THE HOWE READINGS ON INSURANCE No. 6 A SHORT SKETCH OF THE HISTORY AND PRINCIPLES OF MARINE INSURANCE By William D. Winter THE INSURANCE SOCIETY OF NEW YORK INCORPORATED January 1935 A SHORT SKETCH OF THB HISTORY AND PRINCIPLES OF MARINE INSURANCE BY WILLIAM D. WINTER PRESIDENT OF THE ATLANTIC MUTUAL INSURANCE COMPANY OF NEW YORK ' • ■ $ .... . \ -V- -V ' c X *!; : ; >>: :,. :,, : »*"»%^ •? / my fortune for it, My ventures are not in one bottom trusted, Nor to one place; nor is my whole estate Upon the fortune of this present year: Therefore my merchandise makes me not sad. — The Merchant of Venice Second Edition THE INSURANCE SOCIETY OF NEW YORK INCORPORATED 1935 The printing of the first edition of this publication in 1925 was made possible by the generosity of zMrs. Cjeorge £. Jfowe who gave to The Insurance Society of NewYork a fund in memory of her husband GEORGE C. HOWE, 1852-1918, for fifty years identified with the fire in- surance business and at all times showing a keen interest in educational work The Atlantic Mutual Insurance Company has generously contributed the cost of this Second Edition Copyright, 1935, by THE INSURANCE SOCIETY OF NEW YORK INCORPORATED KB /Hi robur et aes triplex circa pectus erat, qui fragilem truci commisit pelago ratem primus, nec timuit praecipitem Africum decertantem Aquilonibus nec tristes Hyadas nec rabiem Noti, quo non arbiter Hadriae maior, tollere seu ponere vult freta. —ODES OF HORACE III Heart of oak and triple fold Of brass engirt his bosom bold, Who first to ocean's ruthless might Trusted a bark, thing frail and slight ; Nor at the war of winds did quail, Though southern blast met northern gale Nor feared the gloomy Hyades, Nor maddened Notus, — lord of seas, Sfnce Hadria knows no stronger will To lift her waves, or bid be still. —A. S. AGLEN, Archdeacon of St. Andrews 309058 A map of the world as then imagined prior to the first voyage of Columbus. Printed at Brescia, May 31, 1485, by Boninus de Bonini9. Reprinted by permission of Mr. James Tregaskis THE HISTORY AND PRINCIPLES OF MARINE INSURANCE CHAPTER I ccording to the chronology of the Bible story of Creation, the seas were formed about 4000 B. C. Fifteen hundred * ^years later the art of shipbuilding had so far progressed that Noah was enabled to build the Ark in which to outride the Flood. This vessel was of no mean size, being a three deck ship and, ac- cording to the story, pitched without and within, indicating that the art of caulking vessels to make them water-tight was well un- derstood. In 1689 B. C, Jacob in blessing his children, says, "Zebulun shall dwell at the haven of the sea; and he shall be for an haven of ships." (Genesis 50-13), and again in Numbers 24-24, the statement is made that "Ships shall come from the coast of Chittim and shall afflict Asshur and shall afflict Eber." Some- what later the prophetess Deborah laments that "Dan remain in ships" (Judges 5-17), while in 1000 B. C. "King Solomon made a navy of ships in Ezrongeber" (1 Kings 9-26). Repeated refer- ence is made to ships of Tarshish which were probably Phoenician trading vessels, plying between Tyre and Tartessus in Spain. All of these references, together with numerous others which might be taken from profane history, indicate that man, soon after his creation, found that the seas afforded an easy avenue of com- munication between distant places. He quickly learned, however, that while the seas could serve him they also could master him. Birth of Insurance A thousand years before the Christian era an active overseas commerce was conducted in the Red Sea and the Mediterranean Sea. The severe storms in these comparatively sheltered waters proved more than a match for the skill of the ancient shipbuilders, and many a vessel with its cargo succumbed to the perils of the deep. The losses entailed, especially those sacrificial losses caused by jettison in order to lighten and save the ship, caused merchants to seek some method of sharing these losses, — and insurance was born. Not insurance as we know it today, but the germ principle 6 History and Principles of the distribution of loss over the many, in order that the burden of loss may not oppress the few, appears in general average, the method devised by these ancient merchants to distribute losses due to jettison. The following concrete example will illustrate the method of distributing such loss, as provided in general average. A ship of Tarshish with its crew of oarsmen leaves Tyre laden with a diversified cargo destined for the western Mediterranean. The merchants whose goods are aboard the ship travel with it, to sell their wares and with the proceeds to buy a return cargo. There being no supervision of loading and human nature being then much as it is today, ships were probably overloaded, safe enough in calm weather, but the minute storms arose in danger of sink- ing. Jettison in such case was the natural remedy and was immediately applied. Origin of General Average — Jettison No merchant would wish his goods sacrificed, but in an emergency there is little time for debate and the most accessible goods would be cast overboard. In many eases, however, valua- ble time was lost in quarrelling over whose goods should be jettisoned and to prevent these delays and in the common interest, the system was devised of assessing the value of the jettisoned goods pro-rata over the entire value of ship and cargo including the jettisoned goods. That this system was devised early in the history of overseas commerce is attested by the fact that in the maritime law code promulgated by the Rhodians in 916 B. C. general average is recognized as a maritime custom. That this system of distribution of loss is sound is proved by the fact that the principle of general average, greatly broadened to meet modern conditions, persists to the present and is part of the law of every maritime nation, while the modern marine policy affords protec- tion against losses of a general average nature. The limited protection given by this ancient system of dis- tributing losses due to jettison could not for long satisfy the demands of a growing commerce. It is not surprising, therefore, to find at a somewhat later period a well established system for Marine Insurance 7 furnishing indemnity for losses caused by the destruction or dam- age of ships and their cargoes. Strangely enough, this method of insurance, which reached a high degree of development in Ancient Greece and Rome, was quite the reverse of our present system of insurance by premium payments. It was a system devised prob- ably by the ancient money lenders to gain the business of those engaged in overseas commerce. Bottomry and Respondentia Bonds This system of insurance was conducted in the following way. The owner of a ship, or a merchant who had a cargo of grain or other goods for shipment, being in need of funds to finance his operation, would seek a loan of his banker on the security of his ship or of the cargo. If the ship successfully completed its voy- age, the owner would earn his freight money and the merchant would have his goods at destination where they could be readily converted into cash and the banker's loan repaid. If, however, disaster overtook the venture, probably neither the ship-owner nor the merchant would be in a position to repay his banker. The modern banker who loans money on the hull of a vessel by mort- gage or on a cargo against the bill of lading would be in a similar position were it not for the protection of the marine insurance policy insuring the hull of the vessel or the cargo represented by the bill of lading. There being in Ancient Greece and Rome no insurance as we now know it, the banker in many cases was subjected to the risk of the vessel and its cargo being lost and the borrower being unable to take up his loan. That he might re- ceive compensation for carrying this additional risk, not of a bank- ing nature, the banker definitely assumed the risk of the loss of vessel and cargo under a form of bond, known as a bottomry bond when the ship was pledged and a respondentia bond when the loan was against cargo, which stipulated that the loan was to be repaid only in the event of the safe arrival of the ship and cargo. For these loans maritime interest was charged, equivalent to the usual rate of interest plus a rate judged by the banker to be equivalent to the risk of the loss of ship and cargo on the voyage in question. The system of loaning money under this form of maritime bond was so extensively carried on in Ancient Athens that the bankers, 8 History and Principles as a group, had dispatch boats at sea, seeking to learn of threaten- ing storms or of wars or of other dangers which might threaten ships or cargoes on which they had made loans. It will readily be seen that but one step more was required to create insurance in its modern form, namely, the separation of the maritime risk from the banker's loan and the charging of the in- creased interest as a premium, instead of as part of the interest on the loan. Insurance by bottomry bond continued for many hundreds of years. Although there is little definite knowledge of what took place during the Dark Ages, still there are indications that com- merce expanded during that period. Knowledge of the heavens and of the seas grew rapidly, permitting more certain navigation, and overseas expeditions, such as the crusades to the Holy Land, created new demands for goods. Yet it was not until late in the 12th century that any suggestion is discovered of insurance being made by premium payments. Beginnings of Insurance While the evidence is slight, it is probable that insurance in its modern form was first effected by the Jews when they were banished from France in A. D. 1182. It is quite certain that the Jews during this exodus invented the bill of exchange, and it would not be surprising if the companion document, the insurance policy, was created at the same time. Thus to this resourceful race, which has been through all ages and in all countries such a dominant commercial factor, probably belongs the credit of de- vising the germ idea of insurance by premium payments, which has developed to such a remarkable extent in succeeding centuries. The Lombards The