Will foreclosures spark an arson boom?

NEW YORK (Fortune) -- Faced with foreclosure on her Russellville, Indiana home, Christina Snyder allegedly concocted the kind of plan that now has insurance executives on edge.

According to the county prosecutor, the 31-year-old Snyder allegedly offered to pay a neighbor $5,000 to help her burn down her house and make it look like a botched rape attempt - all in order to claim $80,000 in insurance money. Snyder wanted the neighbor to bind her hands in duct tape, write "whore" on her shirt, and then help her escape once the blaze was set, the prosecutor says. The neighbor demurred, instead reporting Snyder to police.

With the national foreclosure rate zooming and the real estate market in a two-year funk, the insurance industry fears more homeowners will see arson as a way out of their financial woes. A recent report by the industry-funded Coalition Against Insurance Fraud notes that with "untold thousands of homeowners struggling with ballooning subprime mortgage payments, fraud fighters are watching closely for a spike in arsons by desperate homeowners who can no longer afford their home payments."

History indicates such a spike is coming. "When the economy is down, we see an increase in fraud," says Dennis Schulkins, a claim consultant in State Farm's Special Investigative Unit.

It may already be happening. Allstate (ALL, Fortune 500) spokesman Mike Siemienas says his company has seen an increase nationally in arsons among homes in foreclosure. In California, the statešs insurance division reports that the number of questionable residential fires in 2007 increased 76 percent over 2006.

National arson statistics for 2007 aren't yet available, but Federal Bureau of Investigation crime data shows there was a significant uptick - 4 percent - in suburban arson in 2006, when the real estate downturn began to take hold. The arson increase in 2006 marked a change from the prior three years when suburban arson fell 3 percent, 5 percent and 6 percent, respectively. Says Dennis Jay, the Coalition Against Insurance Fraud's executive director, "It's a growing problem."