An Insurance Broker’s Dilemma

SYNOPSIS 4

A major museum currently obtains insurance from Haverford, through its insurance broker Ashton & Ashton (A&A). It is time for renewal of the policy, and A&A has obtained several bids. There is one lowball bid from a “shaky” company called Reliable. If A&A conveys the Reliable bid to the museum, the museum will probably accept it. A&A receives 10–15% of the premium as commission, 17% in the case of Haverford. Should A&A present the low bid? If it does not, could it be accused of conflict of interest?

ANALYSIS

It is helpful to view this as a case in professional ethics. It raises the question of what an insurance broker’s professional duties are, with respect to conflict of interest and advising clients. As noted in Chapter 2, professional duties are based on the obligation to meet expectations that the profession created in the public mind.

The conflict of interest matter is easy to resolve. While professionals are normally expected to avoid or minimize conflicts of interest, the conflicts are often inherent in the nature of the profession. If so, professionals are expected to make the right decision without being influenced by personal incentives. In the present case, the conflict of interest is a built-in characteristic of insurance brokerage and exists whether or not A&A presents the low bid. It should have no bearing on how A&A decides to deal with its client.

The main issue is how many choices A&A should present to its client. There are two basic policies. One is to present the client a full range of representative bids, give advice, and let the client decide. A second policy is to make some decisions for the client by screening out bids that the broker thinks are clearly inappropriate.

As a rule, brokers are expected to give advice and not make decisions. This is not true of all professionals. Physicians, for example, generally present only the alternatives that they believe are medically sound. They may refuse to perform a surgery even when the patient requests it. If the surgery is medically ill-advised and turns out badly, the physician gets the blame. This is not inappropriate, because making this sort of judgment is part of a physician’s professional promise. Public expectations appear to be evolving toward greater patient responsibility, but these expectations tend to be forgotten when a malpractice lawsuit is filed. Brokers, however, are generally expected to present the full range of alternatives, and the client is expected to take responsibility for the decision. Quoting the low bid is therefore consistent with professional ethics.

Furthermore, failing to quote the low bid seems inconsistent with professional duty. While a broker would not be expected to mention every option, it is important to provide a representative selection. One of the primary motivations for working through a broker is to make sure one is aware of the range of options. This may well reduce utility, because the museum is apparently unwilling or unable to make the right decision, even after hearing A&A’s advice. Yet there is no obligation to achieve higher utility through actions that are otherwise unethical. A&A can be as emphatic and detailed as it wants, however, when it advises the museum to reject the lowest bid, and there is probably a utilitarian obligation to do so.

The primary virtues at stake are honesty and loyalty to the client. An honest presentation of the alternatives, together with a stern warning about the risks of insuring with Reliable, seems consistent with these virtues.

The action of presenting the low bid can now be evaluated:

1. Generalization test: Pass.

2. Utilitarian test: Pass.

3. Virtue ethics test: Pass.

The action is not only permissible but also obligatory, because failing to present the low bid fails the generalization test.

Question:

You engage a real estate “agent” (actually, broker) to help you find a house in an unfamiliar city and give her the price range. She only shows you houses that are at the upper end of the range, because her commission is a fixed percentage of the sales price. Does her conduct conform to professional ethics?