F Insurance, as an industry, is not a profession.
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
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, (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. 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.
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.
An agent must be subject to considerable training, and the quantity and quality of training varies by company. Unfortunately, the attitude of many agents and some insurers is that if an agent can pass the state examination to be licensed, then all that needs be taught is product knowledge. Actually, training is supposed to teach the student how, whereas education teaches a student why.
Real professional insurance training is time-consuming but it is available through universities and through the American College, the College of Insurance, and the Insurance Institute of America. The Society of Insurance Trainers and Educators (SITE) has identified sixty-nine insurance professional designations, generally requiring class attendance, study, and the subsequent passing of written examinations.
F However, neither the insurance industry nor the public as a whole nor through the regulatory body (insurance departments), require that a practitioner have even one of these designations, nor do they require undergraduate degrees.
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 most states. Actuaries who have the Fellow (or often, 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."
One ethics requirement that permeates all of the insurance professional's training and ethics is that
Fthe professional must always be aware of and protect the client’s best interests.
The 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. One of the characteristics and probably the most important is:
F "In the applying that knowledge (of the vocation) the practitioner should abandon the strictly selfish commercial view and ever keep in mind the advantage of the client."
Often followed by other professions, 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." (Our underlining) This certainly indicates that in order to be a professional, one must accept ethical standards that require that selfish commercial views be abandoned.
While some economists take the position that the primary (and some say, only) responsibility of a business is to increase profit, that approach 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.
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, he dishonors his professionalism and the profession as a whole.
Professionalism is usually contained in the Code of Ethics of a profession, 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."
Regardless if the insurance agent has a professional designation, such as a CLU, CPCU, ChFC, CLF, REBC, FLMI, FSA (and ASA), RHU and similar professional designations in the insurance industry and is a member of such a professional organization if he practices what the Code "preaches" then he is acting as a professional. Therefore, the almost-universally accepted standards in the code should be followed by anyone who holds himself or herself out to be a "professional."
Many times the problems that are faced by insurance personnel may be either legal or ethical, or both. It is necessary to understand applicable law when studying ethics because:
F Law sets minimum standards, whereas ethical behavior is the highest standard.
Therefore, law and ethics address similar problems, but the standards differ. 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 (and the insurer) 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, which it has done in providing a Medicare program for those elderly citizens who were unable to obtain commercial insurance, protecting retirement funds of employees (ERISA), providing portability and other regulations in respect to health insurance, flood insurance, and other situations where state regulation has not been sufficient in the eyes of the federal government and regulators. In many instances, ethical problems have resulting in legislation.
As an example, the Medicare program was instituted in 1965 which provided basic health coverage to a certain segment of the population, and which opened up a "supplemental" market as Medicare was not intended to provide all health services to the beneficiaries. The Medicare Supplement market flourished, but there was an inherent problem—the beneficiaries were mostly senior citizens and many of them were confused by the program. Therefore, unethical agents (unfortunately, there were many of them) would sell the person more than one Supplement policy, even though they only needed one policy. It was not uncommon for a Medicare beneficiary to have several health insurance policies, intermingled with long-term care policies, and all of which were creating unbearable financial strain. The federal government later enacted regulations which created ten base policies that pretty well covered all the basics, and they required all companies to sell only those policies. These regulations also outlawed the sale of more than one Medicare Supplement policy to a beneficiary, including any policy of any kind that duplicated the Medicare coverage they already had.
Penalties were severe, the state insurance departments enforced these regulations plus similar state regulations, so those specific ethical problems were solved by regulation.
Regardless of the intent, laws and regulations almost always have problems, many times leading to further regulation. The various states attack these problems that may also affect other states through the National Association of Insurance Commissioners which provides model bills for the insurance departments to present to their state legislatures for passage.
California is a prime example of regulators being aware of ethics violations, particularly in the area of marketing insurance products to seniors. Annuities and Long Term Care Insurance (LTCI) marketing created the majority of the ethical problems in this respect. The California Department of Insurance and the state legislature have been successful in the elimination of many of the ethical problems, and are reducing the frequency of others.
