Uberrimae Fidei – Utmost Good Faith
Adapted from Barry Zalma’s book, in two volumes, “Insurance Fraud” now available from Amazon.com with Volume One available as a Kindle book and a paperback. and Volume Two Available as a Kindle book and a paperback. Other insurance books by Barry Zalma are available at https://zalma.com/blog/insurance-claims-library/
Insurance adjusters and fraud investigators, like everyone else, can become frustrated. Every adjuster and fraud investigator have had “gut feelings” about a case that are not supported by the evidence. Frustration faced by an adjuster was responsible for allowing the California Supreme Court the foundation for creating the tort of bad faith in first party insurance claims.
In 1973 an insurance adjuster, without sufficient evidence, caused his employer’s insured to be arrested for arson and fraud. The adjuster was frustrated by his failure to prove that a bar owner had destroyed his bar by arson a few years before and was convinced he had done so again. The adjuster told a police officer of his suspicions, past experience with the insured and his gut feeling that the insured caused the fire.
The insurer demanded that the insured appear for examination under oath in accordance with conditions of the policy. The insured refused to appear because of the arrest citing his First Amendment Right against self-incrimination, but offered to appear as soon as the criminal charges were resolved.
The California Supreme Court, in Gruenberg v Aetna Insurance Co., 9 Cal 3d 566, 108 Cal Rptr 480 (1973), concluded that unfounded actions by an investigator which caused an insured to be arrested for arson required the application of the new tort of bad faith to first-party insurance cases.
Gruenberg created, by his suit against his insurer, a tort of first party bad faith. The California Supreme Court ruling on a demurrer where the court is required to consider true everything alleged in the complaint, said:
We conclude that plaintiff has stated facts sufficient to constitute a cause of action in tort against defendant insurance companies for breach of their implied duty of good faith and fair dealing; that plaintiff’s failure to appear at the office of the insurers’ counsel in order to submit to an examination under oath and to produce certain documents, as appearing from the allegations of the complaint, is not fatal to the statement of such cause of action; and that plaintiff has stated facts sufficient for the recovery of damages for mental distress whether or not these facts constitute “extreme” or “outrageous” conduct.
The reason the Supreme Court found a need to allow tort damages was the improper and unethical actions of the adjuster that caused Gruenberg to be wrongly arrested.
Ethics is a process of systematically applying, using, defending and recommending concepts of right and wrong behavior. Ethical behavior is required of both parties to a contract of insurance for the system to work. Ethics is the essence of insurance. The concept of the utmost good faith is, by definition, a call for ethical behavior by the parties to a contract of insurance.
The insurance contract since modern insurance was first created was founded on the concept of Uberrimae Fidei. The phrase is used to express the principle that a contract must be made in perfect good faith, concealing nothing. In the case of insurance both the insured and the insurer must observe the most perfect good faith towards each other. Insurers and reinsurers are dependent on utmost good faith. It may be viewed as a legal rule but also as a tradition honored by insurers and reinsurers in their ongoing commercial relationships.
An ethical insurer with knowledge of the risks being taken equal to or better than that of the person insured, may not, in good faith, claim that material facts were concealed from him because utmost good faith required the underwriter to use his superior knowledge to favor the insured. An insurer can only exercise the discrimination required of it in selecting the risks it decides to take if it deals with an ethical insured who makes known to the insurer all of the facts relative to the risk the applicant is asking the insurer to assume. It certainly cannot, as it was alleged Mr. Busching did in the Gruenberg case, cause the police to arrest the insured by misrepresenting material facts to the police investigator.
Demonstrating high moral and ethical standards are vital to success in the insurance business. Insurers that have a clear vision based on ethical practices should be more successful over the long term than organizations suffering ethical lapses. Ethical insurers seldom face litigation for the tort of breach of the covenant of good faith and fair dealing. At most, if they dispute an obligation under a policy of insurance, they are compelled to pay the indemnity promised by the contract. Unethical insurers who breach the covenant are compelled to pay contract and tort damages.
Ethical values in an organization like an insurer are logically connected with success of the organization. Success follows ethical behavior because the insurer that stresses high ethical standards will also stress quality, fair, and thorough claims service. It is quality claims service that the contract of insurance promises. The insurer that provides consistent, ethical, high quality insurance claims service will usually be successful over a period of time because such service is what is promised by the policy. The insurer that does not provide consistent, ethical, high quality insurance claims service will usually fail over a period of time once the people they insure learn that the promises made by the policy will not be kept.
