When a person believes that they have a constitutional right to privacy, they must not have read the constitution well because it does not specifically address “privacy.” Privacy, it appears, is a right established by the courts because of their interpretation of a constitutional provision that does not mention privacy. But be that as it may, it is now a more-or-less accepted right of every American. Ethically, it was never questioned as an ethical behavior.
One of the most recent problems involving privacy is that of Internet privacy. For a person to order something from a firm or individual via the net, to makes inquiries, to register a product, or nearly any other activity involving the internet, requires identifying information of some sort – ranging from credit card numbers, social security numbers, addresses, etc., to just the e-mail address. There are innumerable unethical businesses and individuals preying on the typical and honest individual using the Internet.
There are also many opportunities for an individual to ethically misuse the information available on the net. There are companies advertising on television that they can get background information, including criminal records, on any individual. To say that this information could be used unethically is obvious. This can be used for ethical purposes, as employers can make sure that a person with a criminal background is not entrusted with company funds or responsibilities. However, criminal records are not always accurate, plus, there has been numerous identity thefts because of information from the net that had been supplied for legitimate purposes.
There is an interesting conundrum involving health records, particularly DNA records. Theoretically, an insurance company could determine that an individual could have certain gene disorders or gene construction that would make the person highly susceptible to disease or impairment in the future. This could be a financial boon to an insurer if followed to the extreme, as they could cut their losses drastically – it is almost like a clear view into future claims. Logically, premiums should then be lowered on those accepted as they would be a “super-select” body of insureds. But this would create a larger body of uninsured individuals who would have to get coverage from somewhere. There is always the hazard that if the insurers do not accept a broad range of applicants, Uncle Sam will step in. Remember Medicare? Medicare was conceived strictly because the insurance industry could not or would not furnish insurance to the senior citizens – or at least, at affordable prices.
Another area involving ethics in privacy involves claim practices, particularly in disability claims. Everyone has visions of a “totally disabled” client collecting disability payments being photographed or videotaped while they were performing some physical activity that they were supposedly unable to perform. Some question whether it is ethical for a claims investigator to “sneak” around and take pictures unbeknownst to the claimant. Is this an invasion of privacy? Is it really unethical? Does one unethical action cancel out another unethical action, such as taking disability payments when not actually so disabled is unethical, then if the act of collecting evidence of the non-disability is unethical (invasion of privacy)?
Most courts have maintained that surveillance and photographing a claimant is not an invasion if privacy. However, they have just as often found that unauthorized electronic eavesdropping, wiretapping or being recorded on hidden cameras installed in a residence, are invasive and intrusive and usually are considered as elements in an unreasonable investigation.
F If the scope of an investigation is relative and pertinent to the claim or to the coverage, it is ethical. However, if such investigation goes beyond that limitation, then it is unfair and invasive.
Banks have personal financial records of its customers, insurance companies may have personal health and financial records, investment houses also have financial information on its clients. Today, after years of litigation and discussion by regulators and government agencies, insurance companies, financial institutions and investment houses can all be part of the same corporation. Is it ethical for a bank, for instance, to provide their “sister” insurance company with financial records of an applicant for insurance (and at no charge)? The answer to this predicament has been approached by the NAIC who has created model legislation for the states to consider.
Legally, an individual who files a claim automatically loses some of their right to privacy as the insurer has a right to investigate the claim according to policy (contract) provisions. However, they cannot excessively intrude into the insured’s privacy. The investigation is limited to a reasonably unobtrusive type of investigation that would be in the best interest of a defendant, in preparing its case. The investigators are limited to an ethical pursuit of the facts, and any excessive activity or harassing the insured would be considered as an invasion of privacy by the courts.
Selection of the proper product to insure a particular risk has been mentioned earlier, as ethics apply in the selection process. First, let it be recognized that there are very few individuals in the insurance industry who are familiar with the workings of many insurance products. Obviously, life and health insurance agents seldom have any in-depth knowledge of property and casualty policies. Those involved in personal lines seldom have in-depth knowledge of commercial lines. There are also employee benefits, liability, property, surety, aviation, marine and so on ad infinitum – who could possibly know the intricacies of most of these products?
With multiple risks, this can create a problem, to say the least, for an agent or broker to be able to select the right product for his client with the proper coverage and in the correct amounts. An added problem is that the insureds rarely fully understand what it is that they have purchased, except for large commercial risks which has risk managers – in which case the risk managers generally dictate coverages and amounts.
Uninsured motorists coverage is generally not understood by the policyholders and sometimes they do not have the coverage that they thought they had. Buildings have been over-valued and under-valued, and the insured is usually not aware of it. Homeowners do not understand restrictions or limitations on hurricane or earthquake coverage, or flood damage. This is so terribly important, and agents have attempted to educate their insureds, at least to the minimum required by law.
A few years ago, when South Florida was devastated by a hurricane, the television news programs showed row upon row of destroyed houses with the names of their insurers spray-painted on the still-standing walls. Never was there better advertising of the relationship between an insurer and an insured as the insureds illustrated the faith that their insurance company was going to rebuild their homes or business for them and in most cases they did. One still must wonder, however, how many of those with destroyed homes actually had the insurance coverage that they thought that they had. Did they fully understand the deductibles and the valuation process? If they had an ethical agent and an ethical insurer, they either had their home rebuilt or they knew how much they would have to contribute to the rebuilding.
In respect to the nebulous “right to privacy” however, does the agent have an obligation, legal and/or ethical, to “invade” the privacy of the insured, such as inquiring into an individual’s lifestyle, personal habits, health condition, driving record, preexisting conditions, financial status, or other situations that might influence the pricing or acceptance of the risk? Obviously the agent not only has an obligation; they have a duty to their carrier to notify them of any condition that effects the risk involved.
