A View From The Press Box

A Question Of Ethics:

Is It Ethical For Insureds
To Profit From Their Losses?

By PETER R. KENSICKI

Insurance texts report that the “heart” of the insurance business is indemnity. After a loss, claimants--at best--should be placed in their pre-loss financial position. No claimant should profit from a loss.

The texts also indicate that there exist certain potential “exceptions” to indemnity--including valued-policy laws, the collateral-source rule, stated-value policies and replacement-cost coverage.

Some jurisdictions, either legislatively or judicially, seem to actively encourage “profiting” from losses covered by insurance—in other words, collecting more in cash than the policyholder incurred in damages. Feeding off of this, we raised a number of ethical issues for National Underwriter readers. We:

• Questioned the ethics of insurers offering insurance in those states, and

• Asked if insurance professionals had an ethical duty to seek legislation that returns insurance to providing only indemnity-loss payments.

It was noted by many respondents that not offering insurance in those states that encourage over-indemnification was inconsistent with voluntary efforts of insurers to encourage over-indemnification.

Comments from a Minnesota agent illustrate the point: “Insurers themselves violate indemnity all the time and encourage [over-indemnification]. Replacement-cost coverage when not mandated and stated-value policies on classic cars are two examples. Insurers understand what they are doing. It would be unethical to withhold insurance in any state for this reason alone.”

On the other hand, a risk manager wrote: “When I was trained as an underwriter, one important rule was to avoid the ‘moral hazard’—including situations where insureds could profit from a loss. Value-policy laws, in effect, allow insureds to profit from their ‘losses’ and have created a legal moral hazard. Insurers should avoid underwriting in those states. The last thing society needs is a legal way to profit from an insurance loss.”

A Kentucky producer agreed: “There is no ethical duty to sell insurance in a state when over-indemnification affects the bottom line. If enough insurers quit those states, pressure will be put on the legislators.”

An insurance executive made a distinction between “economic” and “non-economic” losses. “When it comes to pure economic losses (not counting pain and suffering), the world is a better place when individuals can be made whole…and no more. When we make it economically attractive to have a loss, temptations can be too great.”

About one-third of respondents stated opposition to valued-policy laws as a violation of indemnity. An Illinois agent said: “Profiting from losses is unethical. Valued-policy laws allow profiting, but few property losses are total and the impact is minimal.”

An association executive agreed: “Valued-policy laws are not just. They were created to add certainty in an uncertain valuations situation.”

However, about one-third of the respondents were not opposed to valued-policy laws, and saw no ethical violations in writing insurance in those states. Said one respondent: “While I agree people should not profit from losses, from a property standpoint, underwriters should evaluate risk and make sure values are agreeable. Who is unethical? The applicant asking for excessive limits, or the underwriter who fails to take action and accepts values as presented?”

A commercial property underwriter noted that valued policy laws were “okay, if it is known to be such a jurisdiction, and if the losses paid are both truly fortuitous and factored into rates. The greater harm is to withdraw from the state.”

From a different perspective, a claims practice analyst suggested: “Offer insurance, but evaluate risk carefully. Insurance is a service and it helps protect people.”

A senior claims executive proposed: “Don’t give up. Work both for change and to be a better adjuster. At the time of a claim, it is incredibly difficult to determine indemnity anyway. Work to get better at making that determination.”

A Florida agent commented: “Some violations of indemnity are good, such as replacement cost.” He also believes the wrong people--the general public--would be hurt by withdrawing from a state, and that such a withdrawal, for that reason alone, would be unethical.

Yet another adjuster wrote: “Respect the contractual obligation—that’s the goal. Don’t quarrel the semantics of indemnity. Replacement cost or actual cash value are purchased as agreed, and insurers must offer the alternative to be competitive.”

An insurance operations executive believes that the decision to sell or not sell is not ethically based, but rather is a business decision: “These laws lead to higher claims costs and higher premiums. If a company can be competitive at the higher rate, it should be allowed to do so.”

An insurance attorney noted: “Insurers can operate ethically in valued-policy states, and do so daily. Most ethics codes require the professional to follow the law. Also, if there is any ethical responsibility of the insurer, it would be to educate the public and elected officials as to why ‘legal over-indemnification’ negatively impacts all insureds.”

A self-insured group executive agreed: “We need to educate the public as to the cost-drivers in our business. If it is okay with insureds to all pay more for the benefit of a few, it should be okay with us.”

A different tack was taken by a well-known insurance author: “The ethical response is for the claimant to return over-indemnification payments to the insurer.” His view was supported by a number of other responders.

The most common theme among all responders to the first question was that withdrawing because of over-indemnification issues would cause greater harm. Insurers can and do price for over-indemnification. The assumed small addition to premium was the lesser harm to the majority.

This thematic concern for the interests of the general public over the interests of insurance theory and insurers reveals both an ethical and thoughtful approach to insurance issues by insurance professionals.

There was greater agreement among responders to the question of seeking legislation to correct gross problems of over indemnification.

There is basic agreement that the insurance business should embark on an education program to explain the more serious problems of over-indemnification. The education program should be directed to both the general public and legislators.

For example, the claims practice analyst wrote: “Give information to legislators and policymakers, but do not lobby for legislative changes.”

An agent added: “The general public pays for the individual’s profit. Educate the public, and they will decide whether or not to put pressure on legislators.”

The insurance executive wrote: “We apparently have not made it clear how products are priced. We need to do a better job of educating legislators so they can sponsor and support appropriate legislation.”

In addition to education, most responding did believe it was ethical to lobby for changes when there were serious breaches of indemnity allowed or encouraged in a jurisdiction.

The risk manager was direct: “It is the obligation of the insurance business to lobby aggressively against over-indemnification to make sure that insurance is provided on an indemnity basis.”

The commercial property underwriter, while suggesting more underwriting effort regarding valuation, added simply: “We should seek to overturn laws that allow profiting from insurance.”

A significant number of responders, while agreeing with lobbying, were skeptical of positive results.

One relatively mild comment was: “Changing legislation is good, but it would take time. It is the better course.”

A stronger statement came from the association executive: “It is ethical to seek legislative changes, but practically the work would be enormous and not worth the political capital.”
In the same vein, an agent noted: “Lobbying for change would be a long battle against the trial lawyers who profit from over-indemnification.”

In summary, a philosophical responder said: “Indemnity is a principle and a goal that will never be fully achieved in this imperfect world. It is ethical to try to reach perfect indemnification, but we must recognize that there are fact situations where pure indemnification would be detrimental to certain claimants.”

This reader went on to say that “the greater good, and the ethical approach, is to provide the public and its representatives with both our concerns for ‘bad’ legal forms of over-indemnification, and the costs to the general public of that over-indemnification.”

This reader’s advice was that “in extreme cases, lobby for change. In the end, as long as the business collects enough premiums from willing and informed insureds to pay whatever legitimate losses they wish to be covered, we, in the insurance business, should not worry excessively about over indemnification.”

Peter R. Kensicki is a professor of insurance at Eastern Kentucky University in Richmond, Ky., as well as a member of the Ethics Committee of the CPCU Society in Malvern, Pa.