The examples are numerous and when a California agent obtains his insurance license or takes continuing education courses—particularly annuities and LTCI—it is apparent that the regulations were devised in order to eliminate or minimize ethical problems. One example involves the practice of marketing primarily annuities by inviting senior citizens to seminars, many of then luncheons (at no cost to the seniors) where the advantages of annuities over other investments are "discussed." Those holding these seminars were often identified as estate planners, financial planners, financial consultants, or some other dignified-sounding name, when actually many of them were just insurance agents. Regulations now require that such invitations or announcements contain a statement that "insurance" will be discussed.
Realizing that ethical problems abound in marketing in the senior's home, regulations now state that the senior must be informed of any visit to the home, along with information as to the purpose of the visit and who will be present. Another regulation in respect to the sale of life insurance or annuities to Seniors requires an agent that offers to sell an "elder" any life insurance or annuity product, to advise the elder or the elder’s agent that the sale or liquidation of any stock, bond, IRA, Certificate of deposit, mutual fund, annuity, or other asset to fund the purchase of the product may have tax consequences, early withdrawal penalties, or other costs or penalties as a result of the sale or liquidation. Further, the agent must advise his client that he/she or elder’s agent, may want to consult an independent legal or financial advisor before selling any assets or before selling or liquidating any annuity product being sold, offered for sale or even being solicited.
Obviously, there had been numerous ethical incidents where an agent had convinced a trusting senior that they should liquidate an existing investment and replace it with an annuity or other product that the agent could provide that was not to the advantage of the elder person. That, of course, was unethical and now it is illegal in most situations. An agent may still abide by the regulations and replace an investment with an annuity or another type of investment (mutual funds, for instance, if the agent were so licensed) including all of the required warnings that replacement may not be in their best interest and the client signing that they had so been notified and warned. Therefore, the legal requirements would be complied with and the client could replace the investment. However, assume that the agent represented more than one insurance company and was aware that the client could have had better results with an annuity from Company A, than with Company B, but he places the business with Company B because the commission was better, or perhaps it would help him to qualify for a sales contest with Company B. Therefore, ethics took the legality of the transaction to another step.
An insurance research organization has concluded that "unrepresented" (not represented by legal counsel) claimants receive a higher net recovery on the average, than "represented" clients. 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. 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 "deep pockets") and with the availability of attorneys working on a contingency basis, why not? Is this out of control? Probably.
Agents may find themselves 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, 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 the 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 if the product "crashes and burns" or does not perform as expected.
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, the insurance company and the 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. This presents a very 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"" whether the "unit" is automobiles, business, buildings, homes, ships, cargo, property or persons.
F Underwriting evaluates the differences within a similar group of units.
Any decision regarding the exposure of risk within the group must be based upon the knowledge of the underwriter and 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 must be considered in every underwriting decision.
Insurance is usually a long-term relationship between the insurer and the insureds and involves considerable amounts of money if maximum claims are reached There must be a considerable amount 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 and 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 may 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, the underwriter seriously consider the agent's statements. Actually, it is part of the job of a professional underwriter to know which agents they can trust and which they cannot. 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 applicant’s exercise regime and the fact that he competes in local events requiring considerable 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.
Underwriters base their decisions upon 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 and combine this 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 honest 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. Since that time, several of the more financially strong insurers have either left the state or have restricted their coverages.
When insurance companies do not receive their (statistically) needed increase, many have just stopped writing business in that state. The effect is that, for instance, when Worker’s Compensation or Auto Liability coverages require a premium increase, 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
It cannot be said enough or loudly enough, insurance company representatives must properly assess each customer’s needs. 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 the result of 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.
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 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. One indicator of client fraud is over-insurance, or the claimant presses 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—and the agent if the agent knows that the house could be rebuilt for a lesser amount. The agent could get into trouble if he initiated such a substantial disparity between the replacement amount and the valued policy limit but this would not be realized unless the house is destroyed—which may never happen and the insured pays excess premiums for years.
