A previous article introduced the concept of utmost good faith as one of two pillars on which ethical principles in insurance may rest, the other pillar being "affected with a public interest." Utmost good faith addresses the relationship between the insured and the insurance company, a relationship that begins at the point of first contact between the two parties and is exhausted when the two terminate their contractual relationship.
When the expression "utmost good faith" appears in legal proceedings, adherence to the principle is usually a requirement for the insured, not the insurer. In that regard, the industry practice of applying the concept to all parties in the relationship sets an industry ethical principle, not a legal standard.
History of Political Reforms
"Affected with a public interest" deals with how the insurance industry relates to the broader society or the public. This notion surfaced during the Progressive Era, a period of great ferment in addressing the aftermath of what Mark Twain called the Gilded Age. Scholars generally agree that the era began in the 1890s and ended during the 1920s. During this time, reformers assailed corruption in big business, passed laws outlawing child labor, introduced worker safety standards, and expanded public high schools.
Political participation was broadened with the adoption of the initiative, referendum, and recall by state governments and constitutional amendments enabling women to vote (19th Amendment) and requiring direct election of US senators (17th Amendment) broadened participation in federal elections. Also, Congress passed the Federal Trade Commission Act, which became a model for protecting consumers against unfair and deceptive practices in trade and commerce. "Trust busting" entered the national lexicon as federal and state governments sought new ways to curb the anticompetitive effects of monopolies.
Insurance was among the areas of public policy affected by reforms. The Armstrong Committee addressed unfair and deceptive practices in life insurance, resulting in laws against rebating and twisting; fire insurance rates were highly controversial, so grassroots pressure demanded regulation of fire insurance rates. Texas and Kansas became the first two states to regulate the rates charged by fire insurers.1
Legal Response to Reforms
Strong resistance to rate regulation arose among insurers who subsequently sued to block rate regulation by the states, resulting in the US Supreme Court rendering an important insurance decision in a case from Kansas, German Alliance Ins. Co. v. Lewis, 233 U.S. 389 (1914).
Defendant Lewis was the Kansas insurance commissioner. As commissioner, Lewis determined that it was in the public interest to regulate the rates insurers charged for fire insurance. Please note the basis of the regulation: public interest. An insurance company, German Alliance, challenged the regulatory authority to regulate rates on several grounds, including the following.
The business of fire insurance is a private business, and the public has no legal right to demand its service.
Rate regulation is not within the police power of the state.
Rate regulation is the same as taking private property for public use.
Rate regulation is taking private property in violation of the due process clause of the 14th Amendment.
Associate Justice Joseph McKenna wrote the majority opinion rejecting German Alliance's defenses. In upholding the Kansas commissioner's authority, he introduced the public interest principle into the business of insurance, using the following language.
[W]hen private property is affected with a public interest it ceases to be juris private only and it becomes clothed with a public interest when used in a manner to make it of public consequence, and affect the community at large; and, so using it, the owner grants to the public an interest in that use, and must submit to be controlled by the public for the common good....
Continuing, he wrote:
Contracts of insurance, therefore, have greater public consequence than contracts between individuals to do or not do a particular thing whose effect stops with the individual. To the insured, insurance is an asset, a basis of credit. It is practically a necessity to business activity and enterprise. It is, therefore, essentially different from ordinary commercial transactions, and … is of the greatest public concern.Insurance is affected with a public interest. (Emphasis added.)
A later opinion would determine that states could also regulate commissions earned by insurance agents. See O'Gorman and Young, Inc. v. Hartford Fire Ins. Co., 282 U.S. 251 (1931).
Roots of the Public Interest Standard
In characterizing insurance as a business affected with a public interest, the justices reached back to a time when capitalism was in its infancy and all business was considered beholden to the public. Sir Matthew Hale, Britain's chief justice of the Restoration, appears to have made first official mention of the idea in 1676.
After decades of ignoring and wrangling over what our judiciary meant by adopting the language, in 1934 the US Supreme Court essentially held that what Lord Hale really meant was that "affected with a public interest" is equivalent to saying "subject to the use of the police power of the state." See Nebbia v. New York, 291 U.S. 502 (1934).
"Police power" is the authority of government to regulate behavior and maintain order for the betterment of the health, safety, morals, and general welfare of the people. It is one of the broadest sources of power relied upon government. Thus, other federal courts later concluded that the insurance industry "offers services of a quasi-public nature."
Amadeo v. Principal Mut. Life Ins. Co., 290 F.3d 1152 (9th Cir. 2002)
It was further established that "[n]either the company nor a policyholder has the inviolate rights that characterize private contracts." Carpenter v. Pacific Mut. Life Ins. Co., 10 Cal. 2d 307 (1937), also cited in 20th Century Ins. Co. v. Superior Court of Los Angeles County, 109 Cal Rptr.2d 611 (2001).
There are additional examples of how the public interest standard expanded far beyond mere price regulation. For example, a Washington state statute says:
The business of insurance is one affected by the public interest, requiring that all persons be actuated by good faith, abstain from deception, and practice honesty and equity in all insurance matters.
RCW 48.01.030—Washington Code
The Idaho Insurance Code uses similar language, stating:
The business of insurance is one affected by the public interest, requiring that all persons be actuated by good faith, abstain from deception, and practice honesty and equity in all insurance matters. Upon the insurer, the insured, and their representatives, and all concerned in insurance transactions, rests the duty of preserving the integrity of insurance.
Idaho Code § 41–113
The Texas Supreme Court says: "[W]e have long-recognized that the insurance industry is peculiarly affected with the public interest." Universe Life Ins. Co. v. Giles, 950 S.W.2d 48 (Tex. 1997).
Georgia's Supreme Court cited German Alliance's holding that "[t]he business of insurance is one so clothed with a public interest, affecting the community at large, as to render it peculiarly subject to proper governmental regulation" in a 1939 case, Cooper Co. of Gainesville v. State, 187 Ga 497 (1939), a case involving an unauthorized insurer conducting business in the state.
Within the insurance industry, Code of Ethics, Canon 1, of the Chartered Property Casualty Underwriter (CPCU) provides that "[i]nsurance professionals should endeavor to place the public interest above their own." Part of the Rule of Conduct accompanying the Canon is the following directive:
The ethical obligation to place the public interest above personal interests or financial gain extends to every CPCU, regardless of whether the CPCU's occupational position requires direct contact with actual or prospective insurance consumers.2
When governments have a rational basis for acting, and the actions are not unfairly discriminatory, arbitrary, or capricious, courts most likely will look favorably upon the action. In short, Amendments 5 and 14 to the US Constitution set procedural safeguards, not subject matter restrictions on government regulation of insurance. Experience and a significant body of literature suggest that applying the public interest standard as a constitutional law principle may be less difficult than applying public interest as either a political or philosophical guide. However, public interest and utmost good faith standards provide a framework for housing basic ethical standards for the business of insurance and will be the subject of future commentaries.
1 H. Roger Grant, Insurance Reform: Consumer Action in the Progressive Era (Ames, Iowa: University of Iowa Press, 1979); Richard Hofstadter, The Age of Reform (New York: A.A. Knopf, 1956) is a Pulitzer Prize-winning classic on the period.
2 The Institutes, The Canons, Rules, and Guidelines of the CPCU Code of Professional Conduct (Malvern, Pennsylvania: The Institutes, 2016), page 5.
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