. l^-^tm^ (0xJk^ Ida
;iTY OF CALIFORNIA
LOS ANGELES
=di
INSURANCE
PRINCIPLES AND PRACTICES
By
ROBERT RIEGEL, Ph.D.
Professor of Insurance and Statistics, JVharton School of Finance
and Commerce, University of Pennsylvania
and
H. J. LOMAN, A.M.
Assistant Professor of Insurance, Wharton School of Finance and Commerce,
University of Pennsylvania
SECOND EDITION
J ^ »> J J • •
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New York
PRENTICE-HALL, Inc.
1922
Copyright, 1921, 1922, by
PRENTICE-HALL, Inc.
All rights reserved
. 4 c c
,» '
He.
Dedicated to
Professor S. S. HUEBNER
A Pioneer in Insurance Education
PREFACE TO THE SECOND EDITION
The very kind reception accorded this work has made possi-
ble a new edition. In availing ourselves of this opportunity,
the method of presentation has remained the same, having
amply demonstrated its adaptability for business and teaching
purposes. The authors are especially grateful for the state-
ments of appreciation received from the insurance press and
members of the insurance profession. A number of the minor
errors which seem inevitable in a first edition have been elimi-
nated, some miscalculations have been corrected, and some
chapters have been brought up to date, although no work deal-
ing with the ever-changing business of insurance can wholly
keep pace therewith. The authors are indebted to Dr. R. H,
Blanchard and Messrs. I. Bendiner and H. W. Glover for
some criticisms and corrections embodied in this revision.
R. R.
H. J. L.
September, ig22.
IV
PREFACE TO THE FIRST EDITION
The significance of insurance as a factor in private and busi-
ness life has increased tremendously in the past ten years. Dur-
ing that time new forms of protection have been devised, the
scope of coverage of policies has been extensively broad-
ened, mathematical problems have received more scientific
treatment, methods have been modified by legal requirements
and the treatment of policy-holders has immeasurably im-
proved; all of which have popularized insurance and extended
its usefulness. This progress has entailed increased specializa-
tion and complexity, which require ( 1 ) more intelligent buying
of insurance, (2) a broader knowledge of the business by
agents and (3) a wider recognition of the necessity of insur-
ance education in the training of prospective business men.
This volume Is an exposition of the principles and practices
of the more important forms of insurance. An effort has been
made to prevent practices from obscuring principles; on the
other hand sufficient illustrations and forms have been in-
cluded to vivify and emphasize the principles discussed. In
brief, an attempt has been made to write a "practical" book
which is something more than a mere compilation of facts and
which will serve equally well as a text-book for commercial
education in universities and schools of business and a guide to
the business man in insurance transactions.
The first section is an effort to coordinate those features of
insurance which are common to all its branches. Here the
economic services and business uses of insurance are explained,
the fundamental principles summarized and the organization
of the business described.
Section Two deals with personal insurance, which everyone
at least once in his life finds occasion to purchase, and particular
emphasis has been placed upon the buyer's viewpoint. The
application of the various types of life insurance policies to in-
dividual circumstances, the factors which enter into the cost of
insurance, the methods of providing for expenses, and the re-
serves, loan privileges and surrender values which flow from
the level premium method are all discussed in some detail be-
cause of their fundamental character. The origin and nature
of dividends, the legal questions connected with insurable in-
terest, the beneficiary and assignment, fraternal insurance, the
V.
vl PREFACE
disability clause, industrial insurance and group policies are also
fully explained. Not the least important part of this section is
that dealing with accident and health insurance, of which no
adequate discussion has ever appeared in book form.
Section Three describes a relatively new form of protection
which is of interest to every employer — compensation insur-
ance. It includes a description of the nature of the contract,
the advantages of the compensation system, the methods by
which claims are settled, the factors controlling rates and the
methods of regulating reserves.
Section Four deals with fire insurance, covering the mort-
gagee's interest In policies, agency and brokerage, under-
writers' associations and their services, an analysis of the new
standard fire policy, a description of the modification of the
contract by clauses and endorsements, a discussion of the older
and newer systems of ratemaking, the importance and regula-
tion of the fire insurance reserve and the procedure of settling
losses.
Section Five, on marine insurance, attempts to present
within a limited space the principal features of the business.
Attention is concentrated on those phases which are of excep-
tional Interest to the insured — the types of policies, the extent
of protection which Is afforded, endorsements and the settle-
ment of various types of losses.
Section Six explains the principal features of title insurance
and corporate bonding and also gives a description of two
forms of insurance not heretofore adequately covered by text-
books — automobile insurance and credit insurance, both of
which have experienced considerable change and development
within recent years.
In all of these sections an effort has been made to eliminate
details which are superfluous or tend to obscure the principles
and methods involved and at the same time to sufficiently de-
scribe the customs and practices of the business. To this end
the volume is provided with a large collection of policies and
forms In common use which in some cases supplement as well
as illustrate the text. In furnishing reports, forms and infor-
mation regarding rates and practices insurance men and state
officials have been uniformly kind and courteous and it is a
pleasure to acknowledge the very great assistance derived
therefrom.
R. R.
H. J. L.
CONTENTS
PART I— INSURANCE IN GENERAL
CHAPTER PAGE
I — The Uses of Insurance 3
Insurance as a factor in business; Insurance introduces security in
business undertakings; Insurance increases business efficiency;
Insurance tends toward the equitable assessment of costs; Insur-
ance serves as a basis for credit. The capitalization of earning
power; Insurance makes saving possible; Insurance as an invest-
ment; Insurance promotes thrift; Insurance as a provision for old
age; Community benefits of insurance. X
II — Fundamental Principles of Insurance . . 19
Definition of insurance; Essential requirements for the proper oper-
ation of insurance; Necessity and nature of insurable interest;
Principles of probability; The law of average; Consequences of
the law of average in insurance; Differences between life and
other forms of insurance.
Ill — Types of Insurance Organizations . . . 28
Six classes of insurance organizations; The advantageous and
disadvantageous features of self insurance; Mutual insurance
companies; Reciprocal or interinsurance organizations; Favor-
able and unfavorable features of Stock companies; Lloyds asso-
ciations; Insurance by the State; Government insurance.
IV — Organization of the Business ..... 39
Organization of companies for personal insurance; The field
force; General agency and branch office systems; Agents; Organ-
ization of the property insurance business; General agents; Special
agents; Local agents; Brokers; Life and casualty underwriters'
associations; Fire underwriters' associations; Types of under-
writers' associations; Example of a national association; Services
of national associations; Nature and functions of sectional and local
associations.
PART II— PERSONAL INSURANCE
V — Types of Life Insurance Policies . . . . 53
Importance of selecting the proper policy; The single-premium
policy; Uses of a single-premium policy; Term insurance; Uses
of term insurance; Ordinary life policies; Their uses; Limited
payment policies; Uses of the limited payment form; Endowments;
Uses of the endowment policy; Annuities and their uses; Install-
ment insurance; Combinations of various features; Special con-
tracts involving two or more lives; Special contracts adjusting
the premium or face of the policy.
Vll
viil CONTENTS
CHAPTER PACE
VI — Net and Gross Life Insurance Premiums . 71
Life insurance premiums and "cost of production"; Elements of cost
in life insurance; Mortality tables; Principle of probability; Com-
pound interest; Natural premium (five year term policy); Net
single premium (five year term policy) ; Net single premium (whole
life policy) ; Net single premium (endowment policy) ; Annual pre-
miums; Expenses as an element of cost; Kinds of expenses; Meth-
ods of loading for expenses; State regulation of expenses.
yil — Reserves, Surrender Values AND Loans . . 89
Reserves, surrender values and policy loans; The reserve under
various systems of premium payment; Effect of interest rate on the
reserve; Size and importance of the reserve; Individual reserves
on different types of policies; Calculation of the reserve; The pros-
pective and retrospective methods; Special methods of valuing the
reserve; The preliminary term and select and ultimate methods;
Cash surrender values and surrender charges; Development and
use of the "cash value" clause; Other guaranteed value options;
Policy loans described; Extent and nature of policy loans; advan-
tages and disadvantages of policy loans; State supervision for
the protection of the policy-holder.
VIII — Surplus and Dividends 110
The origin of surplus; Participating and non-participating policies;
Method of apportioning surplus; Distribution of surplus; Divisible
surplus and the nature of dividends; Size and importance of divi-
dends; Comparison of participating and non-participating con-
tracts; Time of distribution of dividends; Special forms of divi-
dends; Sources of dividends; Dividend options.
IX — Insurable Interest, the Beneficiary and As-
signment 119
Description of insurable interest; Interest of a person in his own
life; Interest of a relative; A pecuniary interest; The beneficiary
defined; Reserving the right to change the beneficiary; The im-
portance of this right; Right of revocation not reserved; Purpose
of assignment of policies; Methods of assignment; Other legal
phases of life insurance; The application; Settlement of claims.
X — Special Forms of Life Insurance . . . .; 126
History and description of fraternal insurance; Differences be-
tween fraternal and "old line'" insurance; Defects of fraternal
insurance in the past and the possibilities of the future; Assessment
insurance; Origin and purpose of industrial insurance; The sys-
tem explained; Cost of industrial insurance; Advantages of
industrial insurance; Nature of group insurance; Process of insur-
ing a group; Factors affecting the group insurance premium;
Advantages of group insurance to the group, the employer and the
community; Insurance of sub-standard lives; Its purpose; Var-
ious methods of rating sub-standard lives.
CONTENTS ix
CHAPTER PAGE
XI — Accident AND Health Insurance . . . .138
Losses due to accident and disease; Disability clauses in life insur-
ance policies; Coverage by separate accident and health contracts;
Types of policies; Limited and unlimited policies; Non-cancellable
policies; The principal provisions of accident and health policies;
Important things to examine in accident and health policies; Acci-
dent and health insurance rates; Compulsory health insurance;
Arguments for and against compulsory health insurance.
PART III— LIABILITY AND COMPENSATION
INSURANCE
XII — Liability AND Compensation Insurance . .155
Social insurance; Definition of liability- and compensation insur-
ance; Industrial accidents; Distribution of accidents; Prevention
of accidents and insurance against consequences of; Industrial dis-
eases; The law of negligence; Liability insurance; The liability
policy; Liability rates; The principle of workmen's compensation;
Nature of compensation laws; Accidents covered by the laws; Bene-
ficiaries; Benefits paid; Methods of insurance; The compensation
policy; Workmen's compensation rates; Manual rates; Schedule
rating; Experience rating; Liability and compensation insurance
reserves; Methods of state regulation.
PART IV— FIRE INSURANCE
XIII — Insurable Interest in Fire Insurance . .187
Reasons for insurable interest; What constitutes insurable interest;
Classification of insurable interests; Protecting the mortgagee;
Various methods of protecting a mortgagee's interest; Their ad-
vantages and disadvantages; The standard mortgagee clause;
Policy provision relating to assignment of fire insurance policies;
Method of assigning; Effect of assignment before a loss; Effect
of assignment after a loss.
XIV — The Fire Insurance Contract . . . .199
Development of the standard fire policy; Provisions of the new
New York standard policy; Parties to the contract; The rate,
premium and consideration; Extent of protection afforded by the
policy; Events covered by the policy; Amounts covered by the
policy; Inception and termination of the contract; Suspension of
the policy; Voidance of the policy; Loss settlements.
X CONTENTS
CHAPTER PACE
XV — Fire Insurance Forms and Clauses . . . 222
The purpose of endorsements; Descriptive forms; Forms relating
to ownership; Forms relating to the description of the property;
Forms covering more than one location; Forms covering other than
direct loss; Use and occupancy insurance; Rent insurance; Profits
insurance; Sprinkler leakage insurance; Clauses; Clauses of per-
mission; Clauses decreasing the liability or hazard; Clauses re-
specting title or interest; Emergency clauses; Clauses limiting the
amount payable; Coinsurance clause; Average clause.
XVI — Fire Insurance Rates . . . . - . . . 234
Divisions of the subject; The factors involved; Classification;
Judgment rating; Schedule rating; Experience rating; Classifica-
tion of fire insurance rates; Minimum rates; Schedule rates; The
Universal Mercantile Schedule; The Analytic sj'stem; The Ex-
perience Grading and Rating Schedule; State regulation of rates.
XVII — Fire Insurance Reserve 245
Definition of the reserve; Object of the reserve; The reserve as
a trust fund; Financial importance of the reserve; Calculation
of the reserve; State legislation relating to the reserve; Criti-
ci'sm of existing reserve requirements.
XVIII — Settlement of Losses ,., ...... 257
Classification of provisions applying to loss settlements; Provisions
referring to the preservation of the property; Estimation of the
amount of loss; Agreement and appraisal; Subrogation and net lia-
bility of the companj"^; Non-concurrent policies.
PART V— MARINE INSURANCE
XIX — Marine Insurance 269
Nature of the contract; Factors essential to a valid contract; Types
of underwriters; Different classes of policies; Policies classified
according to the interest of the insured, the valuation of the sub-
ject matter, the term of the policy, the description of the subject
matter and the scope of coverage; Uses of various types of poli-
cies; Analysis of the policy; Description of the property; Incep-
tion and termination of the contract; Perils covered by the policy;
Various types of losses; General and particular average; Total
and partial losses; Expenditures; Factors influencing marine in-
surance rates; The subject of insurance; The insured; Nature
of the trade; Statistical experience; Competition; Policy condi-
tions; Underwriting judgment.
CONTENTS xi
PART VI— OTHER FORMS OF CASUALTY
INSURANCE
CHAPTER PAGE
XX — Automobile Insurance 299
Types of automobile coverage and types of companies; Liability
insurance policies; Property damage policies; Liability and prop-
erty damage rates; Factors influencing rates on private passenger
cars; Public automobiles; Commercial automobiles; Manufactur-
ers' and dealers' cars; Collision insurance policy; Collision in-
surance rates on private passenger cars; Commercial cars; Pub-
lic and livery vehicles; Manufacturers' and dealers' cars; The
fire insurance policy; Factors affecting fire insurance rates on priv-
ate passenger cars; Livery and renting automobiles; Commercial
vehicles; Manufacturers' and dealers' cars; Theft insurance.
XXI — Title Insurance .311
Land titles; The lawyer's abstract and its defects; Guarantee of
title by an insurance company; The operations of a title company;
Extent of the guarantee; Extent, of the title business; Types of
policies; Policy covering owner's risk; Policy covering mortgagee's
risks; Special policies; The premium; Guaranteed mortgages.
XXII — Credit Insurance 322
Causes of business failures; Necessity for credit insurance; Gen-
eral plan of credit insurance; Types of policies; Limited and un-
limited policies; Principal provisions of credit insurance policies;
The services of credit insurance.
XXIII — Corporate Bonding 336
Development of corporate suretyship; Nature of suretyship; Ad-
vantages of corporate bonding; Divisions of the subject; Bonds
covering honesty only; Fidelity bonds; Account bonds; Bonds
involving financial strength only; Appeal bonds; Bonds for costs;
Bonds involving honesty and ability; Public official bonds; Fidu-
ciary bonds; License bonds; Bonds involving honesty, ability and
financial strength; Contract bonds; Franchise bonds; Depository
bonds; Bonds involving honesty and financial strength; Bonds
for lost instruments; Internal revenue bonds; custom house bonds;
Factors affecting bonding premiums .
Bibliography 351
Appendices 359
INDEX TO APPENDICES
PAGE
I. Application for Life Insurance (Part I) 361
II. Application for Life Insurance (Part II) 363
III. Endowment Life Insurance Policy 367
IV. Disability Clause 370
V, Agent's Renewal Contract (Life) 372
VI. Sample Page of Life Insurance Rate Book 378
VII. Sample Page of Industrial Life Insurance Rate Book . . . 379
VIIL Assignment Blank (Life) 380
IX. Policy Loan Agreement 381
X. Release of Interest 382
XL Surrender of Policy 382
XIL Proof of Death (Claimant's Statement) 383
XIIL Proof of Death (Agent's Statement) 387
XIV. Wisconsin Valuation Report on Fraternal Societies . . .388
XV. Summary of Operations of War Risk Insurance Bureau
(Life) 390
XVI. Accident and Health Policy. Form No. 1 391
XVII. Accident and Health Policy. Form No. 2 395
XVIII. Accident and Health Policy. Form No. 3 399
XIX. Accident and Health Rates 402
XX. Scope of Compensation Laws of the United States . . . .403
XXL Compensation States Classified According to Whether the
Law is Compulsory or Elective 403
XXII. Compulsory Compensation States, Classified as to Different
Kinds of Insurance Allowed 404
XXIIL Universal Standard Workmen's Compensation Policy . . 405
XXIV. Sample Classification Sheet of Compensation Manual . . .408
XXV. Sample Rate Sheets of Compensation Manual 409
XXVL Sample Page of Compensation Schedule Rate 410
XXVII. Financial Statement of a Compensation Mutual .... 412
XXVIII. Statement of a State Workmen's Compensation Fund . . . 412
XXIX. Plan of the Philadelphia Contributionship 413
XXX. New York Standard Fire Policy 414
XXXL Co-Insurance Clause 417
XXXII. Mortgagee Clause 417
XXXIII. Mortgagee Clause with Full Contribution 418
XXXIV. Excess Floater 418
XXXV. Household Form 419
XXXVI. Lightning Clause 419
xiii
xiv INSURANCE PRINCIPLES AND PRACTICES
PAGE
XXXVII. Loss Payable Clause 420
XXXVIII, Permit to Use Dangerous Article (Gasoline, Benzine or
Naphtha) 420
XXXIX. Sprinkler Leakage Clause 420
XL. Use and Occupancy Clause 421
XLI. Fire Insurance Binder 423
XLII. Cancellation Notice 423
XLIII. Renewal Receipt 424
XLIV. Short Rate Table 424
XLV. Agreement to Appraise 425
XLVI. Proof of Loss (Fire) 427
XLVII. Daily Report 429
XLVIII. Monthly Report 430
XLIX. Agent's Contract (Fire) 431
L. Maps of Fire Underwriters' Associations 432
LI. Universal Mercantile Schedule .... Facing page 432
LII. Basis Table, Dean Schedule 433
LIII. Contents Table, Dean Schedule 433
LIV. Occupancy Table, Dean Schedule 433
LV. Calculation of Building Rate, Dean Schedule 434
LVI. Calculation of Building and Contents, Rate, Dean Schedule 434
LVII. Riot and Civil Commotion Policy 436
LVIII. Application of Reciprocal 438
LIX. Policy of Reciprocal 439
LX. Statement of a Lloyds Association 443
LXI. Marine Insurance Binder 447
LXII. Marine Cargo Policy 448
LXIII. Hull Marine Policy 452
LXIV. Marine Protection and Indemnity Clause 457
LXV. Marine W^ar Risk Clause 458
LXVI. Alien Enemy Warranty (Marine) 458
LXVII. Embargo Warranty (Marine) 458
LXVIII. Warranty Against Capture (Marine) 458
LXIX. Explosion Clause (Marine) 458
LXX. Deviation Clause (Marine) 459
LXXI. Warranty of Use (Marine) 459
LXXII. Average Clause (Marine) 459
LXXIIL Extension of Coverage (Marine) 459
LXXIV. F. P. A. Clause (Marine) 459
LXXV. Extended Coverage (Marine) 459
LXXVL Warranty of Safety (Marine) 460
LXXVII. Warranty of Neutrality (Marine) 460
LXXVIII. Warranty Not to Abandon (Marine) .460
LXXIX. Reduction of Policy (Marine) 460
LXXX. Sailing Warranty (Marine) 460
LXXXI. P. P. I. Clause (Marine) 460
INDEX TO APPENDICES xv
PAGE
LXXXII. Inception of Risk Clause (Marine) 460
LXXXIII. F. P. A. Clause (Marine) 461
LXXXIV. Loading Warranty (Marine) 461
LXXXV. Return of Premium (Marine) 461
LXXXVI. Goods in Enemy Territory (Marine) 461
LXXXVII. Lighterage Clause (Marine) 461
LXXXVin. Machinery Clause (Marine) 461
LXXXIX. Latent Defect Clause (Marine) 462
XC. Cancellation Clause (Marine) 462
XCL Valuation Clause (Marine) 462
XCII. Loading Warranty (Marine) 462
XCIIL F. P. A. A. C. Clause (Marine) 462
XCIV. Warranty Against Capture (Marine) 462
XCV. F. P. A. E. C. (Marine) 463
XCVL Sailing Warranty (Marine) 463
XCVIL Leakage Clause (Marine) 463
XCVIIL F. P. A. Clause . 463
XCIX. Riot and Civil Commotion Clause (Marine) 463
C. Subrogation Warranty (Marine) 463
CL Statement of a Marine Insurance Mutual 464
CII. Automobile Liability Policy 467
CIII. Automobile Certificate of Insurance 469
CIV. Automobile Collision Endorsement 470
CV. Automobile Property Damage Endorsement 471
CVI. Automobile Fire, Theft, and Transportation Policy . . . 472
CVII. Automobile Valued Policy Endorsement 47S
CVIII. Automobile Lock Warranty Endorsement 475
ex. Sample Page of Automobile Liability, Property Damage, and
Collision Rates 48g
Rates 486
CXI. Sample Page of Automobile Fire and Theft Rates . . 487
CXII. Sample Automobile Classification Sheet 488
CXIII. Credit Insurance Policy 489
CXIV. Credit Insurance Policy 493
CXV. Surety Bond (Individual) 496
CXVL Surety Bond (Schedule) 499
CXVII. Contractor's Bond 502
Part I
INSURANCE IN GENERAL
Chapter I
THE USES OF INSURANCE
Insurance as a factor in business. — The value of insurance
Is usually much underestimated. This is partly the result of
adopting a very narrow vIcav of the insurance business for, In
appraising the value of any business enterprise, we must consider
not only the plain and apparent benefits which result from Its
activities but also its more remote consequences. Upon care-
ful analysis it will be seen ( 1 ) that insurance performs a large
number of functions for the business man and the community
which are usually accepted without notice or appreciation and
(2) that the numerous forms of insurance have in sub-
stance very much the same objects in view. To illustrate the
significance of these two facts and to show the important part
played by modern insurance in business enterprise are the prin-
cipal objects of this chapter. For convenience the various
services of insurance have been grouped as far as possible and
are described under ten headings.
1. Insurance introduces security in business undertakings.
— A service which is common to all forms of Insurance, — life
insurance, property insurance, credit Insurance, bonding,
title insurance, etc., — Is to substitute for large and uncer-
tain losses a small but certain payment. By this we mean that
the business man enters into a contract to pay a relatively small
premium at fixed intervals, in exchange for which the insurance
company agrees to assume the risk of certain large losses which
may or may not occur. For example, while an individual knows
that fires are constantly destroying business properties and
stocks of goods he cannot tell how soon his property will be
thus visited, if ever. If he could foresee his fire losses with any
accuracy he could make provision beforehand without the as-
sistance of insurance, provided there were sufficient time; but
since the event and its results are uncertain he has no assurance
that his most earnest efforts to provide for the future may
not be cut short by an untimely catastrophe. But what Is
most uncertain with regard to an individual may be closely cal-
3
4 INSURANCE PRINCIPLES AND PRACTICES
culated for a group. A study of fire insurance statistics would
show that on bakeries, for example, a certain percentage of loss
through fire might be expected in a given period. If such
statistics were more satisfactory in character it would be pos-
sible even to find the statistical results with regard to particular
kinds of bakeries in particular buildings. How this might be
accomplished is shown in the chapter on fire insurance rates.
It is therefore possible to make provision on a mathematical
basis for a group which is not possible for an individual. The
element of certainty or assurance is a vital one in every business
and to every Individual, and insurance provides a way in which
such certainty can be introduced where it did notpreviously exist.
Nor do other forms of insurance differ from fire insurance
in this respect, except in degree. Any person who is familiar
with the record of the past experience of life insurance com-
panies can tell with the greatest ease that out of 100,000 per-
sons at age twenty, 3,891 will die before they reach twenty-five.
Nevertheless with regard to an Individual we can predict
nothing, and one who attempts to provide against death by
saving may or may not be successful. In marine insurance we
also find persons and companies who, relying upon their know-
ledge of conditions and the experience of the past, are willing
for a small consideration to assume the risks incident to sending
a vessel or a cargo across the sea. It is true that here the con-
ditions affecting the risk are so many and so varied that the
problem of calculating a correct premium is more complicated,
but the principle Involved Is the same.
Similar illustrations are found In every field of insurance. No
property owner is absolutely sure that his title is good and no
one would be willing to make a single prediction about It Inas-
much as his judgment, however good, might be wrong. But
given a sufficiently large group of risks underwriters are
willing to transform doubt into certainty by granting Indemnity
in return for a stipulated premium. No merchant knows when
a given debtor's account may have to be written off as a "bad
debt," nor how much he may lose on an individual debtor, but
In many lines of business the average loss through bad debts Is
almost absolutely sure. When a combination of risks thus In-
creases the certainty of the future it becomes possible for the
manufacturer to remove his doubts by the purchase of a credit
Insurance policy. The law of most States makes a business
responsible for compensation to Injured employees, usually
THE USES OF INSURANCE 5
specifying exactly the amount to which the individual employee
is entitled; but even in the largest plants it is difficult to esti-
mate the total amount which will have to be paid out in any
given year. But by combining, for instance, all steel plants in
the country we can arrive at a much more exact conclusion, and
through compensation insurance can remove this element of
chance from the employer's business. Probably most business
men would admit that nothing is more uncertain than the law,
and yet they assume a legal liability when they permit a sales-
man to enter their premises, when they hang a sign over the
sidewalk, operate a factory with windows opening on the
street, and perform many other acts without a thought of the
element of risk thereby introduced. A public liability policy
would make many of these uncertainties certainties.
So we might go on to illustrate the element of uncertainty
in the operation of an automobile, in an operation performed by
a physician, in the operation of an elevator, in the existence of
a plate glass window, the operation of a steam boiler and the
sending of a package by parcel post, in all of which the uncer-
tainty, or at least a considerable part thereof, may be eliminated
by the use of insurance. It is the failure fully to appreciate
this principle that causes men so often to insure their property
but to neglect their life insurance, to inform themselves of their
liability under compensation acts, yet ignore their liability to the
public. Enough has been said, however, to illustrate the possi-
bilities In the removal of risk made available to the individual
and the business man. If all uncertainty could be removed
from business, profits would be sure; insurance removes many
uncertainties and to that extent Is profitable.
2. Insurance increases business efficiency. — The natural
result of the elimination of risk and uncertainty is an increase
in business efficiency. Every manufacturer knows that If it
were possible for him to reduce the uncertainties of his busi-
ness by one-half his efficiency as a business unit would be at
least trebled. The price of goods is often regarded as an in-
dex to the efficiency of their production and distribution, and
it Is well known that the smaller the risk involved, the lower
the price It is possible to charge. The most uncertain busi-
nesses are in the main the most inefficient ones; for the exis-
tence of the large element of doubt minimizes the importance
of the many small factors which go to make up the sum total
of efficiency. With a few great risks out of the way the busi-
6 INSURANCE PRINCIPLES AND PRACTICES
ness man Is free to devote his attention to those smaller per-
fections which give him an advantage over his competitors.
Suppose, for example, that a young man has accumulated a
small capital and is offered an opportunity to invest this sum
in an exporting business. He may be very confident of the
success of this business and would be willing to risk his
future in it without reserve. But he reflects upon the hazards
incidental to ocean transportation and the dangers of fire and
dishonesty. His investment represents an accumulation ac-
quired by saving and hard labor, and when he considers the
chances of fire, of shipwreck, of damage to the goods by water,
etc., he becomes unwilling to take the risk unless insurance is
Introduced as a means of protection. With this assurance he
Is an efficient business man, without it he is a gambler harassed
by doubt and hesitation.
Merchants would be unwilling to trust their goods upon the
ocean if they were not protected by marine Insurance and
would be content to let foreign trade take care of Itself, prefer-
ing to avoid the risks Incidental to water transportation.
Without Insurance many employers would be afraid to entrust
large sums of money and Important duties to subordinates,
and would be forced to give their own valuable time and at-
tention to these affairs; but when protected by a bonding com-
pany's policy they know that most of the risk has been re-
moved. Without some form of compensation insurance a
small business would constantly worry along under the danger
of being rendered Insolvent by the claim of an injured work-
man. In many States this form of Insurance is compulsory.
As further Illustrations, let us take the case of a partnership,
and the relations between employer and employee. It may
seem a strange statement but It is nevertheless true, that life
Insurance has made the partnership a more attractive form of
business enterprise. This Is so because a partner may die and
his heirs be disinclined to continue the business, asking Instead
for a division of the assets. Under such circumstances It is
doubtful whether the remaining partners would be In a position
to pay promptly the large sum necessary to purchase the In-
terest of the deceased partner, and yet without this resource
the heirs may make considerable trouble for the business. A
life insurance policy with the proceeds payable to the business
upon the death of the partner provides funds which are Im-
mediately available to satisfy his heirs. The partners may
THE USES OF INSURANCE 7
thereby eliminate this worry from the large number of dis-
quieting possibilities which they have to face.
In recent years business men have attempted to stabilize
relations with employees by furnishing them with insurance,
the employer paying all or a portion of the premium and thus
making the employee feel that the concern is vitally interested
in his welfare. That far-sighted business men have realized
the value of this relief is evident from the purchase of group
insurance policies involving millions of dollars of insurance, as
illustrated by the Arlington Mills policy for eight million dol«
lars, the policy of the Mid-West Refining Company for two
million dollars, and policies of approximately one million dol-
lars in the Westinghouse Companies, the Acadia Mills, the
Monomac Spinning Company, the Trans-Continental Oil Com-
pany and many other important concerns.
In extending credit to customers every merchant hopes and
expects that the buyer will pay in full; he depends upon his
credit department to eliminate all the bad risks. Let us go a
step further and assume that, since past experience shows him
that a certain relatively small loss from this cause is normally
to be expected, he adds something to the price of his goods to
cover it. There still remains the uncertainty as to whether such
addition is sufficient. The failure of a single large customer
may transform the year's operations from success to failure,
or unusual business conditions may increase the loss to unex-
pected size. But by means of a credit insurance policy he can
go still further and eliminate most of this remaining risk,
thereby Increasing the efficiency of his credit department.
We find, therefore, that all forms of insurance possess In
common the attribute of improving efficiency in business by
removing doubt, worry and hesitation; an attribute which is
manifested by the emancipation of the business man from fear
of possible loss, the encouragement to enter into business pro-
motions, the insurance of fidelity of employees, removal of a
dangerous element in partnerships, stabilization of relations
with employees and the diminution of losses through bad debts.
3. Insurance tends toward the equitable assessment of
cost. — Another advantage of Insurance as conducted by modern
methods Is the correct distribution of costs. Owing to the fact
that Insurance is based upon large numbers of risks it has be-
come practically a necessity to have a large and well organized
system for determining premium rates. It is essential to the
8 INSURANCE PRINCIPLES AND PRACTICES
success of the insurance business that costs be assessed equit-
ably among policy-holders. In life insurance it is necessary to
employ the services of expert actuaries and mathematicians,
not only to arrive at premium rates, but to calculate surrender
values, reserves, policy loans, methods of converting policies,
and to solve many other problems. In fire insurance, a vast
number of factors have to be judged in arriving at the rate
on a risk. As expressed by one writer: "He who assumes the
risk of a flour mill, for example, should know more of its dan-
gers than the miller himself * * * Drawing a greater
number of contracts in a year than do many lawyers in a life-
time, and standing often face to face with the most perplexing
questions of jurisprudence, it may be questioned if he should
know less than does the attorney who has made it his profes-
sion. Seriously affected by every discovery of the chemist, and
liable, at any moment, to have his chances of loss on whole
classes of risks alarmingly increased, by new chemical combina-
tions which follow each other as rapidly as the changes of a
kaleidoscope, he should know not less of them all than does the
chemist himself. In short, there is scarcely a science, art, or
manufacture with which he should not be more or less
familiar, and if the successful conduct of any one business or
calling requires a life-time of study and application, how much
more should the business of insurance — which demands a
knowledge more or less intimate of every other — require
lifelong study and the closest and most constant observation." ^
In marine insurance, the problem becomes even more difficult,
due to the multiplicity of considerations to be taken into ac-
count; and the involved procedure developed in the making of
compensation insurance rates would be a puzzle to many a
mathematician. Naturally such work can best be performed
by persons who make this their business, and only by an organ-
ized system of insurance is a group of persons developed who
specialize in this essential work. Indeed the theory and prac-
tice of insurance have been so extensively and intensively de-
veloped within recent years that no person can be thoroughly
familiar with all phases of all branches of the business.
4. Insurance serves as a basis of credit. — Credit extension
is a most important service in modern business life and is con-
tributed to by practically all forms of insurance. The simplest
*F. C. Moore, "Fire Insurance and How to Build," New York, 1903, pp. 22
and 23.
THE USES OF INSURANCE 9
Illustration of the necessity of Insurance Is the example of a
mortgage upon real estate. No mortgagee Is willing to lend
his money with property as security unless he knows that such
property Is protected from destruction by fire. No dealer cares
to sell goods to a retailer on credit unless he has some assurance
that the goods and the business of the retailer are protected
from sudden disaster by fire. It Is well known that the bulk of
international financial transactions depend upon three docu-
ments, a draft, a bill of lading and a marine insurance certifi-
cate; and the last is not the least important of these. The bill
of lading gives security to the draft and the marine Insurance
certificate gives security to the bill of lading. Business men
are unable to obtain loans at the bank if their property is not
protected against loss by fire and a grain dealer can not use
his warehouse receipts as collateral for a loan unless the grain
is protected against a similar risk.
While the part played by fire and marine insurance in the
extension of credit Is quite generally recognized, there are few
who realize that logically other forms of insurance should oc-
cupy a similar position and be viewed by creditors as equally
necessary. A bank in making a loan to a business Investigates
its assets but sometimes overlooks the greatest of all, — the life
of the leading spirit in that business. His life may be of more
Importance to the success of that business than the final value
of any other asset. Why, therefore, should not life Insurance
be considered as necessary to the extension of credit as fire
insurance? Life Insurance also serves Its purpose in the pur-
chase of a home on credit. If the wage earner of the family
lives to pay the installments upon the purchase price, every-
thing may finally work out satisfactorily; but what will be
the situation if his death occurs before the obligation is dis-
charged and his dependents are left to shoulder the burden
of the remaining payments? They should be protected
against this contingency by the existence of a life insurance
policy to the extent of the debt, at least. One class of assets
of a business is the accounts owing to it by other concerns.
But we know that such accounts are of varying value, depend-
ing not only upon the character of the debtors but upon future
business conditions. Before these debts are taken at their face
value it is logical that they be guaranteed In some manner, as
for instance being covered by a credit insurance policy. The
possibility of the ruin of a business by the dishonesty o£
10 INSURANCE PRINCIPLES AND PRACTICES
trusted employees is worth consideration In passing upon It as
a credit risk and It would seem discreet to require that the
creditor be protected against this possibility by the existence of
a bonding company's policy, which will minimize the possi-
bility of such dishonesty and reimburse for any loss that may
occur.
These forms of insurance, therefore, increase the credit
standing of the business In question. If we agree that life in-
surance for an important person in the business is as essential
as fire insurance on its property, why should not the health of
the same individual be required to be Insured, on the ground
that it also is an essential part of the credit rating of the
business ?
The above Illustrations are sufficient to show that a very
narrow view has usually been taken of the value of insurance
as a factor in the extension of credit; that in fact there is no
good reason for not considering every form of Insurance car-
ried by a business concern or an individual as a part of credit
■rating. How illogical it is to consider an automobile as a busi-
ness asset, when under certain conditions Its risks outweigh
its benefits, and yet refuse to recognize a compensation insur-
ance policy, a burglary policy, a surety bond or an accident
and health policy, all of which under all conditions protect
against risks instead of creating them.
5. The capitalization of earning power. — We are all
familiar with this idea in corporation finance. We consider
the worth of a corporation as being its value as a going con-
cern, and we estimate the intangible asset called good-will by
separating its earnings from the earnings of tangible assets.
We speak of the security market being a market for Incomes,
meaning that persons are willing to pay for a security their es-
timate of its present and future earning power. Many persons
have applied this idea to personal finance also with the assis-
tance of some form of insurance policy.
Let us assume that a machine produces a net income of
$2,000 after the money necessary for Its up-keep and allow-
ance for interest have been deducted, and that the average life-
time of this machine Is twenty-five years. It Is easy to compute
that Its capital value under these circumstances Is approxi-
mately $50,000, and that if It were lost this would measure
approximately the detriment to the business owning it. By
a similar method It is easy to calculate the monetary value of
THE USES OF INSURANCE 11
the life of a bread-winner to his family. Why should not the
earning power of a human life be represented by an insurance
policy to its capitalized value, a policy which wiir reimburse
his dependents for the loss of that earning power? Let us
further assume that a machine such as described above must be
repaired when damaged and that under these conditions, in-
stead of bringing in a net income of $2,000 it costs the business
$2,000 to restore it. The human machine is similar to this,
when viewed in relation to his family which must support him
when he is ill or crippled. Not only does he then lose his earn-
ing power but he becomes an expense to his family; and if to-
tally disabled he is in a condition which has been described as "a
living death." His family should be protected against the
possibility of the human asset becoming a liability by accident
and health insurance and by a total disability clause on the life
insurance policy.
The position of a business firm in relation to a valuable em-
ployee is very much the same as the position of the family with
respect to its principal support. The principle illustrated by
the above paragraphs has been more and more recognized in
recent years by progressive business men. There is, for in-
stance, a policy of two million dollars issued on the life of the
president of the FIsk Rubber Company and vice-president of
the Willys-Overland Company, a large part of which Is for
the protection of the business. This is one of the more un-
usual cases, but hundreds of ordinary illustrations might be
cited of policies of from $100,000 to $500,000 used for this
purpose.
In the same sense the book accounts of a business may be
regarded as assets from which a certain earning power is ex-
pected. Every loss from bad debts diminishes the net earnings
of these book accounts and against the insolvency of debtors
there is only one sure remedy, — the existence of a credit in-
surance policy. Part of the value of the title to a piece of real
estate lies In its marketability, and this in turn Is dependent
upon the soundness of the title. The marketability of titles is
today practically universally protected by title Insurance poli-
cies. The same Idea is applicable to any form of property.
A fire Insurance premium might be considered as capitalizing
the value of a building, a plate-glass policy as capitalizing the
value of a window, use and occupancy protection as capitalizing
the value of a "going" business, a marine policy as capitalizing
12 INSURANCE PRINCIPLES AND PRACTICES
the value of a cargo shipment. In each of these cases, of course,
this statement is true only to the extent to which the particular
policy protects, but if a policy covering all possible contin-
gencies were issued on property the idea would be true in
every respect.
6. Insurance makes saving possible. — Insurance must be
regarded as a hedge — a word familiar alike in the sporting and
commercial world. If a person who has entered into a con-
tract for the future delivery of wheat protects himself by con-
tracting with another for the future delivery of the same article
he is said to have "hedged," because whatever he may lose on
the first contract, he makes on the second. In a similar fashion,
life insurance may be used as a hedge against the risks of sav-
ing. Many men decide to obtain protection by the practice of
saving regardless of the fact that death may not give them
time to accomplish their object. The following illustration
will make this clear. Suppose of two thousand healthy men,
each twenty-five years of age, and married, one thousand de-
cide to save money and protect their wives by placing $100
in the bank at interest each year, and the other one thousand de-
cide to invest an equal amount annually in life insurance. The
following table shows the results : ^
Savings Group: Insured Group:
End of No. of Amt. received No. of Amt. received
Widows by each Widoivs by each
1st year 8 $104 8 $5,000
Sth year 40 104 — 564 40 5,000
10th year 80 104 — 1249 80 5,000
20th year 174 104 — 3096 174 5,000
28th year 238 104—5197 238 5,000
It is apparent that, even though after the 27th year some
financial advantage accrues from the savings plan, such advan-
tage goes only to those who ( 1 ) are fortunate enough to live
that long and (2) are possessed of suflScIent will-power to con-
tinue saving unassisted.
Some business firms decide to carry their own Insurance risk
by the practice of self-insurance, which involves setting aside
a certain sum each year in a fund to pay any losses Incurred.
The great and obvious risk involved here is no different in any
essential respect from the risk run by the one thousand men
who used the savings fund as protection. If a fire or a large
'These results are excluding any possible dividends received.
THE USES OF INSURANCE 13
compensation payment or a disastrous damage suit comes too
soon, it may find the self-insurance fund with insufficient ac-
cumulation to meet the consequences. Against such a contin-
gency insurance provides an Intelligent and common-sense
hedge. Instead of immediately assuming all the risk of self-
Insurance It would be wiser for many business men to assume
this risk gradually, combining one-tenth self-insurance with
nine-tenths insurance the first year, one-fifth self-insurance with
four-fifths insurance the second year, and so on until the ob-
ject they have in mind is fully attained. Thus in a sense
insurance may be regarded as prerequisite or essential to sav-
ing, in order to guard against uncertain results of the latter.
7. Insurance as an investment. — Some forms of Insurance
combine with the insurance feature an Investment element.
This Is only incidental to the protection element and yet serves
a useful purpose. In life Insurance particularly. Its Importance
has been emphasized. Under the level-premium plan, a man
pays in the early years of the policy a premium more than
sufficient to carry the risk and this saving goes to make up for
the deficiency In the annual premium In the latter years of the
policy when the mortality rate has greatly increased. The
extra amounts collected In the early years are therefore In the
nature of savings which earn interest. This saving element
exists In some term policies, in all ordinary-life policies to some
extent, to a greater extent in the limited-payment and is ex-
tended still further in the endowment policy, which purposely
combines life Insurance and saving. The sums so accumulated
by the Insurance company earn Interest and experience has
shown that insurance companies have earned a fairly large rate
of Interest for the remarkable safety of the Investment. In
the past twenty-five years It Is said that no policy-holder has
lost any of the savings he had in any large and well-established
legal reserve life Insurance company.
In other forms of Insurance the saving feature Is less promi-
nent. By straining the analogy somewhat we may consider
that the amounts put into a self-insurance fund or paid out as
premiums are put aside into a fund for a "rainy day" — to take
care of losses which are sure to occur to the group as a whole,
although each individual member of the group hopes that he
will not be the victim.^
' See also the fire insurance plan of the "Philadelphia Contributionship,"
Appendix XXIX.
14 INSURANCE PRINCIPLES AND PRACTICES
Insurance companies have further developed this idea of
thrift by making it applicable to the proceeds of policies. In
order to prevent beneficiaries from squandering the proceeds of
a life insurance policy, income policies have been invented,
which provide for the payment of the proceeds in instalments.
Likewise, the proceeds of the policy may be left with the com-
pany for safe keeping, earning meanwhile a reasonable rate of
interest. Some companies have sold "gold bond" policies,
the proceeds of the. policy being a bond with fixed interest pe-
riods instead of cash. It should also be noted that the saving
element in a life insurance policy has been made little different
from the saving plan of a bank, inasmuch as the policy-holder
may borrow at any time from the savings fund he has accumu-
lated or may withdraw it entirely In the form of a_suri£nder
value.
8. Insurance promotes thrift. — In the illustration of the
two thousand men, one thousand of whom made use of insur-
ance, it was assumed that all of those who adopted the savings
method possessed the determination to adhere to their plan
and that none failed to put away $100 faithfully each year.
In actual practice, however, we know that it is difficult to save,
and what would appear- to be a small assistance is often the
difference between success and failure. Life Insurance pro-
vides certain inducements to save. In the first place, each
person receives a notice a short time In advance of the date
when his annual premium Is due, making It impossible for him
to forget the payment and forming the habit of putting away
a small sum at regular and determined intervals, an element
which has always been insisted upon as essential to the develop-
ment of thrift. This encouragement of saving undoubtedly
results in many persons accumulating sums which they other-
wise would never have. Money or time which would other-
wise be wasted Is utilized for the purpose of meeting these
regular payments and this has been said by one writer to bear
the same relation to thrift that the utilization of by-products
does to manufacturing — much being saved that would other-
wise be wasted. In a savings bank, furthermore, a depositor is
usually allowed to withdraw his funds upon short notice at any
time, so that a resolution to save may be broken without seri-
ous reflection. Under the life insurance contract no with-
drawal is usually permitted during the first two years of the
THE USES OF INSURANCE 15
contract, and sometimes even after this date a withdrawal
charge is made.
9. Insurance as a provision for old age. — Another form
of savings must be referred to here. In most cases saving
consists of putting away small sums in order to accumulate a
large fund, but the term may be equally well applied to the
putting away of a large sum in order to insure the payment of
a number of small sums in the future. Some persons who are
in possession of considerable money have no dependents to pro-
tect and their only concern is to make sure that they will them-
selves be taken care of in their old age. The interest on the
sum they possess may not be sufficient for this purpose, and as
soon as they begin to draw upon the principal, th^y reduce their
annual income, and have no guarantee that they may not be so
unfortunate as to live too long. Such a person may, however,
save his principal sum by investing it in the form of an annuity,
which guarantees him an annual income as long as he may live.
An illustration will make this plain. Suppose a man, age 65,
has accumulated $8,000, the interest of which at 6 per cent
will provide him with $480 annually, a sum which is insuffi-
cient to support him. By using a portion of the principal each
year he can increase the sum annually available to $700 or
$800, but he runs the danger that the principal will be ex-
hausted and that he will then be left without any Income. On
the other hand, for $8,000 he may purchase an annuity which
will pay him about $900 a year until his death, however late
that may occur.
It may be that sometime in the future we will have in the
United States a form of insurance which is common in Europe
— old age insurance — in which the worker is compelled, if
necessary, to lay aside a portion of his earnings in early years
to support him in his old age.
10. Community benefits of insurance. — The uses so far
enumerated have been individual in character but insurance
also performs some services which, while not designed to
benefit any particular individual, nevertheless benefit all,
through their effect upon the community. Among these public
services may be mentioned the following:
a. Fire insurance and other forms of property insurance
encourage the individual to look forward to the future by
urging him to provide, not merely for the present, but for
events which may reasonably be anticipated. Adequate pro-
16 INSURANCE PRINCIPLES AND PRACTICES
vision for the future distinguishes the civilized from the sav-
age community and marks the difference between stability and
instability in business. The principle of providing for future
contingencies has long been recognized in corporation finance
and its scope is only beginning to be realized in personal affairs
and business policy outside of the field of finance. Life insurance
goes further and impels a man to provide, not merely for his
own lifetime, but even for the period after his death. It there-
by greatly increases the sense of responsibility and strengthens
family connections. Similarly, credit insurance is fundamen-
tally an attempt to stabilize business conditions and title in-
surance performs the same function for property rights.
b. Life insurance, workmen's compensation insurance and
accident and health insurance relieve the community of much
of the expense which would otherwise be incurred for the care
of dependents left by the improvident. They encourage persons
not to depend upon the charity of the state, but rather upon
their own efforts to prevent poverty and distress and thus
strengthen character. So great a social factor has this been
considered abroad that systems of social Insurance have been
built up, enforced by and in some instances supported by th"e
State. Fires, defalcations, failures, explosions, tornadoes and
other calamities have likewise often tended in the past to im-
poverish families which would have been relieved of the finan-
cial shock if adequate insurance had been maintained.
c. All forms of insurance, by lessening the number of persons
who are rendered destitute through such happenings, tend to
maintain the standard of living. They reduce the number of
unfortunate examples of destitution and misery which operate
to lower the ideals and standards of conduct of others who are
brought in contact with them.
d. A well-organized system of Insurance tends to distribute
equitably the cost of accidental events which would otherwise
be paid in a haphazard manner. For example, the cost of fire
insurance is now reflected fairly accurately in rents; but in the
absence of a system of insurance some tenants might pay exces-
sive sums while others did not pay their fair share of the fire
losses. Credit losses, Instead of being cared for by a small
and regular addition to the selling price, in the absence of in-
surance are met by an assessment depending on circumstances,
naturally resulting In an addition sometimes deficient and some-
times excessive.
THE USES OF INSURANCE 17
e. All forms of insurance, if properly conducted, tend td
reduce the extent of the evils they are designed to alleviate.
The strongest argument for the reduction of fire losses, for
example, is the pecuniary argument that smaller losses will
make possible smaller premiums. The cooperative effort,
which is primarily intended to collect and disburse insurance
funds, tends to be applied in time to the reduction of losses.
Thus, fire insurance inspections, life insurance medical and
nursing services, oversight by bonding companies of employees,
inspection of automobiles and of factories, are expedients In-
troduced to prevent fires, reduce the death rate, prevent sick-
ness, eliminate theft and defalcation, prevent automobile acci-
dents and reduce the number and severity of Industrial
accidents. These efforts were fostered and supported by Insur-
ance.
f. Insurance accumulates, from the small deposits of many
persons, a large fund which may be Invested and used In the
development of American enterprise. In other words, vast
funds are made avalfable as capital which otherwise would
never be brought together in one place. The reserves of life,
fire, compensation and casualty insurance companies represent
the contributions of millions, each contribution being insignifi-
cant In itself, but in total amounting to a sum equal to the na-
tional debt of the United States In 1918. This vast sum is dis-
tributed among the securities of enterprises of all kinds.
g. Insurance has enabled small business enterprises to com-
pete with large corporations upon more equal terms. As pre-
viously remarked, the element of risk Is a highly important
one In any business. A large company can afford to take some
risk. If one of Its forty buildings burns, the loss is not so seri-
ous; should the only building of a small competitor be de-
stroyed, all is lost. The same is true of many other kinds of
assets. The small business cannot afford to take much risk.
A large business In the absence of Insurance is able to maintain
a self-insurance fund, because its .resources are great enough
and Its risks sufficiently diversified and distributed to make
such a fund of some value, but to a small })uslness this is a
pure gamble. Insurance has therefore been of special benefit to
the small manufacturer and merchant.
The several propsltions contained in this chapter may then
be summarized as follows:
18 INSURANCE PRINCIPLES AND PRACTICES
(1) The various services rendered by insurance are usually
very inadequately appreciated;
(2) There is a striking similarity in the benefits rendered
by all forms of insurance;
(3) Insurance increases the security of business enter-
prises ;
(4) Insurance tends to improve the efficiency of business;
(5) Insurance equitably distributes the costs of losses;
(6) Insurance is an Important factor in the modern credit
system ;
(7) Insurance enables the capitalization of various assets,
human and inanimate;
(8) Insurance is Intimately connected with saving and in
fact makes the latter practicable;
(9) Insurance provides a safe investment for surplus funds;
(10) Insurance encourages and promotes thrift;
(11) Insurance furnishes a method of providing for old
age;
(12) Insurance is beneficial from the social as well as the
individual standpoint.
Chapter II
THE FUNDAMENTAL PRINCIPLES OF
INSURANCE
Definition of insurance. — Insurance may be defined as a
social device whereby one person is enabled to make a con-
tract with another, the second party agreeing to assume cer-
tain definite risks of the first party upon payment by the latter
of a compensation called the premium. This agreement is
subject to the general law of contract, the application of which
is limited in many essential respects, however, by the peculiar
nature of the contract and by well-understood customs and
usages of the business.
Essential requirements for insurance. — In order that such
a contract may operate equitably, produce the desired benefits
and be practical from a business point of view, certain condi-
tions are absolutely necessary. Briefly stated, these conditions
are the following:
1. The insured must be subject to a real risk. This risk
may be a loss of goods or benefits which he already possesses
or of prospective benefits or profits. The threatened loss may
be a loss of visible property or of such an intangible thing as
a legal right of action; but it is Important that the contract be
based upon some actual possibility of loss and not upon the
mere desire of the Insured to bet against the happening of
some event. The latter is a perversion of the real function
of insurance. It Is preferable that the risk be one which can-
not be afiected by the actions of the parties Involved; i.e., that
the insured cannot himself produce the event insured against
or Increase the probability of its happening. At least, he
should have no Incentive for so doing, as otherwise a great
mioral hazard is involved in the contract. But if this were
strictly adhered to many forms of insurance would be pre-
vented from adequately exercising their legitimate functions.
2. It has been found in practice that the risk to be Insured
must be Important enough to warrant the existence of an in-
surance contract. Many policies of Insurance exclude unim-
portant losses as costing more to insure than the value of the
19
20 INSURANCE PRINCIPLES AND PRACTICES
protection given. Obviously to cover every small loss that
might possibly occur would be to greatly increase the cost of
protection at the expense of those who desire protection against
really great hazards. Thus in marine insurance it is custom-
ary to exempt the insurer from liability for small losses; in com-
pensation laws the injured workman does not recover for the
first few days of disability, and in accident and health insur-
ance various restrictions are introduced limiting the company's
liability.
3. The cost of insurance must not be prohibitive. In order
to be of any great benefit to a large portion of the business
community the premium paid must be sufficiently small to be
within the reach of nearly everyone. Otherwise the risks
written will be confined to a small and select group of persons
insufiicient in number to allow the law of average to work.
Likewise the expense of doing business, which is a factor in the
size of the premium, must be kept within due proportions.
We have seen many instances in the past where new methods
of conducting the insurance business have been introduced by
competition because the expense of existing methods was thought
to be excessive. It is essential for insurance agents and brok-
ers to remember that their income is derived in the last analysis
from the premiums paid by the policy-holders and that conse-
quently their existence must be justified be rendering some real
service to the insured.
4. A large number of risks is necessary. As will be shown
more fully later, it is necessary for an Insurer to accept a con-
siderable number of risks in order to operate on a safe basis.
The natural tendency of the Insured to select a company of
some size is not misleading in the respect that mere size In the
insurance business is productive of a real advantage up to a
certain point. It will readily be recognized that an insurance
plan involving only two persons would be little better than each
individual taking care of his own risk personally, and that it
Is only by a combination of many risks that any substantial
advantage is gained.
5. It Is necessary that the extent of the hazard Involved be
capable of approximate mathematical calculation. It Is, of
course, not required that the calculation should be absolutely
accurate. Many forms of Insurance have operated for years
on inadequate statistics but this has always resulted In dissatis-
faction and dangerous underwriting practices. As stated in
PRINCIPLES OF INSURANCE 21
the preceding chapter, one of the services of insurance should
be the development of a scientific system of making rates, for
any other method of doing business necessarily results in in-
equity between classes of risks, individual policy-holders and
different sections of the country. It would be obviously unjust
and impractical to charge a man of twenty-five the same life
insurance premium as a man of fifty, or to charge the owner
of a celluloid factory a lower premium than that of a retail
stationery store. Only a system of rating which takes into
account the probability of loss will produce equitable premiums
for the various classes of risks. It might be said that common
knowledge indicates some difference between kinds of risks,
but even if this is granted one cannot, by common knowledge,
arrive at the degree of difference between them.
Insurable interest. — One of the fundamental principles
among those enumerated above is that the person insured must
possess some real interest in the subject matter insured, a doc-
trine which has been spokehlDf as the necessity of an insurable
interest. It is this insurable interest which makes a contract
between the insurance company and the insured particularly
proper. In all forms of insurance this principle has been rec-
ognized by the courts although, as we shall see later, in life
insurance and marine insurance considerable departures from
the principle have been permitted. While insurable interest
is necessary to the contract, insurable interest without a con-
tract confers no rights upon its possessor. A contract of in-
surance has been held, for example, to confer no rights upon
third parties who happen for some reason to be interested in the
subject matter involved. The illustration might be used of a
workman who recovered damages for an industrial accident
from his employer. The employer was insolvent and the
workman found himself unable to collect on the judgment,
whereupon he had recourse to a suit against a liability insurance
company which had insured the employer against such an event.
The court held, however, that a workman had no rights under
a contract which was solely between the employer and the in-
surance company, even though his own injuries might be the
subject upon which the contract depended. In the same way
public liability insurance policies exist, not for the protection
of the public who may be injured, but for the protection of the
party responsible for the injury, who may be liable for dam-
ages. In marine insurance an insurance policy may be taken
7.
22 INSURANCE PRINCIPLES AND PRACTICES
out by a freight forwarder and after a loss a third person may
appear and claim the proceeds of the policy, but it is necessary
for the latter to show that he was the person for whom the in-
surance was intended at the time it was issued. Both an in-
surable interest and a contract must therefore be present.
Principles of probability. — The calculation of premiums for
insurance of nearly every kind is based upon the application
of the mathematical principles of probability to past experience.
In life insurance these principles of probability are applied to
past experience as represented by a mortality table; in fire in-
surance the principles are applied to past experience of fires
tabulated according to occupancies, types of buildings, etc. ; in
liability and compensation insurance to past experience showing
losses paid, etc. Premiums in insurance are usually expressed
in the form of rates, i.e., by the amount of premium per unit
of protection. Thus, in life insurance a rate is quoted per
$1,000 of protection, in fire insurance per $100 of insurance,
in liability and compensation insurance per $100 of payroll,
in marine insurance usually per $100 of insurance, and in ac-
cident insurance per $1,000 of principal sum.
The most important of the principles of probability is that
chance may be represented by a fraction, the numerator of
which expresses the number of times the event happens and the
denominator the number of times the event may possibly hap-
pen.^ Thus let it be supposed that past experience shows that
out of 10,000 houses, 50 are burned in the course of a year;
the probability of a house being destroyed by fire is therefore
50/10,000. Suppose that the mortality table shows that of
66,797 persons alive at age 53, 1091 die within a year; the
probability of death at age 53 is then 1091/66797. Suppose
that in a given industry with an annual payroll of $2,000,000,
the losses paid on compensation insurance policies are $6,000;
the probability of loss in this industry is 30 cents per $100 of
payroll. Applying the principles of probability to the expe-
rience of the past, we arrive at the probability that an event
will occur in the future. To justify such a conclusion as
this it is necessary ( 1 ) that a sufficiently large number of
instances be considered to give a dependable average and (2)
*As expressed in Wentworth's "College Algebra": "The chance of an event
happening is expressed by the fraction of which the numerator is the number of
favorable ways and the denominator the whole number of ways favorable and
unfavorable."
PRINCIPLES OF INSURANCE 23
that the conditions of the future coincide with those of the past.
Since the conditions of the future do not ordinarily coincide
exactly with those of the past, some allowance must be made
for possible changes, and therefore underwriting is not merely
a mathematical science but involves an element of judgment.
The law of average. — The probability of an event happen-
ing is ordinarily spoken of as the chance that the event will
happen. A distinction must be made between this chance or
degree of probability and the degree of uncertainty connected
with the event. The function of insurance is primarily the re-
duction of the uncertainty, and secondarily, the reduction of
the probability. For example, if the degree of probability is
zero, the event is certain not to happen and the degree of un-
certainty is also zero. As the degree of probability increases
to say, 1/10, the degree of uncertainty likewise increases. The
degree of probability and the degree of uncertainty continue to
increase together up to a certain point, but when the degree of
probability reaches a certain height, i.e., as the chance of an
event happening becomes more certain, the degree of uncer-
tainty diminishes, until when the probability becomes a cer-
tainty, the degree of uncertainty is again zero. The degree of
uncertainty is therefore entirely different from the degree of
probability and it is the former to which we are now referring.
Let us suppose that out of 10,000 lives, on the average, 10
die every year. The probability is therefore 1/1000, or .001.
Suppose, however, that from year to year, although the aver-
age is 10 deaths, the figures vary, showing as few as 8 deaths
some years and other years as high as 12 deaths. The range
is from 8 to 12, and the variation from the average may be
said, roughly, to be 4. The degree of uncertainty may be
crudely expressed relatively, then, by the fraction 4/10,000 or
.0004. Suppose then that 1,000,000 lives are insured. The
probability is .001 or 1,000 deaths. On a large number of lives,
however, the variation from year to year will be relatively much
less, probably only from 980 to 1020, a variation of 40 or
.00004. This is a figure considerably smaller than .004. The
degree of probability in our two illustrations remains the same,
but the degree of uncertainty, experience shows, is considerably
reduced when we deal in larger numbers. It is the function of
insurance to combine a large number of risks and thus reduce
the degree of uncertainty. We can predict the future much
more accurately with regard to a group of risks than we can for
24 INSURANCE PRINCIPLES AND PRACTICES
an individual risk, of which our future knowledge is practically
zero. We can say that out of 1,000,000 persons, 400 will die
within a year, but the fate of any individual is a mystery and
must remain such. This idea is sometimes described as the
"law of average."
Consequences of the law of average in insurance. — In in-
surance there are many important consequences of the law of
average, some of which are:
1. Insurance is the exact opposite of gambling. In gam-
bling two persons deliberately set about to create some hazard
for pleasure or profit; they introduce the element of risk where
it previously did not exist. Insurance, however, is designed as
a hedge against risks which are already present, the object be-
ing to neutralize the existing risk. Thus a person who be-
comes the owner of property assumes the risk that it will burn,
and takes out a policy of insurance to eliminate this risk or at
least reduce its consequences. Every person living runs the
risk of dying, every person in foreign trade assumes the risk
that his goods will be lost at sea, every manufacturer runs the
risk that some person will be injured on his premises and that
he will be held responsible, every buyer of property runs the
risk that his title will prove to be defective, every employer
runs the risk that his employee will prove to be dishonest. In-
surance is designed to reduce these existing risks instead of
creating new ones.
2. Insurance is preeminently social in nature. It represents,
In the highest degree, cooperation for mutual benefit. Various
individuals who are all subject to similar risks combine to re-
duce the consequences of these risks, many thousands of per-
sons paying premiums that the unfortunate few may be indem-
nified for the losses which will occur. This principle of mu-
tuality is present in a stock company organized for profit as
well as in a so-called mutual company, because in the last anal-
ysis losses are paid from premiums. The stockholders of the
stock company are supposed to make a profit merely as a re-
ward for directing and managing the cooperative scheme.
3. Insurance involves the accumulation of large funds to
meet future contingencies. Thus we find that in life insurance
reserves are built up to reduce future premiums, in fire insur-
ance to meet future losses, in liability and compensation insur-
ance to meet claims and suits which will appear in the future.
Since these funds so accumulated are the property of thousands
PRINCIPLES OF INSURANCE 25
of insured persons, the State has intervened, and, as a matter
of public policy, has regulated their use. The investments of
insurance companies are governed by state statutes designed to
preserve such funds for the purpose for which they were
intended.
4. Large catastrophes prevent the proper working of the
law of average. A San Francisco fire is an exceptional hap-
pening which no one can foresee and to which past experience
furnishes no guide. One method of attempting to reduce the
consequences of such losses upon the financial standing of an
insurance company is to secure a wide distribution of risks.
Thus a company which insured risks in the city of San Francisco
alone would have been made insolvent by its losses, the pre-
miums collected being insuflficient to meet the claims presented.
But most of the fire insurance companies involved were writing
insurance not only in San Francisco but over the entire world.
A wide distribution of risks, furthermore, reduces the variation
in losses from year to year and consequently renders the opera-
tion of the insurance business more certain and sure.
5. It is also essential to the law of average that the size of
the individual risk shall not vary too greatly. We would not
expect the losses of an insurance company to remain uniform if
it insured 500,000 risks for $1 each and five risks for $100,-
000 each. A few losses on the latter risks would be suflficient
to upset all the calculations that could be made. It is cus-
tomary in nearly every form of insurance to limit the size of
the risk which will be accepted. Thus in life insurance, $100,-
000 on any one life is a limit frequently used; in fire insurance,
companies sometimes will not accept more than $20,000 in
congested districts where a conflagration risk exists. Natur-
ally the maximum risk which will be accepted depends to a
large extent upon the size of the company concerned. As a
result of this limitation of risk the practice of re-insurance has
developed, whereby a company which has accepted a risk greater
in size than it desires re-insures a portion in another company
or companies.
