Privacy may be considered an ethical right even though it is not mentioned in the Constitution as such, but it has been established by the courts. It was never questioned as an ethical behavior prior to its legalization, but now the protection to the right of privacy raises many ethical problems. One of the most recent problems involves Internet privacy. For a person to order something from a firm or individual via the Internet, to makes inquiries, to register a product, or nearly any other Internet activity requires identifying information of some sort—ranging from credit card numbers, social security numbers, addresses, bank references, etc. There are innumerable unethical businesses and individuals preying on the typical and honest individual using the Internet.
In respect to the nebulous "right to privacy" in insurance matters, does an agent have an obligation, legal and/or ethical, to "invade" the privacy of the insured by inquiring into an individual’s lifestyle, personal habits, health condition, driving record, preexisting conditions, financial status, or other situations that might influence the pricing or acceptance of the risk? Obviously the agents not only have a legal obligation; they have an ethical duty to their carrier to notify them of any condition that affects the risk involved.
Ethics are often heavily involved in claim practices, particularly in disability claims. Everyone has visions of a "totally disabled" client collecting disability payments while they were being photographed or videotaped performing some physical activity that they claimed they were unable to perform. Some question whether it is ethical for a claims investigator to "sneak" around and take pictures unbeknownst to the claimant. Is this an invasion of privacy? Is it really unethical? Does one unethical action cancel out another unethical action, such as if the accepting disability payments when not actually disabled is unethical, then is the act of collecting evidence of the non-disability unethical because it is an invasion of privacy?
Most courts have maintained that surveillance and photographing a claimant is not an invasion of privacy. However, they have just as often found that unauthorized electronic eavesdropping, wiretapping or recording on hidden cameras installed in a residence are invasive and intrusive and may be considered as elements in an unreasonable investigation.
F If the scope of an investigation is relative and pertinent to the claim or to the coverage, it is ethical. However, if such investigation goes beyond that limitation, then it is unfair and invasive.
Legally, an individual who files a claim automatically loses some of his right to privacy as the insurer has a right to investigate the claim according to policy (contract) provisions. However, they cannot excessively intrude into the insured’s privacy. The investigation is limited to a reasonably unobtrusive type of investigation that would be in the best interest of a defendant in preparing its case. The investigators are limited to an ethical pursuit of the facts, and any excessive activity or harassing the insured would be considered as an invasion of privacy by the courts.
Selection of the proper product to insure a particular risk is definitely an ethical matter, as it is entirely possible to legally sell a client an insurance product that does not address the client's concern and reason to purchase insurance. There have been many instances of improper marketing to the point that the California legislature has addressed the suitability problem through a variety of regulations, in particular addressing the marketing of annuities and Long Term Care Insurance to seniors.
Selling annuities to a senior is a financial product sale, and an effort must be made to make sure that the client and product suit each other. It is extremely important that detailed financial records be kept of all transactions with the seniors as typically some of the material discussed will be otherwise forgotten, including the tax situation of the client. The tax situation of the client is important in determining suitability as if the client really has little or no income tax liability and none is anticipated, then serious consideration must be given as to whether (a) this is the proper product for the client, and (b) if the client can afford the financial strain of investing in an annuity.
In the marketing of annuities, since annuities are not designed to be effective short-term investments, if the client does not have sufficient liquidity to maintain a decent life style after purchasing an annuity, then it could be entirely possible that an annuity is not suitable. If it appears that the client may need or want the funds that are invested in the annuity in the near future because of, for instance, liquidity problems, then other types of investments or products should be used—not an annuity. The surrender charges and taxation penalties for short-term investing in annuities must be fully explained so that the client understands that if he purchases the annuity for short-term needs, it can be quite costly.
Suitability is even more important in the sale of a variable product as in order to obtain the maximum benefit from such a product, a variable annuity for instance, the client should be knowledgeable in investing and care must be taken that such a purchase does not deplete present investments upon which the client depends for living expenses.
If the recommendations by the agent are suitable, the insurer (and the agent) must maintain adequate records so that in the future at any time, after the fact, it can be determined if the recommendations were suitable for that client.
Ethics must apply in the selection of the proper insurance product and the product selection process. It would be a near impossibility for an insurance agent to be familiar with the vast variety of insurance products available, and the large number of coverages available and with varying amounts, this creates the problem of selecting the correct product with the proper coverage and in the correct amounts. For large commercial risks, there is usually a risk manager who dictates coverages and amounts, but outside of that area, not only is it difficult to select the right product, it is as difficult—sometimes even more difficult—for the client to fully understand what it is that he has purchased. This is an ethical problem as laws can not determine whether the insured understands the product without interrogation by a court. With multiple risks, this problem can be multiplied exponentially.
Does the insured really know what coverage he has? This problem was illustrated during recent hurricanes where television news programs showed row upon row of destroyed houses with the names of their insurers spray-painted on the still-standing walls by the homeowner. One still must wonder, however, how many of those with destroyed homes actually had the insurance coverage that they thought that they had. Did they fully understand the deductibles and the valuation process? If they had an ethical agent and an ethical insurer, they either had their home rebuilt or they knew how much they would have to contribute to the rebuilding prior to the loss.
"Cafeteria" plans used in employee benefits provides one ethical solution as the employees choose between various life and health benefits. This is conducted on a group basis and there are individuals readily available who are knowledgeable in the various products that can, and do, fully explain the products and their applicability to the employees.
