Umbrella Insurance - CheapCE

Table of Contents

3-3 Primary Underlying Policies Indemnification and Defense

Actual Claims Result From Negligence

3-2 General Liability Forms

Third-Party Forms

3-1When Is Umbrella Insurance Necessary?Chapter 3

2-9 A Reasonable Man

Negligence

2-8 Strict Liability

Absolute Liability

Protective Acts

2-7 Consent

Mistakes

2-6 Privilege

Conversion

Trespass

2-5 Intentional Interference With Property

False Imprisonment

Defamation

2-4 Mental Distress

2-3 Assault

Battery

Intentional Interference With The Person

2-2 Intentional Torts

Torts

Liability Insurance For liability Exposures

2-1How Does Umbrella Insurance Fit In With General Liability Claims?Chapter 2

Price Variances

1-2 Liability Dollar Figures

Umbrella Insurance Defined

Umbrella Policy Questions

1-1What Is Umbrella Insurance?Chapter 1

Umbrella Insurance Table of Contents

Table Of Contents -

United Insurance Educators, Inc.

Characteristics of Personal Umbrella Policies

Primary Purpose

4-9 Catastrophic Coverage

No Standard Form

4-8 The Liability Policy

A Legal Reason

4-7 Legal Competence

4-6 Premium Must Be Paid

Offer & Acceptance

4-5 Legal Contracts

Exclusions In Coverage

Excess Liability Versus Excess Coverage

4-4 Excess Personal Liability Coverage

Comprehensive Ceiling Coverage

4-3 Bumbershoot

An Indemnity Policy (Chart)

4-2 Million Dollar Limits

Excess in 3 Ways

Excess Liability Insurance

4-1Umbrella Policy CharacteristicsChapter 4

3-11 Excess Coverage

3-10 Umbrella Liability Insurance

Jury Awards

Determining Monetary Damages

3-9 Absolute Liability

Shared Blame - Injured Party Preference

3-8 Injury Avoidance

Dual Risk Contribution

Daily Risks Of Life

3-7 Relaxed Standards For Evidence of Negligence

Successful Liability Claims

The Law of Negligence

3-6 Paying For A Legal Defense

News Exposure

Ownership & liability

3-5 Public Opinion

Legal Liability Must Exist

3-4 Terms: Coverage & Liability


Table Of Contents -


"Ethics" - From Ethos Meaning Character

6-3 Defining Ethics

Controlling Behavior

6-2 Determining Our Own Life Goals

Everyone Has A Code Of Ethics

6-1Agent EthicsChapter 6

Premium Rates

5-15 Underwriting & Production

Line Limits

5-14 Retention

5-13 Unique Aspects of Post-Selection

5-12 Post-Selection

Substandard Risk Applicant

Preferred Risk Applicant

5-11 Standard Risk Applicant

Accepted Or Rejected

5-10 Information & The Inspection Company

5-8 Information: The Agent's Role

Actual Underwriting Processes:

Line Underwriters

5-7 Staff Underwriters

5-6 The Agent As A Preliminary Underwriter

Recognizing The Underwriters

5-5 Exposure Distribution

Subsidizing Rates

5-4 Actuarial Equity

Pricing Specific Contract Risks

5-3 Risk Classifications

Adverse Selection

5-2 Underwriting Based On Exposures & Risks

Books of Business (Blocks of Business)

Assessing Policy Risks

5-1Underwriting The Umbrella PolicyChapter 5

4-14 A Risk Management Field

4-13 Conditions Miscellaneous Provisions

4-12 Insuring Agreements Exclusions

4-11 Policy Layout Declarations Definitions


Table Of Contents -


6-42 Can Ethics Be A Part Of Promotional Selling?

6-40 Psychology Or Manipulation?

6-39 Keeping Our Priorities In View

6-38 A Survey Of CEOs

6-37 Changing Our Views

6-36 "Levels" of Ethics

6-35 Standing Up For What We Believe

Forming Who We Are

6-34 It's Easier To Say It Than It Is To Actually Do It

6-31 Man's Nature

What Does Ethics In Action Mean?

6-30 Objectivist Ethics As A Theory

Thinking Individuals Will Always Be Top Performers

Objectivist Ethics

6-29 Determining Identity

Ethical Responsibility A Matter Of Daily Choices

Reactions To Our Actions

6-27 Question #4 - What Are Our Responsibilities To Other Moral Persons?

6-26 Back To The Question of "Why?"

6-23 Who Do You Choose To Work For?

6-22 Understanding The "Why" Of Your Profession

6-21 Competency

Addressing Three Questions

Religion - A Common Component

6-20 Believing In Right And Wrong

6-19 Question #3 - What Does It Take To Be A Moral Person?

6-17 Question #2 - What Is The Scope Of Ethics?

6-16 Day-To-Day Heroism

Ethical Egoism

6-15 Egoists (Not Egotists)

6-13 Question #1 - Is It Possible To Teach Ethical Behavior?

6-13 Facing Ethical Issues Daily

6-12 4 Basic Issues

6-11 The Formation of Values

Behavior Examples

6-5 Continually Learning

Religion & Ethics

6-4 Imitating Other's Behavior

6-3 Moral Excellence


Table Of Contents -


7-1 - 7-6IndexChapter 7

Company Rating Services

Assimilating The Information Gathered

6-54 Insurance Company Financial Statements

Gathering Company Information

6-53 3 Reasons To Practice Due Diligence

6-52 Agent Representation

What Does Due Diligence Mean?

Due Diligence

6-50 Implied Statements

6-49 Where Did The Dishonest Reputation For Salespeople Come From?

Love Envieth Not

6-48 Repeating Mistakes Through Lack Of Knowledge

6-47 Can Honesty Always Be Considered?

6-44 Sympathy Or Empathy?

6-43 Ethical Conduct Is Hard Work

United Insurance Educators, Inc.8213 - 352nd Street East

Eatonville, Washington 983281-(800) 735-1155


Table Of Contents -


Consumers have many choices of insurance types, coming undera variety of names. Little wonder that they often seem confusedor misinformed.

Umbrella PolicyQuestions:

There are several questions that could be asked:

What is umbrella insurance?How Does Umbrella Insurance Fit In With General Liability

Claims?When Is Umbrella Insurance Necessary?

What Are Umbrella Policy Characteristics?How Are Umbrella Policies Underwritten?

As this course progresses there will undoubtedly be additionalquestions that could have been added on an individual basis. Aswith all insurance types, the first step for the insurance agent isunderstanding the policies personally; only then may he or shefully explain it to the consumer. Greater understanding of policytypes also means fuller service to the general consumer because theagent will know what is needed for full coverage.

Let's address the first question: What is umbrella insurance?Jane Bryant Quinn, noted financial author of Making the Most ofYour Money, defines umbrella insurance in the following way:"An umbrella policy covers liability judgments that exceed thelimits of your auto and homeowner's policies." Of course theremust be an umbrella policy purchased and in place for this tohappen. Like all liability insurance types, the policy may not bepurchased to cover an incident that has already occurred.

Umbrella InsuranceDefined:

"An umbrella policy covers liability judgmentsthat exceed the limits of your auto and

homeowner's policies."

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Chapter 1 - Page 1


Chapter 1

What Is Umbrella Insurance?

Certainly there are variations, but typically the consumer carries$300,000 worth of liability on their basic policies. After that,umbrella policies pick up liability claims up to $1 million ormore. Again, figures can vary, but these represent the normalsituation.

Liability DollarFigures:

Prices vary, too. Premiums tend to be based on the number ofvehicles that are owned. Costs will be somewhere between $100and $500 per year depending upon multiple factors. Some compa-nies may even include a $1 million liability option into thestandard auto and homeowner's policies. If this is the case, theconsumer still must elect to purchase the option in order for it tobe included.

Price Variances:

Although there are always exceptions possible, umbrella coveragewill defend the purchaser not only against claims of damage orpersonal injury, but also against libel (except for some professionsof a public nature), slander, false arrest, invasion of privacy, andsimilar charges that could cause personal harm.

As with all insurance products, prices should be compared.Usually price comparison is the easiest way to save insurancedollars. Insurance agents often wrongly assume that price compari-sons are only for consumers. This attitude is unfortunate. Evenagents need to constantly compare prices. Every other industrydoes so as a means of staying competitive and insurance should notbe any different. If the agent's product does cost more the agentshould try to find out why; are there added benefits or security inthe policy? If the product is simply higher for no apparent reason,the agent may want to represent a different product that is more inline with comparison prices.

According to author Sylvia Porter, some insurers charge up to 50percent more than others. Of course, this is not publicized! Thecustomers simply do not realize it and maybe their agents are notaware of it either.

Why would an agent want to sell a lower priced product? Thereason is one of logic: happy clients tell their friends. When anagent is able to save a client money, they tell others, which in turnbrings the agent additional business.

Many types of products are not price advertised and umbrellainsurance tends to be one of them. No single company always has


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the best rates, so the agent will need to invest some time initially,but it is time well spent.

Few consumers tend to shop around. They would rather dependupon their agent to do it for them. Many agents prefer to carrymore than one product. In this way they can demonstrate to theiragent that they did do some comparison shopping.

Whatever product or products the agent chooses to carry, it isimportant that financial strength is present in the issuing company.Professionals recommend an A company rating or better.


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It is logical that liability insurance would not exist if there wereno liability exposures. Liability happens under a variety ofcircumstances, from accidental deaths, auto accidents, civil suitsand a multitude of other incidents. Liability exposures oftenresult in large losses. Punitive damages tend to be very large.They are awards to plaintiffs in excess of full compensation forinjuries sustained (called compensatory damages) and are made:

Liability InsuranceFor LiabilityExposures:

1. to punish the defendant and 2. discourage others from engaging in similar conduct.

While some types of liability claims can be foreseen and avoided,others are more difficult to recognize. This can especially be truefor businesses because they are more likely to be targeted thangeneral citizens.

The legal basis for liability claims are torts and contracts. Theseare not mutually exclusive in that a person claiming to have beeninjured or wronged in some way may seek action either under atort or a contract, or in some jurisdictions, under both.

Torts:

The word "tort" comes from the past participle of the Latin verbtorquere. It means "to twist", which is from the same root as theword "torture." Funk & Wagnalls standard desk dictionary(volume 2) defines tort in the following method: "n. Law Anyprivate or civil wrong by act or omission for which a civil suit canbe brought, but not including breach of contract." Corley andRobert define it as "A wrongful act committed by one personagainst another person or his property. It is the breach of a legalduty imposed by law other than by contract." Both are saying a tortis a wrong (other than breach of contract) for which a civil actioncan be brought. Most of these claims result from negligence, butother grounds are also possible:

1. intentional interference,

Umbrella InsuranceChapter 2 How Does Umbrella Insurance Fit in With General Liability

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Chapter 2

How Does Umbrella InsuranceFit In With General Liability Claims?

2. absolute liability, and3. strict liability.

Sometimes acts are intentional, although the resulting conse-quences may not be. When an intentional act causes injury toanother, that act is deemed an intentional tort, even though theintent may not have been to cause injury. Even acts that werethought to be beneficial may result in unintentional harm toothers.

Intentional Torts:

Intentional interference with the person:

Intentional torts may be classified as1. intentional interference with the person, or2. intentional interference with property.

IntentionalInterferenceWith ThePerson:

Battery, assault, infliction of mental and emotional disturbance,defamation and false imprisonment are all examples of the firsttype, intentional interference with the person. The second type willbe discussed later in this chapter.

Battery is the intentional, unpermitted and unprivileged contact.Actual contact must be made in order for battery to exist. Itincludes not only the person themselves, but also with anythingconnected or associated with them, such as the clothes they arewearing, the cars they are driving or the packages they arecarrying. Therefore, if the person has packages knocked from theirarms, or their jacket tugged, it can be considered battery. Actualharm is not required for a charge of battery to be legally upheld. Infact, it is not even necessary for hostility to be involved. Forexample, a person is shopping downtown, carrying packages. Aman approaches asking for spare change. The shopper continueson attempting to ignore the man. The beggar then reaches out andgrasps the shopper's arm, though still asking politely (withoutanger or harsh words) for change. The moment the man grabbedthe shopper's arm, he could be charged with battery. Only theabsence of expressed or implied consent of the shopper is neces-sary to constitute battery.

Battery:


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Only the absence of expressed or implied consentof the shopper is necessary to constitute battery.

Some personal contact, however unintentional, occurs every day.Most people would not charge battery. People are bumped byother shoppers, sometimes even scattering their packages. Evenso, battery is not implied. Why do battery charges get filed?Usually because the person feels intimidated in some way. Most ofus assume that some unintentional contact (even undesired contact)with others is inevitable in daily life. We may not like it whenanother steps on our foot, but we do not file battery charges againstthem; it takes a feeling of intimidation.

Assault is an act of violence or the physical threat of violence. Itis different from battery because assault requires apprehensionover threatened contact, whereas battery requires actual physicalcontact. It is not necessary for the aggressor to actually intend tocarry out an assault; a belief by the threatened person that thethreat may materialize is enough cause for action. For example, ifa weapon is pointed at a person, even though no physical action isactually taken, assault has still occurred, as long as it producedapprehension. On the other hand, if the person was not aware ofthe intimidation, no assault occurred because no apprehensionoccurred. Verbal insults do not necessarily mean that assault isinvolved. If verbal insults are accompanied by threateninggestures, however, that is an entirely different matter.

Assault:

Assault is different from battery because assaultrequires apprehension over threatened contact,

whereas battery requires actual physical contact.

We often hear of "assault and battery charges." Assault andbattery do seem to go together. That is because first the aggressorintimidates causing apprehension (assault), and then physicalcontact is made, resulting in battery.


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Liability can arise from intentional acts that cause anotherperson to experience mental or emotional distress. This distressmust be proven to be severe and extreme. Insults or abuses thatsimply cause anxiety do not qualify. Often the abused personmust actually experience physical illness which was caused the byemotional or mental distress. This is most often seen in claimsfrom debtors who file claims against creditors for harassingcollection actions.

Mental Distress:

Mental distress claims often arise from debtorswho file such claims against creditors for

harassing collection actions.

Defamation involves injury to one's reputation. Defamatory actsmay be either libel or slander. Historically, libel is writtendefamation while slander is spoken defamation. Today, withE-Mail, fax machines and other forms of communication, thesedistinctions are no longer clear. Therefore, the trend has been tobase the differences on the performance of the form of defamationor on its potential harm with the more permanent or harmfulforms considered to be libelous.

Defamation:

In order to be legally viable, defamatory statements or writtenforms must be intentionally or negligently communicated tosomeone other than the defamed party. It is not illegal to state orwrite defamatory statements directly to the person. The defamedperson must prove that (1) the action was intentional or negligentand (2) the defamatory meaning is reasonably understood byothers.

Libel and slander laws vary widely among jurisdictions. Amongthese jurisdictions there is inconsistency, so it is important forthose who feel they have been wronged to seek the correct counselfor the area involved.

False Imprisonment has been used far more than most peoplerealize. False imprisonment is the intentional restraint ofanother's freedom of movement. Years ago, this was used to freeour nation's so-called mentally ill from undesiredinstitutionalization. It is now much harder to commit those we

False Imprisonment:


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feel are mentally incompetent because of false imprisonmentlaws.

For a false imprisonment liability claim to occur, the imprison-ment must be total, even if it happens to be brief. It must be anintentional act, although not necessarily malicious in nature. Therestraint need not be physical, but it must contain threats of physi-calness or force which would intimidate the person intocompliance.

Sometimes false imprisonment is confused with malicious prose-cution, which is the malicious institution of groundless criminalproceedings against another person.

This has become widespread and often goes unpunished becausethe guilty party is not known. There are multiple types ofinterference:

IntentionalInterferenceWith Property:

Trespass involves real property rather than personal property.Real property is land and the items attached to it. Trespass is thewrongful entry upon the land of another or the failure to removeproperty from another's land when an obligation exists to do so.Trespass includes entry of the area above and below the land aswell as the surface of the land. In other words, when a trespassorder exists, it is illegal to fly over the land in a plane or balloonas well walk upon the actual surface. It would also be illegal todig or otherwise enter below the surface.

Trespass:

It is not necessary to establish that any damage to the propertyhappened for a liability claim to be filed. Trespass exists bymerely entering or walking into the area forbidden. The originaltrespass order, however, probably came about due to damage orinterference of some kind.

Conversion is the intentional interference with the personalproperty of others. Personal property is anything capable ofbeing owned that is not real property. Personal property wouldinclude everything that is not land or items permanently attachedto land, such as crops and houses. For conversion to exist, theremust be action which was designed to deprive the owner of theproperty from use and possession to such a degree that a forcedsale of the property existed.

Conversion:


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For conversion to exist, there must be actionwhich deprived the owner of property use andpossession to such a degree that a forced saleof the property to the converter is justified.

Conversion is accomplished by:

1. taking possession to exercise control which is adverse to theowner,

2. depriving the owner of control through an unauthorizedtransfer,

3. refusing to surrender goods to the one who has a legal right tothem,

4. misusing an owner's possessions without authorization (such asdriving a car left at a parking lot or business), and

5. intentional damage to, destruction of, or alteration of property.This could include changing the appearance of something withthe intent of confiscating the property.

The point of tort law dealing with conversion is to give thewronged person the ability to recover the property or its value ofwhich they were wrongly deprived.

Some activities do not bring about liability. A person will not beheld liable for an intentional tort if the conduct is consid-ered privileged. For this to be the case, the person must haveacted in a manner which served public interest. Of course, not allwill agree on this. Whether or not the action is considered privi-leged will depend upon the circumstances involved and theattitude of the court. There is no assurance that conduct will beconsidered privileged in most cases. Common situations that aredeemed privileged by the courts include mistakes, consent andprotective acts.

Privilege:

Even though an act may be a mistake, whether or not it is privi-leged will depend upon specific circumstances; many "mistakes"are not exempt from liability claims. A mistake that is oftenconsidered privileged involves acts causing damage that were

Mistakes:


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intended to protect another's rights (even if the danger is mistakenand did not actually exist). When consent exists and damage results, this is often consid-ered privileged. Therefore, no liability claim would exist. Ifsomeone has given permission to another to perform a specifictask and damage results, liability may not exist, due to the givenconsent.

Consent:

When action or reasonable force is necessary to protect anotherfrom harm, privilege usually exists. In fact, a person is typicallyprivileged to use reasonable force to prevent interference withone's own property or person, as well as others.

Protective Acts:

It is very important to point out that

reasonable force is allowable;what is reasonable often has to be

determined by the courts.

It is very important to point out that reasonable force isallowable; what is reasonable often has to be determined by thecourts. Killing someone stealing is not necessarily reasonableforce. Killing someone who was raping another person would bereasonable, while killing someone for stealing a bicycle wouldprobably not be considered reasonable force.

There are no guarantees when it comes to privilege. Courts areoften not consistent in their rulings, although we do have anappeals process when we think the courts are wrong. It would befoolish to act simply because we felt the action would beprivileged. Most acts ruled privileged do depend upon somemeasure of common sense, however.

There are different types of liability. One type is absoluteliability.

Absolute liability is sometimes known as Liability WithoutFault. It is imposed where public policy demands that a person beheld liable for specific acts, even if they were neither intentionallynor negligently inflicted. Sometimes people actually make thistype of claim more likely. One example of this are those who post

Absolute Liability:


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signs such as "Danger-Bad Dog." This implies prior knowledge ofa dangerous situation.

Absolute liability can result from many different situations. Thismight include such things as damage from earth vibrations as aresult of blasting operations, aircraft use, storage of dangerousmaterials and potentially dangerous animals. Keeping wildanimals imposes absolute liability even if their keepers havedomesticated them. Basically, the rationale of absolute liability isthat in ultra dangerous activities where losses are inevitable atsome point, the loss is shifted to those best able to control it.

Absolute liability, like other types of liability, will vary with thelocation. There may always be local modification or interpretation.

Strict liability is typically applied to product liability, rather thanpersonal acts. It is felt that manufacturers and merchandisers ofgoods are held liable for injuries caused by the defective productsthey produce. This could be true even if the manufacturer had nointentional negligence or fault. The claimant must prove that theproduct was defective and that the defect produced unreasonabledanger. Manufacturers may not be liable if the product wasexperimental or for products that are unavoidably unsafe. Manysports products are considered unavoidably unsafe, for example.For a claim to be valid, the product must have been used asintended. This is an important point, since many products wouldbecome unsafe if used outside of their intended parameters.

Strict Liability:

Most policyholders are aware of negligence claims and this iswhere insurance agents are most likely to become involved whenselling products. Everyone is exposed to loss from damageclaims involving allegations of negligence. Law requires allpersons to use care in their actions to prevent negligence. If aperson fails to perform as a reasonable and prudent person wouldunder similar circumstances, a negligence claim can occur ifsomeone is injured or property is damaged.

Negligence:

Obviously, an injury or loss must occur before a claim can befiled. While this might seem like an obvious statement, there havebeen misunderstandings. Even if a person is acting recklessly, ifno injury or loss results, there can be no claim filed.

It should also be pointed out that negligence claims are alwaysunintentional. Intentional acts would fall under battery or assault.Negligence can be due to carelessness, thoughtlessness, forgetful-ness, bad judgment, or stupidity. It can even result from a bad


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temper. Negligence never involves intent, even if bad temper isinvolved. A negligent person has no desire to cause harm, butbecause of some type of negligent behavior, he or she does so.

We often hear, in the insurance industry, the term "the prudentand reasonable man" rule. This is the standard used for determin-ing negligence claims. It was established by the Common Law ofEngland. Although they never talk of a "reasonable woman", theintent is to cover both equally. The assumption is that the term"man" covers the human race as a whole.

A Reasonable Man:

A reasonable man is assumed to have theminimum perception, memory, experience and

information common to the community in general.

A reasonable man is assumed to have the minimum perception,memory, experience and information common to the community ingeneral. He is considered to have normal intelligence and mentalcapacity. Therefore, this definition would exclude the legallyinsane, children not of legal age, and those who are senile or havesome other mental impairment. When it involves a trade or profes-sion, such as an insurance agent, they are also expected to havecorresponding knowledge.


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As the last chapter stated, the legal basis for liability claims comefrom tort law and contractual relationships. Like all liability insur-ances, umbrella insurance follows certain procedures. Possiblelosses are the costs of defense against lawsuits alleging liabilityand the damages which must be paid when the defense fails.

The role of insurance is to prevent the lossesfrom falling on the insured. The loss is trans-ferred to another entity; in this case, the insur-ance company. Since the contract betweenthe insured and the insurance companybenefits a third party, liability insurance isoften referred to as third-party forms. Mostpolicies pay claims to the third party directly,rather than releasing the funds to the insured.

Third-Party Forms:

Some claims may occur due to intentional action or even criminalaction on the part of the insured. In such a case, the insurancecompany is seldom liable, even though they may hold a contractwith the insured. In fact, the responsible party may be subject tocriminal proceedings as well as suit under civil law. The differ-ence between the two has to do with offenses committed against anindividual and those committed against the state. With civilclaims, the offender is not prosecuted unless such prosecution isinitiated by the offended party, whereas under criminal offenses,prosecution is brought about by some aspect of our society todiscourage similar conduct. In this case, the aspect of society maywell be the insuring company who issued the policy.

The insurance company's obligation to pay a claim would notextend to jail time or related fines from intentional acts. Theinsurer's obligations only extend to the insured's obligations undercivil law (those proceedings initiated by the injured party). Directbodily injuries committed intentionally by or at the direction of the

Umbrella InsuranceChapter 3 When Is Umbrella Insurance

Necessary?

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Chapter 3

When Is Umbrella Insurance Necessary?

insured would not be covered, but other than such intentional acts,civil liability resulting from criminal law violation would usuallybe covered by the policy.

There are, of course, different types of liabil-ity forms. The general liability insuranceprogram is similar to many fire and inlandmarine programs and multi-line forms (suchas homeowners insurance). Standard policiesinsert appropriate forms, which outline thecommon provisions, conditions and defini-tions which would apply to all policies underthe program. Special aspects are appliedthereafter, as policies are applied for.

General LiabilityForms:

As we know, everyone is exposed to some amount of liability, nomatter how careful they think they are. The law requires people tobehave reasonably, under the Prudent Man rule (doing what aprudent man would do). When they do not act reasonably, theymay be held legally liable to pay damages to those injured eitherphysically or materially. Some negligence cannot be foreseen, soeven a prudent man can experience liability losses.