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 often 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.
Agents may often find themselves in a situation where an insured wishes to replace an existing insurance policy with another policy. It is important to differentiate between "replacing" a plan (which is legal) and "twisting" (which is not legal). "Twisting" is where an agent or broker attempts to persuade a policyholder through misrepresentation to cancel one policy and purchase another one. Replacement is the substitution of one insurance policy for a policy of like kind and value (no misrepresentation involved). State laws universally protect policyholders from "twisting." Replacing requires notification of the existing insurer of a replacement of one of their policies, often giving them time to respond.
Replacement can be a "good thing," such as when the first interest-sensitive life insurance policies were introduced. Millions of policyholders had life insurance policies where their cash value was credited at 3% or lower during a time when anyone could walk into a bank and get a much higher rate of return on a Certificate of Deposit. Legitimate, honest replacement possibly saved the life insurance industry from the "buy term and invest the difference" syndrome—or at least it had a very positive effect. In such situations the replacement still can be called into question because when a policy is replaced, the agent receives a new commission. So while the agent may provide a service to the client, regulations have had to be strict as there would be the temptation to misrepresent policy benefits of existing policies so that a new sale can be made.
The principal reason that replacement can be very good for the client is because of the ethics of the agent. As mentioned earlier, agents frequently represent more than one company and can, therefore, have choices in legally replacing a policy—financial condition of the new insurer, detailed comparison of benefits, easier ways to qualify for benefits, etc.—even without taking the commission differences into consideration. An ethical agent must always look at the replacement through the eyes of the client.
Another ethical question can arise—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 also 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 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.
Since 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? Obviously from an ethical viewpoint, 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 property and casualty 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. 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 ethics of a 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:
F "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 insurance 101,but agents have been known to create a fictitious interest—either financial or familial—in the life of an applicant in order to get the commission or by request of the applicant because they owed (usually an illegal) debt to another person, or for same-sex living arrangements. Often illegal, unethical or 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.
Note that the NAIC act mentions "good faith" so the question then becomes—what is "good faith?" 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" may seem like a religious term—actually religion and ethics are 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.
Therefore, 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." As a matter of fact as this text is written, certain big-city newspapers are under fire for reporting information that many, including a large number of congressmen, feel is deleterious to the war on terror. They had been asked by those responsible for the security of our nation, not to publish this information, but it was the opinion of the newspaper(s) that it was something that people should know. The legality of this is under question, but perhaps a better question would be "Did the newspaper(s) act ethically when they hurt the security of the nation after being asked not to divulge this information?"
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, they would also be immoral.
Take the situation of an automobile accident where a person in one of the cars 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 and they could possibly injure the person even more—is this an immoral act, and an unethical act as well? Or is this highly ethical as by not trying to help the injured person, he fulfills one of the basic ethic rules: Do no harm.
What most would consider as immoral/unethical behavior is considered by some as just common 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 (perhaps not a good example as many used car salesman are rather notorious for being unethical).
A health insurance agent takes an application for Major Medical insurance on a family who has no health insurance. In order for the application to be approved, it was necessary to obtain medical records on the father. The insurer had a firm practice of never paying more than $50 for medical records, but the physician belongs to a large medical group who has a firm policy of charging a minimum of $100 for records to be sent to an insurance company. This impasse could mean that the applicant would not get his health insurance (and the agent would not get a commission). Since the agent was not aware of the physician's charge—normally $50 would have been enough—he had indicated to the applicant that his payment of the first month's premium (usual health insurance practice) would be all that the applicant would have to pay up front.
If the agent simply cancels the application with no explanation (he was embarrassed to admit that the applicant might have to pay something for his records), then the client and his family has no insurance and have been without insurance during this period of time.