F In order to assure of the suitability of a product, it is the ethical duty of the agent/broker to explain fully and completely, the various options to their clients, including suggesting that the client acquire additional expert advice in areas where the agent/broker is not expert.
Ethical marketing of insurance products to seniors has been mentioned previously, but is so important that it should be independently addressed. The concerns of the California Department of Insurance and the California legislature have addressed those concerns in respect to the marketing of insurance products, centered principally on annuities and Long Term Care Insurance (LTCI). Any agent or broker who markets, or intends to market, these products must be aware of these laws and regulations, many of which were the direct result of unethical marketing practices by insurance marketers. Even with the multitude of regulations, there continues to be ethical situations that arise when marketing insurance to seniors.
LTCI is a relatively new insurance product, and only in the past few years has the IRS acknowledged it as "insurance." This plan is a very important part of the insurance portfolio, particularly because "baby-boomers" are already starting to retire. Unfortunately, there is no reason to believe that they will be much more educated in LTCI although as a whole, although some have been introduced to the plan through an employer-sponsored benefit program. In addition, they will know more about investments and annuities than the present group of senior citizens.
A common ethical problem arises in discussing LTCI with seniors because many Medicare recipients believe that if they go to a nursing home, Medicare and their Medicare Supplement policy will pay the nursing home charges, which can run $5,000 per month or more. In many cases an agent has an ethical mandate to make sure that the seniors fully understand that if they need long-term care—as many, if not most, of them will—they could be facing a disastrous financial situation including losing their home. The problem of "suitability" arises often as even if the senior decides to purchase LTCI, first it must be determined if they can afford the premiums. Secondly, it must be determined how much of the cost of long-term care can the senior pay for out of their own funds as that would have an impact on the waiting period, etc. Ethics are important at this point, as the agent must work towards what is best for the senior, not how much coverage they can sell (and receive more commission).
Ethics permeate marketing LTCI in many other areas. For instance, if the agent notes a wheelchair in the house, even if it is folded up and out-of-the-way and the senior indicates that it is not needed—or even if there is a cane readily available—this must be reported on the application. An applicant may be required to undergo a memory test, either on the telephone or by a paramedic, and the temptation is great for the agent to "coach" them as to the best way of "beating the system." If the agent detects some memory loss, the temptation may be to ignore it, hoping that it will not be picked up by the underwriter or paramedic.
Many times the most ethical approach, and one of the most difficult, in some of these situations is for the agent to carefully explain that LTCI insurance may not be for them. If LTCI is suitable to the client and if the applicant is insurable, with these types of policies the agent has a client that will need more servicing than is usual with clients. The agent must be prepared to be available to answer questions and to otherwise service the client as long as the policy is in force. Agents have been known to notify their clients that they are no longer in the insurance business in order to forestall any questions that may be raised after the policy was in force—after all, they do not receive any extra compensation for the time they spend with existing clients. This is, of course, a highly unethical approach.
Some agents that market Medicare Supplement policies do not mention LTCI because they do not understand the product and do not want to sell it, plus it is time-consuming and difficult to sell, therefore they do not inform their Supplement clients that such a product even exists. There have been recent lawsuits filed by family members because the agent did not inform the senior that such coverage was even available. This does not mean that agents must become LTCI "specialists," but ethically, they should make their clients know that such coverage was available, and if they did not market the policy, make arrangements for another to do so. This has particular application to financial consultants and estate planners.
Some agencies now require that when a Medicare Supplement policy is sold, the client must also sign a form stating that they had been informed of the availability of LTCI and that they understand that Medicare does not provide complete coverage for nursing home or home health care costs, and that they are or are not interested in purchasing such a plan. Good marketing technique? Sure. Ethical? Absolutely. Even if the client does not purchase LTCI coverage, they are now aware of how it works, and many times they will discuss it with their family, thereby avoiding a financial crisis affecting the whole family if the senior should need such care. If the agent's company or agency does not offer LTCI but the need is apparent, it would be a breach of ethics to submit this information to another agent without the client’s knowledge and permission.
A discussion of ethics in marketing would not be complete without mention of "scare marketing." Since insurance provides coverage for future unforeseen events (except for title insurance), many insurance sales are made because the agent or broker has stressed the hazard of not purchasing coverage and the likelihood that something bad was going to happen to the applicant. This was stressed to the point that coverage was purchased primarily because the applicant was "frightened" into buying.
The use of scare marketing varies by insurance product and life insurance (for instance) is one product where a certain amount of "scare" is inherent by its very nature. Nobody wants to think about dying but everyone instinctively knows that they will die, so when they talk about life insurance, the insured risk will always occur—eventually. Life insurance is sold for many reasons other than that of providing funds for survivors in case of premature death. Many agents, who use life insurance as a solution to a particular financial situation, are expert in creating a vision of the effect of the early death of the client without the proper coverage being discussed. Is this unethical? Or just realistic and the agent is providing a real service to get a person to provide for their survivors in case of premature death (often defined as anytime after day-after-tomorrow)? There have been instances of a person deciding to hold off purchasing life insurance for a period of time, and the following day or week, is killed in an accident. Happens.
The amount of life insurance for pure protection is usually debatable. Dr. Huebner, a founder of the American College, created the "Human Life Value Concept" which is a method of determining how much life insurance an individual really needs. Financial planners and estate planners can vary widely in the amount of insurance recommended in identical situations. Ethically, an agent must explain the product and its use as clearly as possible and it must address the client's individual situation. If the agent is truthful and the client fully understands the plan, then no ethical questions should arise.