6. The proper working of the law of average is also based
upon a random selection of risks. In some forms of insur-
ance, however, of which life insurance is a good example, poorer
risks exclusively would present themselves for insurance and as
a consequence the insurance company institutes a system of se-
lection whereby sub-standard lives are rejected or at least are
26 INSURANCE PRINCIPLES AND PRACTICES
charged a higher premium than the normal risk. In fire in-
surance very little selection is exercised but the same results
are attained by making the rates proportionate to the hazard
involved. The violation of this principle has been well illus-
trated by the experience of some fraternal societies whose mem-
bers were admitted without medical examination and the same
rate charged everyone without regard to age. Such fraternal
but inequitable method cannot long continue because the so-
ciety accumulates a large number of extremely poor risks.^
Differences between life and other forms of insurance. —
We have seen that in a great many respects all forms of in-
surance are similar. It would be a mistake not to notice, how-
ever, some of the differences between life insurance and other
forms of protectioon. The principal differences to be noted
are the following:
1. The event which is contemplated In life insurance is a
certain event, the only uncertainty being the time when the event
will occur. A vessel insured under a marine policy may or
may not be lost; a workman covered by a workman's compensa-
tion policy may or may not be injured; but death comes some
time to all. The marine insurance company, the fire insurance
company and the casualty company may or may not be called
upon to pay a claim on a given risk, but every ordinary-life
contract results in a claim. One writer has very properly de-
scribed this by saying that the life insurance premium must
provide two funds, one against the certainty of death at an
advanced age and one against the possibility of premature
death.
2. The classification of risks in life Insurance is generally
more simple than in other forms of insurance. All risks are
first divided into two great classes — those which are insurable
and those which are not. Those risks which are insurable are
then sub-divided Into age groups. In some companies, where
persons of Impaired health are accepted, each age group is
again sub-divided into standard and sub-standard risks. In
other forms of insurance, however, there is usually a multi-
plicity of classifications. Thus in fire insurance every building
differs from others in some particular and, aside from dwell-
ing and churches, these differences are so great that schedules
are required to appraise risks. In marine insurance a hundred
different factors contribute to make up the hazard on a given
' See Appendix XIV.
PRINCIPLES OF INSURANCE 27
risk', such as the voyage, the season of the year, the type of
vessel, etc. In accident and health insurance a chissification
based upon occupations is used and in compensation insurance
risks are rated according to the type of Industry.
3. In most forms of insurance the contract is for a term of
one year and often is cancelable by either party before this
term has expired. The life insurance contract, on the other
hand, while it may be canceled by the Insured, cannot be can-
celed by the company, and therefore Is usually a long term con-
tract. Furthermore, a company cannot change the premium
during the course of this long period.
4. The principle of Indemnity Is more strictly adhered to
in property Insurance than in life Insurance. Ordinarily a
property owner may not recover more than the actual cash
value of the property destroyed, while a life may be Insured for
any sum within reason. This question will be further dis-
cussed later in connection with Insurable Interest, where It will
be shown, however, that the principle of indemnity In property
Insurance, emphasized by many text writers, Is only relatively
recognized.
Chapter III
TYPES OF INSURANCE ORGANIZATIONS
Classification of insurance organizations. — In all forms of
insurance the insured is offered his choice of a number of dif-
ferent organizations for the purpose of insuring his risk. These
organizations may be broadly classified into six groups; (1)
self-insurance; (2) stock companies; (3) mutual associa-
tions; (4) reciprocal underwriters or inter-insurers; (5)
Lloyds; (6) government or state agencies. To consider the
advantages and disadvantages of each type of organization sep-
arately for every form of insurance would be a tremendous as
well as an uninteresting task, inasmuch as the same ground
would have to be covered many times. Each of these types
has certain characteristics, whether it be writing life, casualty
or property insurance, and from these characteristics its advan-
tages and disadvantages naturally follow. We shall therefore
devote this chapter to a general discussion of these various or-
ganizations, irrespective of the type of insurance business in
which they are engaged, merely pointing out important quali-
fications relating to particular businesses.
1. Self -insurance. — Self-insurance is the endeavor of one
who is subject to a risk to lay aside periodically sums which in
time will provide a fund for reimbursing him for any loss
which may occur. In the absence of insurance proper this is
the only method available. Its advantages and defects are al-
most self-evident. It is apparent that if the insured himself
operates the insurance fund he has it entirely within his own
control at all times, can regulate the amount spent for expenses
and, finally, any reduction in the risk involved is a direct sav-
ing to him. Thus if a person attempts to provide a fund
against his own death he is obliged to furnish only the net
amount required. No commission is paid to an agent for writ-
ing the insurance; no fees are paid to the State for the privi-
lege of doing business; no salaries are paid to officials for man-
aging the fund. If the insured regulates his habits and thereby
increases his lifetime by five years the benefit accrues directly
28
TYPES OF INSURANCE ORGANIZATIONS 29
to him. These facts would be equally true of any type of risk.
But to provide a fund to take care of losses takes time. Sup-
pose that he lays aside $1,000 per year and has a loss of
$10,000 the second year. It is apparent that this is not in-
surance in the real sense of the word.
Such a plan may be attempted, of course, under widely vary-
ing conditions. The illustration of life insurance furnishes an
extreme case of a field in which self-insurance is entirely in-
applicable. Here, as we have previously seen, the person whose
life is at risk has no assurance that the fund he accumulates will
be sufficient, by the time the loss occurs, to cover that loss. He
has no distribution of risks and consequently no law of average
to rely upon. This is not self-insurance; it is gambling with
death. On the other hand, let us suppose that a shipping com-
pany possesses fifty vessels ranging from $40,000 to $80,000 in
value, all engaged in different trades. Let us suppose that the
corporation has figured that $50,000 is the correct amount to be
annually set aside in the insurance fund. In this case the self-
insurance plan can be operated with a greater prospect of suc-
cess. It is hardly likely that many of these vessels will be lost
in any one year, and should the losses or repair bills of one year
be extremely high, it is probable that the following years will
be low enough to counter-balance this exceptionally poor luck.
There are two elements here present which were not present in
the life insurance illustration; (1) a number of risks are cov-
ered instead of one, and (2) the risks are distributed and not
subject to identical hazards.^
Between these two extremes are varying degrees of safety
in the self-insurance plan. Where the two elements described
above are present the disadvantages of the self-insurance plan
are considerably reduced. Where these elements are to a large
degree lacking it would be much better for the business man
to at least supplement his self-insurance plan for a time with
* Compare, for example, the variations in fire losses in these two cases:
Penna. R. R. Co. City of Philadelphia
1908 $10,583 $ 2,469
1909 20,115
1910 18,808 5,313
1911 19,722 47,434
1912 20,343 10,939
1913 47,298 2,043
1914 18,468 8,865
30 INSURANCE PRINCIPLES AND PRACTICES
some other form of protection; later, if the self-insurance plan
is successful he may gradually reduce the other forms of insur-
ance he carries. In attempting to carry his own liability or
compensation insurance he must bear in mind also that the
cost is likely to increase, inasmuch as claims continue to come in
long after the accidents have occurred. States usually permit
self-insurance of the compensation risk only where the employer
can satisfy the authorities that he is financially able to carry the
risk.
2. Mutuals. — The self-insurance plan is plainly inadvisable,
due to the risk involved, for the small owner who possesses
only one or a few properties. Therefore a mutual plan has
been devised whereby small owners are enabled to insure them-
selves by combining their risks. The various individuals pro-
ceed to do jointly, under this plan, what would be impossible
individually. We might take the law of one State as an illus-
tration of the manner in which a mutual fire insurance com-
pany may be organized. At the time of organization a guar-
antee capital of not less than $25,000 must be provided by
issuing shares which shall receive dividends of not more than
7 per cent annually. This guarantee capital is Intended only
as security for the payment of losses until the mutual is fairly
started in business and is applied to losses only after its other
assets have been exhausted. When the surplus of the mutual
amounts to 2 per cent, of the total insurance in force the guar-
antee capital shall be retired and such capital may be retired
by vote of the policy-holders and the consent of the insurance
commissioner when the net assets of the company over and above
its liabilities and reserve are for two years last preceding its
last annual statement equal to 25 per cent, of the guarantee
capital.^
Under this plan every member of the mutual organization
becomes an insurer and an insured. Every member makes him-
self liable for his share of the losses which may occur. It may
happen that the premiums collected are In excess of the amount
needed to pay losses, in which case the excess is returned to the
policy-holder as a "dividend" — this term being a misnomer. In-
asmuch as the return is really not profits but saving. States
have sometimes mistakenly decided to tax such dividends as if
they were similar to the profits made by a commercial under-
* See Appendix CI., for balance sheet and statement of a marine insurance
mutual. See also Appendix XXIX and page 96.
TYPES OF INSURANCE ORGANIZATIONS 31
taking. If, on the other hand, the amounts collected are in-
sufficient to pay the losses, the members of the mutual organi-
zation may be called upon to pay an assessment. Thus the
law referred to above provides that mutuals shall collect the
full premium in cash or notes payable, but the contingent
liability of each member shall be not less than an amount equal
to the cash premium written in the policy. The policy-holder
is liable for all losses incurred while he is a member of the
organization.
It follows from what has been said above that the amount
for which the member of the mutual organization is liable is
indefinite. The premium which he originally pays may or may
not be sufficient to cover the losses which subsequently occur.
Some of what he has paid may be returned to him or he may
be called upon to pay more. It is apparent then, that the
mutual organization may follow either of two policies. It
may collect in advance a sum more than sufficient to cover the
risk and return the balance, or it may collect an insufficient
amount with the idea that it will later collect anything addi-
tional which may be required. The former plan has usually
been successful; the latter usually a failure. This, of course,
is a general statement and not intended as a reflection on or a
recommendation of any particular organization following either
plan.
We can briefly summarize the remaining features of the mu-
tual by stating the advantages and disadvantages claimed for
the plan. The advantages are:
a. Where no commissions or very small ones are paid to
agents, mutuals claim to be able to do business at a smaller
cost than other organizations. (This does not apply to life
insurance.)
b. Any profits or savings which are made go to the policy-
holders and not to the stockholders.
c. The mutual is theoretically under the control of the policy-
holders.
d. The mutual can exercise a more careful selection of risks.
(Inapplicable to life insurance.)
e. The mutual is interested in the reduction of losses.
f. Many mutuals have operated without finding it necessary
to call for assessments.
g. The policy-holders will naturally look after their owa
interests very carefully.
32 INSURANCE PRINCIPLES AND PRACTICES
The disadvantages which the mutual is said to be under are
as follows:
a. If small, the mutual runs the danger of being unable to
pay losses in case of great disaster.
b. If working in a large territory, the advantage of selection
of risks and of careful oversight is partially lost.
c. No second party, such as the stockholder, intervenes be-
tween the policy-holder and possible loss.
d. The contract Is indefinite, since the policy-holder may be
called upon to pay further premiums.
e. The expenses of agents are justified by the service they
render and these services are not fully rendered by mutuals.
f. The control of a mutual is in reality no more in the hands
of the average policy-holder than is the stock company control.
g. The mutual is no better managed than the stock company
because the stockholders of the latter are very careful about the
management, since their dividends depend upon it.
In life insurance mutual companies have gradually attained
a position of preeminence; at the present time their number and
the amount of business written exceeds that of the stock com-
panies. With the exception of the fact that policy-holders in
a mutual company receive a participating policy, there is little
difference between the mutual and the stock life insurance com-
pany. Even this difference almost disappears when the divi-
dends of the life Insurance company stockholders are limited
to a definite figure, such as 6 per cent., and the stock company
Issues only participating policies. In compensation Insurance,
likewise, the mutual companies have gradually obtained a great
share of the business, although In most States a larger amount
Is still written by stock companies. In casualty Insurance the
mutual Is little known, and In marine insurance there is only
one Important mutual In the United States. In fire Insurance,
"factory mutuals" and mutuals formed In particular trades
have been successful and have come to occupy a well-recognized
position in the business.
3. Reciprocals. — The reciprocal organization Is a develop-
ment of the mutual idea. Here the various policy-holders are,
as In the mutual, both Insured and insurers.' The active head
of the organization, however. Is an attorney-in-fact who has
been given authority to conduct the affairs of the organization
through powers of attorney conferred upon him by the various
'For statement of a reciprocal see Appendix LX.
TYPES OF INSURANCE ORGANIZATIONS 33
members. The entire management is subject to his control
with only such limitations as are provided for by the terms of
the organization and the written powers of attorney/
• The advantages of this form of organization most frequently
referred to are the following:
a. The elimination of expense through the conduct of the
business at cost, with the exception of any amount which may
be paid the attorney for his services. The amount which the
attorney is to receive and the expenses are usually limited in
some manner.
b. The elimination of profit, Inasmuch as the excess which
is collected is refunded to the policy-holder.
c. The direct interest which each member has in the success
of the organization.
d. Some provisions usually exist for preventing large losses
through conflagration, such as a re-insurance arrangement with
another insurance organization.
e. Elimination of the cost of the constant struggle to obtain
new business In the form of commissions to agents.
f. Assessments are usually limited. Whether such limita-
tion Is legal or not is hard to say.
Such organizations are criticised on the following grounds:
a. The fact that the cost of a policy Is Indefinite, the mem-
bers being liable for assessment,
b. The Immense control which rests In the hands of the at-
torney-in-fact, whose authority Is only recalled by the members
revoking their powers of attorney.
c. The large sums which have been made by attorneys who
have operated such plans for their personal profit alone.
d. The failures of some reciprocals, due to inability to pay
losses or collect assessments.
Reciprocals are quite common in the fields of fire insurance
and automobile insurance.^ The method has been very little
applied in life, accident, health, compensation or marine Insur-
ance.
4. Stock companies. — A stock company Is organized for
profit, the stockholders being entitled to any gains that may
result from the operation of the business and responsible for
any losses which may be Incurred. The capital Is provided by
the sale of shares of stock and the law requires a certain mln-
* For power of attorney used see Appendix LVIII.
' For policy see Appendix LIX.
34 INSURANCE PRINCIPLES AND PRACTICES
imum paid-in capital, which must be maintained unimpaired.
Usually a stock company possesses also a more or less substan-
tial surplus as an additional guarantee to the policy-holders.*'
The stockholders adopt by-laws and obtain a charter from the
State authorities, after which officers and directors are elected.
The advantages claimed for the stock company are:
a. A good business organization which operates efficiently.
b. Expenses maintained at a low figure because the stock-
holders' self-interest requires this.
c. Better service than is afforded by mutuals and reciprocals.
d. A definite contract of insurance with the premium ab-
solutely fixed In advance.
e. A capital and surplus as a guarantee and protection to
policy-holders.
f. Usually a good distribution of risks and consequently
better working of the law of average.
On the other hand its disadvantages are claimed to be:
a. A high expense rate due to the Impersonal character of
the management and the commissions paid to agents.
b. No better service than Is rendered by other organizations.
c. Control of the company Is in the hands of the stockholders
and not the policy-holders.
d. Experience has shown that mutuals, etc., have been able
to operate safely at lower rates.
e. The distribution of risk Is no more satisfactory than that
of a large mutual or other organization.
The stock company is found In all fields of insurance. Its
principal advantages are the definite contract which it is able
to offer and the capital and surplus which serve as a guarantee
to the policy-holder for the payment of possible losses. The
competition In the Insurance business Is keen and the rate of
failure among stock companies, as well as others, has been
very high.
5. Lloyds associations. — The most prominent association
of this type Is Lloyds of London, which has served as a model
for similar organizations. The Lloyds Association is an
association of individual underwriters, eilch of whom be-
comes personally liable for the amount of insurance for
which he subscribes. It is therefore insurance written by
individuals as contrasted with insurance written by companies
or associations. One individual is not responsible for the ful-
For statement of a stock fire insurance company see p. 247.
TYPES OF INSURANCE ORGANIZATIONS 35
fillment of the obligation of others. London Lloyds Is an
extremely strong organization that has a long and satisfactory
history, for the membership- is very carefully selected and de-
posits are required for the security of the policy-holders. The
necessity of upholding its past reputation compels this associa-
tion to see to the prompt payment of its members' obligations.
Unfortunately, some organizations bearing the name of Lloyds
were not operated upon the same basis and have brought the
name into some disrepute In this country, although a number
of successful organizations have been In existence for some
time.
The advantages of this form of organization are :
a. Their business is usually limited to some specific line
where careful selection of risks Is possible.
b. IVIany persons who are Insured are also underwriters, al-
though this Is not necessarily true.
c. Individuals of large financial resources are often under-
writers on policies, with unlimited liability.
d. By operation within a restricted territory, expenses are
considerably reduced.
e. Agents' commissions are sometimes dispensed with.
The criticisms of such associations have been:
a. The security of the organization depends entirely upon
the Individuals who compose It.
b. Some organizations allow members to limit their liability,
so that a number of good underwriters are found to be liable
only to a very limited degree.
c. Such organizations have been frequently used by dis-
honest persons as a source of personal profit.
d. Their operations are very diflficult of government regu-
lation by reason of the individual nature of the contract.
e. The resources of the underwriters are sometimes Insufii-
cient for the amount of risk undertaken.
Such associations are unknown In life, accident, health and
compensation insurance, but common In fire and marine in-
surance. London Lloyds, however, accepts risks of every class,
even to contracts which are practically gambles, such as the
insurance of losses through the state of the weather, the fall
of kings and a state of war.
6. State insurance. — By State Insurance we understand an
insurance enterprise operated by the State or nation, the gov-
ernment assuming liability for the payment of the losses. Such
2,6 INSURANCE PRINCIPLES AND PRACTICES
plans are not numerous in the United States, although gov-
ernment insurance in Europe is quite common. The most suc-
cessful form of State insurance in the United States has been
the "State fund" organized for the insurance of the compensa-
tion risk.^ These are more fully discussed in the chapter on
liability and compensation insurance. The_State usually furn-
ishes a fund with which to begin business, which fund assumes
practically the form of a mutual managed by the State. The
premiums collected are usually slightly less than the premiums
of the stock companies and the balance remaining after the
payment of losses is returned to the policy-holders. Some State
funds have been very successful, others only moderately so,
while still others have been criticised as inefficient, wasteful
and unsatisfactory. Such State funds may be divided into two
classes :
1. Those which are made monopolies, no other form of com-
pensation insurance being permissible.
2. Those which are competitive, existing side by side with
the stock companies and private mutuals.
One State in this country has attempted to operate life
and fire insurance plans, but thus far none of these attempts
can be considered a great success.* The principal obstacles to
the plan seem to be : ( 1 ) the inability to secure a sufficient vol-
ume of business and (2) the political character of the man-
agement. The natural results of these two factors are a high
expense rate, a small volume of business and insufficient assets
to meet losses. National government insurance of marine
risks was very extensively adopted during the war and served
to supplement the efforts of private companies to supply the
large amount of insurance then demanded. In the United
States this form of insurance was very helpful in meeting the
emergency then existing but afterward was abandoned. It
served the purpose of insuring American and Allied vessels and
cargoes against the ordinary marine perils and against the war
risk. Likewise the government maintained a fund for the self-
Insurance of its own vessels.
When the United States became actively engaged In the
World War in 1917, It was soon realized that some provision
should be made for insuring the lives of soldiers and sailors.
At the same time It was evident that the rates which old line
' See Appendix XXVIII for a statement of operations of such a State fund.
* See, for example, the State life insurance fund of Wisconsin.
TYPES OF INSURANCE ORGANIZATIONS 37
companies would have to charge for so dangerous an occupa-
tion were prohibitively high. Congress therefore decided that
the Government should bear the excess burden and on Octo-
ber 6, 1917, passed the War Risk Insurance Act which, in ad-
dition to providing for family allowances and allotments, and
compensation for death or disability, granted benefits In the
form of voluntary Insurance. In order to administer the
affairs of such an undertaking, a separate division was estab-
lished In the Treasury Department known as the Bureau of
War Risk Insurance, which was placed under the supervision
of a Director, subject to the general supervision of the Secre-
tary of the Treasury.
None but those actively engaged in the service of the Army
or Navy was eligible to obtain this Insurance, which was
granted upon application to the Bureau and without medical
examination within 120 days of entrance to the service (or be-
fore April 6th, 1917) and before discharge or resignation.
The applications were handled through the Army and Navy
Insurance and Allotment Officers designated In the Quarter-
master and Paymaster Corps respectively.
The type of insurance was a one-year renewable term poHcy
of the increasing step-rate variety, convertible into a perma-
nent form within five years after the signing of the proclama-
tion of peace. The amount obtainable was a multiple of $500
and not less than $1,000 nor more than $10,000, and the rates
charged were the net rates of the American Experience Table
on a 3^ per cent, basis, reduced to a monthly premium. The
coverage was for death or total and permanent disability, and
the proceeds In event of loss were payable at the rate of $5.75
each month per $1,000 of Insurance in force. The total In-
surance written on this plan reached approximately 38 billions
of dollars. The premiums collected during the war amounted
to 300 millions, and the losses to over one billion, which means
that the United States bears a loss of over 700 millions, pay-
able from other revenue.
In regard to the conversion privilege and In pursuance of
Section 404 of the Act, regulations have been Issued specify-
ing the types of insurance into which the temporary or war
insurance may be converted. Thus far, six kinds of perma-
nent policies have been Issued:
1. Ordinary-Life.
2. Twenty-payment Life.
38 INSURANCE PRINCIPLES AND PRACTICES
3. Thirty-payment Life.
4. Twenty-year Endowment.
5. Thirty-year Endowment.
6. Endowment maturing at age 62,
The rates on these are calculated on the same basis as the tem-
porary insurance except that allowance is made for annual,
semi-annual and quarterly premiums. In this connection it
should be explained that under the original Act no provision
was made for the separation of this converted insurance
from the temporary, nor was any settlement made
possible except by monthly installments. An amendment to
the Act was passed December 24, 1919, and among other
liberal provisions it provides for settlement by means of a lump
sum or other optional methods; it extends the class of possible
beneficiaries; and it authorizes a separate life insurance fund
in the United States Treasury for the converted insurance.
These changes, added to the fact that the insurance is par-
ticipating, that all overhead and administrative expenses are
borne by direct government appropriation and that it includes
the most' liberal total and permanent disability clause ever
placed in a policy, make it most attractive. However, the
insurance was not "sold" originally and as a result the lapses
have been enormous, only the more intelligent having retained
their insurance. Even the liberal reinstatement provisions pro-
mulgated by the Bureau have been only partially successful in
preventing lapses. The early administration of the Act was
faulty in the extreme, and the greatest efforts are now required
to correct the confusion and abuses caused thereby.^
" For a statement of operations of the War Risk Bureau, see Appendix XV.
Chapter IV
ORGANIZATION OF THE INSURANCE BUSINESS
Organization. — A discussion of the organization of the
insurance business must be divided into two parts. We must
distinguish in the first place between personal insurance and
property insurance, where the systems of doing business are
sufficiently different to warrant such distinction; and secondly,
between the internal organization of a company and the volun-
tary agreements entered into by companies and agents intended
to foster common action.
Personal Insurance. — The following discussion is based
upoQ the organization of a life insurance company, but many
of the statements made are equally applicable to the transaction
of the accident, health and compensation insurance business.
The best introduction to this subject is a presentation of the
excellent outline of Mr. J. B. Lunger.^
Officials:
r Board of Directors
A. Deliberative bodies ">
L Committees of the Board
r President
B. Executive officials \ Vice-Presidents
L Treasurer
r Comptroller
C. Administrative officials. A Secretary
L Superintendent of Agents
r Actuary
D. Advisory officials \ Medical Director
L Counsel
Directed by the above officials we find the following office
departments :
I. Agency
II. Financial
III. Actuarial
IV. Medical
V. Legal
VI. Bookkeeping
VII. Auditing
VIII. Claims
IX. Real Estate Loans
X. Policy-W^riting
^"Yale Insurance Lectures," Volume 1, pp. 112-125.
39
40 INSURANCE PRINCIPLES AND PRACTICES
XI. Policy Loans
XII. Inspection
XIII. Policyholders' Bureau
XIV. Editorial and Advertising
XV. Supply
XVI. Mail
XVII. Filing
To co-ordinate the work of departments, committees of
officials meet as follows :
I. Committee on Agency Methods
II. Committee on Review of Applications
III. Committee on Clerical Efficiency
IV. Committee on Claims
V. Committee on Office Methods and Systems
It is hardly within the scope of this volume to attempt a con-
sideration of the various duties and classifications of the diff-
erent offices and departments, as we would then be entering
the field of corporate management. We therefore pass to a
consideration of that portion of the organization with which
the policy-holder comes in more direct contact, namely the field
force.
The Field Force. — An agency system is apparently an
absolute necessity in life insurance, since one of the strongest
companies, after giving up the solicitation of business, saw its
policies in force dwindle to almost nothing. This part of the
organization is highly important for at least two reasons. ( 1 )
It keeps the organization alive as a going concern, and (2) it
is the point of contact between the company and the policy-
holder.
General Agents and Managers. — The methods of handling
agents may be classified in two groups ( 1 ) the general agency
system, and (2) the branch office system.
1. The General Agency System. — This method consists in
dividing the country into territories, to each of which is as-
signed a general agent who has control over the definite field
for which he is responsible. If he produces results he may
regard the district as peculiarly his. On all business which
may be written within that territory he is entitled to a certain
initial commission and renewal commisisons on subsequent
premiums paid. The general agent agrees to promote the
company's interests; to use his best efforts in obtaining and
maintaining a satisfactory agency force; to pay his own ex-
penses and to employ the required sub-agents. In some
ORGANIZATION OF INSURANCE BUSINESS 41
instances the general agent is a large producer of business him-
self and in others he is principally an executive who employs
and directs others who actually write the business. In any
event it will be noticed that the general agent works to a
large degree on his own account and pays his own expenses.
His remuneration depends upon his success.
2. The Branch Office System. — When organized according
to this method the company establishes districts throughout the
country and places them in charge of branch office managers.
A branch office is under the manager's direction, but his powers
are more limited than those of a general agent, inasmuch as he
is directly under the control of the home office, while the general
agent usually manages his territory in any manner he pleases
as long as satisfactory results are produced. The manager
secures agents and directs their work but the contracts made
with such agents are subject to the approval of the home office.
The remuneration of the manager consists of ( 1 ) a definite
salary, and (2) certain bonuses for increases in the volume of
business. It will be noticed that the manager is thus merely
an extension of the office itself.
In conjunction with either of the above plans we may have
the appointment of agents directly by the home office, who are
not subject to the supervision of the general agents or managers
and whose territory may be more or less restricted. There is
also in life insurance the brokerage system, whereby the seller
of life insurance effects an agreement for remuneration with the
general agents of several companies; but under these circum-
stances he is really an agent of several companies rather than
a broker in the sense that this term is usually understood.
Each of the methods referred to above has certain advantages
and disadvantages; both have been successfully applied.
Agents. — Under either the agency system or the branch
office system the bulk of the business is obtained, not by gen-
eral agents or managers, but by sub-agents employed by them.
Under the agency system these sub-agents are really employed
by the general agent, although they may be legally considered
as agents of the company. The general agent enters into a
contract with them whereby they agree to certain terms of
employment and receive in return an initial commission and
renewal commissions on subsequent premiums. Commissions
are usually in the form of percentages of the premium paid
by the insured. Thus the general agent may pay over to the
42 INSURANCE PRINCIPLES AND PRACTICES
sub-agents his whole initial commissions and a certain propor-
tion of the renewal commissions he receives from the company.
Or the general agent may pay to the sub-agent a proportion
of both his initial commission and subsequent commissions.^
Under the branch office system, of course, the agent receives
his commissions directly from the company. Two methods of
paying commissions have been utilized. The first system is
to pay the agent from 25 to 50 per cent of the initial premium
and thereafter 5 per cent on subsequent premiums for a term
of say, eight years. Another system is to pay the agent a
considerably higher percentage of the initial premium and to
dispense with renewal commissions.
Property insurance. — The system described below is that of
fire insurance, but the main outline is generally true of marine
insurance and casualty insurance. The arrangements for cor-
porate bonding, title insurance and credit Insurance vary some-
what.
General agents. — If the extent of business warrants It, the
company may divide the country into districts, placing each in
charge of a general agent. The general agent in this case Is
only an extension of the home office, making contracts with
agents and subject to more or less strict supervision by the
home office.
Special agents. — The special agent is a direct representative
of the company and, as his name indicates, is employed for
particular duties. He is the direct connection between the
home office and the agent, or between the general agent and
the local agent. It Is his business to travel about the country
examining the work done by the local agencies, offering sug-
gestions as to how the business may be improved, contributing
his services In connection with rating problems, and settling im-
portant losses. The latter work is more generally performed,
however, by a special agent known as an adjuster. The special
agent Is supposed to be both an aid to the local agent and a
check upon his work.
Local agents. — The local agent Is the representative of the
company who directly writes the business. In general, his acts
and his knowledge are considered the acts and knowledge of
the company, although certain limitations are placed upon his
authority. The company depends to a considerable extent upon
his judgment in accepting a risk. Unlike life Insurance agents,
' See the agent's contract in appendix V.
ORGANIZATION OF INSURANCE BUSINESS 43
he has policies in his possession which go into force when
countersigned by him. Unlike life insurance agents, also, he
usually has a certain amount of control over the business he
writes and his clientele is much more his personal property.
He forwards to the company copies of the policies written ac-
companied by a daily report,^ and his financial transactions are
recorded upon a monthly report* which is forwarded to the
company and which forms the principal basis for the book-
keeping of the latter. The remuneration of the agent is a
commission in the form of a percentage of the premium. The
agent usually represents, not one, but several companies. He
sometimes has an exclusive territory but in large cities is
usually required to compete with others who are writing
business in the same locality.^ The commission systems em-
ployed are the following:
1. Flat commissions, where the agent receives the same per-
centage of commission on all kinds of business, say 25 per
cent.
2. Flat and contingent commissions, where the agent re-
ceives a flat minimum percentage on premiums reported from
month to month, and an additional payment at the end of the
year if the underwriting result on his business is profitable. For
instance, he may receive a 15 per cent, flat commission and
10 per cent, extra on the difference between the premiums and
the losses and expenses.
3. Graded commissions, where the percentage of the pre-
mium received by the agents depends upon the class of busi-
ness written. Thus, he may receive 25 per cent, on dwellings,
public buildings and their contents, etc. ; 20 per cent.
on churches, schools, colleges and their contents; 20 per cent,
on brick and stone mercantile buildings and 15 per cent, on
the contents of brick or stone mercantile buildings.
Brokers. — The broker, as contrasted with the agent, is the
agent of the Insured and not of the company, in spite of the
fact that he directly derives his income from the latter. The
insured is therefore generally responsible for the acts of the
broker, while the company is usually responsible for the acts
of an agent. The broker solicits the insurance from the prop-
erty owners and sells the same to the company either directly
' See appendix XLVII.
* See appendix XLVIII.
^ See appendix XLIX ,
44 INSURANCE PRINCIPLES AND PRACTICES
or through an agent. Where conditions are more complex,
the services of the broker become more valuable. Thus in
large cities he furnishes the insured with the advice and serv-
ice necessary under these conditions, adapting the policy to his
needs, seeing that the necessary insurance is maintained, obtain-
ing the proper kind of policy with the necessary endorsements,
and advising him In case of loss.
Associations." — In all forms of insurance it has been found
desirable to obtain concerted action by means of associations.
In life insurance, such associations have been largely confined
to improving the moral tone of the business, regulating the
conduct of agents and affording a means whereby agents can
protect their interests by common action. In other forms of
insurance, however, such associations have assumed very
broad and important powers. The fire insurance business fur-
nishes the best illustration of the extent to which such associa-
tions influence the conduct of the business.
Fire underwriters' associations.^ — The following outline
will give a general idea of the different kinds of associations
and the scope of their work:
CLASSIFICATION OF ASSOCIATIONS
According to: —
National
Sectional
T , f Urban
Local < c u u
I. Suburban
I Technical and educational. Regulation
' \ of brokers and agents. Rate-making
r Company representatives
< Special agents
(^ Agents and broke
I^No distinction
1. Jurisdiction <
2. Functions
Occupation of
members
ters
3. Membership <
Classification of >
between members
members
Requirements
1. Without qualifica-
Classified J tion of voting power
membership j 2. With qualification
of voting power
{Adherence to agreed commissions to
agents
Adherence to stated scale of brokers'
compensation
'A considerable portion of the following is adapted, with the kind permission
of the publications concerned, from the author's monograph on "Fire Under-
writers' Associations," Chronicle Co., N.Y. ; his article on "Fire Insurance
Rates" in the Quarterly Journal of Economics, August, 1916; and his article on
"Ratemaking Organizations in Fire Insurance," ylnnals of the American Acad-
emy, March, 1917.
' Adapted, with permission, from Robert Riegel, 'Tire Underwriters Associa-
tions in the United States." The Chronicle Co., Ltd., New York, 1916.
ORGANIZATION OF INSURANCE BUSINESS 45
These cooperative bodies at the present time may be divided
into three classes: (1) the very numerous local associations,
which govern rates, commissions and brolcerage charges; (2)
the sectional bodies which restrict commissions and to some
extent supervise rates; and (3) the national associations,
which are now rather indirectly concerned with rates and
whose principal services are educational and technical In char-
acter. If we omit the minor detail of extent of jurisdiction,
we may make a two-fold classification; (1) educational and
technical associations and (2) commission-regulating, rate-
making bodies. Among the latter are some composed of com-
pany representatives, some of special agents, some of local
agents and brokers. All, however, constitute merely an effort
to do cooperatively what had previously been accomplished
individually.^
Example of a national association. — The most Important
national association Is the National Board of Fire Under-
writers, organized in 1866, membership in which is open, by
election at a meeting or by action of its Executive Committee,
to any stock fire Insurance company doing business In the
United States. There are now about one hundred and sixty
member companies. Until 1878 It was a rate-making organ-
ization but since that time It has exercised neither jurisdiction
over rates nor concerned itself with them and is conducted
along lines best designated as " educational and technical,"
having the following purposes:
1. To promote harmony, correct practices, and the princi-
ples of sound underwriting; to devise and give effect to meas-
ures for the protection of the common interests, and to pro-
mote such laws and regulations as will secure stability and
solidity to capital employed In the business of fire insurance
and protect It against oppressive, unjust, and discriminative
legislation.
2. To repress Incendiarism and arson by combining In suit-
able measures for the apprehension, conviction, and punishment
of criminals guilty of those crimes.
3. To gather such statistics and establish such classification
of hazards as may be for the Interest of members.
4. To secure the adoption of uniform and correct policy
forms and clauses, and to endeavor to agree upon such rules
and regulations In reference to the adjustment of losses as
* For examples of their jurisdiction see maps, Appendix L.
46 INSURANCE PRINCIPLES AND PRACTICES
may be most desirable and in the best interest of all concerned.
5. To influence the introduction of safe and improved
methods of building construction, encourage the adoption of
fire protective measures, secure efficient organization and
equipment of fire departments with adequate and improved
water systems, and establish rules designed to regulate all
hazards constituting a menace to the business. Every mem-
ber is in honor bound to co-operate with every other member
to accomplish the desired objects and purposes of the Board.
The expenses of the Board are borne by assessments upon
member companies in proportion to their net fire premiums
in the United States, and are apportioned upon the receipts
of the preceding year. The officers are a president, vice-presi-
dent, secretary and treasurer. The activities of the association,
as of most underwriters' associations, are controlled by various
committees, each of which devotes its attention to a particular
field.
The services of national associations. — We may summar-
ize the services of national associations of the type considered
as follows;
1. They educate the public to an understanding of the value
of insurance in the reduction of risk.
2. They bring about harmonious co-operation of fire com-
panies and underwriters toward aims broader than merely pro-
viding indemnity for loss.
3. They have reduced various expenses which, of course,
ultimately fall upon the insured, such as,
a. Expense of watching legislation.
b. Expense of protesting against unjust laws.
c. Expense of reducing arson.
The effectiveness of efforts along these lines has been cor-
respondingly increased.
4. They have compiled and published statistics of the insur-
ance business which are recognized as standard — the National
Board Tables — and have made instructive comparisons of data.
5. They have endeavored to reduce arson and incendiarism.
6. They have inspected and criticised the protective facil-
ities of cities and towns and have suggested improvements
therein.
7. They have furnished consulting engineers to assist in
all kinds of construction and to give advice on apparatus and
ordinances.
ORGANIZATION OF INSURANCE BUSINESS 47
8. They have set up standards for the installation of light-
ing and heating devices.
9. They have formulated codes as guides to correct build-
ing.
10. They have improved methods of adjusting losses.
11. They have been largely instrumental in causing the
adoption of a standard fire policy and have formulated stand-
ard forms and clauses.
12. They have tested and inspected fire preventive and pro-
tective devices of all kinds and have established a standard of
efficiency for such devices.
13. Finally, they have been the greatest factor in educating
the public to the fact that reduction in fire losses means reduc-
tion In insurance premiums and that the latter Is principally
dependent on the former.
The above is only a partial list of the services rendered by
these organizations; yet It Is hoped that it is sufiicient to show
the benefits derived by the public from their existence, sup-
ported though they are principally by private capital. Their
very existence is suflScIent to show that Insurance companies
and underwriters are not concerned wholly with furnishing
Indemnity, and with profits and losses, but perform other real
and useful services to society. While Indemnity for loss is an
indirect and negative service of Insurance In the sense that
insurance does not replace what is lost, the above presents
another aspect of the business, showing results which, although
Indirect, are yet positive In character.
Services and functions of sectional and local associa-
tions. — We now proceed to consider the sectional and local
associations, which are commission-regulating, rate-making
bodies. We may pass over the form of their organization,
which is generally a system of committee government, and
concentrate attention upon the purposes for which they were
organized and upon the services they have rendered.
These sectional and local associations were necessities of
the times for the prevention of rate-cutting and excessive ex-
pense and for the enforcement of cooperation. They have
performed the following economic functions:
I. Services in promoting economy.
A. In the making of fire Insurance rates they enable the
saving of great labor and expense. A single Inspection and
a single rating suflftce for all the companies In a given territory
48 INSURANCE PRINCIPLES AND PRACTICES
and a common agency performs the work, for all. Instead of
thousands of inspectors individually acting as expert buyers
(as they may be termed) for separate companies, which nat-
urally involved great duplication of effort, a much smaller
number is sufficient to enable these associations to make a com-
mon rate for all companies on each risk in a given territory.
These rates are distributed to agents operating in the territory
who are members of the association. Cooperative action,
with its consequent saving, replaced individual effort. Nor
does this accurately measure the extent of the saving, for we
have not considered that reduction of expense which naturally
follows specialization and division of labor.
B. One methoci of meeting competition in a period of un-
restrained rivalry is by increased commissions to agents. Above
a reasonable figure this is no advantage to the insured; it is
rather an added burden. By means of associated action ex-
cessive commissions are prevented and the "rebate" elimi-
nated.''
C. A watchful eye may be kept upon insurance legislation
without duplication of expense, in order to prevent laws which
are prejudicial alike to insurer and insured.
II. Services in promoting standardization.
A. Nothing has had so much influence upon the develop-
ment of scientific, standard methods of rating as these sectional
and local associations. They have also furnished an agency
through which rate-making systems generally may be intel-
ligently applied and new systems developed. When a num-
ber of companies pool their facilities to obtain a rate it must
be admitted that the result is more probably just and adequate
than where the charge is the result of competition or is influ-
enced by it. It is impossible for ruinous competition in the
insurance business to prove of any lasting advantage to the
policy-holder. In most other businesses the result of com-
petition among producers or distributors is an advantage, more
or less permanent, to the consumer. In purchasing insurance,
however, it is impossible for him to receive the same article at
the reduced price. The commodity he purchases is not deliv-
ered to him at once but over a term of one year, three years
or five years. If the price is reduced by 25 per cent, the sta-
bility of the selling company is reduced and this stability is
the only guarantee that the consumer will receive the paid-for
• See Appendix XLIX.
ORGANIZATION OF INSURANCE BUSINESS 49
protection. The company, in other words, after the advance
payment of the premium, stands in the position of debtor to
the insured and it is to the advantage of the latter to have
it in as good financial condition as possible. Adequate rates
are, therefore, to the common interest and in bringing them
about the associations render a service to all. Stamping de-
partments, through which all policies have to pass, were estab-
lished to prevent secret price-cutting and promote standardiza-
tion. There is a division of opinion on the subject of loss sta-
tistics; but if they are of value in rate-making the association
presents itself as an effective medium for their collection and
standardization.
B. They standarize the reductions which are made for
"long-term" policies and establish standard tables of "short-
term rates.-'''
C. The advantages which resulted from the adoption of
a standard fire policy will be shown later. Similar benefits
have resulted from the activities of the associations in stand-
ardizing clauses and forms."
III. Services in general.
A. By mutual acquaintance and expulsion of undesirable
members the associations have reduced objectionable practices
in the business to a minimum. In this respect they may be
compared with stock and produce exchanges.
B. Mutual consultation and assistance have enabled
underwriters to formulate policies to meet local and national
emergencies.
C. They have been instrumental in preventing fire, and in
increasing fire protection facilities.
Organizations of underwriters were formerly, and are
under the present system, as much economic necessities as rail-
road traffic associations, steamship pools, export associations,
lumber dealers' associations, trades unions or butter and egg
"exchanges." They were necessary to terminate rate wars
and to insure against future endangering of company solvency
by struggles for business at inadequate, profitless rates. Even
the insured derived no benefit from the latter. In no business
is a price reduction at the expense of quality an undiluted ad-
vantage, and every inadequate insurance rate reduced the sta-
bility of the company and the value of its promise to pay in-
" See Chapter XVI, p. 236.
" See Appendices XXXI to XL inclusive.
50 INSURANCE PRINCIPLES AND PRACTICES
demnity. The small property owner, indeed, suffered a reduc-
tion in his prospective indemnity's quality without enjoying
any corresponding cheapness of rate; for the large insurer, in
an era of unstable rates, is always the one able to command
the reductions. The history of the railroad business is a well-
known example of this fact. Competition in rates results in
discrimination; the tariff associations were designed to pro-
mulgate and enforce uniform charges.
In spite of the legitimacy of the associations' objects, the
advantages of which have long been recognised in foreign
countries, abuses crept into the system while unrestrained by
intelligent regulation. The opponents of the system alleged,
and in some instances proved, ( 1 ) an absence of classified
statistics to support the rates made, (2) discrimination, and
(3) arbitrary control of the licensing of brokers. These are
considered at greater length in the chapter on fire insurance
rates.^^
" For a more extended discussion of Underwriters' Associations see Robert
Riegel, "Fire Underwriters' Associations," Chronicle Co., N. Y.
Part II
PERSONAL INSURANCE
51
Chapter V
TYPES OF LIFE INSURANCE POLICIES
Importance of selecting the proper policy. — When securing
a life insurance policy there are two things in which the pur-
chaser is preeminently interested. First, he wants to know
how much he has to pay in the form of a premium and sec-
ondly, what the insurer promises in return. Both will depend
on the nature of the policy obtained, for many variations
exist. These differences have been introduced to meet the
needs and circumstances of distinctive cases, with the result
that a person desiring insurance protection can secure a policy
which meets his requirements and fits his pocketbook. It
should not be assumed from this that any one policy is
"cheaper" or "better" than another, except for a particular
purpose, because all are on a mathematically equivalent basis;
and although the premium on one type of policy may be lower
than on another, the difference is mathematically justified. In
all cases the insured gets just what he pays for, no more and
no less; the price of life insurance, unlike the price of many
other commodities, is based on cost. While no particular
policy is universally better than another, there is usually one
policy that is more nearly adapted to individual needs than
any other, as is true of other commodities. Prices, sizes and
styles vary to meet the desires and requirements of the buyer.
Therefore we proceed to a discussion of the various types of
policies and the circumstances to which they are best suited,
viewing them with respect to ( 1 ) what the insured must pay,
and (2) what he or his beneficiary receives.^
The single-premium policy. — To start at one extreme, let
us first take the case of a wealthy individual, the owner of a
large and, at present, prosperous enterprise. He is now amply
supplied with cash but he knows that history supplies many
examples of men who were once rich and later poor. He
knows that a business which has taken years to build up may
* For sample of a life insurance policy see Appendix III.
53
54 INSURANCE PRINCIPLES AND PRACTICES
disappear in a few months, often through no fault of the
owner, and that investments considered "gilt-edge" may some-
times involve the loss of millions. He wishes to protect his
dependents absolutely, without the chance of any inability on
his part or theirs to meet the premium payments of the future,
and therefore he does not desire to enter into a contract in-
volving the payment of premiums for a term of years or for
his lifetime. Here is a perfectly definite situation which de-
mands a definite solution and obviously not every kind of a
policy will meet his needs.
We find by inquiry that several companies quote a rate
known as a "single premium." This is exactly what its name
implies, and means that for the payment of one sum of sufficient
size a company will assume all the liabilities of a life insur-
ance contract and will never collect any additional sum from
the Insured. This meets the needs of our hypothetical but not
unique case. It can readily be seen that one premium of this
nature, which takes care of the policy for its entire duration,
will necessarily be a very large sum. Thus, if we examine
the rates of one company we find that at age 25 the single
premium on an ordinary-life policy for $1,000 is $400, while
the annual level premium on the same policy is only $20.70.
TABLE OF ANNUAL RATES ON VARIOUS POLICIES OF $1,000 EACH,
AT DIFFERENT AGES, IN AN OLD LINE MUTUAL COMPANY.
S-Year Re-
Or
dinary-
20-Payment
Id-Year
neivable Term
Life
Lifi
»
Endoiument
Age
Annual
Single
Annual
Single
Annual
Single
20.... 11.60
18.50
372.50
28.10
372.50
47.50
650.00
25.... 12.00
20.70
400.00
30.40
400.00
48.10
651.50
30.... 12.60
23.50
432.50
33.20
432.50
48.80
654.00
35. ...13.50
27.00
470.00
36.70
470.00
50.00
657.50
40.... 15.00
31.70
513.50
41.00
513.50
51.80
664.00
45.... 17.60
38.00
563.50
46.50
563.50
54.80
675.50
50.... 22.50
46.60
619.00
53.80
619.50
59.60
694.00
55. ...31.10
58.30
679.00
64.00
679.00
67.60
722.50
60.... 45.50
74.60
741.50
78.30
744.50
80.20
• • • ■
It Is evident that the advantages of the single-premium
policy are :
1. The insured is free from the trouble of providing for the
payment of the annual premiums otherwise required for a
long term of years or for the remainder of life.
TYPES OF LIFE INSURANCE POLICIES 55
2. The insured has the satisfaction of knowing that his
object is definitely accomplished and that no inability on his
part to pay premiums in the future can defeat that object.
3. The insured obtains the benefit of compound interest on
a large sum, which makes the aggregate which he actually pays
out less than it otherwise would be.
4. If the insured lives to an advanced age the amount he
pays as a single premium is less than the total he would have
paid In the form of annual premiums.
The disadvantages to the average person of the single-
premium method, however, are so great that it Is seldom used.
1. The sum necessary for a single premium is so large that
few persons are willing and able to pay it at one time.
2. If the insured has the sum necessary he may be able to
earn a larger rate of Interest on It than that earned by the
insurance company. In doing so he usually takes a greater
risk, however.
3. If the insured dies at an early age he has paid a very
great deal more for protection than if the premium were paid
annually.
We see, therefore, that the single-premium method Is totally
unsulted to the circumstances of the great majority of persons
and that It is useful only to the man of considerable means
who does not wish to be annoyed by future premium payments.
This Is not so slight an advantage as appears at first sight.
Many men of wealth have become almost penniless and even
objects of charity In their old age, and at their death have
seen their dependents left unprovided for. By the single-pre-
mium method they might have insured the future of their de-
pendents beyond a doubt when they were wealthy and well
able to do so. Another Illustration of the use of the single-
premium policy is found in the case of the wealthy man who
desires Insurance for some specific purpose, such as to meet
an Inheritance tax. When he Is amply supplied with funds,
he can afford to pay a single premium to insure the payment
of this tax upon his estate. It furnishes also a method by
which a life insurance policy may be presented as a gift, the
donor handing the recipient a full-paid policy with no obliga-
tions attached. It will be noted that the single-premium pay-
ment is particularly suited to the purchase of an annuity, the
insured "saving" a large sum immediately for the benefit of
assured periodical payments in the future. The single-prc-
56 INSURANCE PRINCIPLES AND PRACTICES
mium principle may be applied to any of the various kinds of
policies mentioned hereafter in this chapter.
Term insurance. — Turning now to the other extreme, there
is the man who needs insurance primarily for the protection
it affords. Let us imagine a young lawyer with fine prospects
for the future but with heavy family responsibilities and an
income as yet very small. This is the situation of thousands
of professional men at some stage of life. Obviously the
single-premium policy would be unsuited to his circumstances;
what he needs is the maximum protection with the minimum
cost. This can be secured by means of a "term" policy, which
is temporary insurance obtainable for various periods. This
is a contract by which the insurance company promises to pay
a stipulated sum upon death, provided death occurs within
an agreed-upon period — one year, five years, ten years, or
twenty years. If the insured outlives the period he receives
nothing. He pays simply for protection during the agreed-
upon period and the policy contains practically no investment
or saving element. The simplest form of term policy is that
which is issued for one year only and is renewed annually,
the insured being charged the so-called "natural-premium,"
based upon the probability of death within one year from the
attained age. At the younger ages this probability is very low,
resulting in the lowest annual cost of any type of policy; but
In the later ages, as the probability of death increases, the
cost mounts rapidly. Thus, we find that a company which
quotes a rate of $11.82 for a one-year term policy of $1,000
at age 25 charges $28.63 for a similar policy issued at age
SS. The same principle Is' extended to a five-, ten-, or twenty-
year period and provides for level premiums for the duration
of the period. Thus a person takes out a five-year term policy
at age 25 and pays an annual premium of $12. When he
reaches age 30, the term of the contract has expired and he
must renew the protection If he still has need of It. The prem-
ium for the new five-year term policy at age 30 Is $12.60.
The Insured may continue to renew the policy as long as de-
sired, without medical examination, provided it contains the
renewable feature, but it will be noted that In the later years
of life Its cost rises rapidly, like the natural premium.
Let us now assume the case of a young business man who
is applying to a bank for a loan. He is the principal asset
of the business, and the bank feels that without his personal
TYPES OF LIFE INSURANCE POLICIES 57
direction the other assets would be of little value. Under these
circumstances the bank may, and now frequently does, request
that it be given the protection of a life insurance policy, pay-
able to the business. It is evident that with the repayment
of the loan the necessity for the policy ceases, and under
these circumstances term insurance furnishes the cheapest
method of meeting the bank's wishes.
At the present time it is not uncommon for business insti-
tutions to finance the university education of promising em-
ployees. Philanthropic institutions also offer scholarships to
deserving young men. It is apparent that the benefit which is
expected from the payment of the tuition is incorporated in the
existence of the young man and that his death will wipe out the
value created by the education. A term policy would, at small
cost, protect against the loss of the tuition by premature death.
Let us consider the case of a man who has undertaken a
contract of purchase calling for periodical payments, as is the
case with hundreds of thousands of young persons purchas-
ing homes through building and loan associations. It is al-
ways taken for granted by such persons that they will live to
complete the payments and that their dependents will be pro-
vided with a place in which to live. A premature death will
end these hopes, however, and this unfortunate contingency
may be most cheaply protected against, or "hedged," by a
term policy for a period coinciding with the term of the con-
tract of purchase or mortgage. Five per cent of all policies
are of this type.
Summarizing the advantages of term insurance, we find that
they are as follows:
1. The cost is small. An annual premium for a five-year
term policy at age 25 is $12, while an ordinary-life policy at
this age costs $20.70 annually. This Is because of the absence
of any "saving" or "investment" element in the term policy.
Hence, this policy is ideally suited to the circumstances of the
young lawyer or physician who has assumed family obligations
upon a small Income.
2. It enables a person to secure the maximum protection
for a given sum. Thus, assuming that the young professional
man has $50 a year available for protection this will buy him
only $2,415 of ordinary-life Insurance, but $4,166 of term
insurance.
3. If the policy contains a renewable feature it may be
58 INSURANCE PRINCIPLES AND PRACTICES
renewed from time to time and the protection continued as
long as desired, without medical examination. If it contains
the convertible feature it may be converted into some other
form of policy, without medical examination.
4. The policy may be cancelled at any time without loss
to the insured.
The disadvantages of this type of policy must not be un-
der-estimated, however. They are as follows:
1. While the cost is small, this is because the insured is
saving nothing. Under the ordinary-life policy the savings
of the early years of life are utilized to reduce the premiums
of the later years, thus enabling a level premium. Under
the term plan, however, the premiums increase with age until
in later life they become, like the natural premium, prohibitive.
2. While the insured gets the greatest amount of protection
for the given sum, it is a type of policy which is peculiarly
likely to lapse. The insured himself has nothing to look for-
ward to and it is therefore a policy suitable only for the most
unselfish purposes. Many persons, becoming discouraged at
paying premiums and receiving nothing but protection, dis-
continue all insurance.
3. While it may be convertible into other forms of insur-
ance, such as ordinary-life, the insured must pay the premium
for the new form of insurance at the attained age, and said
premium is higher at the attained age than it would have been
if the final form of policy had been taken out originally. Thus,
if a young man at age 25 carries term insurance for fifteen
years and then converts it into ordinary-life insurance he
pays a premium annually of $31.70, whereas an ordinary-life
policy taken out at age 25 would have cost only $20.70 an-
nually.
4. Many persons are disappointed at the end of ten or
fifteen years of premium paying because they have accumulated
nothing, forgetting that the premium is small on a term policy
only because it furnishes nothing but protection and that they
have had the benefit of that protection for the period.
5. If the term policy does not contain the renewable and
convertible feature (which most of them do), the insured
may find himself without Insurance at a time when he needs
It most, because of inability to pass a medical examination.
This objection has no force where the renewable and convert-
ible privilege exists, as Is the case with the insurance which the
TYPES OF LIFE INSURANCE POLICIES 59
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Limited-payment. — There are many persons whose earning
power is limited to a certain period of life, as, for example,
a person whose work involves considerable activity or physical
effort. These individuals may be much in need of insurance,
but a policy requiring life-long payments is undesirable. Take,
for illustration, an actor who is twenty-five years of age and
whose present earnings are very large. He figures that at
best he cannot retain his skill and ability to amuse audiences
beyond fifty-five years of age, and the question arises in his
mind of how to meet payments after that time. The solu-
tion of his problem is a limited-payment policy; either a
twenty- or thirty-payment life exactly fits his needs. The an-
nual level premium on a twenty-payment life policy for $1,000.
62 INSURANCE PRINCIPLES AND PRACTICES
at age 25, according to our table, is $30.40, compared with
$20.70 for the ordinary-life contract. For a difference of $9.70
he makes certain that when he reaches forty-five years of age
his insurance will be fully paid for the balance of his life, re-
gardless cf how long he lives, and he obtains exactly the same
protection which the ordinary-life policy affords. The com-
pany has collected a higher premium but in return has prom-
ised that no more premiums shall be due after a certain date,
no matter how long the insured continues to live. After the
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payment of the first premium the proceeds are payable at
death if the policy has not lapsed. In a later chapter it will
be seen that all forms of premiums are reduced to a mathe-
matical basis, one equivalent to the other, and that the above
arrangement is a fair and equitable one to all concerned. If
the Insured should be so unfortunate as to die shortly after
the policy is issued he has, of course, paid more for the pro-
tection than under the annual-premium plan. On the other
hand, however, if his life exceeds the usual span he has paid
TYPES OF LIFE INSURANCE POLICIES eZ
less than under the annual plan. Thirty per cent of all con-
tracts issued are of the limited-payment type.
Endowments. — We will next consider the endowment pol-
icy, which promises payment upon death, if this event occurs
within a certain specified period, and also agrees to make the
payment in case of survival at the end of the stipulated
time.^
Naturally a policy that pays for either death or survival
over a designated number of years will cost more than one
which provides payment for death only. Thus, the company
whose rate is $20.70 per year for an ordinary-life policy of
$1,000 issued at age 25, charges $48.10«for a twenty-year
endowment issued at the same age for a like amount, $38 for
a twenty-five year endowment and $31.70 for a thirty-year
endowment. What particular advantage has this policy to
justify a higher premium? An illustration may help to make
this clear. If we take the case of a well-known New York
financier who received an income of $50,000 anually, but who
was not able to save any of it, we can realize how many per-
sons with a smaller income are frequently in a similar posi-
tion. This gentleman, one of the ablest financial men of his
time, spent his salary as rapidly as it flowed in, and all at-
tempts to save any of it were futile. This worried him, as he
was fully conscious that the time was approaching when his
income would diminish and he would have nothing laid aside
for the proverbial rainy day. An insurance salesman sug-
gested an endowment policy as a means of saving his money
and at the same time providing family protection. The com-
bination of this protection and investment feature appealed
to him and he v/as insured for $100,000 on a twenty-year
endowment policy.
A situation with less money involved is frequently encoun-
tered, particularly among younger men, and a contract which
compels them to lay aside a certain sum periodically acts not
only as an incentive to save but actually forces thrift upon
them.
To give another illustration of the usefulness of an endow-
ment, a person with a small amount of cash may safely
purchase a home with a lien against it and provide for the
retirement of the mortgage with an endowment policy. The
advantage is that, in event of premature death, the proceeds of
* For sample policy see Appendix III.
64 INSURANCE PRINCIPLES AND PRACTICES
the policy will be available immediately and prevent possible
foreclosure. If he adopts the method of paying the debt by
saving a certain amount each year an untimely death may cut
this short, while an endowment meets this contingency and the
sum is assured either at death or at the end of the endowment
period.
This form of policy may also be used to excellent advantage
by a contract on the life of a child which will mature about the
time he is old enough to attend college. In many cases this
is the only means whereby an education may be assured. Sev-
eral endowments maturing during each of the several years
while the son or daughter is attending college would further
facilitate matters. These "child" endowments may also be
used to give a young person a financial start in the world.
Or in the case of the "long-term" endowment, maturing when
the policy-holder is from sixty to seventy years of age, the
proceeds may be used to protect the insured against the con-
sequences of his economic death, i.e., the loss of earning power.
This may be done by placing the fund in trust; or by investing
Ei
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owment
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TYPES OF LIFE INSURANCE POLICIES 65
it and using the income from it; or by using the income and
a part of the principal each year; or better still, by the pur-
chase of an annuity. Twenty-year endowments form five per
cent of all contracts issued.
Annuities. — An annuity may be defined as an insurance con-
tract wherein the insurer, in consideration of a certain prem-
ium, promises to pay a definite income to the annuitant. This
contract may be purchased by a single premium and the pay-
ments by the company will begin six months or a year later.
This is called an "immediate" annuity. Or the annuity may
be bought by annual level premiums over a period of years and
the company begin its payments at the end of this term of
years. This is known as a "deferred" annuity and has the ad-
vantage over the preceding type that the premium is
spread out over a long period of years and the individual is
better able to pay in this manner than by one single premium.
The annuity policy may provide for annual, semi-annual,
quarterly or monthly payments, either for a certain term of
years or for the balance of the life of the annuitant, depending
on the kind of annuity purchased.
The advantages of annuities are: (1) a person can make
sure of receiving an income in old age; (2) he can safely
distribute an estate before death by making sure of a life
income for himself; (3) the rate of return on the money paid
to the insurance company is very high when the annuity is taken
out at an advanced age. The objection to either the immediate
or deferred annuity is that in case of death all premiums are
considered fully earned by the company and the contract is
terminated. This objection is sometimes removed by promising
that a certain number of installments of the annuity will be
paid even if death occurs and in the case of the deferred
annuity by providing that all premiums shall be returned in such
event. Of course additions to the premiums are necessary in
order to take care of such promises.
Installment insurance. — Although most persons think that
it is preferable to have the proceeds of the policy payable in
a lump sum, it undoubtedly would be better for the beneficiary
in the majority of cases if the policy were paid in installments.
The old adage of the widow with the proceeds of a life insur-
ance policy being "a shining mark for a mining shark" is just
as true to-day as ever. To protect the widow against the lure
of speculation the insured may obtain a policy providing that
66 INSURANCE PRINCIPLES AND PRACTICES
the proceeds will be paid in ten, fifteen, or twenty equal an-
nual installments. Many others arrangements may also be
made with regard to payment of the policy proceeds. If the
face of the policy is $10,000 and the proceeds are payable in
ten equal annual installments, the insurance company natur-
ally makes an interest allowance for the sums thus retained
each year up to the final payment. Therefore, it can afford to
make each installment something more than $1,000. On the
other hand, the policy may promise to pay the proceeds in
ten installments of $1,000 each, and in that case the face of
the policy is not the full $10,000 because of the interest allow-
ance. The installment method of paying the proceeds gives
rise to the name "income" policies, one of the best types of
insurance to make a person realize the amount of protection
he requires. Suppose we take the case of a married man with
a wife, two children, aged four and seven years, and an in-
come of $5,000 per year. Granting that a man uses one-half
of his income on himself, that would still leave $2,500 needed
annually for the rest of the family, an income which would be
brought to an end by the premature death of the husband.
A $5,000 policy is often considered a large amount of insur-
ance, yet this would only produce, at six per cent, an annual
income of $300, which is ridiculously inadequate. The only
logical arrangement is to have a policy producing an income
of $2,500, in order to eliminate the financial hardships that
the dependents might otherwise have to endure.
Many policies permit the installments to be paid monthly,
quarterly, or semi-annually as well as annually. Another
arrangement makes the installments certain for a definite num-
ber of years and continuous thereafter as long as the benefi-
ciary may live. Necessarily, on policies of equal face values,
the installments paid under the latter provision will be smaller
than in the case where they cease after a certain number of
payments have been made. The reduction will be in accord-
ance with a calculation made on the basis of the probable
extended life of the beneficiary, and the longer this period,
the smaller will be the installments. Payment of proceeds by
means of a "gold bond" should also be mentioned. When
the insured dies, a gold bond to run for a definite period of
years and bearing a stipulated rate of interest is issued to the
beneficiary. This interest is paid at specified times to the bene-
ficiary and at the maturity of the bond the principal is paid.
TYPES OF LIFE INSURANCE POLICIES 67
Briefly summarized, the advantages of the installment pol-
icy are:
1. The beneficiary is protected against loss of the proceeds
through fraud or unwise investment.
2. The premium is smaller in proportion to the face of the
policy, buying more in installments than it could in a lump
sum.
3. If the installments are continuous, the beneficiary is
provided for as long as he or she lives.
4. The insured may make sure that the beneficiary will
receive at least a certain amount by buying a contract which
provides for a definite number of payments.
5. If the payments extend over a sufficient period they
will provide for the education of the children.
6. The beneficiary is relieved of the trouble and expense of
managing the fund, the insurance company assuming this re-
sponsibility.