An important ethical question arose a few years ago when AIDs was first recognized in this country. AIDS was primarily a disease that affected the homosexual community so naturally life and health insurers were quite interested in whether an applicant for insurance was “gay.” Politicians on both the state and federal level soon “outlawed” any question regarding sexual preference when taking an application for health insurance. But just because the question could not be asked, was an agent under an ethical obligation to report that the applicant was gay if the agent was made aware of it from other sources? How about a strong suspicion due to living arrangement with a person of the same sex, or certain occupations which are commonly held by homosexuals? Many agents felt that it was their obligation to let their insurer know that the individual was probably gay because of other factors
Although companies denied the practice, when insurers started feeling the backlash for refusing coverage to those they felt had the most exposure to AIDs, underwriters would try to find some other reason for not accepting the risk. Now, however, an AIDS question may be asked on the application for life or health insurance, but if answered negatively, there are no other questions asked about sexual preference (by law). The gay lobby fought hard to even keep the AIDS question out of the application but insurance departments could not very well not put in a question regarding a deadly disease such as AIDS, and still ask questions about heart conditions, cancer and other health questions. The insurance departments took the most ethical route without destroying the underwriting process for life and health insurance, including Long Term Care insurance and at the same time, protected the rights of others.
In respect to choosing the right coverage, the “Cafeteria” plans used in employee benefits provides one ethical solution, whereby an employee can choose between various life and health insurance benefits. This is conducted on a group basis and there are individuals who are knowledgeable in the various products that fully explain the products to the employees.
The best solution for making the right decision for other lines is more difficult. Marketing of insurance should be more on the cafeteria-approach, wherein the insured is more educated in various alternatives. Not likely to happen, so -
F it is the ethical duty of the agent and broker to explain fully and completely, the various options to their clients, including suggesting that the client acquire additional
expert advice in areas where the agent or broker is not expert.
Available coverage should always be explained to the client once the agent/broker has learned more about the lifestyle of the client. If this is done properly, it can even lead to sales of similar products, as illustrated in the following example:
Long Term Care Insurance (LCTI) is a relatively new insurance product, and only in the past few years has the IRS acknowledged it as “insurance.” It is an important product, particularly for senior citizens. However, many Medicare recipients believe that if they go to a nursing home, Medicare and their Medicare Supplement policy will pay the nursing home charges, which can run $5,000 per month or more. Medicare only provides nursing home coverage for no more than 100 days, and then only with strict guidelines and this fact needs to be emphasized to the Medicare recipients. Many agents have hesitated to discuss this product because they were not familiar with it, and if the truth were known, they just wanted to sell their Supplemental policy and then “get out of there.”
Recently, family members who have a parent that is confined to a nursing home, and with the costs eating away their inheritance, have successfully sued agents who did not inform their client that such coverage was even available. Suits have also been filed against financial planners and estate planners who did not make their clients aware of this coverage; so the estate was depleted with nursing care costs.
Many of the large agencies that sell Medicare Supplement policies now require that the client sign a form stating that they had been informed that (1) Medicare does not provide complete coverage for nursing home or home health care costs, and (2) Long Term Care Insurance had been explained to the client. By signing the form, the client states that they were not interested in purchasing such a plan.
This form serves two purposes. Obviously, it is necessary to avoid any future lawsuits if the insured should be required to have nursing home care or home health care for an extended period of time. Secondly (and perhaps more importantly to the agent and agency owner), the client will generally ask what it is they have to sign, and many times they show interest in learning more about this product.
Ethical? You bet. Not only has the agent provided a service to their client, but also in those cases where the agent is not familiar with LTC Insurance, there is a LTCI specialist in the agency that can follow up. To be completely ethical, the agent should have some knowledge of LTCI – for instance, if the client uses a wheelchair or walker, or seems to have cognitive problems (forgetfulness, etc.), then the agent should not let the client have expectations of coverage. However, if the agent’s company or agency does not offer LTCI, but the need is apparent, it would be a breach of ethics to submit this information to another agent without the client’s knowledge and permission.
A discussion of ethics in marketing would not be complete without mention of “scare marketing.” Since insurance provides coverage for future unforeseen events (except for title insurance), many insurance sales are made because the agent or broker has stressed the hazard of not purchasing coverage and the likelihood that something bad was going to happen to the applicant. This was stressed to the point that coverage was purchased primarily because the applicant was “frightened” into buying.
The use of scare marketing varies by insurance product of course, and life insurance is one product where a certain amount of “scare” is inherent by its very nature. Nobody wants to think about dying but everyone instinctively knows that they will die, so when they talk about life insurance, the fact that there will always be a claim is inescapable (if the policy stays in force and except for the first two years of contestability and suicide). While most life insurance is sold for financial reasons ostensibly, there will always be that fear that death may arrive sooner rather than later – after all, life insurance is purchased to provide coverage in case of “premature” death. Some agents become quite “expert” in creating a vision of the applicant passing away relatively soon, and leaving a “mess” financially and psychologically unless proper coverage is obtained, and obtained now. Is this “unethical?” Or just realistic and the agent is providing a real service to get a person to provide for their survivors in case of premature death (often defined as anytime after day-after-tomorrow)? There have been instances of a person deciding to hold off purchasing life insurance for a period of time, and the following day or week, is killed in an accident. Happens.
In life insurance in particular, the coverage amounts are often nebulous. The maximum risk involving a million-dollar building would be a million dollars (or thereabouts), but how much is the life of an individual worth? The American College’s former President, Dr. Huebner, created the “Human Life Value Concept” many years ago, which is one way of determining how much life insurance an individual really needs. Other methods include the amount of the debt when insurance is to cover debt payment or a series of transactions when financial programs for retirement and beyond are created. Estate planners have a different purpose, so the coverage and amounts would vary in those situations also.
Scare selling has been used, and probably still is used, in the marketing of special types of health products, such as dread disease policies – most commonly used now for expenses related to cancer. People who are approached to purchase Long Term Care insurance are often sold using these tactics, as they are made aware of the looming possibility of having to enter a nursing home later in their life, and the expense of long term care and how the client would not be able to leave anything to his heirs, etc. Flood insurance is sold to those who live in areas where their property could be flooded with detailed expressions of catastrophic results; homeowners are made aware of how they could lose everything they own and will own in the future because of a lawsuit if a child is injured on their property; earthquake insurance is sold to a new arrival to California by showing them building supposedly damaged by earthquake (which is generally dropped after the new arrival discovers that none of his neighbors carry the expensive earthquake insurance); those who live in hurricane-prone areas are informed about the damage that those powerful storms can do, complete with pictures of damage because of previous hurricanes; and there are innumerable other such examples of what some may call “scare” selling. However, the sales of LCTI, Flood insurance, Earthquake and Hurricane coverage is not, in itself, “scare selling.” It is in most cases “needs” selling. It is all a matter of degree – as one experienced agent put it, “When their eyes get big and they start trembling, then you are scare-selling. If they buy and their hand is not shaking, it is needs-selling.”
