Ethical Decision-Making When Conducting/Documenting Investigations
Understanding the boundaries and proper procedures for maintaining the highest ethical standards.
The ethical component in claims investigations is always a matter of paramount importance. The special role of a claims adjuster or investigator in determining coverage for a claim requires that there be strict adherence to the highest ethical standards under an adjuster’s code of ethics and the National Association of Insurance Commissioners’ (NAIC) Unfair Claims Settlement Practices Act, which is applicable in most jurisdictions. Similarly, when claims counsel is involved, those same considerations apply together with all the ethical standards of the profession under the state bar association and the American Bar Association’s Code of Professional Responsibility.
Ethics in Claims Handling
In certain types of claims, the role of an insurer is that of a fiduciary, and the law imposes special requirements on one who assumes that position. By its very nature, the role of fiduciary entails strict confidence, trust, and respect for the rights of another. The fiduciary is charged with the responsibility of acting in the best interests of another—the insured—at all times. Ethical conduct is not an aspiration; it is an imperative.
In other types of claims, the nature of the relationship necessarily changes. Rather than a fiduciary relationship, it may become one that is adversarial. Where the issue of coverage arises, the relationship becomes an adversarial one as a matter of course. But ethical conduct in those cases remains a priority, a prerequisite to proper coverage investigation and determination. The law makes no distinction between the two in measuring ethical compliance.
Adjuster’s Code of Ethics
In virtually every jurisdiction, insurance adjusters are bound by an adjuster’s code of ethics. Compliance with the code of ethics is required by regulatory authorities in every state. The failure to adhere to those ethical standards will subject an adjuster to administrative sanction, which can include revocation of the adjuster’s license to handle claims in that state.
Although the codes may vary somewhat by state, the adjuster’s code of ethics adopted by Florida is representative. The purpose of the code is explained as follows: “The work of adjusting insurance claims engages the public trust. An adjuster must put the duty for fair and honest treatment of the claimant above the adjuster’s own interests, in every instance.”
The following are the standards of conduct outlined in the code that define “ethical behavior” for insurance adjusters (in summary form):
- Disclosing any financial interest in a matter.
- Treating claimants equally and in accordance with the policy.
- Never acting in a manner prejudicial to the insured.
- Making truthful and unbiased reports.
- Acting with honesty and integrity, without improper remuneration.
- Acting with dispatch and due diligence.
- Promptly reporting improper conduct by other adjusters.
- Dealing carefully with elderly persons/insureds.
- Not negotiating with third-party claimants represented by attorneys.
- Interviewing witnesses fairly and objectively.
- Not advising against seeking legal advice or representation.
- Not negotiating with or interviewing persons in stress or shock from a loss.
- Advising insureds/claimants of all claims rights.
- Not drafting special releases.
Violation may be grounds for administrative action and may constitute an unfair claims settlement practice.
Unfair Claims Settlement Practices Act
Since its creation by the NAIC more than 25 years ago, the Unfair Claims Settlement Practices Act has served as a benchmark measure of proper claims handling. In many jurisdictions, violation of the act will give rise to a civil action in the nature of a statutory bad faith claim. The Unfair Claims Settlement Practices Act is one of several models promulgated by the NAIC for states to use as a guide, in whole or in part, for enacting their own laws. Its provisions may be found in either state statute or the state insurer’s regulations—or both, depending upon the state. The act’s stated purpose is to “set forth standards for the investigation and disposition of claims arising under policies or certificates of insurance[.]”
A common law action for bad faith is premised upon the same considerations as those found in the act. Indeed, the notion of bad faith claims handling in both a statutory and common law context is in a very real sense nothing more than an allegation of unethical conduct in the handling of the claim. It is the ultimate form of enforcement action for improper claims handling.
Unfair claims practices are defined as any of the following acts committed flagrantly and in conscious disregard or with such frequency as to indicate a general business practice:
- Knowingly misrepresenting facts or policy provisions.
- Failing to promptly acknowledge communications.
- Failing to adopt standards for prompt investigation and settlement.
- Not attempting settlement of claims with clear liability.
- Compelling litigation by lowballing.
- Denials made without conducting a reasonable investigation.
- Failing to affirm or deny coverage within a reasonable time.
- Attempting to settle claims for less than the amount advertised.
- Attempting to settle claims on the basis of an altered application.
- Making claims payments without indicating the coverage basis.
- Unreasonably delaying by unnecessarily requiring a proof of loss.
- Failing to provide a reasonable and accurate explanation.
- Failing to provide forms within 15 calendar days of a request.
- Failing to assure repairs by a preferred vendor are properly done.
Confronting the Ethical Issues
All of us have confronted ethical situations in claims handling and claims litigation. While often it is unpredictable when such a situation will arise, the potential for confronting an ethical issue is almost inevitable. It can arise in a nearly limitless number of situations but is frequently found in these areas:
- Background investigations
- Witness interviews
- Criminal histories
- Financial/Tax investigations
- Health/Medical records
- Records and document investigations
- Alibi verifications
- Loss site inspections
- Bankruptcy records
- Divorce records.
Every claim adjusted, investigated, and litigated has the potential—if not the likelihood—of raising ethical considerations for an insurer and its representatives and counsel. An awareness of the ethical boundaries of claims investigation and the proper ethical procedures for conducting an investigation and litigating a claim is essential. At every step, the question must be asked, “Is this the right thing to do?”
As with most ethical decisions, the answer most often comes not from a prescribed code of conduct, but from an inner sense of right and wrong.