Other Frauds

Principles Obligatory in All Forms of Contract.—The principles of equality and honesty that are morally obligatory in sales and loans at interest are also obligatory in other forms of contract. The following are examples of equality.

(a) Gratuitous Contracts.—Obviously these contracts do not require equality in respect to recompense, since their nature is that no recompense is given for what is received. But in other ways equality must be observed. Thus, there must be mutual consent, offer on one side and acceptance on the other; there must be mutual respect, for each must honor the gratuitous promises made to the other; there must be a return of the same thing in quality and quantity as was borrowed, unless this would mean (as in mutuum) a loss to the borrower, etc. Moreover, the fact that all the advantage is received by one party is balanced by the fact that this party must bear the ordinary expenses and is held to special care himself, but cannot exact special care in the other party. Thus, a borrower has all the advantage from a loan, and he is obliged to use extreme care in using the lender’s property, while a depositor has all the advantage from the contract of deposit and cannot demand more than ordinary diligence of the depositary in guarding the goods left with him.

(b) Aleatory Contracts.—Aleatory contracts, or contracts of chance, are concerned with some uncertain event whose outcome depends upon luck or skill or a combination of both. The chief forms are betting, lottery and gaming (all are considered as gambling), to which must be added insurance and market speculations. All of these are indifferent in themselves and obtain their morality from circumstances. However, gambling, besides conforming to the requirements of contracts in general, must observe some special conditions to guarantee its lawfulness:

1. The outcome should be objectively uncertain and not a “sure thing” to be truly a contract of chance. While the contractants may be subjectively certain of winning, neither may so manipulate the matter as to exclude the other’s chance of winning. Should one insist upon betting against another’s assurance of a certain outcome, he is making a gift, hardly a bet.

2. Each must stake what belongs to himself and is not needed for satisfying other obligations, e.g., supporting one’s family, paying creditors, etc. Failure to observe this condition leads to many sins of theft or negligence. Should a person gamble with money belonging to another, per se he has a right to the winnings under the title of industrial fruits. However, if it would be impossible for him to restore in the event of a loss, the wager is void and the winnings must be restored to the other player, since the amount bet could not be lawfully won by the other contestant.

3. A reasonable proportion should be observed between what is bet and the probable winnings, and all betting should offer a fair chance of winning. Equality is not necessary, but odds and handicaps should be offered by the favored side. However, the odds may be waived by other bettors.

4. Honesty must prevail to exclude fixing the outcome or an unlawful style of play. The conventions of each bet or game establish the norms of cheating. Thus, hidden cards, marked cards, false dice void a bet. But running a horse solely to “tighten him” or “round him into shape” without full effort to win is expected in horse racing. Winnings through cheating must be refunded.

5. The loser must pay. Since civil law forbids many forms of organized gambling, the question arises whether a wager that has been outlawed constitutes matter for a valid contract that must be fulfilled. If the law is purely penal, the contract is valid and the obligations ensue; if it is a law that binds morally, then the contract is invalid, and the loser probably need not pay, but has acted sinfully in gambling.

Although not sinful in itself, gambling is so open to serious abuse that it has been strictly regulated by civil laws which bind in conscience.

Insurance is reduced to the category of contracts of chance, although its purpose is different from gambling, for it is concerned not with an uncertain good, i.e., to make money quickly, but with an uncertain evil, i.e., to avoid loss. In many instances an individual who does not take out insurance gambles more than one who does.

Conditions Requisite for Validity. The special conditions requisite for the validity of an insurance contract are founded upon its aleatory nature. This involves especially that the matter of the contract is in some way outside the control of both insured and insurer and beyond their power, both legal and moral, to govern beforehand. From this follows the second essential condition, that there be some risk for both parties. Some moralists today maintain that many insurance contracts are unjust to the insured by reason of defect of proportionate risk on the part of the insurer. They argue that the insurer avoids all risks and makes increasing profits annually whenever insurance is on such a large scale that the use of statistical tables favors the insurer. The fact that insurance companies are listed among the most wealthy corporations lends credence to the argument and explains why some moralists favor the insured in cases of restitution not involving fraud on the part of the beneficiary. Other moralists insist that such injustice can not be proved, that high profits are owing to increased efficiency and better service, that premiums are adjusted when it becomes apparent that they are out of proportion to the risks involved by the insurers.

On the part of the insurer is required the ability to pay indemnities occurring at the normal rate, but not to cover all at once. His right to the premiums is correlative to the obligation to pay the stipulated indemnities, while his liabilities are based upon probable losses occurring successively. In regard to the insured, his basic obligation is to make an honest and complete disclosure of the risk involved. Moral cases, for the most part, are concerned with error, innocent misrepresentation, and fraud on the part of the insured. Both the natural and civil law indicate the effect of these elements on an insurance contract.

The natural law invalidates a contract in which consent of one or both parties arises from substantial error concerning the nature or the matter of the contract—in insurance, the risk involved. In general, then, whenever the error of the insured is such that he would not have contracted had he known the facts, the contract is invalid, even if the error was due to innocent non-disclosure or misrepresentation on the part of the insured. In such cases, the innocent insured has no right to the indemnity owing to the invalidity of the contract; he has, however, a natural right to all premiums paid out, since no contract is involved and the insurer has no claim to them. In case of fraud, at least after judicial decision, the insured would have no right to the premiums and must also recompense the insurer for expenses sustained.

