Triple jeopardy

July 11, 2017 § 16 Comments

John Noonan’s basic thesis is that Church doctrine prohibiting usury doesn’t categorically prohibit anything at all: that the doctrine boils down to the idea that charging interest is either licit or illicit depending on circumstances and subjective intentions extrinsic to the contract itself. The putative coup de grace in reaching this conclusion for Noonan is what is called the triple contract.

The triple contract is an agreement between two parties, but in order to understand it you have to first consider a contract between three parties: lets call them the investor, the managing partner, and the insurance provider.

The managing partner proposes (say) to undertake a risky but potentially very profitable sea voyage. The investor provides funds to finance the voyage in return for a fixed profit. The insurance provider, for a fee, provides security to the investor: a guarantee that the investor will receive his money back and a fixed profit, even if the voyage fails.[1]

In the triple contract the managing partner is also the insurance provider, and he imputes his fee as the insurance provider to himself.  In effect he agrees to provide an insurance bond as an inducement to get the investor to invest, and then underwrites the insurance bond himself.

As with most attempts to turn the moral prohibition of usury into a decorative accessory which doesn’t actually prohibit any well defined objective behaviors, the part you aren’t supposed to notice is the whole matter of security for contracts. In this case the fact that insurance bonds (understood equivocally) were accepted as morally licit is supposed to make Noonan’s readers fail to notice the difference between actual property staked as security and a personal IOU.

A personal guarantee is not a licit “insurance bond”. Rent charged against a collection of property, set aside and held in escrow as a contingency if things don’t go according to plans, is licit.

Of course, if you game the scenario forward this raises the question of why a managing partner with the resources to fully insure the investor and his profit would bother with an investor in the first place. But it might make sense if, say, the managing partner had illiquid property like farms or estates to post as security: property he doesn’t want to sell unless the enterprise fails.

So if you encounter the triple contract as something supposedly problemmatic when you are reading about usury, you can rest assured that it is a nothingburger.  The sleight of hand involved rests on all of the usual equivocations.


[1] Note that in insurance underwriting it is not typically the case for an insurance bond to cover even 100% of the possible loss, let alone the entire loss plus a profit, because of the perverse incentives this creates to destroy economic value.

§ 16 Responses to Triple jeopardy

  • On your footnote:

    I always laugh at the liberty mutual commercial where the lady talks about how Liberty Mutual will replace the whole value of your car rather than just 3/4ths of it saying “I guess they don’t want you driving around on 3 wheels. Smart.”

  • wiseguy says:

    Have you read “Interest and Usury” by Bernard Dempsey. S.J.?

    I’m curious as to your thoughts on it.

  • Zippy says:

    wiseguy:

    I have it, and I’ve read at least chunks of it, but well before I wrote the FAQ. My impression, which might not be fair and which I’d have to go re-open the text to confirm, is that he is one of those scholastics I am referring to in this post: those who became too wrapped up in their own theories and failed to pay close enough attention to what Aquinas himself and the actual Magisterium have said on the subject. But again that could be unfair. The book does form part of my own background reading on the subject, though specifics have faded.

  • Zippy says:

    TimFinnegan:

    Even a “100% replacement value” auto or home policy only reimburses direct costs. The indirect costs of time, hassle, logistics, etc provide a disincentive against deliberately burning your own house down.

    But the moral hazard does exist, and goes up with the payout — maybe you need cash now more than you need that nice but illiquid car or house. (Relevant: https://zippycatholic.wordpress.com/2017/05/28/arbitrage-on-the-holodeck/ )

  • If I recall correctly, the policy the commercial was advertising was for “new car replacement,” so if you buy a new car and within a certain amount of time/miles you total it, they will buy you a brand new car, instead of writing you a check for the depreciated value of your car; that’s why I laugh. They also have “bette car replacement” where if you total your car they will replace it with a car one year newer and with 15000 fewer miles on it. This just seems like it’s asking for insurance fraud, though I don’t know exactly how the policy is written/how it works in practice.

    You still have to pay the deductible as well as the indirect costs, but I really have no idea how these policies are sustainable, and I have no idea what actuarial model they are using that said it was sustainable.

  • TomD says:

    They’re sustainable because people are mostly honest and don’t intentionally destroy things to cause insurance fraud.

    And too many people already look at an insurance payout as a “win” which just goes to show that MONEY is more valuable than things, even when you just used the money to get the things.

  • I know a girl from work who, when she realized there was no way for her to avoid hitting a car that stopped short in front of her, intentionally waited a moment to hit the break so the dent was worse. She got a larger payout, got her father to help her pull out the dent himself, and is using the money to take classes at community college.

    Smart?

  • Rhetocrates says:

    While you *may* be able to find particular situations wherein moral prudence demands you take action that at first appears to be inconsistent with your morality (such as, perhaps, lying to Nazis about the Jews in your house), that is never an argument for the lack of general binding force for your moral precepts.

    The fact that it’s so hard, perhaps impossible, to come up with such a situation in the case of usury just makes it funny.

  • […] Source: Zippy Catholic […]

  • TomD says:

    “If I don’t charge usury to the Jews, the Nazis will get them!”

  • Zippy says:

    Malcolm:

    A good test for that kind of case is whether she could have openly told all of that to the insurance company and to the authorities when making the claim — including the fact that she deliberately caused excessive damage herself in order to get a larger payment — and still been entitled to what she got. I’m guessing that she probably actually violated the contract and that therefore her excess profits are theft or fraud.

    That doesn’t mean that stupid contracts aren’t possible, of course. But chances are you’d have a very hard time finding an insurance bond which explicitly says it will cover any and all damages that you intentionally cause yourself, unless you were willing to pay more for the bond than its maximum payout (which would make no sense for you).

  • wiseguy says:

    Dempsey does a lot of your favorite thing while discussing usury—bringing up the concepts of just price and opportunity cost.

  • TomD says:

    Sometimes the insurance company doesn’t care, really. My friend tried to explain that his car had pre-existing damage before the hailstorm, but they didn’t care; told him it was easier just to repair everything.

    I also am impressed with the girls’ reaction time – able to realize an accident is happening, that it won’t kill her, and that she should refrain from breaking to get a bigger dent. So impressed that I suspect the story was created afterwards to cover up her embarrassing lack of reaction time.

  • @Zippy,

    Oh yeah. My reaction was admittedly torn between amusement and mild horror.

    @TomD,

    Sure, that’s possible. Given the situation I heard the story I doubt it, though. Nor do I actually care either way, to be honest.

  • […] enforced by such severe penalties, and apparently directed at the increasing popularity of the triple contract, might seem to the superficial observer a decisive blow. … In fact, however, it remained […]

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