Actually, it is rather difficult at times to determine the line between needs-selling and scare-selling, and a lot of it depends upon the type of insurance that is purchased and how informed the client is about the hazards and risks, plus the motive of the agent. In some situations, for instance when marketing to a senior citizen, an agent can be overly pessimistic about the risks so that where sometimes an elderly person will be emotionally upset to the point where they really cannot make a proper decision – then this is obviously a breach of ethics. If the risks are presented factually, with complete information as to the possibility or probability of loss, and if financial consequences are presented logically and completely, and if the insured fully understands what they are buying, then, of course this is not unethical but is very ethical.
As an illustration of what may be called “scare selling, the following actually happened. A leading provider of cancer and dread disease insurance policies, often markets these products on a cafeteria approach to schoolteachers (and many other organizations and groups). At one presentation, the teachers were in the school auditorium and the agent making the presentation for the cancer insurance asked that, starting from the left, every third person raise their hand. Then he informed them that that is the statistically, one out of every three persons will suffer cancer of some sort during their working years. The presenter (and others) could not help but notice a tall, well-dressed and rather attractive teacher who had asked several questions during the presentation.
After the presentation of the various products, the teachers that were going to purchase the products lined up at tables at the back door. The tall teacher started to pass the table to sign up for cancer insurance, but she stopped and went back. She told the agent that at first she was not going to purchase that coverage, but she changed her mind because it really bothered her, as she was one of the people that hold up her hand. True story. Is this scare selling? Is it unethical? There was no misrepresentation as 1 in 3 people do get cancer.
Be assured that the state insurance departments have addressed scare selling tactics and many are now illegal - particularly if elderly people are involved.
A related ethical situation rose many years ago, when a rather small company first entered the market with a dread disease policy (which at that time also included and emphasized costs related to polio – a predecessor to today’s “cancer policy”) as an additional expense policy and not as a true indemnity plan. Their rapid growth caused consternation (read jealousy) among agents, particularly large mutual life and health insurers, and the large mutuals made it known that they would enforce their “duplication of coverage” provision in their policy. This would have serious affected the sales of the dread disease policy, so the smaller company sued the giant mutual life insurers.
This garnered much publicity in the industry and in the national press. Insurance departments threatened to close down the company because of pressure from agent’s organizations in their states, particularly local Life Underwriters Associations. But the David did not back down in the face of the threats of the Giants.
After a few months of this, the President of the smaller company was invited to attend a luncheon with the CEOs of three of the largest mutual life insurance companies, at a private club in New York City. Obviously, the location and the presence of these powerful men was intended to intimidate the small company President (didn’t work). After listening to the CEOs state their position, the small company President simply informed the CEOs that he would meet them in court in his (Southern) state in front of a jury. He asked them to consider what a jury might rule when they were informed that people had purchased insurance in good faith, but they could not collect for the loss that they had paid to obtain protection against if the individual was covered by another insurance policy. In other words, the poor policyholder would lose protection that they had paid for because of the greed of the big, old (and in those days, “Yankee”) companies. He thanked the CEOs for their hospitality, and caught a plane home. Two weeks later, these CEOs officially notified him that they would not pursue the duplication of coverage problem any further. Another true story.
Were the large mutuals unethical? Is there even a rhetorical question?
F Contrary to popular belief, it is the lower levels of insurance that are the most expensive.
Agents know this because they understand that the lower levels are the ones that will have the most claims as they are used first. “Cheaper by the dozen” is applicable to insurance as the larger the protection coverage, the lower the unit cost. This is particularly applicable in liability coverage as the per-thousand premium coverage decreases substantially as the amount of the policy benefits increases. This should always be explained to the client, and it probably is most of the time.
Some clients, though, may only qualify for the smaller amounts. A person with a bad driving record, for instance, will probably end up with restricted coverage in an assigned risk pool. Even so, regardless of what the applicant indicates that they need, other factors other than price should always be explained. More times than not, a client who seems to know all the answers and only wants the least expensive coverage, really does not understand the coverage but is just trying to save money. It takes diplomatic handling at times, but it is important and ethical to make sure that every client knows what coverage is available, rather than just the price.
When a client wants limited coverage, the obvious first question is “Why?” If cost is the only reason, a little discreet questioning may bring out that the individual is a bad credit risk. Youth may be the reason that there are limited choices. Some auto insurers offer coverage, with discounts, for students who maintain good grades, or have taken drivers education courses. Of course it is ethical to discuss the possible discounts, but an interesting question would be whether it is ethical for an agent to discuss driver’s responsibilities to the young drivers?
Carrying this a step further, if it is seems apparent that the individual is a bad driver because of a bad driving record or attitude problems (with the youths); or perhaps the applicant is elderly but obviously is too feeble to really be a safe driver, then is it ethical to suggest to the applicants that they forget about the expensive coverage (even if they could get it) and simply use public transportation and/or the assistance of others to move from place to place?
A way to lower premiums is to increase the deductible, but there must be a balance between affordability of premiums and affordability of the portion of a potential claim paid by the client. Sometimes a client can truly only afford a high deductible, but if that is the case, they would probably have a difficult time paying their share of the claim. The ethical approach would seem to be to discuss this situation so that the client understands fully that there could be other alternatives. It is also important for the client to fully understand that the deductible may not apply to some claims – for instance, on some health insurance policies, certain health claims are “first dollar coverage” and the deductible does not apply – which is a good thing.
When working with health insurance applicants with limited income and with no employee health coverage and they can only afford a very high deductible – is it ethical to suggest that they check eligibility for Medicaid, particularly for the children? What about the situation when the children are eligible for Medicaid but the parents may not be eligible. This actually releases funds (that would have been spent on premiums covering the children) so that better coverage can be affordable to the parents. Another ethical question may be whether taking children from insurance coverage at the suggestion of the agent, which reduces the premiums into the insurance company, but and since Medicaid is paid out of taxes, doesn’t this put more people at the welfare trough? The agent represents the insurer and brokers represent the clients (but who represents the taxpayers?), so the ethical questions may be different.