Liability comes from a number of different areas. Damages to aperson or property can happen due to business activities, recrea-tional activities or personal activities. Some of the largest liabilityclaims have resulted from the policyholder entertaining guests attheir home or place of business or when permitting others to usetheir property in some way.

Actual claims come about as the result ofnegligence in some form. We have all heardof the salesperson who falls on a child's toyand sues the resident (whether renting orbuying) for the resulting medical bills.Successful liability claims prove negligence insome way, whether by leaving a roller-skateon the sidewalk, allowing a pet dog to bite avisitor, or committing some overt action thatcauses harm.

Actual ClaimsResult FromNegligence:

Sometimes liability results not from an overt action, but the lackof action. Failing to pick up the roller-skate would be an exampleof this. The renter or homeowner failed to pick up the roller-skateand this lack of action caused the harm. A dog that is not fenced inand bites someone means the owner failed to take necessary actionto prevent the harm that resulted. In all cases, the insured is


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expected to do what a prudent man would do to prevent harm to aperson or property.

Liability awards often tend to be much higher than the actualdollar loss. The amount of damages awarded will depend on thepreconceptions and bias of the jury. Therefore, the type of loss andthe circumstances under which it occurred often affects the amountof the award. Since the general person could not pay for largeliability losses, they transfer the risk to an insurance companythrough the policy purchased.

Umbrella insurance takes over after otherpolicies or the self-insured person has alreadypaid some of the losses. Typically there aretwo underlying insurances, which are usuallyreferred to as the primary policies. Thosetwo are homeowners insurance and personalautomobile policies. These two policiespromise the insured protection of indemnifi-cation and defense.

Primary UnderlyingPolicies:

� Indemnification means the insurance company pays for claimswhich the policyholder is legally liable for (if not legally liable,the insurance company will not pay anything) which haveresulted from the policy's covered perils, to the limit of liabilityamounts which have been purchased. In other words, if theinsured purchased $25,000 of protection per occurrence, even ifthe claim amount is $40,000, only the $25,000 will be paid.Coverage will usually apply for claims resulting from activitieson the insured's property, as a result of the insured's actions oras a result of the actions of an insured's home employee, suchas a cook, cleaning person, or babysitter.

� Defense means that the insurance company who issued thepolicy must defend or settle any covered claim or lawsuit that isbrought against the insured for property damage or bodilyinjury. There is often inadequate coverage purchased fordefense. Once the policy limit purchased has been reached, thepolicyholder must cover any additional legal fees themselves.Legal fees are not limited to an attorney; they can also includeinvestigation and negotiation of claims. Because a legaldefense can easily eat up the typical $100,000 of purchasedcoverage, suits are often settled out of court, even though theinsured may not feel they are at fault.


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There are two terms that need to be under-stood in liability claims: coverage andliability. The word coverage refers to thecontractual obligation of the insurancecompany. It is the amount the companyagrees to pay to indemnify the insured forclaims brought against them, which they arelegally liable for. Liability refers to the legalresponsibility of the policyholder to otherpersons for damage done to them physicallyor materially. This is important tounderstand, because a person may be liablefor a claim, but not necessarily have coveragefor it, under the terms of their policy.

Terms:Coverage & Liability:

Regarding liability and coverage, the reverse can also occur. Apolicyholder may have coverage for an occurrence, but not belegally liable. Why would this be an issue? Say, for example, thatgood, old Uncle Charlie drinks too much. While intoxicated, hefalls on the road in front of his nephew's home. Charlie was notactually on the nephews property, but even if he were, the nephewplayed no part in the fall. There was no demonstrable negligenceon the part of the nephew; all negligence was with Uncle Charlie.

Even though the nephew has no legal liabil-ity, he feels sorry for Uncle Charlie, so heturns the claim in to his insurance company.Although he has coverage under the liabilityterms of his policy, there is no legal liability.Therefore, the nephew's policy will not payfor Uncle Charlie's medical bills, even if thepolicyholder wants the policy to do so.

Legal LiabilityMust Exist:

Sometimes a policyholder may feel responsible for damage doneto another or their property. However, if no legal liability exists,the policy will not pay. Liability policies pay only when legalliability exists.

Legal responsibility also does not hinge on insurance coverage.Whether or not one is covered for a legal liability by an insurancepolicy has no bearing on what may be required of the individual. Iflegal liability exists, the individual is responsible - with or withoutinsurance coverage.

Insureds can be found responsible for a loss, even when no appar-ent liability seems to be present. This is why so many cases end up


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in court - there is disagreement over who is liable. Usually, thereare three elements that will make the determining decision: thepublic's attitude towards the claim, the application of the laws ofnegligence in any given state, and the jury's (if applicable) opinionabout damage awards.

Public opinion exists on every subject.These opinions are often what laws areformed from. For example, the public thinksit is wrong for oil tankers to allow oil spills,so public opinion and law holds them respon-sible. This is simplistic, but basically it ishow society's views become law.

Public Opinion:

Sometimes people assume that not owninganything removes the need for liability insur-ance. What they fail to see is that liabilityjudgments do not consider personal owner-ship. Whether or not one owns anythingsubstantial has nothing to do with liabilitylawsuits. Where negligence exists, lawsuitswill follow. It is ironic that public opinionconsiders those with this attitude to beespecially negligent. In fact, such attitudescan often weigh heavily in favor of the injuredparty because it is felt that lack of coverage isan element of negligent behavior.

Ownership& Liability:

Besides lack of liability insurance coverage, other things will alsoaffect society's view of liability claims. Current events oftentrigger higher claim awards because juries are more aware ofparticular circumstances or views. There is no maximum monetarylimit for liability losses and no person is immune from lawsuits, nomatter how careful they try to be.

The news exposure given large liabilityawards has seemed to encourage lawsuits.More claims than ever before are being filed.There has been talk of limiting the amountthat attorneys can collect, even on successfulclaims, as a means of limiting frivolous orexcessive lawsuits against others. Certainly,attorneys would fight any such legislation.With the expectation of large rewards,lawsuits are filed even when the dispute couldhave easily been settled between the two

News Exposure:


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parties. Jury awards in the millions of dollarsare now commonplace, where once it was ararity. Defendants are finding themselvesloosing everything they own to large liabilityawards.

When judgments are brought against a party, they do not onlyreflect what is currently owned. They also obligate the defendantto pay from whatever resources they may have or acquire in thefuture. This includes income as well as assets. Many defendantsfind themselves forced into bankruptcy as a result of successfulliability claims.

Even if the individual feels they will be ableto prove their innocence, the costs of a legaldefense can be staggering. Even afterwinning the case, these individuals may faceyears of paying off legal fees and investigativefees, as well as court costs. Winning does notnecessarily mean the other party will be liablefor legal fees. Often they are not.

Paying For ALegal Defense:

It is probably easier to maintain high insur-ance limits, such as an umbrella policy, thanto leave oneself unprotected. Certainly, noone wants to be involved in litigation involv-ing a negligence claim, but it happens to themost careful of people. When a person failsto meet certain legal standards regardingnegligence, a successful liability claim canoccur.

The Law OfNegligence:

For a successful liability claim to occur, someelements must exist:

Successful Liability Claims:

1. The defendant must have been under some legal duty to act in acertain way to prevent harm to people or property. As previouslystated, this is often referred to the Prudent Man rule.

2. The defendant must have failed to exercise reasonable care. Whenthere is a legal duty to exercise reasonable care, it must be proventhat the defendant failed to do so. When an individual fails to act ina way that avoids endangering others, that person is negligent.Reasonable care is care that an ordinary prudent person would takein similar situations (the Prudent Man rule).


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3. Even if reasonable care was not taken, there was no intention tocause injury to another or their property. Of course, intentional actscausing harm to persons or property bring the issue into criminalintent, which is another matter entirely.

4. For a claim to be brought, the failure to exercise reasonable caremust have resulted in loss to another. That loss can be physical ormaterial. If no loss results from the carelessness, no claim can bebrought. There must be a chain of events beginning with the negli-gence and ending with the loss. If there is no injured party, there isno claim of liability.

Certainly, agents need to be aware of liability opportunists. Therewill always be those waiting for a liability claim with the possibil-ity of high rewards. Therefore, it is the responsibility of agents tobring this to the attention of their policyholders. Changes in howliability laws have been interpreted have resulted in largermonetary claims. Individuals are also being held to higherstandards of "reasonable care."

We are seeing strong evidence that judgesare relaxing the standards regarding "evidenceof negligence." This means that acts oromission of acts that previously were notconsidered negligent in some way are now.The flow of events following an act oromission of an act is now being extended toencompass more and more. As a result, negli-gence is more easily proven.

Relaxed StandardsFor Evidence OfNegligence:

Daily risks of life. In the past, the courtsalso felt that the injured party bore moreresponsibility than they seem to now. In thepast, a defendant could maintain that theinjured party bore some assumption of risk intheir daily life. While that is still true to somedegree, more and more courts are putting lessof the risks on the injured party and more ofthem on the defendant.

Daily Risks Of Life:

Dual risk contribution. Many situationsbear some responsibility with more than oneperson. In the past, courts tended to feel thatthe injured party was only entitled to compen-sation for the part of the negligence that wasnot their own. For example, in the past aperson who had drank a couple of beers

Dual RiskContribution:


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would be considered partially at fault, even ifthe auto accident were proven to have beenthe result of another driver. Today that is notnecessarily the case. Unless it could beproven that the beers had contributed, theinjured party may not be considered partiallyresponsible.

Injury Avoidance. Some injuries to aperson or property could have been avoided ifthe injured party had taken some precaution-ary steps or action (such as erecting a fence,for example). Defendants often used thistactic to avoid liability claims. Today, thecourts are much less likely to accept thisdefense, unless the action not taken wouldhave been taken by a prudent man in similarcircumstances.

Injury Avoidance:

As we know, many liability claims are notclearly one person's fault or another. Rather,blame is truly shared by more than oneperson. Even when this is the case, courts arestill tending to favor the injured party. Oftenseveral rules could apply, and perhaps evenshould apply, but the judge or jury maychoose to disregard some of the rules in favorof others. Often it depends upon the exactcircumstances. For example, a landowner isnot liable for the public sidewalk and injuriesthat happen because of defects in thesidewalk. On the other hand, if a person tripsdue to a defect in the sidewalk, but lands on aspade left in the landowner's yard, negligencemay exist for the landowner. The judge couldrule that the sidewalk caused the injury, or heor she could rule that the spade caused theinjury.

Shared Blame - Injured PartyPreference:

One person may be held strictly liable for thedamages. When this happens it is calledabsolute liability. This may be done regard-less of actual fault. A good example of thishas to do with employees of a business. It iscommon for the business to be held liable forthe actions of their on-duty employees, even

Absolute Liability:


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though the business itself had not sanctionedthe employee's actions.

There was a time when liability claimsfocused on actual dollar losses. Today thereare multiple ways of construing losses, withactual dollar loss being only one of them.These additional losses, which are hard toplace a monetary value on, are often referredto as general or punitive damages.

Determining MonetaryDamages:

Juries were not always desired for liabilityclaims, but today they nearly always are.Juries tend to favor higher rewards than dojudges. Today, a jury trial on a liability claimstrikes fear in the hearts of defendants andtheir attorneys. There is no assurance thatjuries will be fair or even impartial whendetermining monetary damages. How eachjury member feels will depend upon their lifeexperiences and their attitudes about thepeople involved. Prejudices will exist basedon a multiple of past experiences and personalinterpretations. Juries are, after all, composedof people who have been fired from largecompanies, faced hard financial times, andfelt injured at the hands of others. Each ofthese experiences will make their imprint andshape their personal views.

Jury Awards:

Insurance companies face especially hard situations when a jury isinvolved. People commonly feel that insurance companies have"deep pockets," as the saying goes. Most people carry varioustypes of insurances. They often feel they pay out too much moneypersonally, so they reason that these insurers must have lots ofextra cash laying around. If the injured party evokes sympathy, itis easy for the jury members to feel that the insurance company canafford to give them a big settlement. This often happens evenwhen the jury members do not necessarily feel the defendant wasnegligent. If the defendant has an insurance company to pay theloss, juries are especially apt to award large settlements.

Juries may simply want to punish a defendant whom they feel wasnegligent, or at the very least, unlikable. It is not unusual forpeople (who make up juries) to desire to punish another for an act


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they feel is selfish, thoughtless, or unfair. Sometimes, members ofthe jury simply like the feeling of power they have in the case.

Of course, we seldom really know the reasons for large settle-ments that seem unusually harsh or unfair. Jury members often donot say why such awards were reached, especially if they feel thatstating their reasons will bring about criticism.

Payment of damages can involve multiple things, includ-ing specific damages for losses that occurred, such as medicalbills; general damages, such as pain and suffering; and thedreaded punitive damages. Punitive damages are generallyconsidered to be a statement of punishment.

As you can see, the need for strong liabilityprotection certainly exists. In past times, itwas hard to identify specifically who neededliability coverage beyond the normal limits.Unfortunately, consumers often mistakenlybelieve that their homeowner and autopolicies are adequate if the simple bareminimums are included. A man who has$100,000 in liability coverage per occurrencemay feel that he carries a sizable liabilitylimit. He fails to realize how high awardshave become in recent years. He fails torealize the risk involved. It is the job of theinsurance agent to point this out to him for hisprotection and the protection of his family.

Umbrella LiabilityInsurance:

Umbrella liability insurance forms are becoming more commonamong the various insurance types. With the rising number oflawsuits, consumers are becoming more concerned with theirpersonal liability risks. Umbrella liability is a contract that fills thegaps in liability protection associated with basic coverage's or self-insured retentions. Basically, they extend the insured's liabilityprotection beyond what he or she would otherwise carry. They canbe either stand-alone policies or an extension of existing policies.

Before Umbrella coverage is purchased, the consumer musttypically have other insurance already in place. Those requiredusually consist of: comprehensive general liability insurance withlimits of at least $100,000/$300,000; $100,000 property damageliability insurance; automobile liability insurance; bailee liabilityinsurance; and at least $100,000 of employers' liability insurance, ifit applies. For self-insured or uninsured exposures, most insurance


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companies require the insured to absorb at least $25,000 on theloss before they pay. This amount may be less in some cases undersome circumstances (such as small business enterprises). Ofcourse, there are going to be wide ranges in the amount ofpremium charged.

Umbrella coverage is excess coverage in three areas:Excess Coverage: 1. it provides higher limits than the other coverage's would;

2. it covers exposures not otherwise covered in other policies; and

3. it provides automatic replacement for existing coverage's which

have been exhausted or reduced by losses.

Umbrella policies may be written on individuals as a separatepolicy. This would usually be done for individuals who arebusiness executives experiencing liability exposures, professionalpeople, and entertainers. Even when the policy is on an individual,they must first buy basic personal, auto, and aviation (when appli-cable) liability policies.


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While every type of liability policy has some familiar aspects,there are also differences among the types. Companies that issueumbrella policies provide additional liability coverage, either aspart of other policies or as an additional policy form.

Umbrella liability insurance may also bereferred to as excess liability insurance.Excess insurance can cover all types ofbenefits, but we will only be looking at liabil-ity coverage. It is called excess insurancebecause it provides benefits in excess of theunderlying or primary coverage.

Excess LiabilityInsurance:

Surplus line insurance is often associated with excess insurance,although definitions are actually different. Surplus line insuranceis typically defined in reference to difficulty in placement of theinsurance in the normal markets. In addition, surplus line insur-ance is not necessarily a large benefit policy.

Excess liability insurance, usually referred to as umbrellapolicies, have seen a great need. The last few years have seenmany variations of this policy type. Many of the policies arenonstandard, but even those that follow a standard pattern willhave important differences. The development has been from anextremely broad all-risks liability contract outline in the 1950's(through Lloyd's of London) to a more restricted form used today.However, even though today's form is more restricted that its origi-nal development in the 1950's, umbrella coverage is still quitebroad in its present context.

Umbrella policies supply "excess" liabilitycoverage for the insured. It is "excess" inthree ways:

Excess In 3 Ways:

1. It provides extra limits (higher limits) with a combined blanketsingle limit over other existing liability policies, which are usuallyrequired before the umbrella policy can be written.

Umbrella InsuranceChapter 4 Umbrella Policy

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Chapter 4

Umbrella Policy Characteristics

2. It is extra coverage for other liability exposures which would not becovered by the underlying liability contracts, above a self-retentionlimit of usually $25,000.

3. It provides automatic replacement for existing coverages which havebeen paid out due to losses.

The maximum limit of umbrella policies arehigh; at least $1 million typically and oftenhigher than that. In fact, it is common to seepolicies written for $5, $10 or $20 million.Corporations and other specialty businesseswill have substantially higher liability cover-age amounts. The retention deductible forsmaller companies may be lowered from thestandard amount of $25,000 to as low as$10,000 by a special rider.

Million Dollar Limits:

An umbrella liability policy is an indemnity.It will protect the insured for a wide variety ofpossible liability losses for which the insuredis legally liable. Contract forms do vary, butthey tend to follow this basic outline:

An Indemnity Policy:

$ 25,001 to $10 millionNone Property in care, custody, or control

$ 25,001 to $10 millionNone Advertiser's

$ 25,001 to $10 millionNone Malpractice

$ 25,001 to $10 millionNone Worldwide operations

$ 25,001 to $10 millionNone Aircraft and watercraft

$ 25,001 to $10 millionNone Personal injury

$ 25,001 to $10 millionNone Water damage

$ 25,001 to $10 millionNone Contractual-blanket

$ 25,001 to $10 million$ 25,000 Employer's

$300,001 to $10 million$300,000Aggregate per year:

Products

$ 50,001 to $10 million$ 50,000per occurrence:

Property damage (auto & general)

$300,001 to $10 million$300,000 per occurrence:

$100,001 to $10 million$100,000per person:

Bodily injury (auto & general)

$10 Million Single-LimitCoverage:

NormalUnderlying

Policy Limits:Type of liability:


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Types of liability covered are not limited to these shown here. Other examplescould include bailee liability, protective liability, and liquor law liability.

As we have discussed, umbrella liability coverage takes overwhen other underlying limits are reached. Umbrella liabilitypolicies may add coverages that the business does not usually havein its underlying insurance, such as water damage legal liability ormalpractice coverage. For insurance agents, it could include Errorsand Omissions insurance. Where no coverage exists in the under-lying policies, generally the defendant must pay the first $25,000 inclaims. This could be considered a policy deductible, which isreferred to as the insured's retention limit. Umbrella policies areoften considered to be catastrophe liability protection because theyguard against the gigantic liability claims that could occur.

Businesses especially are becoming conscience of liabilityexposures that may not be covered by their standard policybenefits. Employees who are found to negligent can cost abusiness millions of dollars in liability claims. We have seenexamples of this: the polio vaccine that caused rather thanprevented polio; airline crashes; and intentional employee miscon-duct aimed at causing harm to the company's creditability.

Premium rates have had their ups and downs. Originally, beforethe flood of lawsuits we now see, rates were fairly modest. Today,they can be high for some categories, but the premium cost isusually considered modest when compared to the potential forfinancial loss. Rates will be based on the type of business, or thepotential for loss faced by an individual.

In the marine field, umbrella liability cover-age is typically called bumbershoot. Thepurpose is to provide excess limits coverageabove the primary marine protection andindemnity coverage. This type of coverage isunique to this field of liability possibilities.

Bumbershoot:

Lloyd's of London developed a combinationof both all-risks property and all-risks third-party liability coverage in a single excesscontract known as comprehensive ceilingcoverage. This type of policy was offered inthe mid-1960's and afforded a very flexible,broad liability coverage. Limits were avail-able in excess of $10 million over the basic

Comprehensive CeilingCoverage:


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fire, business interruption, crime and liabilitycontracts of the insured.

Of course, not only business enterprises needliability protection. Individuals also face risksof being sued. When the insurance is onindividuals, it is often referred to as excesspersonal liability coverage. Excess personalliability coverage is one of the few greatuntapped markets that agents should begin tofocus on. In fact, currently only three fields ofinsurance is greatly undersold: long-term careproducts, disability insurance and excesspersonal liability coverage.

Excess PersonalLiability Coverage:

It is easy to present excess liability products. Anyone who readsthe newspaper or watches television knows that lawsuits are on therise. Settlements are often in the millions of dollars, even whennegligence is questionable. Business enterprises, corporations andprofessional people are especially being targeted by lawsuits. Thatincludes, it should be noted, insurance agents and insurancecompanies.

Personal excess liability plans (umbrella insurance) typicallyincludes the entire family, their residence, personal injury, automo-bile, employer's (for the baby-sitter and gardener), aircraft, sports,and water craft liability. Sometimes excess major medical cover-age is also included.

Although umbrella insurance is excess liabil-ity coverage, excess insurance can be cover-age for other things besides liability. Theterm excess coverage literally means insur-ance coverage with high limits which are usedto supplement basic policies of a substantialrisk-retention program.

Excess LiabilityVersusExcess Coverage:

Simply put, umbrella policies provide:1. extra insurance above the limits offered by other policies; 2. broader coverage than offered by other policies; and 3. catastrophic protection for liability claims.

Like all types of insurances, there are exclu-sions in coverage. Actual exclusions willvary from policy to policy, so the agent needsto be aware of how his company practices in

ExclusionsIn Coverage:


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this area. Generally, though, personal liabil-ity policies will not pay for business claims.That also works the other way around:business policies will not pay personal claims.

Claims that have been or should be covered by workers' compen-sation, occupational disease, unemployment compensation, ordisability benefit laws are not covered under liability insurancepolicies.

Claims which are connected with nuclear energy are not covered.

Claims which were incurred by anyone in his or her capacity as acorporate officer or a member of the board of directors of anycorporation are not covered.

Claims involving uninsured or no-fault automobile insurance arenot typically covered.

Risks that are not covered are usually disclosed in a separatesection of the policy called exclusions. Some of the exclusionsmay be covered under other policies, or they may simply beuninsurable under any policy.

Insurance policies are actually legal contracts. Contracts areentered into by two or more entities, depending upon the terms ofthe document. One or more of the entities, for a specifiedpayment, agrees to do or refrain from doing, some specific act oracts. In order for the contract to be binding, there must be fivebasic requirements:

Legal Contracts:

1. an offer and an acceptance of the terms; 2. some form of material payment, in this case a premium; 3. entities entering into the agreement or contract must be legally

competent to do so; 4. a legal reason for the contract; and 5. in the case of insurance, a written contract.

Every agent has had experience with the offer and acceptanceof an insurance contract. That is what the selling presentation isall about. The agent explains the policy and offers it to theconsumer. The consumer must either accept or reject it. When itis accepted, the agent has made a sale.

Offer & Acceptance:

When it comes to umbrella liability coverage,in most cases, the agent cannot bind the policy.


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The opposite is also true; the applicant makes an offer and theinsurance company either accepts or rejects it. Once the consumerhas accepted the offer of the insurance agent to apply for the insur-ance, the tables are turned. Now it is the consumer who makes theoffer by filling out the application for insurance and the insurancecompany who either accepts the offer or rejects it. In the case ofproperty-casualty insurance, the agent can usually bind coverageand make it effective immediately, but he or she is doing so onbehalf of the insurance company. The insurer (insurance company)still retains the right to investigate, underwrite and cancel thecoverage, in accordance with the policy and state laws, if the riskdoes not meet the company's underwriting requirements. If thecompany rejects the applicant, it probably means that importantinformation was not given to the agent at the time of application.When it comes to umbrella liability coverage, in most cases, theagent cannot bind the policy. It must be submitted for acceptanceto the insurance company's underwriting department.

No policy is valid unless a premium ispaid. The premium is the value placed on thepromise of protection against specific finan-cial risks. Not only does the consumerpromise to pay the premium, however; he orshe also promises not to act in an unsafemanner. That is what underwriting is allabout. If it is discovered that the applicanthas a history of claims (due to negligence),the company will feel that he or she will notkeep their promise to act as a prudent manwould act in similar circumstances. If they donot feel the applicant will keep their promiseto behave safely, the company will deny thepolicy.

A PremiumMust Be Paid:

The premium is the value placed on the promiseof protection against specific financial risks.