If the agent pays the extra $50 out of his pocket for the medical records without notifying the company or the client, is this ethical? The insurer probably would consider this as a form of rebating and would not allow an agent to pay part of an applicant's premium. Therefore, if the insurer found out that the agent had paid his own money, the agent could lose his ability to represent the carrier. If it were kept "secret," it would still probably show somewhere on the medical records as a receipt for $100 for the records. If the agent instructed the physician's office to hold the records and he would pick them up, and then he "loses" the receipt for $100, this is dishonest and therefore unethical, even in the face of serving the "greater good."
A dilemma must have more than one response, so another response that could possibly happen "in the real world," is that the agent would contact either another company with whom he is licensed and see if they would pay the $100, even though the other company may not have as good a policy or pay the commission of the agent's regular insurer. Would this be an ethical approach? It would be ethical only if (1) the regular insurer who has already seen the application, is notified that the medical records cannot be obtained for $50; (2) the client is made aware that another insurer is available to provide his coverage; (3) the agent meets with the client and completely explains the benefits under the new policy proposal and honestly and fully compares the benefits between the policies; and (4) explains fully the reason that he had to go to another company. This response would mean that the client either accepts the new plan, or does not take either of the plans—which would mean that the agent did not do a good job in explaining the problem, or possibly the client may offer to pay the additional $50 out of his own pocket.
There are other alternatives, for instance the agent may pay $50 to the client who then writes a check to the insurer for $50. This is not honest, therefore it is not ethical. Is this done? Probably. In any event, this must be the original idea of the client, or it is really unethical.
Another alternative is available: If the agent is not licensed with another health insurer, he (or other agents or even the agency manager) would likely know another agent who could write the application and whose company would pay the records fee. Is this ethical? Probably, provided the client is made aware that another agent will be calling on him and the reasons thereof, the agent's primary carrier is made aware of the situation (they may waive their $50 rule if it appears that they might lose the case) and the commissions are paid to the new agent only. This has worked in a number of situations, and is known as the "scratch my back…" approach as the next time that the new agent has a similar situation he cannot handle through his carrier, he may "repay" by referring a client to the original agent.
What has happened in similar cases is that the agent explains the situation to the client, including the alternative use of another insurer that would cover the cost of the records. When the client is made aware of the situation (including the fact that he may have to complete another application), in many cases the client will thank the agent for being truthful. The client may volunteer, or the agent may suggest, obtaining the records personally and then forwarding them to the insurer as the medical records actually belong to the patient. If this does not work, sometimes clients will volunteer to pay the additional cost—$50 in this case.
It would be fair to say that similar situations arise in all lines of business where coverage cannot be provided by one carrier because of their internal regulations, but the agent attempts to avoid the problem, sometimes correctly, sometimes unethically. Brokers, on the other hand, face these situations differently as they represent the client. In the above situation, brokers are often used as they can provide coverage in difficult situations. Financial arrangements that are legal and ethical can occasionally be worked out between agent and broker.
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.
What does this have to do with insurance ethics? It has been said by some that the insurance industry must be considered as at least a little culpable as they maintain voluminous records of automobile accidents in order to arrive at proper premiums. 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 then becomes: 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.
Many of the following considerations concerning the relationship of the agent to the insured have been previously discussed. As the company's agent, the agent is responsible for acting on behalf of the company from which arises his responsibilities. However, the insurance company has responsibilities to the insured also.
Considering the ethical responsibilities of an insurer, their responsibilities include developing and marketing the insurance product and when the product is applied for, the company must underwrite the product. Underwriting creates a custodial situation with the insurer and they are then privy to sensitive private information about their insureds. Perhaps the most important responsibility is their promise to meet the insured's (legitimate) claims. Each of these relationships carries with them ethical responsibilities.
The first responsibility is the creation of the insurance policies (products) that must be dependable and not harmful, particularly because an insurance policy is a promise to pay compensation when a specific harmful event occurs—therefore, an insurance policy is an ethical instrument. Morally (and legally) the company must remain fiscally sound so that it can meet the obligations for which they have contracted. The product should be fairly priced as discussed earlier. The product should not be too complicated for the average lay person to understand and understand its value—this places another ethical burden on the company to give fair value.
