Utmost Good Faith Binding Between Insured And Insurer Part III. How did the insured make use of the loophole of the Utmost Good Faith?
I eager to prove my capacity to earn the non-motor insurance profit commission besides the normal agent commission during my first year begin as an agent/broker after I quitted my full-time job in a general insurance company after passing the Chartered Insurance Institute (UK) with marine insurance major.
I combed every inch of the industrial estate regardless the size of the factory. During the hot and sultry dried climate in the equatorial zone. I walked into a cafe to quench my thirst.
” Are you an insurance agent? An elder man approaching me.
” Yes, how can I help you sir.,” I politely replied him.
After the normal exchange card, he invited me to his office nearby to discuss Good In Transit policy. The first year, everything went on smoothly. During the second year, He introduced his son to me as he is planning to retire soon, spending more quality time with two grandsons.
His son- a middle man dressing like a school teacher, well groom and decently formal dressing. Mr. Christ has vast experience in logistic working in mainland China and a short stint in United State. When he took over his father business, my nightmare to begin. 1st year, there was four genuine minor claims wich was duly honored and full settlement by the insurer.
Upon renewal, I reevaluation the risk and adjust the premium accordingly. During the duration, they were 2 minor claims within 2 months, followed by 2 major claims one week after another consecutively.
As I was away handling another claim, after finish my job, I paid him a cordially visited him on my way home.
“Mr. Christ, very lucky you have the GIT insurance to cover the claim.”
” Mr. since I bought the insurance from you, I have the ri….ght to claim.Am I right? He said with a sure to claim tone.
” Obsoletely sure, you have the right.”
I recorded our conversation and passed it to my friend Dr. Robby who was then a prominent psychiatrist. His analysis it as Mr.Christ has a high moral hazard.
I personally investigate the claim, read every wording of the submitted documents. Thus, the four claims were delaying for some time. Mr. Christ blew up of his anger, he hired one lawyer to file the claim, another more veteran and prominent one followed suit.
The insurer called me up to meet the 2 hired lawyers with the presence of the insured in the insurance office.
“The last claim more than RM400,000 of consignment, the contract is ex-work, the buyer is from oversea, does your client .i.e the transporter has any insurable interest on the good? I questioned the well-prepared lawyers.
” No” they replied me.
Claim repudiate
Another 3 lorries that make the claim were not with the contract of affreightment signed up with the transporter. The outsiders’ lorries were not in the subcontract list payroll. The insured had abused the weakness on the annual carrying. Besides, anyone lorries with a genuine claim can forward to him, of which he took a lion share of the claim money.
The insured had a high moral hazard on the fraud claim.
Finally, The insurer discharged all their liability from the renewal date, and fully refund the paid premium to the transporter.
Utmost good faith has a bigger role binding the insurer, more in the next episode.
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Very interesting! I never thought of it this way. Looking forward to reading the next chapter.
True, everyone, I know taking insurance very lightly, until claim occurr, start looking agent or lawyer, But the saddest part is that lawyer does not study claim and insurance law until they are doing Master degree. The next chapter still mixing with the right ingredients before putting in the oven.
This is interesting read. Waiting for next.
Sure, it is on the way.
Raymond Huang Moral hazard denotes the moral character of a person – whether he acts honestly, responsibility and diligently in his dealings with others. There are good and bad moral hazards. You say ‘high’ moral hazard in relation to an insurance claim – it suggests that the claimant may be acting dishonestly with intention to defraud. If you can prove fraud, you should resist the claim but it is not easy proving fraud.
Like · Reply · 15 hrs
Yow Wan
Yow Wan If the proved fraud ends up in court, end of the day it’s the judge who will decide and the judgement is binding
Like · Reply · 14 hrs
ChangShen Ging
ChangShen Ging Moral hazard refers to the increase in the probability of loss that results from dishonest tendencies in the character of the insured person. More sim- ply, it is the dishonest tendencies on the part of an insured that may induce that person to attempt to defraud the insurance company. A dishonest person, in the hope of collecting from the insur- ance company, may intentionally cause a loss or may exaggerate the amount of a loss in an attempt to collect more than the amount to which he or she is entitled. Fraud is a significant problem for insurance companies and increases the cost of insurance.
Morale hazard, not to be confused with moral hazard, acts to increase losses where insurance exists, not necessarily because of dishonesty but because of a different attitude toward losses that will be paid by insurance. When people have pur- chased insurance, they may have a more careless attitude toward preventing losses or may have a different attitude toward the cost of restoring damage. Morale hazard is also reflected in the attitude of persons who are not insureds. The tendency of physicians to provide more expensive levels of care when costs are covered by insurance is a part of the morale hazard. Similarly, the inclina- tion of juries to make larger awards when the loss is covered by insurance—the so-called deep-pocket syndrome—is another example of morale hazard. In short, morale hazard acts to increase both the frequency and severity of losses when such losses are covered by insurance.
the legal hazard—should be recognized. Legal hazard refers to the increase in the frequency and severity of loss that arises from legal doctrines enacted by legislatures and created by the courts. Jurisdictions in which legal doctrines favor a plaintiff represent a hazard to persons or organizations who are sued at tort. Although legal hazard is greatest in the field of legal liability, it also exists in the case of property exposures. In jurisdic- tions where building codes require that new build- ings conform to statutory requirements, the destruc- tion of a building that does not meet the require- ments may force an owner to incur additional costs in reconstruction, thereby increasing the exposure to loss.
Like · Reply · 1 · 6 hrs
Raymond Huang
Raymond Huang In the insurance business, we look out for people with good moral hazard. Honest, fair, good tempered and keen to adopt good risk management. Will submit fair and honest claims. Bad moral hazard is the opposite.
Thanks for the contributors from the insurance forum. It is a good idea to exchange ideas and how to improvement the local insurance industry.
ChangShen Ging Newton’s cradle
Raymond Huang “What is the difference between moral hazard and morale hazard? ”
Morale hazard is an insurance term used to describe an insured person’s attitude about his belongings. It arises when the person does not care about his possessions because he knows he is insured. For example, suppose a person pays insurance for his new phone. Morale hazard arises when the model of his phone becomes outdated and he no longer cares about it. He hopes his phone gets damaged before his insurance period is over so he can receive a new one. He is indifferent to his phone and unconsciously changes his behavior to try to receive a new one.
Moral hazard describes the behavioral changes before or after an event occurs. One type of moral hazard is ex-ante. Ex-ante moral hazard describes the behavioral change of a person or company before an event occurs. For example, suppose Sherman, a professional snowboarder, does not have health insurance and goes about his career without doing difficult tricks that could leave him in the hospital. Sherman knows that if he gets injured and has to go to the hospital, he has to pay the bills out of pocket. He decides to get health insurance, and once his insurance policy starts, he does difficult tricks and takes on more risk. Sherman, consciously, takes on more risk than before he had insurance because he has reduced his liability.
Moral hazard describes a conscious change in behavior to try to benefit from an event that occurs. Unlike moral hazard, morale hazard describes an unconscious change in a person’s behavior when he is insured.
The debate is getting hotter as time goes by. In my opinion, as long as the insured get the claim full settlement that is most important.