The amount of money each party promises is seldom equal. Forexample, the umbrella liability policy will have a limit (or apromise to pay) of $1 million or more, yet the premium will proba-bly be no more than $500 to $1,000 per year. Obviously, theamount of premium paid does not equal the amount of protectionreceived. The amounts are unequal. It is this unequal concept that


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has made the insurance industry what it is today. The consumerknows they will be protected from large losses (claims) by agreeingto a small loss (the premium).

To enter into any contract, the parties orentities involved must be legally competentto do so. Any person who had been judged tobe incompetent could not sign a contract. Ifthey did sign one, it would not be legallybinding. Each state has a specific age that aperson must reach before they can be consid-ered competent parties, usually age 18 or 21.In some states, however, a person can be asyoung as 14 years old and still sign a legallybinding contract.

Legal Competence:

In some cases, even adults are not considered able to bind acontract. For example, an officer of a corporation must have legalauthority, through the articles of incorporation, to sign a contract.If the articles of incorporation have not given such authority, theofficer may not bind a contract.

Any contract needs to have a legal purpose;a legal reason for entering into the contract.Without a legal purpose, the contract wouldnot be enforceable. The key word here islegal. Some acts are illegal, so no contractwould be enforceable. For example, Joemight contract to buy a quantity of cocaine forresale, but the contract is not enforceable,because the act itself is illegal. A bindingcontract can only be for a legal purpose.

A Legal Reason:

In the case of insurance contracts, there are specific legal formsthat are used. Unless otherwise required by law, it is legal to haveoral contracts, which are spoken rather than written. Of course,that would never be possible when it comes to insurance. In orderfor the insurance contract to be valid, it must be in a specificlegally written form. Most states mandate at least some portions ofthe insurance contract. Once a policy is issued, changes may bemade only by endorsement.

Once acceptance by both parties has taken place, a promise hasbeen made. The consumer has promised to pay a premium and theinsurance company has promised to deliver specifically statedfinancial protection.


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Liability policies may be either designed foran individual or for a business. It was notuntil 1960 that a personal catastrophe liabilitypolicy came into existence. Policies tend tobe developed as needs develop and it becameobvious by 1960 that there would be a marketfor such a product. Originally it was felt thatbuyers would consist of professional people,wealthy individuals, and public figures, suchas actors. These three groups were commonlythe target of liability lawsuits and oftenresulted in large settlements. The newcentury will see nearly every walk of life,regardless of financial standing, exposed toliability lawsuits. In addition, today's awardscommonly exceed the basic limits of liabilitybenefits offered by the average homeowner orauto policy.

The Liability Policy:

Liability policies may be designed eitherfor an individual or for a business.

There is no standard umbrella form forpersonal policies. Each company developedtheir own form. As a result, coverage andappearance will vary, unless particular stateshave mandated forms in some way. Becauseof this, it is important that the selling agentcompletely understand what they are selling

No Standard Form:

As we previously stated, there is actually a difference between anexcess policy and a true umbrella policy, although the names areoften interchanged. An excess policy provides additional layers ofcoverage above the amount furnished by the underlying or primarypolicies. Normally an excess policy has the same terms and condi-tions as the underlying policy. An umbrella liability policyprovides excess coverage, but also covers risks which may beexcluded in the underlying policies. Therefore, the differencebetween an excess policy and an umbrella policy are the risks thatare covered, with the umbrella policy providing broader benefits.

Umbrella policies give broadercoverage than excess policies.


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Personal umbrella contracts are truly the catastrophic policy of theliability field. They are designed not for the small claims, but forthe catastrophic (extremely large) ones. As a result of thecatastrophic nature of umbrella policies, personal umbrellacontracts that cover loss exposures that are not covered by theunderlying policies are subject to deductibles called retentions.For personal policies (not business policies), the deductible can beas low as $250, but typically it is much higher. If a covered risk isnot otherwise insurable because of some unusual exposure, thedeductible is bound to be much higher.

CatastrophicCoverage:

The primary purpose of personal umbrella insurance is toprovide million dollar-plus excess limits and to also broaden thetypes of risks covered. Although policies vary, typically they will:

Primary Purpose:

1. apply worldwide benefits, unless prohibited by law, without territo-rial restrictions.

2. provide liability coverage for those who use specific types ofautomobiles, watercraft and aircraft, when this benefit is excludedunder their homeowner's policy.

3. include liability coverage for negligence assumed under certain oralor written agreements.

4. cover a wide range of personal injury risks for such things as libel,slander, false arrest, humiliation, defamation of character, falseimprisonment, wrongful eviction, wrongful detention, maliciousprosecution or invasion of privacy, and

5. to provide payment for defense costs when the underlying policieswould not cover such costs.

Personal umbrella policies add an additional amount of liabilitycoverage above the limits provided by the underlying policies, suchas a homeowner's policy and auto insurance. The amount addedshould be enough to be considered catastrophic protection. Animportant feature is the additional protection against risks notcovered in homeowner's and auto policies.

Although policies will vary, there will be some features that tendto be common to all policies of this type. It should be noted thatbusiness policies will not necessarily be the same as personalpolicies. Some of the characteristics include:

CharacteristicsOf PersonalUmbrellaPolicies:


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1. These are unilateral contracts, which means the insurer makesan enforceable promise to meet its contractual obligations; theinsured makes no promises that he or she can legally becompelled to keep. Of course, the insured must make theirpremium payments in a timely manner in order to keep thepolicy in force. It should be noted that if the insured violatescertain conditions of the contract the insured may be preventedfrom collecting benefits when a claim occurs.

2. The contract is one of adhesion. This term is used in insur-ance to indicate that it is a one-sided contract, favoring theinsurance company, since they drafted it. Although the insur-ance company drafted the policy, the insured must accept orreject it; there is no negotiation available as to the provisionscontained in the contract. There have been policies that wereso one-sided that the individual states stepped in and mandatedcertain provisions as a form of consumer protection legislation.Courts will not enforce some provisions in contracts ofadhesion if they are unfair or oppressive to the party who hadno input in the document. Any ambiguity will be decided infavor of the insured, and any exclusion in the contract must beclearly and conspicuously stated.

3. Insurance contracts are aleatory, which means they dependupon gambling or luck. This is the basic foundation of allinsurances, with only a few exceptions. No one knows for sureif they will experience a loss, so they pay their premiumswithout knowing if there will be any benefits received inreturn. Consumers want to lose on some insurance contracts.For example, even though we might carry health insurance, thatdoes not mean we wish to have a large claim, because it wouldmean ill health. No one really wants to die, either, in order tocollect on a life insurance policy. Consumers generally plan toexperience a small loss in the form of the premiums they pay,to prevent a large loss in the form of a liability claim.Ultimately, though, insurance contracts are a gamble. Consum-ers are gambling that they will have a loss (covered by theinsurance contract) and the insurance company is gambling thatthere will be no loss to cover.

4. It is a conditional contract, meaning that there is a continuingrelationship created between the insured and the insurer. Theinsured must pay the premiums in order to keep the policy inforce, but they may also have to meet other conditions.Policies may specify specific duties that are required in order tokeep the policy active. Insurance companies may not have to


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pay benefits when those specified duties have not been met.

5. Personal liability policies insure specific persons only. As aresult, the rights under the contract cannot be assigned toanother person without the written consent of the insurer.

6. Liability contracts, like other types, contain a certain amount ofgood faith. Although underwriting is involved, the insurermust assume that the applicant told the truth when filling outthe application. The applicant must also assume that the cover-age is correctly represented. If the applicant intentionallymisrepresents or omits pertinent information he or she mayactually void the entire policy.

7. Umbrella policies are an indemnity contract. There arealways those people who would use an insurance policy to gainfinancially. The aim of insurance is never to allow the insureda profit, but rather to prevent loss from financial claims.Therefore, umbrella policies contain conditions which aredesigned to prevent the insured from benefiting from a loss.

Each issuing company will determine,according to their preferences, how theumbrella policy is designed. Consequently,there will be variances from company tocompany. Variations will also exist betweenamounts of coverages, price andrequirements. Despite the differences, therewill also be similarities, which include thefollowing:

Policy Layout:

1. Declarations. Most policy types contain declarations, whichidentify the persons involved, what is insured, premiumamounts, and the length of time insured. It is often said thatthis section is the "who, what, when, where, and why" of thepolicy.

2. Definitions. Each policy must list commonly used words andphrases and their definitions to ensure that the applicant fullyunderstands what is and is not covered. Although there arevariations, usually there are two parts to this policy section.One part explains the terms applied to the person buying thepolicy and the insurance company issuing it. The other partwill alphabetically list the commonly used terms and theirdefinitions (as they apply to this issued policy). When these


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definitions are used in the policy they are typically boldfacedor italicized. Sometimes both boldfaced and italicized. Whilemany of the terms seem obvious, they are still defined toprevent any misunderstanding.

The definitions section is very important to the insuringcompany. Courts tend to rule in favor of the insured whenthere is an ambiguous provision, so the company's possibilityof loss could be great if the policy is not clear as to what is andis not covered. When policy language is well defined, many courts haveruled that the policy is understandable and the insured's failureto read his or her policy does not automatically mean theyshould collect benefits. Of course, it is the job of the agent tofully explain the policy, but even if he or she fails to do this,that failure does not permit the policyholder to collect benefitsthat are not due under the terms of the policy. Therefore, everyagent (even if the policy has been explained) should encouragetheir policyholders to also read the policy they have purchased.

3. Insuring Agreements. In a way, insuring agreements are thepromises made by the insurance company to pay for certainfinancial losses, under specific circumstances. This componentof the policy lists those promises and obligations assumed bythe insurance company that issued the policy. For umbrellapolicies, those obligations are typically those sums for whichthe insured is legally responsible, the costs of a defense, andany other benefits stated in the policy. The insurance companywill provide these benefits when each party has meet theirrequirements, as listed in the policy. One of the first requirements listed is typically the mostobvious: listed coverage will be provided as long as premiumsare paid in a timely manner. If premiums are not paid, benefitswill not be due either. Other requirements will also be listed. The insured may berequired to meet certain conditions in order for benefits to bepaid by the insurance company. Remember: the insurancecontract is an agreement between two parties, and each partymust meet their required conditions. Since no policy coversevery conceivable loss, the insured should look in the InsuringAgreements for words or phrases which would restrict or limitcoverage. It should also be noted that no one section statesevery condition. The policy needs to be read in its entirety foran understanding of all covered items and exclusions.

4. Exclusions. No policy pays for all losses under all conditions.The section listing exclusions tells the policyholder precisely


Characteristics

Chapter 4 - Page 12


what is not covered. Many professionals feel it is more impor-tant to the applicant to read what is not covered than it is toread what is covered. Exclusions can vary, but typically they will include: � obligations assumed by worker's compensation, unemployment,or disability benefits or laws; � under a personal liability umbrella policy, business pursuits,professional services and liability resulting from owned or rentedaircraft and watercraft; � property damage to property in the care, custody, or control ofthe insured; � any act committed by or at the direction of the insured with theintentional desire to cause harm, whether physical or material; and � injury to a person or property for which there is insurance under anuclear energy liability policy.

5. Conditions. Insurance policies are conditional contracts,which means that each party must meet required conditions.Those insured must meet policy requirements in order for a lossto be covered. The section on conditions list these require-ments. The insurance company's promises of payment underthe Insuring Agreements are only enforceable if an insuredperil actually occurs, and if the insured has complied withcertain conditions that are contained in the issued policy. Forexample, premiums must be paid in a timely manner. Graceperiods applying to premiums would be a condition of thepolicy. The insureds easily understand that they must pay the premi-ums. Sometimes it is harder to get the insured to understandthey must also meet other conditions if benefits are to be paid.Insurance agents should also check out the policy before it isdelivered to the insured to be sure that it was issued in themanner the agent expected. If it was not, either the policyneeds to be corrected, or the change or difference needs to befully explained to the consumer so that he or she has the chanceto either accept or reject the issued policy. When the consumeris fully aware of both their rights and their obligations underthe contract, there will be fewer problems later on.

6. Miscellaneous Provisions. Not all policies have miscellane-ous provisions, but they are common in most. This policycomponent is utilized because there are conditions or dutieswhich exist that may not fit correctly or uniformly into theother sections of the policy.

Endorsements may be attached to the policy with the intent ofclarifying, extending or restricting coverage, or addressing


Characteristics

Chapter 4 - Page 13


coverage times and premium amounts. When an endorsement isused, typically it overrides any other conflicting statement or clausewithin the policy. The exception to this would be any item orrestriction mandated by state law.

Insurance is a risk management field thatoffers protection while attempting to avoidsevere losses to the insuring company. All ofthese policy characteristics are designed to dothat. Those that design policies are gamblersto some extent because they are using designtechniques that, while proven from pastexperience, are not fool-proof.

A RiskManagementField:

Society relies upon insurance policies to prevent losses that, asindividuals, could not easily be coped with financially. Manyaspects of our society could not function as they currently dowithout insurance products. As such, agents and insuranceproducts are extremely important to our culture.


Characteristics

Chapter 4 - Page 14


With few exceptions, all policies are underwritten to some degree.Some types of policies may be underwritten easier than others, butmost are underwritten in some way.

There will be a difference in underwritingwhen it comes to personal or businessumbrella policies. Each has their own risks.Agents, of course, want to offer the bestpolicy they can for the least amount of money.Therefore, as an agent, you will want to checkaround for the best offering from thosecompanies with a secure financial rating.Unfortunately, those consumers shopping foran umbrella policy are often doing so becausethey have found themselves to be a higherthan average risk.

AssessingPolicy Risks:

Insurance companies are perhaps the best score keepers around.They know from past experience and other accounting methodsapproximately what their losses will be on a block of business overa given time period. For insurance companies, one of the mostimportant elements has to do with "selection." By that, we meanselecting risks that are likely to be profitable as a group. There willbe claims, of course, within the block of business. That isexpected. As a block of business, however, profit is likely.

Insurance companies do have other goalsbesides profit. Because profit is based upon agrowing book of business (also called a"block" of business), they also strive toprovide proper insurance coverage, whilemaintaining risk and pricing standards. Bydoing so, this block of business will growbecause it will be something that consumerswish to purchase. Only when consumers wantto buy something can it be profitable, whether

Books Of Business:

Umbrella InsuranceChapter 5 Underwriting the Umbrella Policy

Chapter 5 - Page 1


Chapter 5

Underwriting the Umbrella Policy

that happens to be a computer, furniture, or aninsurance policy. For insurance companies,this means properly selecting, classifying,rating and monitoring umbrella liabilitycontracts.

Insurance itself is fairly basic. For a premium (a predeterminedsmall financial loss), the insured transfers the threat of a largefinancial loss over to another entity, the insurance company. Theinsurance company then spreads the risk out over a group ofsimilar policyholders with similar risks of financial loss, so thatpayout of benefits can be somewhat predictable.

For a premium (a predetermined small financial loss),the insured transfers the threat of a large financialloss over to another entity, the insurance company.

Insurance companies are careful to select members of the group so thatclaims do not overpower premiums taken in. The insurers want a"pooling" effect, with everyone paying into the pool of money, but onlya few needing to take out of it.

Any risk exposure can be underwritten, ifsomeone is willing to do it and the pricecharged is enough to cover the exposed risk.Therefore, underwriting and pricing are inter-related; one function cannot be discussedwithout the other. Both parties are also inter-ested in both functions -- the insurancecompany is interested in underwriting and theconsumer is interested in price.

Underwriting BasedOn Exposures& Risks:

Underwriting itself is the process of either accepting or rejecting theapplicant in exchange for a given financial payment in return for a speci-fied protection from financial loss. This rather long sentence is reallyonly saying one thing: what benefits for how much money? Once theapplicant is deemed acceptable, other concerns then take priority: theterms under which the company is willing to accept the applicant. Thiswould relate to the policy itself, the insuring agreements, exceptions andother provisions of contract.

Adverse selection is always a concern. Astudent of theory might say: "Because insur-ance is based on the law of averages, why notsimply insure anyone wanting insurance trust-ing in the laws of probability?" If every

Adverse Selection:


Chapter 5 - Page 2


person would apply for the contract, thatmight work. The problem is, not everyonewould apply. Therefore, those most likely toapply for the policy would be those with thelargest risk factors. This is called adverseselection. Those needing the protection mostapply; those needing the protection least donot. Therefore, claims rise as more and moreof the "insurance needy" collect benefits. Inany competitive market, such as insurance,selection always occurs, either by the insur-ance companies or by the consumersthemselves.

All consumers do not have the same risks.Some drive automobiles; some do not. Someconsumers work at jobs that carry specialrisks. Some consumers do not work outsideof the home at all. Some consumers are veryconscience of safety; others are not. Someconsumers are older than others, and experi-ence special risks due primarily to age (suchas the risk of entering a nursing home). Theseare not the only factors, of course, that deter-mines risks for given insurance contracts.The types of risks vary extensively and oftendepend upon the actual policy being appliedfor.

Risk Classifications:

Insurers look at the contract being appliedfor and then consider the particular risksinvolved. Within each type of contract, orclass variation, there will be common lossexpectancies. Of course, not all of theinsureds will experience the loss; only aportion of them will. The insurance compa-nies strive to eliminate those applicants whoare likely to have higher-than-average lossexpectancy. By doing so, the companies willsee a profit. The more selective the insurancecompany tends to be, the lower the premiumcharged often is. This is because they havefewer losses so can afford to charge a lowerpremium. Those companies who accept virtu-ally everyone will have higher losses and,therefore, be forced to charge higher premiums to

Pricing SpecificContract Risks:


Chapter 5 - Page 3


cover those losses. As the premiums continue torise, those policyholders who can will change tocompanies with more severe underwriting andlower premium costs. Gradually, the companywho accepts virtually everyone will be left onlywith the highest risk people and this will drive thepremiums up even higher. Adverse selection hasnow occurred. Anytime selection is left up to thebuyers rather than the sellers of insurance, theinsurance company is likely to experience loss.

Gradually, the company who accepts virtuallyeveryone will be left only with the highest risk people

and this will drive the premiums up even higher.Adverse selection has now occurred.

Sometimes government branches or consumeradvocates claim that insurers are overly selectiveand perhaps even unfair in their underwritingpractices. Usually such claims are aimed at socialissues. The term actuarial equity may be used insuch references. This typically implies conditionswhere each risk is charged a premium in accor-dance with its chance of loss. This tends to dealwith issues where insurance is necessary, such asmortgage insurance or auto insurance, and theconsumer's difficulty in meeting the premium ratecharged. This can be a common issue in cityareas where claims against homeowners may beextremely high, for example. In poorer areasclaims may be higher driving rates up. Because itis a poorer area, those who live there may be theleast able to handle the higher premium rates. Insuch cases, consumer advocates may pressure thecompanies to broaden the area's boundaries sothat lower risk areas are combined with higherrisk areas. This would bring down the rates in thehigher risk areas, but raise the rates in the lowerrisk areas (giving an average rate somewhere inthe middle of the two).

Actuarial Equity:

There may be other ways to lower rates. Thosehigh-risk individuals can be subsidized by charg-ing lower than actuarially fair rates. This losswould be subsidized by those who experiencelower rates due to lower risks because the lowerrisk individuals would pay higher than theiractuarially fair rates in order to offset the

Subsidizing Rates:


Chapter 5 - Page 4


company's losses on the high risk consumers.Government subsidies may also be imposed toallow lower premiums for the higher riskgroups.

Although some advocates seem to feel that insurance companiesare unfair in their selection practices, seldom is a better systemsuggested. Rather, it tends to fall on those who have to subsidizethose who have not. Although it is not morally feasible to allowthe poor to suffer, most insurance companies also feel it is not fairto put the burden on their backs entirely. They are, of course, abusiness entity following standard business practices. Therefore, amix is usually the best answer: some allowance for businesspractices and some allowance for subsidization by one group infavor of another.

The primary purpose of underwriting is nosurprise: the profitable distribution of policy-holder risks. This does not necessarily meanthat insurance companies try to avoid alllosses (payout of claims), but it does meanthat they try to minimize those payouts.Insurance companies expect some claims tohappen. It is the nature of their business toexperience claims. Without claims, consum-ers would have no reason to even purchaseinsurance. In fact, some well-publicizedclaims are actually good for their businessbecause it shows consumers the need for theirproducts. This pushes sales. However, insur-ance companies do not want an excess ofclaims that cause financial losses for thecompany itself.

Exposure Distribution:

The book Fundamentals of Insurance by Robert I. Mehr tells this story:

A client who just bought a fire policy one morning asks his agent:"Now that I've just bought this fire policy, what would I get if my houseburned this afternoon?"

Replied the agent: "About 10 years."

It is not uncommon to hear of insurancefraud, most notably arson. For the most part,luckily, consumers are honest people.Insurance companies do certainly experience

Recognizing theUnderwriters:


Chapter 5 - Page 5


claim abuse, but abuse is not the same asfraud.

To consider underwriting procedures, we must first consider whothe underwriter actually is. Consumers probably picture a studiousperson with eyeglasses, a frown, and little awareness of the "real"world. In fact, underwriters consist of those considered to beexperts in the type of policy being written. Therefore, the personsunderwriting cancer policies are likely to be different than thoseunderwriting auto policies. Both persons will have commonfactors, however. They will be schooled in mathematics (orprobabilities of exposures), schooled in their particular field ofexpertise, and they will be realists. They know what to expectfrom those being underwritten.

The writing agent is also an underwriter in away. He or she makes a preliminary appraisalof the possible risk exposure. This is donethrough the use of an application process.The agent asks the potential policyholderquestions and judges from the answersreceived whether or not that person should beconsidered for insurance. If the answersgiven are unfavorable, the agent knows thatthe application should not be completed.Although agents help in the underwritingprocedure, they are not underwriters accord-ing to the true meaning of the word. Theysimply aid the process of underwriting.

The Agent As APreliminaryUnderwriter:

Many agents have heard the phrase "red flagging." It is oftenused in relation to agents or their applications that are submitted tothe underwriting departments. When an underwriting departmentnotes a particular agent who continually fails to find or discloseimportant underwriting information, or whose clients seem to havean unusually high claim experience, that agent may find themselves"red flagged." It means that the underwriters feel that agent iseither disregarding required procedures or intentionally ignoringthem. Whatever the reason, the underwriters will begin to payspecial attention to their applications and will reject any question-able person simply based on the agent submitting the applicationfor insurance. In some cases, the insurance company may evencancel the agent's writing contract.

It is important to understand that insurance companies keeprecords of the loss experience of their agents. Whether the agent is


Chapter 5 - Page 6


simply uninformed, poorly trained, or truly fraudulent does notmatter. No company will keep an agent who falls outside of thenormal boundaries on a consistent basis.

Once applications for insurance are submit-ted, the actual underwriting falls on the under-writing departments. Seldom are they madeup of a single person; more likely they aregroups of people. Most are made up of twosections, called staff and line. Staff under-writers concern themselves with thecompany's general underwriting requirements.They make recommendations, as an overallpicture, to the company regarding productdevelopment, rate structures and generalguidelines. They analyze operating statisticsto determine if the guidelines they are usingare working as they anticipated. The staffunderwriters are generally located in the homeoffice, rather than field posts.

Staff Underwriters:

Line underwriters are responsible for theactual acceptance or rejection of applicants.They may be located in the home office or infield branches of the company. The lineunderwriters are the ones who will be mostfamiliar with the individual insurance agents.These are the underwriters that are referred towhen policy application is discussed. Theyare, in fact, the true underwriters because it istheir decision that will decide whose applica-tion is accepted and whose is rejected. Expertline underwriters are the lifeline of thecompany; their decisions can make a companya good profit or cause them to experiencelosses.

Line Underwriters:

Underwriting effectively requires that allparties act responsibly. This includes theagent, but also the consumer. It is the respon-sibility of the consumers to give correct infor-mation, but it is also the responsibility of theagent to ask application questions in a waythat is understandable and easily answered.Many states have mandated application

Actual UnderwritingProcesses:


Chapter 5 - Page 7


language in an effort to minimizemisunderstandings.

