Ethics and Insurance

I started my career in 1970 in a management trainee program for the Continental Insurance Company of New York. The two-year course included classroom instruction in the Chicago office from the corporation’s top management in the various departments.

Continental Insurance logo

As I recall, even though the course went into great detail with subject matter that ranged from a full day tour of Underwriter’s Laboratories to actual hands on boiler inspections, the material presented barely touched on ethics.

The education manager did tell us that our corporate objective was to meet the reasonable assumption for coverage by the insured. Of course, that was the legal theory in practice at that time and still is to some degree.

The education manager railed against Mayor Daly’s actions when the McCormick Place burned. According to him the huge convention center should have been a partial loss of about 10%. He said the Mayor condemned it based on political reasons and rolled the bulldozers before objections could be launched. He said it very quietly, because such words criticizing “Hizzoner” were considered treason in Chicago in the early 1970’s.

The VP of underwriting for farm, who was the head of underwriting for the nation, spoke to us for over an hour about the ethical considerations of farm underwriting. He said that when a fire occurred the difference between a small fire and a total loss often came down to whether the farmer walked or ran to his phone to call for help. He said that if the farm was prosperous he would likely run.

He never once spoke to the ethics of the underwriters on his own staff. He seemingly just assumed they would “do the right thing”.

It seemed like ethics were considered a given, at that time.

Shortly after we went through the course, I heard about an underwriter in the Chicago office who “issued” a phony policy to one of the large downtown Chicago hotels. The underwriter, and a small number of co-conspirators collected and pocketed the “premium”. They had written the policy on the $30 million hotel with a $100,000 deductible and assumed there would be no losses. Unfortunately for them, a $3 million fire occurred.

That was the first time that I realized that insurance employees did bad things.

About that same time a theatre burned to the ground in a small town in southern Minnesota. The agent in that town wrote nearly every large business in his town with The Continental. The Continental was the largest fire company in the U.S. at that time. The agent had “bound” the business verbally the day before the fire. I was traveling with the Special Agent (field rep) for that territory as the last lap of my training. We were working out of the Minneapolis branch.

About ten people in the branch, the manager, production superintendent, several key underwriters, the claim manager and several field people met after hours and constructed an underwriting file to send to the home office. The file was duly date stamped to make it appear it had been handled properly, and in a timely fashion, so that the $250,000 loss could be paid without fail.

I didn’t feel right about what was done that evening. I did understand that The Continental was the “logical carrier” and probably would be held for coverage by a court of law. But in my mind, the agent’s E&O should have responded. I was told the E&O carrier would subrogate against The Continental, so what we were doing was merely avoiding a lot of red tape and embarrassment for a good agent.

My first year in the field I was asked by one of my largest agents to help him back date coverage to cover a claim. I refused. He went around me to my superior who also refused. In the end, the agent cut back sharply on the business he placed through our company. In hindsight doing less business with an unscrupulous agent wasn’t a bad thing.

A few months later another agent asked me to fulfill the promise of an exclusive sales territory that my predecessor had “promised” to him. The agent was a bank president whose agency placed a great deal of crop/hail through our company. He wanted me to make him the only agent who could write crop/hail through us in his county. My predecessor had retired but stopped in our office quite often for coffee. He told me that not only had he not offered an exclusive, the subject had never come up.

I kick myself even to this day for not closing that agency for my company, because two years later that banker/agent handed us a $2 million loss under the bankers’ blanket bond. It seemed his dishonesty went beyond fabricating conversations.

Perhaps the first instance of corporate ethics that hit home for me was on the last day of our training. We were having a few congratulatory beers when one of the home office people asked me what I thought of the education manager. I can remember telling him that I thought the manager was quite sharp, maybe too sharp for the position he held. It was explained to me that he had recently been demoted from a fast track to the CEO office. His son had broken into a draft board and burned records. His corporate career was essentially over. I’ve often wondered about that home office decision.

Over the years I’ve seen dozens of occasions when ethics were challenged and found wanting. So much so that it appears that maybe we all should take a moment to think about how we make ethical determinations.

Years ago I was introduced to a process for determining whether or not a considered action passed the test of ethics.

  1. Define the problem. If you can’t reduce the problem to a one-sentence statement, perhaps it is more about unresolved personal issues than a real business problem.
  1. Consider alternatives. Once you have a comprehensive list, you might be able to eliminate those alternatives that present ethical problems immediately. Make sure your alternatives are legal and meet the standards and rules you work under.
  1. Establish a list of the stakeholders, who will be impacted by your actions.
  1. Determine how each stakeholder will be impacted by your action and assign a score for each stakeholder on a scale of one to ten with one being very poor and ten being excellent.
  1. If your average score is less than seven you need to consider other alternative actions.

If all else fails use the “mom” test. Many people say if you would not be embarrassed to have your mother read about your actions in the local paper, it probably is ethical.

James Holm


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