Ethics at time of application has been pretty well covered, so the next time that the insured normally has contact with the insurer and when ethics questions may arise is at time of claim. Ethics in claims investigation has been discussed, but claims settlement goes much further. It must be remembered that in claims settlement,
F each claim is individual and unique, so they are negotiated.
With some products, “negotiation” is rare and claim processing is simple. For instance in life insurance, it is normally quite cut-and-dried. Just the opposite would be true in many commercial liability policy claims. If it is a matter of replacement of a damaged insured object, paying a bill covered under the policy, for instance, then there is no need for negotiation. The majority of claims negotiations occur when intangibles are involved.
Negotiations in claims settlement can create ethical problems, particularly if the parties involved are unequal or when one party attempts to intimidate the other party. The claims adjuster is in a rather difficult situation at times, as the insured and any other claimants will often assume that the adjuster knows more about the insured values than they do – which usually is not the case. Conversely, the insured or claimant that receives the settlement offer may also have little understanding of the values – often the insurer unintentionally (we hope) intimidates them.
F Mostly, claimants just want adequate compensation for their loss, but very often have no idea as to what that might be.
Some claims adjusters attempt to intimidate the claimant into settling for an amount that is much less than the actual value, and some act as if it is a “feather in their cap” if they save the insurer money that actually should be paid to a claimant. Unfortunately, some insurers may feel that is the principal job of an adjuster. Sometimes the adjuster may also negotiate damages – if it had been an ethical settlement, there probably would be no damages!
COVERAGE should be explained to the insured as the first step – immediately after normal pleasantries have been exchanged. The entire tone of the settlement is established here as the insured either has the coverage that they expected, or the coverage is much better than they expected – or not. Insurance terminology is not always fully understood by the insured (understatement) so both the adjuster and the insured should be on the same page. After all,
F if the claimant and/or the adjuster do not understand the coverage, then how can they agree on a settlement?
In the same vein, policy exclusions, limitations, provisions and conditions must be fully explained. When coverage is not definitive and is questionable, then a reservation of rights letter should be immediately issued, or the parties should enter into a nonwaiver agreement. If a third party is involved and there is no contractual agreement between the third party and the insurer, then the coverage must also be explained. However, it is not considered by many to be ethical to inform the third party of the maximum coverage of the insured’s policy. On the other hand, if the claim is very serious and the coverage will not provide enough to settle the claim, then this amount would, of course, be disclosed to the third party with the knowledge of the insured. In some states (Florida is an example), the third party is entitled to not only know the coverage amount, they are entitled to a copy of the insured’s policy.
F Once coverage is explained and is known by all parties, then there must be complete agreement as to how the coverage applies to the claim.
If negotiations continue when there is not complete understanding and agreement on coverage, then this would be unethical as the situation is out of balance - one party does not have the good-faith requirement of understanding the facts.
The establishing of liability follows the claims investigation, as the next logical step. This can be the most difficult part of any claims settlement, and some adjusters or claims representatives will attempt to use negligence as the only settlement issue. However, claim liability is a legal action, which can include not only contract law (understanding the policy and coverage) but also tort and statutory law. Statutory law is particularly applicable in no-fault insurance situations, and local statutes can certainly affect the settlement value.
Settlement practices and procedures are not within the scope of this text, but one fact emerges that affects ethical standards.
F If the investigation is not adequate or complete, then any settlement thereof shall, by its nature, be inequitable (and unethical).
Cutting-corners or the use of intimidation can greatly limit the ability of the parties to negotiate liability – generally to the advantage of the insurer because of superior knowledge and expertise. If, for some reason, certain facts just are not obtainable that are necessary to complete the investigation – and this happens frequently – then an ethical solution would be in favor of the insured if there are any questions whatsoever. Actually, a court would undoubtedly rule in favor of the insured if litigation between parties ensued – so it is not only ethical to err on the side of the insured, it can also be a wise business decision.
After all is said and done with the claims settlement, then damages must be addressed. Damages are not just “punitive” damages as there are many kinds of damages – some are covered and some are not. Usually they relate to damage/loss of (tangible) property, bodily/personal injury, or financial loss. What is covered and how much is determined by the policy and the controlling liability.
In auto insurance, liability will cover property damage and bodily injury but not personal injury or any loss that is strictly financial. The insured is insured for specific liability and liability for the actions of the insured outside of the policy provisions, are not covered.
One area where ethics play a big part is in the use of after-market auto parts used as repairs on insured’s automobile instead of “factory” parts, which are more expensive. This question has pretty well been settled as the result of litigation and disputes over whether the parts were substandard. Although there are experts on both sides of this question, the fact is that there have been some large (outrageous, some say) awards given by courts against insurers who have used these parts.
Of course, there are also bodily injury (BI) claims that raise ethical questions, on both sides of the issue. BI claims are of two types, those that are covered under the policy (called “special damages”) and can be proven by receipts or similar documentation - and those that are intangible but also covered. Medical expenses relating to a BI claim can be well documented, but other ethical considerations may be involved. In this area, rather uniquely, there can be a collateral source rule, which allows the victim to receive compensation from another insurer, and these payments are not offset by a claim against the party responsible for the tort. This may go against insurance principles, but is a fact of life in some jurisdictions. Could this be considered ethical – to receive money for compensation from two sources, duplication of payment, if you will? Even if is may be unethical; suffice it to say that an injured party would rarely turn down the additional funds.
A claims representative has a problem sometimes when legal counsel represents the third-party claimants, as the claims representative cannot contact the third party without the approval of their attorney. This can make it difficult to build a good relationship to settle a claim legally and ethically. Even if there is a policy provision permitting the insurer to require a physical examination of the insured, the examination can be subject to questionable ethics. There are doctors who only do independent medical examinations, and many of them usually render reports that are favorable to the insurance companies but unfavorable to claimants. After all, they get a lot more money from examinations requested by an insurance company, than an occasional examination requested by an individual. Ethics of both the insurer and the physician can be questioned in some of these cases.
In attempts to lower claims costs, some insurers use paper reviews of the medical records of a claimant’s medical records. An outside firm on a fee basis and affording considerable savings in time and money usually offered this service. However, one of the television news programs attacked this practice by showing that the reports were many times conducted by non-medical persons and often were drawn from a standardized format without much actual evaluation of the medical information provided. The question can be raised whether this is unethical practices, or is it a good business practice that saves money? Or, is it unethical not to take advantage of a cost-savings device?
