Editor's Note: This is part 3 of a three-part series.Part 1 appeared in the August issue and Part 2 in the September issue.

Many states that require continuing education units (CEUs) foradjusters, whether or not adjusters are required to obtain alicense or pass an initial licensing examination, mandate that acertain number of CEUs be on the subject of ethics. In thosestates, there are usually a number of ways of accomplishing thisrequirement, either through classes offered by a claimsassociation, obtaining a professional designation such as theAssociate in Claims from the Insurance Institute of America, or bypurchasing a text and completing a correspondence course such asthose offered by the National Underwriter Co.

But what in the world are “ethics,” and why are they so darnedimportant for adjusters? As Winning by the Rules, Ethics andSuccess in the Insurance Profession states, there are dozensof definitions. At its highest level, ethics is a field ofphilosophy along with logic and mathematics. That makes sense: aninteger is a whole number. The word integrity is based onintegers — a logical wholeness — two plus two will always equalfour. If we make it equal something else, then the answer lacksintegrity. A person with integrity will be honest both at home andat work; one lacking integrity may be honest at work, but cheat ona spouse at home.

Aristotle defined ethics as implying “conflicts in morality.”Dr. John C. Merrill, in The Imperative of Freedom(Hastings House, 1974) wrote, “Ethics has to do with duty — duty toself and/or duty to others. It is primarily individual or personaleven when it relates to obligations and duties to others. Thequality of human life has to do with both solitude and sociability.We do right or wrong by ourselves in that part of our lives livedinwardly or introvertedly and also in that part of our lives wherewe are reading and responding to other persons. This duality ofindividual and social morality is implicit in the very concept ofethics.”

This is a bit like the summary of the Law in the Bible: “Loveyour neighbor as yourself.” It does not mean narcissistic,exclusive self-love, but it does imply the need for self-respectand self-knowledge if one is to have the ability to loveothers.

Ethical Rules

It is common to think of sets of rules as being ethical guides.One might suggest the Ten Commandments that some people want tohang in their courthouses as a standard of behavior. But that canbe problematic. Are those commandments intended to be the basis ofour law? We could argue that “Thou shalt not kill” or “Thou shaltnot steal” are good laws; we don't want thieves and murdererswandering around. But what about the one that commands us to “Honorour father and mother”? Should this be the law cited in thecourtroom when a child has been beaten and abused by a drunkenparent? In Charles Dickens' time that might have been the case.Ethics then were absolute. The “law” was not to be broken.Punishment was ever present. Or what about the one, “Thou shalt notcovet (desire)”? Have we not built an entire advertising industryon the concept of covetousness? I see my neighbor's BMW and wantit. That's what marketing is all about!

When teaching ethics I used to use the example of Mrs.Throgmorton, head of the local Anti-Child Abuse Society. She was inthe grocery store one day, in line behind the mother of atwo-year-old. They approached the cash register where the store hadplaced all sorts of candy and other goodies right at the eye levelof children in the grocery cart. Like all children, Junior grabbed,and Mother took it from him saying, “No, no, Johnnie, we can'tafford that!” Johnnie screamed, “I WANT IT!” and grabbed again.Mother again grabbed it from him, and slapped his hand, makingJohnnie scream.

“Child abuse!” shouted Mrs. Throgmorton, demanding that themanager, who came running, call the police and have Mother arrestedfor abusing and striking her child. She could not be dissuaded,insisting that the police be called to the scene. The manager triedto convince her otherwise, but her sense of ethics said the ruleshad been violated and Mother should be punished. So the policearrived. They, too, could not convince Mrs. Throgmorton to relent.So the child welfare department came and agreed to look intoMother's home situation. Eventually the court dismissed any chargesagainst Mother, and Mrs. Throgmorton was incensed at the outcome.It was unethical on the part of the court, she complained to thepress. Then Mother sued her and her Anti-Abuse Society for falsearrest, malicious prosecution and defamation of character.

What were the ethics of this situation? Was Mrs. Throgmortoncorrect that this was child abuse, or was Mother — who really couldnot afford the candy — simply disciplining her child? Was the storebeing unethical by placing candy at the check-out counter wherethey knew it would be at eye-level with the child? Was the managerunethical by allowing a build-up at the check-out counter withoutopening another counter? Should the police have allowed the childwelfare department to press charges? Was it unethical for Mother tosue the Anti-Abuse Society?

