Conflicts of Interest with Insurance Companies

Liability insurance policies allow the insurance company complete control over litigation involving claims made against its “insureds” or clients who have policies with the company.

Conflicts of interest may arise between the insurance company and the insured when the insurance company has this much control over a client’s case.

If a disagreement arises between the two, the insurance company may be required to provide and pay for independent counsel for the insured and counsel for the company.

When Do Conflicts of Interest Arise?

Some common instances in which a conflict of interest may necessitate the insurance company providing and paying for independent counsel include:

1. The complaint filed against the insured client comprises allegations that may fall within and outside the policy’s scope: If such is the case, the insurance company will very certainly try to defend the charge in such a way that the policy does not cover the claim. On the other hand, the insured would probably want to defend on all grounds accessible to them, regardless of whether such reasons would bring the case under the policy’s coverage.
2. The insured is being sued for damages in excess of the policy limitations: In such a case, the insured person usually prefers to settle at or around the policy limits. The insurance company is aware that the policy limit is its maximum payout and is so likely unconcerned about any amount in excess of the restrictions. However, the insurance company may be required to settle claims within the policy limitations.
3. The insured claims that the insurance company acted improperly in conducting the defense: Some courts have ruled that if a general hostility between the insurance company and the insured creates a conflict of interest, the insurance company must pay for independent counsel for its client.

Insurance companies can avoid conflicts of interest by:

1. Being aware of instances in which personal and corporate interests are or may be in conflict or where someone would reasonably believe there is a conflict.
2. Recognizing that conflicts of interest can be avoided or handled if they are promptly disclosed and managed effectively.
3. Seeking counsel from a manager or Human Resources, especially if they are unsure whether a conflict of interest exists.

Concerning conflicts of interest, there are various potential danger areas. Among the most common are:

Friends and Relatives
Insurers should not let close personal or family relationships unfairly influence their professional actions. This indicates that an insurer should:

1. Ensure that those participating in company choices are completely aware of any overlapping close personal or family links and that those relationships should not affect decision-making.
2. Not assign family members or close personal acquaintances to reports within the organization.
3. Refrain from making decisions concerning present or future business partners who employ close friends or family members.

Financial Interests in Person or Family
Insurers should not allow their personal investments or the investments of close family members to influence their decisions.

This indicates that insurers should:

1. Disclose any significant personal or family financial interests to Human Resources.
2. Understand that a “substantial” financial stake can include being an owner, partner, officer, or director or owning at least 5% of a company’s stock.
3. Make no personal loans to executives or members of the Board of Directors.

What Are Some Examples of Conflict of Interest in Insurance?

Conflicts of interest are typical in businesses with several parties involved. Many of these confrontations are minor and unimportant.

However, regarding insurance, some of these disagreements can be disastrous.

Some examples of conflict of interest in insurance are as follows:

The Commission Structure
Insurance products are distributed globally via a network of agents. These agents are compensated according to the number of sales they make, i.e., they are paid a commission.

The issue is that some insurance policies provide a higher commission than others.

Furthermore, some insurance service providers charge a higher commission than others. As a result, an insurance agent may encounter a conflict of interest problem. In many circumstances, the best policy for the policyholder is not the most profitable policy for the insurance agent.

To address the issue of inherent conflict of interest, the commission-based pay system has been suggested to be eliminated. Instead, the cost of insurance should be reduced, and individuals should be required to pay a charge to insurance brokers when they use their services.

However, it has been noted that a fee-based system reduces sales because customers are hesitant to make such payments. This is why the United Kingdom is the only country in the world where customers pay insurance agents. This model is seen as a failure in all other countries.

To minimize such conflicts, it has been advocated that commissions for different insurance products sold by different insurance companies in the same genre be homogenized. However, no action has been taken to that end as of yet.

Service Providers
In the case of general insurance, service providers, i.e., insurance company partners, confront the greatest conflict of interest.

Let’s look at an example to grasp this better.

For example, if a car is involved in an accident, the garage, or service provider, is obligated to fix the vehicle. The insurance company must pay the garage bill on behalf of the consumer.

The issue is that because the consumer is not paying out of their own pocket, they appear to be fine with the cost.

In such cases, service providers are at odds. They may exaggerate a bill in order to maximize their profits.

However, they will be acting against their partner’s best interests, the insurance company, if they do so.

This problem is not confined to car insurance. Hospitals routinely perform needless operations on insured individuals. This allows them to inflate the bill and gain more money at the expense of everyone else.

It is quite difficult to prevent these behaviors in the case of medical insurance. For motor insurance, however, businesses engage outside surveyors and in-house personnel who determine the extent of loss. This has helped to eliminate the inherent conflict of interest.

However, this position is not without risk, and insurance firms are constantly looking for innovative ways to prevent such incidents from occurring.

For example, many insurance firms provide lower prices when customers choose policies with co-pay provisions.

The customer’s part is likewise increased if the overall bill is exaggerated. As a result, there is no incentive to make exaggerated claims, and customers begin to pay greater attention to what services are offered and if a reasonable price is charged.

State-Owned Insurance Companies:
In many places, the government has a large stake in the leading insurance companies. This is because the government previously owned insurance businesses in many nations. Following privatization, other companies were permitted to sell insurance.

However, if the government is both a market participant and a regulator, there is an obvious conflict of interest. The government is likely to enact regulations that undermine the interests of other players or even consumers. To avoid such conflicts of interest, the government must renounce its holdings in insurance companies and take a back seat in its management.

Bottom Line
The issue is that most purchasers need to be made aware of such conflicts’ existence. As a result, individuals wind up acting foolishly while purchasing insurance. Customers must be educated since it is the only way their interests can be protected.

Do I Need an Attorney to Deal with a Conflict of Interest?

If you suspect you have a conflict of interest with your insurance company, you should consult with an insurance lawyer. An attorney can assist you in obtaining reimbursement from the insurance company.