In anticipation of screaming and yelling and loud denials, it is important to recognize that
F Insurance, as an industry, is not a profession.
In order to peel some of you off the ceiling, let it be explained that physicians are part of a profession, as are attorneys, accountants and architects, to name a few. INSURANCE itself is NOT a profession and in the discussion of ethics, is it important to recognize this fact. This does not mean to say, in any way, that there are not professionals within the industry, as there certainly are.
A person in the insurance business does not wear a uniform, there are no requirements that insurance employees be “board certified” or professional workshops that must be attended, journals that must be read, etc. (Of course, the insurance employee does not usually drive large luxury cars, live in mansions or have large yachts, either.)
The subject of whether insurance is a profession or a business was posed to Dr. Overman, former president of the American Institute of Chartered Property Casualty Underwriters. His thoughtful response, as outlined in Winning by the Rules, by Ken Brownlee, CPCU, is perhaps one of the most succinct and understandable answers to this question. He listed several criteria that separate a true profession from other vocations, and they include
While “insurance” itself, is not a profession, a career in insurance may be considered a professional vocation, as there are many professions within the industry, and these will be discussed later in more detail.
When one takes a look at the “profession” requirements, it immediately becomes apparent that a graduate degree is not required – even though available at many universities – and a background of general knowledge is not even required.
F Licensing and training does not make a profession.
Should insurance be a profession? Probably! Particularly since there are so many professionals in the industry, and more specifically, because of the importance of the services that insurance provides to society.
Some in the industry may point to the licensing and continuing education requirements for insurance agents as proof that insurance, itself, is a profession. That argument is rather specious as even dogs and automobiles require licenses and there are examinations for plumbers, electricians and bus drivers, to name a few.
How about the training an agent must take? The quantity and quality of training varies by company, and some insurers seem to feel that if an agent can pass the state examination to be licensed, then thereafter all that is needed is for the agent to be acquainted enough with the various products to sell them to an unsuspecting public. Actually, training is supposed to teach the student how, whereas education teaches a student why.
Real professional insurance training is time-consuming and can be costly. But it is available, through universities and through the American College, the College of Insurance, and the Insurance Institute of America. There is a Society of Insurance Trainers and Educators (SITE) and they have identified sixty-nine insurance professional designations, generally requiring class attendance, study, and the subsequent passing of written examinations.
So, does it seem that insurance is a profession or not? With all of this training available, there are still many in the insurance business that has not earned such designations, although others may hold several designations. There are no “jobs” where insurance training is required, that does not offer some sort of designation and membership to organizations composed of others who hold the same designations.
F However, neither the insurance industry nor the public as a whole and through the regulatory body (insurance departments), require that a practitioner have even one of these designations, nor do they require undergraduate degrees.
Note the word, require. They are all voluntary.
In some cases, those with professional designations are given special recognition – such as those with CLU or CPCU designations may not have to take licensing examinations in some states. Actuaries who have the Fellow (or in some states, also Associate) designation in Actuarial Science are afforded certain recognition in the certifying of assets and/or reserves in some states. Insurers may require that people in certain positions hold certain designations, but as an industry, designations are not required to practice the vocation of “insurance.”
If a CLU, CPCU, FSA, CPA or Legal Counsel for an insurance company were approached as to whether they subscribe to a code of ethics, the response frequently would be: “Of course. After all, I am a professional.” And this response would be correct. However, in today’s “feel-good” atmosphere where one is not supposed to denigrate or hurt the feelings of another, there are all kinds of “professions.” Even the world’s oldest profession has its code of ethics, starting with “I will never reveal the name of any of my customers.” The accounting industry took a more “professional” approach by the Commission on Standards of Education and Experience for Certified Public Accountants, which in their report listed seven prerequisites of a “profession.”
Maintaining membership in this profession requires one to abide by the standards of behavior of the group, such standards usually requiring that
Fthe professional must always be aware of and protect the client’s best interests.
Often quoted as Dr. Solomon Huebner, the founder of the American College presented one of the best analyses of exactly what constitutes a “professional,” because he was concerned about life insurance salespeople becoming professionals. He presented four characteristics of the professional, three of which have been duplicated in some degree with the requirements listed above. The fourth characteristic, which may be contained in (4) and (6) above, needs further scrutiny as it is particularly applicable today.
F “In the applying that knowledge (the preceding characteristic was knowledge of the vocation) the practitioner should abandon the strictly selfish commercial view and ever keep in mind the advantage of the client.”
The CPA Commission on Standards of Education and Experience for CPAs which expounds on the definition of professionalism, and applies equally well with most professions, states that a member of a profession requires the individual being involved in a standard of conduct which governs the relationship of the practitioner with clients, colleagues, and the public, plus there must be shown an acceptance of social responsibility which is inherent in a profession that is required to show public interest. This certainly indicates that in order to be a professional, one must accept ethical standards that require that selfish commercial views be abandoned.
The counter-claim to this is, of course, the position taken by many economists, that the primary (and some say, only) responsibility of a business is to increase profit. This is not correct according to most economists and scholars, because they insist that the pursuit of self-interest must be constrained by ethical considerations of justice and fairness.
As an authority on the treatment of others, the New Testament prescribes a widely accepted practice (of nearly all religions) that we must love our neighbors as ourselves. If we do not love ourselves, then it follows that we would not have any self-love or self-interest and we do a disservice to others and ourselves. However, if we pursue our self-interest at the expense of others, then we would be acting unethically. There are times when we must sacrifice our own interests for the interests of others.
When one is engaged in a profession, then others rely upon the knowledge and experience offered by the professional. In these situations there is great temptation to abuse the position of power a professional has because of their knowledge and experience, as it is easy to take advantage of another. This would be the “cardinal sin” of any professional, because if their clients cannot trust the professional, they dishonor their professionalism and the profession as a whole.
