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) for adjusters, whether or not adjusters are required to obtain a license or pass an initial licensing examination, mandate that a certain number of CEUs be on the subject of ethics. In those states, there are usually a number of ways of accomplishing this requirement, either through classes offered by a claims association, obtaining a professional designation such as the Associate in Claims from the Insurance Institute of America, or by purchasing a text and completing a correspondence course such as those offered by the National Underwriter Co.

But what in the world are “ethics,” and why are they so darned important for adjusters? As Winning by the Rules, Ethics and Success in the Insurance Profession states, there are dozens of definitions. At its highest level, ethics is a field of philosophy along with logic and mathematics. That makes sense: an integer is a whole number. The word integrity is based on integers — a logical wholeness — two plus two will always equal four. If we make it equal something else, then the answer lacks integrity. A person with integrity will be honest both at home and at work; one lacking integrity may be honest at work, but cheat on a 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 to self and/or duty to others. It is primarily individual or personal even when it relates to obligations and duties to others. The quality of human life has to do with both solitude and sociability. We do right or wrong by ourselves in that part of our lives lived inwardly or introvertedly and also in that part of our lives where we are reading and responding to other persons. This duality of individual and social morality is implicit in the very concept of ethics.”

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

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 to hang in their courthouses as a standard of behavior. But that can be problematic. Are those commandments intended to be the basis of our law? We could argue that “Thou shalt not kill” or “Thou shalt not steal” are good laws; we don't want thieves and murderers wandering around. But what about the one that commands us to “Honor our father and mother”? Should this be the law cited in the courtroom when a child has been beaten and abused by a drunken parent? 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 not covet (desire)”? Have we not built an entire advertising industry on the concept of covetousness? I see my neighbor's BMW and want it. 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 in the grocery store one day, in line behind the mother of a two-year-old. They approached the cash register where the store had placed all sorts of candy and other goodies right at the eye level of children in the grocery cart. Like all children, Junior grabbed, and Mother took it from him saying, “No, no, Johnnie, we can't afford that!” Johnnie screamed, “I WANT IT!” and grabbed again. Mother again grabbed it from him, and slapped his hand, making Johnnie scream.

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

What were the ethics of this situation? Was Mrs. Throgmorton correct that this was child abuse, or was Mother — who really could not afford the candy — simply disciplining her child? Was the store being unethical by placing candy at the check-out counter where they knew it would be at eye-level with the child? Was the manager unethical by allowing a build-up at the check-out counter without opening another counter? Should the police have allowed the child welfare department to press charges? Was it unethical for Mother to sue the Anti-Abuse Society?

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

The Ethical Dilemma for Adjusters

Adjusters face ethical issues every day. A claim may be suspicious. Should we report it to the police or our special investigation unit? We catch an insured or claimant in an exaggeration or misstatement of what we know to be true. Should we enforce the “misrepresentation” clause in the policy and deny the otherwise valid claim? We are to deal with insureds “in good faith,” but what exactly is “faith,” good or otherwise? Belief in what we can't see, like pain? Or is it something more than that? There is a difference between “good faith” and “blind faith,” and blind faith is not necessarily the same as 'bad faith,” a subject that seems to garner a lot of attention in claims ethics classes. Many law books have been written on the subject, and many defense attorneys make a living defending insurers accused of committing the 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 to trustees, executors or guarantors. When one represents another in a transaction, that representative is a “fiduciary.” Yet over the last five decades the concept has gotten watered down. Adjusters, except in a few states where the courts have upheld the fiduciary principle of insurance contracts in dealing with third parties, the standard has been reduced to only that of fidelity — honesty and full faith, not utmost good faith. It takes malfeasance, not just misfeasance or nonfeasance, to find the insurer and its adjuster liable for bad faith in most states today.

Good and Bad Faith

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

How much “attempt” is sufficient? Is it sufficient to just send a letter and wait? Or should we go to an insured's home and knock on the door? How prompt is “prompt”? Today, tomorrow, next week? “Fair and equitable” to whom? The insured? The claimant? The insurance company? “Equitable” means “even,” a perfect balance between two sides, the insured and the insurer. It means we can neither over-pay nor under-pay a claim, for that would be unfair and inequitable. And how “reasonably clear” must liability be? In third-party claims liability is often cited by adjusters as “clear” or “probable,” “possible” or “doubtful.” Is that reasonably clear enough?

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

Fraud is real, but there had better be proof that will hold up in court. Crime requires proof beyond the shadow of a reasonable doubt. 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 an adjuster in another state who had a dilemma. He had taken a statement (not a sworn one) from a third-party claimant in which he had asked if she had ever suffered a previous injury. She said she had not. But when he ran an Index Bureau report on her, she had made 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 would stand up in court and if he reported it and they hauled her away to jail in front of her three screaming children and showed it all on the evening news, it would be bad news for the adjuster and the insurer if she was not convicted. Who can say? She might have forgotten the prior injury, or it may have had nothing to do with the new claim. Or she might have been a fraudulent crook. We'll never know if her two plus two was intended to equal four or something else. The SIU guys said I was wrong — she should have been charged with fraud and gone to jail. But it is like Aristotle suggested, ethics are “conflicts in morality.”

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