Underwriting itself includes both preselection and postselectionof applicants. Preselection is the process of gathering relevantinformation regarding possible risk exposures and arriving at adecision regarding the acceptance or rejection of the applicant.Post-selection happens after the risk has been accepted by theinsurance company. It is the process of reviewing those alreadyinsured and terminating those no longer desirable, if the termina-tion is both possible and acceptable under the terms of the contractand under the state laws where the policy was issued. Post-selection is not possible under some insurance policies, mostnotably in most health insurance policies. This is understandable.If health insurance policies could terminate those persons with thehighest claims experience, no one would be safe when sickness orinjury occurred. The point of having health insurance is to protectoneself from catastrophic losses. However, in automobile insur-ance, postselection does make sense. If a person consistentlydrives poorly, there is no reason why the insurance companyshould be forced to continue to insure the risk. The insured, insome types of policies, does bear the responsibility of acting in asafe and acceptable manner.

Obtaining information is one of the mostimportant parts of insurance operation. Theunderwriter needs information to make aninformed opinion regarding possible claimlosses. Insurance companies do, of course,desire to make a profit. Consumers may notrealize that it is also important to them thatcompanies maintain a profit level; otherwisethe company would fold and insurance protec-tion would be lost.

Information: The Agent's Role:

The amount and type of information needed will depend, to somedegree, on the type of policy being underwritten. Automobileinsurance wants different types of information than does healthinsurance, for example. There are basic pieces of information thatall policies will want:

1. the applicant's name2. the applicant's address3. the applicant's Social Security number4. and usually, the applicant's date of birth.


Chapter 5 - Page 8


Underwriters will then require detailed information in specificareas. The more common types of information requested include:

1. past loss experience2. financial information to determine certain qualifications3. living habits (how safe are they?)4. the property's or applicant's physical condition5. the applicant's personal character.

Not all of these things will apply in all circumstances and theremay be additional areas of interest for some types of policies.

Information sources will vary, but the underwriter will havespecific methods that he or she routinely uses. The sources usedwill depend upon the specific risks involved, practicality andcertainly costs. Some information sources can be expensive.

Agents are one of the best information sources because they havebeen to the applicant's home or place of business and personallytalked with them. The agent will (hopefully) have noticed theoxygen tank in the corner of the living room, or the walker that theapplicant used.

Since the agent personally talked with the applicant, he or she willhave gotten a "feel" for the person. The agent, once experienced,will develop the ability to suspect when the consumer seems to beholding something back, telling less of the story, or appear over-anxious to receive the coverage. Through general conversation anda feeling of one-on-one, the consumer may open up and give fulldisclosure. Certainly the agent will also ask the pertinent questionsthat determine the consumer's eligibility.

Some applications require the agent to submit an Agent's Reportform. This form asks questions regarding specific things, such asthe presence of an oxygen tank sitting in the corner. Of course, thequestionnaire does not specifically say "Was an oxygen tank in thecorner?" Rather, it asks the agent to disclose anything that wouldnot be compatible with the policy application. The Agent's Report,in effect, is asking the agent to state anything that seemed unusualin relation to the application. On it will be questions relating torisk and asking for a recommendation from the writing agent as toacceptability. It is not unusual for the underwriter to accept orreject an application solely on the basis of the Agent's Report form.This may especially be true when the underwriter knows from pastapplications that the writing agent is truthful and experienced.

Insurance companies commonly hire outsideInformation &


Chapter 5 - Page 9


companies to aid in their underwritingprocess. These companies are usuallyreferred to as Inspection Companies. Theyare often nationwide investigating firmswhich utilize all public information sources.They submit a report concerning the applicantto the insurance company, with specific atten-tion to certain areas of desired information.For example, an umbrella application wouldnot require the same information that a healthapplication would.

The InspectionCompany:

In the past, there has been some controversy regarding much ofthe information that these Inspection Companies offer. The contro-versy usually centers on how the information was obtained andhow reliable it happens to be. Ultimately, of course, it is the insur-ance underwriters who must determine whether or not the informa-tion is relevant. The typical consumer would probably be shockedat the amounts and types of information (and misinformation) thatis held on them by these reporting firms.

Perhaps the best known of the inspection companies is Underwrit-ers' Laboratories, Inc. of Chicago, Illinois. We generally knowthem as a testing facility. Many policies require companies to useitems bearing their label in order to get insurance coverage. TheUL label has become the symbol for safety.

The actual sources used will depend upon the company issuingthe policy and the type of policy being issued. There are manyinspection companies available. Insurance companies also may useloss-control engineers, who provide safety information to helpidentify liability exposures. Sometimes the value of additionalinformation is simply not worth the cost, so the insuring companiesdo not bother obtaining it. Again, this is why the Agent's Reportcan be so important to the underwriters.

Once the information desired has beenobtained, the underwriter will decide whetherto accept the applicant or reject the applicant.The information that was obtained will be thedeciding factor. Since underwriters know thatsome information may be limited or perhapseven wrong, they use their experience andknowledge in their decision making, alongwith the Agent's Report. Some types ofpolicies can be only accepted or rejected.

Accepted Or Rejected:


Chapter 5 - Page 10


Other types can be accepted, but with restric-tions in the policy due to the informationobtained. These are often referred to asmodified policies.

Applicants tend to be one of three categoriesof risk: standard, preferred, or substandard.Standard risk applicants could be compared toan average risk. They do not represent higherclaim risks for the insuring company, butneither do they represent lowered claim risks.They are an average or standard risk.

Standard Risk Applicant:

In some cases the information gathered bythe agent and underwriters may indicate thatthe applicant has a lower-than-average lossexperience or potential loss experience, whichallows them to be considered a preferred riskapplicant. This usually means they also paylower premium rates, so it is a desirable riskcategory for many applicants. The coverageitself would usually be a standard policy, withthe only difference being lower premiumrates.

Preferred Risk Applicant:

When an applicant appears to have higher-than-average loss expectancy, they are classi-fied as substandard risk applicants. Thisusually means they pay a higher premium thaneither the standard risk classification or thepreferred risk classification. Because theinsuring company is taking on higher riskexpectancies, the policy may be issued withmodifications in the coverage. This is notalways true. Some types of policies aredictated by state mandates, which do notallow modifications. In those cases, thecompany must decide whether the increasedrisk is worth the premium collected. Substan-dard risk applicants do, of course, have muchhigher rejection rates than would a standardrisk applicant.

Substandard Risk Applicant:

Where state laws do allow policy modifications, substandard riskapplicants are likely to be issued policies which restrict certaincoverages and may also contain larger deductibles. In some cases,


Chapter 5 - Page 11


substandard risk applicants can receive a standard policy, but athigher premium rates. How substandard risk applicants arehandled will vary according to the issuing company. That is whysuch applicants really should shop around.

Where state laws do allow policy modifications,substandard risk applicants are likely to be issued

policies which restrict certain coveragesand may also contain larger deductibles.

Of course, some applicants will simply present too many potentiallosses. In such cases, they may find that they are ineligible for thedesired policy. Insurers do not believe that those with substantialrisk factors can be profitable at any feasible premium or with anypolicy modifications. As a result these applicants are totallyrejected and cannot receive a policy at all. It should be noted thatwe stated "at any feasible premium." The key word here isfeasible. If companies were allowed to charge unlimited premium,at some point some amount of premium would make the riskacceptable. However, the premium charged would be outrageousand probably beyond the applicant's ability.

As we said earlier, post-selection is theprocess of reviewing those individuals whoare already insured, and terminating thosewho are no longer desirable. Underwritersperiodically review renewal applications,using state approved techniques similar tothose that were utilized upon the originalapplication. Some types of policies do notallow the company to terminate the contractdue to loss experience, but other types doallow this. Those policy types that do allowpost-selection allow it because the lossexperience is due not to circumstances beyondthe policyholder's control, but rather toactions or non-actions that they themselvesare responsible for.

Post-Selection:

Policy types which allow post-selection do sobecause the loss experience is not due to

circumstances beyond the policyholder's control,but rather to actions or non-actions that

the policyholder themselves are responsible for.


Chapter 5 - Page 12


One claim does not necessarily mean that the policyholder will beterminated. However, if the insuring company's investigation ofthe claim reveals information either not discovered when the origi-nal policy was issued, or shows a lack of responsibility on theinsured's part, then termination could be a possibility.

Post-selection has several unique aspects.There has been much public criticism fromconsumers and consumer groups regardingpostselection. There are those who feel thatinsurance companies are obligated to providecoverage at affordable prices regardless of thecircumstances. This, of course, could fuelconsumer irresponsibility. Auto insurance isa prime example. If the insured did not haveto worry about his or her driving responsibili-ties, knowing that insurance must be providedno matter how many claims occur, wouldthere be any reason for the driver to becomemore responsible? Is it not the cost of insur-ance that encourages people, at some point, tobecome responsible drivers? Less claimsmean lower rates. If rates were not dictatedby driving behavior, would there be less incli-nation to drive within legal limits? These arequestions whose answers have become adividing line between insurance companiesand consumer groups.

Unique AspectsOf Post-Selection:

Because postselection does cause image problems, rather thanterminate contracts, insurance companies prefer to simply refuserenewal of them. The companies feel consumers are less irritatedby a "non-renewal" than they are a "termination" notice. Ofcourse, agents know that either type of notice may still create diffi-culties for them. They live and work in the neighborhood andconsumers expect the agents to keep them insured.

When a company decides that one of their policyholders hasbecome an undesirable risk, they have to make a choice:

1. wait for the policy to expire, and then do not renew it; or2. terminate the policy before renewal time.

Of course, whatever the company does, they must comply withany applicable state laws.


Chapter 5 - Page 13


If the insurance company decides to simply wait until the policy isdue for renewal, even though they realize the policyholder is a badrisk, they still must cover any claims due under the policy terms.Once the agent is notified that the company will not renew thepolicy, he or she may then place the business elsewhere, if othercompanies are available.

If the insurance company decides to terminate the existing policy(where state law allows this), there must generally be somecompelling reason for doing so. For example, if a follow-upinspection of insured property were to reveal a problem or anunsound business practice, the underwriter might recommendimmediate cancellation. This would especially be true if thepolicyholder were causing the problem in some way.

Post-selection is available only if the policy can be canceled.Some types, as we mentioned, will not allow cancellation. Forthose types of policies which are not cancelable, all underwritinginformation must be obtained by the insurer prior to issuance. Insuch policies, the insurer has only a two-year period in which theymay cancel the policy for misrepresentations or concealment ofinformation. After two years, even if the applicant misrepresentedthe facts, the insurance company cannot cancel the policy.

Once the underwriters have accepted anapplication, decided the type of policy to beissued and determined the appropriatepremium rate, they must decide how much ofthe insurance they want to retain. Insurancecompanies do not necessarily keep the fullamount; sometimes they offer a portion of thebusiness to other insurers, who then assumethe risk for the amount they insure. Thisprocess is called reinsurance.

Retention:

Even under the best of circumstances, thereare limitations established on the amounts ofinsurance that one insurer can sell. Under-writers seek a safe distribution of exposureunits. The financial condition and size of theinsurer are important in determining howmuch one company can safely underwrite. Abasic question always asked is "What is thelargest single amount the insurer can afford tolose on one exposure?" Although insurance

Line Limits:


Chapter 5 - Page 14


companies underwrite to minimize theirpotential losses, losses can still occur. Theanswer to the question must be supplied bythe insurer's financial officers and approvedby the board. The answer helps to establishline limits, which is the maximum amount ofinsurance an insurer will write on oneexposure. Line limits for particular exposuresare compiled into a line book, which serves asa general guide to underwriters.

The actual line limits vary. Their establishment in the propertyinsurance field is more complicated than in the life field, becausethere are more variances. It is important to realize that line limitsdo not represent the amount that can be written on the property, butrather the amount the insurance company is willing to lose on oneof them.

There is always some amount of conflict possible betweenunderwriting and production. Those selling want to be able towrite applications and those underwriting want to weed outpotential risks. Therefore some conflict in inevitable. Thoseselling often believe that underwriting is too conservative. Sellerswould like borderline applicants to be accepted. Underwritersmust obtain a safe and profitable distribution of exposure units.Communication between the two is not only necessary, but vital.

Underwriting &Production:

There are, in some areas of insurance, pressure from the govern-ment regarding underwriting. This is especially true concerningproperty and auto insurance in inner-city areas. It can also be truefor liability insurance. Underwriters do not view insurance compa-nies as charitable institutions; rather they are business entitiesdesiring to use sound business practices. It is not surprising thatgovernment and insurance companies should have somedisagreements.

Premium is the name given for the price paid for insurance.Premium is the rate per unit of coverage multiplied by the numberof units of insurance purchased. Different types of insurancemeasure units of insurance differently. For example, nursinghome insurance typically prices their units in $10 daily benefitincrements while property insurance may measure by squarefootage where a building is concerned.

Premium Rates:

At one time rates were often figured individually. Each case wasjudged by the underwriter separately. This eventually became too


Chapter 5 - Page 15


expensive to do as the volume of business continued to rise.Cooperative rate-making bureaus were formed in most insurancelines to develop equitable rates. They published rates which areused by most insurers. Subscribers sometimes deviate from theserates, but they are still used as a foundation.


Chapter 5 - Page 16


Chapter 6

Agent Ethics

eth'ics (eth'iks) n. pl. (1) the principles of honor and morality. (2) accepted rules of conduct. (3) the moral principles of an individual.---eth'ic, adj. pertinent to morals.

The New American Webster Dictionary

While the study of ethics is actually a complex matter with manyshades of right and wrong, basically ethics is about an individual'sperception of life. It is the abstract view of what is right andwrong. There may be few absolutes and many varied definitions.

Everyone has a code of ethics, even if they do not realize it.Their code is what makes them take one choice over another.Even a dishonest person has a code of ethics because ethics do notnecessarily imply the correct principle; simply that some sort ofprinciple exists. Therefore, a person who believes he has the rightto steal has a code of ethics. It just does not happen to conform tothe code that society would like him to follow.

Everyone HasA Code Of Ethics:

When it comes to insurance ethics, many of the views of right andwrong are dictated by law and state requirements. Originally,ethics involved the questioning of why certain things should bedone or thought. Much of the issues that America and her citizenswrestle with daily have to do with one simple question: What isthe right thing to do? That one simple question does not alwayshave one simple answer.

As insurance representatives, we do not have the answers to thebig problems in America, but we are often a mirror of what isgoing on in our neighborhoods and cities. If, as individuals, we aresurrounded by people who are primarily concerned withthemselves, then it is likely that we will have the same attitude inour work and play. Therefore, if the agency in which we weretrained stresses SALES, SALES, SALES without any other input,it is likely that we will loose sight of the role that ethics shouldplay. When ethical behavior is not deemed important by ourimmediate bosses and peers, it is not surprising that problemseventually materialize.

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As individual insurance agents (and as individuals) we mustdetermine our own goals in life. We cannot allow others to setthem for us, no matter how well intentioned those "others" maybe. Ethics help us to set goals that will bring about pride inourselves and in our achievements. Regardless of our personalcircumstances, it is always possible to have a moral code (a codeof ethics). Even those in dire circumstances have reported this.Viktor Frankl, author of Man's Search For Meaning, discoveredthat even in the brutal confines of Auschwitz, a concentrationcamp, people could still choose to have a moral basis to theirlives.

Determining OurOwn Life Goals:

It has been said that legal authorities may be able to mandatebehavior, but not ethics. Technically, this is probably correct. Aperson who would like to steal may not do so because of the conse-quences such behavior would bring about. Therefore, his behavioris controlled, but not his ethics. Although he does not steal, hewould still like to.

Controlling a person's physical behavior may, however, eventu-ally lead them to an understanding of ethical behavior. It is notunusual for an individual to become the person they pretend to be.A person who acts ethically, even if they do not desire to be, mayeventually soak in the ethical behavior and adopt some of thatpotential. In fact, since morality is about the way we live, we dolearn it over our entire lifetime. To think that a person who is notethical today will never be ethical is simply wrong. In fact, itcould go the other way as well. The person who is behavingethically today may not do so tomorrow. Even so, it is true thatmost of our ethical behavior is learned during childhood andadolescence. Whether we like to believe it or not, we are all bornwith a conscience; society dictates how this conscience is formed.What we fill our mind with and the environment we exist indefines our conscience.

Controlling Behavior:

A wise insurance agent will certainly follow state and federalregulations, but ethics goes beyond what is simply mandated bystate or federal authorities. Ethics define who we are. Once aperson, in any line of work, realizes that their daily actions (andeven lack of actions) pronounces who they are, perhaps ethicalbehavior will once again be "in style."

What are ethics? Who determines what is or is not ethicalbehavior? Must religious beliefs be a part of ethical behavior? Isit possible to make your living in commissioned sales and still be

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ethical? Perhaps more to the point, is it possible to make aGOOD living in commissioned sales and still be ethical?

Ethics are complex in many ways, but in other ways it is quitesimple. Each of us know what we perceive to be right and wrong.That is not to say that everyone agrees, but each person does have apersonal code. Following our personal code of ethics will gener-ally confirm to some degree with what society expects of us.

Ethics began as society's code of unwritten rules. From the timethat humans began living together, such codes of unwritten ruleswere necessary simply to survive. These rules established the wayin which others were to be treated and prevented violence if every-one followed the same code.

For centuries, societies have argued over what is ethical ormoral. It was during the fifth century BC in Greece that thephilosopher Socrates gave ethics its formal beginning. The word"ethics" comes from the Greek word ethos, which means"character."

"Ethics" - From EthosMeaning Character:

The word "ethics" comes from the Greekword ethos, which means "character."

Ethics involves the questioning of why certain things are done orthought. Socrates' student, Plato and later Plato's student,Aristotle, further developed Socrates' philosophy of ethics. Somesay that their thoughts on ethics were so profound and completethat nothing new has been said since Plato or Aristotle on thissubject. We will explore the role ethics plays as it relates to theinsurance field and to personal actions in general.

It might be said that ethics are a recipe for living. Our code ofethics gives each of us our personal rules and values which deter-mines the choices we make each day of our lives. These choicesaffect not only ourselves, but everyone around us. Some types ofethics tell us what NOT to do (it is wrong to steal, so we must notdo so). Others tell us what we OUGHT to do (be kind toanimals). In addition, there are those ethics or morals thatactually take us beyond the basics of moral obligations. MaryMahowald, a medical ethicist at the University of Chicago, callsthis added ethical stand virtues. Virtues might be referred to asgoing beyond the call of duty. It may also be referred to as moralexcellence. Such moral excellence would include those who haveno legal or moral duty to another, but goes to extremes to help

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them anyway. It refers to the person who gives their life for astranger or goes to other countries to work for people they do notknow, even though there will be no financial rewards at all.Virtue is going beyond what we are obligated to do.

Virtue is going beyond what we are obligated to do.

Ethics are never a separate part of our lives. They are part ofeverything we do and everything we say. Ethics determine how wetreat those we know and how we treat strangers. Ethics determineour actions in financial and public matters. Ethics belong in everyprofession and are especially needed in some. Because ethics, as asubject, is so broad and complex, it may sometimes be divided intosections such as personal ethics, religious ethics, legal ethics,professional ethics, medical ethics and so forth. Ethical neutralityis not possible. Doing nothing is a statement of ethical beliefs.

In today's lawsuit prone society, the wise insurance agent orbrokerage will make a point of following state regulations, butethics actually goes beyond what is simply mandated by state orfederal governments. Ethics define WHO we are. A man who tellsconstant lies is known to others as a "liar" (although studies showthat 90 percent of us lie regularly). A man who steals is known toothers as a "thief". An insurance agent who is unethical will alsoearn a reputation for such.

Children learn from what they see and hear. Children tend to bevery good at seeing adults as they really are. Children also tend toimitate the behavior they see, especially if it is coming from theadults that are close to them, such as parents. As a result, parentswho set good moral or ethical examples are teaching theirchildren to do the same. Unfortunately the reverse is also true. Inhomes where prejudice, racism, sexism and other immoral codesare practiced by the parents, those same values are being taught totheir children. Children learn from what they see, good or bad.We have all heard adults say "Do as I say, not as I do." Thechances are, however, that the children will do as they do.

Imitating Other's Behavior:

Many Americans at least partially arrive at their code of ethicsthrough their religion. In fact, the Bible sets down many prescrip-tions for ethical behavior. The Bible is probably the best knownsource of sound ethical advice. Even so, not all have agreed withthe concepts stated there. In fact, interpretations of the Bible havebeen used to validate behavior that would seem very un-religious.

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Karl Marx, the father of communism, called religion the "opiateof the masses." Even Sigmund Freud, the father of modernpsychology, regarded organized religion as institutional"wish-fulfillment."

As we stated, moral or ethical conduct is continually learned.Susan Neiburg Terkel reported in her book titled Ethics, whenMahatma Gandhi, India's beloved leader in the struggle forindependence from England, was asked why he had changed hisviews over the course of a week, he explained, "Because I havelearned something since last week."

Continually Learning:

It is doubtful that any person is only good or only bad; each of ushas shades of each. We continue to learn as new ideas arepresented and new experiences encountered. Unfortunately, if wehave been poorly educated on ethical conduct, we might be facednot only with leaning the basics of ethical behavior, but unlearningbad conduct as well.

Let us look at some examples of behavior and then examine eachsituation for what may or may not be perceived as ethicalbehavior.

Behavior Examples:

EXAMPLE #1 Dan, an insurance agent, was having a hard time selling enoughinsurance to make ends meet. Having a wife and small children, hesought out a company that might be able to offer him more finan-cially. Eventually, he ended up working for a firm that sold LivingTrusts (primarily to retired individuals). Dan knew very littleabout living trusts, but the firm would pay him $300 to $600 forevery trust he brought in. His pay depended upon what he chargedhis clients.

In his first training session, Dan felt that he would probably learnall that he needed to know to feel right about selling the LivingTrusts. What the training session actually did was lay out thetechniques to get people to buy. Another agent in the training classseemed to know a great deal about trusts, so after the training classDan made a point to talk to Joe.

Dan: "Joe, you seem to know a lot about these Trusts."

Joe: "There's not much to them, at least not those that you'll beselling. The people put whatever they have into it and when theydie the trust distributes it."


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Dan: "I don't mean to sound stupid, but isn't that exactly what awill does? They said in the class that these trusts will protect thepeople from probate and taxation."

Joe (laughing): "Don't believe everything you hear. Look, I'vegot to go. Are you on board?"

Dan: "Do you mean am I going to sign on?"

Joe: "Yeah, are you going to pitch these Trusts?"

Dan: "I guess so. Aren't you going to?"

Joe: "Maybe. The leads will be good for other things if nothingelse."

Dan now realizes that something must have been left out of thetraining class. The money is needed, however, so he decides to goahead and market the living trusts. The instructor of the classencouraged the agents to also present them to their present insur-ance clients. Dan has a fair amount of clients and has mentallycalculated how much money he could bring in if only a fifth of hisclients purchased the trusts. Dan is now visualizing how he willspend the money.

Where does "ethics" fit in here? As long as Dan states the presen-tation as it was taught to him, is he free from any ethical liability?Is it really Dan's obligation to further investigate the validity ofLiving Trusts? Is it Dan's responsibility to understand where a trustdoes or does not fit? Or is it the responsibility of the firm whotrained Dan to make that determination?

EXAMPLE #2 Dorothy, an insurance agent, sells long term care policies. Sheknows that the product is a good one, having investigated thecompany and its policies completely. Sometimes Dorothy does getfrustrated because so few people seem to understand the need forhaving such a policy. Since Dorothy's own mother is in a nursinghome, she certainly understands very well that such policies areneeded. Recently, Dorothy was having a difficult time getting a 76year old man and his 73 year old wife to realize the need for such apolicy.


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Dorothy: "Mr. James, even though the cost seems high to you,the cost will be even higher if you or your wife go to a nursinghome."

Mr. James: "Look, I know this is probably a good company. Youseem honest to me and I'm sure you believe in what you are doing.You just don't know me or my family. My boys have already toldus that they will take care of us and I believe they are honest, too.I've already put the place here in the oldest boy's name. Did thatseveral years ago. If I get sick, Addie [his wife] will take care ofme and if she gets sick, I will take care of her. If both of us getsick, our boys will step in. The point is, I am not going to go toany nursing home and neither is my wife."