When questions like this arise, there is always one thing to keep in mind: insurers must take all legal and ethical steps necessary to reduce their costs in order to stay in business. Additional costs in operation are reflected in increases in premiums, therefore, it follows that any action that reduces their costs would be reflected in stability and/or lowering of premiums.
F If a settlement is not what the insured expected or wanted, usually the claims representative or adjuster is blamed.
After all, that puts a face to the policy, and it usually does no good to write nasty letters to the home office. Of course, the claims representative must take some responsibility for such reaction to a settlement or investigation, particularly is there are high limits and involving such actions as rehabilitation or the creation of a structured settlement. If the claims representative has performed his settlement duties correctly, does the obligation to the client end at this point? Or should he assist the insured in other related matters, such as whether the other party had other resources, whether the courts could provide another remedy, or even if governmental or public bodies could assist the insured?
There are substantial arguments against performing services other than settling the claim and defense if that is all that is called for by the policy. Anything else could be construed as the practice of law as it would be extra-contractual. Some experts even believe that subrogation is a waste of time as it is nothing other than swapping dollars between insurers.
This is a difficult problem for both agents and insurers. The ethical position of a firm in response to someone who public reveals proprietary information that leads to civil litigation, and in some cases, criminal prosecution, is revealing.
Claims representatives watch closely for any indication of fraud – that is part of their training – but at times it is difficult to determine as there may be actions that taken by themselves would not be fraudulent, but combined would make a case for fraud. One of the indicators of possible fraud is a prevalent desire for a quick settlement, which is, unfortunately, usually demanded by the public also.
Of course, if results show that there was no loss and the insured is making a fraudulent claim, then this is a criminal act and must be reported. As far as the insurer is concerned, they will simply deny the claim and cancel the policy.
Insurance companies’ claims representatives and investigators will, on occasion, bring legal action against those who have committed the fraud, but they are seldom successful in court. Attorneys are well versed in defending against such claims by an insurer, and usually they countersue on the basis of libel, slander, defamation of character, malicious prosecution, and a list of other counter-charges. The insurer must prove criminal intent, which is usually quite difficult, and if the insurer is unsuccessful they are open to a personal injury counter-claim.
The subject of whistle-blowing affects more than just claims personnel, and in actual practice, can involve many lines of insurance just on a business basis. While whistle-blowing is generally used in an employee-employer relationship, it applies just as well between an insurance agent and a client. It applies primarily in an employer-employee environment and would apply to those who are employees of an insurance company. Claims representatives and adjusters come to mind – as do salaried agents.
F ” Whistle-blowing” is a term used in business ethics, which connotes an employee who knows that a fellow employee or the employer is engaged in activities, which cause unnecessary harm, violate human rights, are illegal, do not follow the defined purpose of the company or institution, or otherwise are immoral. The employee then notifies superiors, professional organizations, the public and/or some governmental agency.
When is whistle-blowing acceptable? To some, it may never be, and that is a problem. People just do not like being known as a “fink,” “rat,” “tattle-tale,” or such. The term itself comes from sports idiom referring to an official (referee or umpire usually) who detects and penalizes the unsportsmanlike behavior or violation of rules, but, it is noted, it is NOT the function of another player to make these calls on a member of his own team. This would leave one with the impression that whistle-blowing is never accepted. Of course, this not true as there are times when it is absolutely the right thing to do.
First, the reason for whistle blowing must be legitimate and for the “right” moral reason – not just a move in order to get ahead in the organization, for instance. There must be an illegal or immoral action involved.
Secondly, and perhaps the most importantly there must be evidence available that would persuade a reasonable (at least) person. Get the ducks in a row.
The next recommended step is self-analyses – mentally review the entire situation again (and again and again if needed). How serious is the problem? Many times things will stop there when it is analyzed. When is the violation going to happen, if it hasn’t already? One should make sure not to “jump on their horse and ride off in all directions.” And very importantly, is the charge upon which the whistle blowing is based, specific – generalities will not do. A handy tool for self-analysis is to imagine being on a witness stand undergoing a tough cross-examination.
Lastly, it is imperative that all internal channels have been exhausted before the information is revealed to the public. If there are others in the organization whose duties it is to report such activities, and you report the problems to that person, then you have done your job. However, if such a person ignores your information, or worse, attempts to cover it up, then one has no recourse but to become a whistle blower.
It must be kept in mind in this discussion, that under some circumstances, it a moral obligation to prevent harm. Everyone has to look at themselves in the mirror in the morning, and live with themselves the remainder of the day. It is so much easier to overlook the actions of those that you know and work with every day, even though you know they are committing illicit, immoral or even illegal acts, than it is to make enemies of those that you have considered as friends, in favor of faceless stockholders. Sometimes it is difficult to be a professional.
F Ethics are heavily involved with the understanding of all parties involved, which then creates a relationship based upon accurate information and proper action by all parties.
An exercise in proper and ethical action is illustrated by the case where a reinsurer of a small casualty insurance company sends its auditors to the company in order to determine the worth of the block of business being reinsured. The reinsurer was aware that the claims costs of the insurer had jumped dramatically the previous year and based upon that fact, the insurer had filed for a rate increase with the Insurance Department. The reinsurer had determined that more exact loss information was needed in order to continue its reinsurance treaty. The auditors soon realized that the claims data had not been recorded correctly because of a technical error, and further, there really had been no increase in claims cost.
The insurance company’s vice-president of claims had been terminated about 2 months earlier for failing to contain the claims costs. The vice president had depended upon the expertise of a claims accounting supervisor who had moved on to another company. So, ethically, what should the insurance company do? Rehire the VP with possibility of wrongful termination lawsuit?
F Conflict of interest can be the most serious of ethic breaches and is considered by most as the most serious of legal breaches also.
Conflict of interest is of major interest to the legal profession as there probably are more situations where a conflict of interest arising when attorneys are involved, starting from the simple situation of representing one client in a matter than involved another client, to more serious matters involving the court and judge and jury. There are many television programs that depict attorneys and law firms, and in nearly many episodes, there is at least one situation or mention of conflict of interest.
Attorneys are not the only ones that face conflicts of interest. Even doctors have been known to prescribe certain drugs from pharmaceutical houses in which they have an investment.