A lot of life insurance is sold over the telephone or Internet (as is auto, health and other insurance) by which an applicant may be able to obtain a lower premium than through an agent. Is it ethical of an agent to point out that the individual is losing a valuable asset—that of the personal attention and service of an individual that they know and who resides in the community, etc.—particularly when most life insurance agents (in particular) never see their clients once the policy has been placed? (Which is very much an ethical problem—disappearing agents.)
Is it unethical for an agent selling a dread disease policy to remind, by word and by documents and illustrations, that one out of three Americans will be struck by cancer (which, in itself, is true)? How about when selling a LTCI policy the agent emphasizes that the prospect certainly would not want to spend their waning years in an "old-folks home" that smells of urine and Pine-Sol (amazing the number of elderly folks who can still "smell" in their mind the odors of the county old-folks home..)?
Flood insurance is sold to those who live in areas where their property could be flooded with detailed expressions of catastrophic results; homeowners are made aware of how they could lose everything they own and will own in the future because of a lawsuit if a child is injured on their property; earthquake insurance is sold to a new arrival to California by showing them buildings supposedly damaged by earthquake (which is generally dropped after the new arrival discovers that none of his neighbors carry the expensive earthquake insurance); those who live in hurricane-prone areas are informed about the damage that those powerful storms can do, complete with pictures of damage because of previous hurricanes; and there are innumerable other such examples of what some may call "scare" selling.
FThere must, however, be a delineation between unreal and unlikely situations and those risks that are real but not necessarily imminent—
which actually is "needs" selling. One experienced agent, an "old-timer" is reported to have said, "When their eyes get big and they start trembling, then you are scare-selling. If they buy and their hand is not shaking, it is needs-selling."
F Contrary to popular belief, the lower levels of insurance are the most expensive.
Agents know this because they understand that the lower levels are the ones that will have the most claims as they are used first. "Cheaper by the dozen" is applicable to insurance as the larger the protection coverage, the lower the unit cost. This is particularly applicable in liability coverage as the per-thousand premium coverage decreases substantially as the amount of the policy benefits increases. This should always be explained to the client—and it probably is explained most of the time.
Some clients, though, may only qualify for the smaller amounts. A person with a bad driving record, for instance, will probably end up with restricted coverage in an assigned risk pool. Even so, regardless of what the applicant indicates that they need, other factors other than price should always be explained. More times than not, a client who seems to know all the answers and only wants the least expensive coverage, really does not understand the coverage but is just trying to save money. It takes diplomatic handling at times, but it is important and ethical to make sure that every client knows what coverage is available, rather than just the price.
When a client wants limited coverage, the obvious first question is "Why?" If cost is the only reason, a little discreet questioning may bring out that the individual is a bad credit risk. Youth may be the reason that there are limited choices. Some auto insurers offer discounts for students who maintain good grades, or have taken drivers education courses. Of course it is ethical to discuss the possible discounts, but an interesting question would be whether it is ethical for an agent to discuss driver’s responsibilities to the young drivers?
Carrying this a step further, if it is seems apparent that the individual is a bad driver because of a bad driving record or attitude problems (with the youths); or perhaps the applicant is elderly but obviously is too feeble to really be a safe driver, then is it ethical to suggest to the applicant that he forget about the expensive coverage (even if he could get it) and simply use public transportation and/or the assistance of others to move from place to place?
A way to lower premiums is to increase the deductible, but there must be a balance between affordability of premiums and affordability of the portion of a potential claim paid by the client. Sometimes a client can truly only afford a high deductible, but if that is the case, they would probably have a difficult time paying their share of the claim. The ethical approach would seem to be to discuss this situation so that the client understands fully that there could be other alternatives. It is also important for the client to fully understand that the deductible may not apply to some claims—for instance, on some health insurance policies, certain health claims are "first dollar coverage" and the deductible does not apply.
When an applicant has limited income, no employee-provided coverage and can only afford a very high deductible—is it ethical to suggest that they check eligibility for Medi-Cal, particularly for the children? What about the situation when the children are eligible for Medi-Cal but the parents may not be eligible? This actually releases funds (that would have been spent on premiums covering the children) so that better coverage can be affordable to the parents. Another ethical question arises if the agent recommends moving children from insurance coverage and having Medi-Cal provide the coverage, this reduces premiums that would otherwise go to the insurance company. By taking insurance away from the insurer, is this ethical? Is it ethical to add more Medi-Cal patients since Medi-Cal is paid out of taxes?
Ethics at time of application has been pretty well covered, so the next time that the insured normally has contact with the insurer (and when ethics questions may arise) is at time of claim. Ethics in claims investigation has been discussed, but claims settlement goes much further. It must be remembered that in claims settlement,
F each claim is individual and unique, so they are negotiated.
With some products, "negotiation" is rare and claim processing is simple. For instance in life insurance, it is normally quite cut-and-dried. Just the opposite would be true in many commercial liability policy claims. If it is a matter of replacement of a damaged insured object—such as paying a bill covered under the policy—then there is no need for negotiation. The majority of claims negotiations occur when intangibles are involved.
Negotiations in claims settlement can create ethical problems, particularly if the parties involved are unequal or when one party attempts to intimidate the other party. The claims adjuster is in a rather difficult situation at times, as the insured and any other claimants will often assume that the adjuster knows more about the insured values than they do—which may not be the case. Conversely, the insured or claimant that receives the settlement offer may also have little understanding of the values—often the insurer unintentionally intimidates them.