Dorothy: "I know your boys are honest. You are honest and I'msure they learned it from you and Mrs. James. The thing is, we arenot talking about honesty. We are talking about health issues.You've already told me that neither your boys or their wives aremedically trained. It makes no difference at all that they have toldyou they would be willing to take care of you. They simply cannotdo it. Oh, I'm sure they'll try to at first. Your boys, and perhapseven their wives, will take turns coming by your home to do all thenecessary things. Won't it be great having your daughter-in-lawgive you a bath? How will you feel when you hear your sonsarguing in the next room about whose turn it is to stay all night?You've given your home to the oldest son. I guess the other boyswill feel it is his responsibility to do the primary care. After all,you have, in effect, already paid him to do so. What if his wifebecomes angry about the time your son is having to spend takingcare of you? As your medical condition worsens and he becomestired of taking care of you, who will pay for the costs? The taxpay-ers? We already have enough to pay for. Why should we pay fortwo more when you could have averted the entire situation? Mr.James, this is not about who you are now, but rather who you willbe when illness arrives. Nor is it about what your sons havepromised you. This is about being a responsible person. This isabout taking care of yourself."

Dorothy appears to be very tough. The ethical question here hasto do with that toughness. Is Dorothy "browbeating" Mr. and Mrs.James? It is possible that her verbal attack may simply make themangry or it may push them into buying. The point is, is such behav-ior ethical? Even if Dorothy believes in what she is selling, is itever ethical to treat others in the manner she treated Mr. and Mrs.James?


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EXAMPLE #3 Mike, an insurance agent, sells Medigap policies. A Medigappolicy supplements Medicare; it is a health care plan. Federallegislation standardized Medigap policies in 1992. Mike's statealso set limits on the commissions earned by Medigap salespeoplewhich drastically cut into his yearly income. Since the mandatedcut in his commissions, Mike has been fighting to keep the wolvesfrom his door, so to speak. He is behind in many of his financialobligations. On this day, he has an appointment with a womanwho is just turning 65 years old next month. She knows she willneed to get a Medigap policy (Medicare supplemental plan) beforeher birthday arrives.

Myrtle Todd: "Thank you for coming by Mike. As you know, Ijust got your name out of the telephone book because I amshopping around. I noticed that your office is fairly close to me."

Mike: "I appreciate your call. Taking out a Medicare supplemen-tal insurance plan can be a confusing matter, so I know you musthave lots of questions. Since I am a specialist in the field, youcalled the right person."

Myrtle Todd: "Actually, I believe I understand Medicare fairlywell. I have been reading the information sent out by our stateinsurance department. I already know I want Plan F. It would benice to get one of the plans with prescriptions, of course, but I don'tbelieve I can afford that. My neighbor, Betty, has Plan F withAARP and she seems very happy with it."

Mike: "When did she get her AARP? Was it before 1992?"

Myrtle Todd: "No, she is only a year older than I, so she bought itafter they came out with their Plan F."

Mike: "Well, the thing is, Mrs. Todd, AARP is a mail-order planso they do not have to abide by our state's legislation. If you haveany problems, they simply cannot help you. Because there are norepresentatives here, you are also on your own when it comes toany claim problems. If your neighbor has not had any problems,she is lucky, but it is just a matter of time. Eventually, she willhave problems with her claims. Have you ever handled healthcare claims?"

Myrtle Todd: "No, I haven't. My medical has been through myhusband's work and they always handled everything."


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Mike: "Well, unless you want to learn how to do claim work, youwant an agent in your area. Otherwise, when you have a majorillness, you are going to be swamped with paperwork at the worstpossible time - when you are sick."

Myrtle Todd: "Perhaps you are right. I never was very good atsuch things and you are close by. Can I have the payments takenout of my bank like my medical plan is currently done?"

Mike: "Yes, you could but I don't recommend it. It is muchbetter to pay for a year at a time. You'll save money and you won'thave to worry about mix-ups."

Myrtle Todd writes out the check for the year and asks: "Who do Imake this out to?"

Mike: "Make it out to me so I can make sure this is done rightaway. Your Medicare starts soon and I don't want your policydelayed."

Because Mike is having financial problems, he deposits the checkinto his account and sends in a quarterly payment to the company.Mike feels confident that he will be able to make up the balance forMrs. Todd within the next month when he receives his renewalcheck. In fact, Mike does send in the balance of the year the nextmonth. Since he was able to do so, neither Mrs. Todd nor theinsurance company ever found out what Mike did.

This example has several potential questions on ethical behavior.The main one we are going to focus on is the depositing of thecheck into Mike's personal account. It is true that Mike did squareeverything financially, so Mrs. Todd was never actually injured byhis actions. However, it is certainly illegal to deposit insurancefunds into a personal account. Any agent reading this probablythought of many things that could have gone wrong that wouldhave caused Mike multiple problems (not only with the stateregulatory agency, but with the insurance company, as well).

The ethical question is simple: Is it ever OK to deposit funds intoa personal account or commingle funds? We know that regulatoryagencies say it is illegal to commingle funds, but the question goesdeeper than that. Is it ethical to do so even when there are extenu-ating circumstances?

EXAMPLE #4


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Shirley, an insurance agent, has just returned to the agency sheworks for. She is completing her paperwork for the sales she hasmade that week. While going through the paperwork, she realizesthat she forgot to get a signature on a replacement form. Jerry, acoworker, suggests that she simply forge the signature.

Jerry: "It's easy. Just put it against the window pane over the topof another signature. Everyone does it. Even this company knowsthat."

Since Shirley does not wish to drive back to her client's house,she does as Jerry suggests. The ethical question is simple: Is itever OK to forge another's signature? This would be an ethicalquestion for anyone in any circumstance, not just an insuranceindustry question. As a parent, would we suggest to our child thathe or she forge our own signature or that of a teacher? If the insur-ance agency truly does know that its agents are forging signatureson insurance forms, is that agency then acting in an unethicalmanner? Is the agency setting the scene for other unethicalbehaviors?

Looking at the conversation between Jerry and Shirley, is Jerrybehaving unethically for suggesting that Shirley forge the client'ssignature, or is Shirley the unethical person for acting upon hissuggestion? Or are both guilty of unethical behavior, each for theirown part in it?

EXAMPLE #5 Jean and George Wren are insurance agents. They jointly owntheir own agency and they work out of their home. They use partof their garage that George converted into a room as their office.When they do their year-end taxes, Jean states that they use theentire garage area plus an upstairs bedroom for their office in orderto get a larger deduction. In addition, whenever possible, Jean andGeorge "hide" income. They try to show less income than actuallyexists.

Since so many people try to lessen their payments to the IRS, isthis behavior ethical? In the past year, the American people havebecome painfully aware of the excessive spending habits andabuses of our politicians. We, as tax payers, are of course shoul-dering the burden for the unethical behavior of our politicians.Knowing that our tax dollars are used in greedy, self-serving politi-cal ways, does our responsibility to pay taxes void itself of ethicalconcepts? In other words, since we are aware that our tax dollars


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are being wasted, does this free us from our ethical duty of payingtaxes?

Ethics are not always merely a matter of how we think and act.Often it is also a matter of character. So many things cometogether to form our character that all must be taken into consid-eration. Values, principles, emotions, plus many other factors allcontribute.

The FormationOf Values:

There is little doubt that each of us are influenced by others.Even so, for each path chosen, we alone must take responsibility.Each of us has the ability to build, change, or destroy our owncharacter. Part of our character is, of course, our ethical guidelines.

It should be noted that no single act defines our personalcharacter. Each of us has likely participated in an act that waswrong. That one action does not define our total character just asone kind act does not build our entire character. Character is morea matter of adding and subtracting our actions and thoughts. Agood person can do something unkind, yet still be a good person.A bad person can do something kind for another and yet remainbasically an unethical person. We refer to these isolated deeds asbeing "out of character." An action that is not consistent withnormal behavior is not likely to form or change the character of aperson (although that single action can affect another in either apositive or negative fashion).

Probably every religion stresses our need to give to the poor.While it is certainly true that the poor do need help, the reason weneed to do so goes beyond that. When we do something foranother, without any self-interest involved, our personal gain isoften much higher than any gain realized by others. The true giverhelps others quietly. To help others, and then loudly proclaim thedeed, is likely a selfish act with personal recognition sought, ratherthan true giving.

What does this have to do with ethical behavior? Ethics is notentirely about yourself; it is also about others. It is not so muchwhat one knows that makes an individual ethical, but rather whathe or she understands. A truly ethical person realizes that theirbehavior is their loudest statement about themselves and those theyassociate with.


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It is not so much what one knows that makesan individual ethical,

but rather what he or she understands.

Making ethical decisions addresses fourbasic issues:

4 Basic Issues:

1. Is it possible to teach ethical behavior?

2. What is the scope of ethics?

3. What does it take to be a moral person?

4. What is a person's responsibilities to other moral persons?

There is no doubt that each of us, regardless of our occupation,faces ethical issues on a daily basis. However, anyone in anoccupation that has a "public interest" is especially faced withethical issues. Insurance has a "public interest."

Ethics are standards to which an insurance agent or broker mustaspire to; it is feeling a commitment to each client. Every type ofprofession tends to have an informal code of ethics which maysometimes be more understood than written. Ethics are a means ofcreating standards within any given profession to upgrade it andgive it honor. It is a means of measuring performance andacknowledging outstanding individuals. Ethics are often a meansof providing priorities and building traditions based on integrity.

It would be hard to imagine doing business with anyone that weknew to be unethical. Can you imagine turning over the control ofyour financial affairs to an attorney that had been convicted ofstealing from his clients? Would you buy a car from a person whohad knowingly lied to others about the cars he represented? Wouldyou deal with an insurance agent who had repeatedly misrepre-sented the products he or she sold? Ethics are the only element,other than legal mandates, that add an element of trust to manyindustries. It is very difficult to mandate ethics. Only behavior, aswe previously stated, may actually be mandated. If a person isethical, that is something within themselves that simply adds totheir trustworthiness.


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No matter what our profession may be, asindividuals, each of us faces ethical issueseach day. Some are very simplistic in naturewhile others are complex and may have manysides (and many correct answers) to them.We face issues that are personal, such as Howmuch should I give to the poor? Is it wrongfor me to take drugs? Should I reportsomeone who is cheating (whether thathappens to be in school or elsewhere)? Thesetypes of ethical questions are all around us.

Facing EthicalIssues Daily:

Some types of ethical or moral questions can be directed to ourreligious institutions for support in determining the right answer.Sometimes the answers can be found in our legal system. If ourstate or federal government says commingling funds is illegal, forexample, then we could also state that it must be unethical as well.Sometimes, determining what is ethical is simply a matter of whatfeels right emotionally. We have all said or heard someone elsesay "It just doesn't feel right." That feeling of right and wrong isprobably the result of our childhood upbringing. Even if we do notdistinctly remember being taught that a particular action is eitherright or wrong, somewhere in our upbringing or past experiences,we have received such teachings.

While this course cannot instill ethics in anyone who has none, itmay provide the tools for determining the more complex issues.By using basic concepts and theories and by having an appreciationof what constitutes an ethical solution, decisions may be made onthe basis of reason.

It should be noted that different conclusions may be reached tothe same ethical question. It does not mean that one solution isright and the other wrong. Ethical questions often have multipleanswers, all of which may be correct. Many ethical questionsinvolve multiple hues; some decisions may be based solely onfacts, while others may be based less on facts and more onemotional factors (or what simply feels right).

We asked the question: Is it possible to teachethical behavior? This, of course, dependsupon multiple factors. First of all, does theperson desire to be ethical? As with allthings, the person must want to achieve thegoal at hand. If other goals are more impor-tant to the individual, then perhaps it will not

Question #1 - Is It Possible ToTeach EthicalBehavior?


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be possible to teach ethical behavior. Ifhowever, ethical behavior is important to theindividual, even if other goals are also sought,ethics may be taught.

One of the first lessons taught to children by their parents issharing. Probably few parents think of this as "ethics", but it is.Sharing is the opposite of greed. As adults, we learn to share innumerous ways, but sharing begins as children. The shift fromsecuring our own interests to sacrificing on behalf of others is anessential part of what is meant by "ethical decision making." Thismay especially come into play for insurance agents. The choice tomake a sale and earn a commission in any way necessary ratherthan sacrificing the sale in behalf of honesty is an ethical decision.The selfish person cannot routinely make such moral decisions, orperhaps more correctly, will not make such decisions.

It is necessary to understand that one of the general features oftaking an ethical point of view is a willingness to take into accountthe interests, desires and needs of others. A person may argue thatit is necessary to look out for one's own interests, desires andneeds. While this is certainly true to a point (we must cloth, feedand house ourselves and our families), taking our own interestsinto account need not mean making unethical or immoral decisionsregarding others. Even commissioned salespeople are able to makea very good living while still maintaining ethical behavior. In fact,the best salespeople do not need to behave unethically because theyhave mastered their trade through the development of communica-tion skills and professional training.

When a child asks his or her parent "Why do I have to share mytoys?" the reply may be "Because if you don't share your toys withyour sister, she will not share her toys with you." This simplelogical answer teaches the child a valuable lesson. Our interestsare tied to the interests of others. Just as the man who is known asa liar or a thief will find others unwilling to trust him, the insuranceagent who is not ethical will, at some point, find making a livingimpossible because no client wishes to deal with him. We arebetter able to achieve our goals when we recognize the goals andinterests of others. Plato argued that immorality (unethical behav-ior) is ultimately self-defeating. While the con artist may notbelieve this and some unethical people do seem to prove the point,most people believe that, at some point in time, each personreceives what they have given. The Bible says we will reap whatwe sow. Even if we do not get back what we give others (whether


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that be good or bad), most people would agree that it is easier to behappy with ourselves when we feel we have done the right thing.

Not everyone believes it is in their own self-interest to be ethical in their behavior. Somewho reject the idea of other's interests anddesires are egoists. Do not confuse this withegotism. An egotist is a person who is self-absorbed or stuck on themselves. Thesepeople make poor egoists. Webster's diction-ary defines egoism as the doctrine that self-interest is the basis of all behavior whereasegotism is the habit of being too selfabsorbed, talking too much about oneself orconceit. Although these words are similar,their meanings are different.

Egoists (Not Egotists):

Psychological egoism maintains that people are always motivatedto act in their own perceived best interest. Psychological egoism isnot an ethical theory since it does not tell people outright how tobehave. Rather it attempts to explain why people behave in certainways. Ethical theorists consider this theory, however, since it doeshave a bearing on their theories of ethical behavior.

Another version of egoism is a genuineethical theory. Traditionally named "ethicalegoism," it maintains that people ought to actin their own perceived best interest. Anethical egoist argues that people should act intheir best interest at all times because it isgood for the general economy (providingindustry and jobs, for instance).

Ethical Egoism:

Psychological egoism is an explanation of behavior,whereas ethical egoism is a theory of behavior.

Although ethical egoism and psychological egoism are separateand distinct, they are often meshed together by writers and speak-ers. Psychological egoism is an explanation of behavior, whereasethical egoism is a theory of behavior. In many ways, ethicalegoism can be substantiated by those who prescribe to it. TheEnglish philosopher, Thomas Hobbes, was a well known believerin ethical egoism. Of course, the interests of individuals come into


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conflict with others whose interests are different. This is where thegreater interest comes into play. Even while pursuing our ownpersonal interests, it is possible for those interests to be swayed orchecked by the interests of others because of possible conse-quences which one may wish to avoid. That is how laws manageto control behavior even if they are unable to control ethics. Underthe theories of ethical egoism, it is in the individual's best interestto follow the established laws because the fines or penaltiesimposed are not desired.

In the marketplace we all try to buy low and sell high. That iscertainly an attempt to pursue our own self interest. It is unlikelythat the buyer worries about the seller when buying low, nor doesthe seller worry about the buyer when selling high. Individual selfinterest is at work. Even though this may be an excellent exampleof ethical egoism, it tends to be both orderly and productive to oursociety. This points out that this theory has positive dimensions toit despite the selfish basis.

A political economist, Adam Smith, believed in ethical egoism.He felt that people, while being interested in their own needs anddesires, created good for society as a whole. Smith felt thateconomic conditions were created and expanded when peopleacted in their own behalf. Our American economy is, in manyways, an example of this belief.

If we were to fully believe in psychological egoism, which statesthat humans automatically act in their own behalf, many of the actsof heroism that we see could not be explained. The passenger whosurvived the plane crash in the Potomac River only to drownbecause he repeatedly handed the rescue rope to others could notpossibly have been acting in his own behalf. Perhaps it could besaid that he was not being heroic so much as he was avoiding guiltwhich he would have felt had he left the others behind. This is notlikely, however, since those he saved were strangers to him.

There is more day-to-day heroism than onemight realize. Such simple things as the childwho shares his lunch with another student, thewoman who gives her last dollars to ahomeless person, the man who donates hisonly day off for a food drive are all acts ofkindness that consider the needs and desiresof others.

Day-To-Day Heroism:


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This still brings us back to the basic question: Is it possible toteach ethical behavior to others? There is no clear answer. Anagent who has never considered ethical behavior might suddenlybegin to do so if the agency where he or she works begins a strongethics campaign. On the other hand, an agent might continue to actunethically even if threats are made to recall his or her license tosell insurance. One thing is certain: the effort must be made toemphasize ethical behavior because there will always be thoseagents who will respond favorably to such efforts.

Question number two asked: What is thescope of ethics? This is a massive questionthat could be carried to great depths if wechoose to. In many industries, including theinsurance industry, the professionals haveknowledge that the general population doesnot have. As a result, those individuals whoseek out the professionals must rely upontheir honesty and integrity. Therefore, afeeling of ethical standards must exist. It wasthe potential for abuse of power that provideda set of rules for what is commonly called"ethical behavior." Sometimes, ethics arewritten standards which may be mandated bylaw on either a local or federal level. Thepremise upon which practical ethics must bebased, according to Stephan R. Leimber of theAmerican College where he is a professor oftaxation and estate planning, is that powermust be exercised in the interest of the clientswho seek the professionals out and may notbe exercised solely in the best interest of theprofessionals themselves.

Question #2 -What Is The Scope of Ethics?

Parts of the insurance industry have been labeled (sometimesunfairly) as lacking ethical standards. Usually what we find is notan industry as a whole without ethics, but rather some individualswho have received much publicity. Senior insurance products havereceived bad publicity fairly often. Part of this has to do with theage of the victims. If a 25 year old is taken advantage of, manywould think he was simply stupid or uneducated to have allowed it.If a 75 year old is taken advantage of, however, publicity is sure tofollow. This is not surprising since a 25 year old is more likely tohave the ability to make sound judgments in comparison to a 75year old person. Also, our older population controls most of thenation's wealth. If a salesperson (in whatever industry) is greedy


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and unethical, he or she is most likely to target those with money.That would typically be older people.

We should also ask ourselves why society seems to consider itless offensive to take advantage of a 25 year old person. If unfairadvantage (a con job) exists, why does it matter how old or youngthe victim is?

When we look at what the scope of ethics is or could be, onemight be surprised at the extent to which it could be taken. Amy L.Domini and Peter K. Kinder have jointly written a book called"Ethical Investing" which looks at how our standards may even bebrought into the field of investing. For example, if an agent werean animal activist, would it be ethical for them to represent compa-nies that use animals in the laboratory for testing? If a client is anenvironmentalist, should he or she invest in any type of investmentthat is detrimental to the environment?

Sometimes, people or cultures do not agree on what is ethicalbehavior. What one culture or society may consider ethical,another may not. Even within the same culture or society, peoplemay disagree on what is and is not ethical. We often see thesedifferences between religions as well.

Every person probably has some degree of greed or selfishnesswithin them. The ethical person realizes this possibility. Sinceethics is a code of values to guide man's choices and actions, theethical person will bypass their own greed and do what is perceivedas best for the majority of people or best for the person they aredealing with. In choosing his or her actions and goals, constantalternatives are faced. It is important, in this context, to notice theword "perceived." It is not always easy to decide which choice isbest and ethical. Without a standard of values, ethical choiceswould be very hard to make. At some level, our religiousbackground may set the standard of values by which we make ourchoices. However we arrive at it, at some point, an understandingof how others feel determines many of our ethical decisions.

Since ethics is a code of values to guide man'schoices and actions, the ethical person will bypass

their own greed and do what is perceivedas best for the majority of people or best

for the person they are dealing with.


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In a book titled "Everything You've Heard Is Wrong" TonyCampolo recites this experience: "I had spent the afternoon at asales conference sponsored by a large insurance corporation. Theexecutives of the company had brought in an array of top-flightspeakers to teach the sales force the most successful techniques formarketing their product. The audience listened with riveted atten-tion as they were instructed how to "set up" clients, push the rightemotional buttons, and close the deal. What they heard were thebest insights about marketing that the experts in the field of behav-ioral psychology could provide. Surefire sales pitches weredemonstrated that, according to the speakers, were certain to elicitthe desired responses from even the most reluctant prospects. Thepresentations were brilliant! It was my task to end the day with amotivational talk that could "psych up" the sales teams to get thejob done. I was supposed to get the audience's juices flowing sothat they would be enthused about doing the things they had beentaught all day long. You can imagine the surprise, if not the shock,that greeted my opening words: 'Everything you've heard today iswrong.' "

He went on to say that he felt people were not things to bemanipulated by techniques and sales pitches. Mr. Campolo feelsmanipulating people shows a lack of respect for who they are.

Most salespeople would probably prefer to work with TonyCampolo's perspective. It is often stressful to feel that selling is acombative situation. The point is, if you are representing a productthat you believe in and the consumer needs, it would seem thatgood communication skills would be more important than manipu-lative skills.

Our third question, What does it take to be amoral person?, is probably more simple thanany of the other questions asked. Most peopledo know right from wrong. While what isright may not always be agreed upon, as longas a person acts on what they perceive to beright, then they are acting ethically.

Question #3 -What Does It Take To Be A Moral Person?

It is unfortunate that so many people in the insurance sales forceperceive their industry to be one of disdain. Insurance issomething that people really do need for the security of themselvesand their families. There is a remarkable story about an insurancesalesman named Martin England, who was white and from theSouth. He learned that Martin Luther King, Jr. was not adequatelycovered by life insurance. Realizing the dangerous job Mr. King


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was performing, he was understandably alarmed. In fact, he was soconcerned that Mr. England began to try to contact Martin LutherKing. As you can imagine, that was not an easy task. Finally Mr.England did succeed in getting Mr. King to sit down with him andallow him to present the situation as he saw it. Martin LutherKing, Jr. did buy life insurance from Mr. England. Only a shorttime later, Mr. King was killed by an assassin. Of course, his deathwas difficult on his family, but think how much worse it wouldhave been had they also been left destitute. An ordinary insuranceman went to un-ordinary lengths to help another. In the process, heearned a commission, but what he gave the King family was muchmore valuable than what he earned.

The "ethical" person simply believes in right andwrong and chooses to do right. Again, thisinvolves the person's perception of right andwrong. Because it involves perception, somepeople become very good at rationalization. Isthe action right because it is for the good ofsomeone else or is it perceived to be right becausea commission will be realized? These are toughquestions. The ethical insurance agent does notbelieve it is necessary to trample their potentialclients in order to get the sale; they do not believeit is necessary to tell half-truths or leave outneeded information. Of course, it is necessary tobe well prepared and to understand good commu-nication techniques, but any job requires certaintypes of skills.

Believing In Right And Wrong:

It is common for ethical people to have someform of religion in their lives. They make noapology for accepting God and religion into theirlives and work. Ethical people tend to be warmand caring by nature, it is said. Whether or notthis is true, we cannot say, but ethical people docertainly seem to place a value on others. In fact,valuing others is an aspect of ethical behavior.Perhaps you cannot have one without the other.

Religion - A Common Component:

It is not possible to be one person away fromwork and another person at work. Who we are isdefined everywhere we go and in everything wedo. Three questions must be addressed:

Addressing Three Questions:

1. What kind of person am I? 2. What kind of work do I want to do? 3. What do I want my legacy to be?


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Just as a man is defined by the lies he tells, and a thief is definedby his actions, even we are defined by our every day activities. Wedo not necessarily have to be a liar or a thief to define ourselves asless than honest. Many of our political figures are not actuallydishonest and yet they are not perceived to be honest either. Howdo we want ourselves defined? Answering such questions cannotbe avoided. Even when we try to ignore them, we are still answer-ing the questions by our actions. It must be realized that thequestions are asked in the minds of every person we come incontact with. They look at us and they form opinions to thesequestions. Coming to terms with the basic philosophical questionsabout what we are doing with our lives may be the most practicalof all possible ventures.

