Question about arson and insurance fraud?

Question

Ok,
I have began investing in real estate. I was speaking to another investor at a REI club and he told me something that shocked me completely. He said that he bought a house for $5000. It was in poor condition, no hot water heater or furnace, holes int the wall, kitchen cabinets gone, etc. He said that he patched the holes, painted the walls and it was appraised for $35000. He then paid someone in the neighborhood (a bad neighborhood) to burn it down. A month later he collected the insurance money (a little more than the appraised amount $45k total).

My questions are:
1. How could he have gotten insurance for this house? Isn't there a pre-insurance inspection for homeowners insurance, or does it not matter what shape the house is in? This house was pretty much unlivable.
2. I was under the impression that a vacant house can not be insured. Am I wrong here?
3. Is there anything that local authorities can do in a situation like this? Would my testimony help, or would it not matter?

Answer 1

1. Usually the inspection happens 30 days or so after the insurance is put into place. There ARE companies, that specialize in insuring sub-standard housing. Usually Lloyds of London or Foremost Insurance, come immediately to mind. Also, if the AGENT was in on it, that would help him do it.

2. Yes, you're wrong. I've insured LOTS of vacant houses. You have to write a vacant fire policy on it - which costs more, and covers less, but it IS insurable. MOST companies won't write a vacant house, but again, there are substandard companies that will. Again, Lloyds and Foremost BOTH do vacant houses, along with low-value houses.

3. You can always report this as insurance fraud, to your state insurance department. THEY are the people who can investigate the claim. Keep in mind, authorities can ONLY prosecute if there is EVIDENCE of who set the fire, etc.

One more thing to keep in mind . . . there's a central database for claims. If someone has one arson claim in a bad neighborhood, oh, that's too bad. If someone has TWO, that's very suspicious. This guy PROBABLY is going to have a very hard time finding insurance coverage - not just for his INVESTMENT properties, but for ANYTHING. Without evidence, just based on the fact that there was an arson claim.

Answer 2

1. Contracts for insurance operate under the principle of "uberrimae fidei" which is Latin for "utmost good faith". Insurance companies have to trust the policyholders and they have to trust the companies (although the principle seems to get a bit bent on that side of the deal!). So they assume that the householder is genuine - the contract is void is that is untrue.

2. On the contrary, vacant houses are more at risk and so need insurance more - insurance companies will not insure a house that is long term vacant under the usual domestic policy that is all - they will insist on some kind of managing agent or security cover.

3. This is a police matter as it is fraudulent conversion and incitement to arson. Both serious offences. You can't give evidence as you don't "know" - what your fellow investor said is called "hearsay". If you saw him make the deal with the arsonist or saw the arsonist torch the house you could give evidence. Some insurers and some jurisdictions have anonymous phone lines to report suspicious behaviour - you could look for one of those.

Answer 3

Do properties get inspected YES! That is the main reasons insurers have AGENTS. Why is it easy to buy auto insurance over the internet but Homeowners is sold through agents? Because a property inspection is required prior to binding a policy. Now, I was born in the morning but it wasn't THIS morning; I can certainly tell when a property is vacant as can the insurers who do follow up inspections.

Any investor who goes to a REI meeting and talks about arson he commited is beyond stupid. I would follow up with a call to the POLICE, forget the insurance commisioner.

Answer 4

He could have gotten a basic fire policy on it if it was vacant, or, he could have gotten a policy for house under renovations, saying it was a fixer-upper, so the condition wouldn't have mattered that much. In both of these cases, fire would be covered. He would have had to purchase vandalism separately (on the same policy but a separate coverage on a basic fire policy). If it was in his business name, it would have been a commercial policy. He may not have been able to get liability coverage but it seems he didn't really care if this was his intent all along.
He must have known exactly what to say & how to act toward the claims adjuster because they are trained to spot fraud by people's words & actions. He must be good and/or got a new adjuster.
If I were you, I would report this to your local police department & fire department & see if you can find out who the insurance company was (the fire department may have had to speak to the insurance company & someone may remember who that was). If you can get a hold of the insurance company name, report it to them too.
People like him make us ALL pay higher premiums. Insurance fraud has been estimated to be in the billions of dollars per year, from padding legimate claims to complete fraud to felonies like arson.

Answer 5

Insurance fraud is a big problem that affects everyone who buys insurance (through higher premium). Many states have set up an arson fraud hot line.

I live in SC and ours is: 800-92-arson

You may want to do an internet search for your state and see if you can locate one. This kind of thing is what it is set up for.

Answer 6

1) usually no inspection; only location matters
2) they don;t know how many people are actually living in it, and no it doesn't matter. Any house can be insured as long as someone owns it. If it gets fuucked-up, you still have to pay to repair the damage even if someone doesn't live there
3) your testimony may help, and the insurance companies will welcome it much

Insurance fraud is one of the top crimes in America

Answer 7

He is giving a big white lie, if this is true if he is caught he will spend sometime in asspounding prison.

Answer 8

1. THERE IS NO PRE-INSPECTION
2 THERE ARE NO OCCUPANCY REQUIREMENTS
3 YES THERE IS---CONTACT A FIRE DEPT ARSON INVESTIGATOR....LET THEM INVESTIGATE IT....IF THERE IS PROOF THEY WILL BRING CHARGES