F Mostly, claimants just want adequate compensation for their loss, but very often have no idea as to what that might be.
Some claims adjusters attempt to intimidate the claimant into settling for an amount that is much less than the actual value, and some act as if it is a "feather in their cap" if they save the insurer money that actually should be paid to a claimant. Unfortunately, some insurers may feel that is the principal job of an adjuster.
COVERAGE should be explained to the insured as the first step—immediately after normal pleasantries have been exchanged. The entire tone of the settlement is established here as the insured either has the coverage that they expected, or the coverage is much better than they expected—or not. Insurance terminology is not always fully understood by the insured (understatement) so both the adjuster and the insured should be on the same page. After all,
F if the claimant and/or the adjuster do not understand the coverage, then how can they agree on a settlement?
In the same vein, policy exclusions, limitations, provisions and conditions must be fully explained. When coverage is not definitive and is questionable, then a reservation of rights letter should be immediately issued, or the parties should enter into a nonwaiver agreement. If a third party is involved and there is no contractual agreement between the third party and the insurer, then the coverage must also be explained. However, it is not considered by many to be ethical to inform the third party of the maximum coverage of the insured’s policy. On the other hand, if the claim is very serious and the coverage will not provide enough to settle the claim, then this amount would, of course, be disclosed to the third party with the knowledge of the insured.
F Once coverage is explained and is known by all parties, then there must be complete agreement as to how the coverage applies to the claim.
If negotiations continue when there is not complete understanding and agreement on coverage, then this would be unethical as the situation is out of balance—one party does not have the good-faith requirement of understanding the facts.
The establishing of liability follows the claims investigation as the next logical step. This can be the most difficult part of any claims settlement and some adjusters or claims representatives will attempt to use negligence as the only settlement issue. However, claim liability is a legal action, which can include not only contract law (understanding the policy and coverage) but also tort and statutory law. Statutory law is particularly applicable in no-fault insurance situations, and local statutes can certainly affect the settlement value.
Detailed settlement practices and procedures are not within the scope of this text, but one fact emerges that affects ethical standards:
F If the investigation is not adequate or complete, then any settlement thereof shall, by its nature, is inequitable (and unethical).
Cutting-corners or the use of intimidation can greatly limit the ability of the parties to negotiate liability—generally to the advantage of the insurer because of superior knowledge and expertise. If, for some reason, certain facts just are not obtainable that are necessary to complete the investigation—and this happens frequently—then an ethical solution must be in favor of the insured if there are any questions whatsoever. Actually, a court would undoubtedly rule in favor of the insured if litigation between parties ensued, therefore it is not only ethical to err on the side of the insured; it can also be a wise business decision.
After the claims settlement phase, damages must be addressed. Damages are not only "punitive" damages as there are many kinds of damages—some are covered and some are not. Usually they relate to damage/loss of (tangible) property, bodily/personal injury, or financial loss. What is covered and how much is determined by the policy and the controlling liability.
In auto insurance, liability will cover property damage and bodily injury but not personal injury or any loss that is strictly financial. The insured is insured for specific liability and liability for the actions of the insured outside of the policy provisions, are not covered. However, one area where ethics enters the picture in respect to damages is in the use of after-market auto parts used as repairs on insured’s automobile instead of "factory" parts, which are more expensive. Using substandard parts is an ethical questions but there has been much litigation in this respect to the point where there have been some large (outrageous, some say) awards given by courts against insurers who have used these parts.
There are also bodily injury (BI) claims that raise ethical questions, on both sides of the issue. BI claims are of two types, those that are covered under the policy (called "special damages") and can be proven by receipts or similar documentation—and those that are intangible but also covered. Medical expenses relating to a BI claim can be well documented, but other ethical considerations may be involved. In this area, rather uniquely, there can be a collateral source rule, which allows the victim to receive compensation from another insurer and these payments are not offset by a claim against the party responsible for the tort. This may go against insurance principles, but is a fact of life in some jurisdictions. Could it be considered ethical to receive money for compensation from two sources—duplication of payment, if you will? Even if it is unethical; suffice it to say that an injured party would rarely turn down the additional funds.
A claims representative has a problem sometimes when legal counsel represents the third-party claimants, as the claims representative cannot contact the third party without the approval of their attorney. This can make it difficult to build a good relationship to settle a claim legally and ethically. Even if there is a policy provision permitting the insurer to require a physical examination of the insured, the examination can be subject to questionable ethics. There are doctors who only do independent medical examinations and many of them usually render reports that are favorable to the insurance companies but unfavorable to claimants. After all, they get a lot more money from examinations requested by an insurance company than an occasional examination requested by an individual. Sometimes ethics of both the insurer and the physician can be questioned.
In attempts to lower claims costs, some insurers use paper reviews of the medical records of a claimant’s medical records. An outside firm on a fee basis and affording considerable savings in time and money usually offers this service. However, one of the television news programs attacked this practice by showing that the reports were many times conducted by non-medical persons and often were drawn from a standardized format without much actual evaluation of the medical information provided. The question can be raised whether this is unethical practices, or is it a good business practice that saves money? Or, is it unethical not to take advantage of a cost-savings device?
When questions like this arise, there is always one thing to keep in mind: insurers must take all legal and ethical steps necessary to reduce their costs in order to stay in business. Additional costs in operation are reflected in increases in premiums; therefore, it follows that any action that reduces their costs would be reflected in stability and/or lowering of premiums.
