Coverage Gap Raises Ethical Quandary

"The same type of situation could occur between a lender and a debtor, a lessee and a lessor, and a bailee and a bailer. It certainly exists in a state with mandatory auto liability insurance. Certifying that coverage existed, when it did not, is not the truth," this respondent added.

If coverage lapsed, it is likely that had an otherwise covered claim been made during the gap in coverage, the insurer would deny the claim and would not certify continuous coverage.

There can also be little doubt that after coverage is reinstated, should a claim be made arising from an incident taking place in the "gap" period, the insurer would carefully investigate exactly when and how the insured became aware of the claim. If it could be proven that the insured was aware of the event, occurrence or claim, the insurer could attempt to deny coverage based on misrepresentation, fraud, or other legal means.

In this latter situation, any certification by the insurer that continuous coverage existed could be meaningless, at least as to the claim made.

Two potential ethical problems appear to exist in this reinstatement situation. The first is a question of whether the action taken by the insurer is consistent with principles of insurance. The second is the truthfulness of indicating to third parties that there is or was continuous coverage.

The financial security of the insurance business, on which we all ultimately depend, is based on the ethical application of insurance principles to any insurance situation. In this case, the principle involves the basic definition of insurance. If 10 different texts were examined, 10 different definitions of insurance would be found.

However, a common thread among all the definitions would be that insurance is, in part, a transfer of risk. For the insurance business, risk is the chance of loss faced by an insured. The chance of loss can be measured by its probability.

The exact risk referred to here is what is sometimes called the underwriting risk, not the other risks the insurer assumes, such as timing of claims payments or any investment risks. For example, Statutory Accounting Principles require that an "insurance" contract transfer underwriting risk to qualify for treatment as insurance on the books of the insurer.

Probabilities are measured on a scale of zero-to-one. The closer the probability of an event is to zero, the less likely the event will happen. The closer the probability to one, the more likely the event will happen. It is at the end points that risk does not exist.

For example, there is no risk that a man can become pregnant by natural procreation methods. Similarly, there is no risk that a man or woman will live forever. These are examples of risks that should not be insured (or called insurance) because there is no risk to transfer to the insurer.

This is also why today, with so many legislated mandates for coverage for preexisting conditions and other expected costs, healthcare losses should not be called insurance, but referred to as some other form of loss financing.

In the current question, it is a sound and ethical decision of the underwriter to ask if there are any known accidents, occurrences or events that took place during the coverage gap period. If there were, there is no risk to transfer and no insurance should be applicable, at least to the known loss.

However, if there are not any known situations, there is an underwriting risk that can be transferred. Insurance is appropriate and, if written, it is ethically sound, based on insurance principles, to say that coverage exists for the gap period.

No matter how much it hurts, ethics and its associated integrity dictate that a lie is not permissible. As to the overall truthfulness of indicating continuous coverage, assuming for the moment that the consensus answer is correct, is an indication of continuous coverage after a gap in coverage a lie?

Those responding who believe it is a lie, and hence unethical, generally state: "Coverage ceased for a period of time. No one can erase that fact. To indicate otherwise is just wrong."

Those responding who believe it is not a lie, and hence ethical, generally state: "The insurer, in its contractual promise, agrees to provide coverage for the time period of the gap. Therefore, should a claim arise that was truly unknown to the insured, the insurer will pay the claim. Coverage actually exists for the gap period, and it is proper and ethical to so indicate."

A solution to this problem, for those who believes it is an ethical problem, is to be careful with the choice of words. "Certifying" that there was continuous coverage would be wrong, but "certifying" that there is continuous coverage would be proper if the gap period is noted.

For example, saying that "coverage was continuous from the expiration of the old policy to date" would be inaccurate, but to say "we are providing continuous coverage from the expiration of the old policy" would be accurate. There is an actual difference in the information being conveyed. Saying coverage was continuous is different than saying continuous coverage is being provided.

The bottom line in this case is that it is an individual choice. If a person believes it is unethical to indicate coverage was continuous, he or she should pick their words carefully. If a person believes that the word choice is a distinction without a difference, or that, in fact, an unknown accident, claim or occurrence during the gap period is covered if the insurer is providing the insured with continuous coverage (and that is what the third party wants to know), word choice is not important.

After all, the third party to the insurance contract is not really interested in what your definition of "is" is.

Put another way, if the real question here is, "could coverage ever have been denied," the answer is "yes," and it may be unethical to indicate otherwise. If the real question is, "could coverage be denied for a newly discovered claim arising from an event during the gap period," the answer is "no," and it is ethical to so indicate.

Peter R. Kensicki is a professor of insurance at Eastern Kentucky University in Richmond, Ky., as well as a member of the Ethics Committee of the CPCU Society in Malvern, Pa.

Next Ethics Column:

Also A Risk Manager?

A reader has posed the question for my next ethics column, scheduled to appear on Sept. 9: "A producer is trying to be added to the payroll of a large client as its risk manager. He has only a license to sell insurance and no risk management designations or a consultants license. He wants an office at the clients facility, a phone line, and to be able to correspond with others as the risk manager for this entity.

Is this an ethical conflict of interest? Does the answer change if the producer does not take a salary from the client?

Please e-mail your responses to Peter R. Kensicki, CPCU, at ethics@eku.edu, or mail them to Eastern Kentucky University, Coates Box 25A, Richmond, Ky., 40475-3101. All responses will be kept confidential.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, July 15, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.