This discussion has shown that there are many ethical constraints on insurance marketing. The old principal of caveat emptor (buyer beware) should not and in most cases now, does not, guide the marketing of products of all kinds—pharmaceuticals, electronics, automobiles, food, insurance policies—which are too complicated and complex for the buyers to be aware of quality, safety factors, or even fair market values. Liability laws attest to the fact that the guiding principal of marketing in today's world is now caveat vendor (seller beware). Honesty in marketing is now the responsibility of the producer.
As with any business, an insurance company owes truth in advertising to its potential customers. As one television advertisement so aptly suggests, the normal person does not trust television advertising because they know that they are trying to sell something. However, if a gecko tells them about insurance, they are more apt to accept it! The very base of marketing is ideal exchange which in turn requires full information on the product and autonomous individuals making the choice to exchange freely. In medical ethics this is known as informed consent which means that there is no misleading, coercive or manipulative advertising. An ad that says "guaranteed renewable" when in reality it is not, is deceptive and unethical.
For life and health insurance, the most relevant health risks must be known. This leads to one of the classic theoretical ethical dilemmas—should a company underwrite a client who is a known health risk, such as an AIDS patient. Further, should insurers provide insurance coverage for those who have AIDS? Technically, any risk can be insured (but the premiums would be prohibitive in many cases). So, in discussing insurance for those with AIDS, the question is "into what insurance pool should they be placed?" There are those who might insist that they be put into the general pool, but that would be unfair to others in the group as they would be subsidizing the AIDS patients. But, as noted, if they were to be put into their own pool, the premiums would be prohibitive. This could bring out those who maintain this would be an area for social insurance, funded through taxes. Remember, Medicare was created out of a need for insurance on those who could not obtain private insurance because of age and/or physical condition.
There is a different, but interesting, problem for life and health insurance companies in respect to genetic testing and/or genetic screening. This provides a rare paradox for ethicists as the more accurate the predictions of time of death or future health of a person, then there is a greater role for the risk factor as to who gets coverage and for how much. If the insurer knew that an insured is going to become ill and his medical costs will be $X at that time, should he underwrite and insure the client in such a manner that there is no revenue loss to the company? After all, insurance companies are not eleemosynary institutions. Insurers make promises to deliver money based upon certain contingencies, and therefore, they have an obligation to their policyholders to stay in a financial condition so that they can fulfill these obligations. Therefore, including persons with known and highly predictable health risks into an insurance group at premiums that cannot be properly underwritten violates the insurer's trust to those policyholders (and investors) who depend upon its financial stability. To some this may seem cruel and hard-hearted, but actually it would be the proper ethical path. The insurer has not only the right, but also the duty, to be discriminatory in underwriting—but not unfairly discriminatory—so the underwriting must be fair. This would amount to treating its constituency fairly in accordance with the ethical fairness that governs marketplace transactions.
The NAICs Unfair Trade Practices Act does not allow the practice of "redlining"—which gets its name from the practice of realtors of drawing red lines around a geographic area on a map to keep certain people out of that area. Redlining is a form of unfair discrimination and is more common in auto and property insurance than in life or health insurance. However, there are companies that do not want to insure in certain geographic areas for reasons other than racist or sexist biases, and do so on legitimate grounds. For instance, homes that are very likely to be damaged or destroyed due to hurricane, mud slides, or other such natural causes, and that are congregated in a particular area, may be excluded from insurance because the risk is more than the insurer is willing to assume. The Gulf Coast at the present time is "redlining" many areas where hurricane coverage is no longer going to be offered. Of course there can be various interpretations as to what are "legitimate grounds" for "redlining."
For underwriting purposes, often insurance companies receive an extraordinary amount of private information about people, particularly in life insurance contracts where a physical examination may be required. Privacy laws abound and are quite strict, but nevertheless, it is an important responsibility for a company to keep confidentialities, including the maintenance of privacy and the protection of confidential health records.