This is a difficult problem for agents, insurers, and businesses as a whole. The ethical position of a firm in response to someone who publicly reveals proprietary information that leads to civil litigation, and in some cases, criminal prosecution, is interesting and generally revealing.
The area of claims settlement often involves "whistle-blowers," however the subject of whistle-blowing affects more than just claims personnel, and in actual practice, can involve many lines of insurance just on a business basis. While whistle-blowing is generally used in an employee-employer relationship, it applies just as well between an insurance agent and a client. It applies primarily in an employer-employee environment and would apply to those who are employees of an insurance company. Claims representatives and adjusters come to mind, as do salaried agents.
F "Whistle-blowing" is a term used in business ethics, which connotes an employee who knows that a fellow employee or the employer is engaged in activities, which cause unnecessary harm, violate human rights, are illegal, do not follow the defined purpose of the company or institution, or otherwise are immoral. The employee then notifies superiors, professional organizations, the public and/or some governmental agency.
When is whistle-blowing acceptable? To some, it may never be, and that is a problem. People just do not like being known as a "fink," "rat," "tattle-tale," or such. The term itself comes from sports idiom referring to an official (referee or umpire usually) who detects and penalizes the unsportsmanlike behavior or violation of rules, but, it is noted, it is NOT the function of another player to make these calls on a member of his own team. This would leave one with the impression that whistle-blowing is never accepted. Of course, this not true as there are times when it is absolutely the right thing to do.
First, the reason for whistle blowing must be legitimate and for the "right" moral reason – not just a move in order to get ahead in the organization, for instance. There must be an illegal or immoral action involved.
Secondly, and perhaps the most importantly there must be evidence available that would persuade a reasonable (at least) person. Get the ducks in a row.
The next recommended step is self-analyses—mentally review the entire situation again (and again and again if needed). How serious is the problem? Many times problems will stop there when it is analyzed. When is the violation going to happen, if it hasn’t already? One should make sure not to "jump on their horse and ride off in all directions." And very importantly, is the charge upon which the whistle blowing is based, specific? Generalities will not suffice. A handy tool for self-analysis is to imagine being on a witness stand undergoing a tough cross-examination.
Lastly, it is imperative that all internal channels have been exhausted before the information is revealed to the public. If there are others in the organization whose duties it is to report such activities, and you report the problems to that person, then you have done your job. However, if such a person ignores your information, or worse, attempts to cover it up, then one has no recourse but to become a whistle blower.
It must be kept in mind in this discussion, that under some circumstances, it a moral obligation to prevent harm. Everyone has to look at themselves in the mirror in the morning, and live with themselves the remainder of the day. It is so much easier to overlook the actions of those that you know and work with every day, even though you know they are committing illicit, immoral or even illegal acts, than it is to make enemies of those that you have considered as friends, in favor of faceless stockholders. Sometimes it is difficult to be a professional.
F Ethics are heavily involved with the understanding of all applicable parties, which then creates a relationship based upon accurate information and proper action by all parties.
A related actual situation providing an exercise in proper/ethical action was where a reinsurer of a small casualty insurance company sends its auditors to the company in order to determine the worth of the block of business being reinsured because the company's vice president of claims was concerned that the company may be in jeopardy of losing their reinsurance. Because of the increase in claims, the insurer had already filed for a rate increase with the Insurance Department to be effective the following year. Based upon the concern of the company's vice president, the reinsurer determined that more exact loss information was needed in order to continue its reinsurance treaty. The reinsurance auditors soon realized that the claims data had not been recorded correctly because of a technical error, and further, there really had been no increase in claims cost.
The insurance company’s vice-president of claims had been terminated about 2 months earlier for failing to contain the claims costs. The vice president had depended upon the expertise of a claims accounting supervisor who had moved on to another company. So, ethically, what should the insurance company do? Rehire the VP with possibility of wrongful termination lawsuit? Should the reinsurance company inform the VP of what had happened, particularly since the VP was responsible for the reinsurer to get involved in this situation which, based upon the information available at that time, was entirely proper and ethical?
F Conflict of interest can be the most serious of ethic breaches and is considered by most as the most serious of legal breaches also.
Conflict of interest is of major interest to the legal profession as there probably are more situations where a conflict of interest arising when attorneys are involved, starting from the simple situation of representing one client in a matter than involved another client, to more serious matters involving the court and judge and jury. There are many television programs that depict attorneys and law firms, and in nearly many episodes, there is at least one situation or mention of conflict of interest.
Attorneys are not the only ones that face conflicts of interest. Even doctors have been known to prescribe certain drugs from pharmaceutical houses in which they have an investment. At first glance, it does not seem to be a problem in the field of insurance because of the workings of the insurance business. A broker who sells a policy that does not fit the needs of the client but is sold because of a higher commission, breaches the conflict of interest ethics rules because the broker supposedly represents the client.
Several years ago, the Actuarial Vice President of a small life insurance company set up a "dummy" consulting actuarial firm, using a post office box address. The company President was aware that since the company could not afford a full actuarial staff at this stage of their growth, that the actuary would farm out certain actuarial duties. The actuary was given free rein to contract with whatever actuarial firm he felt was the most qualified. The actuary contracted with his dummy firm, in effect, contracting with himself.
