Problems settling “wind versus water” claims after Hurricane Katrina–with policyholders, including members of Congress, challenging denials based on the standard flood exclusion–generated unwanted negative publicity for the insurance business. The fallout has included insurers being skewered in Washington hearings and initiatives launched to repeal the industry's federal antitrust immunity.

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

The questions posed for this article sought comments on the ethical ramifications of settling claims based on “moral obligations,” and whether such settlements should be extended only to “victims” of catastrophes or to all “victims” of unfortunate events, regardless of whether insurance coverage applied.

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

Unlike all past questions of ethics posed for this column, there was no controversy at all. Everyone responding agreed that ethically, losses should be settled based on the contractual language of the insurance contract, after being compared to the facts of the loss.

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

Respondents agreed with an Ohio producer, who said one should always “settle claims based on the contract, not some moral obligation. When not adjusted based on the contract, the adjustment becomes immoral.”

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

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

Yet another adjuster summed up all of these comments: “It is not a matter of ethics. It is a matter of contract.”

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

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

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

As to the ramifications of paying uncovered claims, this consultant noted: “Addressing 'moral obligations' may destroy the concept of 'excluded perils.' Adjusters must keep one eye on the facts of the loss and one on the coverage. Nothing else should blur his or her vision. If there is doubt, ethically you give the benefit of the doubt to the insured.”

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

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

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

Another adjuster wrote: “If you settle a claim outside contract language, based on a 'moral obligation,' you wake up the monsters of 'precedent,' 'waiver' and 'estoppel.' I don't want to be the one responsible for that.”

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

One of the many adjusters responding remarked: “Contra Proferentem–interpreting ambiguity in the favor of the insured–is being taken to extreme by politicians looking for a scapegoat to unload the financial responsibility of the government.”

Others suggested changes in the method of loss financing for combined wind and water losses. One respondent suggested that “maybe coastal wind/flood losses should be underwritten by fully assessable pools or fully assessable special-purpose mutual insurers. Then, individual insureds with losses can be paid whatever they demand and be assessed for any losses not contemplated in the original premium.”

One semi-serious suggestion was that the Federal Reserve System insure these types of losses. The Fed could then just print whatever money it needed to pay losses without regard to contract language and with no additional premiums for anyone.

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

Adjustments based on noncontractual or “moral obligations” were universally considered unethical. No one sought to extend the concept to any type of loss.

Special Reports /

'Moral Obligations' Can't Drive Claims Adjustment

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