There can be a conundrum when an insurance company rejects or rates an insurance risk because of confidential information which the applicant may not have wanted to be given to family members. What if an applicant for health (or life) insurance is rejected because of a sexually transmitted disease (STD) and the person is married with children and the spouse has no knowledge of the disease? Actually this has happened, and more than once. Only those persons who have legitimate claims to such knowledge should have access to it. In such as case, should the spouse be made aware of the reason for the rejection as they are at risk for the disease? What if it is a more serious disease, such as syphilis? Should the insurer notify the agent as to the reason for the declination, and if so, should the agent notify the applicant and then drop it, allowing the applicant to handle it with the spouse as they seem fit?
Does a pharmaceutical company have a right to access the list of a Health Maintenance Organization's client records so it can push its prescription drugs? No matter what the case, to have information on someone is to hold that information in trust and it is unethical to divulge it except to those who are legitimately entitled to it which are, and only are, those the client has authorized to receive the information.
Volumes have been written about how claims should be handled, but simply put, the insured has a right to prompt, fair, and equitable settlement. "Prompt settlement" is defined as the efficient processing and payment of a claim within a reasonable time. "Fair settlement" is defined as paying what a claim is worth—any attempt to settle for less than what a reasonable person would expect is unethical. If the claim has to be compromised, the company must then give the reasons for such compromise claims settlement. Further, it is the responsibility of the company to make known when and where appeals procedures are available.
When an insurance company finds that a certain type of policy that is markets is not profitable and its recourse is to discontinue selling that particular policy or form, then several things could happen. If the policy is guaranteed renewable, there could be an automatic reinstatement period which allows the policyowner to automatically reinstate the policy after the end of the grace period. In such a case, sometimes the company will change its procedure and require policyowners to apply for and qualify for reinstatement, and when reinstated, it is on a modified basis. Sometimes beneficial riders are dropped and promises of return of premium are discontinued.
Sounds drastic, but what if the company is forced to adopt such a policy in order to minimize loss? If a company is burdened with commitments that are unexpectedly much more than anticipated, what is their responsibility at that point to the policyholders? What is their responsibility to their shareholders? The question seems to be in these situations, "To what degree and when can profits override policy obligations?" Then what would happen if the situation changes so that the terms of a policy now benefits one party and injuries another far more? Should the insurer's main concern be profit or the concern only for the benefit of the client? But what if the company needs to make changes and adjustments just to stay in business and fulfill obligations of its policyholders? Sometimes overlooked is the fact-of-life that the client cannot be benefited unless the company remains competitive in the marketplace.
A company has the responsibility of due diligence in the hiring and firing of agents. The biggest problem many insurers have is acquiring agents. Recruiting of agents can make or break an insurer or line of business of an insurer. Further, if the insurer does not recruit agents well, they may find themselves with unethical agents. It is not unknown for some agencies to operate "on the fringe" and shuttle business from one insurer to another, depending upon how much money the agency can make on the business and still keep their licenses. For an agency recruiter who does not know the reputation of agents in a city or area, it is easy for them to find themselves with a group of unethical agents with accompanying problems. Along with the responsibility of diligence in the hiring of agents, the company also has an obligation to provide for the training of its agents.
McGill's Life Insurance asks, "(S)hould a company keep a top producer if it becomes clear that top producer writes business by cutting ethical corners? Recently a CEO of a major insurance company that had recently ceased commission payments on internal replacements contemplated offering no commissions for external replacements. The reason was simple—such a move would disincentivize replacements. Clearly, this was an insurance executive who took the company's responsibility to its clients very seriously. But is such a plan fair to the agents who also had to work hard on replacements? Would it be fair to the shareholders of the company if it forced productive agents to look for another company? This example shows that responsibilities are not simply one-sided but involve a multitude of responsibilities, some of which may be in conflict."
In this discussion of insurer's responsibilities, it becomes apparent that in many cases, things are not cut-and-dried, but to the contrary, there are many who have an interest in an action or a situation. Because there are several that hold similar interests, many times there arises conflict of interest and/or obligations among those involved. In the above situation, the CEO has duties to many persons—his agents, shareholders (or policyowners), clients, and to himself and his family. When such cross-purposes exist, and only ethical course of action is to attempt to resolve the problem without hurting another party in the process, and still be fair and true to yourself.