Lombard merchants of Italy quickly grasped the idea of insurance by premium payments and they, in their intercourse with the Hansa merchants of the Baltic Sea, probably introduced this new method of insurance to them. The practice of issuing bottomry bonds was still carried on, and from the various state edicts endeavoring to control the issuance of these bonds, it is quite apparent that abuses had crept into their use. Marine Insurance 9 Once the idea of insurance by premium payments was under- stood, the use of bottomry bonds declined as a form of insurance. Bottomry bonds in a different form, however, continued to be used by masters of ships in distress at distant ports as security for raising funds otherwise unavailable, with which to make repairs and thus enable the pledged vessel to complete its voyage. With the improvement in communication between distant places by means of the cable and wireless, the use of bottomry bonds even for this purpose has practically disappeared. Marine insurance was devised at an auspicious time for its development. Nautical knowledge was rapidly broadening, men were seeking new routes to known lands and trying to discover new continents. Within three hundred years much new geo- graphical knowledge was acquired, the mariner's compass was in- vented, America was discovered and a new age had dawned. During this period commercial activity had greatly broadened and both the Continent and England were pregnant with new com- mercial life. Regular overseas communication was carried on between the Mediterranean and the Baltic, and the Hansa merchants had made a commercial invasion of England and controlled its foreign trade from their headquarters in the Steelyard on the banks of the Thames. There is evidence that they introduced marine insur- ance into England, but to the Lombards who later gained the commercial supremacy in England must be given the credit for developing the new form of insurance. Not only were they in their day, the fifteenth century, the merchant princes of England, but they were the bankers for the Crown. The indelible impress made on English insurance by these Italian merchants is nowhere better evidenced than in the reference to them in the clause in the present Lloyd's form of policy reading, viz.: "And it is agreed by us, the insurers, that this writing or policy of assurance shall be of as much force and effect as the surest writing or policy of assurance heretofore made in Lom- bard Street, or in the Royal Exchange, or elsewhere in London." 10 History and Principles Method of Early Underwriting Both on the Continent and in England the underwriting of marine risks was done on the individual plan. The application for insurance was carried from house to house and presented in turn for the consideration of those who were in the habit of in- suring marine risks. If favorably disposed, the individual would sign his name to the application, with the amount which he was willing to pay in the event of total loss. From this system of placing the risks the word "underwrite" was derived and the individuals who signed came to be known as "underwriters." To facilitate the getting of names, merchants and shipowners employed insurance brokers, who carried the application from house to house until the full amount desired was underwritten. Some states had a measure of insurance control and required that insurance policies be recorded as public documents. With the banishment of both the Hansa and Lombard mer- chants, native Englishmen became merchants and English over- seas trade both to the East and to the new lands in the West grew apace. New commodities were introduced into England, among them coffee from the East and tobacco from the West. Coffee Houses and Lloyd's The introduction of coffee had a real bearing on the develop- ment of marine insurance in England. As the taste of the Eng- lish people for coffee was cultivated, coffee shops sprang up here and there in London and elsewhere, which partook of the char- acter of clubs, catering to certain groups of business men. In one of these, conducted by Edward Lloyd, men interested in shipping were wont to gather. Lloyd was a man apparently of some busi- ness acumen and, in order to attract trade, gathered information of interest to men engaged in maritime affairs, which he posted in his coffee house. In 1696 he commenced the publication of Lloyd's News in order that wider circulation might be given to this maritime information. In one issue, along with his marine gossip, he carried an article which caused offense to the Crown and the publication was suppressed after a short life of six months. Marine Insurance 11 The publication again appears thirty years later as "Lloyd's List" and has been published continuously ever since. The popularity of Edward Lloyd grew, and men interested in all phases of overseas trade gathered at his coffee shop to exchange views on commercial problems. As insurance brokers could always find many of the underwriters at Lloyd's, considerable underwriting was done there. Formation of Lloyd's It was not until 1769, however, that the underwriters who gathered at this Coffee House formed a definite organization under the name "Lloyd's," and moved to the Royal Exchange. The Coffee House idea moved with them, this particular function of Lloyd's being vested in a head-waiter and his two associates who cared for the physical needs of the members. It is interest- ing to note that today, for the first time in its history, Lloyd's is building its own home, having obtained a satisfactory site but a stone's throw from the Royal Exchange.* It is a quaint item of marine insurance history that in New York during the last century it was customary in the marine in- surance company offices to have a sideboard whereon were placed crackers and cheese and other viands, some of a liquid nature, for the physical refreshment of those who entered to transact business. Corporate Underwriting Some fifty years before the organization of Lloyd's, corporate underwriting had its inception in England. Not without great difficulty was this method of insuring introduced, for the whole power of the individual underwriters was massed to prevent the passage of the bill chartering the proposed companies. These individuals would have been successful, had not the company advo- cates offered a bribe in the form of a £600,000 contribution for the support of the civil list of the Crown. This handsome pro- posal appealed strongly to the King, who sent a special message to Parliament successfully urging the passage of the bill granting charters and a monopoly of corporate marine insurance under- • The new Lloyd's building was declared open by King George V on March 24, 1928. 12 History and Principles writing to the London Assurance Corporation and the Royal Exchange Assurance Corporation. The proposal of the contri- bution to the funds of the civil list proved little more than a gesture, as the payments were not forthcoming and the sum due was later reduced to £150,000, which was finally paid. This monopoly, contrary to the fears of the individual under- writers, proved a blessing to them. The English merchant and ship-owner, accustomed to the security of individuals whose in- tegrity was known, were loath to turn to the untried companies, with the result that the companies' business grew slowly and the individual underwriters were secured in their control of the business. A hundred years later, when an attempt was made to revoke the monopoly, its most earnest supporters were found in Lloyd's, then a strong and powerful organization. The first efforts to overthrow the monopoly were made late in the eighteenth cen- tury. The grant of monopoly contained a saving clause provid- ing for its termination if it were found to be at any time hurtful or inconvenient to the public. Relying on this clause, the Globe Insurance Company in 1798 endeavored to enter the marine field and petitioned Parliament for a repeal of the monopoly. Op- posed by the power of Lloyd's, the petition died in committee. Again in 1806 and 1807 similar efforts were made by the Globe Company without result. Repeal of Monopoly In 1809 a powerful group of men petitioned for the repeal of the monopoly and this time the question was thoroughly discussed before Parliament, but again the petition was refused. The accounts of the debates in Parliament on this petition are exceed- ingly interesting, as much information in regard to the state of marine insurance is given, together with interesting sketches of the leaders in the marine insurance field. (See Frederick Martin's History of Marine Insurance.) These discussions revealed weak- nesses in the control of Lloyd's and a reorganization was effected. This greatly strengthened the local association and broadened the operations of its foreign agents. Marine Insurance 13 Sometimes events of apparently slight importance lead to momentous changes. So it happened that the overthrow of the marine insurance monopoly in England was directly traceable to the refusal of the directors of a large insurance company to ap- point as its actuary Benjamin Gompertz, a brother-in-law of Nathan Rothschild, the banker. Infuriated at this slight to his kin, Nathan Rothschild vowed to form an insurance company and give to Benjamin Gompertz a more important position than that which he had sought. Immediately gathering together some of his influential friends, he organized the Alliance British and Foreign Fire and Life Assurance Company with a capital of £5,000,000. Under the magic of the Rothschild name this huge sum was quickly subscribed. The directors then petitioned Parliament for the repeal of the monopoly that this Company might engage in marine insurance. Under the powerful influence of Rothschild, this effort succeeded and the monopoly was repealed on June 24, 1824. Lloyd's, how- ever, had not shot their last bolt. A member of Lloyd's, a sub- scriber to the new company, sought an injunction prohibiting the directors from engaging in marine insurance because the pros- pectus inviting stock subscriptions had not proposed this form of underwriting. The Court granted the injunction. Nothing daunted, Nathan Rothschild quickly organized the Alliance