The only disadvantages connected with the policy are :
1. The beneficiary may, for some very good reason not
foreseen or imagined by the insured, have need of a lump
sum of money.
2. The beneficiary, unless the policy provides for continu-
ous installments, may outlive the installments provided for.
Combinations. — We have explained the most common con-
tracts in life insurance, but nearly all of those mentioned can
be further adapted to particular circumstances by combinations
of the various features.
Let us take, for illustration, the case of a young physician
aged twenty-five, whose earnings are as yet small and who
takes out a one-year renewable term policy on the increasing
step-rate plan and containing the conversion privilege. This
seems to be a good type of policy for a few years. Later, how-
ever, when he is thirty years of age, his earnings have increased
and he desires permanent protection. According to the con-
version privilege, he may choose from a number of policies,
and the question is, which meets his needs? Estimating that
his best earning period will be between the ages of thirty and
fifty, he thinks a limited-payment policy will suit him. At the
same time he realizes that when he reaches sixty-five or
seventy he will wish to retire; therefore, he would prefer an
endowment maturing at that time, enabling him to purchase
an annuity or provide in some other manner for his declining
68 INSURANCE PRINCIPLES AND PRACTICES
years. So he converts his term policy into a twenty-payment
forty-year endowment. This means that he will pay premiums
from age 30 to 50 and at age 70, if he is still living, the insur-
ance company will turn over to him the proceeds, although in
case of death at any time between the writing of the policy and
age seventy the policy will be paid to the named bene-
ficiary. He may also stipulate that in case of his prior death the
proceeds shall be paid in installments in accordance with any of
the arrangements mentioned on a previous page. There are
frequently other and more complicated schemes. This illus-
tration is given with a view of showing a few possibilities of
combining various features in a single policy, the premium
always being adjusted to meet the requirements of the case.
In all instances the insured receives exactly that for which he
pays. When making comparisons of rates on different poli-
cies of like amount at the same age the "guaranteed" values
should always be observed as well as maturity dates, because
the higher the premium, the greater the loan and cash values.
A fuller description of these relative values is reserved for
a later chapter.
Special contracts. — While the foregoing explains the types
of policies that are the most common, there are nevertheless a
great many other varieties of a special character. These may
be classified in two groups: (1) those involving more than
one life and (2) those that provide, by special clauses or en-
dorsements, for some adjustment of premium, face value
or proceeds. In the first group we have :
1. Joint life. — This is a policy which insures two or more
lives and promises payment when the first death occurs. Its
only extensive use has been by partnerships, where the mem-
bers of a firm are insured under one contract, the advantage
being a lower premium than if each partner were separately
insured. When a death occurs under such a policy it expires,
however, and if protection is needed for the remaining mem-
bers a new one must be secured, which may not be possible.
2. Last survivor. — Two or more lives are involved in this
policy but it differs from the joint-life policy in that payment
is not made until the last member of the group dies, instead
of the first.
3. Contingent or Survivorship. — This differs from the
previous policies in that payment is made only if a certain
person dies and another continues to live. This is of value to
TYPES OF LIFE INSURANCE POLICIES 69
protect a lender, where a person by borrowing has anticipated
his right to an estate at some future time, the right to the
estate being contingent upon his outliving another person.
4. Last-survivor annuities. — This policy promises to pay
an annuity to two or more persons as long as they live. Should
death occur the full amount will be paid to the survivor or
survivors until all are dead. Ordinarily not more than two
lives are involved, usually a husband and wife.
5. Reversionary Annuity. — The beneficiary of the policy
receives a life annuity if the insured dies first but nothing
is paid and the contract expires if the beneficiary dies before
the insured. This is really a form of income policy and makes
certain at low cost that the beneficiary will have a life income
if the insured is the first to die.
The second group of special contracts should be divided
Into two sub-groups.
1. According to adjustment of the premium, which may
be taken care of by clauses providing for:
a. Waiver of Premiums. — A clause to the effect that in
case of the total and permanent disability of the insured the
policy shall be considered full paid for its face value and no
more premiums required. Usually the disability must begin
before the insured reaches age sixty.
h. Return of Premiums. — A promise that in case of death
within a certain time a part or all of the premiums will be re-
turned in addition to the payment of the face of the policy.
This Is easily possible as the cost of this special feature has
been added to the original premium.
c. Decreasing Premiums. — The early years of the policy
have very high premiums, which offset the later years. Usually
these scale down year after year until no more premiums are
paid. In other words, It Is a modification of the limited-
payment policy and has practically the same advantages.
2. According to adjustment of the face of the policy :
a. Decreasing face value. — These forms provide that
when the Insured attains a certain age the face of the policy
shall be reduced each year by a certain amount until a definite
face value is reached which is then considered paid-up. This
type of policy gives a greater amount of protection in the years
when most needed and gradually decreases as the necessity for
the insurance decreases.
b. Multiple indemnity. — Double the face value Is some-
70 INSURANCE PRINCIPLES AND PRACTICES
times provided for if death results from an accident. A very
small addition to the regular rate is necessary for such a
"frill."
c. Disability. — In addition to the waiver of the premium
in case of disability, it is frequently provided that in case of to-
tal and permanent disability the proceeds of the policy shall be-
come due and payable. This is sometimes accomplished by the
payment of equal annual installments over a period of years, in
which case the face of the policy is decreased by the amounts
so paid and when death occurs only the difference is payable.
There are other kinds of disability clauses which promise
an Income, and in addition pay the full face of the policy when
death occurs; but the cost of such variations must always be
included in the premium.^
Disability insurance is frequently written by collateral
contracts covering accident and health, and a full description
of these is given in a later chapter.
^ See disability clauses in Appendices III and IV.
Chapter VI
NET AND GROSS LIFE INSURANCE PREMIUMS
Life insurance premiums and "cost of production." — The
previous chapter has shown that life insurance policies, like
suits of clothes, must be adapted to the different needs of
various classes of persons. It is plain that they are like suits
in other respects — there is a diversity in character, length of
service^ and price. Again, the price charged for the different
policies must be at least sufficient to cover the cost of pro-
duction and yet low enough to compete with the articles offered
by other sellers. As a consumers' mutual association for
manufacturing clothing sells goods at cost of production plus
the expense of marketing, so a mutual life insurance company
sells its policies at cost of production plus expenses. On the
other hand, the stock company, organized for profit to the
stockholders, is induced by competition to meet the rates of
the mutual as far as possible.
It is evident from the foregoing that in life insurance (1)
the cost of production will largely govern the premiums
charged and (2) that this cost of production differs for va-
rious types of policies. The cost of production in manufac-
turing corresponds to the "mortality cost" in life insurance,
for the life insurance company is selling protection. The
*For example, we find a company quoting rates as follows:
ANNUAL PREMIUM RATES PER $1000
Ordinary
lO-Pay-
20-Pay-
10-Yr.
20- Yr.
10-Yr. Renew-
Age
Life
ment
ment
Endoivm't.
Endoium't.
able Term
20.
...$18.50
$45.50
$28.10
$100.10
$47.50
$11.70
25.
... 20.70
49.10
30.40
100.60
48.10
12.30
30.
. .. 23.50
53.40
33.20
101.20
48.80
13.00
35.
... 27.00
58.50
36.70
102.10
50.00
14.20
40.
. .. 31.70
64.60
41.00
103.30
51.80
16.10
45.
. .. 38.00
72.00
46.50
105.30
54.80
19.80
50.
... 46.60
81.00
53.80
71
108.60
59.60
26.30
72 INSURANCE PRINCIPLES AND PRACTICES
marketing or selling expense of a manufacturer is duplicated
by the "loading" or expenses allowed in life insurance to cover
commissions to agents for obtaining the business, the main-
tenance of offices, etc. A broad knowledge of any business
must include a knowledge of its costs, prices and expenses.
The elements which enter into the cost of insurance and its
selling expense will evidently throw considerable light upon
the operations of a life insurance company and the relations
between it and the persons insured. In fact, such a considera-
tion is absolutely essential to an intelligent discussion of life
insurance problems or to the efficient buying and selling of
life insurance protection. In this respect, also, insurance does
not differ from any other commodity, for the salesman who
knows his goods is able to sell more with greater satisfaction
to his customers, and the customer who buys judiciously is
more likely to purchase the kind of commodity which meets
his requirements.
Elements of cost in life insurance. — The cost of production
of the commodity life insurance includes mortality and ex-
pense, which together determine the premium to be charged.
Let us now consider the former. The mortality cost of dif-
ferent types of policies is primarily determined by the amounts
which the company must pay out in death claims on these
different types. At this point it Is Important to note that life
insurance differs from other commodities in that the price is
fixed and collected before the goods are delivered. This has
two vital consequences — (1) we must be prepared to esti-
mate the death claims before they become due and payable,
and (2) since we collect the price in advance and have the use
of the customer's money, wc must be prepared to allow him
interest. It would be more correct, therefore, to say that the
mortality cost depends upon the present value of the expected
death claims.
Mortality tables. — The only way In which we can gauge the
death claims of the future is by the experience of the past.
Life insurance is based upon facts exhibited by past experience
and embodied in a so-called "mortality table." We assume
that history will repeat itself under similar conditions, and from
the mortality table, with the assistance of the principle of prob-
ability, we are able to predict the future. We cannot forecast
the future for a single individual but we can foresee with
LIFE INSURANCE PREMIUMS 73
tolerable accuracy what will happen to a large group of in-
dividuals. Various investigations have resulted in slightly
different representations of past facts; hence there are dif-
ferent mortality tables, the variations being principally due to
the conditions under which the facts were compiled. The two
most important tables at present are ( 1 ) the American Experi-
ence Table, based mainly upon the lives insured in a large
American company, and prescribed by law in many States as
a basis of valuation, and (2) the National Fraternal Con-
gress Table, based upon the lives of persons Insured in fra-
ternal organizations. We present on page 74 the American
Experience Table, which will be used in our illustrations in this
chapter. It will be noted that this table shows for each age
up to and Including age ninety-five the number of persons alive
at the beginning of the year and the number dying during the
year.
At age twenty-five, for ex:ample, out of every 89,032 persons,
718 die during the year and before they reach age twenty-six,
leaving 88,314 persons alive at the latter age. Similar In-
formation is given for every age. Although this tabic starts
for convenience with 100,000 lives, it might equally well start
with any other assumed number. The important fact shown
by the table Is not the absolute number of persons alive and
dying, but the ratios between those dying during the year and
those who began the year alive, and between those alive at the
beginning of various years. The absolute figures used are
of no consequence, therefore, so long as they show these ra-
tios correctly. The table was not constructed, as a matter of
fact, by the observation of 100,000 persons from age ttn to age
ninety-six, but by noting the percentage of persons aged twenty-
five who died In one year, the percentage of persons aged
twenty-six who died In one year, etc., and then applying these
various percentages to a hypothetical group of 100,000, start-
ing at age ten. By this table, with the help of the principle of
probability as stated, we can predict the future.
Principle of probability. — The principle of probability em-
ployed may be illustrated by a person rolling dice. Each
die has six sides with six different numbers engraved thereon,
any one of which Is equally likely to come uppermost when
the die is rolled. What is the chance that a person will obtain
a four upon rolling a die? This chance may be and is com-
74 INSURANCE PRINCIPLES AND PRACTICES
AMERICAN EXPERIENCE TABLE
OF MORTALITY
At Number
Age Sui'viving Deaths
10 100,000 749
11 99,251 746
12 98,505 743
13 97,762 740
14 97,022 737
15 96,285 735
16 95,550 732
17 94,818 729
18 94,089 727
19 93,362 725
20 92,637 723
21 91,914 722
22 91,192 721
23 90,471 720
24 89,751 719
25 89,032 718
26 88,314 718
27 87,596 718
28 86,878 718
29 86,160 719
30 85,441 720
31 84,721 721
32 84,000 723
33 83,277 726
34 82,551 729
35 81,822 732
36 81,090 737
37 80,353 742
38 79,611 749
39 78,862 756
40 78,106 765
41 77,341 774
42 76,567 785
43 75,782 797
44 74,985 812
45 74,173 828
46 73,345 848
47 72,497 870
48 -. . 71,627 896
49 70,731 927
50 69,804 962
51 68,842 1,001
52 67,841 1,044
53 66,797 1,091
54 65,706 1,143
AMERICAN EXPERIENCE TABLE
OF MORTALITY
At Number
Age Surviving Deaths
55 64,563 1,199
56 63,364 1,260
57 62,104 1,325
58 60,779 1,394
59 59,385 1,468
60 57,917 1,546
61 56,371 1,628
62 54,743 1,713
63 53,030 1,800
64 51,230 1,889
65 49,341 1,980
66 47,361 2,070
67 45,291 2,158
68 43,133 2,243
69 40,890 2,321
70 38,569 2,391
71 36,178 2,448
72 33,730 2,487
73 31,243 2,505
74 28,738 2,501
75 26,237 2,476
76 23,761 2,431
77 21,330 2,369
78 18,961 2,291
79 16,670 2,196
80 14,474 2,091
81 12,383 1,964
82 10,419 1,816
83 8,603 1,648
84 6,955 1,470
85 5,485 1,292
86 4,193 1,114
87 3,079 933
88 2,146 744
89 1,402 555
90 847 385
91 462 246
92 216 137
93 79 58
94 21 18
95 3 3
LIFE INSURANCE PREMIUMS IS
monly expressed by a fraction, of which the number of pos-
sibilities is the denominator and the number of possibilities
fulfilling the conditions the numerator. The. chance in this
case is therefore, 1/6, or one in six. What is the chance that
either a four or five will be shown? Here two possibilities ful-
fil the condition, and consequently the chance is 1/6 (the chance
of a four) plus 1/6 (the chance of a five), or 2/6. By apply-
ing this idea to the table we can obtain fractions indicating
the probability of dying or living, reasonably certain of fulfil-
ment because the table is not based upon theories or assump-
tions but upon facts verified by past experience. What Is
the probability that a person aged twenty-five will die In one
year? If the number of possibilities Is 89,032, that is the
denominator of our fraction, and if past experience reflected by
the table shows that 718 persons usually fulfil this condition
by dying, 7 1 8 is the numerator. The probability of dying In one
year is therefore 718/89,032 at this age, or about 8/1000.
What is the chance that a person aged twenty-five will die
within two years? It is 718 plus 718 (the number happening
to be the same for the second year) over 89,032 or 1436/
89032. It might also be expressed as 718/89032 plus
718/89032. The probability that a person aged thirty will
die In two years is 1441/85441. Any conceivable probability
of living or dying can be calculated from this table, covering
one, two or more lives, and this demonstrates that insurance
is not gambling as often supposed, but In fact is just the oppo-
site, it being possible to prognosticate about groups of lives,
although impossible for the individual life.
Compound interest. — A brief consideration of the factor of
interest and we are ready to calculate the mortality cost on the
different varieties of policies. In Insurance the price is col-
lected from the consumer in advance and he must be allowed
interest by the company for the use of the money. The as-
sumption made, which Is not absolutely in accord with facts
but near enough for all practical purposes, is that the prem-
ium Is collected at the beginning of the year and the death
claims paid at the end of the year. As a matter of fact, death
claims are usually paid a few weeks after death, but as will
be seen later this makes no appreciable difference to either
contracting party. It is assumed, then, that the company has
the use of the money for a period of time varying with the
manner in which the premium is paid. In order to pay out ono,
76 INSURANCE PRINCIPLES AND PRACTICES
dollar at the end of a year, therefore, it is only necessary for
the company to collect at the beginning of the year a sum
which, together with interest, will equal one dollar by the
end of the year. Since we cannot predict what rate will be
earned by the company on its funds we must assume a rate
of interest, which must be a conservative one, so that the com-
pany does not anticipate doing what may later prove to be
an impossibility. The rate now generally assumed and often
prescribed by law is three per cent. In order to pay out one
dollar in death claims at the end of the year it is necessary
for the company to collect at the beginning of the year only
$1.00/1.03 or $.9708, because a little figuring will show that
this sum with interest at three per cent will equal $1 at the
end of the year. To be fair we must allow the customer com-
pound interest on his money; that Is, if we have the use of his
money for two years we must allow him Interest on the principal
for one year and Interest on the principal plus interest for the
second year, etc. In order to pay $1 at the end of two years
it Is necessary for the company to collect $1.00/1.0609 or
$.9425, $1.0609 being $1 at three per cent compound Interest
for two years. To get the present value of a sum due at the
end of any specified number of years, therefore, we can either
divide It by the amount of $1 for a term of years at three
per cent or multiply it by the discounted value of $1. A com-
pound interest and compound discount table Is given below:
INTEREST AND DISCOUNT TABLE
Amount of $1 due at the Present luorth of $1 due
end of a term of years at the end of % term of
Y ears at 3 per cent years at 3 per cent
1 $1.0300 $.970874
2 1.0609 .942596
3 1.0927 .915142
4 1.1255 .888487
5 1.1593 .862609
6 1.1941 .837484
7 1.2299 .813092
9 1.2668 .789409
8 1.3048 .766417
10 1.3439 .744094
Natural premium (five-year term policy) . — We can now as-
certain how the mortality cost Is computed for a five-year term
policy at age 25, using this simple type of policy for the first
illustration. We will suppose that the premiums are collected
LIFE INSURANCE PREMIUMS 77
at the beginning of each year and that just enough is collected
to meet the death claims of that year, a system known as the
"natural premium plan." We can foresee from the table that
the company must have at the end of the year $718,000 in
order to pay $1,000 to the beneficiaries of each of those who
die during the year. But since the premiums are collected at
the beginning of the year the company need acquire at that
time only that sum which, together with interest, will equal
$718,000 by the end of the year. Dividing by $1.03, the
amount of $1 at 3 per cent compound interest for one year,
we reach the result $697,087,374. This amount must be col-
lected at the beginning of the year from 89,032 persons in-
sured, so that the amount from each person is approximately
$7.83. The second year 718 persons will die, so that at the
end of that year $718,000 must be on hand, and $697,087,374
at the beginning of the year must be collected. But as some
of the original premium payers have died, at the beginning of
the second year the company can collect from only 88,314 per-
sons, making each person's contribution $7.89. For the third
year we require $718,000; $697,087,374 must be collected at
the beginning of the year from 87,596 persons, or $7.96 per
person. For the fourth year $718,000 is required for death
claims which will be furnished by $697,087,374 at the begin-
ning of the year, or $8.02 per person. For the fifth year
$719,000 is required, or $8.10 from each person insured at
the beginning of the year. The following shows in tabular
form the amount necessary at the end of each year and to be
collected In total and per person at the beginning of each
year:
FIVE YEAR TERM POLICY— NATURAL PREMIUM PLAN
Premium at be gin-
Total required by Total necessary ning of each year
end of year at beginning of year per person
1st year $718,000.00 $697,087,374 7.83
2nd year 718,000.00 697,087.374 7.89
3rd year 718,000.00 697,087.374 7.96
4th year 718,000.00 697,087.374 8.02
5th year 719,000.00 698,058.247 8.10
The following table shows the natural premiums at various
ages on a 3 per cent and 3 ^ per cent basis :
per cent
3^ per cent
$ 7.58
$ 7.54
7.83
7.79
7.89
7.86
7.96
7.92
8.02
7.98
8.10
8.06
8.18
8.14
8.69
8.64
9.S1
9.46
10.84
10.79
13.38
13.31
18.03
17.94
25.92
25.79
38.96
38.77
60.19
59.90
91.62
91.18
140.26
139.58
228.69
227.59
78 INSURANCE PRINCIPLES AND PRACTICES
NET NATURAL PREMIUM TO INSURE $1,000 ONE YEAR
AMERICAN EXPERIENCE TABLE
Age
20
25
26
27
28
29
30
35
40
45
50
55
60
65
70
75
80
85
Net single premium (five-year term policy). — We have
previously seen that there are various ways of paying premiums.
If the above premiums had been collected from each person in
full at the beginning of the five-year period (in the form of a
"net single premium") it is plain that the total amount collected
and the amount collected per person would be considerably
smaller by reason of ( 1 ) the extra interest earned for the
longer periods that many of the premiums would be on hand,
and (2) the fact that the entire 89,032 persons would pay
the single premium, whereas when the premiums are paid an-
nually the number of premium payers is constantly being de-
creased by death. To calculate the cost per policy-holder if
the premium is paid in a lump sum at the beginning of the
period, let us refer again to the table immediately preceding.
For the death claims due at the end of the first year, $697,087
.374 must be collected at the beginning of the five-year period
because the money is in use by the company for one year. The
funds for the second year's death claims, if collected at the
beginning of the five-year period, will be in the hands of the
company for two years and two years' interest may be reckoned
on. The sum which will produce $718,000 (the second year's
death claims) at 3 per cent compound interest for two years,
is $718,000 divided by $1.0609 ($1 at compound interest for
two years) or $676,783,856. To have the third year's death
claims by the end of the third year, the company need collect
LIFE INSURANCE PREMIUMS 79
at the beginning of the period only $718,000 divided by
$1.0927, or $657,071,704. Similar calculations for the fourth
and fifth year's death claim? are shown in the table below :
FIVE YEAR TERM POLICY— SINGLE PREMIUM PLAN
Total Amount necessary at Amount
Death Claims the beginning of the period per person
1st year $ 718,000 $ 697,087.374 $7.83
2d year 718,000 676,783.856 7.60
3d year 718,000 657,071.704 7.38
4th year 718,000 637,933.701 7.17
5th year 719,000 620,215.748 6.97
TOTAL $3,591,000 $3,289,092,380 $36.94
Since we collect this total at the beginning of the period
from every person Insured, a division of the total by 89,032
shows that $36.94 per person Is sufficient to cover the mortal-
ity cost.
The two plans of paying premiums we have been discussing,
the natural-premium plan and the single-premium payment,
are not plans In current use, because of very apparent defects.
The natural premium Is a constantly Increasing amount, where-
as a person's earning power very rarely continues to Increase
Indefinitely. While mathematically quite feasible the plan Is
practically unadaptable to most persons' needs. The single
premium is not desirable because the insured's means do not
ordinarily permit of his paying the cost of insurance in a lump
sum. A level or decreasing annual premium accords with the
needs of the majority of persons but the level or decreasing
annual premium is easily found from the net single premium.
We will therefore continue to consider the net single premium
for different types of policies and later translate these single
premiums Into practicable annual level premiums.
Net single premium (whole-life policy). — The uses of the
term policy are limited and we will now consider the whole-
life policy, which is much more commonly purchased. The
same method of calculation may be used. Whereas under the
term policy the company insures the person only for a term of
five, ten or fifteen years, the whole-life contract insures the per-
son as long as he lives. Since authenticated instances of long-
evity beyond 96 years are extremely rare, the table stops at
age 96. The whole-life policy may therefore be regarded as
a term policy for the length of life or up to age 96; in fact,
80 INSURANCE PRINCIPLES AND PRACTICES
at age 96 the policy should be paid even if the person is still
alive. The calculation of the single premium on a whole life
policy taken at age 25 is shown in the accompanying table, only
a few of the first and concluding calculations being given :
WHOLE LIFE POLICY— NET SINGLE PREMIUM PLAN
Amount required
No. $1 at compound at beginning
Year Age Dying Death Claims interest (3%) of the period
1 25 718 $718,000 $1.0300 $697,087,374
2 26 718 718,000 1.0609 676,783.856
3 27 718 718,000 1.0927 657,071.704
4 28 718 718,000 1.1255 637,933.701
5 29 719 719,000 1.1593 620,215.748
etc etc etc etc etc etc
68 93 58 58,000 7.4632 7,771,465
69 94 18 18,000 7.6870 2,341,616
70 95 3 3,000 7.9176 378,903
71 96 8.1551
Total $31,711,417.76
Dividing the total $31, 711, 41 7. 76 by the number of persons
from whom it is to be collected at the beginning of the period,
89,032, gives the single premium per person as $356.18.
Net single premium (endowment policy). — ^We may now
consider the endowment policy, which promises, for example,
$1,000 upon death within a stipulated period, say twenty years,
or $1,000 at the end of the period if the insured is still alive.
Two probabilities are involved here, the chance of death and
the chance of survival. Some of the insured will collect under
one contingency and some under the other; in either event the
insurance will be paid. We can compute the cost to the insur-
ance company on the persons who live and the cost on those
who die; the sum of these is the total cost of the insurance.
Divided among the people alive at the beginning of the period,
the net single premium for each person is obtained. The
table on page 81 shows the calculation.
By analysis and the application of the same principles, the
net single premium for any type of policy may be computed.
A ten-payment life policy has the same single premium as an
ordinary whole-life policy, because the present value of future
death claims is the same, although an annual premium paid only
LIFE INSURANCE PREMIUMS
81
DEATH CLAIMS
No.
No.
Death
$1
at Com-
Amount necessary at
Ag
e
Living
Dying
f Claims
■*>ound interest
beginning of period
25
89,032
718
$718,000
$1.0300
$ 697,087.374
26
88,314
718
718,000
1.0609
676,783.856
27
87,596
718
718,000
1.0927
657,071.704
28
86,878
718
718,000
1.1255
637,933.701
29
86,160
719
719,000
1.1593
620,215.748
30
85,441
720
720,000
1.1941
602,988.660
31
84,721
721
721,000
1.2299
586,239.007
32
84,000
723
723,000
1.2668
570,742.909
33
83,277
726
726,000
1.3048
556,418.582
34
82,551
729
729,000
1.3439
542,444.489
35
81,822
732
732,000
1.3842
528,812.398
36
81,090
737
737,000
1.4258
516,917.001
37
80,353
742
742,000
1.4685
505,265.894
38
79,611
749
749,000
1.5126
495,177.239
39
78,862
756
756,000
1.5580
485,247.634
40
78,106
765
765,000
1.6047
476,722.716
41
77,341
774
774,000
1.6528
468,282.732
42
76,567
785
785,000
1.7024
461,104.776
43
75,782
797
797,000
1.7535
454,517.973
44
74,985
'OTALS
812
812,000
1.8061
449,584.717
1
$14,859,000
$10,989,549,109
MATURED ENDOWMENTS
No.
Matured $1 at
corn-
Amount necessary at
Age
Living
Endovjments po
und interest
beginning of period
25
89,032
45
74,173
$74,173,000
$1.8061
$41,067,792,146
SUMMARY
Present
No.
Net Single
Value
Alive
Premium
Death
Claims . . .
. ..$10,989,549,109
89,032
89,032
89,032
123.433
Ma
tured Endowments . .
• • • %^ ^ \J y ^ \J ^ * '^ t -^ 9 ^ \J ^
... 41,067.792.146
461.270
$52,057,341,255
584.703
ten times will be greater than an annual premium paid until
death. An annuity is paid to those who live, so that the cost
depends on those who live through each year, but otherwise
the net single premium is calculated in the same manner. The
premium on a child's endowment is figured as on other endow-
ments, although if a promise is made to return the premiums
paid should the child die, something must be added to cover
the additional cost of this feature. Every insurance feature
costs something, but this cost may always be calculated in
advance by the principle of probability, the mortality table
and the interest.
82 INSURANCE PRINCIPLES AND PRACTICES
Annual premiums. — We may now consider how the single
premium is translated Into an annual or limited-payment pre-
mium. The calculation is simple. Divide the net single pre-
lum by the present value of an annuity due of $1 at the same
age for the premium-paying period. To explain the rule we
must consider the nature of an annuity due of $1 a year. An
annuity due of $1 Is $1 due at the beginning of the year and its
present value Is $1 divided by the amount of $1 at compound
interest.
The net single premium on the five-year term policy issued
at age 25 we calculated to be $36.95. The appropriate an-
nuity due is an annuity due of $1 for five years (the premium
paying period) beginning at age 25. Its present value would
be found as follows:
ge
Living
Paid Each
Year
$1
at Compound
Interest
Present
Value
25
89,032 $1
$89,032
$1.00
$ 89,032.000
26
88,314 1
88,314
1.03
85,741.747
27
87,596 1
87,596
1.0609
82,567.630
28
86,878 1
86,878
1.0927
79,505.676
29
86,160 1
86,160
1.1255
TOTAL
76,552.044
$413,399,097
Dividing by 89,032, the number of persons, we get $4,643
as Its present value. The present value of five annual pre-
miums of $1 must be equal to the net single premium, for con-
sidering Interest and allowing for deaths, net single and net
annual premiums are mathematically equivalent. The prop-
osition may now be stated thus: If a net single premium of
$4,643 is equivalent to five annual premiums of $1, a net single
premium of $36.95 on a five-year term policy is equivalent to
five annual premiums of how much? Evidently the quotient
obtained by dividing $4,643 Into the net single premium
($36.95), or $7.96. Thus the rule Is obtained that the net
annual level premium is found by dividing the net single pre-
mium by the present value of an annuity due. To repeat the
thought in slightly different form, the net annual level premium
is to the net single premium as a $1 premium is to the present
value of five $1 premiums.
LIFE INSURANCE PREMIUMS 83
Net annual level premium (?) $1 annual level premium ($1)
Net Single Premium ($36.95) Present value of five $1 premiums ($4,643)
or
XT ^ c ^ n ' fs-»^nf\ v^ *, Net annual level premium (?) X Present
Net Single Premium ($36.95) X $1 = , r ^ «, • it±cAi\
\ / -r value of five $1 premiums ($4,643)
or
N. S. P. ($36.95) X $1
Net annual level premium ($7.96)
P. V. of five $1 premiums ($4,643)
In similar fashion we find the present value of a $1 annuity
due for the whole of life at age 25 to be $22.1044, and divid-
ing this into the net single premium for a whole-life policy or
$356.18 (See page 80) we find the net annual level premium
to be $16.11. Suppose this life policy was paid for in ten an-
nual payments, beginning at age 25 and ceasing after age 34.
The annual level premium for this limited-payment policy
would be found by dividing the net single premium by the
present value of a ten-year annuity due at age 25 ($8,484),
making the net level premium $41.98. For the twenty-year
endowment at age 25, divide the net single premium of
$584.71 by the present value of a twenty-year annuity due of
$1 at age 25 ($14,258), making the net annual level premium
$41.01.
Expenses as an element of cost. — The annual premiums
above referred to are net and include no allowance for
expenses." Using the net annual level ordinary-life premium
as an illustration, the expense allowance may be made by
adding a fixed amount to the net premium, by adding to the
net premium a percentage of itself, or by adding to the net
premium both a fixed sum and a percentage of the premium.
Let us see the effect of each of these methods and whether they
are equitable as between ( 1 ) policies issued at different ages
and (2) expensive and inexpensive policies.
Applying the method of adding a fixed sum to the net pre-
mium, gross premiums are found in the following way:
Whole-Life Policy, Age 25 Whole-Life Policy, Age 40
Net Premium $16.11 $24.75
Plus Fixed Sum 4.03 4.03
Gross Premium. .$20.14 $28.78
We see that the loading on the policy issued at age 25 is
the same as on the policy issued at age 40, but the loading on
' For sample page of ratebook, showing gross rates, see Appendix VI.
84 INSURANCE PRINCIPLES AND PRACTICES
the former Is 20 per cent, of the gross premium, while the
loading on the latter is 14 per cent, of the gross premium. If
expenses do not vary in proportion to the premium the method
is equitable; if expenses are greater on a high-premium policy
than on a low-premium policy, the low-premium policy is dis-
criminated against by this system.
Let us now examine the elements constituting the expenses
of a life insurance company. They are as follows:
1. Cost of obtaining new business:. . .Principally consisting of the commission
paid the agent, which is a percentage of
the premium in nearly every case.
2. Cost of collections: ,Tbe principal hems being the commissions
paid the agent for a period of years after
the first, usually a percentage of the prem-
ium and taxes, which are often a per-
centage of premiums.
3. Settlement expenses: Principally investigation of claims and
leffal expenses. The size of the premium
has no effect on these ; but it obviously
costs more to settle ten $1,000 claims
than one, and more for a $10,000 policy
than for a $1,000 policy.
4. General Expenses: Salaries and clerical expense. This var-
ies with the amount of business done ; it
may be questioned whether it varies be-
tween policies of different sizes, but cer-
tainly is little affected by the size of the
premium.
5. Investment Expenses: .These are taken care of out of income on
investments and so are not a factor in
expense loading.
Summarizing, we see that new business and collection ex-
penses vary with the premium, but that general and settle-
ment expenses vary with the amount of the policy, irrespective
of the size of the premium. The flat sum system of loading
would be equitable as far as the latter two elements are con-
cerned, but would penalize unjustly the lower-priced policies
in regard to the former two elements. The percentage
system would be justified by the former two elements but not
by the latter. The percentage plan would work out as follows :
WIiole-Life Policy 2o-Year Endoivment
Age 2$ Age 2$
Net Premium $16.11 $41.01
Plus 25 per cent of Net Premium 4.03 10.25
Gross Premiums $20.14 $51.26
LIFE INSURANCE PREMIUMS 85
It is evident that equity will be served only by a combina-
tion of the flat sum and percentage methods, each of these
logically taking care of two of the four expense elements.
This system would be applied as follows:
Whole-Life 20-Year
Term Policy Endoivment
Age 25 Age 25 Age 25
Net Premium $7.96 $16.11 $41.01
Plus Flat Sum 2.00 2.00 2.00
Plus 12^% of Net Premium 1.00 2.01 5.13
Gross Premiums $10.96 $20.12 $48.14
It is seen that here the loading increases as the premium
increases, but not in the same proportion. A change from
term to whole-life increases the premium 102 per cent and
increases the loading only liZ per cent. The endowment net
premium is 154 per cent greater than the whole-life premium,
but the loading on the former is only 78 per cent greater than
on the latter. The diagrams below show ( 1 ) the gross pre-
miums and loading under the flat sum method, the former in-
creasing and the latter stationary; (2) the gross premium and
loading under the combination method, both increasing, but
the former faster than the latter.
In addition to expenses the loading provides a margin for
certain contingencies, such as where the interest earned proves
less than the estimated three per cent., where the mortality ex-
ceeds that stated in the mortality table, where losses occur
through the forfeiture or lapse of policies, and possibly where
funds are required to provide or increase a dividend.
Another problem connected with loading is the difficulty of
providing the funds required for expenses at the time they are
to be spent. But the only practicable method of so providing
Involves temporary borrowing from the reserve, the discus-
sion of which must be postponed until we have seen the object
and nature of the latter. (See next chapter). Regulation
by the State is concerned chiefly with this very phase of the
subject. The law in reality prescribes, not the amount of
loading, for this is regulated only by competition, but the
amount of money collected for other purposes which may be
borrowed to use for expenses during the early period when the
expenses in connection with a particular policy are greater than
the amounts derived from the loading.
86 INSURANCE PRINCIPLES AND PRACTICES
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LIFE INSURANCE PREMIUMS
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88 INSURANCE PRINCIPLES AND PRACTICES
In some States laws have been passed to regulate the ex-
travagant race for new business in which some companies would
otherwise be impelled to engage, entailing excessive commis-
sions and expensive advertising. In New Yorlc, for example,
this regulation was attempted by a law providing that increased
amounts of insurance must be acquired at a decreasing rate of
expense and new business became more and more difficult to
secure.
Chapter VII
RESERVES, SURRENDER VALUES AND LOANS
Reserves, surrender values and policy loans. — These may
well be considered in the same chapter because of their com-
mon origin and interrelations. The reserve is a fund that
grows out of the premiums paid. The amount of this fund
at any time depends on (1) the kind of policy, (2) the face
of the policy, (3) the age of the insured at issuance, (4) the
length of time the policy has been in force, and (5) the rate
of interest assumed by the company. The amount of the sur-
render value differs from the reserve only to the extent of a
small surrender charge, made to meet the expenses incidental to
the surrendering of the policy. The policy loan value is usually
the same as the cash surrender value except that in place of a
surrender charge the loan bears a stipulated rate of interest.
Effect of different kinds of premiums on the reserve. —
In order that the reserve may be clearly understood, a review
of the different kinds of premiums is necessary. Life insurance
may be purchased by natural, single, level or decreasing pre-
miums. The natural premium is based on the mortality cost
for one year at the age concerned and, with interest, is just
sufficient to meet all death claims at the end of the year if the
actual experience is the same as the expected experience. With
increasing age the probability of dying becomes greater and
the natural premiums must be increased to meet the larger
number of death claims that will have to be paid, as shown on
page 78. The increase is not uniform each year but is
constantly accelerated until in the older ages it results in a
premium that is prohibitive and impractical. This way of
charging premiums is most frequently used in connection with
the one-year renewable-term plan, which has an increasing
step-rate premium. Since the sum on hand at the end of each
year is sufficient to meet only the maturing policies there is no
fund placed in reserve.
The single premium is exactly what its name implies, one
premium of an amount which, when compounded at the as-
sumed rate of interest, will be sufficient to meet all the losses
and expenses that will ever be charged against the policy. One
g9
90 INSURANCE PRINCIPLES AND PRACTICES
lump sum thus paid has to be so large that it is even more
impractical than the former method and, therefore, is rarely
used. (See page 54)
When the same amount is deposited with the company each
year during the premium-paying period of the policy we have
what is called a level premium. This method is superior to
either of the former because the premium is moderate and is
never increased. The policy-holder, it will be noted, pays to
the company a larger sum in the earlier years than is necessary
to pay mortality costs. This difference, with compound inter-
est, goes into a fund known as the reserve and takes care of
the later years when the mortality cost has risen to exceed the
amount of the level premium but at an age when a natural pre-
mium, as we have seen, would be so high as to be unattractive
and almost impossible to collect. It is this level-premium idea,
variously applied, which makes possible the many types of poli-
cies that are written. Under the decreasing-premium plan,
which has never attained great popularity, the premium paid
decreases with advancing age and the anticipated decline of the
policy-holder's earning power.
It can be seen from this that a reserve will accumu-
late only under the single, level and decreasing premium
plans, because under the natural-premium plan, while some
infinitesimal reserve may exist during the year, at the end of
the year it Is exhausted by the death claims. In the case of
a single premium the sum is Increased each year by the interest,
and then from this total the current mortality cost Is deducted.
The remainder is the reserve. This process Is repeated year
after year, the factor of Interest making the reserve per policy
grow larger and more rapidly, as shown in Table II.
The reserve per policy under the level premium plan Is not
so large at first, in actual amount, as under the single-premium
plan, but grows with greater speed than the single-premium re-
serve, because it Is Increased each year, not only by the inter-
est but also by the amount of the level premium, although re-
duced each year by its share of the matured policy claims.
The reserve on a group of policies and also on the individual
policy on the ordinary-life plan, where premiums are paid for
the whole of life, taken at age 21, is Illustrated in Table I,
where Its operation may be traced.
It was assumed In this case that there were 91,914 persons
Insured on the ordinary-life plan at age 21, for $1,000 each,
SURRENDER VALUES AND LOANS
91
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i{ovj -lof ppn junouiy :j;ns3}j
6.45
13.13
20.04
^-atj xiquiHf^ uvinqnj^ Kq ^pititQ
rvj ,.H -H
On t^ 10
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{^9aX9^3}J 3}V?
'Q-3uS?y sprih-g) suitvjj yiv3(j
^fo }U3m£vj U3}fy uv3j^ fo pu-^
}v puvu uo junotuy uspuwuis-^
588,191.559
1.187,678.047
1,798,869.041
{vnp3Q) UP3^ fo puj ]V 3nQ
722,000
721,000
720,000
S- ^ (Z) + (9)
^^tS3X3jui puv ivcuuuj fo tuns
1,310,191.559
1,908,678.047
2,518,869.041
(9) umnioj ut tun^
2 uo UP3J^ 3UQ UOf J^3U3)UI
]U3J U3J fm-SUQ puv 33Ul{X
44,305.994
64,544,668
85,179.146
^SutuujS3g IV puvfj uo mns pjoj^
1,265,885.565
1,844,133.379
2,433,689.895
_ S3zz-n?^
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3i{j jv pivj suiniui3uj pnuuy
1,265,885.565
1,255,941.820
1,246,011.847
•(01 ^^S) '^^-^3!
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588.191.559
1,187,678.048
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94 INSURANCE PRINCIPLES AND PRACTICES
Effect of interest rate on the reserve. — Another factor
affecting the size of the reserve is the rate of interest assumed
by the company. The higher the rate of interest, the less it
will be necessary to collect in the form of premiums because
the interest will make up the difference. Since the premiums
and the reserve vary inversely with the interest rate, the higher
the interest assumption, the lower the reserve and the premium,
and vice-versa. Thus where the interest rate is 3 per cent,
the reserve at the end of the fifth year on an ordinary life
policy issued at age 21 Is $39.20. If 3^/2 per cent is the rate,
the reserve would be $34.63, and if 4 per cent the reserve
would be $30.60. A comparison of the reserves on these dif-
ferent assumptions is shown in Table III. It might be men-
tioned that the net level premiums on an ordinary-life policy
issued at this age would be $14.72 when a 3 per cent table is
used, $13.77 at 3^/^ per cent, and $13.24 at 4 per cent.
TABLE III— COMPARISON OF TERMINAL RESERVES ON ORDINARY-
LIFE POLICIES OF $1,000 EACH AT AGE 21
American Experience Table of Mortality and Different Interest Rates
End of Policy Year 3 Per Cent sYz Per Cent 4 Per Cent
1 $7.36 $6.45 $5.65
2 14.95 13.13 11.53
3 22.79 20.04 17.64
4 30.86 27.21 23.99
5 39.20 34.63 30.60
10 84.91 75.82 67.70
15 138.00 124.61 112.51
20 199.17 181.94 166.17
30 346.53 324.05 302.92
40 515.49 492.31 470.02
60 815.47 802.15 788.80
75 1,000.00 1,000.00 1,000.00
This difference in interest assumptions is frequently lost sight
of in making comparisons between the reserves, surrender
values and loan values of different companies. Since these de-
pend on the assumed rate of interest, fair comparisons are
obviously made only where similar assumptions prevail. It is
also evident that in a mutual company the reserve basis makes
little difference to policy-holders collectively because, while a
higher assumed interest rate enables lower premiums, other
factors being equal, it Implies the probability of smaller
dividends.
SURRENDER VALUES AND LOANS 95
Size and importance of the reserve. — This important fund,
the reserve, is the backbone of the level-premium plan, although
it has been the subject of attack by individuals and organiza-
tions who do not believe in a scientific method of conducting
an insurance company and who see no reason for piling up a
huge sum to take care of the future. State regulation has been
necessary to safeguard it as a trust fund and to prevent its
misuse, as it will be needed in the future to pay claims. If it
were not for this supervision by the States many irregularities
would follow, with consequent loss to beneficiaries. It can be
seen that when a State charters or licenses a company to operate
within its borders it must also supervise it, and In order to ac-
complish this the States require the insurance companies to file
periodical reports with a designated public official, so that he
can determine whether the company is being safely operated or
not. A company to be solvent must at all times have enough in
the reserve so that, supplemented by future premiums, it will
be able to meet all future claims. A reserve sufficient to do
this is also necessary in case a company wishes to go out of
business and have its policies reinsured by another company.
The possession of this reserve makes life Insurance com-
panies important factors In the financial world. If the sums
held as reserve by all life Insurance companies were totaled
they would reach nearly five billion dollars and any business
that has at Its disposal an amount of money as large as this
necessarily exerts considerable financial influence. This re-
serve must be Invested safely for the policy-holders In order
that the assumed rate of Interest may be earned and recogniz-
ing the character of the reserve the laws of the States have re-
stricted the types of investments which may be made with this
fund. Consequently, the bulk of It is invested in bonds and
mortgages.
A better Idea of the Importance of the reserve in a life in-
surance company may be gained by comparing the amount of
the reserve with the admitted assets. A recent balance sheet
of one of the oldest and most reliable mutual companies is
given below. Note that over four-fifths of Its total admitted
assets belongs to the policy-holders and is kept by the company
In the form of reserve. This balance sheet will also serve to
show the conservative nature of the securities in which the re-
serve Is Invested. The Item "Legal Reserve" Is down as a
liability, the company recognizing that It Is not their property
96 INSURANCE PRINCIPLES AND PRACTICES
but that of the insured. Observe also other items such as "Con-
tingency Reserve" and "Dividends Payable" which are held for
the policy holders.
BALANCE SHEET
Assets :
Real estate (Including home office) $4,111,455.84
Loans on real estate mortgages 199,503,024.62
Loans on policies as collateral 57,501,322.88
Premium notes and automatic premium loans 1,602,310.60
Premiums deferred under Soldiers' and Sailors' Civil
Relief Act 8,509.25
U. S. A. Bonds, amortized value 33,085,979.02
U. S. A. Certificates of Indebtedness 11,850,000.00
Other bonds, amortized value 118,494,169.20
Stocks, market value 291,811.00
Cash on hand and in banks 2,005,322.11
Interest and rents due and accrued 6,753,525.71
Due and deferred premiums... 5,778,040.30
Assets not admitted — deducted l22,6g4.'jB
Total admitted assets $440,861,775.75
Liabilities :
Reserve required by law to be held on the company's
policies $387,890,303.00
Reserve for annuities and special contracts 2,417,236.00
Present value of not due installments 8,879,745.00
^Losses and endowments, unadjusted, etc 1,529,498.06
Estimated amount of taxes payable in 1920 1,468,432.47
Unpaid accounts, medical fees, commissions, etc 284,761.39
Dividends due and in course of payment 1,033,985.97
Deferred dividends payable in 1920 182,510.48
Funds for deferred dividends payable after 1920 828,322.00
Annual dividends payable in 1920 16,100,000.00
Reserve for taxes in dispute 500,000.00
Reserved for contingencies 19,746,981.38
Total liabilities $440,861,775.75
* Figures include $989,404.91 for death losses incurred of which no proofs
have been received.
A statement of the income and disbursements of the same
company for the same year, is given below. Only 15 per cent
of the total income for the year was spent for operation. This
contrasts sharply with industrial corporations, where the cost
of operation is usually at least 85 per cent of the income. This,
of course, is due to the very nature of the life insurance busi-
ness.
■D
SURRENDER VALUES AND LOANS 97
STATEMENT OF INCOME AND DISBURSEMENTS
Income:
remiums $64,693,729.07
Interest 20,156,307.29
Rents 363,488.52
Consideration for installment and option settlements. . . . 2,017,920.35
All other income «. . 331,272.48
Total income $87,562,717.71
Disbursements:
Death claims $19,171,216.98
Matured endowments 8,157,265.48
Annuities 254,811.34
Surrendered policies 6,529,618.52
Dividends to policy-holders 14,726,708.36
Disability claims 797.56
Total paid policy-holders $48,840,418.24
Taxes 1,766,887.09
Commissions to agents 7,936,549.38
Medical examinations, etc 413,763.43
Salaries of officers, trustees, and home office employees 1,135,683.43
Rent for occupancy of home office 270,000.00
All other disbursements 2,000,762.55
Total disbursements $62,364,064.12
From the standpoint of the individual policy-holder the re-
serve is his savings fund on which he is receiving interest. If
he needs cash it is the basis of the sum he may borrow or re-
ceive as a cash surrender value from the company; if he lapses,
it may be used to purchase paid-up insurance, or extended insur-
ance; if he wishes to convert the policy, it determines the addi-
tional amount he will have to pay, in the form of a premium,
or how much will be returned to him, depending upon whether
the conversion is to a policy with a higher or lower premium.
Just how rapidly this fund increases was illustrated in Table II,
which shows the terminal reserve on individual policies.
Calculation of the reserve. — There are several ways of cal-
culating the reserve of an insurance company, the most com-
mon being known as the prospective method. It is this system
that is used by the States in order to ascertain solvency. It is
necessary to assume a mortality table and also an expected
rate of interest, the American Experience Table of Mortality
is the one generally employed and' three and one-half per cent
is the usual interest rate assumption. Taking these as the bases
of calculation, the present value of all future death claims Is
98 INSURANCE PRINCIPLES AND PRACTICES
estimated. This will be recognized as exactly the same as the
total of the net single premiums on all the policies at the at-
tained ages, and from this sum is deducted the present value
of all future premium payments. The result is known as the
prospective reserve. And possibly here is the best point at
which to give a definition of the legal or required reserve. It
is that amount which, if added to the present value of future
premium payments, will equal the present value of future death
claims. Anticipating what will happen, regardless of what
has happened, it is called the prospective reserve. In the form
of an equation, it may be expressed as:
Reserve -f- Future Premiums = Future Death Claims
or, transposing terms,
Reserve = Future Death Claims — Future Premiums, which, allowing
for interest to be earned, becomes
_ JPresent Value of ] [Present Value of ]
Reserve— ^p^ture Death Claims] (Future Premiums]
For illustration purposes suppose that it is desired to find
the net terminal reserve at end of age 93 on a whole life policy
issued at age 21. The present value of the future death claims
at the end of age 93 is found to be
Age No. Dying Death Claims Present Value Per Policy
94 18 18,000 17,391.29|
95 3 3,000 2,800.50] voi-^^
The present value of the future premiums is found to be
Age No. Living Premiums Present Value Per Policy
95 3 41.31 39.91] -
94 21 289.17 289.171
The difference between $961.52 and $15.67, or $945.85, is
the reserve. A less tedious operation is possible. The present
value of future premiums will be recognized as equal to the net
single premium at age 94, since this is the amount which with
interest would cover such claims. The present value of future
premiums of one dollar is the present value of an annuity due,
or at this age, $1.1380, and since we know the net annual level
premium on this policy to be $13.77 we multiply the present
value of an annuity due of $1 or $1.1380 by $13.77, giving the
present value of future premiums as $15.67. This, deducted
from the present value of future death claims (which are al-
SURRENDER VALUES AND LOANS 99
ways equivalent to the net single premium at the attained age)
gives the reserve as $945.85.
In the form of an equation, it will appear as:
_ (Net Single Premium) (Present Value of .. Net Annual Level)
Reserve =-^ „. „..„•„ j „„„ } — { 4 per cent basis to be $20.5922. Multiplying
$13.7725 by $20.5922, we have $283.60607, which is the pres-
ent value of future premiums on one policy. Since there are
89,751 such policies, the present value of the future premiums
on all policies is $25,453,928,388. Deducting this from the
present value of future death claims, we have $1,798,953.78,
which is "that amount" which the insurance company should
hold as legal reserve in order to be solvent. The sum actually
on hand is slightly less thali this due to not carrying all deci-
mals sufficiently far.
Special methods of valuing the reserve. — It has been ex-
plained that the reserve is a trust fund required by law to be on
hand at all times. But it is possible to evade this requirement
by a mathematical subterfuge which makes a portion of the re-
serve available for expenses. This evasion is tacitly recognized
by the laws of many States because of its necessity. We have
previously referred briefly to the difficulty of providing funds
for expenses at the time required. We are now in a position to
see the various methods by which this difficulty may be met.
In one company the gross premium on a whole life policy at
age ?)S is $27.00, and the net premium $21.08, leaving $5.92
available for expenses. We may easily assume that this is suf-
ficient to cover annual collection costs and general expense,
leaving a margin for the payment of settlement expense at ma-
turity. But it is estimated that the total cost of new business
is around 80 per cent of the premium or about $16.86, of
which a large part is the commission to the agent. Where is
this sum to come from? In a large and old company it may be
borrowed from surplus but in a young, small company this
source is not available. The other possibilities are:
1. To charge an Initiation fee or specially large first-year
premium. But this Is a violation of the level-premium Idea and
necessitates a difficult explanation to the insured.
2. To borrow funds which would otherwise be devoted to
SURRENDER FA LUES AND LOANS 101
paying surrender values and dividends. But this is precluded
by the necessity of maintaining a consistent dividend policy and
reasonable surrender values. The latter, as stated, is regulated
in some States.
3. These difficulties are further complicated by the necessity
of meeting competition.
There remains the reserve, if some method of legally bor-
rowing from it can be devised. Three methods have been used
which will be described In the order of their effect on the re-
serve.
1. The preliminary term plan. Under this plan the first
year of the policy's term Is considered as term insurance; the
policy then goes into effect In Its own name at an age one year
higher and for a term one year less. Take, for example, a
twenty-payment life policy at age 35 with a net premium of
$29.85. Of this, on a 3 per cent basis, $22.00 should be in
the reserve at the end of the first year. But consider this as a
one-year term policy plus a nineteen-payment life policy and
the reserve at the end of the first year is zero. The full net
legal reserve the second year Is $44.72, while the reserve at
the end of the first year on a 19-payment life policy issued at
age Z6 (i. e., preliminary term plan) Is $23.54. As the years
elapse the preliminary term reserve catches up to the full re-
serve until, as shown in the following table, by the end of the
twentieth year the reserves are the same.
TABLE IV— PRELIMINARY TERM RESERVE ON A 20-PAYMENT
LIFE POLICY
Amount of $1,000. Age 35. American Experience Table and 3 Per Cent
End of Policy Year Full Net Reserve Preliminary Term Reserve
1 $22.00
2 44.72 $23.54
3 68.20 47.87
4 92.46 73.00
5 117.52 98.96
10 255.78 242.28
15 418.33 410.90
20 609.92 609.92
If death does not occur until after the twentieth year, there
is obviously no difference in the two plans. If, however, death
occurs prior to that time, the reserve of the individual policy-
holder does not contribute to the extent it should and the funds
must be procured elsewhere.
102 INSURANCE PRINCIPLES AND PRACTICES
2. The modified preliminary term plan. Instead of allowing
the entire reserve on a policy to be freed for use as expenses
during the first year, only the reserve on an ordinary life policy
may be so used. Thus, the full net reserve (3 per cent basis)
on a twenty-year endowment policy issued at age 35 would be
$34.59 at the end of the first year. The reserve on an ordinary-
life policy is $22.00, and this may be borrowed, leaving $12.59
in the reserve. The reserve under this plan in like manner
gradually approaches the full net reserve and equals it at the
end of the twentieth year, but the deficiency is never as great as
under the full preliminary term plan. An Important variation
of this method of valuation is to use the 20 payment life policy
as the basis of calculation in place of the ordinary life.
3. Select and ultimate method. The mortality table deaths
are in excess of the actual deaths for the first few years of the
policy by reason of medical selection and by this method the
company is permitted to discount this saving in advance. The
benefits of medical selection are presumed to endure for five
years, the mortality the first year being 50 per cent of the
tabular or expected mortality, the second year's mortality 6S
per cent, the third year's mortality 75 per cent, the fourth year's
mortality 85 per cent and the fifth year's mortality 95 per cent
of expected. These savings the company may anticipate and
borrow from the reserve. Thus, on the twenty-year endow-
ment above mentioned, the full net reserve at the end of the first
year is $34.59, but $6.24 may be used, leaving $28.35 in the
reserve. The following table will show that by the end of the
fifth year, the savings having been exhausted, the reserve on
the select and ultimate plan equals the full net reserve.
TABLE V— SELECT AND ULTIMATE RESERVE ON A 20-YEAR
ENDOWMENT POLICY
Amount $1,000. Age 35. American Experience Table and 3 Per Cent
Select and Ultimate
End of Policy Year Full Net Reserve Reserve
1 $34.59 $28.35
2 70.40 66.92
3 107.50 105.93
4 145.91 145.50
5 185.71 185.71
The stricter laws authorize valuation on the select and ulti-
mate basis and this is sufficient for older companies. In the
SURRENDER VALUES AND LOANS 103
Middle West, where many young companies have been organ-
ized In the past few years, the laws permit the preliminary
term plans and there has been some agitation in the Middle
Atlantic States recently to recognize the preliminary term plan.
It must be clearly understood that the above statements are
neither direct nor implied reflections upon the standing of any
company, for practical solvency depends upon ability to pay
claims when due and not upon the possession at any given mo-
ment of funds segregated for a particular purpose, although
some may consider the latter as a partial Index of the condi-
tion of a company. To the writer's knowledge there has never
been a failure of any company that Is traceable to the use of
the preliminary term plan.
Cash surrender values and surrender charges. — Many poli-
cies do not remain in force for the period for which they were
originally Intended. Through carelessness, misunderstanding
and necessity there are numerous surrenders and lapses every
year. It has been found, however, that In case of withdrawal
it is not necessary for a policy-holder to forfeit everything he
has paid Into the company. As previously stated, the reserve
is the basis of the surrender value and the company stipulates
In the policy the amount of the reserve In the form of annual
values that will be returned to the insured if he no longer desires
to keep the policy In force. The amount he Is thus able to se-
cure is known as the "Cash Surrender Value".^
No reserve or surrender value is usually available to the in-
sured until the end of the second or third year of the policy,
largely due to the original commission, medical examination,
and other expenses of a new policy. However, the surrender
value continues to grow with the reserve, until at the end of
the 5th, 10th, 15th or 20th year the full legal reserve and the
surrender value coincide, as shown in Table VI. The practice
varies considerably among the different companies and in some
instances the cash value corresponds to the reserve at the end of
the third year. It should be mentioned, however, that where
this Is the case those who withdraw In the early years of the
policy are not contributing their share of the expenses of the
business.
* For table of surrender values see the policj[ in Appendix III. Also Table
yi, p. 104.
104 INSURANCE PRINCIPLES AND PRACTICES
TABLE VI— ORDINARY-LIFE POLICY CASH AND LOAN VALUES
COMPARED WITH FULL NET RESERVE
Age 25. Annual Premium $20.55. American Experience Table and 3 Per Cent
Cash and Loan Values
Full Net Reserve End of Year of an Old Line Company
$8.60 1
17.47 2 $7.47
26.61 3 16.61
36.04 4 26.04
45.76 5 35.76
55.77 6 46.77
66.09 7 58.09
76.72 8 69.72
87.67 9 81.67
98.94 10 93.94
110.55 11 106.55
122.49 12 119.49
134.77 13 132.77
147.39 14 146.39
160.36 15 160.36
173.67 16 173.67
187.34 17 187.34
201.37 18 201.37
215.77 19 215.77
230.50 20 230.50
A nominal surrender charge is frequently made, seldom ex-
ceeding $10 per $1,000 of insurance and often on a graduated
scale, decreasing as the policy becomes older. The charge is
justified on three grounds. ( 1 ) The expenses incidental
to the surrendering of the policy should not be borne by
the remaining policy-holders; (2) the company incurs the
expense of replacing a policy in the group for the one that has
been lost; and (3) the best medical risks voluntarily withdraw
and this results in an adverse mortality selection. There can
be little doubt as to the accuracy of the first two but the last
has not been definitely established. As to the insured, it would
seem that the best reason for such a charge is the discourage-
ment of unnecessary surrenders. The amount of the charge has
been a subject of State regulation, referred to more fully at the
end of this chapter.
Development and use of the "cash value" clause. — The
insurance companies have not always guaranteed surrender
values; in fact, there was a time when the lapsing of a policy
meant the forfeiture of all rights thereunder. This, as we have
seen, was unfair to the retiring member and some of the com-
panies consequently granted cash surrender values voluntarily.
This was followed by the so-called non-forfeiture laws
SURRENDER VALUES AND LOANS 105
which make such values obligatory, except for term insurance.
None of these laws require a cash value prior to the third year
but there are no restrictions if a company desires to grant it
earlier. As a result the tendency of recent years has been the
opposite of the early days of life insurance and in their rivalry
for business the companies have sought to outdo each other in
the liberality of their surrender values. While there is no doubt
that a cash surrender value is not only a privilege but a right of
the insured, the use of it should be confined to cases of absolute
necessity. Too often it has led to unnecessary forfeitures of
policies and irreplaceable loss of protection. Nor has education
as to the purpose of the policy served to lessen forfeitures. In
fact, they have grown at an alarming rate. Some idea of the
extent of this practice is shown by a comparison of the ways in
which policies are terminated. In a representative year, of all
the policies written off, about one-third in number and one-fourth
in amount are surrendered. An effort has been made by some of
the companies to check this by requiring a sixty or ninety-day
notice. But as long as liberality in this respect is used as a sell-
ing point it is doubtful if much can be accomplished.
Other guaranteed value options. — Besides the privilege of
securing the cash value of the policy by surrendering it to the
company there are other options left to the insured if he no
longer desires to pay premiums. The two most commonly
found are those granting extended term insurance and paid-
up insurance. These arc usually stipulated in the non-forfei-
ture laws in case of lapse. Extended insurance means that the
full amount of the policy will remain in force for such period
of time as the surrender value will purchase term insurance if
used as a net single premium at the attained age. This privi-
lege was the first development in guaranteed values, the first
to be required under non-forfeiture laws, and it is also the
provision which is usually automatic in case of lapse. Paid-
up insurance means that the surrender value may be used
to change the policy to one that is fully paid, of an amount
which the surrender value used as a net single premium will
purchase at the attained age. Besides the options mentioned
above annuities of various kinds are sometimes procurable
by the surrender value used as a net single premium. In
general the insured may use the surrender value of his policy as
a net single premium to buy whatever the insurance company
has for sale.
106 INSURANCE PRINCIPLES AND PRACTICES
Policy loans described. — Originally policy loans were the
result of voluntary concessions by the company, available only
to temporarily pay premiums and seldom for more than two or
three months. Competition has promoted promiscuous borrow-
ing, regardless of the purpose, and any amount up to the cash
surrender value can usually now be secured.^ A specified rate
of interest, not exceeding five or six per cent, is usually charged
either until the loan is repaid by the insured or the policy ma-
tures, in which latter case the loan will be deducted from the
proceeds along with any accrued interest. Interest is usually
paid in advance and frequently the surrender value may be bor-
rowed as of the end of the next succeeding year if the premium
and one year's interest on the loan have been paid.^
Extent and nature of policy loans. — The extent to which this
privilege is used can be understood when it is said that nearly
one-fifth of the reserves of the insurance companies are in-
vested in policy loans. This has been the subject of much criti-
cism, since it is maintained that insurance companies were not
originally intended to perform the functions of banks. During
the last score of years the percentage of reserves invested in
policy loans has steadily increased, the year 1919, however,
being an exception, as there was actually a decrease during that
year. At the end of 1918 the outstanding policy loans for all
the companies licensed to do business in the State of New York
were $713,087,000, which was decreased to $697,446,000 in
1919. It is claimed this decrease was due to the unusual pros-
perity during that year and it is expected that a period of finan-
cial stringency will again increase the loans. One of the
greatest reasons for these large policy loans is the exploitation
of this privilege as a competitive selling point. Some companies
have attempted to discourage policy loans by requiring sixty
or ninety-day notices and while this may act as a deterrent, the
only real solution to the problem is to educate the policy-holders
in this respect. Too few realize that when they borrow on
their policy they are leaving a legacy of debt to the benefi-
ciaries.
Advantages and disadvantages of policy loans, — As a gen-
eral proposition the loan provision is bad for both insurer and
insured, although there are exceptions. For example, in times
'For examples of loan values see the policy in Appendix III and also Table
VI, p. 104.
' For provisions see policy in Appendix III.
SURRENDER VALUES AND LOANS 107
of financial stringency loans on life insurance policies have pre-
vented financial embarrassment and possible bankruptcy. The
availability of such sums is also advantageous when a rare op-
portunity for wise investment presents itself. Furthermore,
many persons take insurance only because of this feature and
otherwise might not procure protection.
The objections to policy loans are more numerous than the
advantages. First, it reduces the amount of the insurance car-
ried by the individual, since the loan plus any accrued interest
will be deducted from the proceeds of the policy. Second, the
insurance companies, realizing that these loans are in most cases
demand liabilities, have to carry large amounts of cash and
other liquid assets, resulting in a lower interest return on the
investments. Third, the time when loans are greatest is dur-
ing a panic period. This naturally is the poorest time to liquid-
ate investments and the company sustains an additional loss.