When this was discovered, the VP-Actuary was terminated. His only defense was that he did the work and did it properly on his own time. He did not have time during normal working hours, and he was not on an hourly basis, so since he had to give up his own free time, he should be paid for it.
How about conflict-of-interest between an employee and himself? The company President when he terminated the actuary (actually one of his best friends also) stated that there would be no legal action taken as his ethics would be forever questioned and that was punishment enough for a professional. Was the company unethical by "overworking" the actuary? True story.
If an insurance company institutes very strict and limiting claims processes for the purpose of limiting claims so their shareholders will be happy, this is a conflict of interest. A claims adjuster faces more situations involving a conflict of interest than most insurance personnel do as they could be in a situation where they are adjusting a claim of a friend or relative, or to refer work to a firm in which they hold some interest. It is also a conflict of interest for a claims representative to receive a "referral fee" from a law firm for business referred to them.
One of the areas in which there are ample opportunities to create conflict of interest in claims administration is where there is a Third Party Administrator (TPA) involved. A TPA may at any time represent
It would be fair to ask, "Who are all these people?" A claims administrator may be in a position where it is necessary (and ethical) to disclose all of the principals, and how can they do this if they do not know who the principals are? In a third-party claim, the failure to include a person or entity whose interest is protected by the policy can easily result in litigation—and an Errors and Omissions (E&O) claim.
In most E&O claims within the insurance industry, an ethical breach or lapse is the principal reason that a claim is filed. An agent or broker could follow the law precisely, but still not handle a situation ethically, with the result that there is an E&O claim. Also, it is true that
F many E&O claims arise because the agent has not understood the risk.
It is the ethical duty of an agent or a broker to identify any potential exposures and at least identify them to the client. Remember the financial planner who neglected to mention the availability of Long Term Care Insurance?
There are many a slip between the cup and the lip—in a complicated commercial insurance transaction it is relatively easy for misunderstanding or misinterpretation. There have been cases where the contents of a business for fire insurance were drastically underinsured when a claim arose. In a commercial situation, those making insurance decisions for the business entity are usually not the owners, but an officer of the firm. This means that if the contents were underinsured, in case of a total loss, the officer stands a good chance of losing his job. The natural inclination would be to blame it all on the agent, while maintaining that the proper amounts had been provided to the agent, who evidently ignored it or misunderstood. An E&O claim can arise.
In similar cases some courts have ruled that the policyholder has an obligation to read the policy. Other courts have not been too generous in this respect, and will consider all types of situations in ruling against the insurer/agent. In some situations where an agent is replacing a policy, if the new policy does not provide at least as much coverage as the previous nonrenewed policy, courts have not been lenient if a claim arises because the new policy did not cover the loss. Sometimes and in some jurisdictions, it does not seem to make much difference if the insured has even read the policy.
These are legal points, but ethics plays an important part in these situations. If the agent or broker had taken the time to analyze the exposures, asked all the questions that he would be expected to ask—even if he had sought expert advice if there were a question in his mind that he would be expected to ask—then he would have fulfilled an important ethical duty, and maybe avoided and E&O claim.
There have been lawsuits involving an insurer becoming insolvent and therefore not in a position to honor the promises of the insurance contract. As was mentioned earlier, the question of ethics arises when an agent has some information that an insurer may be suffering financially. One of the problems in this situation is that if an agent "bad-mouths" an insurance company, the agent could lose his license for making slanderous remarks. Of course, the best defense against slander is the truth, but it is very difficult for an agent or broker to know with certainty that an insurance company is having financial difficulties. Often it is not even known to the Department of Insurance until the company is insolvent.
Legally, most courts have found that the agent owes no duty to the insured in such a situation. Ethically, the agent should notify customers when an insurer with whom he has placed insurance, does become insolvent. This can be advantageous to an agent as it gives him an opportunity to replace the coverage.
There are times when an agent or broker has received unofficial information regarding the financial condition of an insurance company. It might seem to be ethical that an agent would want to point this out to potential clients who are thinking of purchasing insurance from the company. This is a real slippery slope—if word gets back to the supposedly troubled company that an agent has been talking about them to potential customers, this could easily be a lost license and stiff action by the slandered insurer. Remember, ethics starts with good sense.
To carry this a little further, if a company does become insolvent, it seems that at that instant the customers of the insolvent company is fair game. However, the Department of Insurance will usually put the company into receivership and take steps to sell the company and/or the business in order to protect the existing policyholders. They will not take it kindly if someone is replacing the policies in the company that they are attempting to rehabilitate.
If the policyholder of the insolvent company approaches an agent so as to obtain coverage with a more financially sound company, the rule is that the "customer rules." If the agent can provide coverage the same as they had previously, there would be little chance of anyone complaining. But what if the company were insolvent because of their too-liberal policy coverages? It happens. Then a policy with identical coverage of the old policy may not be possible. Here is where ethics are important.
F The agent/broker must make sure that the applicant fully understands that they are not going to have the same coverage as under the old policy if such is the case.
Recently, in this situation, agents of some of the replacing companies were instructed to get a signed statement from the applicant stating that they understood that they would not have the exact same coverage that they previously had.
Sometimes, when one insurer has purchased the business of another insurer, whether the former insurer was financially sound or not, the assuming insurer has instructed their agents to contact all of the assumed policyholders and to fully explain the coverage that they have. This is certainly ethical, especially since it costs the insurer extra money to reimburse their agents for their time, but it is also a good business decision as the assuming insurer had a minimum of lapses of the business they had acquired.