Marine Insurance Company, appointing Benjamin Gompertz as its active manager. The way being opened, many companies were organized to write marine insurance; a few successful ones sur- vived, the majority soon passing into oblivion. The Policy The form of policy changed but little during the gradual progress of marine insurance in England. Such a quaint docu- ment with its obsolete wording could not fail to be the cause of many disputes. Coincident with the growth of the business, there evolved a series of court decisions defining the principles of marine insurance and interpreting the meaning of the policy. To Lord Mansfield, who in 1756 ascended the bench as Lord Chief Justice of England, belongs much of the credit for the 14 History and Principles sensible interpretation given to the marine policy. He developed a body of law founded on English and Continental precedents applied in the light of commercial customs and usages, which to this day is the basis of both English and American practice. In- terpreted by the Courts, the policy with its quaint wording and, to the lay mind, its ambiguous phrases, has become a well-under- stood commercial document. The continental countries were wont to codify their laws and many efforts were made to codify the marine insurance law of Great Britain. These efforts were unavailing until 1906 when the Marine Insurance Act was passed by Parliament, followed in 1909 by the Marine Insurance (Gambling policies) Act. These two Acts embody in codified form the marine insurance law of Great Britain and are well worthy of study as a concise sum- mary of marine insurance principles. Several valuable works on these Acts have been published. Marine Insurance 15 CHAPTER II In the American Colonies When the history of the United States is studied, the domi- nant position held by European countries over the destinies of the early colonists is apparent. Commerce with the colonies was closely controlled. Therefore, it is not surprising that, prior to the formation of the United States, little evidence appears of marine insurance underwriting in the colonies. Such underwrit- ing as was done was conducted on the individual plan and here and there in the larger seaboard cities offices were opened for the underwriting of marine risks. The first of these commenced operations in Philadelphia in 1721 under the guidance of one John C. Copson. Communication with England being slow and uncertain at this time, Copson pointed out the advantage of being able to insure ships and cargoes locally and of knowing at once that the property was insured, rather than waiting in uncertainty until mail advices were received. What success attended this Snd other similar ventures is not known. Record appears of insur- ance offices being opened in New York City in 1759 and again in 1778. The lack of historical information would indicate that there was little demand for Marine insurance in the American colonies. In the United States With the close of the Revolutionary War an independent American commerce arose and, as a natural sequence, the need was felt for an American Marine Insurance facility. Accordingly in 1792 there was organized in Philadelphia, then the commercial metropolis of the United States, the Insurance Company of North America to which was granted a formal charter in 1794. The corporate system of underwriting evidently appealed to the Ameri- 16 History and Principles can merchant and shipowner, for many companies were soon established in other seaboard cities of the United States. The history of these companies is one of periods of intermittent pros- perity and adversity. War always creates a demand for marine insurance protection, while the succeeding period of peace is one of readjustment which only the strongest companies survive. Scores of companies have been organized in the United States but few have survived for a very long period. The commercial growth of the United States was phenomenal and its oversea trade grew so rapidly, especially after the develop- ment of the Clipper Ships, that marine insurance had a remark- able growth. Many companies were organized on the mutual plan, but, as they were managed by inexperienced underwriters, their careers were short and but few survived to the latter part of the nineteenth century. Today only one of these, The Atlantic Mutual Insurance Company, is operating, but this is the largest and strongest company in the world doing exclusively marine, yacht, inland and transportation underwriting. Development in the United States The progress of marine insurance in the United States has always been an uphill fight. Unlike other forms of insurance, it is international in its character and consequently marine com- panies are in active competition with the underwriters of the world. Competing with the old and strongly financed companies of Great Britain, the American companies had and still have a difficult struggle. The foreign company does a world-wide busi- ness while the American company is to a considerable degree confined in its underwriting to risks to and from the United States. In order to force American companies out of this business, foreign underwriters will often write American business at un- profitable rates in an effort to control it. Furthermore, most of the larger British companies are entered in the American insur- ance field and carry on locally an active competition for business. Nevertheless, in spite of the obstacles there is a well-estab- lished marine insurance facility in the United States today, fully able to care for the needs of American merchants and shipowners, Marine Insurance 17 but unnecessarily handicapped in combating foreign competition by the unwise restrictions placed upon its activities by the various States and unduly burdened by taxes high in comparison with those assessed by the governments of foreign countries. The World War gave a passing vision of the necessity for an independent national marine insurance facility to safeguard the nation's commerce, but, like many another war lesson, it was soon forgotten. The emancipation of the American marine insurance companies can be largely accomplished by the adoption, by each of the several States, of the so-called Model Marine Insurance Law of the District of Columbia.* This greatly enlarges the field of marine insurance and taxes the companies on the basis of their profits and not on the basis of their premium writings. This method of taxation corresponds to that imposed on marine insur- ance by other important maritime nations. Marine Insurance and Commerce It will be interesting to consider the part that marine insur- ance plays in overseas commerce. As has already been pointed out, the present method of insuring and the use of the bill of exchange probably began at about the same time. The practice of selling goods in foreign markets on a credit basis would not be carried on, were it not for the security given by the marine insur- ance policy. This document is always attached to the commercial papers or is referred to in them, and is available to indemnify against loss of or damage to the goods on which the credit trans- action is founded. When consideration is given to the tremendous volume of goods which is constantly in transit from market to market to supply the needs and the desires of mankind, some appreciation may be had of the very vital place that marine insurance has in the life of man. Were this system not available to furnish, in almost limitless amounts, indemnity against marine and transportation perils, only a small measure of the human comfort that man has attained would be enjoyed. Credit transactions make possible the * Since this was written, several of the States have adopted laws similar to that of the District of Columbia. 18 History and Principles international interchange of commodities, the credits being given on the security of real values as evidenced by the goods in transit. The continued existence of these goods while the credit continues is vital to the security of the lending bank, but as all goods are perishable and subject to loss or damage, the lender places his real reliance on the policy of insurance, knowing that by virtue of this document his security will not be destroyed merely because the collateral itself has been lost or damaged. The Policy The marine insurance policy which makes possible these inter- national interchanges of commodities is a very wonderful docu- ment. A real appreciation of the commercial progress attained at the beginning of the 17th century may be had by considering that the policy then in use is little different from the basic form of policy current today. That a document so fully meeting the needs of commerce was conceived by the insurance men of that early date, is no small tribute to their ability. The Perils The "perils" clause in one of the earliest authentic policies extant, that on the Ship "Tiger" dated in 1613, differs little from the wording of the modern policy. In this part of the policy marine underwriters, more than three hundred years ago, fashioned a form of protection for ocean voyages that indicates a remarkable appreciation of the needs of merchants. Here in a single document insurance is provided against the many different hazards to which property at sea is exposed, namely, fire, of the sea, war, pirates, rovers, thieves, barratry, etc., as set forth in the "perils" clause in use at the present time, reading as follows : "Touching the adventures and perils which the said Insur- ance Company is contended to bear, and takes upon itself in this voyage, they are of the seas, men-of-war, fires, enemies, pirates, rovers, assailing thieves, jettisons, letters of mart and countermart, reprisals, takings at sea, arrests, restraints and detainments of all kings, princes or people of what nation, con- dition, or quality soever, barratry of the master and mariners, Marine Insurance 19 and all other perils, losses and misfortunes, that have or shall come to the hurt, detriment or damage of the said goods and merchandises or any part thereof." It is somewhat remarkable that, when at a later date insur- ance was devised to protect fixed property on land, a similar plan was not adopted of providing