The Ethics of Co-Signers

Let’s try this one as a hypothetical: Let’s suppose that somebody wants to borrow money from you. It’s not a large sum by your standards – losing it won’t bankrupt you – but if you just gave that amount away to anyone who asked for it you’d be broke in short order. Let’s also suppose that the person who is asking is a decent human being and you have no particular reason believe that they won’t pay you back, but they’re not currently working and won’t be for the foreseeable future. You might be reluctant to make the loan under those conditions, but let’s further suppose that the person asking for money finds a responsible third party (a parent, for example) who agrees to pay you back if the borrower can’t for some reason. Suppose you made that loan…

Now let’s suppose that a few months later your borrower dies in a tragic accident that is in no way his or her fault. What are you going to do? We will assume that you are neither heartless nor insensitive, but at the same time you can’t afford to just give money away at will – and your borrower’s parents co-signed on the loan, promising to pay you back if something like this happened. Would you go to the co-signer and ask them to honor the commitment they gave you and repay the loan? Does our answer change if the borrower’s parents are devastated by the loss? Does it change if they are approaching retirement age? How about if they have taken in the borrower’s (now orphaned) children and are working hard just to get by?

This sort of thing happens a lot more often that you would hope; there was a story about a case just like this that appeared this past week on CNN online. It’s not exactly a case of biased reporting, but it’s clear that both the reporter and most of the people who have written in the Comments think that it is terrible of the finance companies involved to be attempting to recover their money from these excellent grandparents who are already expending their savings and giving up any real chance of retirement in order to raise their grandchildren. The fact that the loans in question were student loans, and therefore can’t be discharged in bankruptcy or otherwise legally evaded undoubtedly make this even worse, but the basic issue remains: what are the loan companies’ ethical responsibilities in this case?

It’s easy to say that the lenders should just forgive all of the debt – reduce the loan amounts to zero, take a credit on this year’s taxes, and move on. And if this was the only such case that would ever happen I’m sure that all of the companies would just write this off. Unfortunately, there are thousands of such cases every year, and if the companies forgive all of them they will go out of business, throwing all of their employees out of work and doing potentially catastrophic damage to their stockholders – none of whom have done anything wrong either, we should probably note. It might actually be heartless to collect on debts like these, but it’s hard to imagine how it would be fair to destroy one group of innocent people in order to help another group of innocent people – especially when the group that will benefit really did bring the crisis on themselves…

Which brings me to the inevitable question: does a financial institution have an ethical responsibility to forgive loans – effectively throwing away money – because either the original borrower or their co-signer have suffered a personal or family tragedy? Does our answer change if the original borrower could easily have obtained life insurance (at a reasonable price) to cover the loan – which a healthy 27-year-old probably could have – that would have prevented the whole situation? Does our responsibility to be kindly and good people override our fiduciary responsibility to our stockholders or our professional responsibility to our employees and other stakeholders? Or should we just offer our loans and financial products at fair rates with clearly-written contracts and assume that our customers are grown adults who can make their own choices and accept the consequences of their actions?

It’s worth thinking about…

The Ethics of Exemptions

If you’ve been following the ongoing efforts to water down or otherwise weaken the Healthcare Reform Act – since the 37 attempts by Republicans in Congress to repeal the act outright have all failed – you’ve probably noticed the exemption offered for religious organizations regarding contraception. The argument goes that since some religious groups oppose birth control in any form, forcing them to pay for these services for their employees would be a violation of their First Amendment right to Freedom of Religion. This is usually countered with arguments that the organizations themselves aren’t paying for birth control – their insurance providers are, which leads to discussions about self-insuring agencies, final responsibility, and claims (and usually counter-claims) about conflicts of interest. But as upsetting as all of these disputes are, they still fail to take into account one of the obvious consequences of allowing any exemptions to our national healthcare laws in the first place…

If you allow any exemptions to any law, somebody will eventually attempt to use that exemption to their own benefit, regardless of whether or not the exemption is actually appropriate. This is the origin of cases where someone who isn’t a Native American has their house declared Tribal land and starts a casino, people whose official residence is somewhere off-shore to avoid paying taxes, and billionaires who receive Federal farm assistance money every year because they own just enough agricultural property to qualify. In a setting like this you’d have to be an idiot not to expect anyone who can do so to try to game the system; the real question becomes at what point is the requested exemption a reasonable interpretation of the law, and at what point does it become fraud?