Error is considered accidental and as not invalidating in natural law when the insurer, knowing the facts, would have issued a policy, but at a higher premium. In this case the beneficiary may accept the indemnity, but must return the difference in the amount owed in premiums.

A special case of substantial error involving a disease unknown to the insured and undiscovered or undiscoverable by the insurance company doctors is considered by moralists as not invalidating a contract in natural law. It is argued that the insurer must assume such risks and that the insured intends to cover such unknown conditions. Moreover, an invalidating clause concerning such a contingency may be considered penal in nature and obligatory only after the sentence of a judge.

Insurance contracts and the civil laws governing them are so complicated that expert legal knowledge is required to understand the legal status of many insurance cases. However, a few dispositions of the civil law which differ from the tenets of the natural law should be kept in mind by the priest or confessor in dealing with the matters. Two favor the insurance companies over the insured:

1. when fraud or misrepresentation lead to accidental error, the contract is declared void or voidable;

2. innocent non-disclosure or misrepresentation in good faith leading to accidental error also render the insurance contract voidable or perhaps even void. It is probable that the beneficiary in such cases might be permitted to claim the benefits due him according to the naturally valid contract, since these civil law dispositions are contrary to the conclusions of the natural law. He would be obliged, however, to restitution for damages caused by his fraud or misrepresentation committed with grave theological fault.

One prescription recognized by civil law and in some places made mandatory favors the insured, the convalidating or incontestability clause. The insurance company recognizes the validity of the policy after a specified period of time has elapsed, even in cases involving fraud on the part of the insured. If the contract prior to the time was voidable, the company loses its right to contest its validity; if the contract was void, it becomes convalidated. By terms of this clause, the natural-law obligation to restore by reason of fraud ceases and the beneficiary may lawfully keep the insurance money.

Obligations Arising after the Policy Is Issued. 1) The insured must pay the premiums at the times and according to the terms stated in the policy.

2. The insured must not increase the risk assumed by the company. Concretely, in cases of property insured, the insured is bound in commutative justice not to deliberately destroy or damage the property covered by the policy under penalty of losing all rights to compensation. Compensation could be claimed, however, if the damaging or destructive action was only theologically right.

3. He must not claim or accept indemnity for articles not damaged; he must not submit a claim beyond a just estimate of the real damage. Some moralists maintain that a claim may be made for a higher amount with the intention of getting a just value after the insurance adjustor has made his investigation and lowered the estimated value. The adjustor’s estimate, even if higher than the insured estimate, may be accepted provided no means have been taken to prevent a full and free examination of damage.

Operations on the stock market and similar markets are primarily contracts of buying and selling; they become contracts of chance when they assume the quality of speculation, i.e., gambling on future changes of prices. It is generally conceded that such contracts are not morally wrong in themselves and follow the laws of betting. Additional justification is added on the ground that such transactions in many instances supply the capital required for large-scale operations, future deliveries, etc. Occasional dissenting voices insist that certain aspects of such transactions, e.g., dealing in future values of wheat, rye, and other commodities, are immoral since they tend to determine prices independent of the real value of the products, the laws of supply and demand, etc. However, the arguments seem to involve more abuses controllable, if not actually controlled, by marketing laws and civil laws rather than any immorality in the operations themselves.

(c) Onerous Contracts.—These contracts require that there be equality between the recompense and the thing received. Thus, in a lease the lessor must not charge excessive rent, and the lessee must pay the rent faithfully; in a contract of labor, the employer must pay a fair wage (that is, one that at the minimum will meet the primary needs of the worker and his family to live in frugal comfort, and which will moreover equal the special value of the service given; for a complete treatment of the theology of the just wage, see Fr. Jeremiah Newman, “The Just Wage,” Theology Digest, Vol. 2, Spring 1957, pp. 120-126, and “A Note on the Living Wage,” by Edward Dui, S.J., in the same issue), and the laborer on his part must give a fair day’s work as to quantity and quality; in partnership, the members must divide the profits and loss according to a reasonable distribution; in guaranty, pledge, and mortgage, justice requires that the burden assumed be not out of proportion to the benefit that is received.

Fraudulent Contracts.—Examples of fraud in contracts are the following:

(a) in gratuitous contracts, a donee who by false representations obtains a gift, a lender who fails to make known to the borrower defects or dangers in the thing loaned;

(b) in onerous contracts, a landlord who conceals defects from one who is renting a house, members of a business concern who keep back information from partners or who give out false statements in order to entice investors, creditors who conceal their knowledge about the unreliability of a man for whom surety is given them;

(c) in aleatory contracts, in a pure wager, a person who bets on a thing supposed to be uncertain but about which he has certain information, or who knows that he will be unable to pay should he lose, or who will allow no odds though he knows that the probabilities are in his favor; in gaming, a player who pretends to be ignorant in order to inveigle another person into a game of skill, or who does not observe the rules of the game, or who fixes the cards or dice for himself in a game of chance; in lottery, a drawer who manipulates the lots so as to favor some of the players, etc.