in a single policy protection against the various perils to which the property of a houseowner or a householder is exposed. It is only within very recent years that there has been any attempt to incorporate in one contract insur- ance against the various perils, such as fire, tornado, burglary, water damage, etc., to which fixed property on land is subjected. Broadening of the Cover Marine insurance, originally designed to protect property at risk at sea, has been greatly broadened to cover the transportation of property not only by water but by land and, in more recent times, by air. The policy, as originally developed, described only perils encountered at sea. It has been necessary to add new clauses to policies enumerating the perils insured prior and subse- quent to property being waterborne. One of these forms reads: "Goods while on land conveyances are covered against loss or damage caused by fire, collision, derailment, or by any other accident to the conveyance; while on docks or elsewhere on shore, against the risks of cyclones, hurricanes and collapse and/or subsidence of docks, wharves, piers or quays and also against fire and floods (meaning rising of navigable waters) whether this insurance be F. P. A. or otherwise." It will be observed that the perils enumerated are of the same general nature as those embraced in the "perils" clause of the marine policy. It is quite apparent that the trend of insurance practice is toward multiple line insurance. Nowhere is this more evident than in the marine insurance field. More and more the merchant is seeking protection against losses which were and still are lia- bilities of the shipowner. Collecting claims from shipowners is ordinarily a slow process. For this reason the merchant is en- 20 History and Principles deavoring to make the underwriter a collection agency, by buying protection against such losses and assigning his claim against the carrier to the underwriter. Insurable Interest As in other forms of insurance, an insurable interest must exist to enable a person to enter into a marine insurance contract. Such an interest may be described as one wherein the relation of the applicant to the goods, in connection with which insurance is desired, is such that he will be benefited by their continued exist- ence, or be prejudiced by their loss or damage. Such interest may be remote, as that of an agent who may earn a small commission upon the delivery of the goods at destination in a merchantable condition. On the other hand the interest may be very direct, as that of an owner who is transferring his property from one market to another. In between these two extremes numerous shades of ownership or relationship exist, which give rise to a valid insurable interest. It must be observed that the insurance policy insures the assured and not the thing, but an insurable interest must exist in the person with relation to the thing in order that a contract of insurance be valid. When Policy Attaches A marine insurance policy covering merchandise, when un- amended by modifying clauses, attaches from and immediately following the loading of the cargo on board the vessel at the port of loading, and continues to cover until the cargo is safely landed at the port of destination. If the vessel loads at a port where cargo is customarily loaded at the wharf, the risk will attach when the slings of the vessel lift the cargo clear of the wharf, or, if loaded with wharf cranes, when the wharf-crane releases the cargo on the ship. If the port of loading is one where the vessel lies at anchor and loads from shore craft, the risk will attach only when the cargo is actually laden on the ocean vessel, unless special pro- vision is made to include the craft risk. This is usually done by including in the policy the following clause, viz. : Marine Insurance 21 "Including transit by craft, raft and/or lighter to and from the vessel. Each craft, raft, and/or lighter to be deemed a separate insurance. The assured are not to be prejudiced by any agreement exempting lighter-men from liability." At destination, however, the insurance continues by the policy terms until the goods are safely landed, so that the craft risk from the ocean vessel at a port where it is customary to discharge into lighters is covered. Warehouse to Warehouse It has been necessary, because of the extension of marine insur- ance policies to cover property in transit on land, to redescribe the points of attachment and of termination of the risk. This has been accomplished by the use of the "warehouse to warehouse" clause, which provides for the insurance of the property while in ordinary course of transit from the moment it leaves the shippers' premises until it is delivered at the warehouse of the consignee. In its most recent form, that of the London Institute, dated Jan- uary 1, 1933, the warehouse to warehouse clause reads: "The risks covered by this policy attach from the time the goods leave the Warehouse and/or Store at the place named in the policy for the commencement of the transit and continue during the ordinary course of transit, including customary transhipment if any, until the goods are discharged overside from the overseas vessel at the final port. Thereafter the risks covered are continued whilst the goods are in transit and/or awaiting transit until delivered to final warehouse at the des- tination named in the policy or until the expiry of 15 days (or 30 days if the destination to which the goods are insured is outside the limits of the port) whichever shall first occur. The time limits referred to above to be reckoned from mid- night of the day on which the discharge overside of the goods hereby insured from the overseas vessels is completed. Tran- shipment, if any, other than as above, and/or delay in excess of the above time limits arising from circumstances beyond the control of the assured, held covered at a premium to be ar- ranged. 22 History and Principles "Note: It is necessary for the Assured to give prompt notice to Underwriters when he becomes aware of an event for which he is "held covered" under this policy and the right to such cover is dependent on compliance with this obligation." The marine policy purposes to protect the assured, with respect to the property named in the policy, while such property is out of the custody and control of the assured and while it is in transit. It is realized that in the handling of merchandise over long voy- ages there is inevitably some loss or depreciation in the property. While the policy is broad in the number of perils against which it insures, the losses against which indemnity is provided are only those happening fortuitously from the perils named. fell S 1*2 §| H Hi* 1 C • 5 .a * S? i* 1 1 * 2M £S M'- o bo o o 5 ■sfj sis" J s s ** ~ s u § I .a 3 o 5 u 'E -o 6-1 o u 26 History and Principles CHAPTER HI Average As the word "average" occurs so frequently in any discussion of marine insurance, it will be profitable to pause at this point and consider its meaning. Its use in marine insurance is a technical one; it means loss or damage less than a total loss and is of two kinds. General average, to which reference has already been made, is a partial loss or an expense falling generally on all the interests involved in a maritime adventure. It is the result of a sacrifice voluntarily made, under fortuitous circumstances, of a portion of either ship or cargo, or the voluntary incurrence of expense for the sole purpose of preserving the common interest from an impending danger. Particular average is a partial loss, suffered by a particular interest, which is not a general average loss. The last phrase is added because in a general average sacrifice it often happens that a particular interest is damaged, say by water in extinguishing a fire. The resulting loss, while a partial loss of a particular inter- est, is contributed to ratably by all the affected interests and is therefore considered a general average. It has been noted that in the handling of goods some resultant damage ensues. A reasonable amount of such damage is antici- pated and becomes an expected commercial loss. Such loss, of course, is not covered by a marine insurance policy. Further- more it is not unusual for some slight fortuitous loss, caused by a peril insured against in the policy, to overtake the property while in transit. To avoid liability for losses of the latter type, "aver- age clauses," as they are known, have been introduced into marine policies and this custom opens up one of the most interesting phases of marine insurance practice. The underwriter endeavors in these average clauses so to furnish indemnity that these small fortuitous losses will remain Marine Insurance 27 at the risk of the merchant, while all other losses resulting from insured perils will be at the underwriter's risk. To acquire the necessary knowledge to be able to do this is no little part of the marine underwriter's training. The Franchise The primary purpose then of the average clause is to bar out of the policy expected fortuitous losses. This is done by the franchise in the average clause. The franchise may be expressed as a percentage or as a named sum which must be reached before liability attaches under the policy. For example, in the clause in common use reading, "Free of particular average unless amount- ing to five per cent (5%)," 5% is the franchise. Expressed in other words, the clause states that no partial loss (caused, of course, by an insured peril) will be paid unless it equals or ex- ceeds 5% of the insured value. If it equals or exceeds 5%, the underwriter pays the entire loss. In another form of average clause known as the "deductible franchise form," only such part of the loss as exceeds the fran- chise is paid. The clause cited above in the deductible form would read, "Free of particular average, unless amounting to five per cent (5%), which is deductible." In the absence of modifying words the franchise in the average clause will be applied to the value of the entire shipment. Since * in modern commercial transactions the value involved in a single shipment may be quite large, it is customary to apply the franchise to a lesser unit than the shipment. Depending on the