, citing the policy condition, at a reasonable time and place, with reasonable accommodations (remote examination, an interpreter, a copy of the transcript, counsel present).
Before you deny. Confirm both requests went out properly, that the insured actually refused rather than failed to respond to a defective notice, and that you warned him in writing that continued refusal may result in denial. If the objection is travel or scheduling, cure it. If he refuses after a clear warning, the insurer may deny for breach of a material condition.
The limits. Document the refusal contemporaneously and keep investigating in parallel. Do not use the EUO as a pretext to avoid a coverage decision you are not yet prepared to defend - courts look at whether the refusal was the real reason for the denial, not a convenient one.
3. What are your obligations to the mortgagee while the insured's claim is under investigation, and after a denial?
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The mortgagee's rights are independent of the insured's conduct. Under the standard mortgage clause, the mortgagee is entitled to notice of cancellation and nonrenewal, may pay premiums if the insured does not, and its claim is not defeated by the insured's acts or neglect - it may still recover loss payment to the extent of its interest, subject to policy limits, proof of its interest, and the insurer's subrogation rights against the insured.
While investigating. Send the mortgagee written notice of the investigation and the reservation of rights, acknowledge its demand, and request a statement of the loan balance and proof of its interest. Do not ignore it and do not disclose the insured's recorded statement or examination testimony - that is the insured's confidential material and sharing it can create its own liability.
After a denial. If you ultimately deny the insured, evaluate the mortgagee's claim separately on the policy limits and the mortgage clause. The $180,000 balance may still be payable up to the $250,000 dwelling limit. Document that separation so the file shows two distinct coverage determinations.