Fraudulent Fire Claims: Legal and Forensic Aspects

Introduction
Anatomy of Fire Fraud
Burden and Standard of Proof
Non-Disclosure and Misrepresentation
Breach of Warranty

Introduction

An important issue arises in cases where fire affects the contents and/or the structure of an insured party's premises. That is: When should forensic scientists and lawyers become involved?

The engagement of an adjuster is an inevitable feature in fire damage instances as it is the adjuster who investigates into the amount of the claim and recommends the adjusted amount for payment. An adjuster may want a forensic scientist to become involved in cases where fraud is suspected.

Anatomy of Fire Fraud

Early warning signs
The following are warning signs that the insured may be making a fraudulent claim in the case of fire damage to his property:

• no sign of forced entry;
  
  
• more than one seat of fire; and
  
  
• strong smell of a highly flammable substance;

Upon investigation, the following features may become evident:

• poor financial performance of the insured party's business;
  
  
• overstocking;
  
  
• no credible proof of purchases and sales (ie, falsified invoices and receipts); or
  
  
• no proof of insurable interest.

Stage two
Having established that one or more of the early warning signs exists, a forensic scientist's confirmation should be sought regarding the following:

• confirmation of distinct seats of fire;
  
  
• the probability that the fire was not electrical in origin;
  
  
• chromotograms with distinct peaking indicating the use of highly-flammable substances;
  
  
• the nature of fire damage to the carpet and to stock (eg, if the fire started at a low level, this may indicate that a flammable liquid was applied); and
  
  
• any other signs that the fire originated internally (eg, the cause for windows to break - by heat or by hand).

The forensic scientist's involvement is important because he will help establish the sequence of events that led to the fire by collecting samples that are then analyzed by a forensic science laboratory. Samples may consist of carpet, slivers of wood, liquid from a container or a workbench, pieces of cloth, and other items.

Stage three
Further queries by adjusters and lawyers may arise relating to, among other things, the following:

• poor financial performance of the insured;
  
  
• exaggeration of the value of stock;
  
  
• no account taken by the insured in respect of obsolescence or depreciation when pitching the claim;
  
  
• unwillingness of the insured to co-operate fully;
  
  
• the number of people with keys;
  
  
• the way in which entry/exit points to the premises were secured; or
  
  
• an increase in insurance cover shortly before the fire.

Burden and Standard of Proof

In the case of Ng Choon v Nippon Fire & Marine and in the recent Uniglory Case, the courts took cognizance of the fact that where fraud is alleged, the burden of proof falls on the defendant insurers. The standard of proof in a civil case was summarized in Bater v Bater as follows:

"A civil court, when considering a charge of fraud, will naturally require for itself a higher degree of probability than that which it would require when asking if negligence is established. It does not adopt so high a degree as a criminal court, even where it is considering a charge of a criminal nature; but it still does require a degree of probability which is commensurate with the occasion."

Thus the standard of proof to meet in a civil case is a higher degree of probability than in a normal civil case but not to the extent of 'beyond reasonable doubt' as in a criminal case.

In view of the foregoing, when should lawyers get involved? As soon as an insurer realises that it is a fairly large fire and that there is a hint of an accelerant being used, the lawyer should be requested to go on site in order to derive an impression of the scene. On site consultations with adjusters and forensic scientists will be invaluable when it comes to trial preparation. After all, the plaintiffs would certainly not have their lawyers on site. That would give the game away too readily.

Non-Disclosure and Misrepresentation

Non-disclosure and misrepresentation are two aspects that must be considered. With regard to non-disclosure, the following ought to be noted:

• the contract of insurance can only be avoided if the undisclosed matters are material;
  
  
• the matter is material if it would have influenced the mind of the prudent notional underwriter;
  
  
• material information is information that would have an effect on the thought processes of the insurers in writing the risk; and
  
  
• although the influence on the underwriter does not have to be a decisive influence, there must be actual inducement (ie, if the matter had been disclosed, the underwriter would have insured on different terms or refused to underwrite the risk).

The law of non-disclosure and the law of misrepresentation are virtually the same.

Breach of Warranty

Licence Warranty 9A
Breaches of warranties in insurance policies must be examined very carefully. For example, a licence warranty (such as Licence Warranty 9A) in a fire insurance policy that requires registration with "local municipal or other authorities" may be interpreted to mean registration with the municipal council, the fire department, the electrical board and/or the electric supply department.

It has been recommended that Singapore's Licence Warranty 9A be modernized by having the wording changed to state as follows:

"Warranted that during the currency of this policy the insured shall hold such licence or licences as is or are required by the relevant enactment, subsidiary legislation and rules and regulations made thereunder and the said insured shall fully comply with the conditions and requirements thereof at all times."

Harzadous Goods Warranty 6A
That which is stored within the risk address must also to be considered carefully. Very often forensic help is required to determine the following:

• whether the liquid or substance that is stored has the chemical composition of the listed goods;
  
  
• whether it was stored in excess of the quantity permissible; and
  
  
• the flash point of the substances.

For further information on this topic please contact Balu Rao at B Rao & KS Rajah by telephone (+65 535 2188) or by fax (+65 534 3972).
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