If we have children, it should also be pointed out that they arevery good at defining who we are. Children may not voice theimage they see, but little is missed. How do you wish yourchildren to view you? What you do in your every-day lives willform their opinions. It will also demonstrate to your children whatpath in life they might take.

When we ask What kind of work do you want to do? we are refer-ring to the quality of your work. Forging signatures, misstatinghealth conditions, omitting information for the sake of a sale, andso forth, determines your quality of work. True professionalssimply feel their integrity is worth more to them than a quickcommission. Certainly, anyone can make an error and that may notbe a reflection of their professionalism, as long as the error iscorrected. If an error is made (even an honest error), and no effortis made to correct it, then again that reflects on the type of workperformed.

The question What do I want my legacy to be? refers to howothers will remember us. Some may not care about this point, butit will be important to those who love us. Most of us probably dowish to be remembered in a favorable light. Can you imaginebeing remembered for the quantity of errors made or for thedishonest and unethical actions taken?

Good business requires that you know whatyou are doing. Sometimes this involvescompetency. Of course, most people wouldnot view themselves as incompetent even ifthey were. Sometimes, the industry itselfmust remove those within it that are notcompetent. Sometimes, competency is merely

Competency:


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a matter of obtaining required or necessaryeducation within any given industry. It isalways interesting to note the amount ofsincere education acquired by the leaders inan industry. The leaders are nearly alwaysmore concerned with educating themselves toa greater degree than are those at the bottom.Education and ethics do tend to go together.It should be noted that success and educationalso go hand-in-hand.

How many times have you, as an insurance agent, sat in an educationalseminar and observed the quantity of others who are obviously not inter-ested in learning. Of course, it is also the responsibility of the educatorsto make the seminars interesting. However, there are always those whoattend simply because they must. In our business, this constitutesunethical behavior. Constant learning is very important in the insuranceindustry, those who realize this will be better equipped to do a good job.

It is also important to know why you aredoing what you do. For insurance agents, thatmeans it is important to understand why yourindustry and services are valuable. We haveall known an agent who seemed to just begoing through the motions of their job (sellinginsurance) without any pleasure beingreceived from it. Whether a person is aninsurance agent, a plumber or a teacher, theremust be pleasure derived from what they aredoing. Unless there is some pleasure or pridein the job, the job will be done poorly. Fewof us could do an outstanding job atsomething we hated.

Understanding The"Why" Of Your Profession:

Often the reason an agent is not enjoying their job is simply becausethey do not understand why they are doing it. If their agency has lostsight of ethics chances are their agents will not know why they are doingthe job (beyond making money for the agency). In the midst of theWatergate investigation, Jeb Magruder announced that he becameinvolved because he had misplaced his "ethical compass." Newspapercolumnists grabbed on to that phrase and many jokes evolved from it.The truth is, however, that it is a very fitting way to describe the situa-tion. The majority of people do know what is right and what is wrong.That is not to say that, if surrounded by only one type of morality, thatone's "ethical compass" cannot only be misplaced, but set off its direc-tion as well.


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It is unlikely that most agents wouldconsider who they work for to be a matter ofethics. However, it may end up beingconnected if ethical behavior is not deemedimportant by the company. When an agent(or anyone, for that matter) feels that their roleday-in, day-out is primarily connected tomaking money without any regard as to howthe money is made, ethics may easily take aback seat.

Who Do You Choose ToWork For?

How does an agent know, other than the extreme cases, if theiragency lacks ethics? It may not always be a black-and-white situa-tion. Sometimes the decision can only be a personal one if theagency is not noticeably to one extreme or the other. One wouldnot expect an agency or brokerage to be outright unethical. Eachstate has mandated certain procedures that a company must followwhich usually prevents such outright unethical behavior. It is morelikely that the company would ignore unethical or questionableactions of their agents which would, therefore, condone suchactions.

Some examples of this might include:

EXAMPLE #1 Joan, an insurance agent, is sitting in the agent's room of the agencywhere she works. As she is completing her paperwork on the businessshe has written that week, she notices that she forgot to have one formsigned. Another agent in the room, Matt, suggests: "Don't worry aboutit. Just put one of his signatures against the window pane and copy overit onto the one you need."

Joan: "Isn't that illegal?"

Matt: "Maybe, but everyone does it. If you're not, then you're the onlyone who isn't."

As Joan asks around, she discovers that Matt was correct. Virtuallyeveryone she spoke to about it confirmed that they, too, copied signa-tures where one was forgotten. Joan found that nearly every agentintended to get all required signatures, so it was not a matter ofpurposely omitting them. Rather, it was an easy way to perform belownecessary levels of competence. Several agents even mentioned that themanagement had sometimes been present when signatures were copied.They simply left the room and acted as though they had not seen it.

While we know Joan was unethical in copying the signature, there areadditional ethical questions involved. Is Matt unethical for advocating


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that another person forge a signature? Is the agency unethical by ignor-ing the behavior going on? By ignoring the behavior, is the agencycondoning it? If Joan had decided against forging the signature wouldshe then be free of any other agent's ethical behavior? Or, having theknowledge of what was going on, would she be unethical to remain atthe workplace? Should she go elsewhere to work and leave it at that or,in the interest of ethical behavior and responsibility, should she reportthe behavior to the State Insurance Department and perhaps to the insur-ance companies as well? Since Joan had developed several good friend-ships among the agents, how does loyalty to those friends and herresponsibility to ethical conduct correspond?

As you can see, ethical behavior is not a simple matter. Do yourstandards of what is ethical apply only to yourself or to others aswell? If your views do not correspond to the views of others, whois right?

EXAMPLE #2 Jerry, an insurance agent, is in the home of a retired couple. He is thererepresenting a Medigap policy from a well-rated company. Thecompany that the couple, Marge and Herb, currently have is also with awell-rated company. They purchased the policy several years before andhave not used it very much since both Marge and Herb have enjoyedgood health.

Jerry: "You said you haven't used your policy very much, right?"

Marge "Yes. Luckily both of us do enjoy excellent health. Of course,we watch what we eat and we do exercise during the week."

Jerry: "I don't want to alarm you, but the policy you have probablywould not have done a very good job. The company is in financialtrouble and we don't know yet if it will make it or go under."

Herb: "That is certainly a surprise. We were told it was an A-ratedcompany when we bought it."

Jerry: "It might have been at the time. So many companies that werepreviously strong have had problems in the last few years. I'm sureyou've seen that in the news."

Jerry does replace the policy owned by Marge and Herb. Jerry knewthat their policy was actually safe because the company was not in anyfinancial trouble. The company he gave them was also sound and didgive the couple basically the same coverage they already had. Therewould be no problem with preexisting conditions, so that was not aconcern in the replacement. Even the price was approximately the same.


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Since he did Marge and Herb no harm, was Jerry justified in replacingtheir policy? Jerry is basically a responsible person who will keep intouch with Marge and Herb. If they need any help with claims, theagency that employs him will help them. Even so, there is no doubt thatJerry lied in order to get the sale. Most states require that an agent truth-fully represent the financial status of an insurance company (theirs andothers), so it is likely that what he did was illegal. Aside from that,however, was what he did serious? Is it ever acceptable to misrepresentanother company? If the couple, Marge and Herb, no longer had anagent representing them or if they never had any contact from theiragent, would Jerry be justified in taking over the business? Jerry willkeep in contact and will give good service. Can the misrepresentation berationalized from that standpoint?

EXAMPLE #3 Jenny, an insurance agent, has a lead card for a couple regarding lifeinsurance. They sent it in about 60 days earlier. Jenny does not call, butstops by their home unannounced. When she does so, she discovers thatthey think she is from a company who had called them on the phone andset up an appointment.

Glenda Maxwell: "Aren't you a day early? I thought we set this up fortomorrow night."

Jenny: "Oh, I'm so sorry. I thought it was for tonight."

Glenda: "Since you're here, we may as well go ahead. It really doesn'tmatter anyway. Ted is in the garage. I'll go get him."

While Glenda goes to the garage, Jenny notes the company nameon the calendar along with their phone number and the agent'sname. The next morning she calls the company and cancels theappointment using Glenda Maxwell's name.

Since Jenny supplied the couple with the insurance they werelooking for, does it matter that they thought she was representingthe agency that called them? Should Jenny have given the couple achance to hear the other agent's presentation which would haveallowed them to compare products? Since selling is socompetitive, is this merely an aspect of the selling game, havingnothing to do with ethics?

When Jenny relays what happened at her agency's office, everyone tellsher how lucky she was to happen into the situation. No one, includingthe management staff, seems alarmed that she did not straighten out themisunderstanding. No one seems alarmed at her call to the othercompany (pretending to be their prospect). In fact, many agents seemedto appreciate her ingenuity.


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If there is an ethical question here, does it only concern Jenny? Is thecompany she works for responsible for guidance in such situations?Since this is not something that would routinely come up, is there anyneed for the company to address this situation at all?

EXAMPLE #4 John works for a large investment company. John is a strong believerin environmental issues. Because of his beliefs, he will not refer anyclient to any stock or company that John feels harms the environment.John seldom allows his clients to see any investment that he does notagree with. John's company knows that John will not present anycompany that he does not agree with. The company says nothing as longas John brings in a good quantity of business. If his business is down,however, they do bring up the matter.

Is it ethical of John to only show those companies that he agrees with?Secondly, is it ethical of the company he works for to only be concernedabout it if his sales are down? Could John ethically represent companiesthat he opposes? Which set of ethics should come first: his own regard-ing the companies or his responsibility to his clients to allow them tomake their own choices? If the company that employs John should require that he show alloptions to their clients, is John ethically bound to follow hisemployers requirements? Whose ethics come first? John's, theclient's, or the employer's? Different people or groups often do notagree on what is or is not ethical. Who should decide which ethicscome first? This question might come under the heading of "Whatis a person's responsibilities to other moral persons?"

Basically, all of these concepts or questionsbring us back to the original point. A personmust know why they are doing a particularthing. In the case of selling insurance, if theagent does not understand the reasons whyinsurance policies are important to own, itwould be very easy to lose track of importantethical elements. The lack of this understand-ing might eventually force the agent to dealwith the basic inquiries that come about whenethics are pushed to the background.

Back To TheQuestion of "Why?"

Most people realize that they are responsiblefor their actions. In sales, we often hear thestatement "For every action, there is areaction." This is generally true in life aswell. It goes beyond the obvious situations (if

Question #4 -What Are OurResponsibilities ToOther Moral Persons?


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you smack someone, they may smack youback). If you are rude to a person, you maynot realize the "reaction" at that moment, butone will surely follow. The reactions may notalways be noticeable to others. This isespecially true when it involves emotions,such as hurt feelings. Since each of us isresponsible for our actions, the question thenis "Are we responsible for the reactions thatfollow?"

Some reactions are directly tied to ouractions and are predictable. If we lie in orderto obtain money, our actions are then directlytied to the reactions that occur. What we didwas deliberate and the "reaction" should be nosurprise. In such situations, we are responsi-ble for the reactions.

Reactions ToOur Actions:

In other situations, we cannot be responsible for the reactions. Ifwe act in a responsible manner and a reaction occurs that hurts oroffends others, we may not necessarily have any responsibility.What a person does in every day life is the result of multipledecisions made over their lifetime. Those decisions include ourperception of who and what we are. Our character (or lack of it) ismade up of our day-in, day-out decisions. The irresponsible personwill not care what his or her responsibility to other moral peoplemay be. Therefore, we will look only at what an ethical person'sresponsibility is towards other ethical persons.

Let's look at the example of John, the investment counselor. He would not present any investment to his clients that he did not personallyagree with. Let us assume that most of John's clients are themselvesethical people. Since his clients are themselves ethical, is John wrong inmaking such investment choices for them without giving them a chanceto bring out their own sets of ethics? What is John's responsibility toother moral or ethical persons?

Moral or ethical responsibility is not a singlechoice. Such choices are made daily in manythings that we do. If we assume that ourchildren are basically moral people, then whatare our responsibilities towards them? Thismay also be said of our peers at work. If themajority of the agents at the firm we work for

Ethical ResponsibilityA Matter OfDaily Choices:


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are ethical people, do we then owe it to themto also be ethical?

Agency XYZ prides itself on being ethical. The owners and managersstress such behavior at all company meetings. While sales are certainlypromoted, it is made clear that the sales must be honestly come by. XYZCompany seeks out the very best products available so that their agentscan present a superb policy to their potential clients. Training andeducation is given a top priority by the company as well.

It would probably be safe to say that XYZ Company has invested notonly time, but money into their company and their sales force. Sincethey have stressed ethical behavior, it is also probably safe to say thatthey do not feel such behavior will hurt them financially. In fact, theyprobably feel it will benefit them financially. Given this scenario, XYZCompany has probably attracted those insurance agents who also give ahigh priority to ethical behavior. If an unethical agent came to workthere and misrepresented the products (theirs or others), XYZ Company,or any other aspect involved in the sale, how would this affect the otherethical agents?

An agent once relayed this true story. She had been building aclient base for about two years when the agency she worked forbecame the subject of an investigation by the state's insurancedepartment. Since she had always prided herself on giving her bestefforts to her job and her clients, it was distressing to see theagency she worked for on the evening news. It did not matterwhether the agency had actually done anything wrong. It did notmatter whether she had done anything wrong. Simply beingconnected by virtue of employment caused credibility problems.

In this same context, the agents at XYZ Company would beaffected by an unethical agent even though the other agents werevery ethical in their behavior. People believe in the old saying "Itonly takes one bad apple to spoil the whole barrel." Therefore,one unethical agent will affect how others in the same agency areviewed. In this context, every agent has a moral or ethical respon-sibility to all the other agents. In the case of the agency beinginvestigated, that agency had a moral or ethical responsibility to allof it's agents. Of course, it is the job of the state's insurance depart-ment to investigate any complaint. That certainly does not meanthat anyone is actually guilty of doing something wrong. Chancesare, however, if it hits the evening news or the newspapers, it willnot matter whether there is any guilt or not. Opinions will beformed. Therefore, each insurance agent and each insuranceagency has an ethical responsibility to act in a way that will notcast doubt on themselves or others.


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Sociologists have contended that determiningour own identity is not an easy thing. Manypeople never realize that we are able to choosewho we are by the choices that we make.Certainly, we are influenced by many things,some of which are beyond our control. Even so,most of who and what we are, we determineourselves.

Determining Identity:

Since reason is man's basic means of survival, itis not surprising that we have the ability to formwho and what we are. This is called ObjectivistEthics. Since everything man needs has to bediscovered by his own mind and produced by hisown efforts, there are two basic points to becom-ing the person we choose to be: thinking andactions. We decide who we will be and ouractions carry out those thoughts. To be anethical person, we must, through our thinking,choose to be so, and then productively worktowards it.

Objectivist Ethics:

If some people do not choose to make any conscience choice, they willdevelop by imitating and repeating the actions of those around them.This is why it is so important that agencies and management staffs makeethical behavior a priority in the workplace. Those who simply repeatthe actions of those around them seldom make an effort to understandtheir own work. Unfortunately, who is imitated is seldom a concern tothese individuals. As a result, one bad apple can, in, spoil the barrel.

Those who do choose to think out theiractions and work productively towards a goalstill do, however, remain the main force.They are the people who are most likely to becopied by others. Even those who survive byusing brute force, or by making others theirvictims in some capacity, survive onlybecause someone else was thinking andworking productively. In other words, conmen survive off the thinking efforts and hardwork of others. Those who use brute force tosteal or loot, survive because there was finan-cial gains made by those who think ahead andcomplete their lifetime goals. It all comesback to those who do use logic andconscience choice.

Thinking IndividualsWill Always BeThe Top Performers:


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Objectivist Ethics, as a theory of ethics,holds man's life as the standard of value andhis own life as the ethical purpose of everyindividual man. The difference between"standard" and "purpose", as used in thiscontext, can be important. "Standard" is anabstract principle that serves as a measure-ment or gauge to guide a person's choices inhis or her achievements or specific goals. Thegoal itself or the achievements obtainedbecome the "purpose". Probably every personhas some "purpose" or goal in life, but notevery one would have a "standard" of life.

Objectivist EthicsAs A Theory:

Pete was born very poor. This poverty made such an impact on him inhis childhood that he now strives to become wealthy. He obtains hisaccumulating wealth by whatever means necessary. Although Petedefinitely has a goal or purpose in life (becoming rich), he does not haveany standards. There is little doubt among those who know Pete that hewill become very rich. Along the way, however, Pete is not findingmuch happiness. He has not thought out the goals he has established.Pete knows what he is doing, but he does not understand why he is doingit. Pete would be surprised (and perhaps even laugh) if someone toldhim that ethics are a part of finding happiness.

Our history is full of wise men who wroteabout the philosophies of life. While many ofthem did not agree on many points, most didagree on one: lack of ethics promotes disor-ganization, financial turmoil and, sometimes,even the demise of governments.

What Does EthicsIn Action Mean?

As individuals, we may often feel that we have little control overothers. This is true to a certain extent, but we do actually havemore control than we might realize. The control we have is theability to choose our own way of life. There is little doubt thatwhat we do on a day-in, day-out basis affects everyone we come incontact with. We are also impacted by others in the same manner.

Tim is driving to work and the traffic is very congested. Even so, hismood is bright and he is humming along with the radio. As he mergesinto another lane in anticipation of an upcoming freeway exit, the manhe pulls in front of becomes angry. Perhaps he feels Tim has cut himoff, or maybe he is just a sour person in general. For whatever reason,the driver is angry. The other driver whips along side of Tim's car, rollshis window down and shouts angry explosive words full of the


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four-letter type. The angry driver also gives Tim a few well known handsignals.

Although Tim did not feel that he had done anything wrong, his moodinstantly changes. He no longer hums with the radio. When he arrivesat work, his secretary greets him cheerfully. Tim's response is short andbleak. Although he did not actually say anything bad to Jane, his secre-tary, she felt that he must be angry with her for some reason. Had sheforgotten to do something yesterday? Jane spent her morning feelingworried and stressed.

By the afternoon, Tim had forgotten about the driving incident (orsimply put it behind him), but Jane was still affected. As the dayprogressed, she expected some explanation from Tim about what she haddone that was upsetting to him. When no explanation came, her stressmounted. That evening on her way home, Jane began to wonder if Timwas simply unhappy with her work in general. That night she barelyslept.

On her way to work the next morning, Jane stopped to get her car filledwith gas. When she handed the clerk a twenty dollar bill, the clerkmiscounted her change. When Jane noticed she was short a dollar, shecurtly pointed out the error to the clerk.

After Jane left, the clerk, Susan, felt humiliated. It was obvious to herthat Jane thought she was trying to cheat her by keeping an extra dollar.Susan never became angry, but she did feel stupid and inferior. It wasjust one more incident that confirmed to Susan that she would neveramount to much. She figured she would probably always work forminimum wages because she simply did not have the ability to do anybetter.

Are these examples of how we affect others an extension of ourcode of ethics? Often we forget that ethical behavior is not onlyconnected to such things as paying our taxes fairly, following thelaws or telling the truth. Ethical behavior can also be connected tohow we treat others. Ethics is a code of values to guide man'schoices and actions. In choosing one's own actions and even goals,we must face constant alternatives. Even such things as themanner in which we speak to others are a part of our dailyalternatives.

Some have argued than man's nature is to beselfish. In order for a person to choosevarious alternatives on a daily basis, he or shemust have a standard of values. The term"value" presupposes an answer to thequestion: of value to whom or for what? This

Man's Nature:


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is where an inborn selfishness might beconsidered. What is the end goal or purpose?Who is the perceived or intended beneficiaryof the action? Ourselves or others?

To be selfish is to be motivated by one's own self-interests. Insur-ance agents are often accused of this. For an individual to centeron their own self-interests, they must have considered what consti-tutes their own self-interests and how to achieve it. Because aselfish person chooses his goals by the guidance of reason, it ishard to believe that selfishness is an accident (or a lack of trainingin the case of insurance salespeople).

Nathan, an insurance agent, has been in the business for only a year.Even so, he has been able to build up a fairly good sized clientele in thehealth market. Soon after he became an agent, he was told that replacinghis own business can bring added advantages in the commissions earned.Although Nathan continues to work to build up his clientele size, hedoes not miss a chance to replace business (his own or someone else's)anytime the chance arises.

Recently, Nathan realized that annuity sales could bring in goodcommissions. His initial intent was simply to bring in new business inthe annuity field. After awhile, however, he found that it was notparticularly difficult to replace annuities. Of course, the client generallyhad early surrender penalties, but Nathan learned how to justify not onlythe penalties, but the new surrender period as well. Nathan was notabove misrepresenting other companies to achieve his goals.

Although Nathan is fairly new to the occupation of insurance, his salespractices are well thought out. Nathan received very little training fromthe agency where he works. Most of what Nathan knows, he learned onhis own or from other agents. It might be argued that specific trainingmight have made a difference in how Nathan looked at his salespractices. However, from an ethical context, it seems fairly obvious thatNathan is not acting irrationally. He has spent time thinking out hisapproach to sales. Selfishness is seldom a matter of emotions orfeelings; rather they tend to be thought out actions. That is not to saythat selfish people are not emotional in nature because they may be.What we are saying is that a selfish person determines their goals on athinking or reasoning basis.

Selfishness is seldom a matter of emotions orfeelings; rather they tend to be thought out actions.

We have been talking about ethics in the workplace, but it shouldalso be noted that ethics IS hard work. Who among us would not


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enjoy an extra $5 (even if it were not due us)? If our boss thoughtwe were the one who did something wonderful, who would notlike to take that credit, even if it belonged to someone else?

Being ethical can be very difficult when being unethical issometimes more rewarding from a financial or public standpoint.The public standpoint is often overlooked. If we feel stronglyabout something that no one else seems to, it is very easy to keepquiet. In fact, that is precisely what gets "followers" in trouble.When a person knows something is not right, but no one else issaying anything, it is easy for the individual to simply go alongwith the group.

Greg works for a very large insurance agency. Greg has always hadvery strong religious convictions and, as a young man, took muchteasing from others regarding his so-called "prudish" outlook. Over theyears Greg simply found that keeping quiet was easier. After all, hereasoned, as long as he personally held his moral ground, what othersdid was their own business.

Mike was also an agent with the same agency as Greg. As time wentby Greg found mounting evidence that Mike was "clean sheeting" hisapplications. One day in the field Greg ran across one of Mike's clients.She was an elderly woman who obviously had some mental disorder.She could not remember simple things and was under a doctor's care.

Back at the office, Greg asked Mike how he ever got her on that policy,which was issued only 6 months previously. "I would not have evenattempted it, given her medical situation," stated Greg.

Mike replied, "I simply stated what she told me. If she didn't say it, Ididn't write it."

On two other occasions, Greg found similar circumstances in Mike'sbusiness. Greg voiced his concern to Mike: "You know those peoplewon't be covered if something comes up. The company will simplyrescind their policy."

Mike: "You worry too much."

It was obvious to Greg that Mike did not intend to change his practices.

Since Greg is not involved and is behaving in a way that he perceives tobe ethical personally, does he have any moral obligation to the clients ofMike? Since Greg considers Mike to be a friend, does he have moreobligation towards Mike or Mike's clients?

Greg was still concerned so he went to his manager. The company'smanager told Greg that it was not his concern as did several other


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coworkers. In fact, most people that he talked to within the companyseemed to be viewing Greg as a potential trouble maker. Greg had heardabout "whistle-blowers" and he knew he could be putting himself in aprecarious position with the company if he became too vocal.

Are Greg's self-interests more important when no one really seems tocare other than himself? Is it the management's responsibility (ratherthan Greg's) to mandate ethics?

On the surface it would be easy to say thatRight is Right no matter what. It is likely thatmost people would, however, suggest a differ-ent course for others than they would suggestfor themselves. Studies have shown thatpeople are more likely to voice ethical behav-ior than follow it.

It's Easier To Say ItThan It Is To Actually Do It:

The truth is, our identity is established by our actions (a liar is knownfor his lies; a thief is known for his stealing, etc.). A common pitfall toproclaiming ethics, but not following them, is that an identity is estab-lished. When we allow ourselves to be defined by whatever we happento fall into, that in itself is a choice. Who we are is established by whatwe do and even by what we do not do.

