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.

 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 insurance contract was founded on the concept of uberrimae fidei—in utmost good faith. The phrase is used to express the principle that a contract must be made in perfect good faith, concealing nothing. The concept of utmost good faith is, by definition, a call for ethical behavior by the parties to a contract of insurance. 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.

 Most insureds come in contact with insurers only when they purchase insurance and when they make claims. The insurer should assess the individual needs of each insured, selling only what is necessary to insure the risk at a fair price. Not only is selling the customer more insurance than is needed—or over-insuring a property—unethical, but underselling or not providing the correct insurance is unethical, as well. On the flipside, an insured may act unethical and commit fraud in over-insuring a property. Ken Brownlee states in Winning by the Rules (National Underwriter Company, 2001) that "someone with a residence that could be rebuilt for $125,000 insures it for $250,000 in a state with a valued policy law. If a fire destroys that residence the insurer must pay the full $250,000 regardless of the cost to rebuild." Thus, it is important for both insurer and insured to approach the insurance contract in utmost good faith.

 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 because utmost good faith required the underwriter to use his superior knowledge to favor the insured. An insurer can exercise only 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 is discussed in the following case, cause the police to arrest the insured by misrepresenting material facts to the police investigator.

 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 but offered to appear as soon as the criminal charges were resolved.

 The California Supreme Court, in Gruenberg v. Aetna Ins. Co., 510 P.2d 1032 (Cal. 1973), concluded that unfounded actions by an investigator that caused an insured to be arrested for arson required the application of the new tort of bad faith to first-party insurance cases.

 On November 10, 1969, the insurers, upon being informed of the fire at Gruenberg's bar, engaged the services of defendant P.E. Brown and Company. Carl Busching, a claims adjuster employed by Brown, went to the bar—the Brass Rail—owned by Gruenberg to investigate the fire and inspect the premises. While he was there, he stated to an arson investigator of the Los Angeles Fire Department that the plaintiff had excessive coverage under his fire insurance policies.

 Eventually the premises were locked and nothing was removed until November 14, 1969, when Busching authorized the removal of the rubble and debris.

 Around November 13, 1969, the insured was charged in a felony complaint with the crimes of arson and defrauding an insurer.

 The charges against Gruenberg were probably a direct result of the comments made by Busching. Because Gruenberg refused to appear for an examination under oath while the criminal charges were pending, the insurers denied his claim.

 He eventually defeated the criminal charges, offered to appear for examination under oath, and was refused because the insurer felt it had denied his claim properly. Gruenberg sued the insurers for damages resulting from the claim and the charges of arson.

 Gruenberg created, by his suit against his insurer, a tort of first-party bad faith. The California Supreme Court 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 court found a need to allow tort damages was the improper and unethical actions of the adjuster that caused Gruenberg to be wrongly arrested.

 Demonstrating high moral and ethical standards is 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 insurance company 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 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 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.

 Attempts to Compel Ethical Behavior

 Some states have attempted to compel insurers to act ethically and in good faith because of a perception that insurers were deceiving insureds. For example, the California Insurance Code contains a Fair Claims Practices statute (California Insurance Code § 790.03) that sets out multiple acts that the Legislature considers unethical and an unfair claims practice, including the following:

 (h) Knowingly committing or performing with such frequency as to indicate a general business practice any of the following unfair claims settlement practices:

(1) Misrepresenting to claimants pertinent facts or insurance policy provisions relating to any coverages at issue.

(2) Failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies.

(3) Failing to adopt and implement reasonable standards for the prompt investigation and processing of claims arising under insurance policies.

(4) Failing to affirm or deny coverage of claims within a reasonable time after proof of loss requirements have been completed and submitted by the insured.

(5) Not attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear.

(6) Compelling insureds to institute litigation to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in actions brought by the insureds, when the insureds have made claims for amounts reasonably similar to the amounts ultimately recovered.

(7) Attempting to settle a claim by an insured for less than the amount to which a reasonable person would have believed he or she was entitled by reference to written or printed advertising material accompanying or made part of an application.

(8) Attempting to settle claims on the basis of an application which was altered without notice to, or knowledge or consent of, the insured, his or her representative, agent, or broker.

(9) Failing, after payment of a claim, to inform insureds or beneficiaries, upon request by them, of the coverage under which payment has been made.

(10) Making known to insureds or claimants a practice of the insurer of appealing from arbitration awards in favor of insureds or claimants for the purpose of compelling them to accept settlements or compromises less than the amount awarded in arbitration.

(11) Delaying the investigation or payment of claims by requiring an insured, claimant, or the physician of either, to submit a preliminary claim report, and then requiring the subsequent submission of formal proof of loss forms, both of which submissions contain substantially the same information.

(12) Failing to settle claims promptly, where liability has become apparent, under one portion of the insurance policy coverage in order to influence settlements under other portions of the insurance policy coverage.