Fourth, the effect on lapses appears very serious, when the high
percentage of the reserve loaned to the policy-holders is realized
and when it is further noted that the majority of borrowers
cease paying before the maturity of their policies. It might be
mentioned in this connection that only about eight per cent of
the loans are ever repaid before the maturity of the policy.
Fifth, it is sometimes argued that this lapsing, which is trace-
able to loans, also results in an adverse mortality selection, on
the assumption that the group that borrows and later lapses con-
sists of the best risks physically. As in the case of the cash
surrender value, the accuracy of this argument is difficult to
prove. It is, however, reasonable to assume that the poorer
risks do not take the chances of surrendering insurance that the
best risks are willing to take.
When policy loans are allowed to run and the interest accrues
for a considerable length of time it is not a very attractive
financial proposition to pay up. Therefore it has become quite
customary to cancel the old policy and secure a new one. This
often involves difficulties because of inability to pass the
required medical examination. It is evident that policy loans
are frequently disastrous and consequently should be discour-
aged in most cases.
State supervision. — ^We have seen In this chapter that one of
the most important functions of a life insurance company Is to
keep intact the large reserve fund which has been Intrusted to
it. In order that the great mass of people, to whom this reserve
108 INSURANCE PRINCIPLES AND PRACTICES
belongs, may be sufficiently protected, the several States have
passed insurance laws. Supplemental insurance incorporation
laws make requirements much more rigid than those specified in
general Incorporation laws. When a life insurance company is
organized a common requirement Is the deposit of from one to
two hundred thousand dollars worth of approved securities with
the State, which is to act as a guarantee fund. A maximum rate
of dividend which the stock-holders may receive Is frequently
specified. The company must also agree to furnish certain
statements, permit examinations, put certain provisions in their
policies and comply with numerous regulations. The necessity
for these arises from the fiduciary relationship of the company
to the Insured. Not only Is the company Itself affected but the
actions of insurance agents and brokers are also regulated by
law, particularly as 'regards representations concerning the
relative merits of different companies, the "twisting" of poli-
cies and prospective dividends.
In order further to safeguard the Interests of the policy-hold-
ers the manner in which the reserve may be Invested Is usually
specified by statute. The different classes of securities in which
they may place their assets are grouped below In the order of
their freedom from restriction:
1. Issues of the Federal Government.
2. Bonds of States, counties, and municipalities, If their rec-
ord is satisfactory.
3. Ordinary corporation bonds, where there has been no de-
fault of Interest.
4. Real estate and farm loan mortgages on property worth
twice the loan.
5. Real estate for the use of the business only.
6. Other property if acquired through foreclosure or as
security for a loan.
|7. Stocks of dividend-paying corporations.
Annual detailed statements of these Investments are furnished
to the proper state officials.
Not only is the safety of the reserve carefully guarded
but the manner in which It Is to be used In case a policy
is surrendered Is specified. In most States the minimum
amount of cash surrender value Is stipulated although all
good and reliable companies actually grant more than
this minimum. The New York law is typical, requiring
a cash surrender value after the policy has been
SURRENDER VALUES AND LOANS 109
in force for three full years, the minimum to be the re-
serve on such policy computed according to the standard adopted
by the company, together with the value of any dividend addi-
tions to the policy, after deducting any indebtedness to the com-
pany and one-fifth of the entire reserve, or the sum of two and
fifty one-hundrcdths dollars for each $100 of the face of the
policy, if the latter is more than said one-fifth. As was pre-
viously mentioned, this sum can be used in various ways and
does not have to be taken in the form of cash.
While the non-forfeiture laws compel the companies to
grant surrender values, they do not require them to make loans
and to keep the face of the policy in force. Therefore the loan
feature may be called gratuitous on the part of the insurer.
While the policy-loan provision is largely a selling point and
the result of competition, there is no doubt that it is better in
many cases than the surrender. For it is possible to secure ap-
proximately the same amount through a cash loan as through
surrender, and, further, when the policy is surrendered, the in-
surance is cancelled and probably lost forever, while under the
loan the insurance stays in force subject to the deduction of the
amount of the loan in case of death or maturity prior to re-
payment.
There are many other State regulations of vital interest to
the insured, especially those pertaining to dividends, which will
be referred to in the next chapter.
Chapter VIII
SURPLUS AND DIVIDENDS
The origin of the surplus. — The premiums paid on policies
take care of the death claims and the reserve.^ In fact, the net
premium as calculated is usually more than sufficient to meet
these items, much of the excess being due to a low interest rate
assumption and the extensive use of the American Experience
Table of Mortality, which overestimates the deaths in early
years. Morever, the allowance which is added to the net pre-
mium in the form of loading for expenses is frequently exces-
sive. As prudent managers the companies have underestimated
their income and overestimated their future liabilities. There-
fore after all the items of expense, cost of mortality, and re-
serve are taken care of, there is usually a sum remaining which
is known as the "surplus."
Participating and non-participating policies. — In a mutual
company all of this surplus belongs to the policy-holders but
in a stock company, if the dividend is not limited, a considerable
portion may go to the stockholders. Policies are therefore des-
ignated as participating and non-participating, having reference
to whether or not they share in the profits. The policy-holder is
in the position of a consumer who may deal either with a profit-
making or a co-operative store. As the mutual idea has gained
headway many stock companies have mutualized and most
of those that have not also write participating business. The
result is that nearly all policies now being written are really
profit-sharing. The theory of the participating business Is that
more than sufficient will be charged to meet anticipated cost and
expense, and that after the actual cost has been definitely ascer-
tained any surplus will be returned to the policy-holders in the
form of a dividend. On the other hand, the non-participating
business discounts or anticipates the future dividends and con-
sequently charges a lower initial premium. However, it has
been demonstrated that the premium on a participating policy in
a good mutual will, in the course of time, be reduced by divi-
* Except those on the natural premium plan.
110
SURPLUS AND DIVIDENDS 111
dends to less than the non-participating premium and that the
net cost in a long life is lower than on the non-participating
policy. The latter may have other advantages which at least
partially offset this. Lastly, we have the gain from forfei-
tures. As mentioned before, many companies do not grant sur-
render values until the end of the third policy year and if a
policy is lapsed during that period the reserve is withheld by
the companies. Since the greatest number of lapses occur in
the first few years of the life of the policy it will be seen that
in the majority of cases the company retains a considerable sum,
a portion of which is saving. Against this, however, the heavy
expenses of the early years must be charged. It has been ar-
gued that those who lapse are a select group and therefore
cause an adverse mortality selection which offsets the apparent
gain, but this is not borne out by the statistics of some of
the reliable companies. The second argument against this
item as a gain is that a policy has been lost and must be
replaced, which will mean expense. This of course is a valid
argument.
Apportionment of surplus. — A surplus having been earned,
some disposition of it must be made. In participating in-
surance it belongs to the policy-holders; In non-participating
the stockholders get it. How to divide it among stockholders
is not much of a problem, but since most insurance is written
on the participating plan, the important and difficult problem
is to apportion It equitably among the policy-holders.
The method of apportioning the surplus most commonly in
use Is known as the "contribution plan." It Is assumed in this
plan that a policy should receive as It has contributed. In
order to attain this result the policy is credited with (1) the
terminal reserve of the previous year, because this belongs to
it, as indicated In Chapter VI; (2) the premium of the year
just ended, since the policy must contribute this to the funds
available for death claims and reserve; (3) Interest on the re-
serve and premiums, since the company has had the use of the
money. It Is charged with ( 1 ) the policy's share of actual
expenses; (2) actual mortality cost for the year; and (3)
terminal reserve as of the end of the current year. The bal-
ance to the credit of the policy is surplus. It is evident that to
keep a separate account for every policy would be a gigantic
task. It is possible, however, to keep an account for each class
and age of policy: as, for Instance, endowments, whole-life
112 INSURANCE PRINCIPLES AND PRACTICES
term, etc.; policies of each kind issued in 1904, 1905, etc.;
policies of each kind segregated according to age at issue. To
go further than this would be to increase the expense beyond
the benefit to be gained. The system may be compared to the
accounts of a commission agent who has so large a number of
consignors that it is possible to do substantial justice by classi-
fying them into groups according to the character of product
and size of account, and who pays interest upon sums left with
him on deposit.
It can be seen, however, that a number of problems present
themselves in working out the items of this account. General
expenses can be charged fairly equitably on the basis of $1,000
of insurance but when it comes to the cost of getting the busi-
ness it is very difficult to decide whether the new or the old
policies should bear this. To complicate the problem still
more, the equity of dil^erent types of policies presents itself.
Distribution of interest earnings is not so difficult. Since the
interest Is earned on the reserve, the best solution is to allow
the interest on the basis of the reserve as of the end of the pre-
vious year plus the premium paid at the beginning of the year.
Therefore, the age of the policies, the kind of policies, and the
number of policies in the group all serve to make the subject
one which is difficult to solve, and it is doubtful If any plan, even
with various modifications, gives absolute accuracy and fair-
ness between the individual policyholders.
Distribution of surplus. — The greater part of the surplus
is distributed to the policy-holders in a mutual company and
also to participating policies In stock companies. The common
practice now is to pay it In the form of an annual dividend.
In the past not all companies saw fit to pay this sum as a
dividend but allowed It to pile up until a huge surplus was
accumulated. This usually led to extravagance on the part
of the company and to prevent the flagrant waste of policy-
holders' funds some States have passed laws compelling distri-
bution. For Instance, the New York laws limit the amount
that may be withheld from policy-holders to a varying percent-
age of the reserve liabilities as follows:
If the net value of the policies in force Is less than $100,000,
20 per cent of such net value or the sum of $10,000,
whichever is the larger, may be retained as a contingency
reserve. If the net value of the policies Is over $100,000,
then there shall be a decrease of the percentage thereof, In
SURPLUS AND DIVIDENDS 113
measuring the contingency reserve, of 1/2 per cent for
each $100,000 of net value up to $1,000,000.
y2% for each $1,000,000 of net value from 1 million up to 10 million
1/2% for each 2,500,000 of net value from 10 million up to 20 million
J^% for each 5,000,000 of net value from 20 million up to 50 million
J/2% for each 25,000,000 of net value from 50 million up to 100 million or over
The sum left undistributed goes under many headings,
varying with the practices of the respective companies. The
most common terms employed are "contingency reserve," "mor-
tality fluctuation fund," "asset fluctuation fund," "equaliza-
tion fund", and other similar names denoting the purpose of
the account.
Divisible surplus and the nature of a life insurance divi-
dend. — After special reserves, as set forth above, are deducted
from the surplus, the remainder is available for distribution as
a "dividend." The term "dividend" as applied to life insur-
ance policies is really a misnomer. We have seen that the
source of dividends really lies in the fact that it has not cost
as much to conduct the business as was anticipated. In other
words, as in a co-operative store, the dividend is not a profit
but a saving, which saving is refunded to the policy-holders in
the proportion which they were overcharged. It differs from
dividends on shares of stock as it represents salvage and not
profits, and for this reason should not be subject to taxation.
Size and importance of dividends. — So large are the "divi-
dends" in some cases that it is very important, when purchas-
ing insurance and making comparison of costs of different
companies, to take into consideration the dividends that have
been paid and the prospects that they will be continued. For
a comparison of participating and non-participating policies
in the early years when the participating rate is the higher of
the two, the non-participating policy should receive credit for
the amount of interest that this diffence in premiums would
earn. Thus, if the premium the first year on a non-participa-
ting policy is $14.72, and on a participating policy $18.00,
the interest on the difference between the two should be credited
to the non-participating policy. It is frequently maintained
that the individual would not be likely to invest the difference
and receive interest on it. Nevertheless, this is the only man-
ner by which an accurate comparison can be made. Table I
shows the existing dividend scale of a participating policy
114 INSURANCE PRINCIPLES AND PRACTICES
issued at age 21, on a 3^ per cent basis, exhibiting a grad-
ual increase as the policy becomes older. Compare the column
headed "net cost" in Table II, which gives the constant non-
participating rate at age 21 on an ordinary-life policy, and
shows how the participating rate soon reaches the non-partici-
pating and then continues on its downward journey until there
is no doubt as to which has the lowest cost in later life.
TABLE I
Age 21. Ordinary-Life Policy, Partic-
ipating. Premium $17.21
End of
Year Dividend Net Cost
1 $3.27 $13.94
2 3.34 13.87
3 3.41 13.80
4 3.49 13.72
5 3.56 13.65
6 3.65 13.56
7 3.73 13.48
8 3.83 13.38
9 3.91 13.30
10 4.01 13.20
15 4.55 12.66
20 5.22 11.99
25 6.10 11.11
30 7.28 9.93
35 8.86 8.35
40 10.81 6.40
45 13.08 4.13
50 15.66 1.55
TABLE II
Age 21. Ordinary-Life Policy, Non-
Participating. Premium $13.77
End of
Year Cost Saving Excess
1 $13.77 $0.17
2 13.77 .10
3 13.77 .03
4 13.77 $0.05
5 13.77 .12
6 13.77 .21
7 13.77 .29
8 13.77 .39
9 13.77 .47
10 13.77 .57
15 13.77 1.11
20 13.77 1.78
25 13.77 2.66
30 13.77 3.84
35 13.77 5.42
40 13.77 7.37
45 13.77 9.64
50 13.77 12.22
Since it is desirable to try to anticipate the possible dividends,
this is often attempted approximately by an examination
of the sources, and several ratios are commonly em-
ployed for this purpose. A very common one is the ratio of
actual to expected mortality, a low ratio being presumed to
indicate the exceptional health of the risks on the company's
books. Unless made advisedly, a comparison of different
companies in this respect is fraught with considerable danger.
For example, it is manifestly unfair to compare a young com-
pany with an old one, inasmuch as nearly all the lives in a
new company are freshly selected, while nearly all of the risks
of the older company have been on the books many years.
While the mortality of the new company may be very low for
SURPLUS AND DIVIDENDS 115
a few years, It is quite possible that it will be fully as large
as that of the older company after this temporary advantage
disappears. Likewise the class of business in which the com-
pany specializes may be an influential factor. It has been
said, for example, that the mortality on endowment policies
is much lower than on whole-life policies. Another mislead-
ing ratio is that of actual expenses to loading, which being
low, is often assumed to indicate economical management.
It should be plain that the result of this ratio is dependent,
not only on the amount actually expended, but also upon the
assumed expenses or loading. In order to effect a low ratio
of the above type it is necessary only to increase the loading
charged the policy-holder. Another ratio is actual interest
earned to assumed interest or "interest required." In a com-
parison of companies they must all be operating upon the same
interest basis, otherwise the numerators of the ratios are dis-
similar in character and the results nil. The safety of the
investments likewise receives no consideration, though very
important. As no one would think of judging an industrial
corporation by a comparison of "anticipated" cost of a unit
of product and actual cost of the same or by a comparison of
actual earning and a "fair" return on investment without
further definition and qualification, so these comparisons in
life insurance usually prove fallacious.
Time of distribution. — As mentioned above, the dividend
is usually on an annual basis. Not only does this produce the
best results in most instances but in some States it is required
by law after the third policy year. It is fairest to the policy-
holders and prevents the company from having an idle fund
open to abuse or extravagance, as in the case where the div-
idend is deferred. No company, however, pays a dividend
until the policy has been In force at least one year, and many
require that two or three annual premiums shall have been
paid. When it commences, however, the dividend continues
and grows larger the longer the policy runs, unless the com-
pany meets with some unusual adverse experience.
The annual dividend scheme has not always been in effect
but grew out of the deferred dividend plan. Under this sys-
tem dividends were not paid except at the end of certain pe-
riods such as 5, 10, 15 or 20 years. "Deferred dividend
policies" were sold In great quantities at one time, but because
of the dissatisfaction resulting from misunderstandings and
116 INSURANCE PRINCIPLES AND PRACTICES
overestimates of prospective dividends, many States prohib-
ited them and they have now been practically abandoned.
Another type of dividend was given under the old ton-
tine policy, now legislated out of existence. Under this pol-
icy all of the persistent policy-holders at the end of a specified
period received the available funds. Those who had lapsed
prior to this time forfeited everything they had paid, as did
those who had died, the result usually being a large *'melon"
for those who remained. The deferred-dividend policy ap-
plied this same forfeiture principle to dividends only, the ex-
tent of its effect in this case depending on the length of time
the dividends were withheld. These plans Introduced into life
Insurance a speculative element entirely foreign to its purpose.
The deferred dividend was undesirable because ( 1 ) the sur-
vivors gained by the death of others, (2) the large undis-
tributed sum held by the company frequently resulted in
extravagance and (3) agents overestimated future dividends
and many misunderstandings followed.
Special types of dividends. — Two other special forms of
dividend should be mentioned. The first is the "guaranteed
dividend," where the company promises at the time of writing
the policy that a dividend will be paid. The other is the "pre-
ferred dividend," which is nothing more than the preference
of policy-holders over stockholders, in the case of stock or
mixed companies. A guaranteed dividend is really not a div-
idend, as the cost of it may readily be Included in the premium;
In fact in most States the insurance laws make it illegal to
promise dividends unless the cost of the same are compre-
hended in the premium.
As a result, neither companies nor their agents Issue any
statements which might be constructed as a promise of divi-
dends. They do, however, issue "Illustrative dividends" such
as those in Table I, which are figures showing what might be
expected if the existing dividends are maintained. The dan-
ger of overestimating future dividends was well demonstrated
by the experience of 1918, when many dividends were cut or
abandoned owing to the unusual mortality.
Sources of dividends. — A more detailed explanation of the
sources of surplus is necessary in order to understand the
dividends paid on life insurance policies.
Mortality saving is usually one of the most important
sources. Since the American Experience Table is used by
SURPLUS AND DIVIDENDS 117
practically all companies to calculate the net premiums, most
companies will have this source. This being an "Ultimate
Table," ignoring medical selection and constructed prior to
the recent strides of medicine and surgery which have greatly
lengthened life, it anticipates a much higher rate of death
than that which actually occurs. Many of the companies with
rigid medical examination show an actual experience of from
SS to 65 per cent, of expected mortality. As a natural con-
sequence the reserves are held' longer, become larger on the
average and earn more interest than anticipated; and due to
the longer life of the Insured more premiums arc collected.
Another source is loading, which includes not only the reg-
ular expenses but usually a sum for contingencies, such as
high death rates due to epidemics, loss on investments on ac-
count of the unprofitableness of investments or the failure to
secure Investments earning the assumed rate of interest. How-
ever, expenses can all be calculated very closely and conse-
quently economies do not contribute a very great amount of sur-
plus to the business.
Next we have gains from investments, which are of two
kinds: those derived from appreciation in the value of securi-
ties and those secured through larger interest earnings than
the rate assumed In the calculation of premiums. The latter
has become more important during recent years, owing to
the steady Increase in the rate of interest paid on securities.
With the exception of the years 1918 and 1919, when the
Insurance companies absorbed a lot of low interest-bearing
government securities, they have been favorably affected by
these higher Interest rates, although the benefit to policy-hold-
ers is offset by the lower purchasing power of money.
Lastly, and least in importance, are the gains from forfei-
tures which sometimes occur in companies that do not grant
surrender values during the early years of the policy.
Dividend options. — The form in which a dividend may be
taken Is usually optional with the policy-holder. Either at
the time of the writing of the policy or at the time the first
dividend is payable the insured makes a selection which re-
mains effective year after year unless a change be requested.
Where no selection Is made there Is usually an automatic pro-
vision to the effect that the dividend shall be applied as a net
single premium to purchase paid-up additions, or else cash
may be paid.
118 INSURANCE PRINCIPLES AND PRACTICES
The number of options varies with the companies, the
more common being ( 1 ) to take the dividend in the form of
cash or apply it to the current year's premium, (2) to pur-
chase non-forfeitable paid-up additions which may be partici-
pating or non-participating according to the terms of the
contract, or (3) to accumulate at a fixed rate of interest,
withdrawable at the policy-holder's option, or in some
cases on policy anniversary. Other choices frequently found
are ( 1 ) to use the dividend to make the policy one that is
paid-up, (2) to convert the existing policy into an endow-
ment or (3) in the case of an endowment to shorten its term.
Chapter IX
INSURABLE INTEREST, THE BENEFICIARY AND
ASSIGNMENT
Description of insurable interest. — When an application
for a policy is received by an insurance company it is not
usually granted unless there is evidence of the "insurable in-
terest" of the applicant. Such an interest may arise from
many causes but three general groups will include practically
all cases: (1) the interest of a person in his own life; (2)
an interest arising from "love or affection," i.e., through blood
or marriage; (3) a pecuniary interest. They will be sepa-
rately discussed in this order.
Interest of a person in his own life. — One of the impor-
tant differences between life insurance and other forms of in-
surance is to be found in the application of the principle of
indemnity. The purpose of property insurance is to make
good the loss sustained. Thus, if property worth $5,000 is
destroyed and the owner has a fire insurance policy for $10,-
000, the maximum amount that will be paid is $5,000. But
in life insurance the courts have held that the value of a per-
son's life to himself is incapable of determination; therefore
the only limits to recovery are the maximum amounts which
the insurance companies will accept. This view leaves us in
an indefinite position and it would seem advisable to apply
the principle of the "capitalization of a human life," i.e.,
capitalize the income which can be reasonably anticipated
if life continues and' purchase a policy which will assure the
payment of such a sum . Furthermore, it is not by any means
certain that the courts will always continue their present atti-
tude.
Interest of a relative. — This refers to the interest which
arises through "love or affection" induced by blood relation-
ship or marriage; although the mere fact that relationship
exists is not conclusive evidence that an insurable interest also
exists. Such interest is presumed in the case of husband and
wife, and usually parent and child, but beyond this the court
decisions indicate that some expectation of pecuniary gain is
119
120 INSURANCE PRINCIPLES AND PRACTICES
necessary in order to make the interest insurable. It should
be kept in mind, however, that the insured who takes out his
own policy may make anybody his beneficiary. The pre-
ceding discussion applies only to those cases where one person
obtains insurance on the life of another.
A pecuniary interest. — By this we mean the interest which
one person (for example, a creditor) has in the life of another
(his debtor) when the continued existence of the debtor prom-
ises a pecuniary gain to the creditor and when the debtor's
premature death may destroy these chances. The extent of
the interest of a creditor is limited by the courts and has been
held frequently to be the amount of the debt with interest,
plus the policy premium with interest thereon. The interest
of a dependent or other relative who has an expectation of
pecuniary gain is included here. The somewhat humorous
case has also been cited of the interest a fiancee has in her
fiance, i.e., an anticipated pecuniary benefit which will arise
from the continued life of the person insured.
To this group also belong the interests involved in the so-
called "corporation insurance" and "partnership insurance."
By the first is meant the interest that a corporation has in its
employees, particularly in the highly-skilled executives whose
death may mean serious loss or even ruin. In the case of
partnerships, each partner has an interest in every other part-
ner, since the death of a valuable member of the firm may
cause its failure. Furthermore, the withdrawal of capital
that may ensue upon the death of a partner may place the
remaining partners in a perilous financial position. The ex-
tent of the insurable interest in either of these two latter
examples is about as difScult to determine as the amount of
insurable interest which the insured has in his own life.
The justification for the requirement of insurable interest
lies largely in public policy. Without such a requirement
people could insure one another's lives indiscriminately and
the contracts would be largely wager contracts, speculations
on the probable duration of an individual's life. In fact,
such policies might endanger the life of the insured, partic-
ularly in the case of children.
The beneficiary defined. — The beneficiary is the person des-
ignated in the policy to receive the proceeds when the contract
matures. All such persons must have an insurable interest,
as explained in the preceding section, except where the insured
INSURABLE INTEREST 121
takes out his own policy and designates some person or per-
sons other than his estate or himself as beneficiary or bene-
ficiaries. It is the purpose of this section to explain the
important legal effects of the two principal methods of naming
beneficiaries; first, with the right of revocation; and second,
where the insured does not reserve the right to change the
beneficiary.
Reserving the right to change the beneficiary. — This is the
method most commonly used, since the insured is certain to
retain complete control of his policy.^ If at some later date
he sees fit to select another beneficiary there is nothing to
prevent it, since the only right the existing beneficiary acquires
is an "expectancy" of future gain. If, for instance, the in-
sured desires to use the policy as security for a debt he will
have no trouble in changing the beneficiary, although it should
be mentioned that a better method to protect a lender is to
name a relative as beneficiary and then to assign the policy.
It should be further added that some companies will not per-
mit the designation of a beneficiary whose only relationship
is that of creditor but require the method just mentioned.
On the other hand, if the right of change was not reserved the
assignment is not possible without the consent of the bene-
ficiary. As an illustration of the policy provision covering
this point the following is cited: "The right of revocation
reserved by the insured. When the right has been re-
served, the insured shall have full power while this policy is
in force (subject to any previous assignment) to change the
present beneficiary or beneficiaries. Such change shall be made
in writing and shall be valid only upon its endorsement on this
policy by the Company at the Home Office." Various word-
ings to the same effect are used by different companies.^
While the advantages of this method are ostensibly con-
clusive there arc some very serious disadvantages. In case of
bankruptcy the creditors have been permitted to attach a life
insurance policy and use the proceeds for their protection.
A specific exception to this rule is found in the National Bank-
ruptcy Act, which gives a bankrupt the right to pay over the
cash surrender value to the trustee, but failure to do this
within thirty days of the ascertainment of the amount means
that the entire policy passes to the trustees.
* See Appendix III.
* See Appendix III.
122 INSURANCE PRINCIPLES AND PRACTICES
Another and much broader protection to beneficiaries is by
State statute, for under certain conditions the laws of some
States prevent creditors from obtaining any part of the policy,
not even the cash surrender value. These conditions usually
are found where a wife or child has been named as beneficiary;
some laws going so far as to include dependent relatives.
However, most such statutes place some limitation on the
amount of this exemption by specifying some maximum annual
premium, such as $500 in the State of New York. Contrasted
with this in Pennsylvania no limit is specified.
Right of revocation not reserved. — When the insured does
not reserve the right of revocation the beneficiary obtains
a vested interest in the policy. The beneficiary is no longer
dependent on the whims of the insured and the policy is not
the absolute property of the latter. This method is of course
of greatest advantage to the beneficiary because the insured
cannot assign the policy, insert another beneficiary, or make
any change without the written consent of the existing bene-
ficiary. The further advantage of this method is that
where there are no State statutes preventing creditors from
taking over the policy, they cannot take it from the insured if
he is a bankrupt, due to the vested interest of the beneficiary.
The principal disadvantage is that it binds the insured, al-
though he can cease the payment of premiums. Another all
too-common illustration of the disadvantage of this method to
the insured appears in the case of a man who has irrevocably
named his wife as beneficiary and who, after having paid a con-
siderable sum in the form of premiums, becomes estranged
from her or divorced. He then usually does not desire her to
receive any benefits under the policy but is powerless to do
more than cease paying premiums.
Purpose of assignment. — Among the numerous uses of life
insurance is its use as security for a debt. Sometimes a debt
is the original cause for obtaining the insurance but more
often the opportunity to make use of the policy as collateral
arises after it has been issued. In either instance assignment
seems to be the best method of accomplishing the desired
result.
Where the policy is primarily secured to protect a creditor,
it is a matter of expediency to name as beneficiary some per-
son with whom the insured has more than a business relation-
ship, because of the probable changes in the amount of the
INSURABLE INTEREST 123
debt without any corresponding change in the face of the
policy. Furthermore, some companies require it. If the
creditor is named as beneficiary he will receive the full amount
of the policy if the insured dies, and if the debt has been de-
creased in the meantime he may receive more than his due.
The best method to prevent this is for the insured to name
a specific beneficiary, such as his wife, and make an assign-
ment to the creditor "as his interest may appear." Thus any
possibility of excess payment being made to an outsider is ob-
viated, since the equity of the assignee will be limited to his
interest, and if there is a balance it will revert to the bene-
ficiary, who presumably will be a member of the family.
Method of assignment. — Unlike fire insurance policies,
there is no special form attached to life insurance policies for
the purpose of assignment. No particular wording is needed
to accomplish the assignment as long as it is sufficiently defi-
inite to establish a legal claim, although as a matter of accom-
modation and uniformity, the insurance companies usually
furnish forms upon request.^ They do not, however, assume
any responsibility as to the legality or effect of the assignment
and furthermore will not be bound to an assignment until it
is on file at a designated office. This, however, does not
mean that the consent of the insurance company is necessary
as in the case of a fire policy.
When the policy is obtained with a view to protecting a cred-
itor complications can be avoided if proper care is taken,
but where an attempt is made to assign a policy which has
been in force for some time and already has a large surrender
value, difficulties are frequently encountered. Thus if the in-
sured has named a beneficiary without right to change, written
consent must be obtained from the beneficiary. This is some-
times impossible. It should be added that companies some-
times request the consent of the beneficiary even if the right
to change has been reserved by the insured. Further compli-
cations are invited when an assignee attempts to assign a policy
because the company may have a lien against the policy of
which the creditor is not aware and it is a well-established
rule that the assignee can only receive those rights which
the assignor possesses at the time of assignment, even though
a new contract exists between the company and the assignee
beginning with the date the company approves the assign-
' See Appendix VIII.
124 INSURANCE PRINCIPLES AND PRACTICES
ment. Then, too, State statutes sometimes make certain re-
strictions, particularly where a beneficiary who is a dependent
relative assigns his or her rights. In fact, the assignment
by an assignee is something to be avoided, if possible, since
the policy is not a negotiable instrument and unforeseen
legal difficulties may be encountered. Formalities are some-
times required for an assignment. If the assignment is made
by a corporation it is customary for the insurer to require
a copy of the minutes of the Board of Directors authoriz-
ing the assignment, in addition to a copy of the assignment
itself.
When the obligation for which the policy has been assigned
is discharged, it is advisable to secure a "release of interest"*
and file it with the insurance company. The reason for this
is that while policies are usually placed In the hands of the
assignee, the courts have held that such possession is not es-
sential. Consequently the possession of the policy by the In-
sured is not conclusive evidence that the obligation has been
discharged. A "release of interest," however, will prevent
legal difficulties.
The application. — The first step In securing a policy Is to
fill out an application. This Is usually divided into two parts. ^
The first part relates to the amount and kind of policy, the
premium, the age of the applicant, the amount of other Insur-
ance carried, etc. The second is used In connection with the
medical examination and In addition to a statement of the
results of the examination by a physician, questions must be
answered by the applicant regarding his health, his habits and
his family history. Some of the statements thus set forth
are deemed warranties and some representations. If the state-
ment is a warranty Its untruth or violation is sufficient to void
the policy. If It Is a representation the policy will not be
voided unless the statement was material to the risk. The ef-
fect of such warranties has been mitigated In two ways. First,
many States have passed laws to the effect that In the absence
of fraud all statements shall be considered as representations.
Secondly, an "Incontestable Clause" has been added to the
policy. This is usually to the effect that the policy is incon-
testable by the company after the policy has been in force for
one year, except for non-payment of premium.
* See Appendix X.
' See Appendices I and II.
INSURABLE INTEREST 125
Settlement of claims. — Settlement of policy claims arises
in four ways :
1. Surrender. — This is when the insured surrenders his pol-
icy to the company for the cash value. All parties interested
in the policy usually have to sign a form requesting the cash
value.
6
2. Matured Endozvments. — It is customary for the com-
pany to send notice to the insured at the maturity of the en-
dowment, whereupon he files a statement to the effect that
he is still living and the company pays the proceeds to him.
With the exception of corporation and partnership insurance
the beneficiary seldom has any interest in the endowment
feature.
3. Death. — When the insured dies it is necessary that the
company be notified. Then with the assistance of a company
representative the "Proofs of Death"^ are made out and filed
with the company. As soon as approved the claim will be
paid. It should be added that a notification or request for
payment is not a claim until the proof of death has been re-
ceived. Therefore, when a company says that all its claims
are paid within one day, it means one day after receipt of
proof of death and not one day after death.
4. Anmiities. — The payment of an annuity begins at a fixed
date which may be, as previously stated, either immediate or
deferred. The company may require, at the time of any peri-
odical payment, evidence that the insured is still alive.
' See Appendix XI.
^ See Appendices XII and XIII.
Chapter X
SPECIAL FORMS OF LIFE INSURANCE
Fraternal insurance — History and description. — Fraternal
insurance is possibly the oldest form of life insurance and its
origin may be traced back many centuries to the time when
organizations were first formed for mutual benefit. While
these historic unions and guilds never applied the word "in-
surance" to their operations, they nevertheless performed the
functions associated with the name. In the United States the
growth of fraternals for the purpose of insurance has been
parallel with that of the old line (legal reserve) insurance
companies and today, while they have not nearly so much
insurance in force as the latter companies, they have enormous
memberships. Most of this growth has taken place during
the last half century, for it was not until after the Civil War
that the really phenomenal increase took place. One of the
chief reasons for this was the fact that the legal reserve com-
panies had just entered upon their period of expansion, fur-
nishing great stimulus to the fraternals. The fraternals sup-
plied keen competition although their schemes were then often
based on fallacious arguments. They maintained that the
legal reserve companies were charging a high level premium,
much larger than current mortality costs and including an
clement of reserve, but that since the average age of member-
ship and average death rate did not change much, year after
year, this reserve was unnecessary. Therefore all they would
collect from their members was the average annual cost. At
first sight this seemed quite a plausible argument because it
was commonly observed that the average age was constant in
a given community. While this was true of a particular lo-
cality because births and deaths balanced each other, it did
not necessarily apply to individual groups and associations in
the community. Consequently as the members grew older the
probability of death increased rapidly. These increases in
the rate of mortality soon had many of the societies in finan-
cial difficulty and they were then compelled to cut down their
benefits and in many cases to dissolve.
126
SPECIAL FORMS OF LIFE INSURANCE 127
The stronger of these associations, however, were able to
pull through by increasing their rates, a measure made pos-
sible only by the nature of their organization. Having been
founded on the basis of fraternal spirit, the members often
felt that they were united by a bond stronger than one of mere
financial relationship and stood by their brothers through
financial difficulty. In this type the social feature was nearly
as important as the benefits. Usually such fraternals were
organized on the lodge principle, with local chapters acting
under the supervision of a superior lodge or lodges which were
State or national in character.
It was this better type of fraternals just described that was
able to exist, and the sounder of them formed the National
Fraternal Congress. This organization constructed a table
of mortality from their combined experience and called it the
National Fraternal Congress Table. Recognizing their de-
ficiencies, they attempted to induce all similar societies to con-
form to a reserve basis as ascertained by this table. Oppo-
sition was met in the form of an association of the weaker
fraternals, and no common agreement could be made to sat-
isfy all. This agitation led to the so-called "Mobile Bill,"
formulated by the insurance commissioners at a convention in
Mobile. The "New York Conference Bill," which is a modi-
fication of the "Mobile Bill," has been adopted by many
States. These laws induce the fraternals to come over
to the legal reserve basis. However, they do not use the
American Experience Table as a basis for calculating the re-
serves required but allow the fraternals to use the table made
from their own experience. An exception to this is where the
American Table is specified by law as the measure of the re-
serve in order to determine whether a fraternal can grant loan
and cash values.
Their combined experience as shown in the National Fra-
ternal Congress Table does not coincide exactly with the
American Experience Table and their reserves are smaller.
Many are still confronted with the problem of bringing the
reserves up to an adequate basis and under some recent State
laws this must be accomplished in a given time. Until this is
completed they may find it necessary to charge rather large
premiums and it should be added that in the process of rec-
tifying the errors of the past many have fallen by the wayside.
The reason for this is more apparent when it is realized that
128 INSURANCE PRINCIPLES AND PRACTICES
the old line companies hold approximately twelve times as
much reserve per $1 of Insurance In force as do the fraternals.
Differences between fraternal and old line insurance. — The
idea that a reserve was necessary has always been the chief
difference between the old-line companies and the fraternals,
but on this point they are now a unit/ Some other differences
still exist, however, and should be mentioned. The fraternals
grant a "benefit certificate" or "life certificate" In place of
a policy, the latter being a long-term contract with a fixed
premium wherein the company Is bound but the Insured Is not.
The certificate specifies that the benefits are dependent not
only on payment of dues but upon compliance with the by-
laws and constitution of the society, and members are not al-
ways assured that there will be no change in the premium.
Other usual restrictions are that only relatives may be named
as beneficiaries, and assignment to persons outside of this group
Is prohibited.
Nevertheless, there is nothing Inherently wrong with fra-
ternal Insurance and Its future possibilities arc very great.
This is true more especially since they have been reconciled' to
a scientific basis. Under Intelligent and efficient management
they have lower expenses than the regular commercial com-
panies because there are no agents' commissions and, fre-
quently, no medical examination. A further advantage Is
that a fraternal bond tends to hold the society together and
thus reduce lapses. In view of these conditions we can ex-
pect the stronger organizations to grow and become larger
and better than ever, and as long as the spirit of fraternalism
is extant the old-line companies will meet with plenty of com-
petition.
Assessment insurance. — Assessment insurance furnishes
glaring Illustrations of the fallacies which have been prevalent
in regard to Insurance. This form of Insurance differs but
slightly from the former fraternal system; In fact many
fraternals have used It. But Its most extensive use has been
by organizations formed for the purpose, and by the so-called
business assessment associations, which usually confine their
membership to particular trades. The earliest assessment
plan was where each and every member was assessed a flat
amount, so that the total collected was just sufficient to meet
the current costs, collections being made each time a member
*Sce Appendix XIV.
SPECIAL FORMS OF LIFE INSURANCE 129
died. If this be applied to any one group, it is equivalent to
the one-year term policy on the increasing step-rate plan.
The objection mentioned in a previous chapter (Chap. VI)
concerning the one-year term with an increasing rate applies
to assessment insurance with equal force, i.e., the rate at
the older ages, because of the greater number of deaths, rises
so rapidly and to such an amount that it is prohibitive. The
other and more Important objection is that the members
fail to live up to their agreements. This will be better un-
derstood by an explanation of how the method worked out.
Where organizations used the assessment scheme, the as-
sumption was that the young members would counterbalance
the older, which in fact did not occur. The discrepancy be-
tween similar premiums and dissimilar ages soon became ob-
vious. The younger men would see the mounting costs caused
by the older members and either not enter or drop out and
join a group with younger lives and lower costs. So, fre-
quently, all the young blood would disappear and there would
be nothing left but numerous old members and, in consequence,
a rapidly soaring mortality cost. Eventually this would be-
come unbearable and the society would end.
A modification of the flat assessment was to scale It on the
basis of the attained age at entry. While this was a slight
improvement, It only postponed the inevitable. Another at-
tempt to stave off the approaching difficulty was to collect the
assessment In advance; but this merely delayed the imposition
of extra charges. Although the plan is now in disfavor, it
Is by no means extinct. A number of fraternals still use the
system In their local lodges, as do some of the business as-
sessment societies.
Industrial insurance — Origin and purpose. — Industrial In-
surance was first Introduced into the United States in 1875,
having had its origin in the recommendations of a Parliamen-
tary Committee investigating insurance for the working classes
in England, about 1854. This Committee found that wage-
earners really were in greater need of insurance than the class
of people who were already insured but, owing to the system of
premium payments, the more humble working man was un-
able to take advantage of the existing plan. Trade guilds,
burial clubs and some fraternals were available to him, but
these were not managed on a scientific basis and their suc-
cess depended largely on the ability and willingness of the
130 INSURANCE PRINCIPLES AND PRACTICES
members to pay. The result, of course, was not satisfactory,
as financial adversity often relieved members of their sense of
responsibility and failure followed. To solve these difficul-
ties it was suggested that insurance companies conducted on a
scientific reserve basis provide ordinary insurance for the
masses by charging a weekly permium and sending a personal
representative of the company to collect it. This plan was
attempted by several companies and the results were most
gratifying. Its extension into other countries. Including the
United States, followed, and it has met everywhere with
practically the same success. In the United States Its growth
has been phenomenal; in less than a half of century It has
grown until it now involves over forty million policies with
a face value of about six billions of dollars.
The system explained. — Practically the same policies that
are written In the ordinary business are included In the in-
dustrial plan, i.e., ordinary-life, limited-payment, endowments,
etc. Guaranteed values, paid-up Insurance, extended insur-
ance, and cash and loan values are also granted.
However, there are some Important differences, which are
described below:
1. Medical Examination. — This has been found to be very
costly when compared with the size of the average Indus-
trial policy. Consequently either the agent or superintendent
makes a report as to the health of the person to be Insured
and this is used as the basis of acceptance or rejection. Oc-
casionally, if the size of the policy warrants, a medical exam-
ination is given.
2. Insurance on children. — Children are accepted under this
plan for a limited amount, although as the child grows older
the amount may be increased In accordance with special infan-
tile tables constructed for the purpose. It might be men-
tioned that the child's endowment is a very popular policy in
this type of business.
3. Size of Policy. — The size of the industrial policy aver-
ages less than $200. However, it is not customary to express
the amount of an Industrial policy by Its face value, but rather
by the weekly premium. I.e., 3-, 5-, 10-, 15-cent policy, etc.
4. The Premium. — The premium differs both in the manner
of payment and the annual cost per $1,000 of insurance.^
a. Marnier of payment. — In place of sending the premium
° See Appendix VII.
SPECIAL FORMS OF LIFE INSURANCE 131
to a designated office an agent calls once a week to collect it.
In order to do this the industrial companies maintain a very
large force of agents, supervised by a superintendent or assis-
tant superintendent who has charge of a specified territory.
The agents are given a "debit," which is the total amount of
weekly premium collections they are to make. In addition to
this they are supposed to solicit new business, prevent lapses,
and promote the interests of the company. The remunera-
tion is usually a commission on the weekly collections and the
new business written.
b. Cost per $1,000 of Insurance. — The cost is consider-
ably higher than for ordinary insurance, due principally to the
expense of collecting the premium and the higher rate of mor-
tality among industrial workers. The system previously ex-
plained for premium collection Is expensive, but it has been
learned by experience that as far as wage earners are con-
cerned premiums must be collected by a personal representa-
tive and at frequent intervals.
The higher mortality rate among this class of people has
been the subject of much Investigation and special tables have
been constructed after a detailed analysis. It has been found
in these analyses that the chief causes for the higher mortality
are unsanitary homes, inadequate food, hard work, close con-
finement, necessary exposure, lack of best medical skill, atten-
tion secured only In the last emergency and ignorance of the
simplest laws of hygiene.
5. Deferred Benefits. — It Is sometimes provided that if
death occurs during the first six months of the policy only one-
half of the face of the policy will be paid. In the case of
policies on children the face is frequently on an ascending
scale, and as the child grows older the amount of the insurance
increases, although the premium remains the same.
Advantages of industrial insurance. — That Industrial Insur-
ance is a necessity there can be no doubt, even though it has
been frequently subjected to severe criticisms. These objec-
tions refer principally to the high cost and alleged extrava-
gance, which are far outweighed by the following advantages :
1. The wage-earner is able to secure Insurance protection.
2. The system of weekly payments Inculcates ideas of saving
and thrift.
3. When a bread winner dies his family Is not so apt to be-
come a public charge on the community.
132 INSURANCE PRINCIPLES AND PRACTICES
4. Poverty and suffering of dependent famlHcs is materially
reduced.
5. Causes of the higher mortality rate (previously men-
tioned) are analyzed and recommendations are made explain-
ing how to reduce the high mortality.
6. Communities where policy-holders are numerous are fre-
quently furnished with a nurse and a company physician is
designated. Their services are available, free of cost, to
persons who are Insured by the company. It has been found
that such service more than pays for itself.
Group insurance — Nature of the plan. — Group insurance,
as it exists today, is of recent origin, and may be defined as the
coverage of a number of Individuals by means of a single
or blanket insurance policy. This type of contract, from its
very nature, has been applied to the employees of Industrial
concerns, where the employer assumes the responsibility for the
payment of the premium, it having been found Impractical to
grant insurance on a group without having some central re-
sponsibility.
Since 1911, when the first policy of this kind was written,
its popularity has grown with remarkable rapidity, until now
we find many companies with separate departments purposely
created to handle group Insurance. In addition, the field of
group insurance has been extended. At first only Insurance
promising payment in case of death was written but now
various types of policies, including limited-payment life and
endowment policies, as well as accident and health insurance
and old age annuities, are sold under the group contract. In
other words, practically the entire field of life insurance is
covered by group policies, although the contract most com-
monly used Is the one-year renewable term.
Method of insuring a group. — When an employer desires
to insure his employees he, or the insurance company repre-
sentative, fills out a preliminary inspection blank. This form
describes the occupation of the various employees, the build-
ings, fire protection, sanitary conditions, drinking water, oc-
cupation of the various employees, and states the average age,
sex, and whether the employees are examined regarding health,
etc. On the basis of this a tentative rate may then be quoted
and the employer files his application and a promise to pay the
premium, along with the individual applications of each of the
employees to be included In the group. The insurance com-
SPECIAL FORMS OF LIFE INSURANCE 133
pany then makes a complete survey of the entire plant and its
surroundings and quotes a final rate. All arrangements hav-
ing been made and the premium paid, the policy is delivered
to the employer and each employee receives a certificate of in-
surance. When a loss occurs the proceeds are usually paid
directly to the employer and he pays the beneficiary named In
the policy. An exception to this is where the State laws compel
payments to be made direct to the beneficiary.
Factors affecting the group premium. — The computation
of the premium that is quoted is based on numerous factors.
They can, however, be divided into two groups; (1) those
elements which are primary to all insurance contracts, such
as the amount of the policy, the kind of policy and the ages
concerned and (2) those which are secondary or miscellan-
eous, i.e., which may or may not affect the particular contract.
1. Primary factors. One of the most important items is
the amount of insurance. Each employer has his own par-
ticular problem to solve and so the face values of the ploicies
vary considerably; but most contracts are on one of the follow-
ing bases :
a. Same amount for each employee.
b. An amount based on length of employment, starting at
a certain minimum and increasing yearly to a certain maxi-
mum; e.g., $500 minimum and increasing $100 each year until
it reaches $1,000.
c. An amount equal to the annual wage of an employee or
a percentage thereof.
Regardless of the method adopted, it is customary to have
a waiting period of from three months to one year. This,
obviously, is to eliminate "floaters." It might be mentioned
here that the third method is possibly the most satisfactory.
The kind of policy may be any one of those described pre-
viously or a combination of life, accident, and health. The
usual policy, however. Is for Insurance covering loss of life
only, for the term of one year. While we have found this
impractical In Individual Insurance it works very well In a
group, since the contracts usually specify a minimum and max-
imum entering age and the employees usually maintain an av-
erage age which Is comparatively low. This is due to the
entrance of the young and the retirement of the old, the re-
sult being an almost stationary age. This, however, does
not allow the premium to be calculated on the basis of the
134 INSURANCE PRINCIPLES AND PRACTICES
average age. While the average age would be thirty-five
if half of the group were age 20 and the other half were
age 50, thirty-five could not be used as the basis of calcula-
tion. This is because the rate of death is much lower at age ZS
than the average of death rates at 20 and 50 and the premium
would thus be too low. Consequently the premium is figured on
every individual employee of the concern and then totaled.
From this may be obtained the average premium, which will be
somewhat higher than the rate for the average age. How-
ever, the rate so ascertained will in all probability remain about
the same year after year if the labor turnover is not abnormal.
Thus, for an average corporation the annual premium each
year on a one-year renewable term policy is about 1^4 P^r
cent, of the total amount of insurance.
2. Secondary factors that tend to vary the rate.
a. Possibly one of the most important is the question of
medical examination. An assumption in group insurance is that
a large enough number will be covered so that no medical ex-
amination is necessary. The insurance company, by accepting
only those who are actively engaged in the employ of a com-
pany, and then in groups of not less than fifty or one hundred,
limited to age 15 or 16 as the minimum and to age SS or 60 as
the maximum, automatically eliminates the type of person
which causes a high death rate.
This point has been the subject of strongest attack on group
contracts as a plan of insurance, it being argued that the in-
surance company by this method would be subjected to an ad-
verse mortality selection. This has not been borne out by
experience and it is doubtful If it ever will be. As a matter
of fact, it has often been said that if an insurance company
would insure the lives of all the persons walking past a given
street corner, it could dispense with medical examinations.
Where the nature of the group is difficult to ascertain by
a general survey the entire group may be given a medical ex-
amination, and if found to be inferior, may be rejected or
rated up. In the same manner, if there are unusual dangers
attached to the occupation or if the locality is unhealthy, an
additional loading may be put on the premium. This should
be allocated evenly over the entire group, regardless of age.
b. Another factor that may cause a higher premium is the
presence of the conversion privilege. Some policies permit
the employee to convert the policy into an individual contract
SPECIAL FORMS OF LIFE INSURANCE 135
for the same amount of insurance in case he separates from
the concern that was paying his premium. If this privilege is
exercised within a certain period no medical examination is
necessary in most cases. The presence or absence of this priv-
ilege often indicates whether the employer has adopted group
insurance as a selfish method of controlling his labor or
largely for humanitarian reasons.
c. An accident and health clause is sometimes endorsed on
these policies and an extra premium must be charged for this.
It should be mentioned that many separate group policies cov-
ering accident and health only are now being written.
d. Group insurance may be participating or non-participa-
ting, and this will also affect the premium. The participating
insurance usually has an unchangeable premium for an in-
definite period but is subject to refunds if the experience is
favorable. While the non-participating policy will have a
lower premium, the rate will be guaranteed for a limited time
only.
Advantages of group insurance. — The advantages of group
insurance are many but may be classified as they apply to the
group, the employer, and the community.
1. The Group. — Group insurance is not intended as a sub-
stitute for individual insurance, but merely as a supplement.
However, it has been found that approximately 40 per cent,
of industrial workers carry no protection and group insur-
ance most ably meets this urgent need. As previously men-
tioned, a medical examination is seldom required, and this re-
sults in many persons obtaining insurance who could not obtain
individual policies. It should not be concluded that the 40 per
cent referred to are individually uninsurable, as the larger part
of them could secure policies if they so desired. Thus group
insurance renders a great benefit to the individuals of the group
and more especially to the dependents of those who arc negli-
gent of their responsibilities.
2. The employer. — The employer is really the one to whom
the contract is sold and there are many inducements from
his standpoint, although as the number of group policies in-
crease, the advantages to the individual employer decrease.
Nevertheless, he usually buys insurance for one or more of
the following reasons :
a. Gives him publicity and advertising.
b. Attracts efficient labor.
136 INSURANCE PRINCIPLES AND PRACTICES
c. Creates a better feeling between him and his employees.
d. Reduces labor turnover.
e. Where the insurance is based on an annual wage it sup-
plies a stimulus for higher efficiency.
f. Makes better workers by alleviating distress among
employees and their families.
3. The community — The burden of caring for an insured
employee's family, instead of falling on the community, is car-
ried by an efficient organization. Much suffering and misery is
in this manner prevented and the community becomes a much
better one in which to live.
Consequently group insurance serves a great need and is
becoming more important each year. This growth in all prob-
ability is destined to continue, because there is a great demand
for insurance of this kind. It is possible that the plan may
eventually be extended to insure whole communities regardless
of employment. In fact, this is quite practicable in every
respect except the collection of the premium.
Sub-standard insurance — its purpose. — A sub-standard
risk is one which a company will not accept by its regular
method of selection and at its regular rates. This definition,
of course, must be viewed from the individual standpoint of
each company, because rates and method of selection differ
considerably among the several companies and a risk that may
be classed as sub-standard by one company may be normal for
another. There is a point, however, below which all com-
panies will consider a risk as undesirable according to their
regular standards. The failures of risks to meet the standard
are due to many causes, of which the following are the most
common : occupation, overweight, underweight, family history,
heart murmur, rapid pulse and sugar and albumen excess in the
kidneys. Nevertheless these risks are possibly in greater need
of insurance than the more fortunate who can pass the regular
medical examination. The development of insurance on such
cases is recent but, as experience in connection with these
impaired lives grows, the various companies are extending
their risks. Undoubtedly a great service is rendered by those
companies which adjust their premiums to take care of this
class of individuals and it is stated on good authority that, of
the 10 per cent of applicants who fail to pass the regular
examination, a majority can secure sub-standard insurance.
Method of rating sub-standard lives. — There are several
SPECIAL FORMS OF LIFE INSURANCE 137
methods of rating sub-standard risks but those principally
used are : ( 1 ) to defer the dividend ; ( 2 ) to place a lien against
the policy; (3) to charge a flat extra premium; (4) to grant
only a restricted type of policy, or (5) to charge a premium as
of some advanced age. A brief description of each follows :
1. Deferring the dividend. — This was one of the first
methods employed, and no dividend was paid until the policy
had been in force for 15 or 20 years. It is not a very satis-
factory method and»has fallen into disuse.
2. Placing a lien against the policy. — Under this system a
lien is placed against the policy and deducted if death occurs
within a certain period. Usually it is on a decreasing plan, so
that if the Insured lives beyond a certain number of payments,
no deduction is made from the face of the policy. This plan
has never been very popular.
3. Charging an extra premium. — This is used extensively in
the case of occupational hazards, such as a flat-rate increase in
the case of locomotive engineers.
4. Restricting the type of policy. — This plan causes less
objection from the Insured and where the defects of the Indi-
vidual are slight it Is possibly the best method of rating. Thus.
a limited-payment policy or an endowment may safely be
granted, while ordinary-life or term Insurance could not.
5. Advancing the age. — For most purposes this is the
method now used and seems to meet the needs better than any
other single method. The manner of rating is to charge the
premium as of some advanced age, depending on the seriousness
of the cause for being classed as sub-standard. In extreme
cases It frequently happens that the Individual is not only rated
up but also restricted to certain types of policies.
The greatest advantage of such a system of insurance Is
that those people who need it most are able to secure it. The
only disadvantage is the lack, of experience on which to base
the rate, which results in some inequality of charges.
Chapter XI
ACCIDENT AND HEALTH INSURANCE
Losses due to accident and disease. — Life Insurance pro-
tects a man's dependents from poverty and suffering after his
death but the man who is incapacitated and unable to earn
a livelihood also has need of insurance, for the financial hard-
ships in such a case may be worse than those resulting from
death. Compensation insurance covers industrial accidents
but there are many accidents occurring without relation to
occupation, and sickness causes about seven times the loss of
time attributable to accidents.
It is estimated that over 250,000,000 working days are lost
each year in the United States due to sickness alone, and that
there occur annually about 5,000,000 accidents, of which less
than one-half are incurred in the course of employment. In
other words the majority of the losses due to accident or dis-
ease are not covered by workmen's compensation, and while an
examination of the causes leads to the belief that accidents can
be reduced, they cannot be entirely eliminated.
Some of the accidents and diseases arise from conditions
of employment, and are therefore partially covered by the com-
pensation acts of the various States, as explained in Chapter
XII. These, however, provide only limited indemnity for acci-
dents and very few provide at all for so-called "industrial dis-
eases." Such laws also cover only accidents incurred in the
course of employment and the remaining one-half of the acci-
dents and diseases are unaffected thereby. So important has
this economic factor been considered, that compulsory govern-
ment insurance has been proposed as a remedy, designed to
make the individual provide against the evil results of acci-
dents and ill-health. It has been argued that sickness and
injury give rise to so much suffering and poverty in the incapaci-
tated person and his dependents that they constitute a com-
munity problem to be solved by community effort. Bills have
13S
A C CI DEN T AND HEAL TH INS U RANGE 1 3 9
therefore been Introduced in State legislatures to provide sys-
tems for such insurance. In the past, however, the forms of
private insurance discussed in this chapter have been the indi-
vidual's principal protection against non-industrial injury and
sickness and probably will continue to be for some time in the
future.
The accident and health policy Is a natural complement to
the life Insurance policy; the latter protects against a perma-
nent loss of earning capacity, the former against a permanent
or temporary loss of the same through accident or disease.
Two partially overlapping forms of protection against these
risks are therefore offered. The "disability clause" which
appears on many life Insurance policies protects only against
pemanent disability and sometimes only against permanent and
total disability. Accident and health Insurance policies, on the
other hand, usually also protect against those temporary dis-
abilities which cause the greater part of the economic loss and
suffering.
Disability clauses in life insurance policies/ — In recent
years various life Insurance companies, by adding a disability
clause to their policies, have sought to make some provision for
such contingencies. In most Instances these clauses provide
only for total and permanent disability or, at best, partial and
permanent disability, the definitions of disability being usually
narrow and restricted. Since over 97 per cent of all disabilities
are of a temporary nature the actual value of these clauses Is
open to debate.
Their limited value Is perhaps due to the unwillingness of
many of the life companies to enter a field concerning which
comparatively little Is known. They Inaugurated the disability
clause mainly for competitive purposes and the extension which
has taken place was made necessary by the same cause.
Originally they promised, for a small additional premium,
to waive all future payments of the premium In case of total
and permanent disability. This could not possibly cost the In-
surance company a great sum, because the average length of
life of a person so Incapacitated is less than two years. Later,
however, the clause was broadened so that the policy would
mature under such conditions and the Insured would receive
the proceeds in accordance with some specified plan. Some
clauses fix this plan definitely, while others give the Insured an
* See Appendices III and IV.
140 INSURANCE PRINCIPLES AND PRACTICES
option along lines similar to the different installment policy
options explained in a previous chapter.
A further provision of this type is one which stipulates that
not only will the company pay a disability income, but that
when death occurs the full face of the policy will also be paid.^
Another clause promises to pay double indemnity if death
occurs on account of one of a specified list of accidents. Just
why a man's life should be worth more if he dies in a certain
manner is difficult to understand but at least it can be used as
a selling argument.
The tendency of these clauses is toward expansion, for which
there is much room, since the definition of disability is still far
from liberal, the options are few, women are excluded, and the
age restriction is usually sixty or sixty-five years. As experience
is collected a further development may be expected.
Coverage by a separate contract. — At the present time
greater and more liberal coverage is possible through a policy
covering accident only, or illness only. Better yet is the com-
bination of the two, known as an 'Accident and Health
Policy," ^ which pays no indemnity for death from natural
causes. A modern contract of this class, indemnifying for loss
of time through accident or sickness, is a valuable supplement
to a life insurance policy, and equally important, for nearly
one-half of all the poverty in the United States is due to loss
of income arising from accident or ill health. When such an
unfortunate event occurs and a person's earning power is
totally or partially destroyed it also usually follows that ex-
penses are greater, largely because of necessary medical atten-
tion. There can be no question that indemnity for such losses
should be made possible. Judging from the fact that the
premium income on this class of insurance has doubled in the
past five years it is reasonable to conclude that the possibilities
may be more fully realized in the near future.
This recent rapid growth is not the mushroom growth of a
new type of insurance. The business has lagged because it has
never before been properly brought to the attention of the
public, the policies have not been liberal but have been limited
in their scope, and the attitude of some companies writing this
class of business (particularly accident) has been to avoid as
many payments as possible.
'See clause in Appendix III.
*See Appendices XVI, XVII, and XVIII.
ACCIDENT AND HEALTH INSURANCE 141
All this is now changed, the tendency being to push this line
of insii'-ance, and the companies are now competing to see
which can provide the most complete coverage and give the
best service for the least cost. The business, however, is in a
transitional period and the policies have not yet reached the
stage of perfection. This has resulted in a market flooded with
a lot of policies among which there is very little uniformity.
Many States have recently attempted to stabilize conditions by
requiring "standard" provisions, as in life insurance. This
has at least forced out some of the poorer accident policies,
which apparently covered much but in reality covered practi-
cally nothing. It does not solve the problem, however, because
the "additional" provisions are frequently important and the
variance among them is very great. In order to better under-
stand the risk assumed and to recognize the good and poor
policies, we will now turn to a classification and description of
these contracts.
Types of Policies. — 1. Ticket Accident Policy. — This is a
policy covering death or injury by accidental means and is
issued for periods of a day, week, 30 days, and 90 days. It can
be obtained at the ticket office of nearly any railroad station and
is used principally by travellers. When issued the date and
hour are stamped on it and it runs for the highest number of
days fixed by attached coupons, ending at noon if issued any
time up to noon, or at midnight if issued after noon. The pay-
ments promised for ordinary accidents are usually $2,500 if
death occurs within 90 days, $1,250 for loss of both hands or
both feet, $12.50 a week for 52 weeks for total disability, and
$6.25 a week for 26 weeks for partial disability. If the loss
occurs because of an accident while being transported by a com-
mon carrier the payments are doubled. The premium for
such a policy is 25 cents per day, $1.50 a week, $4.50 for 30
days, and $10 for 90 days.
The value of such protection is difficult to estimate because
It does not cover disappearances, injuries where there is no
visible wound or contusion on the body of the insured,
medical or surgical treatment, hernia, poisoning, sunstroke or
freezing, injuries resulting from firearms, fireworks, racing or
games, suicide, accidents while entering or leaving any moving
conveyance and numerous other contingencies. In other
words the causes of accidents that are most apt to occur are
142 INSURANCE PRINCIPLES AND PRACTICES
eliminated, although op the daily basis the insured is paying
$91 a year for the insurance.
2. Limited Policies.^ — These cover accident or sickness due
to specific causes named in the contract. While the ticket acci-
dent policy enumerates those causes which are eliminated, the
limited policy mentions only those which are covered. This
type of policy has been one of the most misleading that has
ever been Issued because, In many Instances, the accidents or
diseases specified are among the remote possibilities. Not only
are the events covered specified, but frequently even the manner
in which they must happen.^' The result is a policy with little or
no coverage, and when the Insured finds himself disabled he Is
likely to find also that the policy which he thought was a good
one is a mere scrap of paper. So much dissatisfaction has re-
sulted from this that many of these policies have been sup-
planted by general or unlimited policies. In fact, since the
organization of the Casualty Actuarial and Statistical Society
of America, in 1914, there has been much general improve-
ment in all accident and health policies.
3. General or Unlimited Policies.^ — The scope of these
policies is more or less general and they are not limited merely
to a few causes as Is the preceding type. Of course the cost
is greater, but the protection afforded is much more adequate.
With the exception of the standard provisions, however, these
policies also vary considerably. Most of them provide for
indemnity in case of accidental death, the amount thus paid
being known as the principal sum. This Is usually the basis
of calculation for double, triple, or quadruple Indemnity, and
also for the amount payable for total disability. For example,
one policy says that for death from ordinary accident the
company will pay $10,000; for loss of both hands, $10,000;
for loss of both feet, $10,000; loss of both eyes, $10,000; one
hand and one foot, $10,000; one hand and sight of one eye,
$10,000; one foot and sight of one eye, $10,000; either hand,
$5,000; either foot, $5,000; and sight of one eye, $2,500. If
the accident occurs on a common carrier or passenger elevator,
each of these sums Is doubled, tripled or quadrupled. In this
illustration, $10,000 is considered as the principal sum. This
* See Appendices XVI and XVII.
•See Appendices XVI and XVII.
•See Appendix XVIII.
ACCIDENT AND HEALTH INSURANCE 143
same policy provides $50 weekly indemnity for total disability,
payable as long as the insured lives in such disabled condition,
and $20 weekly for partial disability for a maximum of twerrfy-
six weeks.
