To The Point
A burning potential
Industry must be vigilant as subprime fallout spawns increased incidents of arson
By Phil Zinkewicz
“Save The Tiger,” a 1973 film with Jack Lemmon and Jack Gilford, depicted a financially troubled garment manufacturer considering arson as a solution because the next fashion season was too far away to offer any assurance of recovery. Lemmon, who won an Academy Award for his part as a reluctant participant in the crime, illustrates the dilemma of engaging in this desperate act.
Of course, while the dilemma might arise for some contemplating lighting the match, whether it be on commercial property or residential, the record clearly shows that arson is a raging reality for more reasons than just “selling the store” to an insurance company. The issue comes to the forefront at this time because of the subprime mortgage crisis, which is subjecting millions of home owners to possible foreclosure. Among them might be many careless, immoral and angry individuals, who see the possibility of recoupment through the match or torch.
In a recent review of arson trends, the Insurance Information Institute (I.I.I.) observed that “insurers are concerned that the subprime mortgage crisis will spur arson by home owners who face foreclosure.” The I.I.I. report points out that higher monthly mortgage payments, which kick in when the low introductory rates expire, paced by falling home values and stricter loan rules restricting refinancing, “may lead to a spike in home owner arson.” This may be happening already if statistics from the California Department of Insurance can be considered evidence of a national phenomenon. Using the California numbers, the Coalition Against Insurance Fraud, as cited by I.I.I., has observed that suspected mortgage-related home arsons have jumped 50% above 2006 levels.
I.I.I. is not alone in its projection that arson will increase as a result of the subprime mortgage debacle. A lengthy entry in Wikipedia, the Internet’s “free encyclopedia,” includes the observation that “there is concern that some home owners are turning to arson as a way to escape from mortgages they can’t or refuse to pay.” This entry cites information from the FBI that says arson grew 4% in suburbs and 2.2% in cities from 2005 to 2006. The article points out that the figures for 2007 and 2008 were not yet available. Two articles referenced in the footnotes of the Wikipedia entry deal with the connection of the subprime crisis to the criminal events. They are “Broke Homeowners Linked to Arsons” by Marilyn Lewis, appearing in the January 20, 2008, issue of “MSN Money” and Jon Birger’s “Will Foreclosures Spark an Arson Boom?” which appears in the January 10, 2008, edition of Fortune magazine
In the February 28, 2008, edition of “Medill Reports,” Benjamin Helfrich quotes James Quiggle, who heads the industry’s Council Against Insurance Fraud, as saying: “Warning signs for desperate home owners are right on our doorstep” and that “They’re looking for any shot of quick cash to bail themselves out.” The Helfrich article asserts that the number of self-initiated arson cases is small, surfacing in the hardest hit states, like California “where suspect residential blazes have doubled in the past two years.” And Helfrich quotes Quiggle’s dire prediction that “the all-out explosion in arsons hasn’t happened yet, but there are a growing number of arrests of home owners whose homes are being foreclosed upon and they suspiciously burn down.”
Extent of the crisis
The media are full of details on what’s involved. The Wikipedia entry notes that the arson crisis began when the housing bubble, which had been a major underpinning of the seemingly indestructible economy, burst and housing values began to drop. The ensuing sequence of events has been widely discussed, but the significant issue is that interest rates climbed both in the subprime market and the adjustable rate mortgage market, trapping those home owners who could not meet their obligations. A lot of them are looking for a way out of the dilemma, including arson.
Subprime and adjustable rate mortgages were devices that offered prospective home owners a way to purchase properties using seemingly cheap teaser rates that subsequently would increase. Wikipedia notes that the value of subprime mortgages as of March 2007 was $1.3 trillion.
If the sources quoted here don’t raise the flag of an arson crisis, here is further commentary on the subject. It comes from Barry Zalma’s “Insurance Fraud Letter.” Zalma, who heads Zalma Insurance Consultants, is a widely quoted California attorney. In his March 2008 copyrighted newsletter, he points out that although arson for profit is a small percentage of total arson fires in the United States, these crimes are nevertheless rampant. Zalma adds that the current foreclosure crisis offers the potential that incidents of arson fires will grow “logarithmically.”
Zalma observes, however, that the perpetrators will not profit from the crime if insurers are vigilant and police, arson units and prosecutors carry out their duties and prosecute arsonists to the full extent of the law. Arson fires, Zalma asserts, always leave physical evidence, even if the house is burned to the ground. Such evidence, he observes, can lead to the arrest and conviction of perpetrators and, at the very least, denial of an insurance claim. In some situations, insurers may even be able to recoup money that was paid out. Zalma’s firm represents insurers in those many instances where their own investigative ability is limited.
According to I.I.I., “Great strides have been made in fighting arson over the past two decades.” Specifically, I.I.I. lists the basic training given to police officers and firefighters in arson detection and the insurance industry’s computerized database of property claims designed to help identify suspicious claims. In addition, the I.I.I. reports that insurance companies have set up special investigative units. Also established to thwart fraud is state authority for the free exchange of information between insurers and law enforcement agencies to eliminate the threat of civil suits claiming a violation of privacy or libel. There are also computer modeling programs to enable fire investigators to better understand the dynamics of arson fires, I.I.I. explains in its report.
As the foreclosure crisis deepens, some home owners who are faced with wipeout are not likely to be deterred from committing arson. Clearly this will require increased vigilance on the part of law enforcement and the insurance industry. *
The author
Emanuel Levy, editor of Insurance Advocate from 1958 to 2004, joined the weekly insurance news magazine in 1946 after serving with the United States Army. He has appeared as a speaker at meetings and seminars across the country sponsored by producers’ and other industry associations and is the recipient of many awards and citations. For many years he was insurance section editor of the World Book Encyclopedia’s annual historical review book.