insurance community university ethics and the insurance industry 1 the webinar will begin shortly. ...

Insurance Community University

Ethics and the Insurance Industry

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DisclaimerInsurance forms and endorsements vary based on insurance company;

changes in edition dates; regulations; court decisions; and state jurisdiction. This instructional material provided by Insight Insurance

Consulting and the Insurance Community Center is intended as a general guideline and any interpretations provided by Insight, Insurance

Community or presenters do not modify or revise insurance policy language. When ISO language is included in the materials, all ISO

content is protected by the ISO copyright. All parties to this presentation and creation of materials assume neither liability nor

responsibility to any person or business with respect to any loss that is alleged to be caused directly or indirectly as a result of the instructional

materials provided. Copyright 2010 – 2013 All Rights Reserved

www.insurancecommunitycenter.com

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Your Instructor Today

Laurie Infantino AFIS, CISC, CIC, CRIS, ACSR, CISR

President, Insurance Community Center


What This Class Will Cover1. Background on “ethics” and “morality”2. Ethics v. Morality3. Ethics and the Workplace4. Ethics and Insurance5. Creating an Ethical Culture6. Case Studies

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Background On “Ethics” And “Morality”

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Foundation of Ethics

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The Foundation of Ethics

• The philosophical background of ethics can be traced to Plato as espoused most notably in the ten books of The Republic (Republico).

• The Republic was patterned after much of the works of Socrates—a teacher of Plato and carried forward by Aristotle who was a student of Plato at the age of 17 in Athens (367BC).

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The Foundation of the “Unethical”Draco and Draconian• Draco was the first legislator of Athens

in Ancient Greece. He replaced the prevailing system of oral law and blood feud by a written code to be enforced only by a court

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The Foundation of the “Unethical”Draco and Draconian• Greek statesman who laid down a code of

laws for Athens 621 B.C. that mandated death as punishment for minor crimes

• “Draconian" remains in use today as signifying a rule or punishment that is so much severe then the crime. Exceedingly harsh; very severe: a draconian legal code; draconian budget cuts.

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A Fable Worth Repeating


Socrates and Glaucon

• In The Republic, Plato recounts a dialogue between Socrates and Glaucon, Plato’s older brother.

• In it, Glaucon argues that only the fear of detection and punishment prevents a human being from breaking the law and doing evil for the sake of his own self-interest.

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• Glaucon thinks that this natural fact is demonstrated by the fable of the shepherd Gyges, who found a gold ring which made him invisible whenever he twisted it on his finger.

• On realizing the ring’s power, Gyges used it to seduce the queen, murder the king, and take the throne.

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• Glaucon’s claim then, is that every one of us, however law-abiding and good we might seem, would do as Gyges did, or something else in our self-interest, if we could avoid detection and punishment.

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Why Should We Study Ethics?

• High profile cases have raised the question of ethical behavior

• Businesses can no longer hide• Transparency is the new watchword• The public demands more from the

business relationships• In general there are higher standards

being placed on behavior (fiduciary?)

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Interesting Ethical/Moral Issues Today• Bailing on your mortgage• Declaring bankruptcy• Unemployment for the MAXIMUM time

available• Wage and Hour

• Non-exempt—overtime• Exempt—no overtime

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Polling Question #1

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Your insured has defaulted at the bank and the bank is foreclosing in the house. Your insured is staying in the house UNTIL they are kicked out. They are required by the bank to continue to carry insurance on the home BUT they have requested you cancel because they do not have the money and they do NOT want you to send notice to the bank. What will you do.


Ethics Vs. MoralityIt Is Not Always That Simple a

Decision

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Ethics vs Morality

• Often these words are used interchangeably

• Morals define personal character• Ethics stress a social system to which

morals are applied. Ethics point to standards of code of behavior expected by the group to which individuals belong

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Polling Question #2

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Your insured has bought a foreclosed home and intends to rent it out. There is no one residing there currently and they have asked you for a quotation to insure the home. You gave your insured two quotations: one that is inexpensive based on it being occupied and the other more expensive if it is vacant. Your insured asks for the less expensive insurance and tells you to tell the company the home is occupied. What is the “ethical” thing to do?