The claims professional may be the only contact a policyholder ever makes with the insurer. The quality of the service provided by the claims adjuster, the claims investigator and/or the Special Investigative Unit (SIU) investigator all of whom are supported by the high ethical values of the insurer, has a direct bearing on all future relationships and contact with the policyholder.
Reasonable people will always be willing to pay more for honest, professional, ethical service than for unethical, and fraudulent promises of service. The ethical insurer’s policies will be renewed even if a less ethical insurer offers the insured a lower premium.
An insurer can only exercise the wise discrimination required of it when it selects the risks it desires to insure when it acts toward those it insures ethically and requires that he who would be an insured deal with the insurer ethically and in good faith.
Demonstrating high moral and ethical standards are vital to success in the insurance business. Insurers that have a clear vision based on ethical practices should be more successful over the long term than organizations suffering ethical lapses. The profitability of an insurer is not based on one quarter’s earnings but its earnings over a quarter of a century.
Ethical insurers seldom face litigation for the tort of bad faith. At most, if they dispute an obligation under a policy of insurance they are compelled to pay the indemnity promised by the contract. Unethical insurers who breach the covenant of good faith and fair dealing are eventually compelled to pay contract, tort and often punitive damages.
Ethical values in an organization like an insurer are logically connected with success of the organization. Success follows ethical behavior because the insurer that stresses high ethical standards will also stress quality, and the fair, thorough and ethical claims service promised by the policy.
In the absence of a plain indication of dominant public policy through long governmental practice or statutory enactments, or of violations of obvious ethical or moral standards, a court will not assume to declare contracts contrary to public policy will usually await legislative action.
Ethical Behavior & Success
To understand the connection between ethics and quality service, it is important to understand the meaning of ethical values in the insurance context. The ethical insurer and its ethical claims and underwriting staff must treat the insureds and claimants with whom they come in contact honestly, fairly and with utmost good faith. The contact must reflect the highest integrity, respect and empathy for the people who need the service of the insurer. Finally, the insurer must reflect a high level of trustworthiness, fairness; honesty and personal accountability.
Vince Lombardi reportedly said:
The quality of a person’s life is in direct proportion to their commitment to excellence, regardless of their chosen field of endeavor.
The statement applies equally to football – about which Lombardi was speaking – and insurance. Excellence in the organization depends on the high ethical values and excellence of its members. Without excellence in claims handling and underwriting coupled with ethical behavior and conduct, an insurer will almost certainly fail. The insurer that demands excellence in claims handling and underwriting within the confines of ethical conduct and values will invariably succeed.
The ethical representative of an insurer investigating the possibility that a claim is fraudulent will pursue all of the investigative conduct fairly, thoroughly and with the utmost good faith. It is important that an investigator catch those who would attempt to defraud an insurance and defeat that attempt but the actions of the investigator must be performed ethically, fairly and in good faith.
An insurance fraud investigator should be totally and thoroughly trained to recognize insurance fraud in all of its forms and to understand insurance and insurance policy interpretation. All of the training will be wasted if, however, the insurer falls into the trap that adjuster Busching fell into and resulted in the California Supreme Court decision in Gruenberg.
No insurer should allow, or even consider allowing a claims handler or underwriter to:
- Violate the rights of an insured;
- Falsely accuse someone of fraud, or
- Succumb to frustration and create evidence of fraud that is false.
Such conduct can be dangerous to the insurer’s bottom line. In addition the individual employee may find himself or herself a defendant of a civil or criminal action. The only protection against the overzealous investigator or claims person is to properly train and support the insurer’s claims and anti-fraud personnel. An ethical fraud investigator will do a thorough and complete investigation. He or she will never accuse an insured of fraud without first obtaining a preponderance of the evidence sufficient establish a defense of fraud and potentially sufficient for a prosecutor to bring a criminal case for insurance fraud. The ethical fraud investigator will never: Lie to a prosecutor or police officer; Lie to an insured; Lie to a claimant; Make promises that cannot be kept; Create false evidence; or Puff up weak evidence as if it is strong and reliable.
While a lawyer is expected to advocate his client’s case vigorously, parties are entitled to a fair trial on the merits of the case, uninfluenced by appeals to passion or prejudice. [Badalamenti v William Beaumont Hosp-Troy, 237 Mich App 278, 292; 602 NW2d 854 (1999)] As long as attorneys will resort to such methods, unjustifiable either in law or ethics, courts have no alternative but to set the verdicts aside. [Hunt v Freeman, 217 Mich App 92, 95; 550 NW2d 817 (1996); Silas v. Secura Ins. Cos. (Mich. App., 2017)]
The ethical fraud investigator protects the insurer, the insured and the claimant by conducting a full, thorough, complete and fair investigation.