At first glance, it does not seem to be a problem in the field of insurance because of the workings of the insurance business. Consider, a broker who sells a policy that does not fit the needs of the client, but is sold because of a higher commission, breaches the conflict of interest ethics as the broker supposedly represents the client.
Several years ago, the Vice President and Actuary of a small life insurance company, set up a “dummy” consulting actuarial firm, using a post office box. The company President was aware that since the company could not afford a full actuarial staff at this stage of their growth, that the actuary would farm out certain actuarial duties. The actuary was given free rein to contract with whatever actuarial firm he felt was the most qualified. The actuary contracted with his dummy firm, in effect, contracting with himself.
When this was discovered, the VP-Actuary was terminated. His only defense was that he did the work and did it properly on his own time. He did not have time during normal working hours, and he was not on an hourly basis, so since he had to give up his own free time, he should be paid for it.
How about conflict-of-interest between an employee and himself? The company President when he terminated the actuary (actually one of his best friends also) stated that there would be no legal action taken as his ethics would be forever questioned and that was punishment enough for a professional. Was the company unethical by “overworking” the actuary? True story.
If an insurance company institutes very strict and limiting claims processes for the purpose of limiting claims so their shareholders will be happy, this is a conflict of interest. A claims adjuster faces more situations involving a conflict of interest than most insurance personnel do as they could be in a situation where they are adjusting a claim of a friend or relative, of to refer work to a firm in which they hold some interest. It is also a conflict of interest for a claims representative to receive a “referral fee” from a law firm for business referred to them.
One of the areas in which there are ample opportunities to create conflict of interest in claims administration is where there is a Third Party Administrator (TPA) involved. A TPA may at any time represent
It would be fair to ask, "Who are all these people?" A claims administrator may be in a position where it is necessary (and ethical) to disclose all of the principals, and how can they do this if they do not know who the principals are? In a third-party claim, the failure to include a person or entity whose interest is protected by the policy, and result in litigation – and an Errors and Omissions (E&O) claim.
In many, many E&O claims of those in the insurance industry, an ethical breach or lapse is the principal reason that a claim is filed. An agent or broker could follow the law precisely, but still not handle a situation ethically, with the result that there is an E&O claim.
It would be safe to say that
F many E&O claims arise because the agent has not understood the risk.
It is the ethical duty of an agent or a broker to identify any potential exposures and at least identify them to the client. Remember the financial planner who neglected to mention the availability of Long Term Care Insurance?
Even though the risk is properly identified and discussed with the client, there still is the responsibility of the agent to provide the right product for that particular exposure. There is doubt that the right insurance coverage can be picked out of a list, as there are too many variables. True, some agents and brokers may have only one choice of a particular policy form in their portfolio, but those that are successful are those that have more choice. Some standardized type of policies just do not fit the exposure, and if that is what is sold, at time of claim there could be unhappiness with the agent or broker, who then may have to contact their E&O carrier.
There are many a slip between the cup and the lip – in a complicated commercial insurance transactions, it is relatively easy for misunderstanding or misinterpretation. There have been cases where the contents of a business for fire insurance were drastically underinsured when a claim arose. In a commercial situation, those making insurance decisions for the business entity are usually not the owners, but an officer of the firm. This means that if the contents were underinsured, in case of a total loss, the officer stands a good chance of losing his job. The natural inclination would be to blame it all on the agent, while maintaining that the proper amounts had been provided to the agent, who evidently ignored it or misunderstood. E&O claim can arise.
In a case like this – and there have been many – in general the court has ruled that the policyholder has an obligation to read the policy. Other courts have not been too generous in this respect, and will consider all types of situations in ruling against the insurer/agent. In some situations where an agent is replacing a policy, if the new policy does not provide at least as much coverage as the previous nonrenewed policy, courts have not been lenient if a claim arises because the new policy did not cover the loss. Sometime and in some jurisdictions, it does not seem to make much difference if the insured has even read the policy.
These are legal points, but ethics plays an important part in these situations a if the agent or broker had taken the time to analyze the exposures, asked all the questions that he would be expected to ask, even if he had sought expert advice if there were a question in his mind, then he would have fulfilled an important ethical duty, and at the same time, saved his reputation and his E&O premiums.
There have been lawsuits involving an insurer becoming insolvent and therefore not in a position to honor the promises of the insurance contract. This was mentioned earlier, the question of ethics arises when an agent has some information that an insurer may be suffering financially. One of the problems in this situation is that if an agent “bad-mouths” an insurance company, the agent could lose his license for making slanderous remarks. Of course, the best defense against slander is the truth, but it is very difficult for an agent or broker to know with certainty that an insurance company is having financial difficulties. Often it is not even known to the Department of Insurance until the company is insolvent.
Legally, most courts have found that the agent owes no duty to the insured in such a situation. Ethically, the agent should notify customers when an insurer with whom he has placed insurance, does become insolvent. This is a “given” as the agent will immediately attempt to replace the coverage.
There are times when an agent or broker has received unofficial information regarding the financial condition of an insurance company. It might seem to be ethical that an agent would want to point this out to potential clients who are thinking of purchasing insurance from the company. This is a real slippery slope – if word gets back to the supposedly troubled company that an agent has been talking about them to potential customers, this could easily be a lost license and stiff action by the slandered insurer. Remember, ethics starts with good sense.
To carry this a little further, if a company does become insolvent, it seems that at that instant the customers of the insolvent company is fair game. However, the Department of Insurance will usually put the company into receivership and take steps to sell the company and/or the business in order to protect the existing policyholders. They will not take it kindly if someone is chasing their policyholders away from the company that they are attempting to rehabilitate.
If the policyholder of the insolvent company approaches an agent so as to obtain coverage with a more financially sound company, the rule is that the “customer rules.” If the agent can provide coverage the same as they had previously, there would be little chance of anyone complaining. But what if the company were insolvent because of their too-liberal policy coverages? It happens. Then a policy with identical coverage of the old policy may not be possible. Here is where ethics are important.
F The agent/broker must make sure that the applicant fully understands that they are not going to have the same coverage as under the old policy if such is the case.
Recently, when a situation like this arose, agents of some of the replacing companies were instructed to get a signed statement from the applicant stating that they understood that they would not have the previous coverage.