The actual Codes of Ethics for insurance professionals are discussed in later chapters, but some Codes of Ethics include the professional definition into the Code, and is worth mentioning at this point. For instance,
F the acquisition and maintaining of knowledge required is stated to be the
individual responsibility of the professional.
Another such statement on professionalism states, in essence, that the distinguishing mark of a profession is acceptance of its responsibility to the public, which consists of clients and reiterates that a “distinguishing mark of a profession is acceptance of its responsibility to the public.” This reinforces the idea held by the public at large that the purpose of most professionals is to “maintain the orderly functioning of commerce.”
Another important characteristic of a profession is for the profession to be represented by an “organization devoted to the advancement of the social obligation of the group.” Those with a CLU, CPCU, ChFC, CLF, REBC, FLMI, FSA (and ASA), RHU and similar professional designations in the insurance industry generally are members of such professional organizations.
How about those experienced, capable and ethical agents who do not belong to any of these professional organizations. Do they abide by the ethical standards and are they required to abide by these standards? The members with these designations are considered as professionals because of the stringent requirements and they must pass the rigorous examinations to receive their designation. Actually, if one simply scrutinizes the Code of Ethics for the particular branch of insurance in which they operate, it will become apparent that these are really just statements of good sense. The point is that if they practice what the Code “preaches” then they are acting as professionals. Many times, “professional” is in the eye of the beholder – or client and the public that the agent serves. Therefore, the almost-universally accepted standards in the code should be followed by anyone who holds himself or herself out to be a “professional.”
Why get into the subject of Law when the subject is ethics? Good question, and a good answer is:
F The law sets minimum standards, whereas ethical behavior is the highest
standard.
Therefore, law and ethics address similar problems, but the standards differ. As we shall see, an agent that is privy to certain pertinent facts affecting the decision of an applicant for insurance, may not legally be required to disclose any of this information, but ethically they MUST make the applicant aware of the situation.
Any person who has taken an insurance agent’s examination or who has worked for any time in the insurance industry, is aware of Public Law 15, issued in 1945 (also called the McCarran-Ferguson Act), which established that regulation and taxation of the insurance industry should be a state function. However, it also says, in effect, that if the states cannot actively regulate insurance, then the federal government will do so.
This law has stood the test of time, with little erosion. Insurance companies and banks and securities firms may now merge whereas banking and securities regulation had always been under federal control, so the foundations are weakening a little. Also, at one time there was concern at the federal level about unions mishandling, and in some cases, stealing, employee retirement funds, so the federal Employee Retirement Income Security Act (ERISA), made certain employee benefit programs subject to federal regulation. Federal courts have limited the ability of the states to become involved in disputes regarding insurance programs subject to ERISA. There have been problems with ERISA as many agencies and TPAs (Third Party Administrators) have misrepresented it in efforts to by-pass state regulation. The loud “CLUNK” heard around the country from the direction of the state insurance departments, is the door closing hard and loudly on such misrepresentations. This started out as an “ethical” problem, but it is now a legal problem also.
Everyone has seen television advertising where an attorney (or actor pretending to be an attorney) announces that they ONLY represent those who have been “wronged” by an insurance company. The message is that if you are injured in an accident, do not contact the insurance company, as you will never get fair treatment. Instead, contact this law firm and let them do the claims work for you.
Guess what? An insurance research organization has concluded that “unrepresented” claimants receive a higher net recovery on the average, than “represented” clients do. Not only that, but the unrepresented claimant received settlements MONTHS earlier.
It is the unalienable right of a customer to sue and the numbers of those who acquire legal help in the settling of claims has increased in recent years, and continue to increase. A lot of this is because of punitive damages. After all, with all the publicity of people receiving millions in punitive damages when they sued an insurer (also known as a “deep pockets”) and with the availability of attorneys working on a contingency basis, why not? Is this out of control? Probably.
In respect to ethics, sometimes agents are in situations where they feel that ethically, they should recommend that the client (or claimant) obtain outside legal assistance. Would this really be that ethical, considering what is known about settlement amount and timeliness?
As anyone in insurance marketing knows,
F the insuring public typically comes in contact with insurance only when the coverage is first purchased, and when there is a loss and claim is made.
Not surprisingly, it is at these two times that insurance standards are most highlighted.
It is a “given” with many (if not most) insurance agents that price sells. Whether this is right or wrong, this attitude permeates the industry. However, people only get what they pay for, in insurance, groceries or automobiles. If they want quality and the person or organization selling the product is ethical, then they should end up with a quality product. If they want the cheapest product, then they must bear some of the responsibility when the product “crashes and burns.”
For most products, there is the rule of caveat emptor (let the buyer beware), but
F caveat emptor cannot ethically be applied to the sale of insurance.
Insurance products are intangibles – they cannot be inspected or experienced before they are used (unless the customer had experience with the same company and same coverage previously). An insurance policy is called an “Aleatory” contract – a promise to perform certain acts. Therefore, the insurance agent – and the insurance company and underwriter – must at least attempt to provide what the customer needs and wants and at a price that is fair and adequate.
Sounds simple, but those who have been selling insurance know that it not always so simple as the customer may not have the faintest idea as to what they want exactly, or more importantly, they might not have a clue as to what they need, but they are just concerned with the price. Now arises a common dilemma –
F should the agent sell the customer what they (think) they want, or should they try hard to sell the customer what they really need?
Insurance is simply the spreading of the risk among a large number of similar units, but difficulties arise in defining a “similar unit.” Even with a group (unit) there can be considerable differences. As an example, let’s use a 2002 Toyota Camry, reportedly the best selling private passenger car in the U.S. in 2002, which, in itself, would put it in a “unit.” But for automobile insurance for any Camry, the unit must be further defined. Common sense says that it is impossible to charge one rate for automobile insurance over the entire U.S. on all owners of 2002 Camrys. Questions must be answered, such as what is the condition of the car, is the car garaged, are there any underage drivers, how is the car used, who is the principal driver(s), what is the driving record of the drivers, how far is it driven annually, how far is it driven to work, etc., ad infinitum?