Who we become is a gradual thing. Seldomare we formed by one single experiencealthough one single experience, if greatenough, can change our direction or focus inlife. Our "becoming" is a gradual and naturalthing. So gradual that people seldom noticewhat is happening themselves. Without evennoticing it, one can slip into a pattern ofbehavior which ends up being the ultimatebasis by which we are judged by others.Therefore, a code of ethics must be a dailygoal that we deliberately choose to follow.

Forming Who We Are:

We have all known someone who allowed their job to be theultimate basis for who they were. When retirement comes forthose individuals, they have nothing in their life to fill the void leftby retirement. These individuals spent so much time becomingwho they were within their jobs that they neglected to define whothey were away from their work. Sooner or later all of us will loseour jobs. While we hope it will be through retirement, it may alsohappen due to layoffs or other means. When a person's identity(which includes ethical behavior) is wrapped up primarily in theirwork, an extreme crisis may occur when that work place is no


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longer there. Men seem to be particularly vulnerable to this situa-tion and often die shortly after retirement. One wonders if thosemen simply could not find a reason to continue living without anidentity they were secure in.

As we stated, being an ethical person IS hardwork. However, when a person learns to basewho they are upon a distinct code of ethics, itis unlikely that their jobs will completelydefine who they are. When success in theworkplace means compromises in personalethics and values, that often means that we areallowing our employers or coworkers todefine who we are. There is a song whichstates "You've got to stand for something, oryou'll fall for anything." There is a great dealof truth in that lyric.

Standing Up ForWhat We Believe:

A sociologist, Irving Goffman, touches upon a troubling image ofthose who establish themselves only through their work identities.Mr. Goffman calls those who aspire to be successful at any cost as"con artists" because they do not learn the business skills but ratherthey develop a way to act and present themselves in a mannerwhich is convincing to others. In commissioned sales this mayespecially be true. Since commissioned salespeople are notguaranteed a paycheck each week, it becomes very important topresent a professional and appealing image to others. Of course,the ideal way to do this is through education, product understand-ing, communication skills, and just plain hard work. Many take theshort cut and, as Irving Goffman states, chooses to develop anoutward appearance of education and understanding (when noneactually exists).

Sales meetings often point out that sales people are, in someways, actors and actresses. The same of course may be said formost people. Each of us generally desire to be accepted by thosearound us. In view of this desire, we tend to put on the "front" thatwe feel will be accepted by those in our company. Even suchthings as politeness may, in some ways, be described as "acting."

Betty is at a party given by one of her neighbors. Being fairly new tothe neighborhood, Betty knows few people. Since moving across thecountry to this small rural town, Betty has been lonely. Her past livingexperiences in the big city did not prepare her for the rural living she isnow a part of. As she is introduced to people, she finds herself thinking


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that most seem to be very ignorant individuals. Everyone is talkingabout weather, school plays, children, church activities and so forth.

The hostess, her next-door-neighbor, Sarah, comes up to Betty andwarmly holds her hand: "I hope you are meeting everyone."

Betty: "Oh yes. I just hope I can remember all the names."

Sarah: "Don't worry about that. We want you to feel welcome andenjoy everyone."

Betty: "You have wonderful people in your town. I'm so glad I movedhere."

Obviously Betty simply was not a person who would have said "Every-one is stupid here" even though she was actively thinking it. It could besaid that Betty was being an actress, playing a part that was not truth-fully her.

Each of us does this on a day-to-day basis because our ethical standardsdo not allow us to be unkind to others. How do we draw the linebetween being a graceful "actress" or "actor" and being a "con artist?"

Just as people will have different views onwhat is and what is not ethical, each givenperson also tends to develop levels of ethics.For example, Betty was actually lying abouther views on the people in the small ruraltown. If asked, Betty would say that lying isunethical and she does not believe in it. Atthe same time, Betty would say that she feelsit is unethical to be cruel to others. Which isworse? Which set of values or ethics shouldbe followed? It is likely that every person,even the most ethical, do not always tell thetruth. Lies, such as the mild kind Betty told toSarah, are often called "white lies." The termlikely originated to describe lies which weretold with a good intent, such as sparinganother's feelings. Even so, a lie is still a lie.Is there ever such a thing as an ethical lie?

"Levels" of Ethics:

We have all heard the saying "Honesty is the best policy." In fact,in some situations, ethics might actually defy this. For example,people who hid Jews during the extermination in Europe lied abouthiding them for the benefit of themselves and those they hid.Certainly, in this case, honesty would not have been the bestpolicy. Honesty would not even have been ethical given the


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circumstances. As we have seen time and time again, ethics doesinvolve individual perceptions. Those who were hunting the Jews,even though they were guided by irrational fears and hatred, wouldhave considered hiding them wrong and unethical. On the otherhand, the people who were seeking to save the Jews held theopposite view.

Although that particular circumstance is not so vivid today, westill have hate groups who hold different views than mainstreamsociety. Ethical conduct is always about perceptions. Althoughsociety may hold a popular view, ethical conduct does not alwaysfollow the "popular" view (as was demonstrated by those who hidthe Jews).

In Arthur Miller's famous play, Death of a Salesman, the maincharacter, Willie Loman, believes that the secret of success lies inthe salesman's personality. This might involve many aspects of thepersonality, but it comes down once again to acting. Being theperson the prospective buyer wants the salesman to be. If the buyerloves children, then the salesman loves children; if the buyer wouldlike to travel, then the salesman either has traveled or wants totravel also. Common ground, we are told, is vital to the sale.

Being an actor or an actress, especially in sales, is a dangerouspart to play. Sooner or later, it is likely that the salesperson's trueidentity will be exposed. The woman who tells the elderly clientthat she loves cats, too, will be caught smacking at the cat whoattempts to climb on her lap. The man who weaves a tall tell abouthis traveling experiences will say something that proves him to bea liar. Sooner or later, chances are that we will blow our cover. Itis simply too difficult to keep what was told to who straight. Thisis especially true in small towns where your clients often knoweach other and will compare notes. Attempts to conceal our truenature will eventually come into the light. As the Bible says,sooner or later who we are "will be declared from the rooftops."

It should be pointed out that it is possible todiscontinue acting in an unethical manner, or"mend our ways" as it is often referred to. Itis never too late to begin to act in an ethicalway. In fact, John Newton, the man whowrote one of our most famous songs, was thecaptain of a slave ship. As he came to realizethat slavery was wrong, he used his experi-ences to bring this same understanding tomany others. The song written by John

Changing Our Views:


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Newton was Amazing Grace. Knowing this,the words of the song gain a greater meaning:

Amazing grace, how sweet the soundthat saved a wretch like me

I once was lostbut now I'm found

was blind, but now I see.

Of course, the most important reason to be ethical is not hard tounderstand. We are a reflection of our lives, our families, ourcommunity and of ourselves. Our children will copy us (that's hardto believe during their teen-age years, but it does happen), ourfamilies and our communities will be affected by our actions andwe, ourselves, must live with who we are yesterday, today andtomorrow. In fact, those around us, including our coworkers, areaffected by our values (ethics). Just as a follower may follow thecheater, he or she may also follow ethical behavior. When youdefine the "inner" character as someone you are proud of, it willshow in your daily behavior which includes your work. This willbring self-assurance which will ultimately benefit you in manyways, including financially. Personal integrity radiates confidenceand everyone prefers to deal with people who seem confident.

A few years ago, the Howard FischerAssociates (one of New York's top executivesearch firms) conducted a survey of CEOs ofthe top one hundred companies in the NewYork area. They were looking for traits whichwere valued most by the leaders.

A Survey Of CEOs:

Of course honesty and fairness were ranked at the very top. Theseare the other character traits which were listed:

1. Never compromise on matters of principle, nor standards of excel-lence, even on minor issues.

2. Be persistent and never give up. 3. Have a vision of where you are going and communicate it often. 4. Know what you stand for, set high standards, and don't be afraid to

take on tough problems despite the risks. 5. Spend less time managing and more time leading. Lead by example.6. Bring out the best in others. Hire the best people you can find, then

delegate authority and responsibility, but stay in touch. 7. Have confidence in yourself and those around you, and trust others. 8. Accept blame for failures and credit others with success. Possess

integrity and personal courage.


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There is much so-called "sound" advicecirculating for achieving financial andbusiness success. We are not here to saywhether that advice is accurate or not. It istrue, however, that before accepting suchadvice, one might wish to consider what theyactually wish to accomplish during theirlifetime. So often, individuals loose track oftheir true goals (such as rearing happychildren, writing a book, etc.) and becomesidetracked with making a living in a mannerthat makes their boss, spouse, or coworkershappy. When an individual looses track oftheir own goals, they are more likely tobecome followers rather than thinkers.

Keeping Our Priorities In View:

Often motivational speakers are concentrating on goals that mayactually be secondary to our main desires. Yes, we all want tomake a good financial living for ourselves and our families. Thequestion is, do we want to make that money at the expense ofourselves and our families?

In an effort to become the super-salespeople that the company,agency or management staff promotes, people tend to embrace avariety of role models. That might include optimum time usage,aggressive sales techniques, becoming a superb team player, ormotivational skills. Certainly all of these avenues can have advan-tages in one way or another. Each method does have it's place inthe business and sales world. Usually, each method that ispromoted contains a certain amount of useful advice because theycontain certain truths. That is precisely why these books tend tosell well. Even so, these methods, whatever they may be, also havetheir limitations.

Agents have complained that there seems to be something"missing" even when they have followed the methods precisely.Very often the why simply is not addressed. Why are you sellinginsurance? Only to make a living? Do you understand where aproduct fits? Does the product do an outstanding job of meetinganother's goal? If not, you have likely missed the why of your job.It is in the why that ethics or values often play an important role.When an agent does understand the role they are playing inanother's life, the satisfaction gained goes hand-in-hand withethical behavior. Clearly defined goals and purposes are essentialif people are to understand what their lives in general and theirwork in particular are really all about.


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It seems that psychology is the current ragein selling. While it may give an air of beingscientific, often the "psychology" listed ismore apt to resemble manipulation. Whensuch techniques are encouraged, individualemployees may feel inadequate to challengethe validity of them. This may especially betrue if the concerned salesperson is not the"star" of the agency. Often, an individual mayfeel their job is not secure enough to questionthe techniques being pushed on them by theiremployer. Or, if the salesperson is not thesuper producer of that agency, they maysimply feel that they have not earned to rightto speak out. In actuality, ethics belong toeveryone, not just the superstars of sales.

Psychology OrManipulation?

We are often told that merely feeling very good about ourselveswill accomplish much in the sales field. There is certainly muchtruth to the concept that self-worth is tied in to many of oursuccesses in life. In fact, low self-esteem may be tied to many ofthe underachievers in our country. However, high self-esteem initself will not accomplish anything. It takes much more than that.Some of the most effective workers in the world are the Japanesepeople. Yet personality tests have revealed that the Japanesepeople traditionally have very low self-images. They are oftendepressed because they do not feel good about themselves. Self-esteem is important to have for many reasons, but it is not likely toinsure economic success.

It has become commonplace for insurance companies and otherindustries to shower their salespeople with prizes, plaques andmedals for selling their products. It seems that companies believetheir employees will work only for material gratification. Thereare those who believe that attempts to build self-esteem in the workplace will result in successful (financial) payoffs for the company.

Sometimes this belief can cause problems. Employees may beginto do their work for the wrong reasons. Their "ethical compass"may become misdirected. When self esteem is tied to financialrewards, the why of the work can again become lost. Of course,financial rewards are essential, but when ethical behavior is nottied into those financial rewards, many negative circumstances candevelop.


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Totally fulfilling work probably does not exist. For many people,commissioned sales is something to be feared. It is probably safeto say that some amount of high self-esteem likely exists for thosewho enter the commissioned sales field. A person must feel theycan succeed even to enter into such work. This brings us toanother area of ethics. In this case, it involves those who recruitcommissioned sales staffs.

Nearly every insurance agent has, at some time or another, had acompany or person promise the world. The majority of workers donot enter commissioned sales. There must be a reason. If financialsuccess were so easy, everyone would be doing it.

Sally has been unemployed for nearly 6 months. After being laid offfrom her job in Seattle, she thought she would easily find another one.As it turned out, the only jobs she could find paid about half of what shehad been earning. In fact, her unemployment benefits would, in somecases, amount to more than she would earn if she took some of the avail-able jobs.

Finally, Sally sees a newspaper ad which promises high income for"self-motivated" people. She makes an appointment for an interview.

When Sally arrives she is surprised to see a roomful of people there forthe "interview". Sally's first impulse is to leave, but since she hasalready gone to the trouble to come, she sits down.

At the appointed time, a well dressed man enters the room and intro-duces himself as the Regional Manager for an insurance agency (not aninsurance company). The gentleman, Mr. Randall, begins his pitch:

Mr. Randall: "Welcome to the world of excitement and money. This isnot for everyone, because those who enter this world must be prepared tomanage themselves and not everyone can do that. Most people need thecrutch of a weekly paycheck paid to them whether they put forth anyeffort or not. In this job you will be responsible for your own paycheck.It can be as low or as high as you desire. You make the determinationyourself based on how much time you are willing to devote to yourwork. Do you need an extra thousand dollars one month? Then yousimply work a couple of Saturdays. It's that simple."

"We offer the most comprehensive benefits around. All you do isexplain those benefits to people who need them. You will be invitedinto people's homes as a guest because you will be offering these folkssomething they want and need. That does not mean that you won't beworking. Selling is work. The difference is, you get paid what you areworth! Aren't you tired of having someone else tell you what you areworth? Aren't you tired of having someone else determine what hours of


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the day and week you will work? Isn't it time that you took your destinyinto your own hands? Make life work for you instead of against you."

"Last year our top producers earned well over $100,000 while workingless than 40 hours a week. In fact, as time goes on, these top profession-als are able to work less, not more, because they gain an understandingof what they are doing. These people work smarter, not harder. Isn't ittime that you do the same? We will teach you how to earn up to yourpotential. It is very likely that you will earn in excess of $50,000 in thefirst year alone. And you will continue to earn additional income onevery sale you make even after the policy is in place. As your renewalsaccumulate and you also continue to make new sales, your potential isunlimited."

As Sally listened, she began to feel an excitement. Looking around,she could see others getting the same excitement. Sally knew she coulddiscipline herself to be on the job and she liked the idea of being incharge of herself; her own boss. Best of all, it sounded like high incomewas common.

Can ethics be a part of promotional selling?At what point does reality need to be inter-jected? Should the fail rate be stated?

Can EthicsBe A Part Of Promotional Selling?

It might be easy to state that the "dark side" should also be stated,but would you expect that in other industries? Can you imagine anew car salesman saying: "Oh, sure, the car looks great now, but itwon't in a few years. They'll be wear and tear and the paint job willdull. Five years from now you'll be glad to just get rid of the car."

Should Mr. Randall be expected to tell the audience all the diffi-culties of commission sales right up front? Should it be disclosedthat only one top producer earned more than $100,000? Or is it thelisteners responsibility to make sound decisions for themselves?

It is common for agents to say that they would never have gotteninto the business if they had known everything. And yet, now thatthey are in the business, they do enjoy their work. There are manyaspects of commissioned sales that can scare a person out of everentering it. Should these aspects be discussed with new recruits?

Few, if any, jobs are totally satisfying. Certainly it is desirable tofind fulfilling work, but most things in life are a mixture of things.In other words, there are times that the job seems extremely fulfill-ing and there are other times when the job seems absolutelyterrible. Even fields of work that seem to be glamorous to others


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generally carry with them a certain amount of negatives. Even jobsthat promise excitement carry stretches of boring mundane tasks.

And yet, promotional advertising is all around us. As viewers ofthis, we must be aware that glamour and excitement also carriessimple hard work and frustration. Look at the ads for joining thearmed forces. These ads show handsome men flying planes or jets,standing on the decks of mighty ships, or visiting exotic foreignplaces. They do not show kitchen duty, strenuous marches, orother mundane tasks.

Even the ads for smoking came under fire for such one-sidedpromotional activity. We felt that cigarette companies, and latelyalcohol companies as well, should not show smoking or drinkingas glamorous or exciting. The rugged cowboy who always lit up acigarette now has cancer. Alcohol companies show young beauti-ful people drinking, laughing and having a good time. Alcoholcompanies do not show the car accidents caused by drunk drivers.

So, the question still lingers: Can ethics and promotionalcampaigns be integrated?

It would be wonderful if every industry was blessed with anindividual whose inner greatness or qualities were able to inspirethose around them with their vision and energy. In truth, fewindustries are graced with such people. Those people who dopossess such qualities often have no desire to be promotional toolsfor businesses.

Perhaps one of the major reasons why ethicalbehavior is something that must be constantlystressed is simply the fact that being ethical ishard work. Even though it may seem to comeeffortlessly to a few, the majority must make aconscience effort to be ethical. Ethical peopletypically have a moral reason for being such.Some might tie it in to their religion (in fact,the majority of people who place high regardon ethical behavior state their religion as amajor factor). We also find that people whoconsider ethical standards to be a high priorityalso value such personality traits as patienceand kindness towards others. In fact,whatever the career line, the most successfulsalespeople state that patience and kindness isnecessary in their line of work. Some state

Ethical Conduct Is Hard Work:


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this quality as a "love of people". Topnotchsalespeople do, of course, develop the neces-sary skills for their jobs, but their love ofpeople motivates them to do a better job thanthe average person. They tend to "go theextra mile" for their clients even when thatextra mile does not overtly bring them anyfinancial rewards.

An individual who is naturally kind towards others tends to havea sensitive awareness of them. Kindness generally takes intoaccount how another person might feel as a consequence of whatwe do. That is not to say that a kind person always sympathizeswith others in every situation. Sometimes being kind meanswithholding sympathy. It does mean that empathy must beinvolved. Let's look at the difference:

Sympathy (noun): (1) fellow-feeling;compassion. (2) condolence. (3) agreement;approval; accord.

Sympathy Or Empathy?

Empathy: (noun): (1) the complete understanding of another'sfeelings, motives, etc.

There are many differing views regarding the need for sympathyor empathy. Sympathy may not necessarily help a person andmay, in some cases, increase the problem that exists. Empathy, onthe other hand, tends to be aimed at correcting a given situation,and may be what is sometimes described as "tough love".

Jackie is a secretary at the XYZ Corporation. Her boss, Craig, is thesupervisor for a large insurance division. Jackie is single, but Craig ismarried with two young children. As time goes by, a romance develops.Both Jackie and Craig are basically nice people who would not inten-tionally hurt anyone. They think they are keeping their affair secret, butin fact, most of the office and field agents are aware of it.

One of the field agents, Marsha, considers Jackie a friend. The easiestcourse of action would be to say nothing despite the vicious rumors thatare circulating. Marsha could even tell herself that what Jackie andCraig do are their own business. After all, they are adults. Furthermore,if Marsha does confront the issue (even out of concern), Craig is likelyto become angry and he has the ability to make Marsha's job miserable.In fact, if Craig wanted to, he probably has the power to have her fired.

The risks are great for Marsha and she is aware of them. Marsha alsounderstands how Jackie became involved. Jackie has been a basically


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lonely person who has always had trouble making friends. Jackie hashad even more trouble finding a comfortable male relationship. Thisaffair is obviously making Jackie happy. It can be seen in how positiveshe has become about her day-to-day life. Marsha is worried that Jackiemight never forgive her if she somehow took the relationship away fromher (even out of concern).

Yes, the risks are multiple and real. On the other hand, Marsha alsoknows Craig's wife and children, although they are not close friends.Craig's wife, Cheryl, would be very hurt by the affair. Marsha knows itis only a matter of time before Cheryl learns of the situation. After all,many of the office and field staff know Cheryl. It is likely that whenCheryl learns of the affair, Jackie will be forced by the company to leaveher job. Craig probably has enough position to keep his job, but notJackie.

Kind people try to prevent someone else from hurting. If Marsha doesnot confront the situation, she knows that the hurt will eventually beeven deeper than it already is. Marsha does understand how Jackiebecame involved and she realizes that it could easily have happened toher under the same circumstances. Understanding how it happened,however, does not mean that she sympathizes with Jackie's lack ofjudgment. Marsha does empathize with Jackie.

Obviously, there is no single answer to this situation. It is a matter ofjudgment and perception. Bad news sometimes only gets worse as timegoes by. If Marsha delays the confrontation, Jackie might lose possibleopportunities that would give her lasting happiness, rather than tempo-rary happiness. Jackie might also simply tell Marsha to mind her ownbusiness and a valuable friendship might be damaged or lost entirely.

Marsha does eventually face Jackie with her feelings about the situa-tion. Marsha decides that it is more important to her to do what she feelsis right. While she does value Jackie's friendship (and she wants to beliked by Jackie), Marsha decides that the kindest thing to do is to behonest. Sometimes the kindest thing is also the toughest thing (as everyparent knows). All Marsha can do is hope that Jackie realizes that she isspeaking from concern, not condemnation.

Although our example looked at a personal relationship, the sameprinciples could be applied to other situations.

Let's say that you are friends with a fellow insurance agent, Dale. Theyoung man is friendly and outgoing. He has earnestly studied all thecompany's products and seems to have a good understanding of them.He likes people and people basically seem to like him. Even so, he isstruggling financially because he seldom makes a sale. Since he is yourfriend, you agree to accompany him on a few of his appointments withpotential clients.


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Your first appointment is at a middle-class home with a well groomedlawn and beautiful flower beds. The couple have two children, ages 5and 8. The husband, Marv, is a welder and his wife, Sherry, works part-time as a waitress at a local cafe. Marv has medical insurance suppliedby his union, but they do not have any life insurance.

Dale: "Your home is beautiful. Who does the gardening?"

Sherry: "I do. I guess you could say that it is my hobby. At least thatis where I seem to spend every spare moment. I suppose I put too muchmoney into it, but a person has to have some pleasure in life. Before youleave, I'll give you some flower starts."

Dale is obviously flattered. As Sherry and Dale continue to talk aboutthe flowers, you notice that Marv is becoming bored and glancing at thetelevision in the next room where the kids are watching a program.

You (interrupting Sherry): "Marv, how is the job going? Is it as toughas I hear in the welding trade?"

Marv: "You bet it is. Last month I only worked two full weeks. Somemonths, we barely make our bills."

You: "Gosh, that would be a worry. Since you mailed this card inasking for some life insurance information, I guess you are the one whorealizes the financial pitfalls and obviously you care about your family.Sherry, you must feel lucky that Marv is concerned. Dale, why don't youshow them the information they requested."

Dale opens his brief case and pulls out a yellow legal pad and severalbrochures. It is obvious immediately that Sherry is not interested. Shepulls out a seed catalog and lays it in front of Dale over the brochures.Sherry opens to a page.

"Have you ever seen these colors before in the Iris?":

Dale: "No, I don't believe I have. They are beautiful."

Once again, the conversation turns to flowers. Marv becomes visiblyagitated. "Put that damn book away."

Sherry: "You are so selfish. I finally get to enjoy some conversationand you act like that."

By the end of the appointment, you think you know exactly why Daleseldom makes a sale. Dale made no attempt to steer the conversationinto the life insurance, but seemed to be drawn away from it at everyopportunity. Even when you brought the talk back to it, with Marvbecoming interested, Dale allowed Sherry to misdirect the conversation.


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Two other appointments went equally bad. During the evening Dalecollected several friendships, some flower starts, and a napkin full ofcookies to take home to his children. Dale made no insurance sales,however.

The next day, you know you need to give Dale some guidance. WhileDale was a friendly, outgoing person, he did not appear to have anyconcept of sales. He allowed the conversation to go in all directions,always listening and joining in, but never getting down to the actualbusiness at hand. While only Marv outwardly acted agitated about that,the other potential clients seemed confused as to why you were there.Eventually, Dale did run over the brochures, but in such an unorganizedmanner that you doubt anyone really understood what he was trying todo.

You doubt that Dale has the ability to ever be a successful salesperson.You fear he will end up in bankruptcy unless he gets into another line ofwork . . . and soon!

The ethical question: Is it kinder to be honest and suggest that Daleleave sales or would it be better to offer a few suggestions and allow himto sink or swim, as the saying goes, on his own?

When a person is discharged, personnelmanagers report that they often try to softenthe blow by being less than honest about theperson's shortcomings. In addition, they oftendo not tell the next potential employer aboutthem. Of course, there may be legal reasonsfor doing so. No company welcomeslawsuits. Telling the truth to someone whowas fired for their temper might actually seemto invite trouble. This is a problem whichbusinesses routinely face.