Sometimes, when one insurer has purchased the business of another insurer, whether the former insurer was financially sound or not, the assuming insurer has instructed their agents to contact all of the assumed policyholders and to fully explain the coverage that they have. This is highly ethical as it costs the insurer extra money to reimburse their agents for their time, but it is also a good business decision as the assuming insurer had a minimum of lapses of the business they had acquired.
Interesting how many times an ethical action results in a good business decision.
Life, Annuity and Health Insurance policies are very explicit regarding the agent waiving or changing a policy provision. The general rule and with the most legal support at this time, prohibits the company from rescinding the insurance in case of a violation of the policy when an agent who has either actual or apparent authority, has waived any policy provision, whether such “waiver” was orally or in writing. This also applies to the insurance company’s attempting to rescind.
Secondly, the company is prohibited from rescinding the insurance because of a policy violation in a situation where the company attempts to defend based upon a violation of the terms of the contract, because of some knowledge or acts on its part or on the part of the agent. The courts do not, as a rule, accept oral evidence to alter the terms of a written document.
Therefore,
F an agent’s actions in respect to waiving a policy provision, affects not only the agent, but also the company.
The company’s instructions nearly always are abundantly clear, so any misconduct of the agent makes him personally liable to the company for any damages as a result of his actions (enter E&O coverage). This stems from the law of agency wherein the agent must indemnify any loss or damage to the principal.
These actions can be an agent exceeding specific authority, binding unacceptable risks, failure to provide the insurance company with information regarding risks (such as health history, or present health condition), making incorrect statements about the applicant, failing to send funds that were collected to the insurer – such as premium payments, or claims payments intended for an insured, and failing to follow explicit instructions from the insurer. These are all, obviously, serious breaches of ethics.
In nearly all cases, however, these situations are resolved by the agent being fired and his license revoked (and the offending agent appears on the dreaded “Revoked License” list on the periodicals issued by the Department of Insurance).
Ethical considerations and (violations of these ethics) vary little by type of insurance – such as not transmitting accurate information to the underwriting department, not properly disbursement of funds, misrepresentation, etc. – but the Life Insurance industry, in particular, has undergone considerable criticisms from policyholders and state insurance departments. One situation, which started as an ethical problem, has now graduated into regulations, rules and laws – and litigation. Many agents who were involved in sales of these products still feel that they have done nothing wrong, and to a certain extent, they are correct. The projections that caused the problems later were legal at that time and were performed under the supervision of and instructions from, the insurance company. Indeed, computer programs were provided from the marketing department of the insurer and in many cases, laptop computers were also furnished. Company-sponsored seminars were frequently held and attendance was often mandatory.
For many years the life insurance industry suffered because permanent life insurance contained cash values that was touted as a savings device, or “forced savings” but the interest rate attributed to the policy was much less than what would have been available in other investments. Without going into the technical details as to why insurers could not meet the prevailing interest rate, the problem was solved in the 1970s with the introduction of Universal Life, which, for the first time (in this country) the cash value could fluctuate and represent the increase in interest earnings of the insurer.
Soon there were many other variations of these interest-sensitive products, and people were looking with renewed interest at the possibility of investing with insurance companies. There were certain additional tax advantages of using life insurance as an investment vehicle, and the investments were “guaranteed” by the assets of the insurance company. Win-win situation to many.
The “problem” policy, which today cannot be sold in most jurisdictions as such, was called a vanishing premium policy - or when sold as an option to another policy, a vanish pay provision. As the name indicates, the policyholder would not have to pay more than (usually) five or seven annual premiums, because of the high interest rate attributed to the cash-value buildup of the policy. At this time in history, even CDs were getting as much as 14% (maybe even higher with offshore banks). The internally generated interest in the form of dividends and/or excess interest credits would be sufficient after the initial premium-paying period to keep the policy in force. In the projections of cash values, the interest rate of 12% was commonly used.
One of the “ethical” problems that arose was that many policyholders of older policies were convinced by illustrated policy values that were based on these (inflated) interest assumptions, that they should replace their older policy with this (miracle) policy.
Insurance companies made the usual disclaimers on their policy illustrations, but these were often at the bottom of the page, sometimes as footnotes, with the obvious result that they were ignored or not read to the applicant, simply erased before presentation, or were proclaimed as irrelevant. If the question was raised to the agent as to how such high interest rates could be forecast, many agents referred to the past where such disclaimers were used by insurers but dividends nearly always exceeded that of those illustrated.
To those who were not involved in such policies or had no knowledge of them, it would still be no surprise that when interest rates dropped, many policyholders received premium notices of premiums due, even after the policy had been in force for the 5 or 7 year period. Many policyholders, at first, thought this was just technical insurance talk and nothing would happen. But many who thought that their policy should even be paid up, or at least the premiums would not be due, found that the reality was that they owed premiums or the policies would lapse. This was not a good time to be in the marketing or customer relations department of a life insurance company that sold these plans.
The next step, obviously, was litigation, charging deceptive sales practices, fraudulent inducement and representation and intentionally misrepresenting the policy. Some of the insurers responded that the policyholder had been put on notice by the disclaimer, or the illustration was not part of the contract, or the problems had been caused by a handful of rogue agents.
In some areas, insurers have been successful with their defense, but not successful in other jurisdictions. One of the factors that caused the courts to rule in favor of the policy holder was the fact that some companies had stated in their disclaimer that the interest values used in the illustration was what the company was experiencing at that time – which was shown to not be true.
The final result of this situation has not as yet been resolved, but thousands of cases have been settled with insurers paying millions of dollars in fines, judgements and legal fees. This is a massive illustration of how important it is to get correct and complete information to its customers. This is an ethical point as much as it is legal, and raises the question as to whether it was ethical to present an illustration using inflated interest rates. It is difficult to not consider it unethical, as how many agents apprised their policyholders that they may have to pay premiums again during the time that the stock market and interest rates tumbled? There were some professionals who worked diligently to make their clients aware of what was happening as soon as they became aware of the lowering of interest rates, and in some cases, they were able to exchange the policy for one more suitable for their needs – probably stopping some litigation.
Universal Life Insurance and its offshoots, of which there are many, rely heavily upon illustrations also. Because of overzealous agents and their illustrations using unrealistic assumptions, there have been problems similar to the vanishing-premium plans. As expected, because of the unethical behavior of agents and companies in providing illustrations, there are now very strict laws, rules and regulations in respect to illustrations.
