 Codes of Conduct
One of the objectives of the Worshipful Company of Insurers is ‘to support and encourage standards of honourable practice as set out by the Chartered Insurance Institute and encourage courtesy and ethical behaviour in conducting the business of Insurers’. In pursuance of this objective, an initiative some years ago by the Company led to the CII introducing an ethical element into their examination syllabus.
More recently the Company initiated a study of the Codes of Conduct of thirteen constituent organisations in the industry, which encompass a wide range of professional bodies, regulators and trade associations. A particular objective of the study was to determine whether the Codes contained a ‘common core’ that could be translated into an overarching code of individual conduct for the entire industry.
In the event, and following detailed consideration jointly with representatives of the CII’s then Society of Fellows, the conclusion was reached that the practices of the component sectors were so diverse as to necessitate their own particular, and in some cases very complex, rules. But it was agreed that the publication of a list of basic principles for individual professional conduct should be available as a general guide to those organisations responsible for formulating and updating Codes of Conduct or Codes of Practice.
The Principles can also act as a reminder to individuals throughout the industry of some basic tenets which provide the foundation for ethical business practices - to the benefit of firms, practitioners and, most importantly, our customers. They will also be of relevance to the academic study of ethical aspects of insurance.
The Guiding Principles have been endorsed by the Court of the Company, and are set out on the following pages. They are followed by the Joint Working Party’s Commentary on the individual Principles. This gives a flavour of the discussions leading to their adoption.
I would thank most warmly all those involved in the study. I would mention in particular Past Master Peter Harris who chaired our original Codes of Conduct Committee, Jennifer Jarrett, chairman of the SOF, who chaired the Joint Working Party that produced the final report, and the organizations that participated.
Michael J Pickard, Past Master
September 2000
GUIDING PRINCIPLES FOR INDIVIDUAL PROFESSIONAL CONDUCT IN INSURANCE
1. To act with fairness, integrity and clarity in all business activities.
2. To act in an honest and courteous manner towards all persons in business relationships.
3. To understand and observe all relevant law including statutory requirements of regulatory authorities; codes of practice; codes of conduct and professional guidance notes.
4. To require such information as is relevant to the conduct of services offered and respect confidentiality of all information obtained.
5. To accept responsibility for recognising circumstances where prejudicial influences or conflicts of interests may affect, or be perceived to affect, objective judgement; to declare such influences or conflicts to the parties concerned and take action as required.
6. To be willing to explain the basis of remuneration and reward in relation to the services offered.
7. To endeavour to acquire and encourage others to acquire relevant qualifications and skills.
8. To acquire, maintain and use the standard of knowledge and competence relevant to the role or function performed.
9. To recognise and act only within the limits of personal competence and any limits of authorisation.
10. To encourage acceptance of these Principles.
COMMENTARY ON THE GUIDING PRINCIPLES FOR INDIVIDUAL PROFESSIONAL CONDUCT IN INSURANCE
1. To act with fairness, integrity and clarity in all business activities.
2. To act in an honest and courteous manner towards all persons in business relationships.
Principles 1 and 2 were accepted as essential requirements for any individual to observe when acting in a professional capacity.
There was debate as to the extent to which the various terms required explanation or definition, but on balance it was agreed that these terms had broad enough usage to be included without definition.
3. To understand and observe all relevant law including statutory requirements of regulatory authorities; codes of practice; codes of conduct and professional guidance notes.
The scope of this principle is extremely wide in that it covers requirements for specific activities as well as those which are more general in nature. Whilst it may appear to be redundant to mention provisions which are mandatory, the Principle serves as a reminder of an individual’s responsibilities within this context. This Principle also establishes the context within which the Principles should be observed by recognising that in business activities there will be objective criteria and requirements that must be fulfilled or taken into account.
During the course of discussion and debate on the extent of this principle, a study paper was prepared on the specific requirements arising in the case of Utmost Good Faith. Initial discussions had focussed on the extent to which Utmost Good Faith could apply to statements and activities of professionals in the insurance field as well as to proposers and policy holders which is the usually understood emphasis of the requirements of the doctrine.