F Legally, the insurance company owes good faith duty to only its insurance
customers (policyholders) —with some court-ordered exceptions.
These "court-ordered exceptions" refer to some courts that have recently ruled that insurers 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 of regulations regarding consumer fraud and unfair trade-practices. It is fair to assume that "good faith" and "fair dealings" would all reflect mostly ethics as these types of laws reflect ethical behavior and, like many such regulations, are a result of unethical behavior. So the history of court decisions involving third party claimants have little uniformity, it would be correct to say that the vast majority of rulings are that the insurer owes good faith duty only to its insureds.
This is extremely important for those involved in insurance claims, as bad faith claims against insurance companies often 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—legal problems because of lack of proper ethics.
F Most claims of bad faith arise because the insurance company has not acted ethically in that it did not keep its insured informed and did not allow 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 settlement of claims against the insured, involving such things as coverage, liability issues, and improper action of the insurer in investigation, representation, etc., whether illegal &/or unethical.
The importance of client education in coverage has been stressed earlier but still requires further amplification. Insurance policies which define coverage are looked at by the public as unintelligible documents (which sometimes they are) out of necessity in order to define exactly what is insured and what benefits pertain to the risk. Some of the archaic language was created by marine insurance which, to this day, still uses rather archaic words and descriptions because throughout time, specific meaning and interpretation have been relegated to certain words and phrases.
This is the age of consumerism, and therefore nearly all insurance policies are now written in understandable—and even, friendly—language, 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 a claims investigation. Failure to keep the insured properly informed is the principal reason for the majority of litigation between insureds and insurers.
"Equity" and "equitable" are often used 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 helps to clarify the statement "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.
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 only. 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. 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 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.
California courts have ruled both ways. 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." Therefore, it behooves the insurer and its representatives to treat a claims situation as a (more strict) fiduciary relationship.
STUDY QUESTIONS
1. Licensing and Training
A. does not make a profession.
B. is not necessary in insurance sales.
C. only applies to those in medicine, law and architecture.
D. is unusually difficult and expensive in most occupations, much less professions.
2. The professional must always be aware of and protect
A. themselves.
B. their employer or insurance carrier.
C. the client's best interests.
D. others in their profession.
3. The acquisition and maintaining of knowledge required is
A. the responsibility of the professional organization.
B. a matter of law.
C. the individual responsibility of the professional.
D. forced upon insurance agents by their carriers.
4. Law set minimum standards, whereas ethical behavior
A. sets lower standards.
B. sets standards exactly equal to the legal standards.
C. does not have standards.
D. is the highest standard
5. The rule of Caveat emptor
A. means that price sells.
B. can ethically and legally be used in the sale of insurance.
C. cannot ethically be applied to the sale of insurance.
D. means "seller beware."
6. The main source of underwriting information is from
A. the agent.
B. medical records.
C. the Medical Information Bureau (MIB).
D. policy records.
7. It is the duty of the agent not to only sell the right product to the customer, but
A. also make sure that all agents collect commission on the sale.
B. to make sure that it is sold at the right price.
C. to make sure that it is sold at the lowest price.
D. to return a portion of the commission to the client.
8. A major cause of unethical behavior is
A. alcohol.
B. unethical insurance companies.
C. unfair and uneven laws that work against the agents.
D. conflict of interest.
9. One identifying factor of ethical behavior is
A. the person takes responsibility for his actions.
B. the person taking the action is rewarded magnificently.
C. that no other person is aware of any transaction.
D. it is usually a legal transactions.
10. Legally, an insurance company owes good faith duty to
A. only its representatives.
B. only its insurance customers (with some court-ordered exceptions).
C. the state Department of Insurance.
D. its reinsurers.
ANSWERS TO STUDY QUESTIONS
1A 22C 3C 4D 5C 6A 7B 8D 9A 10B