F Underwriting evaluates the differences within a similar group of units.
Any decision regarding the exposure, whether it is a business, building, automobile, person or whatever, must be based upon the knowledge of the underwriter. Such knowledge must be very accurate if the underwriter is to make the proper decision for insurability, and if so, insurable on what basis. These factors that the underwriters must take into consideration may affect the ethics of a situation, and ethics must be considered in every underwriting decision.
Just common sense dictates that insurance is usually a long-term relationship between the insurer and the insureds. It usually involves considerable amounts of money if maximum claims are reached, and in any event, premiums are usually not cheap. This is to say that there is a LOT of trust involved in any insurance agreement, and the underwriter certainly is well aware of this trust. The character of the applicant is often investigated, along with other experience. Without going into a long dissertation, suffice it to say that an underwriter, who is comfortable with the ethical conduct of a proposed insured, is inclined to be more lenient in underwriting.
The conduct, reputation and ethics of the agent is always (or should always be) taken into consideration in the evaluation of any risk. There are insurance underwriters; for instance, that keep meticulous records of agent conduct which will have considerable influence on their decision on difficult underwriting decisions. If a health insurance agent comments on an application that the applicant does not appear to be in as good health as they insist they are because they have a noticeable shaking of their hands, their coloring is very pale, and they speak very slowly, etc., then an underwriter would know to dig deeper into the health history. The next time that the agent has a questionable case but insists that the situation is better than it appears will be seriously considered by the underwriter. Ask any underwriter in any insurance company and they can tell you who they trust and who they do not trust. One thing is certain, the agent who is not trusted will have his business scrutinized very thoroughly, in detail, and often.
Another ethical question here. What if the agent who reported that the applicant was not in as good health as reported, later submitted an application on an individual who would be usually considered as overweight but the agent maintains that the extra weight is mostly muscle because of the agent’s personal knowledge of the applicant’s exercise regime and the fact that he competes in local events requiring physical strength. However, the underwriter “went by the book” and offered an increased premium because of overweight. Would this be ethical behavior on the part of the underwriter? Realistically, could the underwriter expect that the agent would be so cooperative in the future? Incidentally, this seemingly overweight situation occurs in health and life insurance and underwriters can increase the premium with no further questions, decline the risk in some cases, ask for additional medical records or tests, or sometimes, if the applicant is not dramatically overweight according to their height/weight tables, will accept the word of the (known to be ethical) agent.
In underwriting and pricing practices as with everything else, practices can change particularly when it involves allegations of discrimination. This was publicized a couple of years ago when a large life insurance company in Georgia was charged with discrimination because they charged black policyholders higher premiums than white policyholders from the period of 1930 to 1950. The life insurer produced mortality statistics that proved nonwhite mortality rates were indeed higher than white mortality rates. Further, the company argued, the State Department of Insurance (who conducted the investigation) had approved their rates.
What can an insurer do in this type of situation? An insurer is not an eleemosynary institution. Like all businesses, they have stockholders to face. Certainly, insurers do not want to sell insurance if there is a high expectation of loss, nor is it ethical to expect them to.
Underwriters base their decisions up on available information, verifiable and actuarially sound. When enough information on all variables is assembled, then the risks can be grouped and then matched against loss expense for that particular exposure. But where does the underwriter get the information?
F The main source of underwriting information is from the agent who must
obtain accurate information from the applicant, combined with other data, depending upon the risk.
For instance in a large commercial risk, prior loss experience is necessary. Assets must be verified in many cases, and annual reports and company brochures are necessary.
Regardless, the only determination that can be made as to whether the process is ethical, is the accuracy and completeness of information submitted. Answers to every question must be honestly and detailed.
State insurance codes specify that all insurance premiums are actuarially sound, fair, adequate and non-discriminatory. Whether the premium is actuarially sound is determined by studies of past loss ratios and then projected forward using techniques that are acceptable to the actuarial professional and to the state departments of insurance.
Fair, adequate and non-discriminatory are all factors that contain ethical considerations as well as legal and code compliance. The most precise definition of “unfair” as it applies to insurance premiums is attributed to Professor Arthur Williams of the University of Minnesota in an essay in 1969.
“An insurance rate structure will be considered to be unfairly discriminatory if, allowing for practical limitation, there are premium differences that do not correspond to expected losses and average expenses or if there are expected average cost differences that are not reflected in premium differences.”
Unfortunately, insurance premiums have become a political issue. There is at least one U.S. Senator who campaigned on his disapproving insurance premium “hikes” when he was Insurance Commissioner in his state. Of course, it is now more difficult to obtain quality insurance coverage in that state.
When insurance companies do not receive their (statistically) needed increase, many have just quite writing business in that state. The effect is that when, for instance, Worker’s Compensation or Auto Liability coverages require a premium increase, but the increase is not granted. As stated before, insurers are not eleemosynary institutions, so they pull out of the State or do not offer coverage in that State. That means that the policyholders must go elsewhere for coverage, nearly always at a higher rate from non-admitted or substandard insurers, or in the case of drivers, enter the assigned risk pool. Some people believe that political ethics is an oxymoron.
It cannot be said enough or loudly enough, insurance company representatives must properly assess each customer’s needs. That even pertains to telemarketing sales and on-line sales, even though all they really do is push price. Many, if not most, life insurance professionals question the ethics of companies who advertise on the radio and on television for an on-line service, where the applicant “shops” for the price on a certain amount of life insurance. Or for that matter, for automobile insurance companies who market heavily in the media, including sending out junk mail, on the basis that they can write the same coverage as other companies, but for less premiums.
The agent or broker’s product is actually the analysis of the risk and subsequent service, particularly in property and casualty insurance. If the agent/broker is not familiar with the problems, hence the needs, of the customer, every effort should be made to determine what these needs are. Not only are there ethical questions in this respect, the agent could sell the wrong product to a customer and find himself with a professional liability problem.