Ethics Defined

• Webster’s Dictionary: “The discipline dealing with what is good and bad and with moral duty and obligation” (personal statement)

• Golden Rule: “Do unto others what you would want them to do unto you”

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What is Ethics?

• Cambridge Dictionary of Philosophy, 1995: The word itself is sometimes used to refer to the set of rules, principles, or ways of thinking that guide, or claim authority to guide, the actions of a particular group; and sometimes it stands for the systematic study of reasoning about how we ought to act.

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Ethics Defined

• Ayn Rand, Russian-American novelist and philosopher (1905-1982):

• Ethics is a code of values which guide our choices and actions and determine the purpose and course of our lives.”

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Ethics vs Morality

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Ethics vs. Morality

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Polling Question #3

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Have you ever cheated on an exam?


Polling Question #4

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Have you EVER lied to your parents?


Ethics and Morality

• This conflict is often at issue in the workplace

• Example

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Josephson Six Pillars of Character

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Polling Question #5

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Your homeowner insured is both a client and a friend. She has a break in and has submitted a claim. You KNOW that she has a habit of buying cloths, wearing them, and then returning them. As you look down her list of items stolen you KNOW that many of the items she had returned to the store. What should you do?


Inflating Insurance Claim

• Attitude– Those who believe one has to lie or cheat

at least occasionally in order to succeed are three times more likely to cheat an insurance company (6% v. 2%)

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Ethics and the Workplace

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http://www.ethics.org/


Common Rationalizations for Not Doing What’s Right• Everyone else does it• Nobody will care• The boss does it• No one will know

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Common Rationalizations for Not Doing What’s Right• I don’t have time to do it right• That’s close enough• Some rules were meant to be broken• It’s not my job• My “competition is doing it”

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The Competition Has Pulled One On You

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The Competition Has Pulled One On You• Your client has told you he is shopping

with other brokers• You arrive for your appointment to

present your renewal quotation and your client tells you he has received a better price

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The Competition Has Pulled One On You• You ask if you might see it and he agrees

to show you• You realize you represent that same

carrier and know it is a great program• You are certain your client does not

qualify for this program and that the agent trying to steal the account has not told the insurance company the whole truth

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Polling Question #6

• What should you do?

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When The Stakes Are Higher,Doing The Right Thing Is Harder


Polling Question #7

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Have you ever been asked by a boss to do something you thought was “unethical”?


Ethics in the Workplace

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Some Frightening Facts

• Based on a study of 62 million Americans – (45%) have observed workplace

wrongdoing, compared to a record high 55% in 2007.

– And 41 million of them (65%) reported the misconduct, a record high compared to 53% in 2005.

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http://jan.blog.ocregister.com/2012/01/24/45-have-witnessed-workplace-misconduct/77194/


Ethics and the Workplace (The Orange County Register) 1/24/12• Workplace conduct tends to

improve during bad economic times and slides during economic growth, said Ethics Resource Center

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Ethics and the Workplace (The Orange County Register) 1/24/12

• Some observed wrongdoing is actual law breaking, the survey said, including:– Health and safety violations (13%), – Stealing (12%), – Substance abuse (11%) and – Sexual harassment (11%).

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Ethics and the Workplace (The Orange County Register) 1/24/12

But more common misconduct includes:•Misuse of company time, 33%•Abusive behavior, 21%•Lying to employees, 20%•Company resource abuse, 20%

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The Orange County Register 1/24/12• Workers were asked to rate the ethics of

their companies’ culture, – 42% rated the culture as having weak

ethics, the highest since 2000 and 7 points higher than in 2009.

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Pressures on Ethical Behavior

• “Retaliation against whistleblowers• Pressure on employees to compromise

their ethics standards • According to the Ethics Resource Center

these two factors are at an all time high.• Effect--downward shift in ethical

behavior.”

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• One factor that may be influencing bad behavior in the workplace, the study found, is the rise of social networking.

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• Workers who spend at least 30% of their workdays on social networking sites are more likely to engage in bad behavior at work and less likely to report misconduct by colleagues.

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• “It appears that as people become more accustomed to sharing information that was once considered private across social networks, the tolerance level for questionable behavior in the workplace has increased,” Harned said.