In other policies the total disability benefits are limited to
from fifty-two weeks to four years, and still others grant par-
tial benefits for as long as such disability continues. Frequently
hospital and surgical fees are paid as per a policy schedule.
Elective settlements may be provided, such as installment pay-
ments, interest-bearing bonds, reward for identification,
■benefits increasing with each renewal, and indemnity for acci-
dental death or disability of the beneficiary or other members
of the insured's family.
Combination accident and health policies cover disease as
well as accident. To receive indemnity, the insured must be
unable to perform his regular duties and be attended by a
physician, a distinction usually being made between benefits
payable when confined to the house and non-confinement bene-
fits. In some cases, benefits do not begin until a certain period
of disability has elapsed, varying from two days to three
months, although frequently when the disability exceeds the
specified period, the indemnity is calculated from the date when
disability commenced.
The disadvantages of the policies thus far discussed are
as follows: (a) The company customarily retains the right
of cancellation, even during the policy term, so that the insured
may legally be deprived of his insurance at any time," although
without prejudice to any claim originating prior thereto,
(b) In addition to the above, the company may refuse to
renew at the expiration of the term (usually one year). Thus
the insured may lose his insurance when he needs it most,
because as a result of a risk becoming sub-standard, the com-
pany may refuse to renew.
On the other hand, while the privilege of cancellation and
non-renewal enables an insurance company to relieve itself of
risks which become undesirable from a physical standpoint, it
also permits it to protect itself against the moral risk of per-
sons who endeavor to obtain payments on fraudulent claims.
It also enables the insertion of a shorter waiting period, which
to certain classes of persons is a distinct advantage. Under a
non-cancellable form, a company must take the strictest pre-
'See p. 397.
144 INSURANCE PRINCIPLES AND PRACTICES
cautions at the time of writing the policy, i.e., must endeavor
to foresee future conditions and charge a premium accordingly.
A large number of non-cancellable policies appeared during
the past few years and some companies which initiated this
type have abandcfned it.
4. Non-cancellable Contracts^'' — Under the non-cancellable
form of policy, the company has no cancellation privilege and
the insured cannot be deprived of insurance by refusal to
renew. One type of such policy approximates the policies
previously referred to, with payments of specific indemnities
for loss of members, and other special features. The other
type confines its protection to indemnity for loss of time, and
this latter was recommended by the Actuarial and Under-
writing Committee of the Bureau of Personal Accident and
Health Underwriters in 1921. Another liberal addition found
in at least one non-cancellable contract is an incontestable
clause, making the policy after one year incontestable as to
the time of the happening of bodily injury or sickness causing
disability commencing after such year and while it is In force.
5. Industrial or Corporate Accident and Health. — A de-
sire for more extensive or cheaper coverage has led to the
organization of many mutual aid associations, the more
Important being fraternal, trade-union, and corporation benefit
funds. Many of the lodge-principle fraternals have provided
their members with some form of accident and sickness bene-
fits. Frequently these funds have been raised from dues and
assessments and without an adequate scientific basis, resulting
In financial difl'iculties and uncertainty as to ultimate receipt
of benefits. They have nevertheless done very beneficial work
In attempting to provide a broad coverage against these con-
tingencies, and some have been wisely managed.
Various trade unions have duplicated the efforts of the
fraternals to provide for accident and sickness. Their benefits
are also frequently obtained from dues and assessments, and
the ability to pay depends upon the size and importance of
the union, as well as upon the loyalty of Its members.
Large corporations, particularly railroads and steel com-
panies, have formed voluntary relief associations and, know-
ing from experience the amount needed to cover such contin-
gencies, they deduct a certain amount from employees' pay
for this purpose. Many corporations guarantee the
'a See Appendix XVIII.
ACCIDENT AND HEALTH INSURANCE 145
solvency of these organizations, and some contribute 50 per
cent or some other proportion of the cost.
6. Workmen's Collective Insurance. — This is nothing
more than a group accident policy, the premium being as-
sumed by the employer, as in the case of the group life insur-
ance contract explained in a previous chapter. In so far as
the accident feature is concerned, workmen's compensation in-
surance has largely displaced it, but a policy covering sickness
and non-occupational accidents is now being written by sev-
eral companies.
Analysis of principal parts of accident and health policies.
— As previously mentioned, there is no uniformity in the pol-
icies on the market; however, when a person obtains a policy
he expects to get the best. This is difficult to determine unless
one knows how to analyze a policy. Therefore, in order to be
better prepared to make a selection, the following explanation
of the essential features of the combination accident and
health contract is given.
1. The insuring clause.^ — This indicates what the policy
covers. A typical clause reads as follows: "The Insur-
ance Company hereby Insures the person named as applicant
in the copy of application for this policy, endorsed hereon or
attached hereto, subject to the provisions, conditions, and
limitations herein contained, against loss resulting directly and
independently of all other causes, from bodily injuries effected
during the term of this policy solely through external, violent
and accidental means, and against disability from disease con-
tracted during the term of this policy." The insuring clause
of another policy which covers accidental loss of life in addi-
tion to disability reads as follows : "The Insurance Com-
pany hereby insures (herein called the Insured and de-
scribed in the Application), subject to all provisions and
limitations herein contained: Against loss of life resulting di-
rectly and independen\tly of all other causes from bodily
injury effected during the term of this policy solely through
accidental means; and against disability resulting from bodily
injury effected during the term of this policy through accidental
means; and against disability resulting from sickness co\v
tracted and beginning after the date hereof; such disability, in
both cases, to be such as will result in continuous total los^
of business time."
* See Appendices XVI, XVII and XVIII.
146 INSURANCE PRINCIPLES AND PRACTICES
Note the difference between the clauses covering disability
resulting from an accident. ( 1 ) The former says the accident
must be "effected directly and independently of all other
causes," while the latter does not. The presence of the former
stipulation means that no other agency can intervene, such as
a pre-existing disease or infirmity. This phrase, it will be
noted, is contained in the latter policy only in the clause cover-
ing loss of life. (2) One says the accident must occur "solely
through external, violent, and accidental means," while the
other merely says "solely through accidental means." Ob-
viously the latter is a broader provision and is not subject to
arguments as to whether the accident was external or violent,
although the force of these two words is questionable.
The important part of the phrase in either policy is the term
"accidental means." This has been subject to interpretation
by the United States Supreme Court and it has been decided
that the event immediately preceding the happening of the
"accident" must have been unexpected. Thus, if the insured
is carrying a heavy burden and thereby breaks an arm, it
cannot be called "accidental means." If, however, he is carry-
ing this same burden and receives some unexpected blow, which
breaks his arm, the injury is included in the term "accidental
means." This objection has been overcome in some policies
by changing the clause to "accidental injury."
The phraseology relating to disability resulting from dis-
ease differs very little in the various policies, usually stating
that sickness must be contracted after the policy is written.
Practically all Insuring clauses mention limitations and a
thorough inspection to discover these limitations must be made,
because they are apt to be found anywhere except in the stan-
dard provisions.
2. Total disability clause.^ — The interpretation of disabil-
ity is often the deciding factor as to whether a claim has arisen
or not. Definitions of total disability vary from "such in-
juries or disease as shall immediately and independent of all
other causes wholly and continuously disable the insured from
following any gainful occupation," to "such injuries or disease
as shall prevent the insured from performing the duties of his
occupation," and are incontestable as to the time of occurrence.
The United States War Risk Insurance Bureau, in connection
• See Appendices XVI, XVII and XVIII.
ACCIDENT AND HEALTH INSURANCE 147
with its life policies, has defined total disability as "impair-
ment of mind or body which makes it impossible for the in-
sured to engage in a substantially gainful occupation." This
is apparently one of the most liberal definitions yet given, al-
though "loss of business time," as mentioned previously in
one of the insuring clauses, Is also considered favorable to
the insured.
Indemnity Is often limited to fifty-two weeks but In some
policies it continues until the insured dies. Loss of sight and
dismemberment of two or more extremities arc sometimes
deemed total and permanent disability without further Inves-
tigation.
A distinction is frequently made between a disability which
requires house confinement, as compared with one that does
not, and this makes a big difference In many diseases, particu-
larly tuberculosis. Practically all policies require that the
disability be one which requires regular attendance by a physi-
cian. This is a practical necessity in order to prevent unjust
claims.
3. Partial disability. ^'^ — In some policies partial disability
is covered, and the amount payable is a fraction of that for
total disability. With the exception of loss of sight or dis-
memberment, however, partial disability benefits seldom run
beyond twenty-six weeks. It should be added that disability
under all policies, except those Issued by the United States
Government, must begin within an age limit, usually from
eighteen to sixty-five.
4. Death. — Those policies which include payment for ac-
cidental death usually specify that the death must occur within
a limited time after the accldent,^^ such as ninety or one hun-
dred and twenty days.
5. Optional benefits. — In place of the lump sum for acci-
dental death It is frequently provided that some other method
may be used, such as a reversionary annuity, a gold bond with
interest, or an installment plan.
6. Standard provisions. — These are required by State
statutes and are primarily for the protection of the Insured
against false policies and fraud. Some attempts have been
made to have the several States make these provisions uniform,
as in life and fire insurance.
'"See Appendix XVIII.
" See Appendix XVIII.
148 INSURANCE PRINCIPLES AND PRACTICES
7. Additional provisions. — Under this heading, we find
many of the "limitations herein contained" mentioned in the
insuring clause, and the following is a list of typical exclusions :
(a) "Any disability for which the Insured is not necessarily
and regularly attended by a legally qualified physician other
than the Insured;" (b) "suicide, sane or insane, or any attempt
thereat, sane or insane;" (c) "women;" (d) "loss of life or
disability resulting wholly or partly, directly or indirectly from
( 1 ) bodily injury sustained or sickness contracted while the
Insured is engaged in military or naval service in time of war,
(2) bodily injury sustained or sickness contracted from riding
or being in or upon any aerial device or conveyance, ( 3 ) bodily
injury sustained or sickness contracted while the Insured is
outside Canada or Europe or the United States (not includ-
ing Alaska, Panama Canal Zone or the insular possessions of
the United States) ;" (e) "persons under age 18 or over
age 60."
8. Miscellaneous Provisions. — So called "frills" are some-
times found providing for double indemnity while in the hos-
pital; double, triple, and quadruple indemnity if an accident
occurs in a specified place or manner; fixed amounts for spe-
cific losses; surgical benefits and doctors' fees; a reward for
identification; or accumulations of the benefits as the policy
becomes older (e.g. 10 per cent increase in benefits each year
for five years.)
Important things to examine in accident and health
policies. — From the preceding analysis it is obvious that the
insured has many things to guard against when securing acci-
dent and health insurance. For convenience, the most com-
mon limitations are listed below:
1. Definition of total disability.
2. Exclusion of certain risks,
3. Age limit.
4. Elimination of benefits for a specified period.
5. Maximum period for which Indemnity will be paid.
6. The time within which death must occur after an acci-
dent.
7. Right of the company to cancel.
8. Inability of the Insured to renew.
ACCIDENT AND HEALTH INSURANCE 149
Accident insurance rates.^" — ^Wlth the exception of policies
covering loss of time due to sickness and disease, usually no
medical examinations are required. Therefore, the rates
charged are based on occupation and are classified in nine
groups, according to hazard, as follows :
Ratio of Indemnity in more
Classification I'lcrease in /,azarcious occupations to
^^" Indemnity in preferred class
Per Cent Per Cent
Preferred 100 100
Special Preferred 120 83
Extra Preferred 125 80
Ordinary 167 60
Medium 250 40
Hazardous 300 33
Extra Hazardous 400 25
Perilous , 500 20
Extra Perilous 2,000 5
The rate manual classifies all occupations under one of these
nine groups and the premium is a percentage of the rate for
the preferred class. Thus, if $20 is the rate for preferred
risks, $60 is the rate for hazardous risks. One of the stan-
dard provisions is that when the insured changes his occupa-
tion to one more hazardous the premium shall be applied to
purchase the benefits of the more hazardous occupation. For
example, if a preferred risk holds a policy promising $50 per
week indemnity and changes to an occupation classified as
medium, the Indemnity will be changed to $20 per week.
It should be mentioned in this connection that many accident
and health policies arc not written for the more dangerous
classifications, some companies accepting only those risks
which will fall Into one of the first three classifications.
So far, these rates have been for the most part based on
the judgment of the Individual companies. The most con-
clusive proof that this Is the case Is the fact that the same prem-
iums are charged regardless of age. However, the business
is now going through the process of reform and the com-
panies are combining their experience for this purpose, the
most Important work being the ascertainment of:
1. Rate of disability from accidental causes.
2. Rate of disability from disease.
" See Appendix XIX.
150 INSURANCE PRINCIPLES AND PRACTICES
3. Number of days' sickness from disease to each year of
exposure.
4. Rate of loss of sight.
5. Rate of loss of hearing.
6. Rate of loss of limb.
The results obtained must then be applied to a specific
policy with the following underlying factors in mind:
1. Comparative hazard of the occupation.
2. Effect of injury upon the performance of the duties per-
taining to the occupation.
3. Influence of occupation upon physical habits and condition.
4. Moral hazard Incident to the occupation.
5. Moral hazard pertaining to malingering, over-insurance,
and self-inflicted injuries.
6. Physical condition and age.
Accident insurance reserves. — The reserves for this type
of insurance are similar to those of workmen's compensation
Insurance. An unearned premium reserve of 50 per cent of the
gross premium must- be maintained on contracts over a period
of twelve months. Also, a reserve for outstanding claims,
particularly those that may run for a long time. The princi-
ples of such a reserve are more fully described in the chapter
on Workmen's Compensation Insurance. The non-cancellable
contract needs an additional reserve to take care of the claims
that will not arise until the distant future.
Compulsory health insurance. — In recent years much Has
been said concerning the benefits and evils of compulsory
health Insurance. We saw in the first part of the chapter
that provision should be made for distributing the loss due
to sickness, but so far we have discussed only private methods.
Compulsory health insurance presupposes that every one will
be insured and that the business will be administered through
a governmental agency. Such a plan has been tried with
varying success In European countries and this has led to the
agitation for a similar scheme In the United States. As a result
the subject was investigated by the United States Public Health
Service, which has recommended a system which should :
1. Provide cash benefits and medical service for all wage-
earners In times of sickness at much less cost than is now pos-
sible. Adequate medical relief would thus be placed within
ACCIDENT AND HEALTH INSURANCE 151
the reach of even the lowest-paid workers, who are most sub-
ject to ill-health.
2. Distribute the cost among employers, employees and the
public as constituting the groups responsible for conditions
causing disease, and afford these groups a definite financial
incentive for removing these conditions. This can be done by
means of small weekly payments from employees, supple-
mented by contributions from employers and the Government
at a rate reducible in proportion to the reduction of sickness.
3. Include an effective health measure, by linking the co-
operative efforts of the three responsible groups with the work
of national. State and local health agencies, and by utilizing
these agencies in the administration of the health insurance
system.
4. Afford a satisfactory basis for the cooperation of the
medical profession with public health agencies.
5. Eliminate the elements of paternalism and charity-giving
by making employees and the public, as well as employers,
joint agents in the control of this fund.
Many arguments pro and con have been given In regard
to this proposition, of which the following are the most Im-
portant In Its favor:
1. The existing agencies are Insufficient to provide the pro-
tection required.
2. The high death and sickness rates among American
workers could be reduced by a comprehensive system of In-
surance.
3. Compulsory Insurance Is a sure way of obtaining the
results desired, while private Insurance will always be merely
partial in results.
4. Cooperative action will Increase the Interest In health,
provide the insured with better medical attention and Indem-
nify him for loss of time with less expense than a private
system.
Against the system It has been urged :
1. Death and sickness rates in the United States are lower
under private Insurance than in foreign countries under com-
pulsory health insurance.
2. Compulsory insurance will not Improve health condl^
tlons. A campaign of prevention would be better.
3. A compulsory system is subversive of the fundamental
principles of Individual initiative and freedom of action.
152 INSURANCE PRINCIPLES AND PRACTICES
4. The compulsory system is detrimental to the proper
relation between physician and patient, and therefore objec-
tionable to both physician and patient.
5. Political influences and a high expense rate would more
than nullify any benefits which the system might be able to
provide.
Part III
LIABILITY AND COMPENSATION
INSURANCE
153
Chapter XII
LIABILITY AND COMPENSATION INSURANCE
Social insurance. — Industry, as carried on today, involves
certain hazards and losses which have come to be recognized
as affecting the welfare of the community as well as of the in-
dividual. This field is covered by what has been called "social
insurance." In European countries compensation insurance
is only one part of a well-organized program of social insur-
ance for the community care of the worker. It was the first
section of this program to be introduced in the United States.
In Europe we find governmental intervention and assistance
in insuring the worker ( 1 ) against temporary impairment of
working capacity through industrial and other accidents,
through sickness arising from industrial or other diseases,
through maternity and conditions of the labor market; (2)
against permanent inpairment of the ability to work through
invalidism or old age; and (3) against financial loss conse-
quent upon death. This is accomplished through burial insur-
ance, widows' and orphans' insurance, health and accident in-
surance and compensation insurance. In the United States,
most of these forms of insurance are voluntary and are con-
ducted with little governmental interference, but compensa-
tion insurance against work accidents and industrial diseases
is the exception, being compulsory in many States.
Definition. — Liability and compensation insurance may be
defined as a contract furnishing protection to an employer
against financial losses imposed upon him by court decision or
statute law when a workman is injured or diseased as a result
of his occupation. The loss would result from a court decision
under the negligence system or from a statute under the com-
pensation system. Both forms of insurance, as is evident, are
founded on the frequency and severity of industrial accidents
and disease.
Industrial accidents. — The number and seriousness of in-
dustrial accidents, even at present, is tremendous. In 1908, it
was estimated (accurate figures being unavailable) that 25,000
persons were killed and 700,000 injured annually by this
cause. At that time this figure was considered an overestimate,
155
156 INSURANCE PRINCIPLES AND PRACTICES
but subsequent investigation has shown that it was probably too
small. An estimate, now in progress of compilation, will prob-
ably show a total of 28,000 killed in the year 1917, and 3,877,-
000 injured, so that in one year the ordinary injuries and loss
of life far exceeds the United States' casualties in the entire
World War. The killed and wounded, if brought together,
would exceed the population of Philadelphia. Estimating an
average life expectancy of 25 years, a working year of 300 days
and average wages of $2 per day (surely low enough), one
year's accidents cause a loss to society of 1,802,984 hours, and
a loss of earning power of $1,1 17,790,400. The losses entailed
fall:
1. Upon the employee, through loss of time and wages,
2. Upon the employer, through labor turnover, friction with
employees and legal expenses,
3. Upon society, through decreased productivity and the
necessity of caring for the dependents of the injured.
Distribution of accidents. — Many of these accidents are,
of course, minor in character; otherwise compensation pre-
miums would be far higher than they now are. Ninety-seven
per cent of such accidents consisted of temporary total disabili-
ties and only 7/10 of 1 per cent were fatalities. Of the 97
per cent which consisted of temporary total disabilities over
two-thirds had a duration of less than 14 days, so that out of
3,905,900 accidents, 2,400,000 of the injured were able to re-
turn to work in two weeks or less. From a study of the serious-
ness of accidents it was possible to construct a "Standard Acci-
dent Table" which analyzed accidents according to their grav-
ity, and this was a valuable factor for some years in the making
of compensation rates. By applying the accident distribution
to the compensation provided by various State laws it was pos-
sible to find the cost of 100,000 accidents in one State as com-
pared with the cost of the same accidents in other States, thus
indicating the difference which ought to exist between the pre-
miums in two States by reason of the varying benefits allowed
under the laws.
Prevention and insurance. — Some of these accidents are due
to the fault of the workman and some to the fault of the em-
ployer, but a large number may be ascribed to the general haz-
ard of industry. The latter term, however, includes all those
accidents to which we are unable to assign a cause on account
of limited knowledge; investigation is constantly showing many
LIABILITY AND COMPENSATION 157
of them to be preventable. A social program should begin
with prevention and secondarily provide a system of indemni-
fication for those accidents which cannot be prevented. The
latter is the function of insurance; but since the more efficacious
the prevention, the lower the premiums, the two are inseparably
connected, and insurance furnishes a highly important means of
encouraging a reduction in the number and gravity of acci-
dents.
Industrial diseases. — Some of the compensation laws of the
States already include compensation for industrial diseases.
Unfortunately, no satisfactory statistics exist to indicate the
extent of industrial disease and the losses caused by it, but we
know it must be a problem fully as great as the accident prob-
lem. Poisons, germs, unsatisfactory ventilation, dust, Im-
proper temperature and lighting conditions annually incapaci-
tate millions of workmen. The next great step in compensa-
tion laws will probably be tfiF general inclusion of i nde mni.fi-
'cation for the results of industrial diseases.
Law of negligence. — This was the basis of liability insur-
ance and Its abolition marked the initiation of compensation
insurance. In England, prior to 1837, the employee, if he had
any rights against the employer for injury, at the most had no
more rights than a stranger. Even many years later he could
not recover damages from the employer unless he could clearly
prov^e that this resulted from definite negligence on the part
of the employer. The law later imposed certain obligations
on the employer, such as to provide a safe place to work, safe
tools and appliances and reasonable carefulness in engaging
workers. But certain defences developed during the suc-
ceeding fifty years for the employer's protection, mainly the
following:
1. Contributory negligence. — If the employee's negligence
contributed to the accident In the slightest degree he lost all
right to collect damages.
2. Fellozv-servant doctrine. — If the employee was injured
as a result of the negligence of a fellow-worker, this barred his
right to recovery on the assumption that by working with such
person he assumed the risks of the latter's actions.
3. Assumption of risk ride. — An employee entering an em-
ployment was presumed to accept all the ordinary and custom-
ary risks of the employment, on the ground that he was paid
for accepting such risks.
158 INSURANCE PRINCIPLES AND PRACTICES
4. Death limitation. — In some States the right of action
against the employer ceased with the death of the injured
party. It was a personal right and if action was not begun by
the injured party it could not be by his dependents after his
death.
5. Burden of proof. — The burden was on the plaintiff to
show the negligence of the employer, that the accident was the
direct consequence thereof, and that his own negligence did
not contribute to the result. In addition to these defences, it
was a common practise for employers to insist that the em-
ployee, as a condition of employment, sign a waiver relieving
the employer of all liability and thus contracting away his
legal rights.
Beginning with the English law of 1880 these defences were
later modified by court decisions and statutes so as to slightly
alleviate the hard lot of the workman. The contributory negli-
gence rule was changed in some States to the comparative negli-
gence doctrine, whereby the workman recovered in inverse pro-
portion to his own negligence. The fellow-servant rule was
restricted in application to those who worked in the same de-
partment, and foremen and managers were no longer consid-
ered fellow workers. Failure to comply with safety statutes
was made prima facie evidence of an employer's negligence,
and increasing burdens were placed upon the employer. Never-
theless, the system up to 1910 was most unsatisfactory from
every standpoint, as shown later.
Liability insurance. — Since the injured employee might sue
the employer and recover damages it was necessary for the
employer to protect himself against loss by reason of judg-
ments rendered against him in such cases, which judgments were
occasionally very large. He purchased, therefore, a liability
policy, under which an insurance company partly assumed the
risk of paying such judgments as injured workmen might obtam.
This type of contract Is still valuable In States where the com-
pensation system has not supplanted the negligence system, to
furnish insurance against liability to others than workmen, and
as covering quasl-employees whose status may be doubtful.
Liability policy. — In the ordinary contract in a stock com-
pany the Insured paid a premium which was based upon his
payroll, the rate being quoted per $100 of payroll. The prob-
able payroll was estimated at the beginning of the year and an
Initial premium paid which was to be added to or deducted
LIABILITY AND COMPENSATION 159
from, at the end of the year, as the ultimate payroll happened
to be larger or smaller than that estimated. The policy covered
loss and expense from legal liability, determined by a court
action or by a settlement with the injured party; the co mpany
agreed and in fact insisted upon defending all suits brought;
and also furnished bonds and paid interest arising out of suits.
It also assumed the expense of immediate surgical relief. The
liability of the company was limited to $5,000 for an injury to
one person in one accident, and $10,000 for injuries to more
than one person in one accident, subject to the $5,000 per per-
son limitation. All damages in excess of these amounts the em-
ployer paid unless for an extra premium he purchased a policy
with higher limits. Employees whose compensation was not
included in the estimate, employees of contractors and subcon-
tractors and persons employed contrary to law were not cov-
ered. The policy ran for a term of one year but might be can-
celled by the company or the Insured upon notice, in the former
case the Insured paying a pro rata premium, and In the latter
case a short rate, later described In connection with the
fire Insurance contract (Chapter XIV). The insured agreed
to give prompt notice of accidents and claims to the company,
not to settle claims or to admit liability, to furnish Immediate
surgical relief, and to assist the company by furnishing infor-
mation and transferring all his rights to It by subrogation. The
company had the privilege of inspecting the prem ises and books
of the Insured.
Liability rates. — While rate-making was originally an activ-
ity of the Individual Insurer the Inherent co-operative nature
of the process of basing charges upon past experience made
common action desirable. This took the form of an association
of liability companies which, acting jointly, Issued a manual
of rates supposed to be binding upon all. The obstensible de-
finlteness of these manual rates was seriously impaired, until
recent years, by competition, in the form of rate reductions by
one expedient or another. The original association, however,
was later replaced by a Bureau, established and maintained by
the companies for the promulgation of rates. While some
companies are not members of this Bureau, we may regard
liability rates as In general fixed by actuaries, commonly em-
ployed, and a Bureau maintained by general consent.
Manual rates are made for classifications of industries, said \
classifications being based on the nature and hazard of the In-
\
160 INSURANCE PRINCIPLES AND PRACTICES
dustry. Thus, while the rate for a clothing store may be 23
cents per $100 of payroll, the rate on a flour mill may be $2.25.
These rates, however, are not for clothing stores or flour mills
in any particular location, and constitute no more than a start-
ing point for ascertaining the rate charged the insured. They
merely represent the average variations In hazards between
Industries, as deduced from experience all over the country.
In order to find the rate for a particular flour mill located in
a given State a modifying factor must be applied to this gen-
eral rate. Thus, we may find that in Arkansas the rate is 110
per cent of the general rate of $2.25, or that in Florida the
rate is 50 per cent of the general rate of $2.25. It may hap-
pen, of course, that In some States the rate is exactly 100 per
cent of the general rate. An examination of the factors which
enter into the making of a rate will show the reason for this
arrangement.
The liability contract protects against hazards of two types.
There is, first, the accident hazard or the chance of an em-
ployee being injured in the industry; and second, the negligence
hazard, or the probability that he will be able to prove the em-
ployer liable for damages. The accident hazard varies between
industries, while the negligence hazard varies with the laws
of the different States. The rates to cover these hazards are
derived from past experience and It would be possible, theo-
retically, to gather the past experience on flour mills in the
State of Arizona and to base Arizona's rates solely on that
experience. But practically, this would be impossible, because
the amount of experience that could be derived from this one
State on flour mills and some other Industries would be woe-
fully Inadequate, due to their insignificant number. There
would not be sufiiclent risks for the law of average to function
properly. So it is with other Industries in other States, and to
avoid this difficulty the country as a whole is taken for com-
parisons between industries, the assumption being that the dif-
ference in hazard in general between industries holds true in
any particular State.
In collecting and using this information for making rates
the "pure premium" is first calculated by a comparison of the
losses Incurred with the payrolls in order to find the losses
per $100 of payroll. At any given date, however, there are
LIABILITY AND COMPENSATION 161
many claims and suits still unsettled and some estimate of the
ultimate cost of these must be made. The pure premium is
multiplied by a factor in order to derive the ultimate loss per
$100 of payroll and also by another factor to allow for the
increasing sympathy of juries, leniency of courts and modifica-
tions of employers' defences, all of which cause the experience
to grow gradually worse. To this result must be added a sum
sufficient to cover expenses and, in a stock company, profit;
these together constitute the "loading." The result is the man-
ual rate. This must be modified for application to individual
States. A comparison is made of the experience of companies
in Florida with the experience in the United States as a whole,
and it may be found, for example, that Florida results show
losses per $100 of payroll only half as great as the average
for the United States. If $2.25 is the manual rate for the
classification, then, the rate for the same classification in Florida
is 50 per cent of that figure, or $1,125.
These rates are for policies containing the standard limits
previously described; if the insured desires limits of $10,000
and $50,000 the premium will naturally be increased. In the
past considerable underwriting judgment has also been neces-
sary to take account of factors which could not be mathematic-
ally considered in the manual rate, or for which past experience
did not furnish a reliable guide. Since one flour mill may dif-
fer considerably from another in hazard, even when located in
the same State, some allowance for the features of hazard of
a particular risk is also necessary.
Principle of compensation. — The liability system was most
unsatisfactory for the following reasons :
1. It was based upon personal fault, whereas many accidents
were due to no personal fault.
2. No damages were recovered by injured workmen in from
25 to 33 1-3 per cent of the cases.
3. The compensation paid bore no relation to the needs or
justice of the case. Juries gave notoriously uncertain verdicts.
4. Under the contingent fee system, on the average, one-
fourth of the damages recovered by workmen went to lawyers
as fees.
5. Damages were awarded only after lengthy litigation, and
in the meantime the workman or his dependents often suffered
severely.
162 INSURANCE PRINCIPLES AND PRACTICES
6. Employers were forced to spend large sums of money in
the defense of suits, some legitimate and some groundless.
7. Unpleasant relations were frequently created between
employers and workmen because of suits and their results.
8. Insurance was for the benefit of the employer and not
the injured party. In fact, the insurance company was obli-
gated to defend suits brought by workmen.
9. The community was assessed for the exorbitant cost of
the legal machinery necessary to handle the multitude of cases.
10. Inability to recover damages for injuries led to destitu-
tion, reliance upon charity and a lowered standard of living.
When the close relation between employer and employee
ceased, when industrial relations became complicated, when the
worker became an impersonal cog in a great organization and
accidents multiplied through the introduction of machinery, it
became economically desirable that the negligence theory be
replaced. This was hastened by the growing social desire for
safety promotion and the improvement of working conditions.
Compensation scraps the theory of negligence and holds the
industry responsible for an industrial accident. It provides by
law a definite compensation for injuries instead of leaving this
to be determined by a lawsuit and it makes the employer, as
the representative of the industry, liable for the; payment of this
compensation. Students of economics will recognize that this
is no hardship on the employer since, except In the most un-
usual cases, he passes this cost on to the consumer in the price
of the product. The consumer of the goods, therefore, pays
for the wear and tear on human machinery exactly as he al-
ways did for the wear and tear on metal machinery, cost of
raw material, wages of labor or any other essential factor in
the production of the goods.
The nature of compensation laws. — Compensation laws are
broadly divided into two groups, the compulsory and the vol-
untary. In some States the adoption of the compensation prin-
ciple is compulsory for certain enumerated "hazardous" in-
dustries of a private character and voluntary for others, but
is usually compulsory In regards to employees of the State and
for nearly all employments; and in still other States Is entirely
voluntary for employments in general.^ But where acceptance
* Sec Appendix XXI.
LIABILITY AND COMPENSATION 163
of the compensation principle is voluntary or optional the privi-
lege is more nominal than real, because in the absence of ac-
ceptance the employer loses certain legal defences and the
workman certain benefits, which loss makes it to their interest
to accept the compensation act. An employer who belongs in
one of the specified groups or who voluntarily elects the com-
pensation system thereby exchanges his liability to be sued for
damages for a specified and limited liability under the compen-
sation law. Failure to accept the compensation law, however,
subjects the employer to the loss of the common-law defences
previously referred to. The employee is presumed to accept
unless he specifically declines.
General opinion now seems to incline toward the universally
compulsory act as the best form of law. It is very common,
however, to find that State laws do not apply to casual labor,
workers who perform duties at their homes, domestic servants
and farm laborers. Some State laws do not cover what are
considered as non-hazardous industries and small establish-
ments.^ These exceptions have little to recommend them except
expediency and are rarely founded upon any sound reasoning.
Prior to the adoption of the compensation principle it was a
general practise for employers to compel prospective employees
to "contract away" their legal remedy for Injury but this is uni-
versally prohibited by compensation acts.
Accidents covered by the laws. — A common definition of
the injuries covered is "disability or death resulting from an
accidental personal injury sustained by the employee arising out
of and in the course of his employment, except where the in-
jury is occasioned by the wilful intention of the injured em-
ployee or where the injury results solely from intoxication." In
the latter two cases, no compensation is payable under the act.
It is suflicient to point out, without entering upon the various In-
terpretations given by the courts of the above provision, that
an injury "In the course of employment" may not "arise out
of" it. For instance, a workman unloading rails may attempt
to light a cigar and set fire to his clothes. The accident occurs
while working but is not connected with the duties for which
he is engaged. In some States th^Jaws cover accidents In the
course of employment, whether arising therefrom or not, and In
'See Appendix XXI. ""^
164 INSURANCE PRINCIPLES AND PRACTICES
a few States the laws cover industrial disease. The acts apply
to accidents occurring within or without the State In about one-
third of the States, in another one-third only to accidents occur-
ring within the State, and in the remaining States the laws
are not explicit in this respect.
Beneficiaries. — Where the employee is Injured he himself
is entitled to the benefits, while in case of death they go to his
beneficiaries. Although many States provide a uniform sum or
percentage of wages, in at least eighteen States the compensa-
tion varies with the number and character of dependent per-
sons. Children are provided for In many cases until they are
sixteen to eighteen years of age, and widows until remarriage.
Some limitation Is usually placed upon the number of depend-
ents; for example, an act may include only dependent parents,
widow or widower and children who are under sixteen years
of age. If none of these exist, brothers and sisters may be
brought within the scope of the act. Aliens ordinarily receive
special treatment.
In order to reduce the costs of the act to a reasonable figure,
the many minor Injuries are eliminated from consideration by
the provision of a "waiting period." Usually, the loss of time
involved must amount to at least two weeks before compensa-
tion becomes payable. In some States, the compensation dates
from the date of the injury and in others from the expiration
of the waiting period, the latter being more common. Such a
provision is often a hardship upon the workman but seems nec-
essary to prevent the otherwise excessively high cost of the
act, to reduce administrative work, and to prevent pretended in-
jury.
Benefits paid. — The laws vary widely as to the scale of bene-
fits paid. Four contingencies are practically universally cov-
ered; total disability, partial disability, specific Injurles^and
death. '"Of these, some are permanent and some temporary. It
will be sufficient to cite one fairly typical law which is neither
extremely liberal nor exceedingly strict, that of Pennsylvania.
Arranging and summarizing its provisions In order to save
space and the reader's time, they are as follows:
1. Total disability. — For the first 500 weeks after the tenth
day of total disability, 60 per cent of the wages of the injured
employee, not to exceed $12 per week nor to be less than $6
per week. The total payment is also limited to $5,000.
LIABILITY AND COMPENSATION 165
2. Partial disability. — Sixty per cent of the difference be-
tween the wages of the employee before injury and his wages
after the injury, but not more than $12 per week nor less than
$6 per week, payable for a maximum period of 300 weeks.
3. Specific injuries.
Loss of one hand — 60 per cent of wages for 175 weeks.
Loss of one arm — 60 per cent of wages for 215 weeks.
Loss of one foot — 60 per cent of wages for 150 weeks.
Loss of one leg — 60 per cent of wages for 215 weeks.
Loss of one eye — 60 percent of wages for 125 weeks.
Loss of two members — 60 per cent of wages for the aggre-
gate of the periods specified for each. If such accident should
cause total disability the above benefits are not to exceed $12
per week nor to be less than $6 per week.
4. Death:
a.. To a child or children if there be no widow or widower
entitled to compensation — 30 per cent of the wages of the de-
ceased with 10 per cent additional for each child in excess of
two. The maximum is 60 per cent of wages for 300 weeks.
b. To a widow or widower without children — 40 per cent
of wages.
c. To a widow or widower with one child — 50 per cent of
wages.
d. To a widow or widower with two children or more — 60
per cent of wages.
e. In the absence of any of the above dependents, then to
a dependent father or mother — 20 per cent of the wages if such
person is partially dependent and 40 per cent if wholly depend-
ent.
f. In the absence of any dependents described above, then
to a dependent brother or sister — 15 per cent of the wages of
the deceased and 5 per cent additional for each additional
brother or sister, up to a maximum of 25 per cent.
5. Burial expenses. — In all cases the reasonable expenses of
the last sickness and the burial of the deceased are to be paid to
the amount of one hundred dollars.
6. Medical and surgical aid. — During the first thirty days
after disability the employer Is required to furnish reasonable
surgical, medical and hospital care, medicines and supplies up to
the amount of one hundred dollars.
166 INSURANCE PRINCIPLES AND PRACTICES
Since the purpose of the compensation act is to provide sup-
port to the injured person or his dependents, the benetits are
paid weekly or monthly in the same manner as the wages were
paid. The injured party or his dependents may, however,
apply for the entire amount in a single payment, and if they are
able to convince the compensation board of the desirability of
such an adjustment the board may grant it with proper allow-
ance for interest. In some States six months must elapse be-
fore such an application can be made, this provision being
designed as a protection against a hasty decision on the part of
the injured party or the beneficiary. It will also be noted from
the above scale of benefits that the indemnity promised to the
injured party depends not only upon the wages which he was
earning at the time of the injury but also upon the number of
persons dependent upon him, the closeness of their relation and
the degree of dependency.
The provisions regarding administration may be grouped
under four heads; the reporting of injuries, agreement be-
tween employers and employees, hearings of disputed claims
and appeals of the courts. The laws of the States with refer-
ence to accident-reporting are as varied as the colors of the
rainbow. Only nineteen require all accidents to be reported,
while many require the reporting of accidents resulting in over
two or three days disability. In some States all employers are
required to report accidents; in others only a few arc so re-
quired. In addition accident-reporting laws are often inade-
quately enforced.
Settlement of claims. — It is common in compensation acts to
provide for the settlement of claims by injured workmen
through voluntary agreements with employers. In such cases
the agreement must be filed with the Compensation com-
mission for approval, in order to protect the employee
against persons who would otherwise attempt to compromise
on the amount justly due him. Three-fourths of the States
having compensation laws have an arrangement of this type.
If the claim cannot be amicably adjusted in this manner the
rights of the parties must be decided by some State tribunal. In
some States, however, where all risks are insured in a State
fund, the compensation is paid by the fund upon the applica-
tion of the injured employee or his dependents.
LIABILITY AND COMPENSATION 167
In the States where no compensation commission exists the
claims In disputed cases are presented to the Inferior courts for
settlement; where commissions exist, the claims go either to the
commission or to some subordinate officials appointed by the
commission. These latter consist either of individual members
of the commission, arbitration committees or referees. In
all cases the referee or arbitration committee Is given most of
the powers of a court, but legal forms and procedure are elim-
inated as far as possible In order to preserve the rights of the
injured party and to avoid technicalities. The object of these
provisions Is to keep as many cases as possible out of the courts,
which used to be swamped under the negligence system with
suits for damages.
The parties are not wholly deprived of their right of appeal
to the courts, however. While the findings of the commission
or its referee as to facts arc considered as final, matters of law
are treated otherwise. Thus, either party may appeal to the
courts for the interpretation of an expression in the act, — as
for example, what is an injury? — but not to decide whether,
for example, a person was intoxicated when injured, wnlch is a
matter of fact.
Insurance requirements. — One of the most important pro-
visions of a compensation act is that relating to insurance. It
would not be sufficient to make employers liable for compensa-
tion without providing some guarantee that the same will be
paid. In the majority of States this Is accomplished by compel-
ling the employer to insure the risk. In five, however, the only
security the employee has is the provision making compensation
payments preferred claims against the property of the employer.
In the States where insurance is required the arrangements
vary.^ In some cases, a State insurance fund is put in operation
which is virtually a mutual association supervised by the State
and this made the sole acceptable form of insurance. The
State here has a monopoly of the compensation insurance busi-
ness. In other States the employer may insure in the State
fund or in some recognized mutual. In still others he has the
choice of the State fund, a mutual association or a stock com-
pany. These do not always compete on equal terms, the stock
company's rates in some States being fixed at a figure higher
' See Appendix XXII.
168 INSURANCE PRINCIPLES AND PRACTICES
than the other Insurers. In most of the States self-insurance is
permitted, the employer being required to comply with more or
less strict requirements, as the case may be, In order to satisfy
the commission that he is able to carry his own risk.
Space does not permit a summary of the provisions intended
to prevent accidents but it may be said that in general they are
woefully Inadequate, the laws being usually very defective, their
enforcement very lax and the Inspectors Insufficient in num-
ber.
The above summary is merely intended to give a general sur-
vey of the nature of the compensation laws existing in the
United States. It will be apparent from what has been said
that the laws all vary to a greater or lesser degree and an em-
ployer can only ascertain his duties and an employee his rights
by a careful Inspection of the law in the state or states where
they are engaged in doing business.
Methods of insurance. — We find four methods of insurance
in vogue for the protection of employers against the legal
liability imposed by a compensation act; insurance in a stock
company, in a mutual or reciprocal, in a State fund, or self-in-
surance. Which of these forms is superior has not as yet been
finally determined. All of them are competing for business and
rival claims are urged upon the attention of the prospects re-
garding the respective benefits under these plans. Here we
can only mention the advantages claimed by the champions of
the various methods and the disadvantages set forth by their
opponents.
The stock company is a corporation organized for profit,
having a capital stock on which it is desired to earn dividends.
The contract It offers is a perfectly definite one, the premium
being named in advance and the policy-holder never being
called upon to pay anything additional. If the premium col-
lected is inadequate the deficit is met from the capital and
surplus of the stockholders. The insurance laws have been
framed to provide a careful regulation of the methods followed
by such companies in doing business and are designed to Insure
their solvency, a feature which is very important in compensa-
tion insurance, where payments to an injured party often extend
over many years. The capital and surplus together form a mar-
gin to work with which protects the policy-holders, a good
LIABILITY AND COMPENSATION 169
company having a capital and surplus proportionate to the
amount of business it does. This fund protects the policy-
holder against large and unforeseen catastrophes and unfortu-
nate underwriting experience. Ordinarily the stock company is
of considerable size and does business over a wide territory.
As a result its risks are of a most diverse character and widely
scattered, two features which, as we have seen, conduce to the
proper and regular working of the law of average on which
insurance is founded. It is also argued that the best manage-
ment will be found in the stock company because the self-inter-
est of the stockholders will impel them to see that the concern
is economically and efficiently managed. The management of
the stock company is theoretically free from political entangle-
ments and permanent In character. The stock companies
obtain their business through a system of agents who receive
a commission on the business they write. In return, it is said
that the agent's services are valuable in selecting risks. In edu-
cating the policy-holder and in giving service to the employer.
The mutual association^ has no capital stock and consists of a
number of employers who form a group In which every member
Is an Insurer as well as an Insured. The policy-holders control
the management and since no dividends are paid a member Is
entitled to any savings which result on the estimated cost but
likewise assumes the obligation of making good any deficit.
Since there are no dividends to be paid and usually very little
In the way of commissions to agents, the mutuals claim to be
able to do business at a much lower cost than the stock com-
panies. The association Is controlled by the policy-holders and
since the officers are usually policy-holders. It Is maintained
that the association will always be operated in the Interest of,
and for the benefit of the policy-holders. Although the stock
company operates over a wider territory, the mutual In a defi-
nite locality has the advantage of strictly enforcing high stand-
ards of prevention and protection which reduce accidents and
consequently cost. In addition, the risks may be very carefully
inspected so as to give a select group on which losses may be
much lower than on a group of risks Indiscriminately selected.
It Is possible for a mutual to render a great service In the pre-
vention of accidents, because the cost of insurance Is directly
dependent upon these accidents and any accidents which the
* See Appendix XXVII.
170 INSURANCE PRINCIPLES AND PRACTICES
employers prevent are unquestionably and directly a benefit
to themselves. Such prevention would also be beneficial in the
stock company if the rates were lowered as a consequence,
which is the case under the experience rating system described
later.
The reciprocal is in many respects similar to a mutual. Here
however, an attorney-in-fact who controls the operation of the
reciprocal is appointed to represent the members. The mem-
bers are liable for assessments as in a mutual and there is
often some attempt to limit the extent of an assessment, al-
though the legality of this is questionable. It will be evident
that the success of the reciprocal is very largely dependent upon
the integrity and ability of the attorney-in-fact.
The State fund is a mutual created and managed by the
State and usually receiving certain privileges therefrom, such
as immunity from taxation or the assistance of a fund to start
business.^ The rates for insurance are usually lower in the State
fund and may be reduced still further by the return of divi-
dends. It is claimed that the insurance is cheaper by reason
of efiicient management ~in""fhe interests of the public.
Inasmuch as some of the expenses of this fund are often
defrayed by the State it is difficult to compare satis-
factorily the cost of this insurance with the cost under
the stock and mutual plans. In some cases the law
provides that insurers in this fund are absolutely relieved of all
liability for payments of compensation, and under these cir-
cumstances the employer gets absolute security. The State fund
usually provides no indemnity against liability, however, so that
in cases where through a legal technicality the Injured party
might sue the employer. It would Inadequately protect him.
This fund is sometimes made a monopoly, and in this case it
eliminates all the vast wastes of competition and avoids the
expense of duplication of personnel and facilities which other-
wise would be necessary. It Is claimed, on the other hand, that
this is an Invasion of the private rights of individuals and that
the State is virtually depriving private insurers of the right to
do business. The State fund, if of a competitive character,
forms an effective and valuable means of compelling reason-
able rates and efficient service on the part of the private com-
panies. Many such funds have been criticized, however, as
'See Appendix XXVIII for a statement of a State fund's operation.
LIABILITY AND COMPENSATION 171
being wasteful and inefficient. The policy-holders have only
an indirect voice in the management of the enterprise. Incase
of insolvency, either employers will have to contribute through
"assessments or else employees will suffer through failure to re-
ceive the compensation due. It is important to notice the argu-
ment that, since many compensation laws make insurance com-
pulsory, agents and their commissions are an unnecessary waste
and that if the State compels a man to insure it should also
secure for him a means of doing so at the least possible cost
and in the best manner.
' Self-insurance is the carrying by an employer of his own risk
by periodically setting aside amounts in a fund to pay losses
when incurred. By this method the employer saves all the
expense incidental to the organization of an insurance company
and is assured of paying only the cost of his own industry. He
need not worry about the equitableness of rates as between his
industry and other industries, or between himself and others
in the same industry. This plan is most directly connected with
the subject of accident prevention. Any accidents prevented
will Immediately and directly accrue to the advantage of the
individual employer and it consequently furnishes a powerful
incentive to provide every means of safety; in other plans the
amount saved through accident prevention may or may not go
to the employer who makes the greatest efforts in this direction.
But the employer assumes all the trouble and expense which
would be taken care of by the Insurance company If he insured
in a private company, and the employee runs the risk of find-
ing the employer unable to pay claims when due. A catastrophe
involving a large loss may exceed the employer's assets, forc-
ing him Into insolvency. Furthermore, It is difficult for the
State to keep watch of his financial condition for the protection
of employees; an employer who is solvent today may be Insol-
vent tomorrow. The employer Is directly Interested in reduc-
ing claims and may therefore try to deprive workmen of the
benefits properly due them; but it has recently been claimed that
other insurers have tried to do this same thing.
The compensation policy. — This differs from the liability
contract In that the amounts payable are limited only by the
compensation law of the State and the contract Is as much for
the protection of the employee as the employer. The provi-
sions relating to premium payments are very similar to those
172 INSURANCE PRINCIPLES AND PRACTICES
of the liability policy and likewise the sums and events covered,
with the exception noted above. The contract is for one year,
with privilege of cancellation by either party. Certain legal
provisions are incorporated which make the contract a real
protection to the employee. The provisions applying after an
accident are very similar to those found in the liability contract,
with the exception of that relating to insurance in more than
one company. The provisions of the contract are very clearly
set forth in the document itself, which Is reproduced in an
appendix.^
Workmen's compensation rates. — Workmen's compensa-
tion rates, like liability insurance rates, are made by concerted
action. The most important rate-making body is the National
Council on Workmen's Compensation Insurance, a federation
of the State rating boards and bureaus throughout the United
States, whose object is to form a central clearing house for
the exchange of ideas and for the solution of statistical
problems connected with rate-making. The work of this
organization is chiefly accomplished through committees, on
which the various members are represented, the results of
the committees' efforts being adopted by the members of the
council. Many States hav^e compensation rating boards,
which exercise jurisdiction over the rates in their territory. A
member is not compelled to adopt the conclusions reached by
the National Council. Because of its national character and
the completeness of Its representation, however, the National
Council is probably the most important single rate-making
body in the United States.
Compensation rates may fundamentally be divided into two
classes; manual rates and merit rates. The former are pub-
lished in a manual and show for each classification of Industries
the rate which it would be necessary to charge In order to pay
the average losses and expenses of that classification for the
country as a whole and yield a reasonable profit to the com-
pany.^ But the manual rate, while most important as a starting
point for all rates, Is not necessarily the final rate charged to^
the purchaser of insurance. In order to do justice between
individual employers schedule rates have been devised which
take into account the tangible features of the individual risk,
and also experience rates which are based upon the past
•See Appendix XXIII.
' See Appendices XXIV and XXV.
I
LIABILITY AND COMPENSATION 173
history of the risk in question. We will begin, however, with
a consideration of the manual rates, inasmuch as these form the
basis of the compensation rating system.
A rate to be adequate must be sufficient to cover three items
of cost; (1) the pure premium which covers. the amount ex-
pected to be paid in benefits, (2) the loading for expenses
sufficient to cover the cost of management and obtaining busi-
ness and (3) the profit of a stock company. In computing the
pure premium it is necessary to obtain an amount which will be
sufficient to cover not merely the initial benefits paid under
policies but the ultimate benefits, which may extend over a long
period of years. This involves an estimate of the outstanding
liabilities of a compensation insurance company and renders
the problem more difficult than it otherwise would be. Likewise,
we find that many industries are so inadequately represented
in some States that the experience of such industries classi-
fied by States is too meagre for rate-making purposes. To
avoid the latter condition a statistical assumption must be em-
ployed. This latter point must be immediately disposed of as
it is a fundamental part of the compensation rate-making sys-
tem.
Since, for example, we cannot depend upon the past experi-
ence on coal mining in Michigan to fix a rate for coal mines in
that State, nor upon the experience on clothing manufacturing
In Arizona to determine a premium on this industry in that
particular State, and since, In fact, there are many industries
which are not adequately represented in all States, the differ-
ence between the pure premiums on various Industries must be
determined primarily on the basis of the experience on each in-
dustry in the country as a whole or at least in several States.
This means a comparison of the losses per $100 of payroll on
contracting work, for example, as compared with the losses per
$100 of payroll on bakeries. But the various States have dif-
ferent compensation laws and the losses will be influenced by
the provisions of the acts. In other words, as the losses stand,
they are not comparable, and before being added together to
arrive at the general experience, must be reduced to a common
level. For this purpose a reduction factor or factors must be
used which will approximately measure, for instance, the differ-
ence between New York and Pennsylvania conditions. One
reduction factor Is inadequate for the purpose and several have
therefore been employed. For death and permanent total dis-
174 INSURANCE PRINCIPLES AND PRACTICES
ability losses, the average cost per case is determined from
past experience in each State, and by multiplication there can
be found what New York accidents would have cost in Penn-
sylvania or what Pennsylvania accidents would have cost in
New York. As regards minor injuries and other benefits, the
two States are reduced to a parity by the comparison of
payrolls and losses, thus finding what the cost of the benefits
paid in Pennsylvania would have been if the payroll of Penn-
sylvania were the same as the payroll of New York. These
two types of calculations are necessary because the proportion
of serious injuries to the total number varies between States,
due to the character of the industries.
When by this method one or more reduction factors have
been found for each State, the losses for the country as a whole
can be grouped together for individual classifications of
industries and occupations and compared with the payrolls of
individual classifications. This comparison shows the loss
which is to be expected upon each $100 of payroll, on the aver-
age, in each classification. This might be 56 cents for auto-
mobile manufacturing or $2.29 for can manufacturing, to
assume figures for illustration.
The next problem Is to pass back from the premiums com-
puted on the basis of combined experience to premiums which
will reflect the different conditions prevailing In individual
States. The rates computed above are for average conditions,
while some States are above and some below the average.
Evidently this may be done by reversing the process followed
in finding the reduction factors, and the factors accomplishing
the result are called translation factors. The translation
factor for death and permanent total disability Is found by the
average-value method described above, while the factor for
"all other" and "medical" losses is the reciprocal of the reduc-
tion factor for the same. Thus, from the general experience
on Individual classifications. State premiums for individual
classifications are arrived at. In Pennsylvania, for example,
the premiums on automobile and can manufacturing, respec-
tively, might be assumed to be $1.00 and $4.00.
One further factor must be taken into consideration. In
the above calculation the experience of past years, say 1916-17,
served as a basis; but the premiums are to be computed for
business to be written In 1920. Losses may be increasing or
decreasing, relative to payrolls during this period. A rough
LIABILITY AND COMPENSATION 175
approximation to such increase or decrease is obtained by find-
ing the loss ratios (losses to premiums) at the two dates,
assuming that the rate of premium was the same. If the loss
ratio of 1916-17 was S6 per cent, and that of 1919 was 53
per cent, it would indicate that the premiums we have found
should be discounted by 5.4 per cent, to allow for declining
losses. Thus the above rate illustrations would become 95
cents and $3.78, respectively.
To this must be added an allowance for expenses and profit,
and the result will be the manual rate. Suppose that in States
where ordinary taxation is levied, expenses are found to equal
38 per cent, of the manual rate, distributed about as follows:
Acquisition Cost 17.5 per cent.
Home Office Administration 8.0 " "
Inspection and Accident Prevention 2.0 " "
Adjustment of Claims 7.0 " "
Taxes 3.5 " "
Total 38.0 "
Then the above pure premium of 95 cents must be increased
to $1.53 in order to cover these expenses. The amount of
$1.53 (the manual rate) is found by dividing the pure pre-
mium (95 cents) by (1 — .38). In the rate manual this
Information may be presented in various ways. For example,
the rate manual will furnish the name and description of each
classification, a special number designating the same and a
symbol indicating the manual rate. By reference to separate
sheets, the meaning of the symbols in dollars and cents may
be found for any individual State. ^ Another method consists
in the preparation of a separate sheet for each State, contain-
ing all the classification numbers and opposite each its manual
rate for that State.
Merit rating. — The manual rate in compensation insurance
may be superseded by (1) a schedule rate or (2) an ex-
perience rate. We will proceed to consider these two systems
of rating in the order given.
Schedule rating. — The system of schedule rating is designed
to measure the visible elements of hazard and to fix the rate
according to the results of this measurement. The process
includes briefly the following steps :
a. The establishment of certain standards of safety in indus-
trial plants and operations.
b. The inspection of risks to determine how nearly such
risks approach or excel the standards established.
*For a sample page of manual and rate sheet see Appendices XXIV and XXV.
176 INSURANCE PRINCIPLES AND PRACTICES
c. An Increase or decrease in the rate for deviation from
the standards established.
A schedule Is usually divided into three principal parts.®
The first portion deals with the structural hazards, such as the
character of the building and the equipment. The second por-
tion covers the mechanical hazards, such as the machinery
employed in the various operations. The third portion refers
to the morale of the plant, Including safety organization, ac-
cident prevention, etc.
Under each of these sections systems of adding to or sub-
tracting from the manual rate are applied. For defects to
which only a limited number of employees are exposed the
process of adding a flat sum to the premium is followed, because
this hazard consequently will not vary with the payroll. For
defects which affect all kinds of industries equally there is
added a certain sum per $100 of payroll In order that the
charge may vary with amount of insurance and not according
to the rate. For defects whose influence varies with both the
number of employees and the nature of the industry there is
added a percentage of the manual rate, which therefore causes
this charge to vary, not only In accordance with the rate
charged, but also with the amount of payroll.
The advantages of schedule rating are the following:
a. The establishment of different rates for risks which are
within the same general classification but vary from the average
risk of that classification.
b. The direction of attention of the employer to specific
defects which require a remedy.
c. It enables the Insured to reduce the rate by remedying
the bad features of his risk.
d. It furnishes an incentive for accident prevention.
In its present state, however, the system is open to the crit-
icism that It considers only the tangible elements of hazard
and does not adequately measure the Intangible elements. An-
other difficulty is that there is not suflUcIent statistical justifica-
tion for the various charges and credits Involved. In this con-
nection It must be remembered that it Is very difl^cult to say
how many additional cents of loss are added by any particular
unguarded machine. As applied thus far the schedule sys-
tem has resulted In a deficit in premiums to the companies,
" See sample page of schedule in Appendix XXVI.
LIABILITY AND COMPENSATION 177
whereas the net result of the application of the system should
be the collection of an equal amount of premiums from the
total number of risks. The loss in premiums from risks which
are above the average should be exactly counterbalanced by
the additional premiums collected from risks which are below
the average. In practice, also, the establishment of arbitrary
credit limits has checked the incentive towards the prevention
of accidents.
Experience rating. — This Is designed to measure both the
intangible and tangible elements of hazard by comparing the
loss experience of the individual risk with the loss experience
of a group of risks, with the idea of modifying the manual
rate favorably or unfavorably as the comparison is favorable
or unfavorable. Ordinarily such a plan Is limited to risks
with a payroll of a certain size and a loss experience cover-
ing three or four years. The process Is divided into the fol-
lowing steps :
a. The Insured submits a schedule showing his audited pay-
roll for the required period and the losses which have oc-
curred during that period, classified according to their char-
acter.
b. These schedules are analyzed to find what proportions
of the premium are paid for deaths and permanent total dis-
ability and for temporary disability and medical benefits.
c. The losses are similarly analyzed so as to show in detail
the actual experience of the risk in question.
d. If the comparison of losses with premiums is favorable,
the insured Is entitled to a percentage reduction of the manual
rate and if unfavorable, the manual rate Is increased.
The advantages of experience rating are the following:
a. It enables the owner of a good risk to obtain some reduc-
tion from the rate charged the average risk of the class.
b. It is a form of merit rating which Is applicable to all
risks, whereas schedule rating could hardly be applied to an
industry like the contracting business.
c. It covers the invisible elements of hazard.
d. The experience rating plan. If satisfactorily worked out,
gives the Insured in a stock company or mutual the principal
advantage of self-Insurance; that Is, efforts toward prevention
directly benefit him by the reduction of his premiums.
178 INSURANCE PRINCIPLES AND PRACTICES
Liability and compensation insurance reserves. — As with
other forms of insurance, the state has here intervened for
the protection of the policy-holders. In the early days of lia-
bility insurance, the reserves kept were at the discretion of the
insurance company and were based upon the officials' estimates
of what was necessary. The protection afforded to the policy-
holder by the State must provide that the insurance company
shall not use the premiums of the policy-holder until It renders
the protection for which such premiums have been paid, an
object which the law accomplishes by two kinds of reserves.
These are (1) the unearned premium reserve and (2) the
loss reserve.
The unearned premium reserve consists of the unearned
premiums as ascertained by an approximate method of cal-
culation. This reserve In liability and compensation Insur-
ance Is no different from the reserve In fire Insurance. Sup-
posing the examination of the company to be made In Decem-
ber, some policies have been written In January and some
In December, some in February and some In November, etc.,
so that the average life of the policies Is six months. All
compensation and liability policies are written for a term of
one year, so that in December one-half of the premiums writ-
ten during that year may be considered as earned and one-half
as unearned. The unearned premium reserve is therefore that
proportion of the premium represented by the ratio of the un-
expired policy period to the total term of the policy. The
New York law reads as follows: "The superintendent of
insurance shall charge as liabilities. In addition to the capital
stock, the premium reserve on policies In force, equal to the
unearned portions of the gross premiums charged for cover-
ing the risks, computed on each respective risk from the date
of the Issuance of the policy." It Is customary for state insur-
ance departments to accept a computation of the premium re-
serve on the yearly basis Indicated above and fully described
in the chapter on the fire insurance reserve, although an un-
earned premium reserve calculated on a monthly basis would
be more accurate.
In view of the extensive treatm.ent of the subject In the chap-
ter on the fire insurance reserve, we need only summarize here
the reasons for an unearned premium reserve, which are:
"\. 1. The premium for the unexpired term must be considj^
LIABILITY AND COMPENSATION 179
ered as held in trust for the policy-holder, the product for
which it was paid having not yet been delivered.
2. It is essential to know the unearned premium and the
reserve held against this liability in order to determine the
solvency of the company.
3. The unearned premium reserve would be necessary for
re-insurance premiums if the company desired to suspend busi-
ness and to re-insure its risks in another company.
If it were not for the peculiar nature of the liability and
compensation insurance business the reserve indicated above
would be sufficient. The liability of a fire insurance company
on a fire insurance policy is determined at the date when the
policy expires; no fire occurring after that time can increase
the company's liability and all those which have occurred dur-
ing the term of the policy are already known. In fact the
claims upon most of them have been settled. In the liability
and compensation business the event insured against must also
occur within the term of the policy but, as explained previously,
notices and claims will be made after the term of the policy
has expired, and the future liability of the company by the
nature of the circumstances Is somewhat indefinite. Law suits
may be started which will be In the courts for years after the
term of the policy has ended. Most of the company's pay-
ments are therefore made on a policy after the terrn of that
policy has expired, and at the moment of examination its
obligations are mainly in the future and not in the past.
Against these obligations some reserve must be provided and
this is the function of the loss reserve.
The loss reserve may be defined as that sum which, to-
gether with Interest, will be sufficient to meet the known and
unknown obligations which may arise from accidents which
have already occurred. It will be recognized that the obliga-
tions on future accidents will be met out of the unearned
premium reserve and the obligations on past accidents out of
the loss reserve. The loss reserve will obviously be more diffi-
cult to compute than the unearned premium reserve and it Is
not surprising that the lawmakers have not been highly suc-
cessful in the past In providing a proper standard for It.
Nevertheless a proper loss reserve Is of the highest Importance,
because It insures the future solvency of the company and gives
the employer some assurance that the claims made by em-
ployees will be provided for.
180 INSURANCE PRINCIPLES AND PRACTICES
The first and prime requisite of this reserve is sufficienqr,
and this is the principal object which lawmakers have been
working to obtain, but it is complicated by the fact that an
excessive reserve is undesirable. Such excessive reserve Is de-
rived from premiums which must be thereby unduly increased,
and when later the reserve is found to be excessive, the excess
goes as dividends to the stockholders, or if a mutual company,
is returned to policy-holders other than those who contributed
it. A company might also use the excess reserve so accumu-
lated for purposes of competition. In addition to this diffi-
culty, changing conditions make the experience of the past
inapplicable to the future. This will be more readily observed
by examining some of the bases which have been used for the
calculation of the loss reserve.
These methods briefly stated are as follows:
1. The individual estimate method consists in an estimate
by the insurance company officials of a sum which will be nec-
essary to cover each particular case. It means that each case
is considered individually according to the circumstances sur-
"rounding It and It therefore entails an enormous amount of
work. In the past the Insurance officials have been inclined
generally to underestimate their outstanding liabilities. This
method fails to establish any common standard, so that while
one company may be setting aside excessive amounts, another
may be making woefully inadequate provision for the future.
