Ethics and Business

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Ethics and Business

Is This an Oxymoron?

E. Stuart Powell, Jr., MA

CPCU, CIC, CLU, ChFC, ARM, AMIM, AAI, ARe, CRIS

Vice President of Insurance Operations and Technical Affairs

Independent Insurance Agents of North Carolina, Inc.

The Issue

A prospective customer asks John Q. Agent to quote on his homeowners insurance. In developing the information for the quote, John determines that the premises on which the house in located are only a few feet outside the city limits. John knows that this area is in a volunteer fire district. But since this particular house is almost in the city, John feels that the city fire department would respond to a fire. Therefore, John believes that this risk should receive the benefit of being in the city for fire protection purposes. He rates the quote using the city classification. John gets the business. The customer gets a very good price for coverage.

Is anything wrong with this scenario?

If so, how do we know what’s wrong?

1

Background

1 Ethics comes from the Greek word - ethos ((((ς) - which means custom, usage, or character of a group of people.

2 In ancient times when governments were less formal and national boundaries were vague, a person was associated with a group (ethnos –εθνος) by custom or behavior. One ethnic group was distinguished from another by the way they dressed, their language, the customs they observed, and the rules of behavior that governed their lives.

1 The American Ethos - those characteristics, qualities, customs or practices that distinguish American for peoples of other nations

3 Definition of Ethics

1 Ethics are an organized way in which man goes about understanding whether human behavior conforms or fails to conform with a given set of rules or customs for acceptable behavior.

2 “the discipline of dealing with what is good and bad or right and wrong, or with moral duty and obligation” Webster’s Third New International Dictionary

4 Types of Ethics

1 Theoretical or philosophical ethics

2 Practical or applied ethics

Right and Wrong

1 Are Right and Wrong relative or is right right and wrong wrong

2 Right and wrong behavior can be relative to the Standard by which behavior is measured

3 Scale of Standards of Behavior

1 Legal (lowest)

1 Criminal – wrongful acts against society

2 Civil – wrongful acts against another individual

3 Agency/Principal or Vicarious – responsibility for the wrongful acts of others

2 Governmental

1 Legislative Statutes – written laws

2 Administrative Regulation – rules required by written laws

3 Business and Professional

1 Customs

2 Practices

3 Professional standards

4 Moral (highest)

1 Religious standards

2 Philosophical standards

4 Reasons for Wrong Behavior

1 Ignorance - Just don’t know

“Ignorance of the law excuses no man; not that all men know the law, but because ‘tis an excuse every man will plead, and no man can tell how to confute him.” John Selden 1584-1654

2 Knows and understands the standard but chose to violate it

3 “Situational Ethics” – Only wrong options

4 Conflicts of Interests

1 Behavior in which a person or entity derives a personal benefit from acting contrary to the interest of others

2 Disclosure - transparency

3 Altruism – a sign of professionalism

5 “The devil made me do it.”