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Ethics in the Workplace (Insurance)

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There is a fine line between Ethics and E & O


Topics to discuss

• Ethics and YOUR client• Insurance is a business of Utmost Good

Faith• Privacy and Compliance• Some standards of behavior are governed by

statute

• The role of and responsibility of an agent

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Ethical Decisions Occur In Every Phase Of The Insurance Transaction

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Ethical Decisions Occur In Every Phase Of The Insurance Transaction

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Ethical Decision Making

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Polling Question #8 • Your friend is writing their personal auto

with your agency• When asked how she uses her vehicle

she indicates she does not use it to drive to work—it is only used for pleasure

• You know that she uses her car to and from work that is over 30 miles each way.

• What should you do?

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Lessons YOU should learn

• The insured who bends the rules on an application is also the type of person who will overestimate values or pad insurance claims

• When there is an uncovered loss—the insured will be the first one to point the finger to the agent for making a mistake

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True Statement

• “I am not a really successful agent because I am just too honest”

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Polling Question 9

• Have you ever• Put something on an application that

was not entirely true such as the home is located within 500 feet of a fire hydrant?

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Polling Question #10

• Have you ever failed to check a box or put in a piece of supplementary information that you know would disqualify your risk?

• Example, indicating that the building is substantially vacant because you thought it would result in a rejection.

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Have you ever???????????

• Misrepresented– Existence of youthful drivers– Prior accidents/losses– Claims– Class Codes– Payroll– Age/Sq Footage of the building

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Ethics and Standard of Care

• Insurance agent/brokers must meet a standard of care acting in the capacity providing insurance products/solutions

• The standard of care is three pronged

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Standard of Care and Ethics

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Based on Regulations and

Law


Regulations• McCarran Ferguson Act 1944

– Insurance is Instate Commerce therefore subject to congressional legislation

• Gramm-Leach-Bliley Act 1999 (aka Financial Services Modernization Act)– Congress granted banks and securities firms

greater authority to write insurance– Affected agencies by requiring a notice to

consumers and the ability to “opt-out” of sharing of non-public personal information with nonaffiliated third parties

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Regulations

• Federal Privacy Act of 1974– Protects consumers from the release of

private information

• Health Insurance Portability and Accountability Act of 1996 (HIPAA)– The act creates standards to protect the

privacy of individually identifiable health information

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Regulations

• HIPPA and the insurance agent– Creates standards when the agent is in

possession of confidential information. This could be information that is included in applications or other sources

– When insuring medical practices or providers such as hospitals, clinics, doctors nursing homes

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Regulations Other

• USA PATRIOT ACT OF 2001– Deals with money laundering and money

transfers to know terrorist organizations. Requires banks (including some life insurers) to protect against this possibility

• Fair Credit Reporting Act• Fair Claims Handling Act

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Regulations Other

• ROBINSON-PATMAN ACT of 1938– Unfair price fixing

• Proposition 103, 1988– Passed by California that repealed the anti-

rebating laws in the state of California

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Duties owed to the Insurance

Company


Duties to the Insurance Company• Insurance Contracts are referred to a

contract of Utmost Good Faith. • Each party to the contract (the

insurance company and the insured) must rely on the integrity and honesty of each party.

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Duties to the Insurance Company• Consumers expect the companies to pay

for their losses• Insurers rely upon the agent for accurate

and complete information• The agent is put in the middle

– Owes the insurer the utmost good faith– Owes the insured the duty to place reliable

coverage with a sound insurer

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• You know that one of your insurance companies is going to be downgraded. It could happen any day. You have many customers with that company. What should you do?

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Duties to the Insurance Company• To the Insurance Company

– Verify account qualifies– Full disclosure of material facts– That you are honest and accurate– Live up to and within your contract

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Representations

• Representations can be an oral or written statement made by an applicant for insurance (communicated by the agent)

• Representation is NOT art of the P & C contract

• Underwriters use the information to determine acceptability

• Some policies have clauses that state that “material misrepresentations” of fact can void coverage

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The Case of the Deep Fat Fryer

Renewal Application

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• The insured was a chain of sandwich shops located in office buildings

• The sandwich shops did no cooking other than to warm up food in a microwave

• Their insurance was placed with an insurance company that offered a modified restaurant package specifically for businesses that did not do cooking

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• At the second renewal, the insured told their agent that they were doing deep fat frying at their location at Universal Studios– They were limiting it to frying French fries

they could serve with their sandwiches

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• The agent at renewal chose not to include this information on the application because the frying would disqualify them from the program for their entire risk

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• The insured suffered a major fire at the Universal Studio location doing damage to their leased premises; equipment and subsequent fire damage to the building

• The insurance company denied coverage based on the “increased hazard” section of the policy

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• Company further alleged that they would never had written the account with the frying

• Additionally the insured had not adequately protected the premises with an approved Ansul system.