suscepti- bility of the goods to damage, the unit may be made each ship- ping package, each 25 bags, each lot of each mark, or a dollar unit may be used as "each amount of $5,000." With such a control- ling phrase added to the average clause, the amount necessary to make a claim is materially reduced, the liability of the under- writer is greatly increased and the rate of premium should be correspondingly raised. Memorandum It would be an ideal situation if it were possible so to arrange average conditions that a single rate would measure the under- 28 History and Principles writer's risk on all the different kinds of cargo in a single ad- venture. It may have been with such an ideal in mind that the so-called memorandum clause was devised in 1748. In the Lloyd's form of policy the memorandum clause is comparatively short and lists but a few items. In this country the tendency has been to broaden the memorandum clause and some of the Ameri- can clauses contain a formidable list of commodities with fran- chises as high as 20%', these percentages indicating in a rough way the relative susceptibility to damage of the enumerated items. A memorandum clause in common use reads, viz. : "Memorandum. It is also agreed, that bar, bundle, rod, hoop and sheet iron, wire of all kinds, tin plates, steel, madder, sumac, wicker-ware, and willow, (manufactured or other- wise), salt, grain of all kinds, tobacco, indian meal, fruits, (whether preserved or otherwise), cheese, dry fish, hay, vege- tables and roots, rags, hempen yarn, bags, cotton bagging and other articles used for bags or bagging, pleasure carriages, household furniture, skins and hides, musical instruments, looking-glasses, and all other articles that are perishable in their own nature, are warranted by the assured free from average, unless general; hemp, tobacco stems, matting and cassia, except in boxes, free from average under twenty per cent unless general; and sugar, flax, flax-seed and bread, are warranted by the assured free from average under seven per cent unless general ; and coffee in bags or bulk, pepper in bags or bulk, and rice, free from average under ten per cent unless general. "Warranted by the insured free from damage or injury, from dampness, change of flavor, or being spotted, discolored, musty or mouldy, except caused by actual contact of sea water with the articles damaged, occasioned by sea perils. In case of partial loss by sea damage to dry goods, cutlery or other hardware, the loss shall be ascertained by a separation and sale of the portion only of the contents of the packages so damaged, and not otherwise; and the same practice shall ob- tain as to all other merchandise as far as practicable. Not liable for leakage on molasses or other liquids, unless occas- sioned by stranding or collision with another vessel." In the above clause reference is made to goods which are insured free of average, unless general. In other words, such Marine Insurance 29 goods are deemed to be so easily damaged that they are not in- sured against partial losses except those of a general average nature. F. P. A. Policies Midway between the policy affording no protection against partial loss and one granting indemnity against partial losses if amounting to a given percentage, is the policy where liability for partial loss is dependent upon the occurrence of a major casualty, namely, stranding, sinking, fire or collision. Such policies in marine insurance circles are known as F. P. A. (free of particular average) policies, as distinguished from W. P. A. (with particu- lar average) policies. The F. P. A. feature is embodied in a clause called the "free of particular average clause." Two forms of this clause are in use, one originating in England, the other in the United States. The former is known as the F. P. A. E. C. (English conditions), the latter, the F. P. A. A. C. (American conditions) clause. The F. P. A. E. C. clause in its simplest form reads, "Free of particular average unless the vessel or craft be stranded, sunk, burnt on fire or in collison," while the F. P. A. A. C. clause is worded, "Free of particular average unless caused by stranding, sinking, burning or collision with another vessel." Doubtless the underwriters on both sides of the Atlantic in formulating these clauses were endeavoring to achieve the same result, namely, to avoid liability for fortuituous partial losses, un- less such were directly the result of the named casualty. In draw- ing clauses, underwriters often give too little consideration to the meaning of words and when the Courts have handed down their judgment interpreting the meaning, the author of the clause is astonished at his creation. So it was that when the English F. P. A. clause was first tested in Court an unexpected interpreta- tion resulted. The Court held that under the English form, if one of the named casualties had happened on the insured voyage and thus "opened up the warranty," as it is termed, any loss would be recoverable which would have been payable had the policy not contained the F. P. A. E. C. clause. To state the case 30 History and Principles concretely, under the English form if a vessel sailed with the insured cargo on board and stranded while leaving port, but was later released without damage to the cargo, any subsequent dam- age to cargo, caused by heavy weather or other insured peril, would be claimable under the policy. That such a clause is open to abuse will be readily seen. In- surance procured on F. P. A. E. C. terms is naturally less costly than that admitting claims for partial loss due to any insured peril. It is therefore possible for a full cargo owner to obtain insurance at a relatively low rate on F. P. A. E. C. terms and, by collusion with the master, have the vessel put lightly ashore in a comparatively safe place on an ebb tide and floated again on the flood tide. This temporary stranding effected early in the voyage would abrogate the F. P. A. warranty and for the remainder of the voyage the cargo would be insured subject to average. Again, a cargo-owner learning that heavy weather had been encountered on the voyage with resultant damage to cargo by seawater might arrange with the master, at a port of call, to strand the vessel for a short time while entering the port of destination. This would "open up" the F. P. A. warranty and so admit claim for the sea- water damage under the policy. The American version of the clause prevents this possible abuse and bars claims for partial loss unless the damage claimed is directly caused by the casualty. That the American theory is more logical will readily be ad- mitted, but as a matter of practice the English form is more often used. The English clause in general use, the F. P. A. Institute clause, as it is known, adopts the American principle with respect to collision losses and fire losses not involving the vessel itself. It also greatly broadens the protection granted by the under- writer under F. P. A. terms. This clause reads: "Warranted free from Particular Average unless the ves- sel or craft be stranded, sunk, or burnt, but notwithstanding this warranty the Underwriters are to pay the insured value of any package or packages which may be totally lost in loading, transhipment or discharge, also for any loss of or damage to the interests insured which may reasonably be attributed to fire, collision or contact of the vessel and/or craft and/or Marine Insurance 31 conveyance with any external substance (ice included) other than water, or to discharge of cargo at a port of distress, also to pay landing, warehousing, forwarding and special charges if incurred for which Underwriters would be liable under a policy covering Particular Average. This clause shall operate during the whole period covered by the policy." Two Insurers Since there are always two parties, and sometimes many more, interested in a maritime venture, it frequently happens that the same goods are insured by more than one person. Some rule to control such cases is necessary and in American policies the rule is set forth that the prior insurance, so far as it is sufficient in amount, is the valid insurance. Insurances of the same date con- tribute pro rata. This rule marks one of the important differences between American and English practice, the latter permitting any insurance, regardless of date, to be availed of, the paying under- writer proceeding against other underwriters on the same prop- erty as if they were sureties and collecting from each his pro rata share. Double insurance, as such insurance is known, must be carefully distinguished from two insurances on the same prop- erty covering different risks, as for example, one policy covering marine perils and another covering war perils, or one covering the total loss hazard only, while another covers only particular aver- age claims. 