Interesting how many times an ethical action results in a good business decision.
Life, Annuity and Health Insurance policies are very explicit regarding the agent waiving or changing a policy provision. The general rule and with the most legal support at this time, prohibits the company from rescinding the insurance in case of a violation of the policy when an agent who has either actual or apparent authority has waived any policy provision, whether such "waiver" was orally or in writing. This also applies to the insurance company’s attempting to rescind.
Secondly, the company is prohibited from rescinding the insurance because of a policy violation in a situation where the company attempts to defend based upon a violation of the terms of the contract, because of some knowledge or acts on its part or on the part of the agent. The courts do not, as a rule, accept oral evidence to alter the terms of a written document.
Therefore,
F an agent’s actions in respect to waiving a policy provision, affects not only the agent, but also the company.
The company’s instructions nearly always are abundantly clear, so any misconduct of the agent makes him personally liable to the company for any damages as a result of his actions (enter E&O coverage). This stems from the law of agency wherein the agent must indemnify any loss or damage to the principal.
These actions can be an agent exceeding specific authority; binding unacceptable risks; failure to provide the insurance company with information regarding risks (such as health history, or present health condition); making incorrect statements about the applicant; failing to send funds that were collected to the insurer—such as premium payments or claims payments intended for an insured; and failing to follow explicit instructions from the insurer. These are all, obviously, serious breaches of ethics.
In nearly all cases, however, these situations are resolved by the agent being fired and his license revoked.
Ethical considerations and (violations of these ethics) vary little by most types of insurance—such as not transmitting accurate information to the underwriting department, not properly disbursing funds, misrepresentation, etc.—but the Life Insurance industry, in particular, has in recent years in respect to interest-sensitive life insurance policies, undergone considerable criticisms from policyholders and state insurance departments. This started as an ethical problem, but has now graduated into regulations, rules and laws (and litigation). Many agents who were involved in sales of these products still feel that they have done nothing wrong, and to a certain extent, they are correct. Many, if not most, of the projections that caused the problems later were legal at that time and were performed under the supervision of and instructions from the insurance company. Indeed, computer programs were provided from the marketing department of the insurer and in many cases, laptop computers were also furnished. Company-sponsored seminars on policy illustrations were frequently held and attendance was often mandatory.
For years life insurance suffered because permanent life insurance contained cash values that was touted as a savings device, or "forced savings," but the interest rate attributed to the policy was much less than with other investments. Disregarding the technical details, the problem was solved in the 1970s with the introduction of Universal Life and other interest-sensitive plans, which, for the first time (in this country) the cash value could fluctuate and represent the increase in interest earnings of the insurer. Marketing material was developed that showed the increase in cash values as the interest rate increased.
Soon there were many other variations of these interest-sensitive products, and people were looking with renewed interest at the possibility of using life insurance as an investment vehicle. There were certain additional tax advantages of using life insurance in this way, plus the investments were "guaranteed" by the assets of the insurance company. Win-win situation to many.
An example of policies developed at that time was the "vanishing premium" policy—or when sold as an option to another policy, a vanish pay provision. As the name indicates, the policyholder would not have to pay more than (usually) five or seven annual premiums, because of the high interest rate attributed to the cash-value buildup of the policy. At this time in history, even CDs were getting as much as 14% (maybe even higher with offshore banks). The internally generated interest in the form of dividends and/or excess interest credits would be sufficient after the initial premium-paying period to keep the policy in force. In the projections of cash values, the interest rate of 12% was commonly used.
One of the "ethical" problems that arose was that many policyholders of older policies were convinced by illustrated policy values that were based on these (inflated) interest assumptions, that they should replace their older policy with this (miracle) policy.
Insurance companies made the usual disclaimers on their policy illustrations, but these were often at the bottom of the page, sometimes as footnotes, with the obvious result that they were ignored or not read to the applicant, simply erased before presentation, or were proclaimed as irrelevant. If the question was raised to the agent as to how such high interest rates could be forecast, many agents referred to the past where such disclaimers were used by insurers but dividends nearly always exceeded that of those illustrated.
It was no surprise that when interest rates dropped, many policyholders received premium notices of premiums due, even after the policy had been in force for the 5 or 7 year period. Many policyholders, at first, thought this was just technical insurance talk and nothing would happen. But many, who thought that their policy should even be paid up, or at least the premiums would not be due, found that the reality was that they owed premiums or the policies would lapse. This was not a good time to be in the marketing or customer relations department of a life insurance company that sold these plans.
The next step, obviously, was litigation, charging deceptive sales practices, fraudulent inducement and representation and intentionally misrepresenting the policy. Some of the insurers responded that the policyholder had been put on notice by the disclaimer, or the illustration was not part of the contract, or the problems had been caused by a handful of rogue agents.
In some areas, insurers have been successful with their defense, but not successful in other jurisdictions. One reason that some courts ruled in favor of the policy holder was that some companies had stated in their disclaimer that the interest values used in the illustration was what the company was experiencing at that time—which was shown to not be true.
The final result of this situation has not as yet been resolved, but thousands of cases have been settled with insurers paying millions of dollars in fines, judgments and legal fees and these types of policies have been removed from the market. This is a massive illustration of how important it is for insurers to get correct and complete information to its customers. This is an ethical point as much as it is legal, and raises the question as to whether it was ethical to present an illustration using inflated interest rates. It is difficult to not consider it unethical, as very few agents apprised their policyholders that they may have to pay premiums again during the time that the stock market and interest rates tumbled. There were some professionals who worked diligently to make their clients aware of what was happening as soon as they became aware of the lowering of interest rates, and in some cases, they were able to exchange the policy for one more suitable for their needs—saving their commissions and probably stopping some litigation in the process.
