A fire can wreak havoc on the best managed business and many companies never recover from the setback. Here's how to help your commercial clients avoid falling prey to a firebug and also how to spot an opportunistic arson insurance fraud in the making.
There are many motivations for arson, including revenge, juvenile boredom, crime concealment, terrorism, psychiatric problems, business rivalry and financial insurance fraud.
And according to the Australian Institute of Criminology and the Insurance Council of Australia, the major motivator is financial gain through insurance fraud.1
This has serious implications for the near to medium term given the world is currently still in the grips of a global financial crisis. As the downturn continues to impact the economy and individuals and small-to-medium businesses suffer from the fallout, the rate of insurance-fraud-related arson is expected to rise.
There are some early signs that this is already occurring in the United States and other parts of the world. In the US, the National Insurance Crime Bureau says referrals for suspicious vehicle fires have increased by 27 per cent in 2009 compared to 2008 as the recession continues to bite.2
To add fuel to the fire, another potential reason for the predicted rise in arson-related crimes is the difficulty in catching and punishing the perpetrators. According to a study by the NSW Bureau of Crime Statistics and Research, only five per cent of arson offences result in an arrest.1
Counting the cost to insurers and business
The cost of arson is often difficult to quantify. At best, arson statistics usually represent educated guesses. While the Australian Bureau of Statistics (ABS) compiles data on a number of crimes (e.g. homicide, assault, robbery, motor vehicle theft etc.), they don’t record arson figures.
The reason arson is normally grossly underreported is the difficulty in proving criminal intent in many cases. The Australian Institute of Criminology estimates that the cost of arson in 2005 in Australia was $1.6 billion and that it accounts for eight per cent of the total crime cost in Australia (see box).1
This does not take into consideration medical expenses for arson victims and intangible costs, such as loss of productivity or social impacts. Hence, the actual costs of arson could be several multiples higher.
Some of the hidden costs of arson to individual businesses include:
- Losing market share and large important customers while business activities are interrupted as they recover from the arson attack
- Increase in insurance premiums due to a poor claims history
- Long lag time for resumption of business due to obtaining new licences and certification in certain industries
- Damage to the business’ brand name as they are taken out of the public’s consciousness for a prolonged period.
Statistics shows that many businesses affected by a major fire either never recover or close within two years of reopening.
Reducing your clients’ risks
Zurich Risk Engineering works with brokers and clients to reduce their claims by developing specific solutions for their businesses in the form of risk improvement recommendations. The recommendations that the team has found to be most effective in preventing arson include installing/implementing the following security measures:
- External security lighting and CCTV cameras around the property
- A back-to-base monitored security alarm
- A monitored automatic fire detection system and/or automatic fire sprinklers
- Physical security measures, such as perimeter fencing, grills on windows and doors, gated entryways, security patrols etc.
Most arson attacks happen at night, when there’s a reduced likelihood of potential witnesses and most businesses are closed. The threat of identification via security cameras is often an effective deterrent for trespassers and thrill-seeking arsonists.
In turn, an automatic fire detection system enables an early response by the fire brigade should a fire be lit in the premises, while sprinklers can contain or extinguish the fire and thereby limit the potential damage. Businesses should ensure that all sprinkler valve locations are locked and equipped with anti-tamper devices.
It’s also important to make sure that industrial rubbish dumpsters, boxes, wooden pallets, crates, plastic ‘wheelie’ bins and other potential fuel sources are locked and secured in areas where arsonists cannot access them.
Easy targets for arsonists include premises located in remote locations, away from public thoroughfares and with poor physical security, as well as unoccupied buildings, which tend to attract squatters, drug addicts and bored juveniles looking for a thrill. It doesn’t take a lot for a squatter to knock over a candle or for some kids to set fire to a building when it is vacant.
Likewise, the local demographics of some locations put businesses in these areas at increased risk of thrill-seeking firebugs. Studies have shown that firebugs tend to be young men from poorer areas where there is also a strong link with other crime forms. Nearly one in two alleged offenders is a male aged between 15 and 19.1
One of the key commonalities of arson targets is the ease of gaining entry into the site undetected. Property owners and businesses located in high-risk areas need to be especially vigilant about arson and ramp up their physical security measures.
Hallmarks of arson fraud
While arsonists motivated by personal reasons (e.g. jealousy, revenge and psychiatric dysfunctions) are often difficult to predict, that’s often not the case with financial gain arsonists. There are many tell-tale signs or risk indicators that an astute risk assessor or property underwriter will look out for, including:
- The business is in financial difficulty. Signs include the bargain basement sale of assets and properties, large scale retrenchment of workers, discontinued alarm monitoring service etc.
- The assets are abandoned or unoccupied. Reinstatement clauses make it more difficult for insurance fraud in this situation (as the property would just be replaced). But the claimable business interruption costs can be significant.
- The property value has dropped due to rezoning or public works (eg building of a new highway, dam or airport).
- The building’s destruction would avoid a costly clean-up (eg treating/removing asbestos). This is especially pertinent where a property is unoccupied due to a health hazard.
- The building site is about to undergo redevelopment and has gained approval from local council to be demolished (a fire can eliminate demolition and debris-removal costs).
- The company has been adversely affected by changes in government regulation or health discoveries that negatively impact the industry.
- The insured has a previous history of arson. Unless some material changes have been made to the property, businesses that have been attractive arson targets in the past continue to be highly vulnerable to a subsequent attack.
- Companies in dispute with unions and workers.
- The land is worth more than the buildings (ie has good redevelopment potential).
- The business is in an industry that is greatly affected by an economic downturn. Some sectors, such as the motor vehicle industry, are especially susceptible to economic woes.
1 Australian Institute of Criminology, National Workshop: Focus on the arsonist and arson prevention 1994, Discussion Paper.
2 “Insurance fraud referrals on the rise but cause remains in question,” Best’s Insurance News, 12 June 2009.© Zurich Financial Services Australia October 2009