2. The pure premium method assumes that since the pure
premium is supposed to represent the probable loss costs on
policies, it may be used as an index of the necessary reserve.
The pure premium minus what has already been paid out in
losses should give the required reserve for future liabilities.
This method would be correct if pure premiums were always
accurate and adequate, but if they are not the method falls
to the ground. What the State Is interested in is, not what
actually remains out of premiums to meet future liabilities,
but what sum the company should have on hand to meet future
liabilities.
3. The average cost method depends upon ascertaining
from past experience the average cost of a notice of Injury,
a claim by an Injured party and a suit to recover damages or
compensation. Having the experience of the past on notices,
claims and suits, it was thought easy to apply this knowledge
to the number of notices, claims and suits at the time of exan^
LIABILITY AND COMPENSATION 181
ination and subtract from the total what had already been
paid on such notices, claims and suits. But the records of
the insurance companies of notices in some cases were far from
satisfactory, the method gave the companies an opportunity
to manipulate the figures, and it was difficult to name a suit-
average cost in the law because of the great variation between
localities and different classes of business.
4. The actual loss ratio method consists In ascertaining
from past experience the ratio of losses to gross premiums. A
similar loss ratio is then assumed for the policies undef'con-
sideration and from the total amount so ascertained is de-
ducted any payments already made by the company. This
method is more simple in application and may be more easily
checked by the authorities. It assumes, however, that the ex-
perience of the past will be true of the future, and if condi-
tions are radically changing this may not be true. It has also
the same objection as the pure premium method in that it is
dependent to some extent upon premiums, which may not be
correct.
5. The fixed loss ratio method substitutes for the loss ratio
of actual experience a ratio prescribed by law. This legal
ratio is based upon experience but upon the experience of many
companies instead of one. This is the method most recently
adopted and appears to work better than the former methods
in use. These various methods have often been combined.
Thus, in some States the average cost method was used for
policies which had been In existence for some time and the
loss ratio method was used for policies more recently written,
subject, however, to checking by the average cost method.
The average cost method and the fixed loss ratio method have
also been combined.
The law of New York will serve as a good Illustration of
the regulation now In existence. It must be remembered that
while the law of New York can only affect companies doing
business within that State, a list of such companies would In-
clude many of the prominent companies of the United States,
and the law affects not only their business written In New York
State but their total business. The New York law therefore
forms a minimum reserve requirement for all companies doing
any business within Its borders. This law is divided into two
parts, the first pertaining to the liability business and the second
to the compensation insurance business.
182 INSURANCE PRINCIPLES AND PRACTICES
With reference to liability insurance, the law provides:
a. $1,500 reserve shall be on hand for each liability suit
being defended under policies written ten years prior to the
date of the statement.
b. $1,000 reserve shall be on hand for each liability suit
being defended under policies written five and less than ten
years prior to the date of statement.
c. $850 reserve shall be on hand for each liability suit being
defended under policies written three and less than five years
prior to the date of statement.
d. For liability policies written during three years imme-
diately preceding the date of statement, the reserve on hand
shall be 60 per cent of the earned premiums, less all losses
and expense payments made under such policies.^"
It will be noticed that items a, b, and c above, are based
upon the average cost method, while item d is the loss ratio
method, 60 per cent of earned premiums being the assumed
ratio of future losses to premiums.
For compensation insurance reserves the law provides the
following : —
a. A reserve for all compensation claims under policies writ-
ten more than three years prior to the date of statement equal
to the present value of the determined and estimated future
payments.
b. A reserve for all compensation claims under policies writ-
ten in the three years immediately preceding the date of state-
ment, equal to 6S per cent of the earned premiums of each of
these three years less all loss and expense payments made under
such policies. ^^
This law has been adopted in Massachusetts, Pennsylvania
and in many other States of the union, but is not considered
by insurance officials as entirely satisfactory. The average costs
are based upon old experience which may not be of much value
as far as the future is concerned. Also, it does not provide
sufficient restrictions for new companies just entering business
whose premiums may or may not be adequate. This criticism
particularly applies to the liability portion of the business. It
will also be noted that the percentage of earned premiums is
^But for the first of such three years, the reserve shall not be less than $750
for each suit being defended.
"Provided however that for the first year of such three-year period the re-
serve shall not be less than the present value of the determined and estimated
compensation claims under the policies of that year.
LIABILITY AND COMPENSATION 183
a percentage of gross premiums which include expenses, so
that a reduction in expenses would bring a reduction in re-
serves, which is far from logical. It has been suggested that
the average cost method might be applied to the more recent
policies as a check upon the fixed loss ratio method.
Part IV
FIRE INSURANCE
185
Chapter XIII
INSURABLE INTEREST IN FIRE INSURANCE
A common statement In texts on Insurance Is that policies of
insurance relating to the loss or destruction of property prom-
ise reimbursement based on indemnity. On this principle the
insured would always receive the actual cash value of the
property at the time of the loss. This Is not quite accurate,
in view of the valued policies Issued in marine and certain
forms of casualty insurance and other less obvious violations
of the principle; but it is true that the law has in the main
gladly recognized the protection against moral hazard which
is given by an actual interest In insured property approximately
equivalent to the face of the policy.
Reasons for insurable interest. — The purpose of all prop-
erty Insurance is, therefore, to indemnify a loser. If only
those who suffer loss are to receive reimbursement, none save
those who may be injured should be permitted to secure pro-
tection, and then only to the extent that they are threatened
with loss. Fire insurance, and life insurance covering the
life of a debtor in favor of a creditor, present similar restric-
tions. But we have seen that the insurable interest of a per-
son in his own life is usually unlimited, the courts of many
States having decided that it is impossible to calculate the
value of human life. In marine and casualty insurance also,
the Interpretation of insurable interest is relaxed. Fire in-
surance policies Issued for more than the maximum possible
loss, however, are considered over-Insurance, and while in the
absence of fraud or "valued policy laws" these policies sel-
dom work harm, the total absence of any interest in the prop-
erty makes an Insurance policy on the same a mere wager.
A person holding a policy of this type cannot gain by the
continued existence of the property and Is not interested in
its preservation; on the contrary, he can make a profit by its
destruction and the moral hazard Is therefore tremendously
Increased. Periods of poor business and decreasing values
have given ample proof of this. Where the value of the
187
188 INSURANCE PRINCIPLES AND PRACTICES
property is difficult to ascertain and, as a result, excessive
insurance is obtained, this same moral hazard attachcs^.though
in a lesser degree. Heavier losses to the insuring companies
and consequently heavier premiums for everybody are the
natural results of a deficiency in insurable interest. Hence,
as a matter of public policy, an insurable interest is desirable
and even necessary.
The method adopted by fire insurance companies to protect
themselves against these hazards is the careful selection of
persons to whom they issue policies. It should be kept" th
mind that while we speak of insurance on property the in-
surance does not actually protect the property itself but is
instead a personal contract protecting an individual or cor-
poration. Therefore if the record of the applicant for a
policy is open to suspicion the insurance company will prob-
ably refuse to grant a contract, particularly if the party has
ever been involved in any of those losses which give rise to
the suspicion that Providence has been assisted by human
agency.
What constitutes insurable interest. — Because the possible
range of insurable interest is wide its existence is often diffi-
cult to ascertain and its definition always difficult. Many defi-
nitions have been formulated, of which the following clause
from the codified laws of one State is a fair example — "every
interest in property or in relation thereto or liability in respect
thereof, of such a nature that a contemplated peril may di-
rectly damnify the insured." Another definition, short but
to the point, is to the effect that "as long as the insured has a
direct pecuniary interest in the preservation of the property
he possesses an insurable interest." Observe that neither own-
ership nor possession are necessary, but a right which may be
prejudicially affected or a liability created, whether actual or
contingent, is considered sufficient. However, the "utility
test" is possibly easier to apply than any of the above. Thus,
if the realization of a contemplated peril may adversely affect
the use of an object, the party or parties thereby affected
possess an insurable interest to the extent of the damage that
might result with respect to such use. The uses to which
property is put are almost as varied as the circumstances in
which men find themselves, and insurable interests therefore
often develop in most unexpected places. To cite a few com-
mon examples of diminished utility, there are the cases of
INSURABLE INTEREST 189
an owner whose property is destroyed in whole or In part;
a bailee, who loses the privilege of keeping property for hire;
or a commission man who is deprived of the usefulness of an
article as an object of sale, by which sale he expects to earn
a commission; or a mortgagee who loses part of his security
for the debt through damage to mortgaged property.
Classification of insurable interests. — The more frequent
instances of insurable interest may be conveniently divided into
five classes :
1. The interest of an actual owner, sole and unconditional.
This is the simplest and most frequent case.
2. The interest of a representative or agent of the owner,
as for instance, a custodian, commission man, bailee or ware-
houseman.
3. The interest of a tenant arising from the consequential
losses of a fire, as the loss of use of property on which rent
is payable, the detriment to a lessee from the destruction of
the leased property, the injuries covered by a use and occu-
pancy clause, etc.
4. The interest arising from legal liability for the property
of others, as in the case of common carriers, bailees for hire
and lessees.
5. The interest of a party holding property as security for
a debt, such as the interest of a mortgagee. The importance
of this latter type of interest warrants a separate discussion
of it.
Protecting the mortgagee.^ — It might be inferred from the
preceding discussion that only one person can have an insur-
able interest in a given property at a given time. This, how-
ever, is not the case, since quite often there is a creditor or
lessee who needs protection as well as the owner. One of
the most frequent instances of more than one concurrent In-
surable interest arises from the relation created by a mort-
gage. The courts have long recognized the existence of
more than one insurable interest In mortgaged property, the
mortgagor having an insurable interest equivalent to the value
of the property, while the mortgagee can carry Insurance equal
to the amount of the debt.
^This section is virtually a reproduction of the material contained in an ar-
ticle by Robert Riegel, "Protection of a Mortgagee's Interest by Insurance",
which appeared in the Journal of Political Economy, December, 1915, and is
used here through the courtesy of the publishers of the above periodical.
190 INSURANCE PRINCIPLES AND PRACTICES
There have been several methods whereby these two In-
terests have been protected and because of their importance
considerable space will be devoted to a description of them.
While under any method the mortgagee has some protection,
its extent is not equal under all circumstances or under all
jurisdictions. His status is subject to interpretation by the
intermediate courts and the courts of last resort of the forty-
eight States besides the Federal courts, although the tendency
of all of them is to favor him as much as possible. The fol-
lowing are five principal methods that have been used to insure
the mortgagee :
1. Mortgagee's policy covering his own interest. — Here the
mortgagee takes out separate insurance for his own benefit,
in which the mortgagor has no rights whatsoever. However,
since he possesses an insurable interest, the latter may obtain
a policy on the same property for his own protection if he
chooses to do so.
In case of loss under this method and payment to the mort-
gagee, the insuring company becomes possessed of the con-
tractual right to collect at the maturity of the mortgage a
sum equal to the indemnity paid. To permit otherwise would
be to grant the mortgagee double indemnity. He would col-
lect the amount of the loss from the insurance company and
his claim on the mortgagor would be undiminished. There-
fore the insurance company becomes subrogated to the rights
of the mortgagee to the extent of the indemnity paid. An
illustration will make this clearer. Let us assume that O
possesses a property valued at $10,000 which he has mort-
gaged to M for a loan of $9,000. M insures his interest in
Company J for $9,000 and a loss of $8,000 subsequently
occurs. The insurance company, J, pays M $8,000 and by
subrogation acquires M's right to collect $8,000 from O at
the expiration of the term of the mortgage, M retaining the
right to collect at that time the remaining $1,000 due him.
The insurance company, if it can ultimately collect the $8,000
from O, loses nothing. If O refuses to pay foreclosure may
be had and If the property brings only, say, $8,500, the com-
pany loses $500, since it cannot legally In the collection of its
claim against O prejudice In any way M's contractual right
to $1,000. An alternative settlement is the payment to M by
J of $9,000 and the latter's acquisition by subrogation of a
INSURABLE INTEREST 191
claim for $9,000. This is the law in every State except Massa-
chusetts.
The advantages of this method arc few and accrue only to
the mortgagee. It gives him double indemnity in one State,
Massachusetts, and if he disapproves of the insurer selected
by the mortgagor he may secure more satisfactory protec-
tion. The disadvantages to the mortgagee arc that he must
supervise the insurance and also pay the premiums. Such
separate insurance is also disadvantageous to the insurance
company, since it increases the difficulty of supervision, tne
moral hazard, and the danger of non-concurrent policies.
2. Assignment of the mortgagor's policy.^ — A second
method is the assignment to the mortgagee of a policy held by
the mortgagor. The efficacy of this method is doubtful, since the
mortgagee acquires by assignment only such rights as the
mortgagor possesses at the time of assignment. A fuller ex-
planation of assignment is given at the end of this chapter.
These rights depend to some extent upon the nature of the
assignment and the jurisdiction. Violations or misrepresen-
tations may have voided the policy and in many States the
mortgagee would then obtain a valueless piece of paper. Sec-
ondly, the mortgagee often has no legal status as a contracting
party and consequently may not be entitled to notice of ap-
praisal, to participate in negotiations after a loss, to redress
if the mortgagor agrees to an inadequate settlement of the
claim, etc.
3. Indorsement of a "loss payable clause." — ^A more ex-
tensively used method of obtaining Insurance of a mortgagee's
Interest Is the Indorsement upon the mortgagor's policy of the
so-called "loss payable clause," stipulating "loss. If any, pay-
able to , as his interest may appear."^ From
the standpoint of the companies this is desirable in some States
because of the liability of the mortgagee for the acts of the
mortgagor, and in general because of the elimination of sep-
arate insurance of interests In the same property and the re-
duction of the moral hazard. But the desirability of such
a method from the mortgagee's standpoint, It is to be strongly
emphasized, entirely depends upon the State where it is used;
there being two radically different Interpretations of his rights.
The first of these is that such an indorsement renders the
' See form on p. 195.
'See Appendix XXXVII.
192 INSURANCE PRINCIPLES AND PRACTICES
mortgagee an appointee and representative of the mortgagor
to receive the insurance money. Where this is the law no
method could afford him less protection than the "loss pay-
able clause," since it subjects him to all the defenses available
against the mortgagor, without the rights of the latter. Not
being legally a party to the contract, an award is binding on
him, the election to build or repair may be exercised without
notice to him, and he suffers all the disadvantages of the
previous method.
In marked contrast are the States which consider the in-
dorsement of a "loss payable clause" the creation of an un-
conditional, independent contract between the insurance com-
pany and the mortgagee. When thus favored, this method
cannot be surpassed, since the mortgagee is not bound by the
conditions of the policy, the acts of the mortgagor cannot be
set up as a defense against him, and yet he possesses all the
rights of the mortgagor.
4. The "standard mortgagee clause" — Of all the methods
of protecting the mortgagee's interest the most prevalent, be-
cause of its general effectiveness, is the indorsement on the
mortgagor's policy of a "standard mortgagee clause." One
form of such clause is here given :^
MORTGAGEE CLAUSE
Loss or damage, if any, under this policy, shall be payable to
as mortgagee (or trustee), as interest may appear, and this insur-
ance as to the interest of the mortgagee (or trustee) only therein, shall not be
invalidated by any act or neglect of the mortgagor or owner of the within de-
scribed property, nor by any foreclosure or other proceedings or notice of sale
relating to the property, nor by any change in the title or ownership of the prop-
erty, nor by the occupation of the premises for purposes more hazardous than
are permitted by this policy. PROVIDED, that in case the mortgagor or owner
shall neglect to pay any premium due under this policy, the mortgagee (or
trustee) shall, on demand, pay the same.
PROVIDED, also, that the mortgagee (or trustee) shall notify this company
of any change of ownership or occupancy or increase of hazard which shall come
to the knowledge of said mortgagee (or trustee) and, unless permitted by this
policy, it shall be noted thereon and the mortgagee (or trustee) shall on de-
mand pay the premium for such increased hazard for the term of the use thereof ;
otherwise this policy shall be null and void.
This company reserves the right to cancel this policy at any time as provided
by its terms, but in such case this policy shall continue in force for the benefit
only of the mortgagee (or trustee) for ten days after notice to the mortgagee
(or trustee) of such cancellation and shall then cease, and this company shall
have the right, on like notice, to cancel this agreement.
Whenever this company shall pay the mortgagee (or trustee) any sum for
* See also Appendices XXXII and XXXIII.
INSURABLE INTEREST 193
loss or damage under this policy and shall claim that, as to the mortgagor or
owner, no liability therefor existed, this company shall, to the extent of such
payment, be thereupon legally subrogated to all the rights of the party to whom
such payment shall be made, under all securities held as collateral to the mort-
gage debt, or may at its option pay to the mortgagee (or trustee) the whole
principal due or to grow due on the mortgage with interest, and shall thereupon
receive a full assignment and transfer of the mortgage and of all such other
securities; but no subrogation shall impair the right of the mortgagee (or
trustee) to recover the full amount of claim.
Dated
Attached to and forming part of Policy No
of the of Agency at
Agent.
Such favorable treatment as Is outlined in the clause is
accorded mortgagees by insurance companies because of the
former's inability to control the acts of their debtors, their
recognized right to protection, and their usual excellence as
moral risks. By such a clause, it will furthermore be noticed,
the right to subrogation is reiterated and acknowledged in
the contract. An indorsement of this nature creates what is
substantially an independent contract between the insurer and
the mortgagee. The word "independent" is thus qualified
because two lines of decisions are existent on the liability of
the mortgagee for his debtor's acts. In four States he has
been declared entirely unaffected by such acts, whether com-
mitted prior or subsequent to the indorsement on the policy
of the "mortgagee clause." In four other States he has been
held exempt from the consequences of acts occurring after Its
indorsement. In one of these States, the provisions of the
standard policy after line 59 (which refer to conditions after
a loss) were held to be Inapplicable and not binding on the
mortgagee. He Is privileged to submit proofs of loss, to
receive notice of appraisal and to be exempt from the "re-
build or repair" provision.
Illustrations will serve to define distinctly the nature of the
settlement of claims under the "mortgagee clause." Let us
suppose that the value of O's property is $10,000, that the same
is mortgaged to M for $4,000, and that O obtains a fire in-
surance policy for $4,000 from Company J on which a "stand-
ard mortgagee clause" Is indorsed for M's protection. A
loss of $3,000 occurs. Company J will pay to M, the mort-
gagee, $3,000. O, the owner, having an Interest In the policy,
194 INSURANCE PRINCIPLES AND PRACTICES
however, is entitled to protection, and therefore is credited
by M with $3,000 in liquidation of the debt, being thus reim-
bursed for the $3,000 damage to his property. An equiva-
lent settlement would have been for J to pay M $4,000, then
to take over M's claim against O of $4,000, and credit O with
$3,000 toward payment of the same.
A situation may exist, however, where O has violated the
terms of the insurance contract and J disclaims all liability
to him. In this contingency, when M receives $3,000 from
the insurance company, instead of O receiving $3,000 toward
the payment of the debt, the insurance company is subrogated
to $3,000 of M's claim against O at the expiration of the
mortgage. Thus O loses $3,000 because his policy was void,
and the settlement is made as though O has never had an in-
terest in the insurance.
For the ordinary mortgagee the indorsement of the "mort-
gagee clause" affords the best protection in most States. Its
advantages may be summarized as follows: —
a. The prejudicial effect of the mortgagor's acts on the
mortgagee's rights is considerably diminished in some States
and entirely eliminated in others.
b. The mortgagee acquires legal rights as a party to the
insurance contract.
c. The mortgagee is exempt in some States from certain
provisions of the standard policy, such as the "repair and
rebuild clause" and the provisions applying after a loss.
It has disadvantages, in comparison with other methods, in
only a few jurisdictions. It is inferior to the "loss payable
clause" in a limited number of States and is not as profitable
as the separate insurance of the mortgagee's interest in Massa-
chusetts.
5. Special contracts. — An even more satisfactory method of
completely protecting the mortgagee is the formation of a
special contract between insurer and mortgagee, embracing
exceptional features for the latter's benefit. This, however,
is chiefly used by trust companies and large lenders who place
a great deal of insurance of this nature.
Assignment of fire policies. — When property is transfer-
red or pledged as collateral it is often necessarily accompanied
by protection. Usually the property is insured, and for trans-
fer it is not always necessary to secure a new policy, but merely
the proper assignment of the old one. This avoids a can-
INSURABLE INTEREST
195
cellation of the policy by the insured, which would mean a
higher premium due to the short rate charged when a policy-
holder cancels his policy. Then, too, in the case of pledge,
the real owner contemplates the redemption of his goods and
if it were not for the possibility of assignment the unnecessary
issuance of a third policy would be involved. For there
would be the policy which he held as owner, a second policy
issued to the pledgee, and later, when the property was re-
deemed, a third policy protecting the original owner would be
needed to replace the two cancelled.
The policy provision relating to assignment. — Recognizing
the necessity of assignment and the need for uniformity of
action when a policy is assigned, it is customary for standard
policies to contain clauses governing assignment, and there is
usually a restriction stipulating that unless otherwise pro-
vided in writing and added to the policy it shall be void if
assigned before a loss.^ The object of this restriction is to
prevent an assignment to an undesirable person. The insur-
ance policy is a personal contract and assignment without any
supervision or restrictions means insuring greater moral haz-
ard and the frequent payment of claims to persons whom the
companies possibly would not originally have insured. Thus,
it is not only fair to the insurance company but also to the
premium payers that the company should decide with whom
they wish to contract.
Methods of assigning. — So frequently is Insurance assigned
that most policies have two forms printed on the back for
the purpose, one for the assignment by the insured and the
other for the consent of the insurer. Unless specified in the
policy no particular form is necessary either for the assign-
ment or the consent, but if it is prescribed, then any assign-
ment not in entire compliance is incomplete.
ASSIGNMENT OF INTEREST BY INSURED
The interest of as owner of the property covered by
this Policy is hereby assigned to subject to the
consent of The Insurance Company, New York.
(Signature of the Insured)
Dated 19
"See Appendix XXX, line 31.
196 INSURANCE PRINCIPLES AND PRACTICES
CONSENT BY COMPANY TO ASSIGNMENT OF INTEREST
The Insurance Company, New York, hereby consents that the
interest of as owner of the property
covered by this Policy be assigned to
Agent.
Dated 19
The assignment need not be in writing, as a verbal assignment
might possibly be held sufficient in certain cases. In securing
consent, however, express agreement is usually necessary, ob-
tained through a properly authorized official or agent of the
company. Soliciting agents and brokers seldom possess the
requisite power for this. Even when the policy prescribes the
method of assignment it Is not necessary to follow it when
the insurance has been taken out for the benefit of "assigns"
or "for account of whom it may concern" or the Interest in-
dicated by phrases of similar effect. In these cases, consent
is implied and the assignee acquires rights against the Insurer.
Another method of transferring protection where there is
no change of title is to have the insurer issue insurance cer-
tificates representing the policy. Here the holder of the pol-
icy gives certificates properly countersigned by the company
and made payable to the party designated.
Effect of assignment before a loss. — The effect of assign-
ment depends upon the circumstances of the case, the two most
important distinctions being when there is a transfer of title
and when there is not.
In case of a transfer of title, even where there is a covenant
to Insure for the benefit of the transferee, the insurance does
not necessarily pass, as a policy ordinarily expires with the
transfer of title as far as the transferor Is concerned. But
where the assignment is made and the consent of the company
is given it has been held by the courts that this is the equiva-
lent of a new policy. Therefore, if the title changes, any
prior violation of the policy by the original holder is waived,
and the only parties to the contract are the insurer and the
assignee.
As opposed to this there Is the assignment where no trans-
fer of title has taken place, i.e., where the assignee Is substi-
tuted for the assignor. If the assignor has forfeited before
INSURABLE INTEREST 197
the assignment he can assign nothing. The assignee takes
the policy subject to all prior set-offs, even though all the
policy provisions concerning assignment have been followed
to the letter. Thus, a mortgagor as an assignor can present
only that which he possesses, and in most States prior for-
feiture due to some violation of the contract makes the policy
void, except where a standard mortgage clause has been en-
dorsed thereon. This clause, as we have seen, waives all the
prior acts of the mortgagor.
Assuming, then, that the assignment is valid in all its de-
tails and no forfeiture has occurred prior or subsequent to
the assignment, the assignee assumes the position of the as-
signor in his relation to the insurance company. He is vested
with all the rights of the policy-holder and can enforce these
rights against the company in his own name. Likewise, the
company has rights against him — in other words, a contrac-
tual relationship has been established between them.
Effect of assignment after a loss. — There is nothing illegal
in assigning the proceeds of a loss, as that is the mere assign-
ment of a debt that is due and is no different from the assign-
ment of an "account receivable" by a mercantile house. The
courts have even decided that it is against public policy to
permit a company to stipulate in their contract that they will
not make payment to a person so appointed, since it amounts
to a sale or transfer of a chose in action, which is always per-
mitted in equity. However, it should not be construed from
this that if the property has been transferred before a loss,
the Insurance can always be transferred after a loss so as to
give the purchaser rights thereunder.
Strictly construed, the policy provision previously referred
to would appear to state that any assignment before a loss
without consent relieves the company of all liability. But
this depends upon the interpretation of the word "assignment,"
and the courts have often considered that certain cases of
transfer are not "assignments" as contemplated by the above
clause. Only cases where the assignor parts with all his
rights and creates a privity between the assignee and the in-
surer are so considered. As instances where the latter is not
true, we have :
1. Assignment for the benefit of a creditor.
2. Assignment of the amount secured by the policy.
3. Endorsement making loss payable to a third party.
198 INSURANCE PRINCIPLES AND PRACTICES
4. Deposit of policy as a pledge.
5. Deposit of policy as collateral for a chattel mortgage.
6. Assignment with a bill of lading as collateral security.
This is not to say that the assignee acquires the rights against
the insurer possessed by the insured, or the rights which would
have been obtained by an assignment with the consent of the
Insurer. These are merely cases where the policy remains In
effect and where the assignee has a claim upon the proceeds
of such policy when paid to the assignor.
Chapter XIV
THE FIRE INSURANCE CONTRACT
In this chapter we will discuss the basis of fire insurance,
that is, the contract between the two parties; and since all the
relations of the parties are summed up in this contract such
a discussion might be extended until it covered every phase
of the fire insurance business. Many of such phases, how-
ever, we have considered in other chapters and need not refer
to here. This chapter is concerned mainly with the condi-
tions of the fire insurance policy, the meaning of the various
provisions found therein and the reasons for the existence of
such provisions. The printed policy is often modified by the
addition of endorsements and clauses but this subject must be
postponed to the following chapter.
Development of the standard policy. — In the early days of
fire Insurance every company Issued a policy which suited its.
particular needs. While at first policies were written largely
at the home offices of the companies, the spread of the insur-
ance Idea caused more and more power to be placed in the
hands of the agents and, dealing with an insured miles away,
the company ran the risk not only of the incompetence of
agents, but dishonesty of the Insured. The original simple
policy accordingly became hedged about by a multitude of
restrictions, policies lacked uniformity, and some companies
attempted to devise policies which would impose as little lia-
bility upon themselves as possible. As stated in a court de-
cision of the period, the provisions were of such bulk and
character that they were not to be understood by men in gen-
eral, even after laborious study. They were Intermixed with
subjects In which the premium payer had no interest, and some
of the most material parts were concealed In a mass of rub-
bish on the back of the policy and the following page, where
few would think of looking. As if It were feared that some
one would, in spite of these difficulties, discover the meaning
of the contract, it was printed in extremely small type and
long crowded lines so that "the perusal of it was made physi-
cally difficult, painful and Injurious." After a time even the
199
200 INSURANCE PRINCIPLES AND PRACTICES
companies which issued the policies did not know their mean-
ing because of the conflicting court decisions which were ren-
dered, and loss settlements where several policies were written
on the same property were almost impossible. There was
therefore considerable agitation to establish a fixed form of
policy.
The first standard policy form was adopted in Massachu-
setts In 1873 and in New York a standard form of policy
was made the only legal form in 1887. Eventually other
States followed the example of New York until there were
about seventeen standard forms in use in various States. Of
these, however, the New York standard policy was the most
Important, having been adopted as It stood by several States,
and only slightly modified by others. The National Conven-
tion of Insurance Commissioners recommended a new stand-
ard form in 1914 which was adopted by three States, Including
Pennsylvania, and an amended Insurance Commissioners' form
was adopted by New York^ and Wisconsin In 1918. Many
provisions of the old New York policy had been nullified by
court decisions and some were considered to be unfair to the
Insured. The advantages of a standard form are : ( 1 ) Every
company Issues the same form of contract, which is merely
modified by endorsements to meet the circumstances of the
case; (2) The Insured becomes educated to the meaning of
the contract; (3) Law suits are greatly reduced in number;
(4) Court decisions gradually fix the meaning of the termin-
ology employed; (5) Discrepancies between different poli-
cies on the same risk are reduced and loss settlements made
easier.
Provisions of the New York standard policy. — We will use,
for Illustration, the present New York standard policy, with
which the policies of many other States are practically identi-
cal. Instead of reading the policy from the first line to the
last, more satisfactory results will be attained by grouping the
policy provisions in their logical classifications and consider-
ing them under the following heads: (1) the parties to the
contract; (2) the premium and consideration; (3) the ex-
tent of protection granted; (4) the provisions governing the
Inception and termination of the contract; (5) the suspen-
sion of the policy; (6) the voidance of the policy, and (7)
the provisions relating to the settlement of losses. This will
* For New York Standard Policy see Appendix XXX.
THE FIRE INSURANCE CONTRACT 201
enable us to consider together those provisions which are
related.
Parties to the contract. — The position of the Insured has
already been described In the chapter on "Insurable Interest,"
and the various types of Insurers In the chapter on the "Types
of Insurance Organizations." The policy reads, "Does insure
John Doe and legal representatives," and the name of the In-
sured Is an essential part of the contract.^ He should not be
named In an indefinite manner and It Is not the general practice
to Issue policies "for account of whom It may concern," although
it may be done where a custodian undertakes to procure Insurance
for his customers, as In the case of a warehouse or grain ele-
vator. In time of war It is essential to see that the Insurance
Is not written for the benefit of an enemy, and Interest hidden
under the expressions, "in trust," "on consignment," etc., are
properly avoided by the companies. Because of Its legitimate
usefulness, however, a "commission clause" of this type is fre-
quently used. The expression — "and legal representatives" —
is intended to cover a trustee or administrator appointed to
manage the affairs of an Insane or otherwise Incompetent
person. The old New York standard form did this In a round-
about way by stating that "wherever In this policy the word
Insured occurs, it shall be held to Include the legal representa-
tives of the insured." With reference to a mortgagee, the
policy provides that "other provisions relating to the Interests
and obligations of such mortgagee may be added hereto by
agreement in writing,"^ and we have seen that such cases are
most frequently covered by the addition of a mortgagee clause.
The rate, premium and consideration. — All contracts with-
out seal require a consideration to make them enforceable,
and the consideration for the fire Insurance contract Is of a
twofold character, consisting (in the language of the policy)
of "the stipulations herein named and of $ premium."*
The promises of the insurance company are conditional upon
the fulfillment of the agreements of the Insured, and where
the policy form is prescribed by the law of the State the in-
sured may reasonably be expected to be acquainted with the
stipulations of the policy. Whether the acts or knowledge of
' See Appendix XXX.
' Appendix XXX, lines 124 and 125.
'Appendix XXX.
202 INSURANCE PRINCIPLES AND PRACTICES
an insurance company constitutes a waiver of such require-
ments is another question to be discussed elsewhere.
The policy specifies the amount of insurance, the premium
and the rate, the latter being the premium per $100 of in-
surance. The amount of insurance merely measures the com-
pany's maximum liability and not necessarily its actual liabil-
ity on any particular loss. The requirements made of the in-
sured are ( 1 ) that he will truthfully furnish certain facts,
and (2) that he will avoid certain acts.
Extent of protection. —
1. Events covered by the policy. — The policy insures
"against all direct loss or damage by fire and by removal from
premises endangered by fire except as herein provided."^ The
amount for which the company is liable can never exceed the
face value of the policy and may be considerably less, but we
are here concerned not with the amount of liability, but with
the events which make the policy payable. It is essential to
consider what is meant by a loss "by fire." It is not neces-
sary that the fire actually reach the property which is de-
stroyed or damaged, but only that fire shall have been the
proximate cause of the loss. Whether a given event is the
proximate cause of a fire Is primarily a question of fact, but
it may be generally so considered when there is an unbroken
connection between the said event and the loss without the
intervention of some new and independent cause. Thus, in
one case an insurance company insured a plant and its equip-
ment, including electrical machinery. A fire of negligible
size and duration occurred in a waste basket, which was suf-
ficient, however, to come in contact with wires connected with
the machinery, producing a short circuit which severely strained
and wrecked most of the machinery in the building. The
court held that the fire was the cause of the loss and, since
the companies had not limited their liability in this respect,
they were compelled to pay. Accordingly, all the natural re-
sults of a fire are considered losses by fire, such as the damage
caused by smoke, by water, by the necessary removal of prop-
erty, and by falling walls where fire was the cause. On the
other hand, we must have a hostile and not a friendly fire,
understanding by the latter one which never leaves the place
intended for it. For instance, a company will not be held
liable for damage caused by smoke thrown off by an oil heater
• See Appendix XXX.
THE FIRE INSURANCE CONTRACT 203
or lamp, nor for damage to a stove which is cracked by heat,
nor for damage to a wall which is blistered because a stove
is placed too near it. On the other hand, if the stove falls
over and the fire consequently leaves the proper receptacle,
a loss by fire within the meaning of the expression results.
The policy also covers loss or damage caused "by removal
from premises endangered by fire," and this expression must
be considered in connection with the provision that such prop-
erty is covered "pro rata for five days at each proper place
to which any of the property shall necessarily be removed for
preservation from fire."^ This is an additional incentive to
the insured to protect the company from unnecessary loss by
saving and preserving goods which would otherwise become
damaged. If a policy for $14,000 of insurance covered a
$20,000 stock of goods on which a $5,000 loss occurred, and
$5,000 worth of the remaining goods were removed to loca-
tion "A," and $10,000 worth to location "B," 5/15 of the
remaining insurance ($9,000) or $3,000, would follow the
goods to location "A," and 10/15 or $6,000 to location "B."
This insurance covers the property for five days, which is
considered a sufficient length of time for the owners to obtain
a new policy covering the new location.
It will be noted that the losses described above are covered
"except as herein provided," and we shall see that certain
articles are not covered, that certain events make the policy
of no effect, and that the company's liability is as a result
somewhat modified.
We find that with reference to insurance property may be
divided into three groups : ( 1 ) such property as is usually
understood to be covered without particular reference to the
same, (2) property which is not covered by the ordinary fire
policy, and (3) property for which liability must be specifi-
cally assumed by endorsement. Thus, it is stated that "this
policy shall not cover accounts, bills, currency, deeds, evidences
of debt, money, notes or securities."^ The insurance of money
is considered undesirable from the standpoint of public policy,
inasmuch as it would be very difScult to prove the amount
destroyed by the fire, or to trace the removal of money or secu-
rities prior to the fire. The value of a deed to property is prob-
lematical, for while the instrument is a matter of public record
' See Appendix XXX.
' Appendix XXX, lines 7, 8, 9.
204 INSURANCE PRINCIPLES AND PRACTICES
it has some value in itself. Evidences of debt, such as prom-
issory notes, are of uncertain value, depending upon the credit
of the promisor. Turning to the property for which liability
must be assumed by specific endorsement, the above quotation
from the policy continues: "nor, unless specifically named
hereon in writing, bullion, manuscripts, mechanical drawings,
dies or patterns."^ These are in the main articles which may
be of much or little value, depending upon circumstances. The
value of a mechanical drawing, for example, may be highly
doubtful, there being no practical method of determining its
market value, while a pattern is valuable only if the article
produced from it is salable and has value. These exceptions
enable the insurance company to make specific arrangements
for the insurance of articles of this type. They are often in-
sured under a "valued" policy in which the value is agreed upon
at the time of issuing the policy. Valued policies are, in gen-
eral, undesirable.
We find that the company also exempts itself from liability
for loss caused by certain excepted hazards, including
"invasion, insurrection, riot, civil war or commotion, or mil-
itary or usurped power or by order of any civil authority or
by theft; or by neglect of the insured to use all reasonable
means to save and preserve the property at and after a fire or
when the property is endangered by fire in neighboring prem-
ises."^ These are very important exceptions.
For losses due to invasion, insurrection, riot, civil war or
commotion or military or usurped power the company is not
liable, because such losses occur under circumstances not con-
templated at the time the policy is issued and where a loss
can hardly be prevented or reduced. Furthermore, in many
cases' the insured party has the right of redress against the
municipality or State. The exemption from loss caused "by
order of any civil authority" has a very definite reason. It
frequently happens that in large conflagrations property is
purposely and legally destroyed to save considerably more
property. In California such a loss is not considered as cov-
ered by the policy, but in most other States it is held to be a
loss by fire and not "by order of any civil authority." Losses
by theft are specifically excluded from coverage,^" inasmuch
'Appendix XXX, lines 9-11.
•Appendix XXX, lines 14-19.
" Appendix XXX, line 16.
THE FIRE INSURANCE CONTRACT 205
as the Insured might be expected to take means to prevent
such losses and because, under the laws of some States, a fire
insurance company cannot cover this risk. Separate insurance,
however, may now be obtained against insurrection, riot, and
civil commotion," also protection against damage to property
caused by striking workmen. The remaining portion of this
provision, stating that failure of the insured to use his efforts
in behalf of the insurance company will result in a denial of
liability under the policy, is a penalty intended to reinforce the
provision requiring the insured to preserve all the property
possible.
The policy further provides "this company shall not be lia-
ble for loss or damage occurring by. explosion or lightning
unless fire ensue and, in that event, for loss or damage by fire
only."^^ Thus, the insurer is liable only for the loss caused by
a fire following the explosion. As an illustration where no
liability exists we might take the case of a steam boiler which,
as the result of the application of heat in the ordinary way,
explodes. For this the company has no liability unless the
explosion is followed by fire. Where the fire precedes the ex-
plosion and the explosion Is a direct result of the fire, the fire
and explosion being in the same premises, the company is liable
for the entire loss. *
2. Amounts covered by the policy. — The contract makes the
company liable "to an amount not exceeding $ ." This
must be construed only as the maximum amount for which the
company can be held liable, its actual liability in particular
cases often being much less, even where total destruction results
from the fire. This Is explained by the clause following: "does
Insure to the extent of the actual cash value (ascertained with
proper deductions for depreciation) of the property at the time
of loss or damage. "^^
Nothing could be clearer In theory than the expression
"actual cash value," but few things are more dificult to de-
termine In practice. The circumstances of every case make It
seem a special problem to which no general rule is applicable.
It Is evident that the meaning of the contract is not affected
by the amount of Insurance on the property or the value of the
property at the time the policy was Issued, but depends upon
Appendix LVII.
Appendix XXX, lines 59-61.
Appendix XXX.
206 INSURANCE PRINCIPLES AND PRACTICES
the actual loss suffered by the uisured. To allow the insured
to recover the original value of real estate which has depre-
ciated, of machinery which has been subject to wear and tear,
of goods which have lost a large proportion of their value
because of changing styles, of articles which have become al-
most worthless, would be an injustice to other policy-holders,
to the company and to the public. It would simply furnish an
incentive for the destruction of property, because more could
be recovered as insurance than the property is worth while in
existence. Even under present conditions it is found that busi-
ness depressions, which reduce the values of buildings and
stocks of goods, cause large increases in the fire losses. Such
conditions furnish an Incentive for a fire.
In spite of the theory explained above some States have
seen fit to pass "valued policy laws." A valued policy is one
where the value of the property insured Is agreed upon when
the contract is made and not when the loss occurs — such con-
tracts being common in marine insurance, but used in fire insur-
ance only for covering bullion, manuscripts, drawings, etc.,
whose value Is difficult to determine at any time. The State
laws referred to make every policy a valued policy, so that if
a property Is totally destroyed the insured Is entitled to claim
from the company the full amount of Insurance regardless of
the value of the property at the time of the loss. Thus, for
the destruction of a building insured for $10,000 the Insured
would be entitled to claim $10,000 although the building might
have depreciated to a value of only $6,000. Such laws have
a tendency to increase fires.
The actual cash value of property Is the material value of
such property and not the subjective value which a particular
person may place upon a piece of property because of affection
or sentiment. Scarcity may, of course, give an object market
value, as in the case of a postage stamp which is desired by
collectors, but a high personal valuation is not sufficient. The
actual cash value is furthermore dependent upon the stage of
ownership which the property has reached in its transfer from
manufacturer to consumer at the time of the loss. In a book-
let Issued by one company this is very appropriately illustrated
by the case of an automobile. In a factory warehouse it Is
valued at the cost of production exclusive of profit, because
the ordinary Insurance contract does not cover profit. In
the dealer's store the cost of production of the automobile has
THE FIRE INSURANCE CONTRACT 207
been increased by the addition of the manufacturer's profit
(which is cost to the dealer) and freight charges. When the
automobile reaches the final purchaser the value has been
further increased by the dealer's profit and then takes a sud-
den drop with the first day's use, and the question of actual
cash value becomes again an open one. We have spoken
above of the cost of production but this is not easy to deter-
mine, because each article must be charged not only with the
cost of the raw material from which it was made but with
a proportion of the trading expenses and administration ex-
penses of the business. In fixing the cash value allowance
must be made for the depreciation in value of property which
is not new.^* It is exceedingly difiicult to estimate the amount
of depreciation in real estate and other things offer even
greater difficulties. Cash value really means the cost of replac-
ing an object with new property at the time of the loss, less
depreciation.
"But not exceeding the amount which it would cost to repair
or replace the same with material of like kind and quality."^^
This is connected with the subject of depreciation. Let us
suppose that an article was originally worth $10,000 and by
reason of five years' use had depreciated $4,000 in value.
Ordinarily we would consider the company's liability in case
of destruction as $6,000, but if by reason of inventions and
improved methods the article in question could now be pro-
duced for $5,000, this would, under the phrase quoted above,
be the limit of liability. From this a deduction for deprecia-
tion would have to be made. Inasmuch as the company Is not
required to furnish the insured with a new article in place of
the one destroyed.
This implies that the company has the privilege of repairing
or replacing the property instead of paying the loss, which Is
true, since the policy contains a provision permitting it "to take
all or any part of the articles at the agreed or appraised value
and also to repair, rebuild or replace the property lost or dam-
aged with other of like kind and quality within a reasonable
time on giving notice of Its intention so to do within thirty days
after receipt of the proof of loss herein required."^® We have
given an Illustration above where It would be more profitable
" See Appendix XXX.
"See Appendix XXX.
"Appendix XXX, lines 176-182,
208 INSURANCE PRINCIPLES AND PRACTICES
for the insurance company to replace the article than to pay the
original cost less depreciation and this clause gives it the right
to so do. Let us Imagine, however, an article originally worth
$1,000 which has appreciated in value so that it is worth at
the time it is damaged $1,200, in spite of the wear and tear
which it has endured. The fire damage, we will assume, is 20
per cent, or $240. If the company takes the damaged article
and replaces it with a new one its net loss will be $240. If it
calculates and pays the amount of the damage its net loss will be
the same. If, however, by repairs costing $100 the article
could be put in as good condition as before the fire, this would
obviously be the economical course to pursue and the insured
would not be injured in any way. This provision is valuable to
the company mainly because the cost of materials and labor
varies from time to time. The provision requiring this to be
done within a reasonable time protects the insured against the
loss of the use of his property in case such repairs cannot be
promptly executed. These options afford the company a fair
method of resisting excessive claims made by the insured, al-
though such options are not ordinarily used since ( 1 ) the
courts generally hold the companies strictly accountable for
supplying materials of like kind and quality and (2) the exer-
cise of the options compels the company to go Into the business
of buying materials, repairing articles and restoring buildings.
The trouble and difficulties Involved In this work have led to
the formation of salvage companies who can be employed to
manage such matters. In order to exercise the privileges re-
ferred to above the company must give notice of Its intention
within thirty days after the receipt of the proof of loss, and
having once given such notice it is bound by It. It should be
noted that In fire Insurance, unlike marine insurance, the Insured
does not possess the privilege of surrendering to the company
what is left of the property and claiming the face value of the
policy, since the policy states "there can be no abandonment to
this company of any property."^'^
The contract provides that the loss shall be settled "without
any allowance for any increased cost of repair or reconstruc-
tion by reason of any ordinance or law regulating construction
or repair."^^ Many cities have enacted ordinances Intended to
prevent the further use of features of building construction
"Appendix XXX, lines 183-184.
"Appendix XXX.
THE FIRE INSURANCE CONTRACT 209
which contribute to fire hazard. Shingle roofs might be taken
as a good example. In the event of the destruction of the roof
it may be necessary by reason of the law to replace it with
a roof costing considerably more and this is a loss for which
the company is not liable. In places where such laws are
strictly enforced the companies assume the responsibility by
endorsement, charging an additional premium therefor.
The insurance company, as we have previously seen, as-
sums liability for direct loss by fire but not for consequential
losses. The policy states that the loss will be settled "without
compensation for loss resulting from interruption of business
or manufacture."^^ The insured can recover the cash value
of the property destroyed, but if It is some time before the
property is again in his possession in its former condition and
he thereby loses money through inability to operate, through
the loss of contracts or the deprivation of profits which he
might otherwise have made, the insurer Is not liable for these
latter losses. Such losses may be protected against by obtain-
ing use and occupancy insurance, business Interruption indem-
nity, rent Insurance or profits insurance,"" but are not covered
by the usual fire insurance policy. Such Insurance may be
provided for by endorsements on the fire policy and will be
referred to In the next chapter.
Finally, in connection with the amount for which the com-
pany Is liable in the event of loss, we must consider the case
where the same property is Insured in several companies, as
is frequently done with large risks. Suppose, for example, a
property worth $400,000 which is Insured In company "A"
for $300,000 and in company "B" for $100,000. The poli-
cies of both companies provide that "This company shall not
be liable for a greater proportion of any loss or damage than
the amount hereby Insured shall bear to the whole Insurance
covering the property, whether valid or not and whether col-
lectible or not."^^ In our illustration, company "A" Is liable
for three-quarters of any loss and company "B" for one-quarter
of any loss. According to the last phrase of the provision, If
company "A" should become Insolvent and able to pay only
50 cents on the dollar, company "B" cannot be relied upon to
make up the balance and the insured will consequently receive
" Appendix XXX.
** See Appendix XL.
"Appendix XXX, lines 101-105.
210 INSURANCE PRINCIPLES AND PRACTICES
only three-eighths of the loss from company "A" and one-
quarter of the loss from company "B," losing the remaining
three-eighths of the damage because he selected a weak com-
pany. Were it otherwise, the property owner would take a
small amount of insurance in a strong company and the balance
of the value he would insure with weaker companies at lower
rates, depending nevertheless upon the strong company to pay
any sums which the weaker companies might be unable to pay.
Inception and termination of the contract. — The policy
states that the company "does insure for the term of
.... from the day of 19..
at noon, to the day of 19..
at noon." The usual periods of time are one, three and five
years. The word "noon" is defined by the policy as noon of
standard time at the place of loss or damage,'^ although
standing alone it was formerly given various interpretations
by the courts. By agreement the date of termination of the
contract might be left open; in one decision the court said that
a standard policy with date of termination left blank would
be considered as binding for at least a reasonable time.
From the standpoint of the insured the vital element Is the
determination of the moment when the contract with the com-
pany takes effect, that Is to say, when the insurance begins.
The acceptance of the risk by the company Is the act which
determines this and delivery of the policy, while excellent evi-
dence of this fact, is not essential. A general agent frequently
binds the company by the statement that the policy will be
Issued and many cases have arisen where the mailing of a
policy was considered acceptance of the risk, because the post-
office Is considered the agent of the Insured and acceptance
Indicated to it Is acceptance Indicated to him. To avoid this
question a representative of the company Issues to the Insured
a "binder," which Is written evidence of the acceptance of the
risk. This specifies that the Insurance Is binding from a definite
date, gives a brief description of the property, stating that the
"binder" terminates upon delivery of the policy or upon a
date named therein, and provides for the adjustment of any
loss In accordance with the provisions stipulated In the stand-
ard policy."
The former New York standard policy contained a provision
** Appendix XXX, lines 106-107.
"Appendix XLI.
THE FIRE INSURANCE CONTRACT 211
that the contract might be continued by renewal, but without
such provision the parties may, of course, by agreement con-
tinue their relations. Such a renewal may be effected by a
renewal agreement, by the issuance of a new policy, or by a
renewal receipt.^* The renewal receipt is merely a statement
in writing of the intention of the parties to renew the contract.
Where changes of amount, location or hazard have taken place,
a renewal receipt Is inadvisable and a new policy should
be issued. A renewal creates a new contract on the same
term.s as the old one, so that if the insured has violated the
old policy so as to make it void, the renewal creates a new
contract which Is not affected by acts during the term of the
old contract. Likewise, the insured need not expect that the
unwritten privileges which he enjoyed under the old policy are
to be continued under the renewal unless endorsed on the
policy. In one case, however, the court held that the Insured
was entitled to presume that the new contract was similar to
the old one, even though he failed to read the new policy. The
description which the Insured gives must apply to the property
as It is at the time of renewal and he must also disclose to
the company any changes in hazard which have taken place.
A policy may be terminated In three ways : ( 1 ) by expira-
tion of the term without renewal, (2) by cancellation and (3)
by the occurrence of some event named in the policy. The first
requires no discussion. As regards cancellation, the policy pro-
vides that "This policy shall be cancelled at any time at the
request of the Insured, In which case the company shall, upon
demand and surrender of this policy, refund the excess of paid
premium above the customary short rates for the expired
tlme.^^ The short rate, which is greater than the pro rata
premium (see pp. 236, 424), Is justified by the expense which
the company Incurred in writing the policy. Either the
Insured or the company may terminate the contract by cancel-
lation. While no obligations are Imposed on the Insured, how-
ever, the company must do two things : ( 1 ) give five days'
notice of Its Intention In writing, and (2) tender, or offer to
tender, the unearned premium. The notice given by the com-
pany is intended to enable the Insured to obtain new insurance
on his property If desired. To a mortgagee, ten days' notice
is necessary.
" Appendix XLIII.
"Appendix XXX, lines 89-100.
212 INSURANCE PRINCIPLES AND PRACTICES
As previously worded, the requirement that "the unearned
premium shall be returned on surrender of this policy" was
construed by the courts to mean that the unearned premium
must be tendered at the time of cancellation in order that an
attempted cancellation might be effective. But it is frequently
difficult for the company to reach the insured with a notice
of cancellation, and a dishonest person may purposely avoid
the service of the cancellation notice and the tender of the
unearned premium. A notice that "the pro rata unearned
premium, if the premium has actually been paid, is held sub-
ject to your order on surrender of said policy," would be in-
effective under the old standard policy according to court de-
cisions. It is provided by the new form, therefore, that the
company may cancel without tender of the unearned premium,
provided that said unearned premium be refunded upon demand
to the insured and the insured notified that such will be done
in order that he may be aware of his rights. In case of can-
cellation by the company the insured Is entitled to a return of
the pro rata portion of the premium for the unexpired time,
so that If a one-year policy Is cancelled at the end of six months
he is entitled to a return of one-half of the premium. In case
the Insured desires to cancel the policy the company returns
only the difference between the premium paid and the "short
rate" customarily charged. A "short rate" is a rate charged
for insurance of less than one year, and is justified for such
Insurance because of the higher relative expense Involved. It
costs nearly as much to write insurance for one month as for
one year, and therefore when the insured cancels at the end of
six months he cannot expect to receive one-half of the pre-
mium. For example, the premium for one month, according
to the short rate table used by the company, might be 20 per
cent of the annual rate. Under any other arrangement, per-
sons would always take one-year policies and cancel them when
necessary, thus causing additional clerical work. A sample
"short rate" table Is given in the appendices.^*^
The policy also provides that "If loss or damage is made
payable In whole or in part to a mortgagee not named herein
as the insured, this policy may be cancelled as to such interest
by giving to such mortgagee a ten days' written notice of can-
cellation."" This applies to a policy taken by the owner and
"Appendix XLIV.
"Appendix XXX, lines 108-112.
THE FIRE INSURANCE CONTRACT 213
made payable to a mortgagee who has lent money on the
property.
While neither the insured nor the company is required to
give reasons for cancellation, the principal reasons for cancel-
lation by the company are increase of hazard, bad physical
or moral hazard, unsatisfactory loss ratio, over-Insurance and
non-payment of premiums.
There are many provisions in the policy as to acts which
render it temporarily or permanently void, all of which are
discussed later in this chapter; but in contrast with the void-
ing of the policy, one provision states that the insurance shall
"cease if a building or any material part thereof fall except
as the result of fire.""^ All insurance on such building or its
contents thereupon ceases because after the building has fallen
the risk has materially changed. While this provision has been
enforced by the courts, it has always been strictly construed
against the companies, who were usually compelled to prove
that a material part of the building had fallen. The intro-
duction of the word "material" now makes this a part of the
contract.
Suspension and voidance of the policy. — Suspension. —
Since the insurance company accepts a risk and names a pre-
mium on the basis of the hazard existing at the time the risk
is offered, many provisions are inserted which are designed to
prevent the increase of such hazard without the knowledge of
the company. In the original New York standard form the
companies attempted to prevent this increase of hazard by
providing that the poHcy was void when one of the above-men-
tioned provisions was violated. The question then arose
as to whether the policy again became valid when the violation
ceased. If the policy became void, for example, when gasoline
was stored on certain premises, did the policy again become
valid when the gasoline was removed? The companies an-
swered this question in the negative but the courts were favor-
able to the insured, and in many States the policy was revived
when the violation ceased. Accordingly, the new policy form
merely suspends the policy while such violations continue.'^
The various acts considered to increase the hazard will now
be considered.
The policy provides that "the Company shall not be
'* Appendix XXX, lines 68-71.
"Appendix XXX, lines 32-35
214 INSURANCE PRINCIPLES AND PRACTICES
liable for loss or damage occurring while the insured shall
have any other contract of insurance whether valid or not on
property covered in whole or in part by this policy."^" Con-
sent for other insurance may be obtained from the company,
of course, and an endorsement made on the policy. Such con-
sent is obtained without any extra charge except in cases where
there is a specific object in restricting the amount of insurance.
Thus, it is sometimes the object not to insure the full value
of the property in order to compel the insured to exercise
greater care. Likewise, the amount of insurance may be
limited with the object of decreasing any moral hazard that
may exist. It will be noted that this prohibition only refers
to other contracts of insurance taken out by the insured and
its object is not to prevent several different Interests in the
same property from being Insured, but to prevent the same
interest from securing several different policies without the
knowledge of the companies. The courts have upheld this
clause as it would otherwise be easy for a person to over-Insure
his property and thus create an incentive for Its destruction.
In regard to the policy provision of the former standard policy,
three lines of court decisions exist. One held that where two
policies existed without consent the later policy was void from
its Inception because of the prohibition and since the second
policy never really existed, the first policy was valid. Another
view was that the subsequent policy invalidated the first policy
and might or might not itself be valid, while a third view gave
the Insured the benefit of one policy, but not of both; I.e., if
the company recognized the subsequent policy, the first was
invalid, and if the second Company repudiated the second
policy, the first was valid.
It will be noticed that this prohibition refers to a property
"covered in whole or in part by this policy,""^ an expression
which brings up the doctrine of "entirety of the contract."
This is important not only in connection with this subject of
suspension but with many others. It would seem that the
intention of the company is that when the policy Is violated as
regards a part of the property, the entire policy on all the
property is suspended. In other words the policy is regarded
as a unit and indivisible. The court decisions of the past show
a tendency, however, to be lenient toward the insured and the
^Appendix XXX, lines 35-37.
" Appendix XXX, line 37.
THE FIRE INSURANCE CONTRACT 215
policy has sometimes been considered as divisible and some-
times as Indivisible. One court held that when the company
acknowledged Its liability upon one building covered by a
policy, It acknowledged liability upon all of them, although
the provision against vacancy had been violated in regard to
part of the property. But in another case, where the policy
covered sixteen tenement houses, the court held the policy to
be valid in the case of one building which was burned, although
at the time eight of the houses were vacant contrary to the
policy provision. The tendency has been to give some con-
sideration to the character of the subject matter insured. The
policy should undoubtedly be strictly construed where it cov-
ers a building and its contents, whereas a policy covering sev-
eral buildings some distance apart might be considered divis-
ible on the ground that in the former case both items of prop-
erty are closely related while in the latter they are separate
entities.
The Company shall not be liable for loss or damage occur-
ring "while mechanics are employed in building, altering, or re-
pairing the described premises beyond a period of fifteen
days."^^ It is plain that the object of tnis clause is to permit
the insured to make such alterations and repairs as are nec-
essary for the up-keep of the property, but not to cover a
building while it Is being extensively remodeled. This latter
is a risk which was not contemplated at the time when the
policy was issued and therefore special permission in writing
must be obtained.
Certain dangerous processes and articles are also prohibited.
The company is not liable "while illuminating gas or vapor is
generated on the described premises; or while (any usage or
custom to the contrary notwithstanding) there is kept, used or
allowed on the described premises fireworks, greek fire, phos-
phorus, explosives, benzine, gasoline, naphtha, or any other
petroleum product of greater inflammability than kerosene oil,
gunpowder exceeding twenty-five pounds, or kerosene oil ex-
ceeding five barrels. "^^ The list in the former standard policy
included in addition benzol, dynamite, ether, nitro-glycerlne;
and in regard to kerosene oil, it was required that it be drawn
and that lamps be filled by daylight, or at a distance not less
than ten feet from artificial light. Benzol, dynamite, naphtha
"Appendix XXX, lines 41-43.
"Appendix XXX, lines 44-51.
216 INSURANCE PRINCIPLES AND PRACTICES
and nltro-glycerlne, however, are also included within the
meaning if not the words of the new clause, while ether and
kerosene oil have become relatively little used in the ordinary
dwelling or business house. The provision regarding the fill-
ing of lamps was never enforceable. It should be noted that
nearly every court has held that where the use of any pro-
hibited article is usual and necessary in the conduct of the busi-
ness of the insured or is kept in similar establishments it does
not void the policy, although there are some decisions to the
contrary. In many cases the provision "any custom of trade
or manufacture to the contrary notwithstanding," has been held
to be in restraint of trade and contrary to public policy.
In regard to manufacturing establishments, the company is
not liable "while operated in whole or in part between the
hours of 10:00 P. M. and 5:00 A. M. or while it ceases to
be operated beyond a period of ten days."^* In the great ma-
jority of cases overtime operation increases the hazard, while
the latter portion of the phrase is intended to cover two cases —
( 1 ) where a strike occurs, with consequent additional danger
to the premises and (2) where business is poor and the prop-
erty consequently becomes worthless in the owner's estima-
tion, thus increasing the moral hazard.
The company is not liable "while a described building,
whether intended for occupancy by owner or tenant, is vacant
or unoccupied beyond a period of ten days."^^ Vacancy has
been considered as meaning the absence of any person or thing,
while unoccupancy refers to the absence of persons. A build-
ing which is unoccupied is not necessarily vacant but either of
these conditions is sufficient to suspend the policy. This pro-
vision has In the main been held valid by the courts. Experi-
ence shows that the hazard is increased by vacancy or unoc-
cupancy, inasmuch as under such circumstances there is no one
on the premises by whom the presence of fire may be promptly
detected. Vacant or unoccupied premises also increase the
danger of accidental fires caused by irresponsible persons.
A company is not liable for property "while Incumbered
by a chattel mortgage, and during the time of such Incumbrance
this Company shall be liable only for loss or damage to any
other property insured hereunder."^^ The chattel mortgage
" Appendix XXX, lines 52-55.
="* Appendix XXX, lines 56-58.
" Appendix XXX, lines 65-67.
THE FIRE INSURANCE CONTRACT 217
Is regarded as objectionable because it frequently indicates the
poor financial condition of the insured, and the property also
usually depreciates in value before payment for it is completed.
A custom of business requiring chattel mortgages may induce
a company to waive its objections but liens on personal prop-
erty are in general avoided. It will be noted that the contract
Is hereby specifically stated to be divisible and not "entire."
The company Insures the property "while located and con-
tained as described herein, or pro rata for five days at each
proper place to which any of the property shall necessarily be
removed for preservation from fire, but not elsewhere. "^^ The
policy is thus suspended, according to its terms, while the
property Is not in the location described. While the language
employed could hardly be stronger or clearer, the courts have
been lenient toward the Insured. In various jurisdictions vary-
ing decisions hav^e been rendered. Thus, a policy on a car-
riage destroyed while out for repairs was held valid on the
ground that the company must have contemplated the moving
of the carriage for this purpose when it wrote the policy, but
in another case a policy on a fire engine was declared void be-
cause the engine was destroyed while at a fire. In general, it
would seem equitable to take Into account the nature of the
subject of Insurance, although this may give rise to difficult
cases in practice.
Finally, there Is a blanket clause Intended to cover other acts
of the Insured not already enumerated, to the effect that the
company shall not be liable "while the hazard Is Increased by
any means within the control or knowledge of the Insured."
Voidance. — As previously stated, the actions which render
the policy permanently void have been considerably reduced
In number by the New York form. Those which remain may
be divided into two groups, ( 1 ) provisions dealing with mis-
representation and (2) provisions dealing with ownership.
The policy provides that "This entire policy shall be void
If the Insured has concealed or misrepresented any material
fact or circumstance concerning this Insurance or the subject
thereof," and "In case of any fraud or false swearing by the
insured touching any matter relating to this Insurance or the
subject thereof, whether before or after a loss."^* Good faith
" Appendix XXX.
•■" Appendix XXX, lines 1-6.
218 INSURANCE PRINCIPLES AND PRACTICES
is an important element of every insurance contract and the
insurer and insured are both supposed to be in possession of
the same facts if such facts are material. It is, however, very
difficult to prove concealment or misrepresentation, as it is
necessary to show that this occurred with intent to deceive and
that it was material to the contract. It is usually held that if
the company does not make the inquiry the insured is not
bound to divulge any information. On the other hand, the
insured must not suppress any information which the com-
pany seeks to obtain. If the statements of the insured could
be considered as warranties it would be sufficient to void the
contract if the company showed that they were untrue, but
the laws of many States hold the statements of the insured to
be merely representations which become significant only if un-
true materially and made with intent to deceive. But the
courts have not been so lenient in their treatment of fraudu-
lent statements made following a loss, although mere mistakes
are not sufficient to invalidate the policy. In the former stand-
ard policy plans and descriptions of the property were stated
to be warranties, but the laws referred to made this provision
nugatory.
The policy is void "if the interest of the insured be other
than unconditional and sole ownership," unless otherwise pro-
vided.^^ As described in a previous chapter, however, the in-
terest of a mortgagee may be and sometimes is insured by his
own policy and the owner of the property may have a mortgage
clause endorsed on his policy for the protection of the mort-
gagee. According to this provision an insurable interest is
not sufficient to make the contract valid. A few illustrations
will make this plain. A stockholder in a corporation is part
owner of the assets of the corporation but he is not a sole
and unconditional owner because the title and ownership is
vested in an artificial body, the corporation. Again a person
may be entitled to royalties from the use of certain property,
but he is not the sole and unconditional owner. A partner has
an insurable interest in the property of the firm, but does not
comply with the requirements of sole ownership. It has been
held by the courts, however, that mortgaging the property
does not deprive the insured of sole and unconditional owner-
ship, inasmuch as while he cannot dispose of the property, he
" Appendix XXX, lines 22 and 23.