Universal Life Insurance and its offshoots, of which there are many, rely heavily upon illustrations. Because of overzealous agents and their illustrations using unrealistic assumptions, there have been problems similar to the vanishing-premium plans. As expected, because of the unethical behavior of agents and companies in providing illustrations, there are now very strict laws, rules and regulations in respect to illustrations.
In a somewhat related situation that illustrates that an ethical act can be wise in a business sense also—several years ago when the interest rates were starting to climb, one life insurance company whose principal market was annuities, decided that they would offer every annuitant a new policy that would reflect the higher interest rate, and allow a 100% rollover with no penalties even though it would probably mean that they would lose considerable business. This was not considered for ethical reasons solely, as they thought that they would not only lose business when their customers were made aware that they could get higher interest, but they would probably lose more if they had to pay the annuity values at a much higher rate when it was annuitized.
Interestingly—to some, it seemed unbelievable—their offer to all of their annuitants was accepted by about 20% of the annuitants with no noticeable change in persistency on the entire block. In other words, 80% of the annuitants just decided to keep the original annuity. As time passed after this and subsequent similar offers, the company reported just normal attrition.
Obviously, insurers have had ethics problems. Insurers have tried to improve their image by stressing ethical behavior in training, improving their agent’s training programs, completely changed the illustration process and numbers, and other such related items directly addressing the problems. One result of all of this turmoil was the formation of the Insurance Marketplace Standards Association (IMSA) in 1996.
This is a voluntary association, which encourages life insurers to maintain high standards of ethical behavior in the sales and marketing of individual life insurance and annuities by becoming members. These standards only apply to selling and marketing, and not to other areas (such as claims, underwriting, policyholder service, etc.).
Insurers voluntarily adopt the Principles of Ethical Market Conduct and then create programs and change existing programs to comply. Insurers do a self-assessment, and make changes accordingly. But perhaps most importantly, the company must secure a favorable opinion by an independent assessor of the company’s policies and procedures before they can advertise as being a member of IMSA.
"Each IMSA member pledges to comply with the following principles in all matters affecting the marketing and sale of individually issued life insurance and annuity products:
STUDY QUESTIONS
1. A claims investigation is ethical if
A. the insured is aware that such an investigation is being conducted.
B. the investigation is relative and pertinent to the claim.
C. the expense of investigation is paid by both the insured and the insurer.
D. the investigation is conducted by an independent investigator.
2. In order to assure the suitability of a product, it is the ethical duty of the agent
A. to explain fully and completely, the various options to their clients.
B. to have home office personnel explain the client's options under the policy.
C. to decline any commissions.
D. to compare the plan with every other similar plan sold in that state.
3. Since as a rule, every claim is individual and unique, therefore
A. they are all declined initially.
B. they are negotiated.
C. they nearly always end up in court.
D. the face amount of the claim is paid immediately following legal action always following.
4. When an insurance claim is made, and once the coverage is explained and known by all parties, then
A. the insurer automatically declines all settlement amounts.
B. an arbitrator assigned by the insure, enters the picture.
C. a copy of all documents are filed with the Department of Insurance, who determines
the final settlement.
D. there must be complete agreement as to how the coverage applies to the claim.
5. A settlement is automatically unethical if
A. a private investigator is involved.
B. if the claimant is required to get an attorney for his own benefit.
C. if the investigation is not adequate or complete.
D. the full amount of the policy is paid to the claimant immediately after claim.
6. The most serious of ethical breaches, which may also be the most serious of legal breaches, is
A. placing an insurance policy with a company that is not the highest rated.
B. for an agent to suggest that professional legal or accounting assistance be used.
C. for an agent to attempt to replace a policy when the original carrier is in receivership.
D. conflict of interest.
7. Many times Errors and Omissions (E&O) claims arise in insurance transactions because
A. a claimant has made a claim of prejudice in claim investigation procedure.
B. the agent has not understood the risk.
C. an insurer wants to get risk of an agent but cannot prosecute them legally.
D. of request of the Department of Insurance.
8. If a company becomes insolvent and the policyholder approaches his agent to obtain coverage with a more financially sound company, and the agent is able to do so except that an automatic renewal provision is not available under the new policy, then the agent
A. does not need to tell the client about that as that would insult the client as can easily
read it himself in the policy.
B. cannot accept any commission from the insurer.
C. must make sure that the client fully understands the difference and that they are not
going to have the same coverage they had before.
D. can force the new insurer to duplicate the original coverage.
9. When an agent tries to waive a policy provision
A. he is only doing what the client expects him to do.
B. usually he is allowed to do so, within limitations, and under the provision that he will
receive no compensation for the sale of the policy.
C. that is a criminal act and is a felony with a $5,000 fine.
D. his actions affects not only the agent but also the company.
10..A life insurance policy, no longer sold, that was later considered as very unethical not only in its sales but in its composition, was the
A. Universal Life Insurance policy.
B. a mutual whole life permanent insurance policy.
C. annual renewable term (ART) policy.
D. the Vanishing Premium policy.
ANSWERS TO STUDY QUESTIONS
1B 2A 3B 4D 5C 6D 7B 8C 9D 10D