Consider the case brought by the Hobby Lobby organization in Federal Appeals Court this past week to avoid having to pay for contraception services for their employees on the grounds that it would violate the company’s religious beliefs. The company points out that they use proceeds from their for-profit business to support the efforts of their ministry, and that therefore the entire organization can be seen as the support system for a religious enterprise. The claim may seem absurd on the face of it, especially since the company itself isn’t registered as a religious organization, and therefore has no legal requirement to spend any amount of funds any specific activity. But that’s exactly the problem: if we are going to allow exemptions for churches, then can we deny them to religious schools? If we allow them for religious schools, can we deny them to religious hospitals? How far from the actual house of worship can we extend this type of religion-based exemption before the whole question becomes absurd?

Even worse is the fact that while Hobby Lobby may appear to be gaming the letter of the law, there is at least some possibility that they are keeping to the spirit. Consider, for example, a company that really is run according to Christian ethics – providing people with money and other support on the basis of need, rather than the amount of work received in return, and so on. This could still be a for-profit company – it could still make a profit each year, in fact – but it would have a real chance of reaching people who would never go to church, let alone listen to a sermon once they got there. Such an enterprise could, at least in theory, adhere more closely to the central beliefs of that faith than any conventional religious institution. If it does so, how can we dismiss it as merely another business enterprise, undeserving of any special consideration?

Which leads me to the question: Can we allow any organization to have exemptions from a law that promotes the general health and welfare of the entire population on the grounds of maintaining religious freedom to the people involved with that organization? Can we allow any such exemptions, in fact, knowing that a non-zero number of applications will be made by people and organizations who have no reasonable justification for requesting them? Does freedom of religion override the right of all people to have complete medical care? And if it can only be said to do so in specific cases and for specific organizations, where do we draw those lines, and who gets to draw it? Or should we just have one set of rules for every organization and company and let the fallout (holy or otherwise) fall where it may?

It’s worth thinking about…

A Matter of Trust Revisited

Last month I wrote about a story on the Consumerist website about a customer whose wife started getting emails addressed to him from an online florist site that asked if he wanted to purchase additional gifts for someone named “Margaret” – which was a bit of a problem, since his wife’s name isn’t Margaret, and neither of them could figure out what these messages where about. Inquiries to the company and to their credit card providers confirmed that their identity didn’t appear to have been stolen, and no fraudulent charges had appeared on any of their cards, but the emails kept coming anyway. In my last post about this, I noted that the company could have caused some real trouble if the couple in our story wasn’t as confident in their relationship as they appear to be, and could have found themselves in real trouble if someone had decided to sue them over this little faux pas. However, the follow-up indicates that the situation is actually much worse than that…

On this week’s installment, the couple in the original story got fed up with the ongoing sales messages and decided to see if there was shipping information on file for “Margaret,” since online order forms will sometimes store that kind of thing. And, sure enough, when they hit the “order now” button the order form came up, complete with an address and telephone number for the mystery woman – who turned out to live in a city neither of them had ever visited, in a state neither of them had ever been to. The folks over at the Consumerist urged them not to contact Margaret directly, and to instead try (again!) to inform the company that they were screwing up by the numbers, but as of this writing there has been no further rely. I have to wonder if the company has any idea how badly things could have turned out…

Consider, for example what might have happened if this contact information had been sent to some unscrupulous person, such as an identity thief, or even a telemarketer. Just the name, address and telephone number could have been used for any number of scams, but the inclusion of Margaret’s email address would have made it almost too easy. If the database glitch that caused this information to be routed to the wrong person had also included credit card or banking information almost anyone could have taken advantage of it, and if Margaret herself had anything to hide the account information could have turned up in another family tragedy – or blackmailing scheme…

In my original post, I noted that even a few years ago this sort of clerical or database error would have had limited effect, and left the company open to extremely limited liability as a consequence, but in the Internet age it wouldn’t take much more than this to bankrupt the company. I should also point out that there has never been any such thing as a database with no errors in it, and no company going forward is going to have one, either – and certainly no Internet retailer ever will. If the company carries general liability insurance on its operations (our consulting company did back in the early 2000’s, but not every business does this) it might cover the potential lawsuits from this sort of problem, but it would probably be a good idea to check the exact language on the policy…