32 History and Principles CHAPTER IV Sue and Labor Clause There is another section of the marine insurance policy, called the "Sue and Labor Clause," which is peculiar to marine insur- ance contracts. This clause reads as follows, viz.: "In case of any loss or misfortune, it shall be lawful and necessary to and for the assured factors, servants, and assigns, to sue, labor and travel for, in and about the defense, safeguard and recovery of the said goods and merchandises, or any part thereof, without prejudice to this insurance; nor shall the acts of the insured or insurers, in recovering, saving and preserving the property insured, in case of disaster, be con- sidered a waiver or an acceptance of an abandonment; to the charges whereof, the said Insurance Co. will contribute ac- cording to the rate and quantity of the sum herein insured. . ." This part of the marine insurance policy is very old in principle, a clause of similar import appearing in the "Tiger" policy previ- ously referred to. The latter part, the waiver clause, is of more recent origin. Until the comparatively recent development of the telegraph, cable and wireless, a maritime adventure was out of touch with the owners and the underwriters for the larger part of the voyage. Disaster, whether of great or small extent, requires prompt ac- tion on the part of those on the scene in order that the adventure may be saved, or that damage already sustained may not become progressively worse. It is therefore provided in this clause that in such case it is not only the right but indeed the duty of the assured or his agents to take all necessary steps for the protection of the property, whether hull or cargo. Such action will not prejudice in any way the rights of the assured under the policy, and the underwriter will consider expenses so incurred, known as special charges in that they relate to a specific interest, as part of the claim under the policy. Marine Insurance 33 While at the present time the underwriter is usually in direct touch with property in peril, this clause is very useful in com- pelling the assured to take all necessary steps to preserve his rights against third parties (carriers for example) and thus safeguard the interests of the underwriter who, on payment of the claim, is subrogated to the rights of the assured. Warranties Warranties play an important part in marine insurance prac- tice. A warranty is of such an important nature that its breach, unless excused or excusable, voids the policy from the date of the breach. Warranties are of two kinds, implied and expressed, the breach of either being equally fatal to the insurance contract. The implied warranties are those read into the contract by law; the expressed warranties are written into the policy by the inten- tion of the parties. The implied warranties are few in number ; the expressed warranties are without number and may relate to any matter whether it be vital to the contract or not. Whether seemingly important or not, an expressed warranty must be com- plied with strictly and literally. Implied Warranties — Seaworthiness The implied warranties are the result of law court decisions of preceding centuries with respect to marine insurance policies. These decisions are in many cases merely the embodiment, in legal form, of the customs and usages of merchants. The implied warranties are just as binding on the assured as matters definitely expressed in the body of the policy. If desired they may be changed to expressed warranties and written into the contract. Doubtless the most important of the implied warranties and the one most often referred to is the implied warranty of sea- worthiness. This warranty is implied in all policies, except those insuring vessel hulls for a period of time. Such policies fre- quently attach while a vessel is at sea, so that the condition of the vessel may not be known to the assured. However, it is required that when a vessel, in an unseaworthy condition, arrives at any port where repairs can be made or equipment or supplies obtained, 34 History and Principles the assured must there use due diligence to make the vessel sea- worthy. Whether or not a vessel is seaworthy is a question of fact to be determined only after taking expert testimony. In order that this implied warranty may be complied with, it is necessary that the vessel at the commencement of the voyage, or of any separate part of the voyage if divisible, be suitably con- structed and equipped, properly officered and manned and suf- ficiently fueled and provisioned, for the carrying of the specified cargo insured on the particular voyage described. This definition will clearly indicate that there is no fixed standard of seaworthi- ness. A vessel may require different degrees of seaworthiness for different portions of her voyage. A vessel fit to load in a safe harbor and navigate a sheltered bay or river to the open sea might be quite unfit to endure the rigors of a transatlantic voy- age. A vessel fit to carry a light non-perishable cargo such as lumber might be unsafe with a heavy perishable cargo -such as nitrate. Often the best proof of unseaworthiness is the fact that with- out apparent cause a vessel founders. Two possible explanations immediately arise, either that the vessel was unseaworthy or that she was intentionally destroyed. With so many factors entering into the question of seaworthiness, it will be seen that only ex- perts offering evidence under all the court rules controlling the giving of testimony can determine the question. Usually the loss of a vessel is attributable to disturbed conditions at sea, so that to prove that the loss resulted from her unfit condition and not because of the perils of the sea is a matter of no little difficulty. The adaptation of the marine insurance policy to the needs of modern commerce is perhaps no better evidenced than in the fact that practically all cargo policies written today contain a clause of the following import, i. e., "Seaworthiness of the vessel as between assurers and as- sured is hereby admitted." When a merchant charters a whole vessel he is presumably in a position to satisfy himself that the vessel is fit for the con- Marine Insurance 35 templated voyage. Today it is rather the exception to have full cargo charters. As a rule, cargo space is engaged from a steam- ship line without knowing, until the bill of lading is issued, the name of the carrying vessel. The shipper therefore has no op- portunity to investigate the condition or fitness of the ship. Hence the waiver of the implied warranty by the underwriter so far as the assured is concerned. This does not affect the assured's right of action for unseaworthiness against the carrier under the bill of lading, to which right the underwriter is subrogated on payment of loss. Commencement of Risk There is an implied warranty that the risk shall commence within ,a reasonable time. That this unwritten clause in the contract of marine insurance is fair, will be appreciated when it is remembered that the hazards of a voyage vary from time to time. A risk placed today on the assumption of prompt sailing may present relatively moderate hazards, while the same risk, if by a vessel sailing a month later, may be fraught with great dan- ger. Thus an insurance by a vessel from a port which, during a portion of the year, is icebound, might present a moderately hazardous risk if sailing in the late fall. If the vessel sailed one month later when ice and snow had become a serious menace, the underwriter would be faced with an exceedingly dangerous risk which he might not have considered at all if it had been pre- sented to him at the later date. Therefore, unless the sailing date is specifically agreed, it is implied that the voyage will commence with reasonable dispatch. If there is unreasonable delay, the underwriter need not go on with the risk, or if he is not informed of the delay in commencing the voyage until after loss has hap- pened, he may be relieved of liability. Deviation Analagous to the implied warranty of reasonable dispatch is the implied warranty of "no deviation." The doctrine of "no deviation" requires that after the inception of the policy the as- sured cannot substitute a different voyage, no matter how slight 36 History and Principles the difference may be or whether or not the substituted risk involves a greater or less hazard than did the insured voyage, save only in the case of excusable deviation. This doctrine is merely the statement in specific form of the general legal principle that a formal contract cannot be varied without the mutual consent of the parties to the contract. In certain cases deviation is excusable. In the policy form the following words appear in the description of the voyage: ". . . and it shall and may be lawful for the said vessel, in her voyage, to proceed and sail to, touch and stay at, any ports or places, if thereunto obliged by stress of weather or other unavoidable accident, without prejudice to this insurance." In addition to these excusable deviations, deviation is excused, — ■ 1. When caused by circumstances over which the master or owner has no control, or 2. To save human life or to aid a vessel where human life may be in danger. 3. To obtain medical or surgical aid for persons on board ship. However, in all cases of excusable deviations the vessel must resume her intended voyage with all possible dispatch. Devia- tion does not void the contract ab initio, but it does void the policy from the time and point of the deviation and relieves the underwriter from any further liability. The implied warranty of "no deviation" like that of sea- worthiness, because of the exigencies of modern commercial practice, has become of relatively little importance to the assured, since there is incorporated in almost every policy whether on cargo or hull a "deviation clause" holding the assured covered at a rate to be arranged when the facts are known. A deviation clause in general use reads: "Held covered at a premium to be arranged in case of deviation or change of voyage, or other variation of the risk by reason of the exercise of any liberty granted to the ship- Marine Insurance 37 owner or charterer under the contract of affreightment, or of any omission or error in the description of the interest vessel or voyage." Legal Conduct In marine insurance policies as in all other contracts there is the implied warranty that the laws of the land will be observed. This warranty of legal conduct, while it extends to the foreign and domestic laws of the country where the contract is executed and to international law and to treaties to which such country is a party, does not prevent the assured and assurer bargaining with respect to voyages contrary to the domestic laws of foreign coun- tries. This will explain why legal foreign insurance might be procured on a rum-running fleet violating our laws. It will be evident that this implied warranty of legal conduct, unlike the other implied warranties, cannot be waived by mutual agreement of the parties to the contract. Good Faith The whole theory of marine insurance is predicated on the understanding that there shall be the sincerest good faith between the contracting parties. The insurance of cargo in almost every case, and the insurance of hulls in the majority of cases, is under- written without opportunity of a personal inspection of the cargo or hull by the underwriter or his representative. It therefore is essential that so far as is reasonably possible there shall be dis- closed to the underwriter by the applicant or his agent all ma- terial facts that would