F It is the duty of the agent not to only sell the right product to the customer, but it should also be sold at the right price.
Contrary to popular beliefs, an agent ethically must not sell just for the purpose of making sales. Actually, this makes good sense anyway, as a dissatisfied customer can spread his story among friends and associates and the agent could find his business to be decreasing without knowing specifically why.
However, the agent is not the only one with ethical considerations in insurance sales. The customer who purchases more insurance than they need might not have been misled by an unethical agent, but may themselves have an ulterior motive. An indicator of fraud is over-insurance, as is the claimant pressing for a quick claims decision.
Homeowners insurance presents a good ethical study on overinsurance. Some states have a valued policy law, which states in effect that if property is totally destroyed, the insurer must pay the policy limits, regardless of what it costs to replace it. (Otherwise, the policy would be a replacement cost policy.) For example, if the home can be replaced for $200,000, but the insured insures the home for $300,000, in case the house burns down completely the insured would receive $300,000. This is an ethical problem for the insured, not the agent unless the agent knows that the house could be rebuilt for a lesser amount. The agent could get into trouble with such a substantial disparity between the replacement amount and the valued policy limit.
Another example regarding life insurance in Georgia (seems like picking on Georgia) related to industrial or burial insurance. These are low face-amount policies, originally sold on a debit – where the agent collected the premiums personally, usually on a weekly basis. It was investigated originally because most were sold to minorities and the premiums were much higher than if they had bought regular life insurance. When the experience showed that the premiums were not much out-of-line, then it was discovered that often multiple policies were sold to an individual, and when the individual died, the beneficiary collected only on one policy. The multiple policies were sold because the face amount maximums were not more than $2,000 (or less in some policies). The agent encouraged the sale of multiple policies so that the benefits would be more in line with what they needed – mostly for burial purposes. The multiple policies were not paid at time of claim because of internal record checking of the insurer was lax, and not due to any fault of the agents.
Did the agent commit an unethical act by encouraging multiple policies? If the agent was aware that in case of a claim, only one policy benefit would be paid, then the agent should have been screaming to the home office to pay the benefits on all the policies. If the agent was not aware of what was paid and how much and how much was in force, how ethical was the agent in not keeping accurate agent’s records? Another aspect is that if the company wanted to put a maximum of $2,000 on coverage on an individual, should the agent sell additional policies?
If this practice was known to the home office and accepted (either specifically or by allowing it to happen) then it would seem that the insurance company had not acted ethically. While not knowing all the facts, it would seem that the insurer acted unethically by not paying the claims on all policies. Insurers failing to check their records would certainly be a weak, lame and unacceptable excuse it would seem. Incidentally, the reason that the insurer did not offer policies for amounts more than $2,000 was because of legal and regulatory reasons for “debit” companies. There was also very little underwriting on these policies. Selling larger amounts would require different premium payment systems than the weekly or monthly collections, etc.
Another situation involving the insurer and the agent, occurs when relatively minor losses are covered, in which case the insurance must be priced higher in order to handle the expenses of paying more claims. Therefore the whole transaction is just swapping dollars as the insurer hopes to make a profit on the premium collected before it has to be paid out as claims. A fact of insurance is that the higher the deductible, the lower the premium.
Dollar-swapping requires a higher premium than what is actuarially necessary, and further, it does not spread the risk of loss, although some portion of the premium is designated for that purpose. The question then becomes, is this really ethical?
In most lines of insurance, this is a non-question, as the insurance company is always responsible for claims. However,
F when there is a high deductible there is, in essence, more claims responsibility on the insured as they are assuming part of the risk.
Many large companies partially self-fund their liability risks, which differs from self insurance as every claim – regardless of size or whether it is within the deductible – is subject to the terms as they appear in the insurance policy. As a matter-of-fact, most liability and Worker’s Compensation polices reserve the right of the insured to settle or defend for the insurance company (and not the insured).
The same situation theoretically arises when there is a “fronted” program, i.e.; a “fronting” company is involved. Another similar situation is where a policy is retrospectively rated.
In these situations, the insurer must take the desires of the insured into consideration for settlement purposes. Also, courts have stated that an insurer, who held ultimate responsibility for a claim, did not act in good faith in a situation regarding the setting of reserves for a retrospective rated policy.
Ethics would require that the insured be made very much aware of his acceptance of part of the risk and how it would affect him with a claim. The agent must educate prior to policy issue, and not rely on the claims department at time of claim to educate the insured on coverage.
Churning and twisting basically are the same – the convincing of a policyholder of another company that they would be better off by canceling their existing coverage and purchasing new coverage with the agent’s company. Of course this is done all the time, and it is not always unethical, but if the insured is in the same or lesser position after replacement, then it is obvious that the reason for the replacement is for the agent to collect a new commission. Then it becomes churning or twisting. Most states have strict regulations in this respect and they do not hesitate to pull a license and fine an agent found guilty of twisting. In many states, anytime that a policy is being replaced, the agent must complete a state-prescribed form that lists fully the reasons for replacing the policy. Most insurers review that forms closely at the home office, and if there is any question that the insured is not going to be in a better position because of the replacement, the insurer will refuse to issue.
How can this be an ethical question? One way is that if the agent encourages, or does not dissuade, an applicant to cancel present coverage so that they can qualify for a new policy - then this is unethical. What will happen if the insured does not qualify for the new policy? This has happened more often than most people realize, primarily in health insurance, but in other lines particularly where there are no immediate binding receipts used.