THE FIRE INSURANCE CONTRACT 219
can dispose of his interest therein. Where property is pur-
chased on the installment plan and the seller retains the title
until the installments are paid, the status of the buyer is doubt-
ful. Such interests are provided for by forms referred to in
the next chapter.
Unless otherwise provided the policy is void, "if the subject
of insurance be a building on ground not owned by the insured
in fee simple. "*** Fee simple is a title free from condition or
limitation, the largest estate of ownership known to the law.
For example, buildings standing on ground not owned by the
insured may have their value suddenly diminished by some
action taken with reference to the ground and the owner of
the buildings have the value thereof practically taken away
from him by an order to remove them.
Unless otherwise provided the policy Is void, "if, with the
knowledge of the insured, foreclosure proceedings be com-
menced or notice given of sale of any property Insured here-
under by reason of any mortgage or trust deed."" Foreclosure
proceedings frequently lead to quarrels between the parties
involved and increase the moral hazard. Furthermore, the
sale of a portion of the property may render the remaining
property proportionately much less valuable. The doctrine of
entirety of the contract very properly applies here.
The policy is also void "if any change, other than by the
death of an Insured, takes place In the Interest, title or posses-
sion of the subject of Insurance (except change of occupants
without Increase of hazard)." ^^ Insurance does not cover a
particular piece of property but some person's interest in that
property. It is therefore a personal contract and the policy is-
sued to one person will not cover another without special agree-
ment to that effect. Otherwise a change of possession or title
might greatly Increase the risk (inasmuch as all persons are not
equally reliable or careful) without the insurance company
being able to protect itself. This clause, however, is not de-
signed to prevent an administrator, executor or heirs from
obtaining the benefit of the Insurance bought by the deceased,
or to cause unnecessary annoyance to an owner who rents his
premises.
^Appendix XXX, lines 24 and 25.
"Appendix XXX, lines 25-28.
"Appendix XXX, lines 28-31.
220 INSURANCE PRINCIPLES AND PRACTICES
The assignment of a policy before a loss may transfer the
insurance to an undesirable person. In this connection, how-
ever, see the chapter dealing with "Assignment of the Policy"
where some cases of assignment without consent are discussed.
The next provision to be discussed has to do with both
agency and the settlement of losses but is inserted at this point
because, in substance, It means that the privileges granted to
the insured without endorsements on the policy in writing are
void and that no act required for the purpose of settling a
loss shall be held to void any provision of the policy. The
subject of waiver may be divided into three sections, refer-
ring to ( 1 ) acts of the agent at the time of the Issuance of
the policy, (2) acts of the agent after the issuance of the
policy and before a loss and (3) acts of the agent after a
loss. The company and its agents must be exceedingly careful.
In spite of the provision referred to, not to do anything which
may be construed as a waiver. After the policy has been is-
sued it is generally held that waiver must be In writing. If,
prior to the issuance of the policy, the company or its agents
are well aware of a condition which exists with respect to such
property the company may be held to have waived the pro-
vision in the policy applicable to such condition. It was very
difficult for the company to deal with the Insured in the settle-
ment of losses without waiving a violation under the old form
of policy. It Is the practice, therefore, for the company to
attempt to have the insured sign a non-waiver agreement pro-
viding that the actions of the company or Its representatives in
settling a loss shall not be considered as a waiver of any of its
rights. Otherwise It might be inferred that an insurance com-
pany waived a forfeiture of the policy, for example, by pro-
ceeding to attempt an estimate of the amount of the loss, or
by a submission of a claim to arbitration. The present policy
Is better worded from the standpoint of the company. It
reads, "No one shall have power to waive any provision or
condition of this policy except such as by the terms of this
policy may be the subject of agreement added hereto, nor shall
any such provision or condition be held to be waived unless
such waiver shall be In writing added hereto, nor shall any
provision or condition of this policy or any forfeiture be held
to be waived by any requirement, act or proceeding on the
part of this Company relating to appraisal or to any examina-
THE FIRE INSURANCE CONTRACT 221
tion herein provided for; nor shall any privilege or permission
affecting the Insurance hereunder exist or be claimed by the
insured unless granted herein or by rider added hereto."''"' The
original form provided that "No officer, agent or other repre-
sentative of this Company shall have power to waive any pro-
vision or condition of this policy except such as by the terms,
etc," but the courts repelled the suggestion that one who was
held out as a general agent could not bind the company by his
acts.
Loss settlements. — The provisions of the policy relating to
the settlement of losses are so extensive and the principles in-
volved are so important, that a separate chapter is devoted to
their consideration. (Chapter XVIII).
"Appendix XXX, lines 78-88.
Chapter XV
FIRE INSURANCE FORMS AND CLAUSES
Since the standard policy form is rigid in nature and not
adapted to all sets of circumstances as it stands, it is therefore
frequently necessary to modify It by the addition of endorse-
ments or "riders." For example, some endorsement 77iust
be made on the policy to give a description of the property
insured, while an endorsement may be made whereby the pro-
hibition of vacancy is temporarily waived. It Is In this con-
nection that the fire insurance broker Is In a position to render
the greatest service to his client. He should be able, by reason
of his experience In insurance and his knowledge of the In-
sured's business, to suggest endorsements which are necessary
to adapt the standard form to the circumstances of the par-
ticular case. It is necessary, furthermore, that these endorse-
ments be worded so as to give to the Insured the protection
which he requires and believes that he Is getting.
Endorsements on the standard fire policy may be divided
into two groups ( 1 ) forms, which are descriptive In char-
acter and aim to supply something which Is missing in the stan-
dard policy and (2) clauses, which are permissive or re-
strictive In character and Intended to alter some portion of the
standard policy. We will discuss the groups In this order.
Forms may be subdivided Into two classes ( 1 ) those which
are intended to describe who and what Is Insured and where
the property is located and (2) those which cover some lia-
bility other than fire, such as profit Insurance.
Descriptive forms:
1. Ownership. — The standard policy provides that the
person Insured shall be the sole and unconditional owner of
the property, in which case it is only necessary to insert his
name. In the case of a firm whose partners change, or of
a partnership which changes to a corporation, some question
may arise as to whether the policy continues to cover the new
arrangement. Thus the words "as now or hereafter consti-
222
FIRE INSURANCE ENDORSEMENTS 223
tuted" are frequently added to partnership policies. But
there are many cases where the interest is not sole or uncon-
ditional. It is doubtful, for example, whether the buyer on an
installment plan to whom the title does not pass until the last
payment is made is an unconditional owner. The insertion of
The name of the insured therefore takes various forms and
in these forms the interest of the insured should be very ex-
actly described. To illustrate, the policy provision is violated
if the property Is owned by a wife and insured in the name
of her husband, or if the property is owned by a firm and
insured in the name of an individual. Property may be in-
sured in the name of a person's estate. A form may also be
added to the policy stating that it is understood that the build-
ing covered by the policy stands on leased grounds, the form
being inserted in order to avoid the prohibition in the policy
of such a condition. The policy also provides that a chattel
mortgage shall not exist without the knowledge and permis-
sion of the company and this fact must therefore be disclosed
in the description of the interest of the insured. Such chattel
mortgages frequently arise from the purchase of machinery
and their existence must be recognized in the policy; a form
stating that the existence of such mortgages will not invali-
date the policy Is sufficient. The policy provision against fore-
closure Is sometimes waived and permission given for the
execution of contracts of sale which are stated not to preju-
dice the Insurance.
It Is frequently necessary for a person to insure goods be-
longing to others and the so-called "commission form" is com-
monly used for this purpose. A description may be Inserted cov-
ering goods "either owned or held by them In trust, or on com-
mission, or sold but not delivered or removed, or for which the
insured may be liable, and the property of others In storage
or for repairs." For example, a commission merchant may
sell textiles and the manufacturer may deliver to him goods
which are not yet sold. The commission merchant may make
advances to the manufacturer on such goods, holding the
goods as collateral for the loan. They are held by him in trust
or on commission. Under the commission clause, in the event
of loss, the loss Is payable to the commission merchant, who
then returns to the real owner the amount due over and above
his Interest as agent or trustee.
224 INSURANCE PRINCIPLES AND PRACTICES
2. Description of the property.^ — It Is essential that the
form describing the property shall cover all that It Is Intended
to Include. It is also necessary to be careful that the descrip-
tive form does not modify some liability which Is expected to
be assumed entirely. The form ordinarily does not cover
"building and contents" because of the different premium rates
upon these two classes of property. In the policy upon the
building it is common to enumerate a number of permanent
fixtures such as heating and lighting apparatus, and If machin-
ery is insured as a separate Item, it Is desirable to see that
the machinery covered under the building item is distinguished
from that covered under the machinery policy. This may be
done by a simple statement of such an Intention. In the case of
policies on stock the property may be described as "stock,
samples, materials, boxes, cases, labels and supplies (manu-
factured, unmanufactured, and In process of manufacture if
the risk is a manufacturing risk)." In all these cases it Is ad-
visable to avoid Indefinite expressions. "Fixed machinery,"
"machinery pertaining to the business," "such goods as are
usually carried for sale," "contents," etc., are expressions
which are very general in character and their meaning Is difii-
cult to define accurately.
3. Location of the property. — It is also necessary to state
clearly the location of the property inasmuch as the policy
covers only while the property is in the location described. A
common description is property "contained in and on buildings,
additions, and extensions situated at a given location." This
expression is sometimes extended to read also, "about the
buildings, additions and extensions," which greatly extends the
scope of the coverage. Policies covering household furni-
ture frequently Include the property of guests while In the
house. If the property is of considerable value it may happen
that the insurance taken will not reach the required percentage
of the value, in which case the owner of the furniture becomes
subject to the provisions of the coinsurance clause referred to
later. In describing the location, there is the same objection
to the use of loose and Inaccurate expressions such as "prem-
I'scs," "adjoining," "communicating," the meaning of which
may be called in question after the loss occurs.
4. Forms covering more than one location. — Some kinds
of property are, by their very nature, designed to move about
* For a household form see Appendix XXXV.
FIRE INSURANCE ENDORSEMENTS 225
and it is therefore necessary to have forms which will cover
them wherever they may be. Such forms make a policy a
"floating" policy. One form is that designed to cover the
clothing and personal property of travellers and is therefore
known as a "tourist" form. This protects the property of
the insured and of the members of his family wherever they
may go in the United States, Mexico, or Canada, or while
being transported. If the property separates and is in more
than one location at the same time, the policy will cover it pro-
portionately in the several locations. The fire form affords
protection against fire only but a marine form usually pro-
tects against perils of navigation and theft, but not pilferage.
A form of this type does not cover the property at any place
where the insured has a specific policy on the same property.
Upon payment of a loss the insurance company is subrogated
to the insured's rights against the transportation company,
if any. This type of insurance is sometimes written on spe-
cific articles of personal property which arc carried about by
artists, actors, musicians, etc.
Other forms of this character are necessary to protect com-
mon carriers on property In their hands for transportation,
and to protect owners against loss of their own property while
in transportation. These insure the carrier against the loss
which would result from his legal liability for the safety of
the goods, or the owner against any loss which would result
when the carrier was not legally liable. The insurance com-
pany's liability in these cases obviously depends upon whether
the carrier or owner is legally liable for the loss resulting
from fire.
Another form of "floater" Is the "excess floater."^ The
object of this form is to indemnify the insured to the extent
that any specific insurance covering the property at a definite
location is insuflicient. The excess insurance may cover at one
location but frequently floats over and protects property In
several locations. In the case of excess insurance the com-
pany is not liable for any loss until that loss exceeds the amount
of specific insurance on the property. Suppose that an owner
has goods In three locations; $10,000 at "A," $4,000 at
"B" and $2,000 at "C." He obtains specific policies cover-
ing the full value of the property at each of the locations
named. This property, however, Is of such a nature that it
' See Appendix XXXIV.
226 INSURANCE PRINCIPLES AND PRACTICES
moves about from place to place or the respective values at
the different locations are constantly changing.
Let us presume that the property at "A" declines to $5,000,
and that the property at "B" and "C" is increased to $7,000
and $4,000 respectively and that a fire at "B" destroys $5,000
worth of property. The insured under these circumstances
has only $4,000 of Insurance at "B" and consequently loses
$1,000 by the fire, although his endeavor was to be fully pro-
tected. Suppose however, with the facts as originally stated,
that the owner takes out three specific policies of $5,000 each,
covering at "A", "B", and "C" respectively, and in addition
takes an excess floating policy of $5,000. If then the change
In the situation which we have described above takes place and
the assumed loss at "B" Is $6,000, he could recover the full
amount; the specific Insurance amounting to $5,000 and the
floating Insurance to $5,000. The specific insurance would con-
tribute $5,000 of the loss and the floating policy $1,000 of the
loss, since the latter Is liable only for the excess over and above
the specific policy. Such a form, however, is usually subject
to a reduced rate average clause which is described hereafter.
Forms covering other than direct loss. — The standard fire
policy provides protection against all direct loss or damage by
fire, but In many cases the fire -inflicts as much damage on the
Insured by reason of the results following the fire, as by the
actual destruction of his property. Certain forms enable the
fire Insurance company to give the Insured protection against
these consequential, as distinguished from direct, losses.
1. Use and occupancy insurance.^ This term is applied to
different varieties of insurance, but in general may be said to be
insurance which is designed to protect against ( 1 ) loss of
profits as the result of Inability to operate a manufacturing or
sales business because its property is destroyed by fire and (2)
certain payments which must be made even though the busi-
ness cannot operate, such as fixed charges, expenses, and wages.
In the case of certain non-profit corporations the first item is
absent while the latter Is present. Where the word "business"
is used in the form it is considered to mean either (a) in a
manufacturing property, the production of goods; (b) In a
mercantile property, the sale of goods; or (c) in other classes
of property, the business operations usual to that class.
* See Appendix XL.
FIRE INSURANCE ENDORSEMENTS 227
Insurance applies only If the said building, machinery, equip-
ment or stock is damaged by fire so as to cause a total or par-
tial suspension of business. Damage to property other than
that described, even though it may result in loss of profits, does
not entitle the insured to indemnity. The company is liable
only up to the amount of the actual loss sustained for a duration
of time not exceeding that reasonably required to rebuild, re-
pair, or replace the property, and only to the extent of such fixed
charges and expenses as must necessarily continue during the
suspension. The latter must be determined from the circum-
stances of the case; one business may be able to let all of its
employees go without injury, while another must retain every
employee.
There are some limitations upon the above coverage. It is
usually provided that "during the time of a total suspension of
business, liability under this policy shall not exceed $ for
each business day of such suspension." The usual case is that
the amount entered here is less than the amount of loss which
is actually suffered, or in other words, full protection is not
taken. During a partial suspension of business, i.e., when pro-
duction is only a portion of what can be produced under normal
circumstances, the liability of the company is ascertained by the
following ratio:
Full Production — Present Production Loss per day or Company's Liability
Full Production Daily liability for total suspension
or
Decrease in Production pgr diem liability for ^ ,
— — of , • = Loss per day
Full Production total suspension
In the above equations the present production is easily as-
certained, and the "full," or "normal" production is defined as
the average daily production (or business) of all plants or
properties herein described for the ... . days of full operation
next preceding the fire. The maximum daily liability for total
suspension is named In the policy but the actual daily liability
cannot exceed the actual dally loss. The tendency of the busi-
ness, that is, the increase or decrease in daily production may
be taken Into account In ascertaining the loss, so that a declining
business cannot recover more than It would have made if it had
228 INSURANCE PRINCIPLES AND PRACTICES
continued in operation. These adjustments are very important
in seasonal businesses such as the clothing industry,
2. Rent insurance. — This may be defined in general as insur-
ance designed to protect a landlord against the loss of income
that would result from a fire. The company agrees that if the
building or a part of the building shall become untenantable by
reason of fire the owner shall be entitled to indemnity for the
actual loss of rents resulting, but not exceeding the amount in-
sured. The loss is to be computed from the rentals being re-
ceived at the time of the fire. The company's liability contin-
ues for the time necessary to put the premises in a ten-
antable condition. The insured agrees to carry insurance equal
to 100 per cent of the rents or to have his indemnity reduced
proportionately and under this form of insurance the indemnity
is perfectly definite. A form covering leasehold interests in-
sures not only the rent which the lessee or middleman pays
to the owner but also the profit which such middleman or les-
see makes by subletting the premises. Or such insurance may
cover his interest in a building which he erects on leased ground.
It is impossible to discuss here the various forms which may be
used to cover possible situations created by the terms of leases,
such different situations being obviously very numerous.
3. Profit insurance. — Fire insurance agrees to indemnify the
insured for the loss of his stock and profit insurance furnishes
the additional protection of guaranteeing him his profits upon
such goods as are destroyed. This is obviously a dangerous
form of insurance because of the moral hazard involved. The
insured, after a fire, can collect all that he would have received
if the goods had not been destroyed, and does not have the
trouble of waiting for the profits to be realized or run the
danger of losing them.
4. Sprinkler leakage insurance. — The installation of auto-
matic sprinklers reduces the danger of loss by fire. Such sprink-
lers come into action by reason of an increase in temperature,
whether caused by fire or otherwise, and sometimes flood the
premises with water when there is no fire. Against the loss
which results from such an event this form of insurance fur-
nishes protection.^
Clauses. — While forms were designed to supplement the
standard policy, clauses are designed to modify its provisions.
We will classify the clauses according to the purposes which
* See Appendix XXXIX.
FIRE INSURANCE ENDORSEMENTS 229
they are designed to serve. It would take an entire volume
to give merely the wording of all the various clauses in use and
we have here noted only the more common.
1. Permits. — We have seen that the standard fire policy
contains a number of provisions which the insurance company
may be quite willing to waive while there are others which can-
not be changed. Those provisions which may be waived give
rise to various clauses designed to give the insured permission
to do something which the policy prohibits without the consent
of the Insurer. Some Illustrations of this type are:
a. A clause permitting the insured to move the property
from the location described without voiding the policy.
b. A clause permitting extensive alterations and repairs
to be carried on.
c. A clause permitting the premises to remain vacant for a
period exceeding 10 days, or similarly to remain unoccupied.
d. A clause permitting overtime operations or night work
in a manufacturing establishment.
e. A clause permitting some dangerous article to be stored
on the premises.^
2. Decreasing the liability or hazard. — In special circum-
stances there are some risks which the Insurer does not desire
to assume, and there are others which he is willing to assume
only under stipulated conditions. Clauses adapted to meet
these conditions are either clauses In which the Insurer disclaims
liability or clauses In which he disclaims liability unless certain
precautions are taken by the insured. The following are illus-
trations.
a. Spontaneous Combustion clause, by which the under-
writer exempts himself from liability for fires resulting from
spontaneous combustion of certain articles.
b. Consequential Damage clause, by which the underwriter
exempts himself from liability for certain kinds of consequential
damage; for example, the loss which would result from a change
In temperature of a cold-storage warehouse, or the consequential
damage resulting from a fall In temperature in a green-house.
c. Dynamo clause, which exempts the company from lia-
bility for damage to dynamos, switches, and electrical apparatus
caused by electrical current unless It Is the result of an outside
fire.
" See Appendix XXXVIII.
230 INSURANCE PRINCIPLES AND PRACTICES
d. Acetylene gas permit or warrant, which permits the use
of acetylene gas provided the manufacturing machine is con-
tained in a separate and independent building constructed ac-
cording to specifications.
e. Gasoline permits, of a character similar to the above/
f. A warranty that the premises will be occupied only by
the owner and his family.
g. A warranty that in return for a reduced premium
granted because of an automatic sprinkler system the insured
will maintain said sprinkler in good condition and will not make
alterations in the water supply without consent.
h. Permission for the use of electricity accompanied by
certain warranties as to the nature of the installation and its
maintenance.
3. Clauses respecting title and interest. — These are clauses
which are necessary in order to permit the insurance of an in-
terest other than sole and unconditional ownership. The two
following are most important:
a. Mortgagee clause, which gives additional security to a
mortgagee by exempting him from liability for the acts or
omissions of the mortgagor, he In turn promising to do certain
things for the benefit of the company.^ This was fully dis-
cussed In the chapter on Insurable Interest.
b. Loss payable clause, which states that the loss, If any, is
payable to a named party as his interest may appear.^ This also
was referred to in the chapter on Insurable Interest.
4. Emergency Clauses. — These are not In common use In the
United States, with the exception of binders.
a. A binder in a sense might be considered a clause of this
character, inasmuch as the conditions of the policy are made part
of the binder and the binder thus becomes an attachment of
the policy. The binder Is used to give immediate protection
until the policy Is written.^
b. A clause providing that the insurance shall immediately
cease in the event of an earthquake.
c. A clause providing that the company shall not be liable
for loss or damage occasioned by or through any volcano, eartli-
"See Appendix XXXVIII.
" See Appendices XXXII and XXXIII.
*See Appendix XXXVII.
' See Appendix XLI.
FIRE INSURANCE ENDORSEMENTS 231
quake, hurricane or other eruption, convulsion, or disturbance of
nature.
5. Clauses UmiUng the amount payable. — An effective
method of exerting control over the insured is to insert a pro-
vision which will make the amount he can recover depend upon
his actions. There are therefore clauses of various kinds de-
signed to limit the amount for which the company shall be
liable under specified conditions.
a. Three-fourths value clause, which provides that in the
event of loss the company shall not be liable for more than
three-fourths of the cash value of the property at the time of
the loss. The object of the clause is to compel the insured to
carry a portion of the risk himself and thereby induce him to
exercise care so as to reduce the risk. The endorsement of the
clause enables the risk to be written at a much lower premium
than would otherwise be possible.
b. Three-fourths loss clause, which limits the liability of a
company to three-fourths of the total loss sustained. The ob-
ject and results of this clause are similar to those of the three-
fourths value clause, but its provisions are even stricter than
the provisions of the three-fourths value clause.
c. Coinsurance clause, which provides that the company
shall be liable in the event of loss only in the proportion that the
insurance taken bears to the insurance required to be taken.^"
Thus, an 80 per cent coinsurance clause requires that insurance
be taken to the extent of at least 80 per cent of the value of the
property and penalizes the insured in the event of loss unless
this is done. A 100 per cent coinsurance clause requires that the
insurance taken shall be equal to 100 per cent of the value of the
property. This is a most common and important clause in fire
insurance and an illustration of its operation will be useful.
Let us assume that a building is valued at $40,000 and is In-
sured for $20,000 under a policy containing an 80 per cent co-
insurance clause. This clause requires that the Insured shall
take insurance to the extent of 80 per cent of the value of the
property ($32,000), but he has taken only $20,000 Insur-
ance and consequently, In the event of a $4,000 loss, he would
be paid only that proportion of the $4,000 loss that the In-
surance taken ($20,000), bears to the Insurance required,
($32,000), or five-eighths. He would therefore receive five-
" See Appendix XXXI.
232 INSURANCE PRINCIPLES AND PRACTICES
eighths of $4,000, or $2,500, instead of the full indemnity,
because he failed to carry the amount of insurance required.
Suppose that under the same circumstances the loss had been
total. The insured could recover five-eighths of $40,000,
or $25,000, if he had that much insurance, but his recovery
is limited by the face value of his policy to $20,000.
This is a frequently misunderstood clause, because it is usually
considered as applying to loss payments, whereas it is equally
logical to consider it as a part of the rate-making system. The
reason for its existence lies in the fact that the great majority
of losses are partial. Only one loss out of twenty-five is a total
loss in cities and probably at least 70 per cent of the losses are
under 10 per cent of the value of the property. The financial
operations of the company are based upon the assumption that
it takes in premiums sufficient to cover losses and in fixing the
rate of premium, whether it be expressed or implied, there is
considered a certain percentage of insurance to value. Know-
ing that few losses are total, a lower rate could be quoted to
a person taking 100 per cent insurance than to one taking 10
per cent. On a $10,000 building a loss of $1,000 would be a
total loss to the company in the latter case and only a 10 per
cent loss in the former case. Now, if the same premium is
charged these two property owners there is only one other way
of protecting the insurance company and maintaining equity
between the persons insured, which is to limit the amount which
the under-insured person can collect in the event of loss. These
two methods of adjusting the rate or adjusting the amount pay-
able of losses can be made mathematically equivalent.
Viewed from the standpoint of the insured the coinsurance
clause is equally necessary. If everyone could take whatever
percentage of insurance he pleased and all received the same
rate, the statistics cited above would show, on a moment's con-
sideration, the financial benefit, in most cases, of taking only a
small amount of insurance. The person taking a large propor-
tion of insurance to value however, would be paying part of the
premiums of those who were unwilling to take sufficient insur-
ance. If, on the other hand, everyone took a small proportion
of insurance to value all rates would have to be materially
increased.
d. The average clause. — The object of the average clause
is essentially different from the purposes of the three clauses
just discussed. They were designed to provide for various
FIRE INSURANCE ENDORSEMENTS 233
kinds of loss adjustments under particular circumstances, while
the average clause provides for the distribution of the Insurance
in force. It reads, "this policy to attach in each building or
locality in proportion as the value in each bears to that in all."
It is true that this clause fixes the limit to which any policy is
liable in any one particular place, or on any specified property,
but if insurance is carried to the full value of all the property,
the loss payment will not be limited by this clause. On the other
hand, if the property is under-insured, then under this clause it
is equally under-insured in every location. If the owner takes
50 per cent insurance he is 50 per cent under-insured in each lo-
cation which the policy covers, irrespective of how the total
value is distributed among the different locations.
Chapter XVI
FIRE INSURANCE RATES
Divisions of the subject. — The most general interest is natur-
ally manifested in fire insurance rates because of the close con-
nection between this subject and all other phases of the business.
Premiums, reserves, state regulation, profits and commissions
are all involved in the rate question. Fire insurance rating may
be considered under two heads, ( 1 ) the medium or agency
through which rates are promulgated and (2) the method or
system by which rates are calculated. The medium or agency,
as we have seen, is usually the underwriters' association, and
we shall have to return to this subject in considering the regu-
lation of rates by the several States. The system or method
employed is little understood by the average person and this
we will now examine.
The factors involved. — In order to fix equitable rates it is
necessary to take into consideration at least three factors. In
the first place time must be considered, inasmuch as the amount
of fire loss does not remain uniform, some years being excep-
tionally unfortunate and others showing very light losses. Sec-
ondly, we shall have to consider the location, for losses in
Pennsylvania are not necessarily the same as in New York.
Some States, in fact, for unknown reasons, almost constantly
show a bad experience. Thirdly, we must take into account
the difference in hazard between classes of risks and individual
risks. Naturally we will find churches better risks than cot-
ton mills and it is equally certain that some cotton mills are
much less hazardous than others.
Classification. — Under the earliest system in fire insurance
all risks were charged equal rates, a method which ignores
the elements we have referred to above and consequently is
possible only in the primitive stages of the business. It was
inevitable that as insurance really became a business under-
writers should begin to classify risks into groups, some being
charged higher rates than others. At one time only three
classes were distinguished but later classifications multiplied
exceedingly. When modern conditions were introduced into
234
FIRE INSURANCE RATES 235
industry the classification had to be extended to an extreme
degree or some new method had to be introduced.
Judgment rating. — The net result was that rates began to be
made largely on the basis of individual judgment. The inspec-
tor simply estimated from his experience the probable hazard of
a risk and fixed a rate. The great disadvantage of this sys-
tem, which endured for many years, was that not only did the
judgment of different individuals vary but that at different
times even the same inspector did not arrive at identical rates
on the same risk.
Schedule rating, — In order to obtain consistency and equity
it was necessary to substitute combined judgment for individual
judgment, a result which was largely brought about by under-
writers' associations and the development of schedules. This
system involves the analysis of the elements of hazard and the
assignment of a value to each element. Values were assigned
to the different elements of hazard on the basis of the com-
bined experience and judgment of many able underwriters. We
will discuss later in this chapter some of the prominent schedules
which resulted. It is sufficient now to know that the advantages
of this method are: (1) that each feature of the risk is con-
sidered; (2) results are constant and, therefore, equitable in
this respect; (3) eliminates many of the criticisms of the in-
sured and of the legislator; (4) it encourages proper construc-
tion by penalizing defects; (5) it discourages discrimination in
payments to brokers and. agents for obtaining preferred risks,
since all risks tend to be equitably rated and equally profitable;
and (6) it results in more careful inspection and rating.
Experience rating. — The greatest defect of the schedule rat-
ing system as at present administered is claimed to be the lack
of statistical evidence of the correctness of rates. Charges and
credits are based upon opinion rather than upon figures. Re-
cently, however, at least one underwriter has turned his atten-
tion to the development of a system designed to rest upon tabu-
lated experience. This method will later be briefly described.
Classification of rates. — We must in the first place distin-
guish between rates upon buildings and upon their contents.
The former are referred to as "building" rates and the latter
as "contents" rates. In regard to fundamental principles, how-
ever, there is little difference between the two, although a sat-
isfactory system must meet the requirements of both. Secondly,
we find that rates naturally fall into three groups, depending
236 INSURANCE PRINCIPLES AND PRACTICES
upon the term of the contract. An annual rate is the rate for in-
surance taken for a term of one year. A term rate is a rate for
insurance for a term of more than one year. If an insured takes
a five-year policy, for example, it may cost him only three times
the annual premium. The reduction is due to the expense saved
by the company, the extra interest earned upon the premium for
the longer period it is held and the additional reserve which
will be on hand in case of loss. A short rate is the rate paid by
the insured who either takes insurance for a term of less than
one year or who cancels his policy before the stipulated time
has elapsed.^ We also notice several classifications of rates de-
pending upon the type of risk involved. A specific rate is a rate
for an individual risk arrived at by the application of a schedule.
Specific rates are almost sure to differ from each other, due to
the different elements of hazard considered. On the other
hand, a minimum rate is a rate designed to cover a grade of
risks of substantially similar character, such as frame dwellings.
All risks within the group receive the same rate. A blanket
rate is a rate for insurance on risks in different locations, as
where several different lumber yards are covered by the same
policy. An average rate is a rate covering several risks of dif-
ferent character in the same location, as for instance, a rate
named upon the contents of a department store. Minimum
rates and schedule rates require further discussion.
Minimum rates. — The great importance of minimum rates
is derived from the large number of risks subject to such rates.
Minimum rates ordinarily apply to dwellings, churches and
other classes of risks which do not differ sufficiently in char-
acter of construction to warrant the expense of applying a sched-
ule. Referring to our historical development of rates these
may be termed judgment rates. In a large city practically one-
half of the number of buildings consists of dwellings, churches,
etc., as contrasted with buildings employed exclusively for manu-
facturing and mercantile purposes. Their value and the amount
of insurance written on them may, of course, be much below the
insurance and value of business buildings. Measured in terms
of dollars of premium the minimum rates class is inferior, but
measured in terms of the number of persons interested this
class is exceedingly important. The minimum rates are usually
fixed by a committee of the local board of fire underwriters and,
while many elements of hazard may be considered, the rates are
* See Appendix XLIV.
FIRE INSURANCE RATES 237
recorded and published without reference to these elements.
The following is an example of the results which may be arrived
at: —
TABLE OF MINIMUM RATES FOR PRIVATE DWELLINGS
Per $100 insurance
One Year Five Years
Brick or stone dwellings $.10 $-40
Household furniture in same 20 .80
Small stores and dwellings — brick or stone. .125 .50
Stocks of merchandise in same 50
The rates upon risks of this character have been peculiarly
subject to criticism. According to the testimony of rate ex-
perts rates upon such risks, which are based upon the aggre-
gate loss theory, do not segregate, for example, the profits and
losses of companies upon dwellings. It is possible under this
theory for the rates on some classifications to be too low and for
others to be too high. Inasmuch as ( 1 ) such policies are taken
out by persons of moderate means; (2) It is easier to add to a
small rate than to a large one; (3) high commissions are likely
to be paid for this class of business and (4) it is a private
rather than a business matter, discrimination between dwellings
and other classes of risks is rendered probable and easy. On
the other hand this business is harder to obtain and frequently
lapses.
Schedule rates. — Manufacturing and mercantile properties
are ordinarily rated by schedules. A common practice is to de-
velop a mercantile schedule applicable in general to mercantile
risks and a series of other schedules adapted to other groups.
Such schedules analyze the various elements of construction,
occupancy and exposure and build up a rate on the basis of the
conditions found. The Universal Mercantile Schedule and the
Analytic Schedule, which are In general use, vary from each
other and both are different from the Experience Grading and
Rating Schedule.
Universal Mercantile Schedule." — We will first examine the
principles upon which the Universal Mercantile Schedule Is
constructed, since this schedule was first in point of develop-
ment and is used with slight variations In several of the large
eastern cities. It is divided Into two principal parts, the first
dealing with conditions In the city where the risk Is located, and
the second with the conditions of the risk itself.
' For sample of a schedul-^ see Appendix LL
238 INSURANCE PRINCIPLES AND PRACTICES
1. The schedule first defines a standard city and fixes a rate
for a standard building in a standard city at 25 cents per $100
of insurance. In order to be considered as standard the city
must possess a number of qualifications in respect to fire pre-
vention and protection which need not be enumerated at length
here. Some cities are superior to the standard city and conse-
quently obtain a basis rate lower than that named, while others
are charged for various defects so that their basis rates are
higher than the figure given.
2. The rates referred to above are for a standard building in
a standard city. A given building may or may not meet the
standards required and accordingly the basis rate for a standard
building in a given city will be raised or lowered by the good
features or deficiencies of the building in question. Thus, to the
basis rate for the building, 15 cents may be added for walls of
Insufficient thickness and 1 cent for a composition or gravel
roof; 5 cents for thin flooring; 5 cents for extra height; 15
cents for open stairways, etc. A series of deductions from the
rate in percentages for exceptionally good features are likewise
offered. Thus, 5 per cent is allowed for tin or sheet iron be-
tween the floors; 1 per cent for parapet walls extending above
the roof, etc.
These, it will be noticed, are all features of construction.
The schedule also takes into account the nature of the occu-
pancy. An occupancy table is drawn up and charges assigned
to be added to the building rate for the various occupancies.
For example, for advertising novelties 10 per cent is added to
the rate, while for aluminum goods the addition is 3 per cent.
There are certain deductions for devices designed to prevent
fire as, for Instance, 5 per cent credit for an automatic fire
alarm, 10 per cent for two or more hydrants, and 5 per cent
for pails filled with water.
To the rate as ascertained up to this point, additions are made
for coinsurance, adverse legislation and generally poor condi-
tions. Thus, the rate up to this point is based upon the assump-
tion that the insured takes out insurance to the extent of 50
per cent of the value of the property. If he Is willing to in-
sure only 20 per cent of the value his rate Is Increased by 30
per cent. If he is willing to insure 80 per cent of the value of
the property his rate Is reduced by 15 per cent. The
reasons for such charges and credits are explained In Chap-
ter XV. The schedule also provides for an increase of rates
FIRE INSURANCE RATES 239
where state laws are passed detrimental to the interests of in-
surance companies, such as valued policy laws, and for charges
to be made where the premises are disorderly and unclean. The
result then reached is the rate on the building.
In order to arrive at a rate upon the contents of the build-
ing, the same procedure is followed up to and including the
point where an addition is made for occupancy. At this point
there is deducted a sum equal to one-fourth of the deficiencies
of the building and this is considered the basis rate for the
stock. To this is added a figure from the second column of the
occupancy table, previously referred to. Thereafter the rat-
ing process is very similar to that described for the building.
Where necessary, there is also taken into account the expo-
sure of the risk, that is to say, the character of the surrounding
buildings. The danger from fire consists not only of the possi-
bility of a fire starting on the premises but also of fire being
communicated from adjacent buildings. Space does not permit
of a description of the methods followed for measuring ex-
posure hazard, but the preceding remarks will convey the idea
that it is not a haphazard process.
The analytic system, — It will be remembered that the
charges in the Universal Mercantile Schedule were In flat
amounts and the credits in percentages of the basis rate. The
charges are the same for all kinds of buildings and for differ-
ent periods of time, while the credits will, of course, vary with
the basis rate. Mr. A. F. Dean developed the theory that
while the elements of hazard undoubtedly bear some relation to
one another. It was Incorrect to attempt to fix a definite amount
as the measure of an element of hazard. The result was the
Analytic Schedule, which Is considerably used In the Middle
West. No measurements were to be In flat amounts; all were
to be percentages of the basis rate and all were to be In the form
of ratios. In this way it would be possible to construct a sched-
ule, all Items of which would depend on the basis rate, and
underwriting judgment would be concentrated upon this one
feature. Any variation In the basis rate would affect every item
of the schedule.
We find that instead of a single basis rate, the schedule
furnishes a series, ranging from 60 cents up to $1.20, the un-
derwriter being free to select the basis rate which meets the
needs of the locality and the time.^ Thus, two factors arc
^ An example is given in Appendix LII.
240 INSURANCE PRINCIPLES AND PRACTICES
taken into consideration which were not of any importance in
the Universal Mercantile system. Cities are divided into seven
classes, depending upon the degree of fire protection and upon
the fire-fighting facilities. The basis rates named appear to be
high, but this Is merely because they are for a standard build-
ing much inferior to the standard prescribed in the Universal
Mercantile Schedule. Most of the subsequent items are there-
fore charges, few credits being present. The charges and cred-
its which are now made respectively for the deficiencies and good
features of the building are all in percentages as before stated,
and the extent of these Is therefore dependent upon the basis
rate selected.*
An addition is made to the rate for occupancies, the system
in this respect also being a considerable improvement over the
Universal Mercantile Schedule. The hazards of occupancy
are very carefully measured, and the charges depend upon the
tendency of an occupancy to cause fires, and on the combusti-
bility or burning tendency of goods involved in certain occu-
pancies; the third column, used for rating contents, considers
the damageablllty of certain kinds of contents or the extent to
which they may be Injured by fire. In order to obtain a rate
upon contents this latter column of the occupancy table^ must
be used, and the table is so arranged that in finding the proper
figure to use for a rate upon contents, the basis rate of the build-
ing, the class of city, the location of the contents, and the char-
acter of the contents are all taken into consideration. The
schedule also improves the analysis of exposure hazard, but this
we will not attempt to describe here.
The experience grading and rating schedule. — Both of the
schedules above described have the same essential defect from
the standpoint of the Insured and the legislator. In that they are
not based upon statistics but upon underwriting judgment.
This has been the crux of the whole controversy over the rate
question. Later we will refer more In detail to some of the
criticisms which have been urged against the fire insurance rat-
ing system. Mr. E. G. Richards has attempted to devise a
system which depends upon the tabulation of actual experience.
The proposition Is to have for every risk written a card descrip-
tive of its character and for every loss a card indicating the same
facts. The card for the risks written would show the grade of
* See sample calculation in Appendix LV and LVI.
*See Appendix LIV.
FIRE INSURANCE RATES 241
town, whether the risk was a buildhig or contents risk, whether
a fireproof, brick or frame property, the grade of building, and
the grade of contents. The loss card would show similar data
for all risks on which losses had been incurred. It would then
be possible by use of a mechanical tabulating machine to sort
out any combination of cards desired and to find what the ratio
of loss to insurance written had been for any combination of cir-
cumstances. Taking a concrete example, we might find that for
a grade 5 wholesale grocery located in a brick building of the
first class, with a grade 4 external exposure and a grade 2 inter-
nal exposure in a city of the first class, the ratio of loss to in-
surance written was $1.45 per $100. Adding to this an allow-
ance for expenses and profit, the rate on a building of this type
would then be, say, $2.59.
This is the average rate for risks of this kind over the en-
tire United States. But the losses vary between States and an
allowance must be made for this fact. Suppose that past ex-
perience shows the losses in the State of Pennsylvania to have
been $1.01 per $100 of insurance on all types of risks, and a
similar figure for the United States on all types of risks to have
been $1,125. Then losses in Pennsylvania bear the relation
to losses in the United States of 1.01 to 1.125. If the rate on
the particular building referred to above is $2.59 for the United
States as a whole, the rate on this same building for the State
of Pennsylvania will be 1212 of $2.59, or $2.33.
In reaching the result many problems of classification have to
be dealt with and many troublesome details in the calculation al-
lowed for, so that the brief summary given abov^e is hardly a
fair representation of the method involved. For example, a
schedule based upon a point system of charges and credits must
be developed for the purpose of measuring the grade of build-
ing and the internal and external exposure, a schedule very sim-
ilar in character to the Universal and Analytic Schedules pre-
viously described. But the details have been worked out by the
author of the system with sufl^cient fulness to demonstrate that
the plan is feasible, and aside from the novel statistical devices
employed to attain the result, the outstanding feature is the
principle of applying tabulated experience to the problem of cal-
culating a fire insurance rate. This method, if put into prac-
tice, would probably require a great amount of statistical work
but would conclusively answer nearly all of the criticisms which
242 INSURANCE PRINCIPLES AND PRACTICES
have been directed against fire insurance rating systems of the
past. In other words, there has been a widespread demand
for a statistical justification of fire insurance rates and no other
method proposed giv^es any promise of meeting this demand or
of convincing the public that it is unnecessary and unjustifiable.
State regulation of rates. — State regulation of rates has nat-
urally had their reduction mainly in view, an object which the
legislators have sought to accomplish in two ways: (1) By
laws primarily aimed at the bodies which make rates and (2)
by statutes aimed at the rates themselves. The most satis-
factory method of obtaining a picture of legislative tendencies
is a brief review of the history of regulation.
Various complaints have been made of the operations of
underwriters' associations. The fundamental objection was
one to which we have already briefly referred, that under-
writers failed to exhibit sufficient justification for rates pro-
mulgated. It was desired that the companies produce figures
showing the experience upon various classes of risks and it
has always been impossible to convince the public that a sta-
tistical justification of rates was an impossible and unprofit-
able task. The only attempts to meet this criticism have been
( 1 ) the theory advanced by Mr. Dean, that if exorbitant
profits are not earned as a whole and if proper relations arc
maintained between risks, equity must result, and (2) the
E.G.R. Schedule, which has never been put to practical use.
While this objection was fundamental, the problem of dis-
crimination was more easily comprehended by the average in-
dividual and obtained first consideration. There was a gen-
eral conception that some classes of risks were receiving un-
justly low rates, while other classes were overcharged to make
up for the deficiency in premiums so created. It was per-
fectly apparent also that there was discrimination between
localities. How could it be otherwise when different schedules
and different rules for rating risks were in use in different parts
of the country? The subject for discussion was, therefore,
not only whether dwellings or business properties were over-
charged, but whether city property was overcharged for the
benefit of rural risks and whether St. Louis rates were equit-
able as compared with New York rates. Discrimination was
also found between different kinds of policies, term rates be-
ing granted on some risks and withheld on others. The worst
form of discrimination alleged and the one of which the least
FIRE INSURANCE RATES 243
proof was presented was that between individuals. Large
corporations were said to have privileges and rights which
were inaccessible to the small property owner. A third evil
complained of was the arbitrary regulation of agents and
brokers, who were strictly supervised by underwriters' associa-
tions and not always in an impartial manner.*^ The complaints
briefly classified were (1) lack of statistical justification for
rates, (2) discrimination, and (3) arbitrary regulation of
brokers and agents.
As a result of these conditions fire underwriters' associa-
tions came to be generally considered as evil combinations or
pools detrimental to public interests, although they performed
many legitimate economic functions. The earliest actions
against them were at common law on the ground that they were
against public welfare. Since the common law doctrine is that
contracts in unreasonable restraint of trade are simply void, and
unenforceable, no adequate redress could be obtained. Further-
more, it was required to show that the restraint experienced
was unreasonable and affected an article of necessity. Insur-
ance, however, was generally held to be not a necessity of
life, although we have seen that, under modern economic con-
ditions, it most assuredly is.
Later, a general antipathy to trusts arose, followed by the
passage of a number of State anti-trust laws. These laws
prohibited contracts and agreements in restraint of "trade,"
"commerce," "business," "dealings in commodities," "prod-
ucts," etc., and the question had to be decided as to whether
such expressions could be considered as including insurance.
The natural result of this inquiry was the decision, in many
cases, that the wording of the acts was too general to reach
the business of insurance.
The anti-trust laws in some cases were then made more
specific, and amended so as to include "mechanisms," "con-
veniences," and also the "price or premium to be paid for
insuring property against loss or damage by fire." These
may be termed anti-compact laws, to distinguish them from the
preceding class of statutes. The only defense against such
laws was to claim that they violated State and Federal con-
stitutional guarantees of the right of contract, equal protec-
* For a discussion of the complaints against fire insurance rating and under-
writers' associations, see Robert Riegei, "Fire Underwriters' Associations in the
United States," Chronicle Company, Ltd., New York, 1916, and Robert Riegei,
"Fire Insurance Rates," in the Quarterly Journal of Economics, August, 1916.
244 INSURANCE PRINCIPLES AND PRACTICES
tion of the laws and due process of law. In most of the cases,
however, the Insurance companies were unsuccessful. The
cooperative making of rates was therefore legally impossible
in some States except by subterfuge.
The next type of legislation showed an entire reversal in
attitude. Whereas the previous laws had all claimed that
concerted action and common rates were detrimental to the
public, the new State rating laws required an identical charge
for the same risk by all companies, but designated the State
as the judge of what the rates should be. These laws are of
three varieties, some requiring the filing of rates, others pro-
viding for the revision of rates found to be unfair, and still
others making the establishment of rates a State function.
We find at the present time, therefore, the following meth-
ods of regulation employed in various parts of the United
States, exclusive of the general, vague and inadequate pro-
vision that there shall be no discrimination in rates.
1. The Anti-Trust Act, generally considered inapplicable
to fire insurance combinations.
2. Anti-trust acts designed to apply specifically to fire in-
surance and generally successful in this respect.
3. Acts requiring the filing of rates for public inspection,
some slight power of regulation being given to the insurance
commissioner.
4. Acts permitting insurance companies to make and file
rates, but giving the department of insurance power to revise
rates when found to be inadequate, unreasonable or discrim-
inatory, and to examine and regulate rate-making associations.
5. Acts placing the rate-making power in the hands of the
State.
Chapter XVII
FIRE INSURANCE RESERVE
Definition of the reserve. — The reserve at any given time
is that portion of the premium income which is held in trust
by fire or casualty insurance companies and is not yet earned,
owing to the fact that the policy-holders have not yet received
the full term of protection for which the premium was col-
lected. It is the natural result of collecting the price in ad-
vance and delivering the product in the future. The policy-
holders pay for their insurance in advance for one year, often
for three or five years, or even for longer periods; in fact,
it is possible to secure a perpetual policy by the payment of one
premium of sufficient size.^ In all these cases the company is
holding prepaid premiums on policies for various terms, and
from the time of the payment of the premium and the in-
ception of the policy to its expiration, the insured has a de-
creasing and the insurer an increasing equity in the premium.
While the entire premium is in the possession of the insur-
ance company, only that proportion which is equivalent to the
expired portion of the policy really belongs to the company.
The remainder is held by the company as an "unearned pre-
mium reserve" or "unearned premium liability," as it is some-
times called. It is this sum which is sometimes called the
"reinsurance reserve," although this term is open to misin-
terpretation. "Reinsurance" implies that this sum is nec-
essary for reinsuring the risks and is held for that purpose.
But this is purely incidental, as we shall see later, and is not
the primary reason for holding a reserve.
Object of the reserve. — The reserve from the standpoint of
the State may be regarded as a necessity for solvency, which
cannot be determined without a comparison of all assets and
liabilities, among which latter the paid-for protection must be
included. As shown later, however, this is a very arbitrary
method of evaluating the company's contingent liabilities.
From the standpoint of the insured the reserve may be re-
garded as a fund which enables the company to return the un-
earned portion of the premium in case of cancellation, and
provides for the reinsurance of the risks with other companies.
* See Appendix XXIX.
245
246 INSURANCE PRINCIPLES AND PRACTICES
It is very important to the insured, for example, to know that
the insurance company has laid aside a sufficient sum to take
care of all possible losses. If this were not done by main-
taining a reserve of the unearned premium the company would
be gambling on the probabilities of loss and endangering its
future solvency. As was mentioned before, this reserve is a
trust fund, and in that respect is very similar to the reserve
held by life insurance companies. In Chapter XIV one of
the provisions of the standard policy discussed was the can-
cellation clause, which provides that either the company or
the insured may cancel, upon proper notice. It necessarily
follows that the company must always be in a position, in
such cases, to return the unearned portion of the premium.
Also, if the company desires to retire from business and to
transfer the risks to another company, the reinsurance reserve
alone makes this possible. It is not to be inferred from this
that another company will assume these risks under all cir-
cumstances for exactly the amount of the reinsurance reserve,
for this depends on the character of the risks that are being
carried. If the underwriting methods of the retiring com-
pany have been conservative it may be that another company
will be glad to assume the business for an amount less than
the unearned premium reserve. On the other hand, if a reck-
less or unfortunate company has accumulated undesirable risks
on its books it may be that the reserve held would be con-
sidered insufficient. In fact, when a company goes out of
business, it is most frequently due to unsuccessful methods of
underwriting, and the accompaniment is usually an inadequate
reserve. In these cases the transfer of the risks often requires
a sum exceeding the reserve.
Importance of the reserve in regard to premium payment.
— It is the maintenance of this reserve that makes it possible to
pay premiums in advance with safety. The insured knows that
the portion of his premium which the company has not earned
is kept in a separate fund and that he may secure his proper
share of it if he surrenders his policy before maturity. Be-
sides, the knowledge that this sum is subject to State super-
vision reassures him when prepaying the premium for one,
three, or perhaps five years. Thus, if on July 1st the company
insured property for one year and collected $26S premium,
on August 1st only $31, or thirty-one days' premium could ac-
tually be considered earned by the company on that particular
FIRE INSURANCE RESERVE 247
policy. The other $334 belongs to the insured. The com-
pany under this contract is supposed to furnish protection for
the remainder of the year and can claim the premium as its
own only in the proportion that protection has been given;
at any time the balance in its possession is unearned and is
held for the benefit of the policy-holder. A calculation as
exact as the above, where the premium is reduced to a daily
basis, is seldom made because of the unnecessary detail in-
volved. Methods of satisfactory approximation will be de-
scribed later.
Financial importance of the reserve. — From a financial
standpoint the size and importance of the reinsurance reserve
is to the fire insurance companies what the prospective or
legal reserve is to the life insurance companies. If the prob-
ability of fire loss could be as accurately forecasted as the
chances of death, a similar method of reserve calculation might
be employed. Owing to the comparatively short period for
which fire policies are written (usually for one year and sel-
dom for more than five), the reserve p^r $1,000 of insurance
is never nearly so large on the average as the reserve of life
companies. The life insurance companies in building up their
reserves are preparing to meet the face of their policies, know-
ing that death must occur, but in fire insurance only a com-
paratively small number of policies ever give rise to claims.
If life insurance were written only on the term plan of from
one to five years, then its reserve would also be far less per
$1,000 of insurance. Nevertheless, the financial importance
of the fire insurance companies lies in the reserve, which is the
most important item in their business. A balance sheet of a
large stock fire insurance company is shown below and a com-
parison of the unearned premiums (which is the reinsurance
reserve) with the other items will serve to show the relative
importance of the former.
LEDGER ASSETS
Book value of bonds $1,304,703 36
Cash in company's office 1,283 50
Deposits in trust companies and banks not on interest 42,191 86
Deposits in trust compaqies and banks on interest 509,921 63
Agents' balances representing business written subsequent to
October 1, 1918 183,115 78
Agents' balances representing business written prior to October
1, 1918 1,829 57
Total $2,043,045 70
248 INSURANCE PRINCIPLES AND PRACTICES
NON-LEDGER ASSETS
Interest accrued on bonds 11,926 95
Market value of bonds over book value 15,011 6+
Gross Assets $2,069,984 29
DEDUCT ASSETS NOT ADMITTED
Agents' balances representing business written
prior to October 1, 1918 $1,829 57
Market value of special deposits in excess of
corresponding liabilities 38,834 49
Total 40,664 06
Total Admitted Assets $2,029,320 23
LIABILITIES
Losses and claims for losses':
Adjusted and unpaid $4,634 09
Unadjusted plus $13,156.97 reserve for losses
incurred prior to December 31 of which no
notice had been received on that date 355,608 02
Total $360,242 11
Deduct reinsurance in companies authorized
in New York 195,478 08
Net unpaid losses and claims $164,764 03
Unearned premiums:
Fire $344,939 40
Team and automobile 131,547 66
Marine 13,238 23
Total 489,725 29
Salaries and miscellaneous accounts due or accrued 2,500 00
Estimated amount of taxes hereafter payable 30,000 00
Liabilities, except capital $686,989 32
Capital $500,000 00
Special reserve fund 250,000 00
Guaranty surplus fund 250,000 00
Surplus 342,330 91
Surplus to policy-holders 1,342,330 91
Total $2,029,320 2
J
FIRE INSURANCE RESERVE 249
Calculation of the reserve. — The reinsurance reserve has
been described as the unearned premium liabihty of the com-
pany. An accurate application of this idea would mean that
every policy reserve would be calculated separately, taking into
consideration the exact proportion of the policy term that had
expired. With perhaps 1,000,000 policies outstanding, this
would involve an enormous amount of work. Therefore, some
method of approximation had to be devised, and an assump-
tion is made that as much business is written in one portion
of the period under consideration as another.
This, however, is not always true because in most cases the
business is increasing, and the amount of insurance written in
December of a certain year will exceed that written during
the preceding January. Nevertheless, the method of approxi-
mating the legal reserve as required by the several States is
to assume that an equal amount of insurance is written in each
period, which is the same as saying that all of the business was
written in the middle of the period. Policies written January
1st have expired at the end of the year, while policies written
December 31st have 365 days to run, the average for both
groups being about 182 days. Policies written February 1st
have at the end of the year about one month to run, while
those written December 1st have eleven months, the average
for both groups being six months. It follows that in the case
of one-year policies a company is required to have on hand
as legal reserve only one-half of the premium income on those
policies. For policies longer than one year the requirement
is usually pro rata. Thus, on all of the two-year policies
written the same year it would be assumed that six months'
premium out of twenty-four or one-fourth is earned, and that
at the end of the year the unearned portion is three-fourths of
the premium income; on three-year policies, five-sixths of the
premium would be a reserve liability; on four-year policies
seven-eighths and on five-year policies nine-tenths, as shown by
the table on p. 251
Many companies for their own use divide their business into
much shorter periods than is specified by law. Their purpose
is to calculate the reserve more accurately, since the smaller
the period the ^lore accurate the result. Frequently the
monthly basis is used, assuming that as much business is writ-
ten the first half of the month as the last. This is only the
250 INSURANCE PRINCIPLES AND PRACTICES
application of the average principle to a shorter period. Thus,
on one-year policies written during May, it is assumed that at
the end of the month one-twenty-fourth of the annual pre-
mium has been earned, at the end of June, three twenty-fourths,
at the end of the next April, twenty-three twenty-fourths, etc.
The operation of the reserve may be more closely traced in
the illustration given below.
7/-
-^ y- -^r-j jy^j -4/^' s-
Y^s
,
/
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s/
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1^
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FIRE INSURANCE RESERVE
251
ILLUSTRATION OF RESERVE CALCULATION
End of 1 ear of
Valuation
Year Policies
Were Written
Term of
Policies
Amount of
Premiums Received
Fraction Earned
During Current Year
Amount Earned
During Current Year
Fraction Unearned
to Date of
Valuation
Amount Unearned
to Date
(Reinsurance
Reserve)
1917
1917 ■
Total
1917 ■
1918
Total
(
1917 ■
1918
1919 ■
Total
1 year
3 years
5 years
Reserve
1 year
3 years
5 years
Unearned
1 year
2 years
3 years
5 years
Unearned
Reserve
1 year
3 years
5 years
Unearned
1 year
2 years
3 years
5 years
Unearned
1 year
2 years
3 years
4 years
5 years
Unearned
Reserve
i?40,000
18,000
10,000
necessary
40,000
18,000
10,000
Premium
60,000
20,000
24,000
20,000
Premium
necessary
40,000
18,000
10,000
Premium
60,000
20,000
24,000
20,000
Premium
80,000
40,000
42,000
24.000
40,000
Premium
necessary
V2
%
}io
at end of
%
1/
710
on 1917
%
Ko
on 1918
at end of
J?20,000
3,000
1,000
Year 1917
20,000
6,000
2,000
business
y>
%
%0
}?20,000
15,000
9,000
44,000
none
%
Ko
t
none
9,000
7,000
16,000
1918 ^
30,000
5,000
4,000
2,000
business. .
V2
%
/lO
30,000
15,000
20,000
18,000
83,000
Year 1918
99 000
none
none
■
Ko
on 1917
%
710
on 1918
M
%
}io
on 1919
at end of
6,000
2,000
business. .
3,000
5,000
8,000
30,000
10,000
8,000
4,000
business. .
none
Ko
1919 >
none
5,000
12,000
14,000
31,000
40,000
10,000
7,000
3,000
4,000
business. .
%
Ko
*
40,000
30,000
35,000
21,000
36,000
162,000
Year 1919
?20 1,000
252 INSURANCE PRINCIPLES AND PRACTICES
It is here assumed that the company began business in 1917
and during the year received a premium income of $40,000 on
one-year policies, $18,000 on three-year policies and $10,000
on five-year policies. The second year of business, 1918, the
company received $60,000 on new one-year policies, $20,000
on new two-year policies, $24,000 on new three-year policies,
and $20,000 on new five-year policies. The third year on
new policies written it received $80,000 on one-year policies,
$40,000 on two-year policies, $42,000 on three-year policies,
$24,000 on four-year policies, and $40,000 on five-year poli-
cies. Applying the table on page 251, we find that in 1917
the company earned one-half of the premiums received for
one-year policies or $20,000, one-sixth of the premiums on its
three-year policies or $30,000, and one-tenth or $1,000 on the
five-year policies. Deducting this from premiums originally
collected leaves an unearned premium of $20,000 on the one-
year policies, $15,000 on the three-year policies, and $9,000
on five-year policies, or a total of $44,000 on hand at the end
of the first year's business.
In the year 1918 the company earned the remaining one-
half of the premium on the one-year policies written in 1917,
or $20,000, on the three-year business written in 1917, it
earned two-sixths or $6,000, and on the five-year business two-
tenths or $2,000, which, considering the premiums previously
earned, leaves at the end of the second year an unearned pre-
mium of $16,000 on the business written during the first year
of their existence. During the year 1918, however, the com-
pany has written some new policies. On the one-year poli-
cies it earned $30,000, on the two-year policies $5,000, on the
three-year policies $4,000, on the five-year policies $2,000,
making a total of $83,000 as the unearned premium on the
current year's business. This, added to the $16,000 from the
previous year's business, makes a grand total of $99,000,
which should be held as the unearned premium reserve at the
end of the year 1918.
In the year 1919, we find that on the three-year policies
written in 1917, two-sixths was earned or $6,000, on the five-
year policies written that year two-tenths was earned or $2,000,
leaving $8,000 as yet unearned on policies written the first
year. On the 1918 business the other one-half of the $60,000
on one-year policies written in 1917 has been earned; on the
two-year policies written in 1918, one-half of $20,000 or
FIRE INSURANCE RESERVE 253
$10,000 was earned during the current year; two-sixths was
earned on the three-year policies or $8,000; and two-tenths
on the five-year policies or $4,000, which left at the end of
1919 an unearned premium of $31,000 on the business written
in the second year. During the current year one-half of the
premium Income on one-year policies or $40,000 was earned;
on the two-year policies one-fourth or $10,000 was earned;
on the three-year policies one-sixth or $7,000; on four-year
policies one-eighth or $3,000; on five-year policies one-tenth
or $4,000. This made a reserve liability of $162,000 for the
1919 business, which, added to the unearned premiums of
$31,000 for 1918 business and $8,000 for 1917 business,
made a total unearned premium liability of $201,000 at the
close of business on December 31st, 1919. This same opera-
tion is repeated year after year, always carrying over the un-
expired portions of the policies written in previous years, with
the results indicated by the table.
State legislation relating to the reserve. — It has been ex-
plained that the reserve in fire insurance is a trust fund and,
like every fiduciary relationship, is subject to State regulation.
Knowing that the future depends on the solvency of the com-
pany, precautions are taken to see that the premiums paid in
advance are properly safeguarded. The amount which a com-
pany is usually legally required to hold is calculated on page
251. To quote a typical State Insurance law in this connection,
the Insurance Commissioner Is directed as follows: "In de-
termining the liabHities of a fire insurance company, charge the
Insurance company 50 per cent of the premiums written in
their policies upon all unexpired risks that have one year, or
less than one year, to run, and a pro rata of all premiums
on risks having more than one year to run; on perpetual poli-
cies, charge the deposit received less a surrender charge of not
exceeding 10 per cent thereof." In regard to perpetual poli-
cies it should be mentioned that the company assumes that
sufficient interest will be earned on the premium paid to be
equivalent to the regular term rate. Therefore, practically
the entire Initial premium should at all times be intact. The
accuracy of the above calculation in regard to term policies
has been discussed earlier In the chapter. It might be added
here, however, that great difficulty confronts the State when
any other assumption Is used, since there Is nothing in fire in-
surance comparable to the American Experience Table used
254 INSURANCE PRINCIPLES AND PRACTICES
for life insurance reserve evaluation. It is assumed that the
underwriting methods of the company are sufficiently safe and
the premiums charged have been calculated with a view to
making a profit. Therefore a reserve equal to the unearned
premium liability is generally conceded to be sufficient when
calculated in the above manner. This, as we have seen, may
or may not be true, depending on the character of the risks
and the distribution of business throughout the year.
It has even been argued that in many cases this method of
ascertaining legal reserve requirements works an undue hard-
ship on new and small companies. We have seen in Chapter
VI that while life companies are allowed to evaluate their poli-
cies in various ways, such as the "preliminary term plan," the
"modified preliminary term plan," etc., to enable them to meet
the early incidence of expense, this privilege is denied to fire
insurance companies. To demonstrate the effect of this on a
new company, let us assume that a new fire insurance company
with a capital of $100,000 began on January 1st, 1920. Dur-
ing the year the policy premiums collected on one-year poli-
cies amounted to $100,000. Suppose that the acquisition ex-
pense was $30,000 (which would be quite low for the first
year of business), and that the claims paid or accrued
amounted to $45,000 ; there would remain a surplus of $25,000
on hand to be applied as the unearned premium reserve. But
the State law specified that the company should have had one-
half of its premium income on one-year policies, or $50,000,
in reserve; since they had only $25,000, their capital was
impaired to the extent of $25,000. Originally only $100,000,
it is now reduced to $75,000. So even where the law
allows a 20 per cent impairment of capital this company
would not have met the legal requirements. From this it can
be seen that a reserve requirement may hamper the operation
of a young fire insurance company to a very great extent.
