Out of the Ashes

Article, Post MazagineJuly 2009

Insurance / Forensic Investigation / Property

Determining a financial motive is a crucial element in defending insurance claims in cases of suspected arson, as Tony Levitt, Senior Partner at RGL London explains.

The financial crisis and worldwide recession have focused on the role of banks and financial institutions. Huge losses have been incurred which are difficult to comprehend. The banks are not the only businesses suffering financial losses. Manufacturing and trading companies, too, are in deep financial crisis.

It is against this backdrop that we tend to see more suspicious fires. When a company makes losses and cannot sell its stock, there is a temptation to resort to desperate measures. Insurers are sometimes seen as a means of finance to rescue businesses from financial difficulties. Fires are started to destroy stock and other assets, and a claim is made against insurers for the replacement value of assets destroyed and the consequent loss of profits.

If a claim is made and arson is suspected, loss adjusters and forensic scientists look into the opportunity to start the fire and cause and origin; and forensic accountants investigate financial motive.

Creative accounting

The accountant reviews the financial position of the insured in the period prior to the fire, and will consider the financial condition had the fire not occurred. This review is placed in a wider context by taking into account the market in which the insured company operates, the general economic climate and whether the insured is performing (or claiming to perform) in line with current market conditions.

Where a business is claiming that it was profitable and adequately funded before a fire, it is essential to establish that the records provide confirmation of this. The forensic accountant should be aware of possible “creative accounting”, which could show a better financial position than actually existed. There are many examples of this and some are set out below:

  • Deliberately overstating stock at year end. 
  • Including invoices for sales to related companies. 
  • Fictitious invoices made out to show increased sales. 
  • Including items sold after the year-end. 
  • Use of provisions.

In fraudulent fire insurance claims there is often an unwillingness to provide all the relevant financial information. This is often accomplished by alleging that computer systems and relevant records were burnt in the fire or were damaged beyond use by water from firemen’s hoses. Not surprisingly, the insured may allege that no off-site backups of data are retained. Also, financial statements are frequently disclosed only for those periods when the business was profitable. All current information is said to have been destroyed and no current financial statements prepared. In this way, information is withheld which could reveal the true extent of liabilities, in an attempt to show that the company was not in financial difficulty at the time of the fire.

Unaudited financial statements must be treated with caution in these circumstances. They may not agree with the underlying computer records and may have been prepared to show a healthy financial position, whether for presentation to a bank or other financial institution, or to insurers when making a claim. Further accounting research is often required to establish whether the financial statements show the correct financial position of the company at that time.

Documentary support needs to be reviewed with care. It is simple to create or manipulate documents, such as invoices or contracts, which are sent by email in support of a claim. These should be checked against other hard-copy information and should not be accepted at face value. It may also be necessary to employ forensic technology techniques to check the actual creation dates and other meta-data of the documents.

In times of recession a company often finds that, as sales fall, stock turnover diminishes, which means that more inventory is held as it is sold less frequently. The cost of holding inventory, and the possibility of it becoming old or obsolete, become factors to take into account. The age and nature of the inventory on hand prior to the fire should be reviewed to establish whether it was saleable. This is particularly relevant in those industries where product change is frequent, such as fashion clothing, and electronics products. If inventory is old or unsaleable, this provides another financial motive to start a fire: destroying the stock and converting it into cash, provided by insurers.

Fraud indicators

There are several indicators which suggest fraud. Each in its own may not be significant, but several appearing together may indicate a possible fraud against insurers.

  • Suspicious transactions, such as fictitious sales to customers. 
  • Lack of support from banks and financial institutions. 
  • Claim out of proportion to prior periods’ results. 
  • Absence of basic financial information or financial statements. 
  • Overstating income prior to loss and understating income thereafter. 
  • Obsolete or slow moving stock. 
  • Financial difficulty and inability to pay creditors or financial institutions. 
  • A poor claims history. 
  • Demands for a quick settlement, without providing supporting documentation. 
  • Physical evidence inconsistent with the loss claimed.

In the aftermath of a suspicious fire, the business may cease to operate. The fire is often cited as the cause of the failure of the business, and a claim is made for loss of profits from the date of fire through to the end of the indemnity period, even though the company no longer trades. The administrators of the insolvent company may view the insurance policy as an important company asset to provide funds in the liquidation. They may blame the financial misfortunes on the fire and may be encouraged by the prospect of contingency fees to run a case against insurers.

In a case of suspected arson, a detailed investigation is essential using loss adjusters, forensic scientists; and forensic accountants to enquire into the financial condition of the business at the time of the fire and thereafter, to establish financial motive. 


As appeared in Post Magazine, July 2009.

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