• The client told the company they had advised the agent

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Outcome

• Insurance Agent was held responsible for misrepresentation

• Claim was $950,000

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Warranties

• Warranties are statements that guarantee that what is being “warranted” is absolutely true

• For a statement to be considered a warranty, it must be made a part of the policy

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Warranties

• Example: D & O policies where the application and its warranty statement of “know” wrongful acts are made part of the policy

• I any warranted statement is found to be false—the policy is void (rescinded)

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Concealment

• Case of just not telling the whole truth (and nothing but the truth)

• Trust me this happens

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The Young Driver

You Should Not Have Told Me

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The Young Driver

• Sally and Beth had been friends since childhood and shared raising their kids together

• Sally also wrote all the personal lines insurance for Beth

• One day Beth called up Sally to share the news that their son, Ryan, had just gotten his driver’s license

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The Young Driver

• Sally was glad to hear the news but now faced the ethical decision as to whether she should tell her excited friend she needed to add him to their policy

• And we all know what that was going to cost!

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The Young Driver

• Situation-based: You were just told this by a friend. You know that the son is covered automatically on the policy Beth has and she can save some money until renewal when the company requires the updated information

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The Young Driver

• Rule Based: The rule is that all licensed drivers should be reported to the insurance company. That is an obligation you have to the carrier and that is, after all, how they charge adequate premium. Many companies are obligating the insured by application to notify.

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The Young Driver

• People Based: Why lose a friend over this. It was just told to you as a friend. Beth did not call to add Ryan on the policy to begin with.

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Fraud

• In criminal law, fraud is intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent, and verb is defraud. Fraud is a crime and a civil law violation,

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• Have you ever worked with someone in the insurance industry that defrauded an insurance company of other party?

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The Case Of The Best Set Of Drivers--Ever

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About the Application


The Case Of The Best Set Of Drivers--Ever• The insurance agent had several large

accounts all of which had fleets of vehicles

• One of the accounts had a fleet of drivers with excellent driving records and accordingly, the BAP was easy to place and very well priced

• One of the other accounts the broker wrote had the opposite—terrible drivers

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The Case Of The Best Set Of Drivers--Ever• The agent had a great idea—use the

listing of good drivers on the second account

• How could he get caught—it was with a different carrier and he had the MVRs to submit

• This way he could get his insured a good rate and save his account

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Outcome

• The office manager found the mis-statements on the file and forced the agent to re-submit

• The client was forced to get rid of some drivers

• At renewal the client found a new agent that would lie for him

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Duties owed to the Insurance

Customer


Differences between

• Agent• Broker• E & S• Wholesaler• Or a combination• Insurance Company

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Agent / Agency Requirements

• Comply with terms of the agency agreement

• Comply with the underwriting rules such as eligibility and binding authority

• Comply with complete and “honest” disclosure

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Broker / Brokerage Requirements

• Comply with any Wholesaler agreements

• Comply with the underwriting rules such as eligibility and binding authority

• Comply with complete and “honest” disclosure

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The 5PM Friday Certificate of Insurance

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The 5PM Friday Certificate of Insurance• You are the last one left in the office• Your client walks in the front door• He needs a certificate “now” or he will

lose the deal• You tell him to wait and you’ll issue the

cert• You pull his file and realize it with an E &

S Broker

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The 5PM Friday Certificate of Insurance• Trying a long shot, you call the carrier

and actually get someone this late on a Friday!

• But they tell you only the E&S broker listed on the account has the carrier’s authorization to issue the certificate.

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The 5PM Friday Certificate of Insurance• Hanging up, you stare at your desk • You are certain the broker will issue the

certificate on Monday without any problem, but what are you to do about your anxious client who is waiting in the outer office?