Typically policy illustrations show policy values on a projected basis, but also on a non-guaranteed current basis (how it would perform using current interest rates). It also shows how it is structured and how it may perform in the future. Forecasting is tightly regulated so that an applicant or policyholder can see how it would perform under different cash-value accumulations, different policy premium outlays, different death-benefits, and different results with different policy configurations. This involves actuarial involvement and technical input to the point where some policyholders or applicants might feel overwhelmed. The days of simplicity in sales presentation of most policies has now gotten to the point where in many presentations, it is necessary to have a laptop.
The requirements of various projections depending upon a variety of “what-ifs” have developed because of ethical-turned-legal pressures. But when it comes to policy replacement, it is often difficult, particularly when there is substantial cash value involved. Cost comparison methods are necessary for an existing policyholder to determine whether it is in his best interest to exchange his policy for another. The National Association of Insurance Commissioners has developed model regulations for illustrations, and there are many chapters of technical and mathematical calculations to be used in any such comparison.
At this point, ethics can be involved during the passing of information from the policyholder/applicant through the agent to the home office, but the major point here is that this entire situation evolved from unethical actions when interest-sensitive products were first sold.
In a somewhat related situation that illustrates that an ethical act can be wise in a business sense also; several years ago when the interest rates were starting to climb, one life insurance company whose principal market was annuities, decided that they would offer every annuitant a new policy that would reflect the higher interest rate, and allow a 100% rollover with no penalties. This was not considered for ethical reasons solely, as they thought that they would not only lose business when their customers were made aware that they could get higher interest, but they would also lose financially as they would have to pay the annuity values at a much higher rate when it was annuitized.
Interestingly – to some, it seemed unbelievable – but their offer to all of their annuitants was accepted by about 20% of the annuitants with no change in persistency on the entire block. In other words, 80% of the annuitants just decided to keep the original annuity. As time passed after this offer – and subsequent similar offers – the company reported just normal attrition.
F An ethical agent will want to sell insurance ONLY from those companies who maintain high ethical standards.
Those who have been in the industry for any period of time know “Fly-by-night” companies and those companies who just do not pay their claims properly. Customers, of course, also want to buy insurance only from ethical companies.
The principal element of ethics in this context, is fairness. Most life and health insurance policies, and many property and casualty policies, permit the insurer to make periodic adjustments to premiums (or policy values, for life & health), such adjustments being consistent with past or expected future experience. Many policies allow the policyowners to share equitably in the insurer’s favorable experience, sometime in increased dividends (mutual companies) or in policy values. Sometimes, though, there is no favorable experience for the company to share with the policyholder.
Determining whether a company is dealing fairly with its insured is often a matter for determination by the State Department of Insurance – particularly where an increase in premiums is indicated. So, to an extent, these regulations are intended to insure a certain level of ethical behavior, but remember,
F Ethics encompasses more than compliance with the law.
Obviously, insurers have had ethics problems. Insurers have tried to improve their image by stressing ethical behavior in training, improving their agent’s training programs, completely changed the illustration process and numbers, and other such related items directly addressing the problems. One result of all of this turmoil was the formation of the Insurance Marketplace Standards Association (IMSA) in 1996.
This is a voluntary association, which encourages life insurers to maintain high standards of ethical behavior in the sales and marketing of individual life insurance and annuities by becoming members. These standards only apply to selling and marketing, and not to other areas (such as claims, underwriting, policyholder service, etc.).
Insurers voluntarily adopt the Principles of Ethical Market Conduct and then create programs and change existing programs to comply. Insurers do a self-assessment, and make changes accordingly. But perhaps most importantly, the company must secure a favorable opinion by an independent assessor of the company’s policies and procedures before they can advertise as being a member of IMSA.
“Each IMSA member pledges to comply with the following principles in all matters affecting the marketing and sale of individually issued life insurance and annuity products:
1. If an agent explains fully and completely, the various options to the client, but the agent is not expert in some areas of interest,
A. the agent should inform the client of additional expert advice in that area.
B. the agent cannot legally inform the client of other expert advice.
C. the agent cannot legally write the application.
D. the agent should just ignore their lack of expertise and bluff their way through.
2. When an agent discusses risk with the client, in such a fashion that the client is concerned that if they do not buy a particular plan, and buy it now, they will be in trouble, this is called
A. needs selling.
B. scare tactics, or scare selling.
C. an ethical presentation.
D. twisting.
3. The most expensive level of insurance
A. is in the high amounts.
B. is in the lower levels of insurance.
C. is somewhere between the large amounts and the miniscule amounts.
D. is when there is a very large deductible.
4. In a claims settlement, since each claim is individual and unique
A. they are negotiated.
B. they must always go to arbitration.
C. then they are extra-legal and cannot be litigated.
D. the decision of the insurer is always right.
5. Generally, most claimants just want
A. the policy to be cancelled.
B. the situation to go to court.
C. the agent to handle all of the claims work, including the investigation.
D. adequate compensation for their loss.
6. If a settlement is not what the insured expected or wanted,
A. there is no further recourse.
B. usually the claims representative or adjuster is blamed.
C. the insured generally just cancels the policy and walks away.
D. the agent must relinquish his commission.
7. The term used in business ethics which designates an employee who reports another employee as committing illegal or immoral acts to the employers, is called
A. a tattle-tale.
B. an ex-employee.
C. a whistle-blower.
D. a hero by all of the other employees.
8. The most serious of ethical breaches is considered to be
A. lying to an employer.
B. fudging an applicant’s height or weight.
C. bringing in experts to help when the agent cannot explain his product well to another.
D. conflict of interest.
9. An ethical agent will want to sell insurance
A. that satisfies his client, regardless of the insurer’s finances.
B. only from those companies who maintain high ethical standards.
C. from any company licensed in the state.
D. only to those who qualify for ERISA protection.
10. Ethics encompasses
A. only compliance with the law.
B. a narrow group of situational circumstances.
C. more than compliance with the law.
D. only those who work for or represent large Fortune 500 companies.
ANSWERS TO STUDY QUESTIONS
1A 2B 3B 4A 5D 6B 7C 8D 9B 10C