Secondly, the agent is the one that completes the replacement form in most cases, even if the insured is required to sign it. It may be hard to believe, but agents have been known to not tell the truth when replacing policies. For instance, they indicate the reason for the replacement is that the original agent has moved or passed away, the other company has had bad press about claims practices, the insured has not been able to communicate with the insurer, or the insured’s relative had a legitimate claim refused by the insurer so they want to change. (These have actually been on replacement forms, plus some that are so “far out” that the application was returned.) Plus, one experienced agent (refuse to call him a “professional”) actually told fellow agents at a local underwriters meeting that he never asked the insured’s to sign the replacement form, as it would just raise too many questions, and besides, he was quite expert at “window-paning” or “obtaining a secondary signature” as some call it.
Knowing that many agents push insurance products just to gain sales (read commissions) many commercial risks purchase coverage net of commissions, and pay the agent or broker a fee for their services. This does not completely solve the problem because some insurers (often because there are built-in rating factors) still charge commissions and return them to the agent/broker. This brings up an interesting ethical question – if the agent or broker has been paid a fee, should they then return any commissions paid by the insurer, to the insurance company? Ethically, obviously, it should be returned, but as a practical matter, many disagree.
In some cases, there are contingency profit arrangements wherein a broker or agent (who may or may not be retained by the insured on a fee basis) is rewarded by the insurance company for bringing a block or book of profitable business to the insurer. Whether this is ethical or not seems to be side-stepped, as many who address this situation, particularly in publications, maintain that the present distribution system (agents and brokers) had been originally set up to meet the needs of marketing to small and medium size organizations and to individuals. The large international corporation of this century does not really fit this type of organization, particularly since insurance is only one way of financing risk with these large firms. Therefore, even the relationship between the insurer and the insured is much different than it was in the “good old days.”
In the modern business atmosphere, mergers and acquisitions are a fact of life and insurers and brokers are no exception. There was concern in the commercial non-life insurance field that because national brokerage firms acquired smaller firms and affiliated with others in the 1970s, that the days of the independent agent were limited. Fortunately, this did not happen, as many independent firms are still involved in commercial coverages. There was consolidation and mergers though, particularly in brokerage firms, as shown by the fact that in 1990 there were ten top brokerage firms, and today there are three top brokerage firms. What this has done, is to lower choices for commercial clients, and lessening the number of choices does not benefit consumers.
F The difference between a broker and an agent is a matter of representation. A broker represents the insured to the insurance company, while an agent represents the insurance company to the insured.
To many in the industry, the lack of choice creates an ethical problem. One situation arose when a large brokerage firm maintained that its corporate insureds did no longer need risk managers as the brokerage firm could provide these services. The problem with this is that a commercial risk manager takes into consideration several forms of the financing of risks, and not just by insurance. Since the broker represents the insured to insurers, by using the broker’s services competing risk financing is eliminated, so the broker benefits - but not necessarily the insured. It is possible for a broker to be working on a contract fee basis, which alleviates the conflict of interest somewhat.
F Conflict of interest is a major cause of unethical behavior.
The National Association of Insurance Commissioners (NAIC) addresses unfair claims practice as:
FUnfair claims practices are… “not attempting in good faith to effectuate prompt, fair and equitable settlement of claims submitted in which liability has become reasonably clear.”
Contracts should be executed in the spirit of good faith and fair dealing, and insurance policies, it must be remembered, are simply “contracts.” Taken from the viewpoint of pure contract law, the “legality of purpose” criteria for contracts refers mostly to insurable interest considerations, such as an individual cannot purchase a life insurance policy on the life of a stranger without having a financial interest in that person’s life. Basic stuff, everyone knows that. But agents have been known to create a fictitious interest – either financial or familial – in the life of an applicants in order to get the commission or by request of the applicant because they owed a (illegal) debt to another person, or for same-sex living arrangements. Sometimes purely illegal, sometimes just unethical, sometimes both.
If the premium is not adequate because of incorrect or insufficient information being furnished, then the consideration criterion for a contract has been avoided. Therefore, the contract is ethically unequal, even though there has been some consideration.
Technically (and legally)
F insurers who are not licensed in a state cannot be participants in a contract as there is no legality of purpose.
The ERISA-type (but illegal) arrangement as discussed elsewhere in this text would apply, and there would be no contract.
Note that the NAIC act mentions “good faith” so the question then becomes what is meant by this exactly? Black’s Law Dictionary states that good faith is “a state of mind consisting in (1) honesty in belief or purpose, (2) faithfulness to one’s duty or obligation, (3) observance of reasonable commercial standards of fair dealing in a given trade or business, or (4) absence of intent to defraud or to seek unconscionable advantage.”
“The phrase ‘good faith’ is used in a variety of contexts, and its meaning varies somewhat with the context. Good faith performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party; it excludes a variety of types of conduct characterized as involving ‘bad faith’ because they violate community standards of decency, fairness or reasonableness. The appropriate remedy for a breach of the duty of good faith also varies with the circumstances.” (Restatement [second] of Contracts #205 cmt. a (1981))
An essential part of good faith is the fact that it is absolutely necessary that there be complete and mutual understanding of the relationship between the insured and the insurer, and also potential third parties to the contract.
The insured trusts that when a covered loss occurs, the insurer will be there to fulfill their part of the insurance contract. Just for exchanging some money and a piece of paper, the insured may receive thousands or even hundreds of thousands of dollars to indemnify them. That is a demonstration of faith on the part of the policyholder.
The insurance company also has to trust its insureds as it is a given that some policyholders will make claims. The insurer expresses its faith in the insured by providing that claims are made fully, timely and in good faith.
Ethical behavior almost seems like a religious term – actually religion is closely entwined as ethics, by its very nature, relates to moral behavior. So does religion and faith of the individual as in the balance of things, they both are higher than the law. As with ethics, faith has a higher standard of behavior than the law.
F One identifying factor of ethical behavior is that the person takes
responsibility for his actions.
People and organizations that do take responsibility for their actions are showing high ethical behavior. The Tylenol situation is an excellent example of taking responsibility, indeed, the company already had procedures in place for recalling a product long before the tampering with Tylenol occurred.