And if your business has any contact with its customer base that depends on a database being maintained without a single embarrassing error every happening, you might want to consider checking the language on your own policy – or getting such an insurance policy, if you don’t already have one…

I’ll Take That Bet

Here’s a hypothetical for you: Suppose your company has the opportunity to hire a CEO on a medium-term contract (5 or 7 years) at a quite reasonable salary – less than you would expect to pay for a manager of his stature, and considerably less than he could get from a number of other offers. The only catch is, he wants a large severance payment in the contract, so that if you want to fire him early, it will cost you an extra $11 million to get rid of him. Would you accept that contract, knowing that in effect you are betting that the savings on his salary (and the money you will make by having him on your senior management team) will make up for the potential loss if you decide to fire him? Would your feelings about this change if his first three years in office were your best ever, with your highest revenue and lowest costs? If you did take this bet, would you still pitch a fit if he collected his $11 million “golden parachute” after his last year with your organization included a $149 million loss?

Well, you might want to talk it over with some of the people from the Massachusetts Blue Cross/Blue Shield organization, since that’s essentially what has just happened to them. You can get the story off of the Boston Herald web site if you’d like, but the basic story is that the CEO of the Massachusetts Blue Cross/Blue Shield stepped down at the end of last year because the Board was fretting about that year’s operating losses. Exacerbating the whole situation is the fact that the outgoing CEO’s predecessor received an even larger severance package in 2005 ($16.7 million, in fact) – and the fact that the organization is a non-profit…

Now, as I’ve previously noted, a non-profit is not the same thing as a charity. Being a non-profit organization does grant an organization several advantages under the law, most notably not having to pay taxes, but since a corporation only pays taxes on profits and a non-profit can’t have any profits, this isn’t as big a deal as you might think. In theory, all this should do is produce a leaner, more efficient corporation, since it can use 100% of its revenue to pay employees, buy equipment, and improve its services. Even more to the point, perhaps, in 2005 the most recent economic boom was in full swing, many people who should have known better were predicting nothing but peace and prosperity for the next thousand years, and the idea of spending $11 million on a CEO’s severance package seemed almost trivial, since a couple of college students could make that much in a weekend by starting a website. The move certainly wasn’t illegal, and it hardly seemed unethical (let alone “unconscionable”); at the time, it represented a savings of over $5 million from the previous CEO’s severance package…

The point I’m driving at is that all business decisions have to base the inherent risks of the situation against the payoff if your choice is successful. If your business environment is highly dynamic, long-term high-risk activities may not be a good idea; if your country or state are in the middle of an economic bubble that even a toddler could tell would not last forever (and might not last for seven years) then gambling on the stability of your senior management may not be your best choice. This is especially true in an industry like health insurance, which (like the securities, real estate, and airline industries before it) had been skating on thin ice while lobbying Congress to maintain its artificial industry conditions for decades before the deluge finally came. In the teeth of an economic crisis, a healthcare revolution, and an increasingly nasty political struggle for the future (if not the soul) of this country, having to publically admit that you bet $11 million on the performance of your new CEO and lost is a hard thing to carry off…

The question is, when you are given the same choice, somewhere in the future, will you take that bet, or play it safe and risk not getting those three banner years instead?

The Ethics of Pet Liability

This week I noticed an online story about a family whose dog had been hit by a car and killed, who were now being billed by the driver’s insurance company to recover the cost of repairs to the car. It seems like a completely cruel and heartless thing to do, doesn’t it? People have just lost a beloved member of the family, are still trying to cope with the loss, and then they get hit with a bill for the damage caused during the accident. Certainly, that’s how the case is being portrayed online and in the media, but then I read the rest of the story and discovered that the family would routinely let their dog wander about the neighborhood alone and unsupervised, and that the community where all of this happened does have a lease law, and I had to admit that, as usual, the situation isn’t quite as simple as headline writers or Internet wags would have you think…

First of all, it’s not as if the driver who actually hit the animal is turning around and asking for money. The motorist reported the accident and called on their insurance company to pay for fixing the car, just as you’d expect. Second, the insurance company has a responsibility to its owners (or stockholders, if it’s a publicly-traded company) to contain costs as much as possible; they are therefore quite reasonably asking the people whose actions caused the loss to pay for the cost of making things whole again. Without a court judgment the insurance company can’t force the family to pay them anything – and it’s debatable if the company will actually file suit, since this would be a small claims action. Until they do, this isn’t a legal demand; it’s just a request to fix something you broke…