The conclusions of the paper however led the working party to believe that the specific inclusion of Utmost Good Faith as being of general application would be misleading and that the reference in Principle 3 to “relevant law” would suffice.
4. To require such information as is relevant to the conduct of services offered and respect confidentiality of all information obtained.
There are many legal constraints on the use of client/personal information. A key requirement for professionals is to gather the information necessary to provide the most appropriate service and advice. The wording of Principle 3 (which covers the Data Protection Act) and Principle 4 is by way of a positive reminder that professional services should only be based upon a full set of information about a client and their needs as is required.
5. To accept responsibility for recognising circumstances where prejudicial influences or conflicts of interests may affect, or be perceived to affect, objective judgement; to declare such influences or conflicts to the parties concerned and take action as required.
Professional individuals need to consider circumstances in which prejudicial influences or conflicts of interest may arise in situations where their expertise and services are being deployed. Differing concepts apply to the various components of the industry - e.g. those applicable to a salesperson will be different from those applying to a claims practitioner. Conflicts of interest may arise not only through the obvious instance of undisclosed financial motivation but also, for example, through influences arising from a personal relationship or friendship between the professional and one or more of the parties involved in a particular transaction.
When a state of possible conflict or prejudice is recognised by the professional it should be disclosed to all the parties potentially affected before proceeding. Appropriate action may involve withdrawal of the practitioner from the transaction and substitution by another who is free of the conflict or prejudice.
6. To be willing to explain the basis of remuneration and reward in relation to the services offered.
Professional services are offered on a number of different financial bases. In some instances there is a legal requirement to declare this to the client and this is covered in Principle 3. In other circumstances there may be no requirement to reveal a basis of remuneration or reward, but if the question is posed the professional should be willing to explain how he is remunerated for his services in a specific transaction. This clause does not require more than a general description of the basis. It is recognised that for an employee it may be difficult to link an individual transaction with the basis of remuneration. This is also a consideration when an individual transaction may aggregate with others to entitle the receipt of some financial bonus or reward. In such a case the additional benefit is not solely based on the transaction in hand, but may need to be explained.
7. To endeavour to acquire and encourage others to acquire relevant qualifications and skills.
In some cases qualifications are mandatory before the individual may practise. This is a broader statement outlining that there should be a personal commitment to attainment of qualifications to formalise recognition of knowledge and understanding and to develop the skills necessary to operate in an effective and efficient manner. The Principle also seeks to encourage individuals to promote similar commitments in others engaged in offering or supporting the provision of services.
8. To acquire, maintain and use the standard of knowledge and competence relevant to the role or function performed.
This is an overarching Principle applying whether or not an individual holds professional qualifications. Anyone offering professional services must have the recognised standard of knowledge and competency to operate effectively. Once attained, the knowledge must be updated and expanded, where necessary, to ensure continuing competency.
9. To recognise and act only within the limits of personal competence and any limits of authorisation.
Any professional must recognise circumstances when their knowledge and competence are not sufficient to meet fully the needs of the client. If this happens, the client’s interest must be protected by the professional seeking guidance from those with the requisite expertise. If it is not possible for the additional expertise to be provided within the terms of the initial arrangement with the client, then the client should be advised accordingly.
When an individual has limited authority and a client requires a service that goes beyond the boundaries of their authority, the individual should arrange either for someone with the necessary expertise and authorisation to act or seek an extension to their own authority.
10. To encourage acceptance of these Principles.
All professionals working in insurance are encouraged to promote these Principles to other colleagues and to clients. The promotion of a professional and positive image of the industry both internally and externally is the responsibility of every individual working in insurance.
THE APPLICATION OF THE DOCTRINE OF UTMOST GOOD FAITH TO INSURANCE TRANSACTIONS
Background
The Principle of UGF is based on a requirement to provide information to the other party to a contract so that they have sufficient information available to decide whether to enter into contractual relations and, if so, upon what terms. All material data must be provided even if it is not specifically requested.