(13) Failing to provide promptly a reasonable explanation of the basis relied on in the insurance policy, in relation to the facts or applicable law, for the denial of a claim or for the offer of a compromise settlement.

(14) Directly advising a claimant not to obtain the services of an attorney.

(15) Misleading a claimant as to the applicable statute of limitations.

(16) Delaying the payment or provision of hospital, medical, or surgical benefits for services provided with respect to acquired immune deficiency syndrome or AIDS-related complex for more than 60 days after the insurer has received a claim for those benefits, where the delay in claim payment is for the purpose of investigating whether the condition preexisted the coverage. However, this 60-day period shall not include any time during which the insurer is awaiting a response for relevant medical information from a health care provider.

(i) Canceling or refusing to renew a policy in violation of Section 676.10.

 Similar statutes appear in almost every state. The California Department of Insurance enforces the statute with fines. Violation of the statute, however, can also be used at trial of a civil action to show a failure of the insurer to apply minimum standards of good faith and fair dealing. If an insured can convince a trier of fact that the insurer violated the statute, it will invariably conclude the actions of the insurer were in bad faith and open the insurer up to a judgment for tort damages including general and punitive damages.

 The statute is enforced by a set of regulations issued by the Department of Insurance designed to set out a minimum standard of claims handling in the state that, when breached, are a serious indication that the insurer's investigation is in breach of the covenant of good faith and fair dealing.

 The California Fair Claims Settlement Practices Regulations, in Section 2695.1, is as follows:

Section 790.03(h) of the California Insurance Code enumerates sixteen claims settlement practices that, when either knowingly committed on a single occasion, or performed with such frequency as to indicate a general business practice, are considered to be unfair claims settlement practices and are, thus, prohibited by this section of the California Insurance Code. The Insurance Commissioner has promulgated these regulations in order to accomplish the following objectives:

 To delineate certain minimum standards for the settlement of claims which, when violated knowingly on a single occasion or performed with such frequency as to indicate a general business practice shall constitute an unfair claims settlement practice within the meaning of Insurance Code Section 790.03(h);

 To promote the good faith, prompt, efficient and equitable settlement of claims on a cost-effective basis;

 To discourage and monitor the presentation to insurers of false or fraudulent claims; and,

 To encourage the prompt and thorough investigation of suspected fraudulent claims and ensure the prompt and comprehensive reporting of suspected fraudulent claims as required by Insurance Code Section 1872.4.

 California, and other states that have similar statutes and regulations, not only require that the insurers deal fairly and in good faith with those they insured, but the state also imposes on insurers an obligation to promptly and comprehensively report suspected fraudulent claims. Failure to report suspected fraudulent claims is as important to the state as the failure of an insurer to promptly pay a claim it owed.

 Ethics for Independent Insurance Adjusters

 Independent insurance adjusters serve insurance companies that do not have sufficient claims staff to handle insurance claims. The professional insurance adjuster recognizes that the work of adjusting insurance claims is a profession of public trust. Independent insurance adjusters should maintain a standard of integrity that will promote the goal of building public confidence and trust in the insurance industry. For more information, see Ethics for Independent Insurance Adjusters Checklist.

 Ethics and the Public Insurance Adjuster

 Insureds are busy professionals and sometimes do not have the time or patience to deal with the details of a first-party property claim. The public insurance adjuster exists to assist insureds in the presentation of a claim to the insurer. The public insurance adjuster is, in most states, licensed by the state insurance department. The insurer's adjuster is often asked to deal with a public insurance adjuster. The contact between the public insurance adjuster and the insurer's adjuster is often adversarial since the public insurance adjuster wishes to justify his contingency fee to the insured. Both should be working toward the same goal: the payment of proper and complete indemnity to the insured.

 Public adjusters are professionals who are employed exclusively by a policyholder who has sustained a first-party property loss. The public adjuster handles every detail of the claim, working closely with the insured to provide the most equitable and prompt settlement possible. A public adjuster should inspect the loss site immediately, analyze the damages, assemble claim support data, review the insured's coverage, determine current replacement costs, and exclusively serve the client—not the insurance company—while working ethically with the insurer's adjuster.

 The Covenant of Good Faith and Fair Dealing and the Fraud Investigator

 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 company 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 do the following:

 ·violate the rights of an insured

·falsely accuse someone of fraud

·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 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 will never accuse an insured of fraud without first obtaining sufficient information to defeat a civil case or cause a prosecutor to bring a criminal case or both. The ethical fraud investigator will never do the following:

 ·lie to a prosecutor or police officer

·lie to an insured

·lie to a claimant

·make promises that cannot be kept

·create false evidence

·puff up weak evidence as if it is strong and reliable

 The ethical fraud investigator protects the insurer, the insured, and the claimant by conducting a full, thorough, complete, and fair investigation.