Expert Commentary

Ethics and the Insurance Agent: "C'mon, Little Sister!"

As the day-to-day manager and sole owner of an electrical-contracting firm, which usually had perhaps a dozen crews out on jobs at any given time, Conrad felt he was indeed lucky that his younger sister, Aggie, worked for an independent insurance agency.

February 2008

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:

  1. 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.

  2. 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.

  3. 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 for security.

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 brother?

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.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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