Ethical Standards

1 Legal Standards

1 Criminal Standards

1 Often based on religious standards

2 Prohibitions against conversion of or destruction of the property of others

1 Stealing

2 Embezzlement

3 Arson

3 Prohibitions against bearing false witness

1 Fraud

2 Perjury

3 False pretense

2 Civil Standards

1 Common Law Standards

1 Torts

1 Negligence - Failure to follow a standard of Prudence that results in damage to others

2 Contracts

1 Utmost Good Faith

2 Voidable Contracts

1 Concealment (misrepresentation by silence)

2 Misrepresentation (innocent but material)

3 Mistakes

4 Duress

5 Undue Influence

3 Agency/Principal (Vicarious Liability)

1 Duties and Obligations of Agents

1 Loyalty

2 Obedience

3 Reasonable care

4 Accounting

5 Keep informed of relevant facts

2 Duties and Obligations of Principal

1 Perform on agency contract

2 Opportunity to work

3 Compensation

4 Reimbursement

5 Indemnity

ONE HOUR

2 Regulatory Statutes

1 State General Statutes

1 Twisting

2 Fraudulent representation

3 Signing blank policies

4 Unfair and Deceptive Trade Practices

1 Misrepresentation or false advertising of insurance policies

2 False information or advertising

3 Defamation

4 Boycott, Coercion and intimidation

5 False financial statements

6 Stock options and advisory board contracts

7 Unfair discrimination

8 Rebates or illegal inducements

1 Fees for Service

9 Unfair claims settlements

10 Misuse of borrower’s confidential information

11 Over-insurance in credit transactions

2 Regulation By Department of Insurance

1 Licensing requirements

1 Prior civil and criminal records

2 Conditions for suspension or revocation

2 Continuing education

3 Agency/Company operational practices

4 Enforcement of statutes and regulations

3 Professional Standards

1 Trade Associations

1 Code of Conduct/Ethics

1 IIABA (Appendix p. 15)

1 To the Public

2 To the Companies

3 To Fellow Members

2 Trusted Choice (Appendix p. 16)

3 NAIFA (Appendix p. 17)Professional Societies

2 Code of Ethics

1 CPCU

1 Oath/Pledge (Appendix p. 18)

2 Ethics Code from By Laws (Appendix p. 19)

3 Nine Canons (Appendix pp. 20-21)

1 Rules and Guidelines for each Canon

2 CLU (Appendix p. 22)

4 Moral Standards

1 Religious Standards

1 Most religions have established rules or codes of behavior

1 Codes are usually part of the created order (natural law) or are given specifically by the supreme being

2 Specific codes - The Ten Commandments

3 General guidelines - The Golden Rule

2 Philosophical Standards

1 Principals for evaluating behavior that are derived by human rational activity

1 The way things ought to be

2 Philosophical standards can parallel religious beliefs or be secular in nature

1 Aristotle’s Golden Mean - “all things in moderation”

2 “The ends justify the means.”

3 “If it feels good, do it.”

TWO HOURS

Applying Ethical Principals - Several Case Studies

1 Is Ethical Behavior Good Business?

1 Should businesses behave in their own self interests?

2 Is what is for the customer, best for the business?

2 Case Studies

Ethical Decision Making

Does it violate any criminal standards?

Does it violate any civil standards?

Does it violate any business standards?

Does it violate any professional standards?

Does it violate any personal standards?

Signatures on applications

A prospective insured calls an independent agent to get some automobile insurance. The agent quotes the coverage over the phone. The insured authorizes the agent to place the coverage. The agent gets an auto application and asks the insured all the questions on the application. The agent tells the insured that he will need to come by the office to sign the application. The insured says he will be by that afternoon but to make sure that he has coverage. Two days later the insured has not come by to sign the application and the agent has been unable to reach the insured by phone. Knowing that the insured wants the coverage and that the insured has answered all the questions on the application, the agent signs the insured name to the application.

A life insurance agent gets a commitment from an insured to buy some life insurance. The insured is in a big hurry so the agent has the insured sign a blank application and indicated that the agent can complete the application from the information she has developed in her fact finding questionnaire.

1 Insurance Applications

1 Offer or acceptance

2 Application information as representation

1 Material misrepresentation

Ethical Decision Making

Does it violate any criminal standards?

Does it violate any civil standards?

Does it violate any business standards?

Does it violate any professional standards?

Does it violate any personal standards?

Misrepresentation of the insurance process

Life and Health Insurance

Agent A has been encouraging a client to buy a very large life insurance policy to coordinate with some estate planning that was done by a local attorney. The client calls to let the agent know that he ready to buy a policy but is also getting a proposal from another agent. Agent A feels that he has done a lot of work on this case and should get to business. To make his proposal attractive, he uses an interest rate on the ledger statement that is 2% higher than the company is currently paying. Agent A believes that interest rates will rise in the future and therefore this proposal is not unreasonable.

Property and Liability Insurance

1. An insured has several large trucks, including a dump truck, that are used in his sole proprietor contracting business. The insured is concerned about the high cost of insuring these vehicles. He goes to another agent for a quote. The prospective agent asks the insured if he lives on a farm or has any farm animals. The insured indicates that he lives on a farm. The prospective agent proceeds to rate the vehicles as farm vehicles. The premium for the vehicles is much lower and the insured is satisfied.

2. Your pick up the policies from a local heating and air conditioning contractor who installs heating and air conditioning units for residential and small commercial customers within in a 50 mile radius or your community. In reviewing the classification under the CGL, you notice that there is only one classification listed, i.e. “sheet metal – shop only”. Knowing that the risk is under classified, do you quote the risk using the correct classifications or try to price the risk as written by the current agent?

Ethical Decision Making

Does it violate any criminal standards?

Does it violate any civil standards?

Does it violate any business standards?

Does it violate any professional standards?

Does it violate any personal standards?

Product/Service vs. Compensation

An agent is asks by one of his commercial property and liability insureds to get his company some health insurance. The agent gets several quotes. The quote from Company A has the better benefits. But Company B is running a contest and the agent can get a 3 day cruise if he places one more group case with Company B. The agent presents the Company B quote and the insured accepts it.

THREE HOURS

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