tend to influence the judgment of the underwriter for or against the risk. Not only is it important that this should be done, it is necessary that it be done in order that a valid contract may result. For if there be concealed from the underwriter any material fact, or if there be a misrepresenta- tion of the risk offered so that the underwriter is induced to underwrite a risk which he might have declined had the facts been fully and truthfully presented to him, the underwriter will not be held to his bargain, since the minds of the contracting parties did not meet. It is not important that the misrepresenta- 38 History and Principles tion or the concealment was unintentional; it is enough to void the contract with respect to consequences arising therefrom, that facts material to a proper consideration of the risk were falsely stated or not stated at all. If the misrepresentation or the con- cealment was willful, the transaction would be tainted with fraud and therefore be void in law from its inception. Representations The statement of a material fact, if tending to influence the underwriter in his estimate of the character and degree of the risk to be insured against, is called a representation. It is dis- tinguished from a warranty in that a warranty must be literally complied with and need not be material to the risk, whereas the representation, although material to the consideration of the risk, need only be complied with substantially. On the other hand, a literal but not a substantial fulfillment of the representation is not sufficient. It should be observed in this connection that there is no requirement that facts which are matters of common knowl- edge shall be disclosed. The subject of representations, misrepresentations and con- cealments, while one of the most important and fundamental among the principles of marine insurance, can only be mentioned and not fully discussed in this brief treatise. It seldom happens that there is unintentional misrepresentation or concealment. In most cases such action is the result of a deliberate intent to de- ceive and thereby induce an underwriter to accept a risk which, if he were fully informed, he would decline. Marine Insurance 39 CHAPTER V Valued Policies The subject of valuation clauses presents perhaps the most marked difference between marine and other forms of insurance. Practically every marine insurance policy, whether it be on cargo, hull or freight, is a valued policy ; that is, the value of the insured subject matter is determined in the policy either definitely or by a formula which, if applied to the shipping documents, will de- termine the value. Thus a hull will be valued at a stated num- ber of dollars, divided perhaps for convenience and for the application of average clauses into one amount for the hull, tackle, etc., and another amount for the machinery. Cargo policies will be valued at the sum insured or at the invoice value, plus a named percentage to cover shipping expenses and other necessary outlays to place the property on the market at destina- tion. Freight, the name given to the money paid for the trans- portation of goods by water, is valued usually at the aggregate of the freight moneys to be paid by the cargo shippers to the vessel owner or charterer. In one way or another practically every marine policy will by agreement therein admit the value of the insured interest to be that expressed in the policy. The principle of co-insurance is fundamental in marine insurance practice, the underwriter as- suming only such proportion of any loss as the amount of his policy bears to the total valuation of the insured interest as deter- mined thereby. In an unvalued policy, such as the common form of fire policy, the underwriter pays the whole loss, not exceeding the amount of his policy. Thus under a marine policy for $5,000 on cargo valued at $10,000 the underwriter would respond, up to an amount of $5,000, for only 50% of any loss incurred. In the case of a fire policy for $5,000 on goods actually worth $10,000 and not con- 40 History and Principles taining a co-insurance clause, the underwriter would be held liable for the first $5,000 of loss. As the principle of co-insur- ance applies to all marine policies, the necessity of careful con- sideration of the value of property insured will be apparent, as any deficiency in insurance leaves with the assured his pro rata proportion of each loss, however trivial. It is equally true that under a marine policy, if no fraud appear, the assured may obtain more than his actual loss in the case of a falling market. The valuation once determined cannot be reopened except by mutual consent. Hull Insurance Up to this point the consideration of the marine insurance policy has been to a large extent from the viewpoint of cargo. It is of interest to note that the general principles relating to cargo policies are applicable in equal degree to hull and freight interests. Notwithstanding the fact that three general interests appear in marine adventures, namely, cargo, hull, freight, the basic form of policy used in insuring each interest is the same. In the in- surance of hull interests many special forms have been developed for ocean, lake and inland waters and for craft of various ma- terials and modes of propulsion, yet all of these forms basically are the same and have incorporated in their wording the general clauses with respect to perils, sue and labor requirements and average. So with policies covering freight interests often times a cargo form is used, amended by clauses to meet any special conditions peculiarly applicable to freight insurance. It will be of interest nevertheless to consider briefly some of the special conditions peculiar to hull policies. These policies are written to cover either a specified voyage of the vessel, or to insure the vessel for a named period of time, usually one year. Mention has already been made of the use of separate valuation clauses in hull policies. Separate valuations are not found in policies on sailing vessels and it was not until the steam era that the need for such clauses appeared. Then with the rapid increase in the size and value of steamers, it was found that the application of the franchise clause of 5% or 3% required for a valid claim Marine Insurance 41 an amount so large as to work a hardship on the owner and to serve no useful purpose to the underwriter in shutting out minor claims. Accordingly the custom developed of dividing the valua- tion into two parts, one for hull, the other for machinery. Even this division in the case of valuable vessels required a considerable amount of loss before a claim could be made under the policy, so that a further clause was added providing for payment of loss if amounting to a named sum, usually £1,000 or its normal equivalent $4,850. Trading Warranties Clause As in the case of cargo policies which always contain a clause describing the geographical limits within which the policy is operative, so in practically all hull policies there is a clause de- scribing the limits within which the vessel may navigate. This clause is known as the "trading warranties" clause. Vessels are of various kinds and each is built with a more or less definite purpose so far as trade is concerned. Some are intended for inland waters only, some for coastwise service, while others are built so staunchly as to be serviceable on any of the "seven seas." The "trading warranties" serve a double purpose; first, to confine the vessel to trade for which it is physically fit, and second, to restrict the vessel as closely as possible to the waters which it will probably navigate during the policy term, in order to reduce the rate of premium. Underwriters will usually grant a lower rate on a vessel closely confined as to trade than on a vessel permitted by the policy to do world-wide trading. Thirds Off Another feature peculiar to hull policies is the "thirds-off" clause now rapidly falling into disuse because of the employment of iron and steel vessels. A marine insurance policy does not cover usual wear and tear. In the days of wooden ships when a vessel was damaged and new material had to be substituted for old, in many cases wear and tear deterioration was incidentally made good in repairing the casualty damaged parts. Accordingly 42 History and Principles the custom arose of deducting from the cost of the new material one-third, as an offset to such wear and tear deterioration. Many modifications of the general rule, which need not be considered here, were incorporated in some of the "thirds-off" clauses. With the introduction of metal vessels, wear and tear deterioration was relatively slow and in most cases the "thirds-off" clause is waived by a special clause in the policy. Collision Clause In almost every hull policy there is included what is known as the "collision clause." This portion of the policy is in reality a separate insurance of a liability character. It does not relate to damage incurred'by collision, as such loss is due to a peril of the sea and is covered in the perils clause. The protection furnished by this clause is to cover the legal liability of the owner of the insured vessel for damage done by his vessel to another vessel through collision. Formerly with a view to inducing care on the part of the vessel owner, it was customary to insure only three- fourths of this collision liability. The owners, however, in their mutual protection organizations, known as "Clubs," insured the other one-quarter liability so that the moral effect was lost. It is now usual, in the case of mechanically propelled vessels, to insure the whole collision liability risk. The owners have also insured their other "legal liabilities" with respect to cargo, crew and passengers in their "Clubs," so that underwriters in com- petition with these "Clubs" sometimes incorporate in their hull policies "protection and indemnity" clauses covering these other "owner's legal liability" risks. Moral Hazard The question of moral hazard, while important, is less promi- nent in marine insurance than in some other forms of under- writing. In the case of cargo risks the insured subject matter after shipment is out of the custody and control of the owner, so