Opinions as to what behavior is “moral” vary and what one may think is an ethical situation, may not appear so to another. The news media is full of situations that may or may not be “ethical.” Sometimes a well-intentioned situation can get out of hand. Recently parents and the school board of a community in Florida were concerned about the student’s dress code. While students in Florida usually wear shorts all year, the teen styles seemed to be dictating shorter and shorter shorts, and due to the influence of some entertainers, the exposure of the navel of young girls was a fashion note. Young men were copying “jail birds” who had their belt removed before they went into a cell, therefore their pants habitually drooped – this was copied as a fashion statement for the young, and the exposure of the top of their underwear was added.
Parents, teachers and the school board adopted a zero-tolerance position with a mandatory expulsion of one day as a minimum. As expected, one of the honor students with an impeccable reputation, showed up for school with a shirt-type blouse that folded over the top of her shorts – which was not allowed, even if there was no “skin” showing in the mid-section.
Is it truly ethical of the authorities to make such tight restrictions? Was it ethical for the young lady to show up with a blouse that did not make the requirements? Actually, her attitude turned out to be very ethical, as she stated that she should have known that this blouse did not meet the standards established by the school so she took full responsibility. The parents did not agree – were they therefore “unethical?” The situation was “fanned” by the newsmedia – were they being ethical? (This might be a rhetorical question.)
F In determining whether an action is ethical, it must be approached as whether it is or would be “moral” behavior.
As a matter of fact, ethical behavior can usually be called moral behavior, and actions to the contrary would not only be unethical, it would also be immoral.
Take the situation of an automobile accident where a person in the other car is injured. Does the uninjured driver offer emergency help even though they may not be qualified? If there is no one else around immediately, of course a party is obligated to offer assistance, and in some cases may be so required by law. If the injured party is bleeding badly, and the other person has had no medical training, but elects to wait for the medics or someone who is professionally trained as they feel that they are not qualified – is this an immoral act, and an unethical act as well?
What most would consider as immoral/unethical behavior, is considered by some as just good business practice. A nurse may not stop at an accident and render medical help as she is afraid that she could be subjected to a malpractice suit even if protected by a “Good Samaritan” law. A used car salesman may represent an auto as being safe and in good working condition, knowing full well that the brakes are about gone. In the eyes of most of the public, used car salesmen are way down the chart of ethics.
Most people have had bad experiences in business matters where the company and/or its representatives did not behave in an ethical manner - from small matters to large matters. In an actual situation that illustrates this point, recently a young mother had her son’s trumpet repaired prior to the school year, and was charged $100 for the service. She thought this was fair and she recommended the company to a close friend whose son also needed the same trumpet repair. Her friend was charged $30. When this was discovered, the first mother called and represented herself as another person, and asked over the telephone what it would cost to do (what she had paid $100 to do). The reply was that it would cost $45.
When the owner of the business was confronted with this situation, the alibi was that they send the instruments out to individual repairmen on a contract basis, and some charge more than others. This business has existed for over 15 years, member of the Better Business Bureau, and is the largest seller and repairer of band instruments in the county. Just because a business is a member of the BBB is no sign that they are an ethical company.
On a more extreme basis, ethics have been missing in recent years when the stock market was booming. It always seemed inconceivable to anyone with any business experience, that a person with no background or experience in a business, could start a new “dot.com” business. People could not seem to get their money invested fast enough in these nebulous, to say the least, enterprises. Then, as everyone knows, the market bottomed out and a lot of people lost their nest eggs or their retirement funds. At the very least, the question must be asked as to whether it is ethical to prey on the gullible?
Some businesses find themselves in a growth spurt and they take on more business than they can handle. Sensibly, they would hire more people, but that would mean more paperwork, more benefits and less profits, so they simply keep piling it on their existing staff. Another example of a business being legal but unethical.
The lesson is that some people consider something just as good business, when actually it is either immoral or unethical behavior, or both.
Is it possible for the insurance industry, (which would die a horrible death if it ever were to be determined as unethical because people must take them at their word for the industry to thrive), to actually do something unethical? Of course.
Example: In recent years, the most popular automobile is the SUV (Sports Utility Vehicle, in case there is someone in the world who doesn’t know). SUVs manufactured by a particular company who was the major producer and who will remain nameless, but they could afford to be involved (just a little pun), seemed to suffer more rollovers than others. This was investigated after several very serious rollover accidents. The auto manufacturer pointed the finger at one tire manufacturer as nearly all of the accidents involved this tire manufacturer. The tires were all recalled, the auto manufacturer improved stability of their SUVs, and things seemed to have settled down now.
However, it has been said by some, the insurance industry is a little culpable as they maintain voluminous records of automobile accidents in order to arrive at proper premiums and reserving. Therefore, the insurance industry was involved in every aspect of these problems, as after all, they did insure the tire manufacturer and the auto manufacturer. The question is – Why didn’t the insurance industry notice these problems from their records? They were involved in every accident as, if for no other reason, auto insurance is mandatory. True, they were not legally bound to investigate but … Interestingly; one auto insurer reduced the premiums on the SUVs even after they recognized the problem.
F Legally, the insurance company owes good faith duty to only its insurance
customers (policyholders) with some court-ordered exceptions.
But some courts have recently ruled that they also owe a good faith duty to third party claimants. These decisions are generally based upon a state’s “unfair claims settlement practices” acts, but some are the result on regulations regarding consumer fraud and unfair trade-practices.
One would naturally assume that “good faith” and “fair dealings” would all reflect ethics mostly, and they would be right as these types of laws reflect ethical behavior and are a result of ethics.
A recent history of court decisions involving third party claimants seem to go all over the map, many taking one stand, and then reversing itself later, and then even, in some cases, going back to the original ruling. One could say, at this time, that the vast majority of rulings are that the insurer owes good faith duty only to its insureds.