And we should remember that the family did cause the accident. Even if there was no law against letting your dog run free on the books in their community – and there was – most people who’ve ever seen one know that dogs will sometimes run into traffic if you don’t stop them. Letting your dog run around the neighborhood whenever it wants to, however quaint and charming that might sound, means that there is a non-zero chance that one day somebody is going to hit it. The family in this story knew about that possibility and continued to let their dog roam freely anyway…

So there’s no question that the company has a legal right to do what they are doing; they do in fact have a fiduciary responsibility to take these actions. The question is, should they refrain from doing so in order to spare the family additional grief and sorrow (and possibly guilt) from having allowed their pet to wander into harm’s way? Does whatever responsibility the company might have to people who are not their customers (and did cause the situation through simple negligence) on the basis of their shared humanity over-rule their responsibility to their customers (to keep prices low) and their stockholders (to maximize profit)? Does the fact that the family was both willfully careless and knowingly in violation of municipal law negate their entitlement to humane treatment? Should the company absorb the cost of the repair rather than risk potential fallout from dog-lovers and libertarians who think dogs should be allowed to run free, or would doing so simply encourage more people to let their pets roam into traffic?

It’s worth thinking about…

Too Important

There’s an old saying in America that you should never discuss religion or politics in public, because of the very high probability of offending someone who might be listening. People don’t usually consider it these days, but this country was originally settled by people seeking either religious or political freedom, or occasionally both; the right of all Americans to maintain their own faith regarding religion and governance is still considered the cornerstone of our entire society. Unfortunately, a side effect of that freedom is that all of our citizens also have the right to believe that theirs is the only true faith, and that everyone else is wrong; another side effect is the right to say so, loudly, and to take umbrage at anyone who disagrees with them. Which is bad enough when it comes to religious intolerance; some of the things that get political in this country are enough to make you think the entire place is a madhouse…

Case in point, consider the tragic story of a young man from South Caroline named Jerome Mitchell, who had his insurance company cancel his policy shortly after he was diagnosed with HIV in 2002. The company claimed that a clerical error in Mitchell’s file proved that he had the condition before he purchased their policy and had failed to disclose it on his application; this constitutes fraud and frees the company from the expensive obligation to provide the treatments needed to save Mitchell’s life. Presented with certified records, signed statements, and even its own internal memos that documented the error, the company simply ignored their (former) customer, their own underwriter, healthcare providers and eventually Mitchell’s attorney, refusing to budge on the matter until finally sued – a lawsuit which has since been upheld at the Appellate Court and State Supreme Court levels, and which the company continues to fight…

You can read the Reuters story here if you want to, but if you found the original story repulsive, the twist ending will really upset you: an investigation that resulted from the Mitchell case found that his insurer, Assurant Health (formerly Fortis) had been systematically investigating every new HIV claim and trying to find grounds for declaring fraud and cancelling the policy. Similar cases are now springing up all over the country, as various regulatory agencies start looking into these “rescinded” account cancellations, thousands of which are apparently blatantly illegal. What makes this political (and, at least to me, fantastical) is when you read the comments section on such stories, and find all of the people who are claiming that this is an argument AGAINST healthcare reform…

In case anyone missed it, this is a case of blatant and deliberate fraud on the part of Assurant; using information they knew to be false in order to violate a contractual obligation. Not satisfied with that, however, they also withheld treatment that an innocent man needed in order to survive, refused to produce any account of their procedures or the process of how this decision was made, destroyed evidence, and appealed the legal loss for at least six additional years (the process continues). Why the people who made these decisions have not be charged with fraud, obstruction of justice, and conspiracy to commit a felony is beyond me; if I was the relevant prosecutor I already would have, and I’d throw in criminal negligence and murder (under the depraved indifference statute) if the customer in question had died as the result of their actions. None of which addresses the real point here, which is that this has nothing to do with politics…

In any industry, companies which charge exorbitant rates, pay their senior management team outrageous salaries, invest money like idiots, and refuse to provide the services for which they are charging are committing fraud, and should be attacked in both civil and criminal actions, as well as by targeted legislation, until they stop. I don’t care what party you belong to or who you think should be running the country, fraud is still fraud, and unethical business practice is still unethical business practice, and both of them are wrong no matter what your personal beliefs happen to be...

