At age 45, Conrad realized that he did not know much about insurance, but
he did recognize that its complexities baffled and could easily complicate his
business and raise his costs. Moreover, any insurance-related oversight could
saddle him with uninsured losses and claims, destroying his profits.
Introducing Little Sister
Aggie, as an agent for Solid Insurance Company (SIC), handled all this potential
"insurance mess" for her brother by developing with SIC underwriters a fixed
set of policies, coverages, and coverage limits suited to the property, liability,
and business interruption exposures which typified any of Conrad's separate
electrical contracting jobs. The underwriters became familiar with the quality
of Conrad's work, and had faith in their agent, Aggie.
So, whenever Conrad won a new contract, he told Aggie about it, and she had
binding authority with SIC to issue an appropriate set of policies to cover
Conrad for the work covered by that contract. She billed Conrad's firm for the
appropriate premiums, and SIC received its premium income when Conrad paid,
which he always promptly did. These were separate policies, not a blanket or
"reporting-form" coverage arrangement, and Conrad knew he was properly insured
without being dependent on any insurance that the property owner or any other
primary contractor or subcontractor happened to carry.
Thus, with Aggie's help, Conrad felt his business was well insured, SIC earned
premium income, and Aggie got her regular commissions. So this was an ideal
insurance situation—good protection, no issues (ethical or otherwise), and all
parties benefit regardless of whether any covered losses occur.
Who Has a Problem?
But issues—important ethical issues—began to arise for Conrad, Aggie, and
SIC on a particular Friday, even though no accidental losses occurred. This
was a Friday at the end of a particularly busy month for Conrad. It was the
late afternoon of the Friday when Conrad realized he had once again forgotten
to tell Aggie about one of his contracting jobs. This one was a rather small
and easy kitchen rewiring and updating job one of his crews had just completed
for a church basement. The job had taken less than 2 weeks. In fact, Conrad's
crew had finished their work yesterday—Thursday afternoon. Nothing had gone
wrong—or in Conrad's mind, ever could go wrong—with this now-completed job.
No property damage, no lawsuits, no business interruption losses on this job,
Conrad thought, so why was there any need to even ask Aggie to get him any insurance
on it? This could save him some insurance premium dollars too.
But somehow Aggie had happened to see one of Conrad's company trucks parked
in front of this church. She was surprised because Conrad had never mentioned
dong any electrical work on this particular church. When she asked him about
it during their regular monthly family dinner that Saturday evening, Conrad
apologized to her for forgetting to tell her about this job. He then went on
to explain that the job was finished, and nothing had gone wrong. He prayed
that she would not ask about other jobs he may never have mentioned to her.
Over the past 4 years, there had been maybe 10 jobs that he had omitted mentioning,
and nothing had gone wrong on any of them.
"So tell me, little sister," Conrad asked Aggie, "can we just forget to tell
SIC about this church job now that it's over? That would lower my job costs,
and I'll make up your loss of commission on the insurance premium I would have
paid SIC by letting you use my electrical contractor's discount to buy that
big flat-screen TV you and your family have been eyeing."
She Solves this Problem
The instant Conrad called her "little sister," Aggie looked up warily from
her dinner plate. Since he was 5 years old and she 3, Aggie knew—but Conrad
apparently never ever realized—that he was not telling her the whole truth.
He usually told her a good portion of the truth, but never all of it. So "little
sister" stopped her in her tracks.
Aggie did not want to delve into every partial truth Conrad had ever told
her—after all she loved her brother, and she wanted him to succeed. But Conrad's
electrical business was her insurance business too, and she did not want "big
brother" to jeopardize both their careers. Still, she decided to focus only
on this church job, without delving into any other jobs he may never have mentioned
to her. Business is business, she knew; but family is family, she reasoned.
So, two questions about just this church kitchen job sprang into Aggie's
mind. First, would not telling SIC about Conrad's church kitchen makeover be
good risk management? No, she realized right
away—and for at least three reasons:
If an injury or property damage claim ever arose in the future about
this job, Conrad would have no liability insurance to provide the legal
defense he would need, even if Conrad's firm was completely without fault.
If SIC ever discovered that Conrad had not told them about this one job,
the underwriters would be wary of ever trusting either Conrad or Aggie again.