For those in the claims field, this is of prime importance. Usually, the bad faith claims against insurance companies arise because the insurer has not protected the insured’s interest in a third-party legal action. The primary reason is that the insurance company and/or its representatives have failed to disclose certain information to an interested third party.
F Most claims of bad faith arise because the insurance company has not kept its insured informed and has not allowed the insured to participate in the decision-making process.
This is a rather complex area but stems from court rulings in contract law that state that no party to the contract shall do anything to destroy or injure the rights of another party to the contract to “enjoy the fruits of the contract.” Third party claims arise from the defense of and/or the settlement of claims against the insured, involving such things as coverage, liability issues, and improper action of the insurer in investigation, representation, etc.
For many years, and in some cases still, insurance policies which define coverage are looked at by the public as unintelligible documents written in fine print (upside down and backwards in Chinese, some say) that only attorneys and insurance adjusters understand. While this is extreme, there was some basis in the lack of understandability because the original insurance policies covered marine risks, and therefore, marine terminology was used. Even today in certain marine policies, it is difficult for the average layman to understand what is covered.
This is the age of consumerism, and therefore insurance policies are now written in understandable language – even friendly, of sorts, such as using “you” and “your” and “we” and “us” to define the insurer and insureds in the policy. This has worked quite well, particularly in individual policies and policies covering personal property. Commercial policies are not as “insured friendly” inasmuch as there must be great care exercised in the description of property and coverages, therefore they must be defined in legal terms. Insureds of commercial policies are considered to have legal representation in business matters, therefore they should have the ability to use legal counsel as a matter of business practice.
Regardless, disclosure is important in any insurance transaction. Whether legally or ethically, (or preferably, both)
F an insurer must take the initiative to make sure that the policyholders know
exactly what is and what is not covered.
Further, it is not only good business sense and good ethics, but legally the insurer is required to keep the insured fully informed during the claims investigation. Failure to keep the insured properly informed is the principal reason for the majority of litigation between insureds and insurers.
Another true story. During the 1970’s, a wealthy rancher in Oklahoma purchased a $15 million life insurance policy – very large in those days (today it would not even raise an eyebrow). The agent resided in another city and was reputed to have underworld connections. He had been in prison at one time – how he got his insurance license returned is still a mystery. The agent also brought large policies to the insurer, written on various members of a professional football team, its owners and officers.
The insurer was a relatively small life insurer, who had an individual retention at that time of only $25,000, so $14, 975,000 was reinsured with a major reinsurer who spread it (retroceded is the technical term) among nearly all professional reinsurers and some direct writers in the U.S. and in Europe. Through this network of reinsurance, there were many companies involved.
Thirteen months after the policy was written, the insured was found stabbed to death in the basement of his Oklahoma home, with his bodyguard wounded and lying nearby. The second annual premium had just been paid – which means that the agent had already received most of his commission. Since this happened in such a short time, and the police had no clues (still an unsolved murder), the small insurance company and the lead reinsurer hired a private investigator firm of former FBI agents.
As the investigation progressed, the investigators kept turning up interesting items, and these details were kept confidential with the reinsurer and the insurer. However, the investigators became alarmed when some of their confidential findings were made public and it was apparent that the agent was receiving this information also. The insurer took all steps that it could to prevent any leaks to the agent, but without much success. Therefore, the reinsurer, with the agreement of its major retrocessionaires (other reinsurers) informed the President of the insurance company that they would not keep him informed of the progress of the investigation until the investigation was completed.
The company President was very upset, as he took it as a personal affront that he could not be trusted, and he felt that his ethics was being questioned. Regardless, it had its desired effect, as the general agent evidently did not receive any more confidential information.
Ethical problems abounded in this investigation. Another example was that the insured had been investigated prior to issuance of the policy by a national insurance inspection firm. The underwriters had been precise as to what was required regarding the finances of the insured – knowing that the reinsurer’s underwriters would also underwrite the case and require detailed financial information. The inspector who interviewed the insured was an experienced investigator, but he took the word of the insured - totally. The insured, it turned out, was heavily in debt (reportedly, but not proven, to underworld characters) but the inspector made no effort to confirm the financial information he was given by the insured. The net worth of the insured was represented as considerably more than the face amount of the policy when in fact, he was deeply in debt. Ethically (and legally), the inspector was deficient as he knew that the reputation of his company would depend upon how well he did his job. As a result, the inspection company was sued (settled out of court) and fell out of favor with the insurer and reinsurers – which carried tremendous clout in the insurance business.
Just in case you are wondering, the policy was settled for about $5 million. The murder case is still open – someone wrote a book about it and made a movie. The widow of the deceased insured shortly thereafter married the attorney that represented her during the investigation. Later she divorced the attorney and married the bodyguard. Really.
“Equity” and “equitable” crop up often in any discussion of ethics. Black’s Law Dictionary defines equity as “fairness, impartiality, evenhanded dealing, such as ‘the company’s policies require managers to use equity in dealing with subordinate employees.’” Also, “the body of principles constituting what is fair and right” (with reference to the Declaration of independence). The next definition is of particular interest:
F “(Equity is) the recourse to principles of justice to correct or supplement the law as applied to particular circumstances.”
This falls in with the definition of ethics in the statement that “law establishes standards, equity establishes higher standards.” Keep in mind, however, that “Equity” is also a legal term, so for purposes of discussing ethics in “non-legal language,” equity means natural justice.
Actually, an insurance company’s duty is higher than just “good faith.”
F The duty of an insurance company is the duty of “utmost good faith.”
This also applies to agents, brokers, independent adjusters, defense attorneys, actuaries, and others involved in the business of insurance. “Good faith” implies that the action taken must be above reproach and held to the highest ethical (and moral) standards. Like “charity,” good faith starts at home. The insurer must offer loyalty to its employees, who in turn are loyal to the insurer, but it goes further – it spreads to the actions and relations between every party involved. The insurance business is rather unique in the fact that it MUST operate in good faith because of its relationship with its clients – the policyholders.