Unless there’s a religion and/or political party somewhere that is in favor of fraud, obstruction of justice, depraved indifference and conspiracy, of course. In which case things are even worse than I’d thought…

Not Always

From time to time, as most of you already know, I’ll find myself getting really unpleasant with someone for over-simplifying the issues of a discussion. I try not to be a jerk about it; everyone does this sometimes, either because they don’t know the details of the subject well enough to create a better argument or because they feel some elements of the subject are too elementary to bother describing in detail, or both – although we should acknowledge that in the first instance people don’t always realize they’ve done so. But I get very tired with people who have never studied business and have no clue how finance actually works who then make fatuous statements about how things should be. Think of it as the private enterprise equivalent of that idiot many of you saw on the news who actually said “I won’t stand for Government interference with my Medicare!” – and could not be convinced that Medicare was a Federal government program…

A good example popped up online this week, with an article about how Anthem Blue Cross is raising their rates for everyone who has an individual policy with the company. This by itself is hardly shocking; most insurance companies have regular raises, and the individual accountholders don’t have the protection of a big group – a single customer threatening to take their business elsewhere just doesn’t have the same impact as UCLA threatening to take 25,000 customers to the competition, for example. What is shocking about this story is that Anthem is raising their individual rate by up to 39 percent this year – after raising it as much as 68 percent last year. Well, that and the fact that there are still people out there who insist that our current national healthcare system isn’t broken, anyway…

Now, I should tell you that I was one of those Blue Cross Individual Policy customers for a number of years, and I never had any trouble with my coverage. But by the same token, I was healthy at the time – and I never had my rates double in less than a year…

A while back I noted that the business model behind the sub-prime mortgage market was inherently flawed, in the sense that it could not continue indefinitely without coming to grief – in other words, flawed in the same sense that a Ponzi scheme is flawed – and that if the institutions involved didn’t voluntarily regulate their industry, the government would be forced to do so or else let the industry crater and take the rest of our economy with it. Now let me suggest that the same kind of disaster is brewing on the health insurance side of the industry. Somewhere between 70 and 80 percent of our economy (it depends on how you count it) is based on the kind of small businesses that rely on individual and small-group coverage policies, and if their health insurance costs keep doubling and re-doubling each year, it will not be long before they start going under en masse – and take what’s left of our economy with them…

This is one of those cases where ideology will not change the bottom line; where the belief that our current system (where we just keep giving more money to large corporations each year) can save us is just as idiotic as the belief that the very best health coverage should be available to everyone, for free, and that there should be no increase in fees, taxes, or anything else that burdens the public. The financial crash of 2008-2009 really wasn’t that hard to predict, and neither is the next one – which could start at any time now. From where I’m sitting, the question of whether an industry can be trusted to regulate itself, and whether government intervention is better than just letting that industry crash, is generally the same answer:

“Not always…”

Rules vs. Image

Back in Elementary School, most of us learned the old saw about not judging a book by its cover, and before the end of Middle School, most of us had suffered at least one embarrassing lesson on the subject. But for some reason this doesn’t keep people from assuming that all lawyers are dishonest, all doctors are arrogant pricks who like playing god, all politicians are amoral mercenaries without a moral conviction anywhere in their soul, all police officers like to “put the boot in” once in a while, or that all bloggers talk too much…

All right; I’ll give you that last one. But this syndrome probably does account for the outrage coming out of Knoxville, TN over a disallowed insurance payout because of a pre-existing condition. Everyone who hears the story is just assuming that the insurance company is just screwing the policy holder out of money by invoking a little-known, seldom-used clause somewhere in the fine print. Which they are, of course; what makes this case special is that the policy in question is a life insurance policy…

There’s a story being reported ABC News Online about a man who died after being gunned down by “unknown assailants” under circumstances the police consider indicative of illegal activity. The insurance company is claiming that since they require disclosure of a customer’s medical condition before they will write a policy, and the dead man failed to disclose that he had hepatitis C, he was in breach of their contact and the policy is void. The widow is suing, claiming that neither the deceased nor she knew about his illness, and the company is just trying to screw them out of the money by invoking the “pre-existing condition” claim…