Business guru Peter Drucker wrote in a 1981 Forbesarticle, “There is only one ethics, one set of rules of morality,one code — that of individual behavior in which the same rulesapply to everyone alike.” Is that what “ethics” are, a “code … ofindividual behavior” applicable to everyone alike? It sounds good.It's reasonable, at least democratic. But is it true? Are ethicsabsolute, as Drucker seems to imply, or situational? Do the sameethics apply to an atheist as to an Amish farmer? Or can they bedifferent?

The Ethical Dilemma for Adjusters

Adjusters face ethical issues every day. A claim may besuspicious. Should we report it to the police or our specialinvestigation unit? We catch an insured or claimant in anexaggeration or misstatement of what we know to be true. Should weenforce the “misrepresentation” clause in the policy and deny theotherwise valid claim? We are to deal with insureds “in goodfaith,” but what exactly is “faith,” good or otherwise? Belief inwhat we can't see, like pain? Or is it something more than that?There is a difference between “good faith” and “blind faith,” andblind faith is not necessarily the same as 'bad faith,” a subjectthat seems to garner a lot of attention in claims ethics classes.Many law books have been written on the subject, and many defenseattorneys make a living defending insurers accused of committingthe sin of “bad faith.”

Back in the 1960s, adjusting was seen as implying a “fiduciary”duty — one of “utmost good faith,” the same level as applied totrustees, executors or guarantors. When one represents another in atransaction, that representative is a “fiduciary.” Yet over thelast five decades the concept has gotten watered down. Adjusters,except in a few states where the courts have upheld the fiduciaryprinciple of insurance contracts in dealing with third parties, thestandard has been reduced to only that of fidelity — honesty andfull faith, not utmost good faith. It takes malfeasance, not justmisfeasance or nonfeasance, to find the insurer and its adjusterliable for bad faith in most states today.

Good and Bad Faith

Remember that NAIC Model Unfair Claims Settlement Practices Actdiscussed in the first part of this series? Those are rules that,for the most part, are simply common sense. But the one that hasgotten the most attention from the courts is the one that makes ita violation, if committed as a general business practice,“Not attempting in good faith to effectuate prompt, fair andequitable settlement of claims submitted in which liability hasbecome reasonably clear.” Talk about an ethical pitfall! How oftenmust such a practice occur before it is considered “general”? Onestate insurance department found that just once was enough, andsuspended the adjuster's license.

How much “attempt” is sufficient? Is it sufficient to just senda letter and wait? Or should we go to an insured's home and knockon the door? How prompt is “prompt”? Today, tomorrow, next week?“Fair and equitable” to whom? The insured? The claimant? Theinsurance company? “Equitable” means “even,” a perfect balancebetween two sides, the insured and the insurer. It means we canneither over-pay nor under-pay a claim, for that would be unfairand inequitable. And how “reasonably clear” must liability be? Inthird-party claims liability is often cited by adjusters as “clear”or “probable,” “possible” or “doubtful.” Is that reasonably clearenough?

At one time a number of states' courts held that the duty of“good faith” on the part of insurers applied to both first andthird parties. Most have repented of their misdeed and apply theduty now only to first-party claims (such as failure to settle witha third party within the policy limits, exposing the insured toadditional damages), yet a handful (just one or two) still willhold the insurer liable for bad faith to a third party. But that'sanother story. Suffice it to say that claim adjusters — whetherlicensed or not and whether representing an insurer or aself-insured entity, and whether handling a first- or third-partyclaim — needs to act ethically at all times, to the best of his orher ability. Like Walter in Double Indemnity (see Part 1)adjusters are a judge and jury, cop and father confessor all inone. Each situation is different.

Fraud is real, but there had better be proof that will hold upin court. Crime requires proof beyond the shadow of a reasonabledoubt. Civil cases require only a preponderance of the evidence.Judge, but judge cautiously.

As the company risk manager I received a call one day from anadjuster in another state who had a dilemma. He had taken astatement (not a sworn one) from a third-party claimant in which hehad asked if she had ever suffered a previous injury. She said shehad not. But when he ran an Index Bureau report on her, she hadmade a similar claim several years earlier. Therefore she had lied.Should he report her to the police for insurance fraud?

I suggested that he really had no evidence of fraud that wouldstand up in court and if he reported it and they hauled her away tojail in front of her three screaming children and showed it all onthe evening news, it would be bad news for the adjuster and theinsurer if she was not convicted. Who can say? She might haveforgotten the prior injury, or it may have had nothing to do withthe new claim. Or she might have been a fraudulent crook. We'llnever know if her two plus two was intended to equal four orsomething else. The SIU guys said I was wrong — she should havebeen charged with fraud and gone to jail. But it is like Aristotlesuggested, ethics are “conflicts in morality.”