It was true that, since Conrad's coverages were written through a separate
set of policies for each job rather than under a unified reporting form
of insurance, Conrad's failing to tell Aggie, and thus SIC, about the church
job would not violate the terms of any insurance or other contract, not
technically. And the delay—forgetting to report until after the job was
finished—is a procedural error, easily corrected, especially since no insured
losses have yet occurred. But purposely failing to ever [EMPHASIS ITALICS]
tell Aggie and SIC about the job would have been a violation of the trust
that Aggie and SIC had placed in Conrad. For good risk management, as in
the rest of life, trust among people who believe in each other is almost
always more important than technicalities.
If he thought he could get away with doing so, Conrad would report (and
pay premiums for) the "dangerous" jobs more frequently and more fully than
for the ones he thought "safe." Aggie realized that she would not want Conrad,
or any other client, making judgments about which jobs or other loss exposures
were "safe" and which were "dangerous." Since the insurer's actuarial soundness
depends on covering a representative sample of all the exposures in a properly
rated collection of exposures, allowing Conrad to practice severe "adverse
selection" against the insurer. If he and other policyholders could do this,
they would be jeopardizing the very insurance on which they were relying
The second basic question that troubled Aggie was whether it would be ethical
for her to allow Conrad to fail to report his completed church project. Technically,
the answer was of course not. As an agent
of SIC, her first duty is to the insurer—a duty which came before any obligation
to the insured, even if this particular insured was her brother. As its agent,
Aggie would have breached her duty to SIC once she knew that Conrad had performed
a contracting job but she did not report it to SIC.
Aggie's failure in this case was only partially in her depriving SIC of the
premium income it would have earned had it insured Conrad for the church job.
Since there had been no insured event (at least not yet), one can argue that
Conrad's not telling Aggie and SIC about this job makes it all a "wash transaction."
SIC earned no premium from Conrad's church job, but it also faced no loss exposures
from that job. It's as if some contractor wholly unrelated to either Conrad
or SIC did the church job.
However, this line of reasoning would miss Aggie's real ethical failure if
she were now to say nothing to SIC. As mentioned above, if she remains silent,
and SIC one day learns the real truth, she jeopardizes the confidence she has
built with SIC with respect to all her clients. More immediately, her silence—effectively
hiding Conrad's original innocent forgetting to get insurance for the church
job—permits the resulting adverse selection against SIC go uncorrected.
Given her continuing duties to both SIC and Conrad, the ethically most appropriate
action for Aggie is to report Conrad's church job belatedly, to insure it as
she would have done had she known about it before the job began or while it
was in progress, and to bill Conrad for the usual premium. And Conrad should
pay the bill. In the long run, he is getting good insurance as part of good
risk management. After all, perhaps in the next few years, someone will suffer
an injury caused some as-yet-undiscovered flaw in the work Conrad's crew created
while rewiring the church kitchen. Who knows for sure? That’s why we manage
risk as best we can.
The same resolution—report the church job to SIC after Conrad has finished
his work and pay the full regular premium—would be appropriate if Aggie, instead
of being an agent for SIC, had been an insurance broker whose first legal duty
was to the insured, her brother Conrad. As a broker, Aggie's crucial duty to
Conrad would not have been to save him a few dollars of premium on a particular
job that he had overlooked reporting to his broker but, instead, to facilitate
insurance transactions for the benefit of all. This crucial duty rests uniformly
on all insurance professionals, tailored appropriately for their respective
roles in making insurance work to everyone's benefit.
Further Ethical Problems Remain
By letting Aggie resolve only this one church kitchen job—by not asking her
to worry about how many other times Conrad may not have told her about his other
jobs where he owed both Aggie and SIC the whole truth and the full premium for
the work his crews were doing—we have sidestepped a crucial ethical dilemma.
If business is business, and family is family, should those who market insurance
(whether as agents, brokers, or employees of direct writers)
ever market to their relatives? After all,
would there have even been an ethical problem had the insured not been the agent's
Let's take the question out of the insurance marketing context and into the
insurance claims arena. If Conrad had a plausibly valid first-party property
claim against SIC for damage to his electrical equipment, and if Conrad's other
sister (Pam) were employed by SIC as a claims adjuster, would it be appropriate
for Pam to adjust Conrad's claim? Is your answer regarding Pam ethically consistent
with your thoughts about Aggie in her dealings with Conrad? Would that answer
change if Pam and Conrad's relationship were contentious rather than loving?
It is these questions which illustrate so profoundly that ethics are rarely
black and white.