that were he tempted to destroy his property he could not do so. In the case of hull insurance likewise, the master for the most Marine Insurance 43 part is in control of the vessel and ordinarily it could be de- stroyed only by collusion of owner, master and mariners. Moral hazard from another angle, however, does play a most vital part in hull underwriting, but it goes under the name of "manage- ment." How a vessel or a fleet of vessels is managed by the owner with respect to care, upkeep and personnel, is all important to the marine underwriter. The finest vessel built, poorly man- aged, may be a less desirable risk than an inferior vessel well manned, well equipped and well maintained. Freight Insurance Freight insurance presents the most difficult form of marine insurance. It relates to an intangible interest arising out of the contractural relation between ship and cargo evidenced by the charter party or bill of lading. Freight, as previously stated, is the term applied to the money paid to the owner or charterer of a vessel for the transportation of cargo. Only by a careful perusal of the bill of lading or charter party can it be determined who has the insurable interest in freight. In some cases freight is pre- paid absolutely and if the goods are lost the owner of the goods also loses the freight which he has paid. He therefore can insure such freight. A similar situation arises where the freight, al- though not prepaid, is "guaranteed vessel lost or not lost," so that in the event of the goods being lost or damaged the cargo owner must nevertheless pay the freight. In these two cases the amount of freight paid or to be paid is usually added to the cost of the goods and insured as cargo. If however, the goods are shipped "freight payable at destina- tion on the right delivery of the cargo," then the freight is at the risk of the shipowner and may be insured by him. In addition to these three methods of paying freight, many variations occur, each producing a different insurance problem so that the difficulty of correctly insuring freight will be apparent. War Risks While the marine insurance policy covers war risks, it is usual for underwriters to delete the war perils from the protection 44 History and Principles of the policy by marginal clauses. When hostilities threaten or actually commence, the marginal clause is cancelled in considera- tion of additional premium and the policy restored to its original condition. The hazard of war risks can be measured only in the light of existing conditions, so that by this method of deleting and reinstating the war perils in the policy, the underwriter has the matter of rates in his control and cannot be committed in advance to rates for insuring a hazard which, when active, varies in in- tensity from day to day. Likewise with respect to the perils of strikes, riots, civil commotions and other labor risks, while these perils are not named in the "perils" clause, it is usual to embody in the policy a clause excepting these hazards. In the event of labor disturbances the policy may then be amended to give pro- tection against these hazards at an agreed rate of premium. The excepting clauses relating to war, strikers, riots, etc., in the cus- tomary form read as follows: 1. Warranted free of capture, seizure, arrest, restraint or detainment, and the consequences thereof or of any attempt thereat (piracy excepted), and also from all consequences of hostilities or warlike operations, whether before or after dec- laration of war. 2. Warranted free of loss or damage caused by strikers, locked-out workmen, or persons taking part in labour dis- turbances, or riots or civil commotions. Should Clause No. 1 be deleted, Clause No. 3 is to operate as part of this Policy. 3. Warranted free of any claim based upon loss of, or frustration of, the insured voyage, or adventure, caused by arrests, restraints or detainments of kings, princes or peoples. Reinsurance The lay mind does not readily visualize the immense capacity of the ordinary freight steamer. Into its immense holds are stowed carload after carload of valuable merchandise. When the loading is completed, many hundreds of thousands of dollars worth of goods, as well as the value of the ship and its freight, are at risk in a single adventure. An underwriter doing a large and varied business cannot control, except in a very limited way by restrict- Marine Insurance 45 ing the maximum amount insured under each policy, the aggre- gate amount which he may have at risk in any one adventure. This condition necessitates reinsurance by which the under- writer shares his risk with other underwriters. This is done in a variety of ways by sharing on a percentage basis each individual item making up the aggregate amount, by reinsuring all in excess of a given retention, say $100,000, or by reinsuring any loss which he may suffer in excess of a named amount, say $50,000. Whatever the method, the result desired is to arrange, so far as is practicable, to have average lines on all insured adventures and thus conform to the basic theory of insurance. All of the principles of marine insurance that apply between owner and underwriter apply with equal, if not greater force, in the rein- suring of interests by underwriter with underwriter. Marine insurance, being international in its scope, sees an interchange of reinsurance between the nationals of various countries. With this interchange passes information of a commercial nature, vital to the interest of foreign nations. Not a few of the large German reinsurance companies were sources of vital commercial informa- tion to the German Government prior to and during the World War. A Suggestion It is therefore of the greatest importance that, in so far as possible, reinsurance of export overseas risks should find lodgment in the United States. The marine insurance facility is unduly extended. It is at present much broader than the needs of com- merce require. Nevertheless, even now, risks in a single ad- venture are at times so large that the capacity of American Companies is strained to care for them. On the other hand an unduly large facility offering a greater underwriting capacity than commerce requires, results in unhealthful competition. Perhaps nothing would so quickly help the marine insurance situation here as to have the purely fire companies withdraw from direct marine underwriting and content themselves with reinsurance of the marine companies. This would at a single stroke accomplish two needful purposes; first, it would provide a broad and almost limit- 46 History and Principles less American marine reinsurance facility, and second, it would eliminate the present unhealthful condition resulting from over- extended direct marine underwriting inducing cut-throat competi- tion for the immediate purpose of taking care of office overhead expenses. Conclusion This brief sketch of Marine Insurance has merely considered some of its outstanding features. No other branch of insurance science offers such an enticing field for intensive study. With it is inextricably intertwined the romance of commerce and of the sea. Its paths lead to every city, town and hamlet in the civilized world. From every place that man has explored come the raw and finished products that civilization demands. By every form of conveyance these products are carried. Across the trackless deserts the camel-train bears its costly burden of rugs and spices. From the jungles of Central Africa porter-trains bring out the ivory and the gums. Down the upper reaches of the Amazon the Indian in his rude canoe carries the indispensable rubber and along the precipitous mountain passes of Colombia, the muleteer with his mule-pack bears the coveted coffees of the Magdalena district. And into all these distant places marine insurance ex- tends, enfolding its protecting arms around the commerce of the world, that man may really enjoy the fullness of the earth. Marine Insurance 47 ENGLISH TRANSLATION OF THE EARLIEST KNOWN CONTRACT OF INSURANCE In the name of God, Amen. I, Georgius Lecavellum, citizen of Genoa, acknowledge to you, Bartholomeus Bassus, son of Bartholomeus, that I have received and accepted from you in Genoa, one hundred and seven pounds (of silver) as a free and friendly loan. I renounce every advantage in law of requiring proof of having acquired, accepted or counted said money. These one hundred and seven pounds, in Genoa, or its equivalent in money, I agree and promise in solemn covenant to return and re- store to you or your acknowledged messenger by myself or my representative. Being well preserved and sound in mind, that if your ship, called the Santa Clara, which is now being prepared in the port of Genoa, God willing, to go and sail presently to Majorca, shall have gone and sailed, having been navigated by direct route from the port of Genoa to Majorca, shall have arrived at that place safe and sound before the expiration of the next six months coming, then in that case the present instrument is null and void as if it had not been made. I personally assume all the risk and responsi- bility for said amount of money until said boat shall have arrived at Majorca, being navigated by direct route as above. And also if said boat shall be safe and sound in some other place, before said six months, the present instrument is likewise null and void as if it had not been made. And likewise if said boat shall have changed its course said instrument is null and void and as if it had not been made. In said manner and under said conditions I promise to make said settlement, otherwise I promise to you to pay and incur the penalty of double the stipulated amount of said money together with restitution of damages and expenses which may arise on that account or be sustained in litigation, the aforesaid remaining secure under the pledge and security of my property, goods and possessions. Made in Genoa, in a room in the house of Carlus and Boni- facus brothers of Ususmares, in the year from the birth of our Lord 1347, following the custom in Genoa, on the 23d. day October about eventide. Witnesses Nicolaus of Tacius, draper, and Johannes of Rachus son of Bonanatus a citizen of Genoa. M mwmsm. of c$&wm LOS AHGSLES LIBRARY