There is extensive case law on the application of the doctrine to insurance situations, and statutory provisions that either enshrine the Principle (e.g. Marine Insurance Act 1906) or
vary the duty (e.g. Rehabilitation of Offenders Act 1974). The duty arises outside of the contract itself. It covers all negotiations leading up to conclusion of the agreement. In insurance contracts of limited duration, such as those that are one-year general insurance contracts, the duty arises on each and every annual renewal as these are in respect of a new contract. The negotiations at renewal are then subject to UGF.
Once a contract has been concluded the requirement for further declaration of information will normally be governed by the actual terms of the contract. There are a number of
marine cases that imply a continuing duty, where there is a fundamental alteration to the subject matter of the insurance and risks to which it is exposed. However, the uncertainty of the legal decisions in this area makes the use of explicit contractual terms for disclosure of change in risk advisable.
The use of proposal forms does not in itself obviate the need for full disclosure of material facts not covered in questions on the form. However, statements issued by the ABI have modified this in the case of personal contracts. Further, if there are answers to questions which can be held to put the other party on “enquiry”, waiver of the right to receive more details can arise if they are not followed up.
Special considerations apply to the application of the doctrine where agents are involved. Much depends on the exact activities of an agent and the extent to which the agent has knowledge other than that possessed by the party for which he or she acts.
The majority of legal cases involving UGF emphasise the responsibility on the part of the person seeking insurance coverage but the courts have always interpreted it as a duty on all contracting parties. The duty of UGF placed on an insurer was stated from the earliest times (Dicta by Lord
Mansfield in Carter v Boehm 1766) but the extent of that duty received little detailed consideration by the courts until the late 1980s in the “Gemstones” cases. These cases
revolved around knowledge by the insurers of fraud on the part of a broker. The fact that this was not declared to the insured was held to be a breach of UGF. The duty was described at Court of Appeal level as one which:
“must at least extend to disclosing all facts known to him which are material either to the nature of the risk sought to be covered or the recoverability of a claim under the policy which a prudent assured would take into account in deciding whether or not to place the risk for which he seeks cover.”
The case went on appeal to the House of Lords. The issue of breach of UGF was not material to the final decision but the various Law Lords commented on the matter. Their views differed as to the extent of the duty but, in the narrowest interpretation, would apply to that which would influence a proposer’s decision whether to insure and upon what terms.
Discussion
Whilst the application of the doctrine is extremely important it is limited both in extent and duration. A broader treatment of the nature of dealings by those involved in both the conclusion of contracts and the handling of ancillary functions such as rating, claims work and risk surveying would be possible. A suggestion might be to recognise the importance of the concept of fair dealing.
The doctrine of UGF itself rests on this underlying concept. It seeks to ensure that the potential parties to a contract have a fair knowledge of what may affect the actual “value” of the
agreement whether to establish terms which are acceptable on the part of the insurer or the benefits the agreement will bring the insured. The basic rationale is that parties should be made aware of information which ensures that they can make an informed decision as to whether to follow certain courses of action and with what consequences in terms of costs, benefits and requirements. This approach also takes prominence in the context of the regulatory philosophy which has been developed in areas relating to business subject to the Financial Services Act 1986 (FSA). This has focused on seeking to ensure that information and advice provided to clients is fair, honest and not misleading.
Conclusion
A Guiding Principle for Individual Professional Conduct in Insurance based too closely on the doctrine of UGF is likely to be restrictive. It leaves open the question of what is an
appropriate standard by which to judge conduct not related to the circumstances where UGF has been held to apply as a legal doctrine. A more general description of acceptable standards of disclosure and conduct would be more transparent and useful as a guide to individuals to whom such a provision might apply. This is particularly important in the context of such functions as claims handling and advice which involve negotiation on a business footing where the outcome will almost certainly be regarded by one or other party (or possibly both) as less satisfactory than they would like. In these circumstances a fair and justifiable outcome is necessary.
It was concluded that the application of utmost good faith as a legal requirement should be covered by “relevant law” in Guiding Principle 3.
Tony Tudor LLB FCII
Director of Education, Qualifications & Research, C.I.I.
© The Worshipful Company of Insurers - September 2000
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