A former officer of a major reinsurance company stated that the pressure to operate with utmost good faith was heaviest at the reinsurance level as reinsurers are traditionally considered as “experts” in insurance as they accept risks of all kinds and of all sizes. They must maintain the highest of ethical standards as they become intimately knowledgeable with the inner working of their client companies and are entrusted with marketing and operating “secrets” of their clients. They maintain good relationships with all insurers, even if they are not clients. Therefore, a reinsurer is privy to business secrets that they cannot reveal to others. It makes it difficult to maintain proper ethics sometimes since insurers are extremely competitive and clients have been known to put pressure on the reinsurers to tell them what other, non-client, companies are doing. The reinsurer just does not give in to such pressure, but they have been known to obtain permission from one company to discuss their products with another company, and sometimes they have arranged meetings between officers of the two companies to discuss products.
Another ethical area for reinsurers is that because reinsurers make it their business to know what is going on in the industry, sometimes they become aware of a block of business, or even an insurance company, that can be purchased. Oftentimes they also know of companies that want to purchase blocks of business or merge with another insurer. Often reinsurers have put the two parties together, with the result that they strengthen their relationship with insurers involved. The ethical question arises regarding the sale. If an outside broker is used to market a block of business or a company, the broker is paid handsomely – often by both parties. Some brokers make their living selling business to other insurers. The problem is, should the reinsurer receive any remuneration for his services? Reinsurance companies do not accept anything if their employee is responsible for the sale of business as that is considered as part of the services that they offer. But how about the reinsurance representative that “put the deal together?” This is not actually part of their duties of providing reinsurance, it can be said, so why not accept something for their hard work (and sometimes it is hard work, getting two companies together)? Of course, the reinsurer should be able to expect future reinsurance from the company(s) in a normal business sense.
In actual practice, there have been and probably still are those individuals who will accept money for doing this. Encouragingly, most reinsurance representatives will refuse any personal reward for doing this. One reason is that they would consider it a conflict of interest, therefore unethical. One reinsurance representative turned down nearly $200,000 as the fee for arranging the sale of a client company to another client company. Strictly ethics. Now you know one of the reasons as to why reinsurers are highly regarded in the industry.
FA fiduciary relationship means that one who acts on the behalf of another is,
therefore, held to the standards of utmost good faith.
An agency relationship is a lesser relationship, and the parties are subject to good faith. Fiduciaries can be trustees, receivers in bankruptcy, guardians, executors or administrators of estates, and others who are appointed to act in the best interests of another. Often, they are required to be bonded.
The majority of insurance attorneys maintain that there is no fiduciary relationship between the insurer &/or its representatives, and its clients. The reason that it is necessary to establish such relationship is because of the good-faith requirement – an ethical issue, basically. A fiduciary relationship would place a much higher burden of responsibility on the insurer or agent, one they are just not willing to accept.
A salesman for a manufacturing company may represent the company with its clients, but its relationship is not that of a fiduciary. However, one must always remember that insurance is an intangible until a loss occurs. To many, that makes a huge difference.
Some courts have maintained that there is no fiduciary relationship between the insurer and its clients, because the interests of the two parties are the same and are equal –
F unless the insurer requires the insured to take some action outside the policy
provisions.
For instance, if an insurer takes over the insured’s loss by requiring that the insured use a particular auto body repair shop, or a health insurer requires that a claimant use a particular doctor or have a particular medical procedure, then the insured is taking action outside the policy provisions. However, if for example, the health insurance policyholder has been made aware that certain physicians must be used in order for the insurer to cover the loss under the policy, and it is so stated in the policy, this then does not create a fiduciary relationship.
But what happens if a third party is involved, as can often occur in a liability policy? A typical liability policy gives the insurer the right and duty to settle or to defend, and the insurer maintains the right to determine which. Legally, in these situations, the insurer is acting on behalf of the insured, and in a position of trust, under these forms.
Be assured that courts have ruled both ways, even in one state (California). The insurance industry seems to be changing its stand on this, as evidenced by a textbook on casualty insurance claims wherein the author states that the claims representative is a fiduciary agent, but a later version of the same text, replaced “fiduciary” with “special trust and confidence.” Another moral dilemma.
1. Insurance, as an industry,
A. is not a profession.
B. is a profession.
C. does not employ or contract with professionals.
D. is highly unprofitable.
2. Licensing and training
A. makes one a professional.
B. does not make a profession.
C. is sufficient for one to develop ethics in their vocation.
D. separates a vocation from a job.
3. The professional must always be aware of and protect
A. their profession from others that want to join their profession.
B. their own personal property.
C. their family.
D. the client’s best interests.
4. In defining a professional, some codes require that the acquisition and maintaining of knowledge required is
A. the duty of the employer.
B. the duty of the professional organization.
C. the individual responsibility of the professional.
D. provided by the federal government.
5. The law sets standards, whereas ethical behavior
A. is implied.
B. is illegal.
C. is immaterial.
D. is the highest standard.
6. The doctrine of caveat emptor (let the buyer beware) in respect to the sale of insurance,
A. must be applied in all instances.
B. does not ethically apply.
C. is mentioned in sales material, and is written at the top of every insurance contract.
D. is not legally relevant as it actually is a myth.
7. Underwriting evaluates the differences
A. in commission structure of the agent.
B. of the height and weight among its insured.
C. within a similar group of units.
D. between the health of the various racial entities.
8. The main source of underwriting information is from
A. the Medical Information Bureau.
B. the Insurance Services Organization (ISO).
C. doctor’s and hospital’s files.
D. the agent.
9. The difference between an agent and a broker is
A. a matter of representation.
B. commission scales.
C. the size of their organization.
D. just semantics, they are interchangeable.
10. A major cause of unethical behavior is
A. legal discrepancies.
B. conflict of interest.
C. low commissions.
D. high commissions.
1A 2B 3D 4C 5D 6B 7C 8D 9A 10B