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The 5PM Friday Certificate of Insurance• Situation-based: Past experience

indicates that the broker, if there, would issue the certificate; you have no doubt that if the broker were in your position, he would elect to help the client, and since possible pain of delay is far in excess of possible downside of not helping client, go ahead and issue certificate.

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The 5PM Friday Certificate of Insurance• Rule-based: You have no authority to

issue the certificate, so regardless of the consequences (including potential loss of a valuable client), you must refuse to do so

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The 5PM Friday Certificate of Insurance• People-based: Let’s make an exception

—after all look at that distraught client. Procedures are valid for normal situations. The client’s position, you have no doubt you would deeply appreciate the professional service of your agent stepping in to help you out, so you should do the same.

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I Forgot to Market to That Insurance Company

Should that cost me this account?

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I Forgot to Market to That Insurance Company• Your insured is very cost conscience and

has asked you to search the market for the “best deal”

• You went to several insurance companies and thought you had found the best deal

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I Forgot to Market to That Insurance Company• The day before your meeting with the

client, your insured calls to tell you he heard that Cheap and Easy Insurance has really good rates according to his friend– You did not get a quote from company

Cheap and Easy and it is too late for you to ask them as the appointment is tomorrow and the policy renews in a week

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I Forgot to Market to That Insurance Company• What do you tell your client at the

meeting?– Yeah, I checked with them and they didn’t

like your loss potential– Sorry, but they were not on my contact list

and I did not contact them

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I Forgot to Market to That Insurance Company

– I know the market and they would not be a good fit for you

– I’ll do a better job next year, but it is too late this year

• Is honesty the best policy in this case?• “Relativity applies to physics, not

ethics”Albert Einstein

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Creating an Ethical Culture

Do you have one?

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Ethical Culture

• Since the Sarbanes-Oxley Act of 2002, passed as a response to the Enron scandal, ethics has become a very important subject in the business world.

• Even though the Act related to mostly public firms, the precept applies to all b businesses.

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Ethical Culture

• Businesses may have an informal sense of ethics, such as the accepted behavior in the workplace; however, making it "official" can help firms build a good reputation with employees, vendors and customers.

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Communication and Ethics

• From the inside out– Internal Ethics

Building a Corporate Reputation of Integrityhttp://www.ethics.org/files/u5/integrity.pdf

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Communication and Ethics

• From the outside in– Ethical perception (your clients or

perspective clients viewpoint)– Word of mouth advertising is your greatest

asset and source of business– Negative comments are regularly repeated

six times more than positive comments– Truth: most people are more apt to make

negative comments then positive ones

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Ethical Culture

• “An ethical culture cannot be built without the full commitment of senior executives and company directors,”

• If leadership and management is not ethical, neither will the organization be as a whole

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Code of Ethics

• Develop and write a code of ethics that reflects the values and culture of your company

• Circulate Code to all employees• Follow the code otherwise it is

meaningless• If the employees see the management,

producers, owners breaking the code of ethics they feel they can do the same

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Code of Ethics

• Regularly review Code with employees (e.g. performance reviews)

• Incorporate as part of new employee orientation

• Have consequences for violation– Salary review-promotions– Termination

• Publicize code externally• Enforce the Code

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Code of Ethics

• Make sure senior management endorses• Be PROUD of your Code of Ethics

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Your Code of Ethics

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Your Code of Ethics

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Your Code of Ethics

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Your Code of Ethics

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Your Code of Ethics

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Disclaimer

Insurance forms and endorsements vary based on insurance company; changes in edition dates; regulations; court decisions; and state

jurisdiction. This instructional materials provided by Insight is intended as a general guideline and any interpretations provided by Insight do not

modify or revise insurance policy language. The authors of these materials, Insight Insurance Consultants is a division of Insight Consulting

and Management Inc. In providing these materials, Insight assumes neither liability nor responsibility to any person or business with respect to any loss that is alleged to be caused directly or indirectly as a result of

the instructional materials provided. Copyright 2010 – 2011 All Rights Reserved

www.insurancecommunitycenter.comLaurie: 714.803.5830 [email protected]

Marjorie: 714.206.9583 [email protected]

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