What makes this story remarkable is that we’re hearing about it at all. Normally, this would be an extremely dull civil case, in which the insurance company attempts to produce evidence that the policy holder did, in fact, know he had hepatitis C before signing the paperwork swearing that he didn’t, and is thus committing fraud (and perjury) by doing so. The policy holder’s estate would attempt to prove that he didn’t know any such thing, although this is difficult (since you can’t prove a negative) and they’d probably have to settle (or drop the matter) if the insurance company could prove its case. Particularly if Tennessee turns out to be one of the states in which you are responsible for whatever you contact to do (or not do), regardless of whether you understand the contract…

In this case, however, we have all of the makings of a sensational news story: a poor widow, a man being shot in the back, and an evil large company refusing to pay off on a life insurance claim because of hepatitis C when that’s clearly not what killed the victim. Never mind that the man had “a lengthy criminal record that included drug trafficking, burglary, vandalism and public drunkenness” according to public records. Never mind that the policy was still in its conditional phase, and the company was perfectly within its rights to cancel if they had reason to believe that the policy holder was lying to them. Never mind that the contract between the man and the company required him to certify not that he believed himself to be healthy, but that (under penalty of perjury as well as the cancellation of the policy) he actually WAS healthy…

The facts of the case are that the insurance company would have cancelled the policy the moment they found out about the hepatitis C, that the policy holder wouldn’t have had a leg to stand on after making claims about his health that were not true, and no one would have bothered reporting on it – if it happened any time before the AIG scandal and all of the other events that have made the insurance industry into one of the most hated sectors in American commerce…

A Few Small Repairs

Regular readers of this space will recall that my wife and I have just completed a relocation from Los Angeles to East Lansing, Michigan, where I am joining the doctoral program in the Management Department of the Broad College of Business. As part of the process, we hired packers to come and pack up most of our belongings, loaders to load everything onto a moving van (and then into a warehouse and back into another moving van), and movers to move everything across the 2,300 or so miles between our previous city and our current city. I’m happy to report that the packers did an excellent job, wrapping several things much more securely than their contract really required. The moving crew that delivered our things were also quite good, carrying on despite summer heat, attacks by bald-faced hornets (whose nest they had accidentally driven the truck into) and the fact that the City had decided that last week was the ideal week to sink an 11-foot deep hole into the street in front of our house, after removing all of the concrete and leaving us on a dirt road…

Unfortunately, I can’t say the same for the crew that loaded everything onto the trucks and into the warehouse. In the course of doing so, the somehow managed to smash one of our television sets, damage the piano, and lose our vacuum cleaner altogether. There were a few other losses, such as one of our photo boxes (smashed, but the pictures are intact) and one of the two supports for a trestle desk (without which the other trestle and the desk top are both useless as well), but none that I felt reflected the total lack of competence suggested by a television set wrapped in a blanket or two and then crushed between other items packed into the truck…

If it sounds like I’m being unkind here, well, I’m really not. There is such a thing as a television packing box, used to protect a television set that is being transported by truck, and the company we hired to pack and move our stuff does in fact sell them. I’m fairly sure that they billed us for a couple of them in the packing supplies, but I can’t prove it. In any case, they didn’t bother to USE ONE when packing up our TV. Fortunately it was our second set; the main one is set up in our family room and working just fine, and our smaller emergency backup set (actually a flat panel that we acquired here at the Meijer) is also working perfectly. Which does not make this any less idiotic…

And don’t even get me started about the piano. My wife tells me that the damage is to one of the legs, and should be easy to repair; she insists that the sound quality of the instrument will not be affected. Which is all very well and good, but considering how much money we shelled out to have the piano moved in the first place, I don’t think it’s unreasonable to expect it to show up undamaged. Or at least, without one of the casters broken off and the foot cracked…

Which brings me to the point of this rant (yes, I do have one!). Our sales representative is going to get the sort of telephone call we all hope we never get sometime this week, and he will then have the choice of taking care of some very unhappy customers, or facing the consequences. It’s a situation so bad that it normally takes bad language to describe it, but this one man has the chance (and presumably the power) to make it all go away. Let’s all hope he chooses wisely…

I’ll keep you posted.