Can Honesty AlwaysBe Considered?

Such evasions of the truth may do more harm than good to theindividual (although in some cases the business has little choice).Unless the person knows and understands the deficiencies andmistakes that led to the loss of his or her job, those deficiencies andmistakes cannot be corrected and are likely to be repeated.Certainly, kindness needs to be used when relaying theinformation, but honesty must still be considered, if the situationallows it.

In the May, 1993 issue of the Ladies' Home Journal magazine,reporter Leslie Lampert did a story on overweight people. To dothe story, she was fitted with a specially made "fat suit" whichinstantly made her appear to add 150 pounds. Most of the people


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she encountered made no attempt to help her in any way. In fact,most people treated her with disgust and sometimes even openantagonism.

One particular person, however, knew how to be both kind andethical (honest). She was a hairdresser that Leslie Lampert went towhile in her "fat suit". The hairstylist, who was very thin, gentlyexplained to Leslie that the hair style she wanted would not beright for her ample figure. Leslie stated that she was honest, butnot insulting. Rather than do a hairstyle that would not aid herappearance, the woman used honesty and caring to suggest a stylethat would be right for her. Certainly, the hairstylist was probablyvery good at her trade since she understood what style would workbest. It goes beyond that, however. She also was concerned abouther clients and their well-being.

A person who does not know what changesneed to be made, will never make any changesat all. As a result, the same mistakes will berepeated over and over again. The truth, insuch a situation, may leave you disliked bythe person, but it may also lead that person(such as Dale or Leslie as an overweightwoman) into the possibility of success.Sometimes being liked is simply not asimportant as being kindly honest. It is notalways kind to deny the truth to a person whotruly needs to hear it.

Repeating MistakesThrough Lack OfKnowledge:

The next question: Are you being kind in telling someone thetruth, or are you getting some type of power or pleasure personallyby pointing out their failure?

As the Bible says, "love envieth not." To bea truly kind person, what you say must not bea reflection of your own insecurities or envy.The ethical person can take pleasure in other'shappiness or successes. We seldom havecontrol over what recognition we receive fromothers, but we do have complete control overhow we react to the recognition othersreceive.

Love Envieth Not:

Most of us have had someone say to us, "I don't want to hurt you,but I must offer some constructive criticism." Usually, that meanssomeone is going to say mean things which are supposed to be for


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our own good. Constructive criticism is often used to mean "youare irritating me with your actions." Before speaking "construc-tively", one needs to assess their personal motivations.

For Example:

"Dale, I don't know where to begin. You did everything wrong.You had no ability to control the conversation. There was a salelaying on every table waiting to be picked up, but you just walkedaway from it."

OR

"Dale, it is obvious that people like you, but I wonder if perhapsyou are too concerned with having them like you. It seemed likeyou were avoiding getting down to the sale. Maybe we could roleplay and see if that helps."

In sales, insincerity (which is, after all, lying) can reach epidemiclevels. As previously stated, we are often told to "be just like theclient". If the client gardens, then we garden; if the client canstheir own vegetables, we can ours, etc. We laugh at the client'sjokes even when they insult us or others; we pretend to completelylike those that we can barely stand. We do whatever is necessaryto get that signature and check. Sometimes what "is necessary" isso against our feelings of right and wrong that we do not enjoy thesale or the commission. We may end up depressed or irritable as aresult. The question: Are there some sales that simply are notworth the price we pay personally and emotionally?

Salespeople are traditionally thought of as untrustworthy. Thisis unfortunate since most are good honest people. Why do yousuppose this image developed? Most of us want to be trusted; wewant people to believe we are as good as our word. If we saysomething is so, we want others to believe it. To be viewed asperson of integrity is not only important in business, but in ourpersonal lives, as well.

Where Did The Dishonest ReputationFor SalespeopleCome From?

The Amish people hold their word in high regard. They refuse tosign written contracts because they feel that, as Christians, theirword should be good enough to guarantee any agreement that issealed with a handshake. The Amish are known for their strengthof character; whatever is promised will be delivered.

Unfortunately, there are few groups of people or organizationsthat are honored with such high reputations. As insurance agents,


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we commonly call on people who feel that other agents before ushave misrepresented products, companies, or services. In fact,agents themselves have sometimes been misled by companieswhich they represented. The more we are in the business world,the less we find ourselves trusting others. We are warned daily to"read the small print."

Often, problems occur not becausesomething was specifically stated, but becausesomething was implied. Salespeople whoallow their clients to assume something that isnot true will be viewed as badly as someonewho openly lied. Misleading another,whether that is an insurance agent misleadinga client, or an agency misleading their agents,will eventually come face to face with credi-bility problems.

Implied Statements:

Implying that which is not true is a form of manipulation. Peoplemay make serious mistakes financially on the basis of what isimplied. In some cases, this can cause serious legal problems forthe agent. More often, it simply means that people learn tomistrust them. In fact, insurance companies themselves may "redflag" some agents if problems of "misunderstandings" seemcommonplace in their client's applications. If an agent continuallyseems to leave out pertinent medical information, the agent maysay that he or she asked the medical questions; the consumersimply failed to understand them. If it happens once or even twice,the insurance company will probably take the explanation, but if ithappens repeatedly the insurance company surely will not.

It is common for an agent to go to work for an agency and simplyaccept whatever companies and products are given them to workwith. While we would like to assume that an agency has done theirhomework, this may not always be the case. In addition, it ispossible that the agency viewed the companies and products onlyfrom a profit point of view.

What responsibilities actually do fall on theselling agent? The answer to this questionwill certainly vary depending upon who youask. As little as ten years ago, due diligencewas something done by broker-dealers, peopleselling securities and by some home offices.Seldom was due diligence thought to be anagent's responsibility.

Due Diligence:


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In more recent times, agents are being told that due diligence istheir responsibility. This statement is often the result of courtactions. In other words, it is now being legally determined thatindividual agents are responsible for the recommendations theygive, the products they sell, and the companies they represent.

What does the term, due diligence,actually mean? For the agent, due diligenceis the analysis of a particular company'sproducts, performance and financial standing.Where life insurance is concerned, this isoften done to determine whether or not thereis a reasonable expectation that the illustratedvalues presented can actually be achieved.Life insurance makes long-term promises toclients. It is vital to those clients that thecompany be able to keep those promises. Duediligence is the agent's analysis of whether ornot the company can, in fact, keep theirpromises. The term, due diligence, is primar-ily derived from the securities industry.

What Does Due Diligence Mean?

Even in the property, casualty and liability fields, due diligencehas importance. Major disasters can cause company failures iffinancial resources are not adequate.

For the insurance company, due diligence is an ongoing processwhich insures that pricing objectives are being realized, and thatintegrity and consistency of internal procedures are beingmaintained. It is working with the agents and agencies, as well astheir policyholders, to preserve fairness in all parts of theoperation. An insurance company that is concerned with duediligence will treat its sales force and back-up members as well asthey treat their policyholders. Company due diligence also meansmaking investments that are sound and prudent. For life insurancecompanies, due diligence is not a new concept, even though it isfor many agents.

It must be noted that the life insurance industry has moved theirproduct design away from fully guaranteed values and benefitstowards a dependency on current, sometimes more favorableparameters. This means more risk has been taken on by theconsumers. The factors more often used these days also tend to bemore volatile. In many cases, only the strength and the integrity of


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the company involved can ensure that projected, nonguaranteedelements of the policy are actually realistic.

As agents and the general public havebecome more educated on the variety ofoptions available, insurance has seen a changein how it is perceived. While price hasalways been considered, additional elementsare now commonly looked at as well.Consumers want to know if the company theyare considering can manage its overheadexpenses, mortality expenses and investmentreturns in a way that allows the company tomake good on it's promises in the contract.

AgentRepresentation:

In addition, the role of the agent has changed. Whereas the agentwas typically thought of as only the salesperson, consumers nowconsider the agent to be someone who must give reliable informa-tion for the good of the policyholder. We no longer accept theview that the agent represents only the company. This change inthe general perception of an insurance agent places greater respon-sibility, both legal and ethical, on the agent.

We no longer accept the view that the agentrepresents only the company.

In the public's view, the level of service and quality of the advicegiven are linked directly to the insurance company and thatcompany's performance. It must be noted that practicing duediligence makes sense from many standpoints, one of which isfinancial protection of the agent, as well as the consumer. Whenan agent takes the time to investigate his companies (and documentthat investigation), he or she is also protecting their own financialfuture. Lawsuits are common and it is reasonable to believe thateven a good agent can experience one. Due diligence is, of course,an ongoing process since companies can and do change how theyoperate. Due diligence might be considered as a method of self-protection through knowledge.

Many agents groan when due diligence isbrought up. They picture hours of work putinto a schedule that is already difficult. Itshould brighten their day to know that there

3 Reasons To Practice Due Diligence:


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are more answers than one might imagine attheir local library. A morning spent lookingup the companies they are representing, or areconsidering, is a morning well spent. Thereare several reasons to do so:

1. to prevent lawsuits from angry consumers who feel they havebeen taken,

2. to protect the trust they have spent hours building up with theirclientele, and

3. to determine if the people associated with the companies theysell have the level of integrity desired.

If an agent bases his or her company affiliations on commissionlevels, leads provided, or where the next convention will be held,he or she is in for a few surprises down the road. An agent shouldrequest a copy of the insurer's annual statement and pay particularattention to the interrogatories, because they are brief and speak toshort-term changes from the previous report.

An agent needs to begin his due diligenceprocess by gathering information on the majorcomponents of the company from as manysources as possible. This would includeseeking information directly from thecompany. In fact, this is probably the firstplace to seek information. Generally, suchinformation is readily available. The agentshould not overlook another simple way togather information: ask questions. Talk toyour immediate manager or regional manager,the home office (especially the underwritingdepartment), and even the company'scompetitor. Anytime an insurance companyseems reluctant to provide information totheir own agents, a red flag should go up.

Gathering CompanyInformation:

Often, an agent can learn more than you might imagine fromsimply asking other agents who have been with the insurancecompany for a relatively long period of time. Find out about thespeed of the company's claim service since this is often an indica-tor of company solvency. Find out if commission checks seem tobe consistent, correct and on time. If a financial error is made, howlong does the company take to correct it?


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The agent should collect the three mostrecent sets of financial statements and studythem. Does the company seem to be makingexcessive profits? Does the company seem tobe making minimal profits? Perhaps too littleto ensure continuance? Compare the surplusin relation to the amount of business beingproduced. Ask the state Insurance Depart-ment to see if there are any watches orcautions outstanding. How many complaintsfrom consumers has the company experiencedin the past year? You may also wish to lookat complaints over a three year period to see ifany pattern seems apparent. The agent mayalso want to watch for any shifts in themanagement of the company since this canchange the philosophy of the company.

Insurance Company Financial Statements:

Once a measure of information is gathered,the agent must assimilate it in a manner whichis easily understood and assessed. There areseveral ways to assess this information, butoften the agent simply looks at it from thestandpoint of "Does it feel right?" With somany carriers to choose from, there is no needto represent any carrier that does not feelcomfortable.

Assimilating The Information Gathered:

Other sources of information that the agentshould consider are the rating services, suchas A.M. Best, Weiss Research or any ratingcompany.

Company Rating Services:

Rating services have not always given the public indications oftrouble in a timely manner. Even so, it is important to seek out theinformation that they offer. A.M. Best states that the primarysource of the information presented in their publication is obtainedfrom each insurance company's sworn NAIC annual financial state-ment as filed with the Insurance Commissioner of the state inwhich the company is domiciled and licensed to conduct business.These financial statements are prepared in accordance with statu-tory accounting requirements established by the NAIC (NationalAssociation of Insurance Commissioners).

It should be pointed out that the ratings still reflect a certainamount of opinion regarding each company's financial strength and


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operating performance. A.M. Best is certainly not attempting togive any type of warranty. Neither do rating companies give anyrecommendations for any particular companies.

The objective of the rating services is to evaluate the factorswhich affect the overall performance of the insurance companies.By doing so, they provide their opinion of the company's financialstrength, operating performance and ability to meet its obligationsto the policyholders. The procedure, according to A.M. Best,includes quantitative and qualitative evaluations of the company'sfinancial condition and operating performance.

As we all realize, evaluating the financial condition of a companyis subject to variations depending upon the person or companydoing the analysis. This is especially true when it comes to evalu-ating insurance companies because so many of their assets areinterest and economic sensitive investments. Many of these invest-ments are based predominantly on actuarial projections of futureclaim payments.

It has become increasingly difficult to predict the amount of lossreserves that must be held in order to maintain financial security.This is especially true for the property and casualty companiesbecause of liberalization of insurance contract interpretations andthe expansion of theories of tort liability. The insurance companieshave the potential of much larger losses in today's world than waspresent in the past.

Even the life insurance industry has seen an increase in thecomplexity of investment oriented life and annuity products, inter-est rate volatility, the reduced certainty of future cash demands andgrowing policyowner and public perception. Today's world issimply more complex than was yesterday's. The banking systemsfinancial problems have added additional stress as policyholdersfeel less secure about major institutions, including insurancecompanies. All of these factors have affected even well estab-lished insurance companies.


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Absolute Liability: Sometimes known asLiability Without Fault, it is imposed wherepublic policy demands that a person be heldliable for specific acts, even if they wereneither intentionally nor negligentlyinflicted. 2-8, 3-9

Actuarial Equity: References to socialissues involving insurance policies andinsurance rates. 5-4

Adhesion: A term used in insurance toindicate that it is a one-sided contracttypically favoring the insurance companysince they drafted it. 4-11

Adverse Selection: The risk experienced byan insurance company when only thosemost likely to experience claims keep thepolicy in force. Those least likely to haveclaims have canceled or lapsed theirpolicies. 5-3, 5-4

Assault: An act of violence or the physicalthreat of violence. It is not the same asbattery because assault only requires appre-hension over threatened contact, not contactitself. 2-3

Battery: The intentional, umpermitted andunprivileged contact of one person byanother. It includes not only the personthemselves, but also their clothing,packages they are carrying and vehiclesthey are in. 2-2

Books Of Business: Also called Blocks ofBusiness, they represent the amount ofpolicies that are in force. 5-1

Bumbershoot: Umbrella policies in themarine field. 4-4

Compensatory Damages: Punitive damageswhich are awarded to plaintiffs in excess offull compensation. Also refer to PunitiveDamages. 2-1

Comprehensive Ceiling Coverage: Devel-oped by Lloyd's of London, it is a combina-tion of both all-risks property and all-risksthird-party liability coverage in a singleexcess contract.

Conditional Contract: This means that thereis a continuing relationship created betweenthe insured and the insurer. Each mustkeep a specified condition in order to keepthe policy in force. 4-12, 4-15

Consent: Often protected from liabilityclaims under privilege laws. 2-7

Conversion: The intentional interferencewith the personal property of others. 2-6

Coverage: Refers to the contractual obliga-tion of the insurance company. It is theamount the company agrees to pay toindemnify the insured for claims broughtagainst them, and for which they are legallyliable. 3-4

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Chapter 7

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Declarations: Sections of a policy whichidentify the persons involved, what isinsured, premium amounts and the lengthof time insured. They are the "who, what,when, where, and why" of the policy. 4-13

Defamation: Injury to one's reputation. Itmay be either libel or slander. 2-4

Definitions: Each policy lists commonlyused terms and phrases to clarify contractmeanings. 4-13

Defense: This means that the insurancecompany who issued the umbrella policymust defend or settle any covered claim orlawsuit that is brought against the insuredfor property damage or bodily injury. 3-4

Dual Risk Contribution: When responsibil-ity is shared by more than one person orparty. 3-8

Due Diligence: the analysis of a particularcompany's products, performance andfinancial standing. 6-60

Egoist: Not to be confused with egotist, it isa person who believes that self-interest isthe basis of all behavior. Egoism is notself-absorbed necessarily, as an egotistwould be. 6-17, 6-18

Empathy: the complete understanding ofanother’s feelings, but not necessarilyapproval or condolence. 6-52

Endorsement: A means by which an insur-ance contract can be changed or altered,usually after it has been issued. 4-8Ethics: The study of right and wrong; acode of conduct to which a person orprofessional is expected to follow. 6-1, 6-3

Excess Coverage: Literally means insurancecoverage with high limits used to

supplement basic policies. It is not neces-sarily the same as Excess Liability Cover-age. 4-5, 4-9

Excess Liability Insurance: The name oftenused for Umbrella Insurance Coverage.3-12, 4-1, 4-2

Excess Personal Liability: Coverage:Umbrella policies placed on an individualrather than a business. There are alsoexcess coverages which are not alwaysaimed at liability coverage. 4-4, 4-5

Exclusions: Varying from policy to policy,exclusions are the risks not covered. Theyare usually disclosed in a separate sectionof the policy and are labeled Exclusions.4-5, 4-14

False Imprisonment: The intentionalrestraint of another's freedom of movement.To bring about a claim, the imprisonmentmust be total. 2-5

General Damages: Typically this includespain and suffering. 3-11

Implied Statements: The implicationthrough language or physical gestures thatsomething will or will not be so, withoutactually stating it. 6-59

Indemnification: This means the insurancecompany pays for claims which the insuredis legally liable for which has resulted fromthe policy's covered perils, to the limits ofliability purchased. 3-3

Indemnity: The type of policy that anumbrella policy is; it protects the insuredfor a wide variety of insured losses forwhich they are legally liable. 4-2, 4-12Inspection Company: Outside companieshired by insurance companies to aid in their


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underwriting process. Inspection compa-nies supply information. 5-10

Insuring Agreements: The promises madeby the insurance company to pay for certainfinancial losses, under specific circum-stances. 4-14

Intentional Interference With The Person:Battery, assault, infliction of mental andemotional disturbance, defamation andfalse imprisonment. 2-2

Intentional Interference With Property:Trespass, conversion or other intentionalactions which deprives the owner of use,enjoyment or possession of their property.2-5

Intentional Tort: An intentional act whichcauses injury to another. The injurysustained may not necessarily have beenintentional; only the act itself was. 2-2

Legal Competence: To enter into any agree-ment, the signing parties must be legallycompetent to do so. This does not neces-sarily mean an adult party. In some cases,the person considered legally competent tosign a contract must be an officer of acorporation, for example. 4-8

Legal Contracts: Legal documents, such asinsurance policies, which are entered intoby two or more entities after agreeing to theterms involved. 4-6

Legal Reason: the legal purpose of thecontract or document. The purpose of somecontracts would be illegal and thereforeunenforceable. 4-8

Liability: The legal responsibility of thepolicyholder to other persons for damagedone to them physically or materially. It

does not imply that insurance coverageexists. 3-2, 3-4

Liability Insurance: Also called third-partyforms, it is a contract between an insurancecompany and the insured to benefit a thirdparty (the injured person). 3-7

Liability Without Fault: Another name forAbsolute Liability. 2-8

Libel: Defamation which is written, ratherthan spoken (which is slander). With theemergence of E-Mail, fax and other formsof communication, this has become a diffi-cult distinction. 2-4

Line Underwriters: This group of individu-als process the day-to-day applicationssubmitted to the company and are responsi-ble for acceptance or rejection ofapplicants. 5-7

Malicious Prosecution: A malicious institu-tion of groundless criminal proceedingsagainst another person. 2-5

Mental Distress: severe and extremedistress caused from intentional acts;usually actual physical illness must result.2-4

Mistakes: Although not exempt from liabil-ity claims, they may sometimes be success-fully claimed as privileged. 2-7

Modified Policies: Policies which areissued but with changed or restrictions inthe policy due to the information obtained.5-11

Negligence: Law requires that all personsuse care in their actions. If a person fails toperform as a reasonable and prudent personwould under similar circumstances, they


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have acted negligently. Claims result fromnegligence in some form. 2-9, 3-2, 3-3

Objectivist Ethics: The ability to form whoand what we are from man's basic means ofsurvival-reasoning. As a theory of ethics, itholds man's life as the standard of value andhis own life as the ethical purpose. 6-346,35

Oral Contracts: Where allowed by law,legally binding contracts that are spokenrather than written. Insurance contracts cannever be oral. 4-8

Personal Property: Anything capable ofbeing owned other than land and the itemsattached to it. Personal property wouldinclude vehicles, clothing, jewelry, etc. 2-6

Post-Selection: This happens after the riskhas been accepted by the insurer. It is theprocess of reviewing those already insuredand terminating those no longer desirable,if termination is possible under the laws ofthe state where issued. 5-8, 5-13, 5-14

Preferred Risk: An applicant or policy thatappears to have a lower-than-average lossexpectancy. These applicants often pay alower premium rate. 5-12

Premium: The value placed on the promiseof protection against specific financialrisks. No policy is valid unless thepremium is paid. 1-2, 4-7, 5-2, 5-16

Preselection: The process of gatheringrelevant information regarding possible riskexposures and arriving at a decision regard-ing the acceptance or rejection of the appli-cant. 5-8

Primary Policies: Those policies which payfirst. With umbrella insurance policies,those tend to be homeowners and

automobile policies, which will pay beforethe umbrella policy does. 3-3

Privilege: An activity which does not bringabout liability because the person has actedin a manner which served public interest,even though it may have caused an injury toanother person or property. 2-7

Protective Acts: When action or reasonableforce is necessary to protect another fromharm, making the act privileged. 2-7

Prudent Man Rule: See Reasonable andPrudent Person.

Public Interest: Any action or occupationwhich could adversely affect the public'swell being. 6-14

Punitive Damages: Considered to be astatement of punishment; awards, whichtend to be very large, that are granted toplaintiffs for injuries sustained. 2-1, 3-9,3-11

Real Property: land and the items attachedto it. 2-5

Reasonable and Prudent Person (ThePrudent Man Rule): One who acts in aspecific manner under specific circum-stances to prevent harm to another or toanother's property. A reasonable man isassumed to have the minimum perception,memory, experience, intelligence, mentalcapacity and information common to thecommunity in general. 2-9, 2-10, 3-2

Reasonable Care: The care that an ordinaryprudent person would take in similar situa-tions. This implies the use of the PrudentMan Rule. 3-7

Reasonable Force: This must often bedetermined by the courts; it is used in


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reference to actions which were necessaryto protect another person from harm. 2-7,2-8

Reinsurance: The process of offering aportion of the business to other insurers,who then assume the risk for the amountthey insure. 5-15

Retention: The umbrella policy's deductibleamount which must first be covered byeither the insured or another primary policy.4-3, 4-10, 5-15

Slander: Defamation which is spoken,rather than written (which is libel). 2-4

Specific Damages: awards based onspecific losses with specific monetaryvalues. 3-10

Staff Underwriters: This group of under-writers determine the company's generalunderwriting requirements, but do notnecessarily become involved in individualapplications. 5-7

Standard Risk: An applicant or policywhich is considered to be average in thepossibility of claim loss. 5-11

Strict Liability: Typically applied to productliability, it is the type stated for faultyproducts, even if the manufacturer had nointentional negligence. 2-9

Substandard Risk: An applicant or policythat appears to have higher-than-averageloss expectancy. 5-12

Sympathy: compassion; agreement; condo-lence. 6-52

Third-Party Forms: Another name forliability insurance since the contract

between the insured and the insurancecompany benefits a third party. 3-1

Tort: From the past participle of the Latinword torquere, it is any private or civilwrong by act or omission for which a civilsuit can be brought, but not includingbreach of contract. 2-1

Trespass: This involves real property ratherthan personal property. It is the wrongfulentry upon the land of another or the failureto remove property from another's landwhen an obligation exists to do so. 2-5

Umbrella Insurance: According to JaneBryant Quinn, it is "a policy which coversliability judgments that exceed the limits ofyour auto and homeowner's policies."Umbrella policies usually give broadercoverage than do excess policies. 1-1, 3-12,4-1, 4-5, 4-9

Underwriters: Made up of two categories,underwriters determine who will receive apolicy and who will not based on specificfactors. Seldom is an underwriting depart-ment made up of one person; usually theyare groups of people. There are staffunderwriters and line underwriters, eachserving a specific function. 5-7

Unilateral Contracts: This means theinsurer makes an enforceable promise tomeet its contractual obligations. Theinsured makes no promises that he or shecan be legally compelled to keep. 4-11

Virtues: This might be referred to as goingbeyond the call of duty. It might also becalled moral excellence. 6-4


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