Problems settling “wind versus water” claims after HurricaneKatrina–with policyholders, including members of Congress,challenging denials based on the standard flood exclusion–generatedunwanted negative publicity for the insurance business. The fallouthas included insurers being skewered in Washington hearings andinitiatives launched to repeal the industry's federal antitrustimmunity.

To avoid all these problems, some have wondered whether it mighthave been better for insurers to just pay all Katrina losses, basedon a so-called “moral obligation.”

The questions posed for this article sought comments on theethical ramifications of settling claims based on “moralobligations,” and whether such settlements should be extended onlyto “victims” of catastrophes or to all “victims” of unfortunateevents, regardless of whether insurance coverage applied.

Answers to these questions were fascinating because no oneagreed with settling based on moral obligations, and no one definedwhat constitutes a moral obligation. Given no support for mythical“moral obligation” settlements, no one suggested extending theconcept to victims of any unfortunate event.

Unlike all past questions of ethics posed for this column, therewas no controversy at all. Everyone responding agreed thatethically, losses should be settled based on the contractuallanguage of the insurance contract, after being compared to thefacts of the loss.

No one wrote in to insist that in at least some situations,insurance loss adjustments should be “morally based” (whatever thatmay mean). There were no defenders of such settlements.

Respondents agreed with an Ohio producer, who said one shouldalways “settle claims based on the contract, not some moralobligation. When not adjusted based on the contract, the adjustmentbecomes immoral.”

An adjuster noted that “the job of the adjuster is todistinguish covered from uncovered claims, and pay for the covereddamage. Exclusions are to be read to see if coverage can beprovided, not to look for excuses not to pay.”

A claims manager added that “our 'moral obligation' is to dowhat was promised in the policy–no more and certainly no less.”

Yet another adjuster summed up all of these comments: “It is nota matter of ethics. It is a matter of contract.”

A former claim trainer commented: “As a CPCU, I am ethicallyrequired to follow the law. Regulators approve the form of coveragein most cases and the rates associated with that coverage.Regulators perform adjusting market-conduct examinations on settledclaims to be sure we comply with our legal contracts.”

Indeed, he added that “it probably would violate state laws tosettle claims in a manner that was contrary to the legalobligations of our contracts. Therefore, paying clearly uncoveredclaims, based on someone's idea of a 'moral obligation' or anyother reason, would no doubt also be such an ethical violation forme or any other professional.”

A Florida consultant and former adjuster agreed: “It is notethical to pay uncovered losses,” just as “it is also not ethicalto avoid payment for covered losses.”

As to the ramifications of paying uncovered claims, thisconsultant noted: “Addressing 'moral obligations' may destroy theconcept of 'excluded perils.' Adjusters must keep one eye on thefacts of the loss and one on the coverage. Nothing else should blurhis or her vision. If there is doubt, ethically you give thebenefit of the doubt to the insured.”

An employee of a major insurer rating organization wasexhaustive in his discussion of the ramifications. He asked: “Howdo you price for this and estimate ultimate claims costs? Further,why should this so-called 'moral obligation' be limited toinsurers? Why not require contractors, building material suppliers,gasoline stations, hotels and many others in catastrophe areas toprovide services at prices not contemplated by them to thosedamaged in a loss?”

He concluded by speculating that the suggestion to pay based ona moral obligation is designed to direct attention away from theethical violations of legislators and regulators who fail toestablish and enforce building codes in costal areas.

The claims manager had similar concerns: “We cannot affordcorporate welfare for those who don't buy the right coverage or donot understand what they bought.”

Another adjuster wrote: “If you settle a claim outside contractlanguage, based on a 'moral obligation,' you wake up the monstersof 'precedent,' 'waiver' and 'estoppel.' I don't want to be the oneresponsible for that.”

The attempt to shift the blame for uncovered losses to insurers,noted earlier, was frequently identified. “It's only thepoliticians that try to put a new spin on what everyone understandscoverage to be,” suggested one respondent.

One of the many adjusters responding remarked: “ContraProferentem–interpreting ambiguity in the favor of the insured–isbeing taken to extreme by politicians looking for a scapegoat tounload the financial responsibility of the government.”

Others suggested changes in the method of loss financing forcombined wind and water losses. One respondent suggested that“maybe coastal wind/flood losses should be underwritten by fullyassessable pools or fully assessable special-purpose mutualinsurers. Then, individual insureds with losses can be paidwhatever they demand and be assessed for any losses notcontemplated in the original premium.”

One semi-serious suggestion was that the Federal Reserve Systeminsure these types of losses. The Fed could then just printwhatever money it needed to pay losses without regard to contractlanguage and with no additional premiums for anyone.

In sum, as written by one respondent: “It is not pleasant todeny all or part of a claim or to apply policy limitations onlosses, but ethically we cannot waiver from what the insurancecontract dictates is owed.”

Adjustments based on noncontractual or “moral obligations” wereuniversally considered unethical. No one sought to extend theconcept to any type of loss.