There is no scientific method of ascertaining the reserve ex-
cept by calculating the present value of future losses, a method
which is impracticable because of the great diversity in classes
of risks and the uncertainty of estimating the probability of
future losses, an uncertainty far greater than in life insurance.
In addition the frequent but irregular occurrence of great con-
flagrations makes additional precautions necessary; but fatal
epidemics, such as the recent wave of influenza, rarely dis-
turb the even course of human mortality.
FIRE INSURANCE RESERVE 255
To further stabilize insurance companies and prevent Insol-
vencies, the States frequently specify the types of securities in
which the reserve may be Invested, enforcing restrictions very
similar to those for life insurance companies, as outlined in
Chapter VII. Besides, It is frequently required that both
domestic and foreign companies make a deposit of approved
securities with the State for the purpose of guaranteeing sol-
vency. This sum, however, is usually inadequate as a reserve,
and does not approach the unearned premium liability. A more
stringent requirement than a "special deposit" in the form of a
flat sum Is one which requires approved securities to an amount
equal to the unearned premium liability. This serves the double
purpose of subjecting the assets to close scrutiny and at the same
time preventing fraudulent manipulation by placing this "trust
fund" beyond the reach of the individual officers of the company.
It should be mentioned that the above applies principally
to the stock companies, mutuals usually being allowed to reg-
ulate the reserves as they see fit and make assessments when
found necessary. The different conditions of organization and
the relative merits of these two types of companies have been
discussed elsewhere.
Chapter XVIII
SETTLEMENT OF LOSSES
Classification of provisions applying to loss settlements. —
The policy provisions which remain for discussion apply after
a loss has taken place. They may be divided into four groups:
(1) those referring to the preservation of the property, (2)
those dealing with the proof of the amount lost, (3) those
providing for the settlement of disagreements, (4) those de-
termining the extent of the company's net liability. With
regard to the requirements made of the insured, the courts
have been lenient when they apply after a fire has occurred,
while the requirements before a loss have been regarded as
more important because they may serve to prevent a fire. We
will discuss the policy provisions in the order in which they
would naturally come into play In the course of the adjust-
ment of a loss.
Provisions referring to the preservation of property. — The
policy requires that "the Insured shall give immediate notice
to this company of any loss or damage."^ That the Insurer
Is entitled to notice of this Important event is clear, inasmuch
as it enables him to take action to reduce the loss by protect-
ing the property, to Investigate the cause of the fire and better
to determine his liability. Without such notice it Is usually
held that he is released from liability. But "immediate notice"
is not always the prompt action which might be supposed.
While it would be unsafe for an insured to presume upon the
leniency of the courts, it has been held that immediate notice
is notice given within a reasonable time and that a delay of
thirty days may be justifiable under certain circumstances. In
another case seven days has been held to be an unreasonable^
delay, sufficient to release the company from liability.
The next action required of the insured Is to "protect the
property from further damage."^ For such further damage
resulting from neglect the insurance company Is not liable, ac-
* Appendix XXX, lines 126-128.
'Appendix XXX, lines 128 and 129.
256
SETTLEMENT OF LOSSES 257
cording to several decisions, since the fire policy Is not designed
to protect the insured against his own negligence or careless-
ness, but only against the danger of loss by fire. The cost of
protecting the property Is naturally considered a part of the
loss.
After this has been done the Insured is required to "forth-
with separate the damaged and undamaged personal property
and put it In the best possible order. "^ This tends to pro-
tect such goods as are undamaged and enables the representa-
tive of the company to make an examination of the property
and to take necessary measures for further protection. The
insured Is not required by this provision to restore the goods
to the same conditions as existed before the fire.
Estimation of amount of loss. — The next few requirements
are designed to enable an estimate of the amount of loss.
The Insured Is required to "furnish a complete Inventory of
the destroyed, damaged and undamaged property, stating the
quantity and cost of each article and the amount claimed there-
on."* This Is In the nature of a preliminary proof of loss.
This provision Is not a mere direction to the Insured of what
his action should be, but is essential to enable him to claim from
the company.
"And the Insured shall within sixty days after the fire, un-
less such time Is extended In writing by this company, render
to this company a proof of loss signed and sworn to by the
insured, stating the knowledge and belief of the insured as
to the following: (a) the time and origin of the fire; (b)
the interest of the Insured; (c) and of all others in the prop-
erty; (d) the cash value of each Item thereof; (e) and the
amount of loss or damage thereto; (f) all encumbrances
thereon; (g) all other contracts of Insurance whether valid
or not, covering any of said property; (h) any changes In the
title, use, occupation, possession, or exposure of said property
since the issuing of this policy; (I) by whom and for what
purpose any building herein described and the several parts
thereof were occupied at the time of the fire."^ We might
call attention here to the policy provision previously referred
to regarding false swearing and fraud,'' which is not lightly
'Appendix XXX, lines 129 and 130.
'Appendix XXX, lines 130-133.
= Appendix XXX, lines 133-145; and Appendix XL VI.
"Appendix XXX, lines 1-6.
258 INSURANCE PRINCIPLES AND PRACTICES
regarded by the courts in the proof of loss, whatever may be
the attitude toward it at other times. The object of the proof
of loss is to enable the insurance company to determine whether
or not it will assume liability for the loss and to what extent.
A time limit is placed upon furnishing the proof of loss, but
this has been sometimes leniently construed by the courts. A
form such as is shown in the appendices is furnished to the
insured for the purpose of making a proof of loss.^ In
several cases it has been held that these requirements are in-
operative as regards a mortgagee because the company's con-
tract with him is held to be a new contract. If the owner does
not furnish a proof of loss the mortgagee may do so for the
protection of his interest. The new standard policy provides
that "upon failure of the insured to render proof of loss, such
mortgagee shall as if named as insured hereunder, but within
sixty days after notice of such failure, render proof of loss
and shall be subject to the provisions hereof as to appraisal
and times of payment and of bringing suit."^
"And shall furnish a copy of all the descriptions and sched-
ules in all policies and if required, verified plans and specifi-
cations of any building, fixtures or machinery destroyed or
damaged."^ This is inserted to assist the company in identi-
fying the property destroyed and in estimating the value of
such property. In many cases this saves the time which
would be necessary to examine the physical property itself.
"The insured as often as may be reasonably required shall
exhibit to any person designated by this Company all that
remains of any property herein described and submit to exam-
inations under oath by any person named by this company and
subscribe the same."^'* This enables the company to protect
itself against fraud or the illegal appropriation of any of the
woods insured. For the same reason the insured "as often
as may be reasonably required, shall produce for examination
all books of account, bills, invoices, and other vouchers or
certified copies thereof, if originals be lost, at such reasonable
time and place as may be designated by this company or its
representatives and shall permit extracts and copies thereof
to be madc."^^ These requirements are important to the com-
' See Appendix XLVI.
'Appendix XXX, lines 112-116.
•Appendix XXX, lines 145-148.
"Appendix XXX, lines 148-153.
"Appendix XXX, lines 153-158.
SETTLEMENT OF LOSSES 259
pany and have generally been given effect by th^ courts, but
the companies, to insure the production of books and papers,
have sometimes used a so-called Iron-safe clause, whereby the
Insured was required among other things to keep books and
papers in a fireproof safe at night on penalty of voiding the
contract, but this was so leniently regarded by the courts as
to make its effect ludicrous. The time and place of examina-
tion of the insured and of his books and papers must be rea-
sonable. The place of the fire has been held a reasonable
place.
Agreement and appraisal. — We have now seen what the in-
sured is required to do after a loss occurs. When the insured
has complleci with these regulations, a special agent of the in-
surance company under the title of an adjuster and the in-
sured or his representative must endeavor to settle upon the
amount to which the insured is entitled. If the two parties
agree the policy provides that "the amount of loss or damage
for which this company may be liable shall be payable sixty
days after proof of loss as herein provided is received by this
company and ascertainment of the loss or damage is made
either by agreement between the insured and this company,
expressed in writing or by the filing with this company of an
award as herein provided. "^^ As previously stated, the In-
sured cannot under a fire policy abandon the property and
claim the full amount of Insurance. ^^ If the parties cannot
agree upon the amount of loss and damage an appraisal is
necessary as provided for In the policy.
"In case the Insured and this Company shall fall to agree
as to the amount of loss or damage, each shall, on the written
demand of either, select a competent and disinterested ap-
praiser. The appraisers shall first select a competent and dis-
interested umpire; and failing for fifteen days to agree upon
such umpire then, on request of the insured or this Company,
such umpire shall be selected by a judge of a court of record
In the State In which the property insured Is located. The ap-
praisers shall then appraise the loss and damage, stating sep-
arately sound value and loss or damage to each Item; and
failing to agree, shall submit their differences only, to the um-
pire. An award in writing, so Itemized, of any two when filed
with this Company shall determine the amount of sound value
"Appendix XXX, lines 185-191.
"Appendix XXX, lines 182-184.
260 INSURANCE PRINCIPLES AND PRACTICES
and loss oi* damage. Each appraiser shall be paid by the
party selecting him and the expenses of appraisal and umpire
shall be paid by the parties equally."" The demand for ap-
praisal cannot be made until the insured has submitted his
claim to the insurance company and the company has made
an unsuccessful offer of settlement. Either party may then
require an appraisal, which does not establish the liability of
the company but merely the amount of liability if any exists.
The umpire acquires the right to act only after the appraisers
have disagreed. The appraisal is concerned largely with mat-
ters of fact. Whether the loss should be settled on the basis
of market value or on the cost of reproduction would hardly
be a pertinent question. Nor can the demand for an ap-
praisal be made conditional upon some other thing being done
by the insured or by the company, for it then loses its value,
as, for Instance, where it was required that tobacco should be
sold at auction and the sale price introduced as evidence of the
value. The parties usually sign an appraisal agreement^^ in
which the appraisers are named and declare themselves to be
disinterested parties, although no such written agreement is
required. Whether an appraiser Is competent as required by
the provision depends upon what he has to do. In many
cases a professional appraiser is selected by the company or
the insured, and the question then arises as to whether such
a party is disinterested as the policy demands. The mere
fact that he has previously adjusted losses for the same com-
pany would not prove that he was an interested party but
might be some evidence to this effect.
The courts of nearly every State have held that if either
party requests an appraisal such is necessary before a suit
can be maintained and a recovery had upon the policy. In
Pennsylvania and Nebraska, however, this agreement to ap-
praise Is held to be revocable by either party and the bringing
of an action in court constitutes such a revocation. The par-
ties are not permitted, in the language of these courts, to "oust
the courts of their general jurisdiction." In those States
where a valued policy law Is In force, there is no provision
for an appraisal and if one is obtained, its result will not be en-
forced by the courts.
"Appendix XXX, lines 159-175.
*' Appendix XLV.
SETTLEMENT OF LOSSES 261
Suits. — If the question of the liability of the company is in-
volved, the case may be brought into court regardless of the
action of appraisers. The policy provides that "No suit or
action on this policy, for the recovery of any claim, shall be
sustainable in any court of law or equity unless all the re-
quirements of this policy shall have been complied with, nor
unless commenced within twelve months next after the fire,"^^
The object is to prevent unreasonable delay upon the part of
either the company or the insured which may make the de-
termination of the rights of the parties more difiBcult.
Net liability of the company. — The next question which
presents itself after the liability of the company has been
proved is the net amount for which the company is liable,
In this connection it must be borne in mind that subrogation Is
a settled principle of insurance. The policy also specifically
provides that "This Company may require from the insured
an assignment of all right of recovery against any party for
loss or damage to the extent that payment therefor is made
by this Company,"^^ and "On payment to such mortgagee of
any sum for loss or damage hereunder, if this Company shall
claim that as to the mortgagor or owner, no liability existed,
it shall, to the extent of such payment be subrogated to the
mortgagee's right of recovery and claim upon the collateral
of the mortgage debt, but without impairing the mortgagee's
right to sue, or it may pay the mortgage debt and require an
assignment thereof and of the mortgage. "^^ The right of
subrogation may be defined as the right of an insurance com-
pany, after paying a loss to the insured, to acquire all rights
possessed by the insured against third parties which are re-
lated to such loss. These rights may be legal, contractual or
equitable.
One very common right Is the right of a mortgagee who
is insured under a separate policy to collect his debt from the
mortgagor. Suppose a property worth $10,000 serves as se-
curity for a debt of $8,000 and that a loss of $4,000 takes
place. Naturally, since the security of the mortgagee has
been decreased by nearly one-half, he expects to be and is
reimbursed by the insurance company. But the mortgagee still
has the right to collect his debt from the debtor, and to permit
"Appendix XXX, lines 192-196.
"Appendix XXX, lines 197-200.
"Appendix XXX, lines 116-123.
262 INSURANCE PRINCIPLES AND PRACTICES
him to retain this right would be to permit him to collect the
same debt twice. Therefore by the principle of subrogation
the right to the debt is transferred to the insurance company
which has paid the loss. A similar situation arises where the
mortgagor and mortgagee are protected by a policy issued
to the mortgagor with the endorsement of a mortgage clause
and the policy becomes void as to the mortgagor, but is in full
force as regards the mortgagee. The company makes pay-
ment to the mortgagee to the amount of the damage and
receives an assignment of his rights to that extent, or pays
the full amount of the debt and receives an assignment of
the entire debt and mortgage. The policy provides that rights
of the mortgagee are not to be prejudiced by this method of
settlement.
Another example of the right of subrogation is found where
the fire is caused by the negligence of a third party, for which
negligence the party whose property is damaged may recover
at law. If the person damaged recovers from the insurance
company, however, the right to recover from the negligent
third party passes to the insurance company. A policy of
insurance issued to a tobacco company covered, among other
items, several thousand dollars worth of unused internal rev-
enue stamps. These, with other property, were lost and the
insurance company paid the loss. Under United States' stat-
utes the stamps were redeemable from the United States Gov-
ernment, and the underwriters, having paid the loss, claimed
and received reimbursement from the Government.
In many cases the insured has several policies covering the
same interest in the same property. In case of a large risk,
in fact, he is often compelled to seek several companies in order
to secure full protection. To cover this situation the policy
provides that "This Company shall not be liable for a greater
proportion of any loss or damage than the amount hereby
insured shall bear to the whole insurance covering the prop-
erty, whether valid or not and whether collectible or not."'*
Applying this to a specific case, let us assume that company
"A" insures a $50,000 property for $20,000, and company
"B" insures the same property for $10,000. A loss of $3,000
occurs. The above provision of the contract makes company
"A" liable for the proportion that its insurance ($20,000)
bears to the total insurance ($30,000) or two-thirds of the loss
"Appendix XXX, lines 101-105.
SETTLEMENT OF LOSSES 263
of $3,000, that is, a liability of $2,000. Company "B" is
liable for the proportion its insurance ($10,000) bears to the
total insurance ($30,000) or one-third, that is, $1,000.
Where the policies issued by "A" and "B" arc concurrent,
that is to say, where the provisions of the policies are identical,
the application of the principle is simple. But there are some
cases where the policy provisions differ and it consequently
becomes a difficult matter to determine the amount of the total
insurance. The policies may differ because the properties
covered are in different locations, because the descriptions of
the insured articles vary, because the interests covered are not
identical, or because one policy contains clauses or endorse-
ments not on the other. This is a situation to be avoided by
both the insured and the company because it results in delay
in the payment of losses and frequently involves complicated
law cases. The most frequent case of non-concurrency is
where one policy is a specific policy covering one item, while
another policy is a general policy covering many items, in-
cluding the one covered by the specific policy. Wc will take
a relatively simple case of this kind and apply to it a rela-
tively simple rule, as an illustration of the difficulties of ad-
justment.
Let us suppose that an owner has a stock of goods consist-
ing of the following.
Falue
Furniture $3,000
Jewelry 500
Wearing apparel 500
Total $4,000
The losses by fire on these articles are as follows:
Loss
Furniture $1,000
Jewelry 500
Wearing apparel 500
Total $2,000
Company "G" had insured all these items under a general
policy for $1,000 and company "S" had insured the furniture
alone for $1,000.
Suppose the principle is adopted that the general policy ap-
plies to each of the specific items in the proportion that the
264 INSURANCE PRINCIPLES AND PRACTICES
value of the item bears to the value of all the property in-
sured. Then the insurance on the various items is as fol-
lows : —
Co. "G" Co. "S" Total
Furniture [30/40 of $l,000l = $750 $1,000 $1,750
Jewelry ] 5/40 of 1,000 V= 125 125
W^earing Apparel . . [ 5/40 of l,000j = 125 125
Total $1,000 $1,000 $2,000
The loss on furniture was $1,000 and the total insurance
was $1,750 of which company "G" insured $750 and company
"S" $1,000. "G" is therefore liable for 75-175 of $1,000
loss or $428.57. "S" is liable for 100-175 of $1,000 or
$571.43. The loss on the other items (jewelry and wearing
apparel) was $1,000 and this was only covered by the general
policy of $1,000 in company "G." But of that general policy,
only $250 applied to these two items and this constitutes
all that the insured can recover of his loss on these two items.
The total loss is therefore $2,000, the total insurance $2,000,
and he recovers $1,250.
Let us suppose that the lawyer for the insured proposes
that the loss be settled on the basis that the general policy
must float over all property and contribute on the basis or
proportions of the respective losses on the specific items. The
insurance on the various items is then as follows : —
Furniture
Jewelry
Wearing Apparel . .
Co."G" Co."S" Total
'10/20 of $1,0001 =$500 $1,000 $1,500
5/20 of 1,000 1 = 250 250
5/20 of l,000j = 250 250
Total $1,000 $1,000 $2,000
The loss on furniture was $1,000 and the total insurance by
this method is $1,500, of which company "G" insured $500
and company "S" $1,000. "G" is therefore liable for one-
third of the loss or $333, and "S" is liable for two-thirds
of t'he loss or $667. The loss on jewelry and wearing apparel
totaled $1,000, covered onlv by a general policv of $1,000
issued by "G" and of this only $500 can be used for
jewelry and wearing apparel. The total lo.ss is therefore
$2,000, the total insurance is $2,000, and the insured recovers
$1,500.
SETTLEMENT OF LOSSES 265
Either of the above bases of settlement might be suggested
and the justice of neither is proved by the poHcy provision.
In the above case, at least five other methods might have been
suggested for the settlement of the loss and in actual practice
many more difficult problems may be found. It is obvious,
therefore, that two non-concurrent policies are to be avoided
wherever possible. The courts have in general followed the
principle of fully indemnifying the insured when the insurance
was sufficient for that result.
Part V
MARINE INSURANCE
267
Chapter XIX
MARINE INSURANCE
Nature of the contract. — The marine insurance policy was
originally designed to protect the holder against perils of the
sea and of fire, but so extensive is the modern coverage that
perils of the land as well are now included within the scope of
the contract. Since the actions of the master and the rights of
shippers are governed by maritime law, such law is In many re-
spects impliedly a part of marine insurance contracts. Like fire
insurance policies, the marine policy is issued to an insured
and is a personal contract.
Unlike the fire insurance policy which consisted principally
of the exceptions or cases where the underwriter was not liable,
the underwriter stipulates in the marine policy the risks for
which he is liable. As a result he has received more liberal
treatment by the courts. The marine contract is designed to
protect the insured against accidents only and does not Indemni-
fy for natural wear and tear and losses which are inevitable.
In credit insurance the Insured bears the "normal" loss; so in
marine insurance he bears depreciation and losses which are not
accidental.
Factors essential to a valid contract. — 1. Good faith and
fair dealing have always been strictly required by the courts In
respect to contracts of marine insurance because, by the nature
of the subject-matter the underwriter Is not in a position to
conduct an extensive investigation. The ship or cargo may be
far removed from the place where the contract is made. The
courts, for example, have held the Insured as strictly bound by
certain implied warranties designed to protect the underwriter.
2. An insurable interest, vested, contingent or expectant. Is
required. The doctrine of insurable interest is essentially the
same in fire Insurance and In marine Insurance. The former
has been fully discussed.
3. Seaworthiness of the vessel. It is an implied warranty,
by which the Insured Is strictly bound, that the vessel is safe
and in a condition to carry the cargo contemplated. With re-
269
270 INSURANCE PRINCIPLES AND PRACTICES
spect to voyage policies on hull this warranty is interpreted
literally but in cargo policies innocent shippers have been
given some consideration, and in time policies on hull this
warranty is often not involved since the vessel is out of the
possession of the owner and beyond his power to inspect,
4. LegaUty of the venture. The object of the voyage must
be of a character not prohibited by law. Thus, a policy
on a vessel engaged in smuggling goods mto the United States,
in violation of the revenue laws, is void.
5. The voyage must he prosecuted without deviatio)i.
The vessel must proceed over the customary route and with-
out unnecessary delay. Deviation by the master on his own
responsibility, without orders from the owner or in viola-
tion of such orders, however, constitutes "barratry" — a peril
against which the marine policy protects the insured. A
deviation due to the necessity of saving human life, or of pro-
tecting the subject-matter insured, is held to be justifiable by
a permission endorsed on the policy.
Types of underwriters. — Marine insurance, like fire insur-
ance, is written by stock companies, mutuals, Lloyds associations
and Interinsurance associations. These have been described
in a previous chapter and it is sufficient to notice here some
minor variations.
1. A distinctive American mutual. Only one marine mu-
tual of any consequence exists at present in the United States.
The original capital was furnished by the ship-owning and
trading organizers, whose promissory notes furnished a source
of credit. These notes served as premium payments to cover
risks, and when a sufficient amount was secured, the company
was organized and gradually accumulated a surplus. This
was retained as a guarantee for the payment of losses and
in time was divided among the persons insured; but payment
was at first deferred and the insured received only a redeem-
able scrip certificate. Such scrip could be sold by the re-
cipient or retained until it was redeemed, redemption being
in the order of issuance.
2. Mutual insurance clubs. These are mutual organiza-
tions in the form of assessment societies. The claim for a
loss is a claim against the association, the members of which
pay an entrance fee and frequently an initial premium. In
the absence or insufficiency of initial premiums, the members
are assessed for the payment of losses 'ncurred during the
MARINE INSURANCE 271
year. The contributions by members are usually either in
proportion to the amounts for which they are insured or In
proportion to the gross tonnage of their vessels. Some of these
associations are designed to insure the ordinary marine risks
on terms similar to the policies issued by stock companies,
some are intended to insure freight particularly, some cover
deductions made by stock companies in the adjustment of
losses, some insure against loss of time and others are "pro-
tection and indemnity associations."^ The latter cover dam-
ages recovered for destruction of life, for injuries to the
crew covered by the Compensation Act of Great Britain, for
loss of or damage to goods carried, for collision liabilities
not covered by the ordinary policy, for the expense of raising
wrecks and for expenses of quarantine. They have the cus-
tomary advantages and disadvantages of assessment mu-
tuals and are peculiar to European countries, never having
become important here.
Different classes of policies. — The most Important features
in distinguishing classes of policies are ( 1 ) the interest of
the insured, (2) the valuation of the subject-matter, (3) the
term of the policy, (4) the description of the vessel or cargo,
and (5) the scope of coverage. These we will consider In
order.
1. Interest of the insured. — Policies in this respect may
be classified as:
a. Vessel policies,^ covering the vessel and equipment.
b. Cargo policies,^ covering goods to be transported.
c. Freight policies, covering either the sum charged for
transporting the cargo, the hire paid for a vessel or the in-
crease in the value of goods added by transportation.
d. Policies made to cover profits, commissions, etc., us-
ually Include these values In the valuation of the cargo.
The above refers to policies supported by an insurable
interest which is legally recognized, these being designated as
"Interest" policies; but policies may also be issued where the
"interest is admitted." The latter are unenforceable at law and
depend upon the honor of the parties, but are sometimes
necessary to protect a prospective Insurable Interest not rec-
ognized by law.
' See Appendix LXIV.
'See Appendix LXIII.
' See Appendix LXII.
272 INSURANCE PRINCIPLES AND PRACTICES
2. The valuation of the subject matter. — We have seen
that "valued" policies, in which the total value of the subject-
matter is agreed upon at the issuance of the policy, are in-
frequent in fire insurance. In marine insurance they are the
common thing, due to the character of the business and to
well-established custom. Policies may therefore be classified
on the basis of valuation as:
a. Valued policies,* where the value of the subject-matter
is specified in the policy. The values of vessel and machin-
ery are often separately stated in these policies.
b. Open or unvalued policies, where no value is agreed
upon and it must subsequently be ascertained and proved.
The expression "open policy" has also been applied to float-
ing policies and to a cargo form discussed later.
3. The term of the policy. — With reference to the dura-
tion of the policy, the contracts may be divided into two major
groups as follows:
a. Time policies,^ which cover for a specific period of
time, regardless of the number of voyages made. Special
varieties arc: port policies covering a vessel for a definite
period while In port, and construction policies covering ves-
sels in process of building.
b. Voyage policies, which cover only a specific trip. This
type of policy Is better adapted to cargo than hull Insurance.
4. Description of the vessel or cargo. — In this respect,
policies may be classified as:
a. Floating policies, which cover cargo shipped on any
vessel or vessels or upon any vessel of a particular line or
group of lines.
b. Named policies, where only a particular vessel or cargo
on a particular vessel Is covered.
c. Fleet policies, covering a group of vessels designated
by name.
d. Open cargo forms," covering all declared shipments
made within named geographical limits.
e. Blanket policies, which cover shipments within certain
time and geographical limits, up to a stipulated maximum
amount, on which the premium is paid.
f. Special types of policies covering tugs, yachts, fishing
* See Appendix LXIII.
"See Appendix LXIII.
' See Appendix LXII.
MARINE INSURANCE 273
vessels, canal hulls, lake steamers, barges, river cargoes, live
stock, lumber, etc.
5. Scope of coverage. — Policies may be grouped with
respect to their coverage of:
a. The customary perils described later.
b. War risks, including hazards peculiar to a state
of war.
c. Total loss only.
d. Special risks. It should be noted that the insured and
the underwriter may by special agreement fix upon one or
more stipulated perils against which protection is afforded
or may introduce modifications of the underwriter's liability.^
Uses of these policies: 1. Vessel, cargo and freight policies. —
Vessel and cargo policies require no description. The latter
are primarily important from a premium income standpoint,
an investigation of 72 American companies in 1920 showing
that 43, or over one-half of the total, derived less than one-
third of their premium income from hull business. Capital
can be turned over much more rapidly in the cargo than in
the hull business and it is in general more profitable.
Policies on freight and other interests require a brief ex-
planation. A vessel-owner who is to receive his recompense
for the service of transportation upon the delivery of the
goods risks the loss of his freight if he fails, through some
marine peril, to deliver the cargo. If, on the other hand, the
shipper pays the freight in advance, without right of recov-
ery, the value of the freight is incorporated in the goods and
their loss will also involve the loss of the freight paid. Either
the owner of the vessel or the shipper, as circumstances war-
rant, may therefore desire to Insure the freight. A vessel
operator may charter or rent a vessel for a voyage, let us say,
the rental to be paid in advance and without right of recov-
ery. This, then, is another form of freight money which, by
the loss of the vessel, is also lost. By placing a sufficiently
high valuation on his goods a cargo owner may insure the ex-
pected profit on the goods at destination. The arbitrary figure
of 10 per cent is often used in estimating this. "Interest
admitted" or "policy proof of Interest" policies may be used
to protect a contingent benefit, such as the prospective charter
of a vessel for which no contract has as yet been definitely
made; a mere expectation.
' See Appendices LXV to C, inclusive.
274 INSURANCE PRINCIPLES AND PRACTICES
2. Valued and open policies. — Valued policies enable the
underwriter and the insured to agree in advance on the value
of the subject-matter and consequently to avoid the controversy
and litigation which might otherwise arise when a loss occurs.
The uncertainty of expenses and profits makes it difficult for
the insured to know the real value of his goods at destina-
tion and it seems reasonable and safe to agree upon some
value which is not excessive, inasmuch as the goods are out
of the possession of the insured and the moral hazard con-
sequently greatly reduced. The actual value of a vessel is
constantly changing because of the freight market and trade
conditions, and under any circumstances is difficult to compute.
If, however, the value of the subject-matter insured cannot
even be approximated, the insured or the underwriter may
prefer to leave the settlement of this important question until
a loss occurs.
3. Time and voyage policies. Time policies give protec-
tion for a stipulated period and therefore avoid the annoyance
of constant attention to the termination of voyages and to
the renewal of policies. On hulls they are therefore the com-
mon type. In the time policy the insured avoids the neces-
sity of continually describing separate voyages, many of which
are over similar routes. Under such policies the warranty
of seaworthiness cannot be so strictly construed as under a
voyage policy. Since cargoes are subject to sea risks for com-
paratively short periods, however, the voyage policy is fre-
quently used. To tramp steamers and sailing vessels the voy-
age policy Is particularly adapted, Inasmuch as these do not
move over fixed routes, and their travels may be more easily
described by separate voyage policies.
4. Special time policies. — The port risks policy Is a spe-
cific variety of time policy. A considerable period often
elapses before a vessel sails; or, due to the freight market,
a vessel may be voluntarily laid up in port for a short space
of time, her operation being unprofitable. To pay the higher
premium required for coverage of navigation risks would be
a useless outlay and the owner consequently acquires a policy
protecting the vessel "whilst at and or within the limits of the
port of ," with leave to dock, change docks, move about
in tow within the prescribed limits or go on a slipway, gridiron
or pontoons for refitting, etc. When the policy is cancelled,
a portion of the premium is returnable. The builder's risk
MARINE INSURANCE 275
policy is also a special time policy, protecting the builder and
owner as their interests may appear, from the time of laying
the keel until the delivery of the completed vessel. Separate
insurances may be issued, one covering the period prior to the
launching and the other the period subsequent to launching
but prior to delivery. On large modern steamers these poli-
cies are of considerable size and the premium is based upon
the maximum liability of the insurer in case of the total loss
of the vessel before delivery. If the construction requires
more than the time anticipated, the policy is renewed; if the
vessel is completed ahead of time, the policy may be cancelled
with the return of a portion of the premium. The policy
protects against all the risks covered by the ordinary marine
policy and in addition against fire, while under construction
or at the dock, and against damage from collapse of supports,
etc., and the risks of launching, including breakage of the
ways. After launching, the hazards of trial trips and col-
lisions, negligence, explosions, breakage and latent defects are
covered. Such policies commonly contain a "protection and
indemnity clause," found also in other hull policies, designed
to cover the insured's liability for damage done to the persons
and property of others.® This does not include the liability
of the insured under a compensation act, hazards incident to
a state of war, strikes, lockouts, labor disturbances, riots and
commotions, earthquakes and delay. Partly due to the war,
this type of insurance has not as yet reached large proportions
among American companies, but is rapidly growing. Of 53
American companies, 12 received no premiums on this class
of business, 32 derived from ^ of 1 per cent to 5 per cent
of their total premiums therefrom, and 9 obtained over 5 per
cent of their premiums from this source, including one com-
pany whose income of this character aggregated 34 per cent
of its total premiums.
5. Floating and named policies. — Floating policies, apply-
ing to cargo shipped by any vessel or vessels, are applicable
to known shipments on unknown vessels. Thus, an American
importer may be aware that goods have been consigned to him
from a particular source, but he may be unaware of the name
of the vessel or even of the line on which such goods are
being transported. When the vessel is known, the fact is
' See Appendix LXIV.
276 INSURANCE PRINCIPLES AND PRACTICES
communicated to the underwriter and the policy transformed
into a named policy.
6. Fleet policies. — A fleet policy is a convenience to a line
owning a number of vessels, for they are by this means cov-
ered in a single policy. In addition, the insured may receive
a more favorable rate than could be obtained on separate
insurances, Inasmuch as it is uniform for the entire insurance
and based upon the average condition and character of the
vessels. Exceptionally poor risks are thereby counterbal-
anced by better vessels. Indeed, vessels which v/ ould be uninsur-
able separately might be cov^ered by this method, as the
underwriter must take or reject the entire lot.
7. Open cargo forms. — The open cargo form is one of
the most common types of policies. It is estimated that 90
per cent of the cargo coverage is of this kind.^ The policy
usually runs for an indefinite period of time and all shipments
of the insured during this period are protected, provided he
declares the same to the underwriter and pays a premium
thereon. There is therefore a constant reporting of new risks
to be covered and of terminations of risks upon cargoes which
have arrived safely, a rate schedule attached to the policy
serving as a guide to the rates which will be charged. In order
to restrict the extent of risk assumed by the company, a maxi-
mum coverage on any one vessel is stipulated, and it is also
provided that "the sound value at the port or place of des-
tination outward is to be deemed not to exceed the purchasing
price at the shipping port, and 10 per cent added thereto, ex-
clusive of duty and freight." The open cargo form therefore
practically provides insurance in advance upon any shipments
in which the exporter or importer is interested. They will all
be covered, whether shipped with or without his knowledge,
provided prompt notification is given to the insurance
company.
8. Blanket policies. — In the blanket policy the maximum
amount of protection which will be required is estimated and
this protection is purchased in a lump sum, the premium being
based on this amount. The nature of the goods and the
geographical area to be traversed are described, and all goods
so designated are covered. As losses are paid the full amount
of the policy must be reinstated by additional premium pay-
ments entailing additional cost to the insured, whereas the
" See Appendix LXII.
MARINE INSURANCE 211
underwriter is assured of the full amount of business for the
period named. Should the actual shipments exceed or fall
short of the estimated amount, the excess or deficit is covered
by an adjustment of the premium made at an agreed-upon
rate.
9. Ordinary and special hazards. — It was at one time cus-
tomary for marine policies to cover not only ordinary mari-
time risks but also special hazards incident to war and piracy.
Later such special hazards were excluded from the ordinary
policy and written as "war risk" insurance." The latter gives
protection against capture, seizure, detention, damage by
capture at sea, arrests, restraints and condemnation, with an
agreement by the insured that he will not abandon in case of
blockade or capture until after condemnation.
In some cases the underwriter does not care to write a pol-
icy covering all the customary maritime losses, the majority
of which are partial, and issues a policy protecting against
total loss only, at a considerably reduced premium. Some-
times partial insurance against all losses is supplemented by
an additional policy covering total loss only, thus giving the
insured protection against great disasters at a very reasonable
premium, and some protection against partial loss.
Analysis of the policy. — It will now be desirable to examine
some of the principal clauses of the policy contract pertaining
to the description of the subject-matter, the beginning and
termination of the coverage, the perils protected against,
double insurance and subrogation, leaving the subject of losses
for separate consideration later.
1. The description. — We have already discussed the de-
scription of the insured's interest under the fire policy and
many of the remarks there made are equally applicable to
marine. insurance. Unless both parties are certain of the trade
usage and the legal decisions pertaining to such general terms
as "cargo" and "goods," their use is dangerous because of
their uncertain scope. Thus, refrigerated goods and live stock
are well recognized as not comprehended by the above ex-
pressions and the status of other articles is extremely doubt-
ful. This uncertainty may be easily avoided by a definite
description of the goods. The description or name of the
vessel is naturally an important part of the policy because of
its influence upon the acceptance of the risk and upon the rate
'"See Appendix LXV.
278 INSURANCE PRINCIPLES AND PRACTICES
of premium. A mistake or change in the master is not now
considered so important.
2. Inception and termination of the coverage. — In the
case of a time policy on hull the risk clearly begins at a speci-
fied date and ends at a specified date, the vessel being covered
while within any geographic or other restrictions contained in
the policy. Various sailing warranties may be introduced in
the policy by endorsement as, for instance, where a ship is
warranted to confine its operation to the harbors of a given
port, or not to operate in specified waters, such as the Arctic
regions, or warranted not to ply the Great Lakes between De-
cember 2d and April 15th." If the vessel is at sea on the
date when the contract terminates an automatic extension of
the insurance which protects the insured until the vessel
reaches the port of destination Is provided, at a pro rata
monthly premium. In the case of a fleet policy the location
of particular vessels does not matter, for it is to be expected
that some will be at sea on the date of expiration. ^^ Time
policies are in general inapplicable to cargo risks, but a floating
policy provides that goods shipped on and after a certain
date are covered from the time they are loaded on board the
vessel. The loading is, therefore, the important factor in the
beginning of the risk.
In a voyage policy on hull the risk begins when the vessel
breaks ground for the given voyage, if the insurance is "from"
a port. If insured "at and from" a port, she is covered while
at the port and making preparations for sailing. In both
cases the risk terminates when the vessel has reached the port
of destination and has beeri moored twenty-four hours in
safety, both physical and political. A voyage policy on cargo ap-
plies from the time the goods are loaded on board the vessel
until they are safely landed at destination. The principal
question which arises here is as to whether the goods are
covered when lighterage is necessary to ship or land the goods.
The earlier view was that the risk of lighterage was not cov-
ered, but at present there seems to be a tendency to hold that
if the use of lighters is necessary or customary, the risk is
covered by the policy. In England, the Marine Insurance
Act specifically excludes the lighterage risk. In order to ren-
der this point certain a clause assuming responsibility for the
" See Appendix XCVI.
" See Appendix LXIII.
MARINE INSURANCE 279
lighterage risk or one disclaiming such liability is often en-
dorsed on the policy.
While the marine policy was originally intended to cover
sea-perils, the scope of the protection has been vastly extended
in modern times by policy endorsements. An excellent illus-
tration of this is the "warehouse to warehouse" clause," under
which the insurer assumes responsibility for losses from the
time the goods leave the factory, store, or warehouse at the
initial point of shipment until the same are delivered at store
or warehouse at destination.
3. The perils covered by the policy. — ^The marine policy
is intended to indemnify for losses resulting from unforeseen
and accidental causes only. Thus, a collision with another ves-
sel, a storm at sea, the striking upon a rock, stranding, damage
of cargo by sea-water, are all unanticipated results of a ven-
ture. The policy does not cover losses which are natural and
customary, such as the ordinary wear and tear of materials,
natural decay through passage of time, damage from the in-
herent vice of the article or the ordinary leakage of liquid
cargoes. The perils which the underwriter assumes^*^ may
be conveniently grouped as follows:
a. Perils of the sea. — This group does not include all
perils which may occur on the sea but only such as arc "of" the
sea. Thus, seizure is a peril encountered on the sea but is not
a peril of the sea. This group includes such perils as the dan-
ger of being driven ashore by heavy seas, of sinking as a result
of striking upon a rock or sunken vessel, damage by light-
ning, stranding, collision with another vessel, springing a leak
in bad weather and damage to cargo by salt-water. Miss-
ing vessels are presumed to have been destroyed by perils of
the sea, but this is subject to rebuttal in time of war.
b. Fire. — Included in the peril of fire is also the danger
of loss to vessel or cargo resulting from efforts to extinguish
fire. Thus, goods may be damaged by water or by steam used
for this purpose. It includes also consequential loss from
this cause, such as damage caused by smoke or odor. Under-
writers are not liable for damage to goods whose own con-
dition or Inherent vice caused the fire.
c. Perils dependent upon the acts of those on board the
vessel. — Suppose, for example, that the dangerous position
" See Appendix LXXV.
** See the policies in Appendices LXII and LXIII.
280 INSURANCE PRINCIPLES AND PRACTICES
of the vessel requires the master to sacrifice a portion of the
cargo for the general safety. This is an act which is for the
benefit of the owners of the vessel and of the cargo and, in
general, of the insurers. The underwriter is consequently lia-
ble for losses so resulting. A long line of legal decisions
has accurately defined acts of this character, as shown later.
Another situation Is found where the master of the ves-
sel, instead of acting for the benefit of others, is acting
in his own interest and against the interests of the owners
of the vessel and of the cargo as, for example, where he
deviates from the course for his own personal interests or
sinks a vessel for revenge. This is a peril which is logically
a subject for some form of insurance other than marine, being
similar to the hazards encountered in corporate bonding, but
it is ordinarily covered by the marine policy.
d. Perils arising from the actions of persons not on hoard.
This group of perils was originally covered by every marine
policy, was afterward excluded from coverage by endorse-
ment, and Is now covered by a second endorsement when de-
sired, for an extra premium. In the main. It comprises perils
peculiar to a state of war or piracy, including theft other than
pilferage, capture by pirates or rovers, men of war or priva-
teers, reprisals, restraints and detainments.
e. *'All other perils." — This phrase is not so inclusive as
it sounds, because the courts, following the rule of ejusdem
generis, have held that It covers only perils similar In char-
acter to those previously enumerated. Thus, the firing upon
a vessel by a war vessel of the same nationality In mistake,
the throwing overboard of money to prevent capture, the dam-
age to goods by water entering a discharge pipe which was
forced below the surface by the weight of the cargo loaded,
have all been held cases sufficiently similar to those enumerated
to justify recovery. Certain types of explosions have been
considered as outside this class, as is true also of bursting
boilers and latent machinery defects.
It is not sufficient that one of the above perils shall have
been Instrumental In causing the loss to impose liability
on the underwriter; the peril must have been the proximate
cause of the loss. The proximate cause Is usually the imme-
diate as distinguished from the remote cause, provided such
immediate cause Is a predominating and not a minor one.
Underwriters have frequently been held liable where, after
MARINE INSURANCE 281
a captain or mate had been negligent, the subject-matter
was damaged by accident or fire, even though the negligence
contributed to the disaster. On the other hand, where the pre-
dominating cause has been gross negligence and subsequent
contributory causes were insignificant in character, the under-
writers have not been held responsible.
4. Double insurance and subrogation. — Where the same
vessel or goods are insured by more than one underwriter, the
liability of such underwriters is determined by the priority
of the contracts. The prior policy is liable for any loss until
it is exhausted and the subsequent policy is liable for the bal-
ance. The premium is returned on that portion of the subse-
quent insurance which is over-insurance. ^'^
Upon the payment of a loss to an insured, as has been
previously explained, the underwriter acquires all the rights
of the insured pertaining to said loss. Furthermore, the in-
surance company would naturally be subrogated to any claim
for negligence which the insured might have against a carrier.
Carriers have attempted to counteract their liability by pro-
viding that any insurance recovered should inure to their bene-
fit, this being followed by the introduction of a clause in the
policy^'' to the effect that the pob'cy would be void if any agree-
ment that the carrier should receive the benefit of the insur-
ance existed in the bill of lading or otherwise. Other clauses
prevent the insured from prejudicing in any way the insurer's
recovery by releasing or impairing rights against third parties,
or assigning any interest or right.
Various Types of Losses. — 1. The incidence of the loss. —
For a better understanding of the sections which follow, it
is necessary to insert here a classification of maritime losses
which has no direct connection with insurance. It is based
upon the manner in which the loss is borne by the various in-
terests concerned. General average losses are those which
are borne by all parties concerned in the venture, vessel, cargo
and freight." Thus, if, in time of peril, the master is com-
pelled to damage his vessel for the general benefit, it is only
just that all concerned should contribute to reimburse him for
his voluntary sacrifice. But in order to maintain the justice
of such contributions the courts have said that the loss must
*' See policy in Appendix LXII.
"See Appendix LXII.
"The compensation for carrying goods.
282 INSURANCE PRINCIPLES AND PRACTICES
be the result of a voluntary sacrifice, incurred in time of peril,
for the benefit of all parties concerned, reasonable in char-
acter and by order of the master or person in command. The
jettison of cargo, described in the section on perils, will be
recognized as meeting the conditions prescribed; also, beach-
ing a vessel, water damage in extinguishing a fire, damage
to machinery through extraordinary efforts to float a stranded
vessel, unusual expenses incurred at a port of refuge, and
many other types of losses may fulfil the conditions.
The method of adjusting a general average loss is as fol-
lows. The ship-owner or his representative arranges for the
adjustment of the loss and usually employs an experienced
average adjuster for the purpose. The master of the vessel is
required to keep the interests together until adequate secur-
ity for any liability may be obtained. A general average
bond and a marine insurance policy are usually sufl^cient, but
in the absence of the latter a cash deposit may be required.
After a survey of the damaged goods and a determination
of the amount of loss have been made, the various interests
are appraised to find a basis for the respective contributions.
Let us take a simple illustration to see the significance of this
basis. A vessel is valued, we will suppose, at $300,000, the
cargo at $400,000 and the freight money at $40,000, and in
the course of the voyage $7,400 of cargo is sacrificed for the
general benefit under conditions which make it a general aver-
age loss. All the cargo, we will assume, is owned by one
shipper. The total value of the venture is found to be :
Vessel $300,000
Cargo 400,000
Freight 40,000
Total $740,000
Each interest contributes to the general average loss in the
proportion that the value of its interest bears to the value of
all interests, giving the following result:
Vessel 30/74ths of $7,400, or $3,000
Cargo 40/74ths of 7,400, or 4,000
Freight 4/74ths of 7,400, or 400
All interests _. $7,400
It will be noticed that the cargo-owner must contribute $4,000
MARINE INSURANCE 283
as his share of the general average loss; therefore, he re-
ceives a net reimbursement of only $3,400, but he is as much
a partner in any general average loss that may occur as any
one else and must bear his share. If the persons concerned
are insured they can recover for their contributions from the
insurance company, provided the loss is due to a misfortune
insured against; if they carry full insurance, they can each
be reimbursed in full. If only partially insured, the English
law permits them to recover only in the proportion that the
insurance taken bears to the value of the interest. Thus, if
the vessel-owner had insured his vessel for only one-half its
value in the above case, he could have recovered only one-
half of his contribution of $3,000, or $1,500. The Amer-
ican courts, however, have not followed this principle in some
cases.
The second type of loss is called particular average. The
burden of such a loss rests upon the particular interests which
suffer. Such losses are different in character from general
average losses, for they are not voluntary, nor incurred for
the common benefit, but are the result of accident or negli-
gence. As illustrations, damage to the vessel by fire, damage
to the vessel by heavy seas, stranding or collision, loss of part
of the cargo in unloading, impairment of the quality of
cargo by sea-water, injury to cargo by fire, loss of freight
through failure to deliver cargo, etc., may be cited. The set-
tlement of particular average losses is described later in the
sections on total and partial loss.
2. Classification of losses by extent and character. —
Viewed from the standpoint of insurance, losses may be di-
vided into total and partial, each of which may be subdivided
according to the character of the loss. By a total loss we mean
complete loss or destruction of the subject-matter of the policy.
Thus, a shipper, Jones, may have on board a vessel a cargo
of cotton goods valued at $20,000, which he has insured in
Company X. On the same vessel, Smith may have shipped
crockery. Brown, hardware, and Black, furniture. If the
cotton goods have their value completely destroyed by a dis-
aster insured against, Jones and Company X regard this as a
total loss, even though the crockery, hardware and furniture are
uninjured. Likewise, the vessel might be a total loss even
though practically all the cargo were saved. A partial loss
is any loss other than total.
284 INSURANCE PRINCIPLES AND PRACTICES
a. Total loss. — Total loss may be divided into two
groups, actual total loss and constructive total loss. Actual
total loss is incurred when the insured loses the possession of
his property, as where it is captured and condemned by an
enemy; where the property ceases to exist, as in the case of
a vessel which founders or a cargo which burns; or where the
property ceases to exist as a thing of its kind, as where food-
stuffs arrive in a putrid state or hides are found to be par-
tially fermented. A constructive total loss is said to exist
when the property is damaged to such an extent that the cost
of repairs will equal or exceed the value of the property when
repaired. This, however, is the English view. American
courts have defined it as being a case where the cost of re-
pairs is greater than 50 per cent of the value when repaired,
a definition much more favorable to the insured.
In theory and in law, actual and constructive total losses
must be sharply distinguished. In cases of constructive total
loss the insured must give the underwriter notice of abandon-
ment in order to claim a total loss. Abandonment means that
the insured offers the insurance company what remains of his
rights in and respecting the damaged property in return for
the payment of a total loss. Notice of abandonment is the
notice to the underwriter of the offer. No such principle ex-
ists in other forms of insurance, where the company always
has the privilege of paying the amount of the damage or of
repairing the property. The notice of abandonment must be
definitely expressed without reservations but the underwriter
has the privilege of accepting the abandonment, which puts
the insured in the same position as if he had suffered an actual
total loss, or the underwriter may reject the abandonment.
In the latter case the insured may either sue the underwriter
for a total loss settlement and leave the justification of the
abandonment to be determined by the courts, or he may agree
to settle as for a partial loss. If the underwriter accepts the
abandonment he pays the full insured value — either the in-
surable value in the case of an open policy or the policy valua-
tion in a valued policy — and is subrogated to all the rights
of the insured.
It is desirable to refer briefly at this point to the applica-
tions of coinsurance in marine insurance. In fire insurance
a coinsurance clause requiring Insurance to the extent of 80
per cent of the value is quite common, and under such a clause
MARINE INSURANCE 285
the insured becomes his own insurer to the extent that he
insures for less than the required amount. The higher the
requirement the lower the rate, however,, for reasons which
have been previously enumerated. In marine insurance, on the
other hand, insurance to the extent of 100 per cent of the
value is required, and if less is taken the company will pay
a loss only in the proportion that the insurance taken bears
to the amount required. Thus 90 per cent insurance means
that the insured can recover no more than 90 per cent of any
loss. The insertion of such a requirement in the marine policy
is unnecessary either in the United States or England, for
the principle is well established In law. It will be understood
in the discussion hereafter, therefore, that the insured has
insured his property for the full value and that if he has not,
he can recover only on the above-mentioned basis.
b. Partial losses. — The great majority of losses do not
fall in the preceding category; they are only partial in ex-
tent. A partial loss may be either a general average loss or
a particular average loss; but that need not concern us here,
being more important in maritime law than In marine insur-
ance. We have thus far been referring to the results of dis-
asters exclusively as "losses," but It is now advisable to
distinguish two groups of results as (1) losses and (2) ex-
penditures, for there are certain expenditures which the In-
sured is able to recover from the underwriter. Such partial
loss or expenditures may be Incurred with respect to cargo,
vessel or freight, and the different principles of settlement
in these cases make separate discussions necessary.
c. Partial loss of cargo. — This may be manifested as a
deterioration In quality or as a loss of part of the cargo.
The two bases of the underwriter's liability for such losses
are (1) the percentage of damage suffered and (2) the sum
insured. To Illustrate the significance of these bases, let us
assume that a quantity of cotton is shipped and insured under
a valued policy for $10,000, Its full value. The cotton is dam-
aged 20 per cent during the voyage; In addition, the market
value of cotton has declined. If the cotton had arrived un-
injured, It would have sold for only $8,000, due to the decline
in market values; In Its damaged condition It sells for only
$6,400. It Is by this comparison of sound and damaged values
at destination, in fact, that the extent of damage Is ascer-
tained. It might seem that the extent of the partial loss could
286 INSURANCE PRINCIPLES AND PRACTICES
be arrived at in this way: $10,000 was the value insured
and the cargo is now worth only $6,400; therefore the in-
surance company is -liable for $3,600, the difference. But this
is making the insurance company responsible for the decline
in market value, which is not a risk insured against. The
correct method of settlement is as follows : The sound value
at destination was $8,000 and the damaged value at destina-
tion $6,400; therefore the extent of the loss ocurring on the
seas was $1,600, or a 20 per cent damage. Applying this
percentage to the amount insured, or $10,000, we get $2,000
as the company's liability. A series of examples would serve
to show that the method explained is the only one which
eliminates the effects of fluctuations in market values. Further-
more, it has been supported by court decisions. In compar-
ing the sound and damaged values at destination the gross
values are to be taken, including freight, as otherwise the
constant value of the freight would affect the amount recov-
ered by the insured.
Where the loss is a total loss of part of the cargo, instead
of a general deterioration in condition, the damage is usually
more easily ascertained. For example, if 1,000 bales of cotton
are insured for $50,000, and 100 are totally destroyed or
must be sold short of destination, the loss is obviously 10 per
cent of the amount insured.
It is essential at this point to consider the limitations placed
upon the payment of partial losses by the insurance com-
pany. One of the most common is the memorandum clause^^
which provides that certain articles are insured against general
average losses and total losses only. Certain other articles
are covered only for partial losses equal to 20 per cent of the
value of the articles or more. On still other articles, the
underwriter is liable only for losses amounting to 7 and 10
per cent, respectively. The greater the susceptibility to dam-
age, in general, the higher the percentage named. The clause
also provides that profits are to be subject to the same per-
centum of partial loss as goods. Furthermore, the under-
writer relieves himself of liability for goods shipped "on
deck," and for loss to certain kinds of goods carried under deck,
except by actual contact of sea water. Ordinary leakage
of liquid cargoes is also exempted. It should be explained
that the clause does not mean that the insured bears, say, 10
** See Appendix LXII.
MARINE INSURANCE 287
per cent of every loss himself. For losses which do not reach
10 per cent of the value, it is true, the underwriter pays noth-
ing; but on losses which reach or exceed the percentage named
the underwriter pays the full loss. The percentage is there-
fore simply an arbitrary limit marking off the minor from the
important losses. The clause has two purposes or results.
First, it enables a much lower premium to be quoted, because
the multitude of small losses which aggregate a considerable
sum are eliminated from consideration on the theory that
they can be covered by an addition to the selling price of the
goods, while premiums are lower than they would otherwise
be. Second, it saves the calculation of a large number of
rates on separate articles, inasmuch as articles can be put on
a common basis by variations In the memorandum percentages.
A policy may contain a "free of particular average"
clause,^'' which specifies that the insurer is not liable for any
particular average losses, the insurance except under certain
conditions being against total and general average losses only.
Two types of clauses are in use, being distinguished as
"F. P. A. A. C." (American conditions) and "F. P. A. E. C."
(English conditions). The latter reads "free of particular
average unless the vessel or craft be stranded, sunk, burned
or in a collision." The courts have held that the conditions
of the clause are satisfied if a stranding, sinking, burning or
collision takes place at any time during the voyage, whether
it be the cause of the loss In question or not. The American
clause reads "free of particular average unless caused by
stranding, sinking, burning or collision with another vessel,"
which wording requires that the stranding, etc., be the cause
of the loss in question.
Various modifications of the memorandum and average
clauses may be introduced in order to fit the conditions of the
particular case.
d. Partial loss of vessel. — A vessel is not ordinarily
bought to be sold again and the method of ascertaining cargo
losses would be generally Inapplicable for losses on hull.
This Is the more evident when we consider the size of the
article, the fluctuations in Its value and the difl^culty of deter-
mining a fair market price. The ordinary procedure, there-
fore, is for the owners to have the necessary repairs made
" See Appendix XCV.
288 INSURANCE PRINCIPLES AND PRACTICES
and the underwriters pay the cost thereof, less any improve-
ment to the owner's property resulting therefrom.
It is difficult to estimate the advantage to the vessel-owner
of obtaining new parts in place of old and in the days of
wooden vessels this was arbitrarily taken as one-third of the
repairs. This was unjust to new vessels, however, and the
injustice became increasingly manifest when metal vessels sup-
planted wooden. Modifications of this principle have
therefore been introduced, ranging all the way from the
elimination of the one-third deduction down to a sliding scale of
deductions varying with the character of the repairs and the age
of the vessel.
The settlement of partial losses is affected also by the use
of average clauses on hull policies and clauses providing for
separate valuations of hull, fittings and machinery. Average
is frequently made payable on each valuation, separately or on
the whole, whether the average be particular or general. If
the percentage named be 3 per cent, therefore, any damage
to a vessel will be compensated for which amounts to 3
per cent of an individual valuation or any damage to 3 per
cent of the total valuation. Policies are also issued which
protect against total loss only. A deductible average clause
makes the owner a self-insurer for a definite sum on every loss.
On all steam vessels a clause is commonly used, providing
that the underwriter assumes liability for damage to the hull
or machinery resulting from the negligence of the master or
crew, explosions, breakage of shafts or latent defect of ma-
chinery."" Many injuries to machinery were not, according
to the courts, included in the ordinary perils covered by the
policy, and this clause gives the insured the benefit of such
coverage.
Instead of the owner repairing the vessel, however, he may
keep the vessel without repairs or he may sell it before re-
pairs are made. In the former case, the amount of damage
must be ascertained by a survey or estimate. If the vessel is
sold unrepaired the purchase price is supposed to measure
the extent of the damage and the insured is entitled to the
insured value minus the amount received from the sale. This
latter principle does not meet with universal approval, since
elements are introduced which are foreign to the insurance
contract.
* See Appendix LXXXIX.
MARINE INSURANCE 289
e. Partial loss of freight. — Freight, profits, commissions,
etc., are all incorporated in the vessel or cargo and it is diffi-
cult to conceive of their loss except by damage to, or destruc-
tion of, the tangible property in which they are merged. In
case of partial loss, the measure of indemnity is that propor-
tion of the policy valuation or insurable value which the freight
lost by the insured is to the whole freight at the insured's
risk. In the very rare cases of unvalued policies on freight
the custom has been to adjust losses on the basis of the gross,
and not the net, freight. The latter is difficult to arrive at
because it is decreasing as the voyage proceeds as a result of
the increasing expenditures incurred.
f. Expenditures. — Not only are actual losses covere3 by
the policy, but also certain expenditures. We have previously
referred to certain general average losses resulting from vol-
untary sacrifices. Such sacrifices may result not only in imme-
diate loss but in the necessary expenditure of funds to put
the owner in the position which he previously enjoyed, or in
expenditures necessary to attain the desired results. For ex-
ample, in attempting to float a vessel it may be necessary to
discharge cargo, fuel and stores, to store the same and later
to reload. In case of damage to the vessel it may be neces-
sary for the master to put In at a "port of refuge" and in ad-
dition to the cost of repairs, to spend money for the wages
and maintenance of the crew, port charges, pilotage, discharg-
ing and reloading of cargo, and for the expenses of leaving
the port. Such incidental and "port of refuge" expenses are
called "general average expenditures" and form part of the
general average "loss." They must, of course, be expendi-
tures directed toward the same end as the voluntary sacri-
fice and not unnecessary expenditures for the benefit of some
particular interest.
The policy also contains a so-called "sue and labor clause.""^
According to this it is necessary for the insured and his rep-
resentatives to "sue, labor and travel for, in and about the
defence, safeguard and recovery of the said goods and mer-
chandises," in order to limit or reduce the loss incurred. In-
asmuch as the insured's efforts are for the benefit of the under-
writer the latter agrees that anything the insured may do
in this connection shall not in any way prejudice his rights
respecting the insurance, and that the underwriter will reim-
" See Appendix LXIII.
290 INSURANCE PRINCIPLES AND PRACTICES
burse the insured for any expenditures incurred in this effort,
in proportion as he is insured. Such expenditures are termed
"sue and labor charges" and it is important to note that ( 1 )
unhke general average expenditures, they must be for the benefit
of the particular property covered by the policy, and (2) that
they must be expended to avert some peril which is covered
by the policy.
It Is a maritime custom that any person who rescues prop-
erty on the sea from damage or destruction is entitled to a
reward from Its owner. If the salvor and the owner are un-
able to agree upon a suitable reward the amount thereof is
fixed by an admiralty court. The salvage of a vessel or cargo
is necessarily an act which benefits the underwriter and the
reward or "salvage" paid is an expenditure for his benefit.
As sue and labor charges are expenditures by the owner to
save property for the underwriter, so salvage is payment by
the owner to another for saving property for the underwriter;
and for salvage expenditures, like sue and labor charges, the
underwriter is responsible.
We referred above to the loss resulting from a collision
of vessels. A legal liability may also arise from this event.
Let us suppose that vessel "A," valued at $100,000, collides
with vessel "B," valued at $200,000 and, as a result, vessel
"A" Is injured to the extent of $20,000 and vessel "B" to the
extent of $10,000. If vessel "A" is entirely responsible for the
accident the owner of vessel "B" may recover damages from
Its owner equal to the damage "B" has sustained. Such legal
liability Is not one of the ordinary marine perils against which
the policy protects, although the damage suffered by "A's"
vessel is covered by the policy issued by "A's" underwriter.
To put It in another way, "A's" policy protects him against
damage suffered but not against legal liability for damage
done. It is customary to add a clause to the policy, however,
protecting against such legal liability.^^ The underwriters
under such a clause agree that ( 1 ) they will be responsible for
such legal liabilities, (2) they will pay the expense of contest-
ing the claim. If a contest Is desirable, and (3) where both
vessels are responsible for the accident, the respective legal
liabilities shall be settled on the basis of cross-liabilities. To
illustrate the latter agreement let us suppose that the two
vessels are equally responsible for the accident, with conse-
"' See Appendix LXIII.
MARINE INSURANCE 291
quent equal legal liability. The underwriters pay the dam-
ages sustained and assume the rights of the insured parties.
Underwriter "A" pays "A" $20,000 and assumes "A's"
rights against "B," and underwriter "B" pays "B" $10,000
and assumes "B's" rights against "A." Vessel "A" was re-
sponsible for one-half of the damage to "B" or one-half of
$10,000. Underwriter "A" is therefore responsible to under-
writer "B" for $5,000. Vessel "B" was responsible for one-
half of the damage to "A" or one-half of $20,000; under-
writer "B" is therefore responsible to underwriter "A" for
$10,000. "Crossing" these liabilities or setting one off
against the other, underwriter "B" is responsible to under-
writer "A" for the net sum of $5,000. There is, therefore,
another expenditure for which marine underwriters are liable
under the collision clause, that is, the expenditure necessary
to satisfy a legal liability.
Marine insurance rates. — Although the factors which affect
marine insurance rates seldom operate separately but usually
modify and exaggerate others by association, it is conve-
nient for purposes of study to divide them, as far as possible,
into groups. We will consider, therefore, these factors in
their relation to the following topics: the subjects of insur-
ance, the Insured, the nature of the trade involved, the results
revealed by statistics, the various phases of competition, the
policy conditions and finally, the extent to which judgment is a
factor.
The subjects of insurance. — 1. The type of vessel. — As the
means of transportation, the vessel must necessarily occupy
an important place in the making of rates. Size, type, adapt-
ability to the trade, motive power, material and structural
strength are always given consideration. It is evident that
wooden and steel vessels must differ considerably in hazard,
that large vessels are less subject to certain perils and more
subject to others and that, in strength, vessels will vary as
much as individuals; but space will not permit of a discussion
in detail of various types of vessels and their uscs."^ To some
extent the underwriter will be guided by the results which
are arrived at by prominent classification societies formed for
the purpose of testing and surveying vessels and reporting
upon their strength and condition as, for example, Lloyds'
" See Robert Riegel, "Merchant Vessels," D. Appleton & Co., N. Y. 1921
292 INSURANCE PRINCIPLES AND PRACTICES
Register and the Register of the American Bureau."* These
are especially valuable when risks are offered which cannot be
personally inspected.
2. The class of commodity. — In both hull and cargo in-
surance the cargo is an important consideration. Innum-
erable conditions must necessarily be taken into consideration,
such as the processes to which the commodity has been
subjected, its susceptibility to odor, moisture, weather condi-
tions, etc., the method of packing, inherent vice and necessity
for proper loading. For example, cocoa and coffee beans may
be easily affected by moisture, grain affords problems of load-
ing, fiber products are subject to spontaneous combustion,
hides deteriorate rapidly, and so on ad infinitum.
The insured: — 1. The personal factor. — Underwriters in-
sist that they insure persons rather than property, in the sense
that the rate must vary with the individual. As between two
individuals engaged in the same trade on the same route and
using practically identical vessels, one individual account will
show an underwriting profit while another is a loss. Due to
carelessness or incompetence one shipper is constantly pre-
senting claims which occur but rarely in the other case. Like-
wise, of two vessel-owners in the same trade with similar ships,
one devotes considerably more money to maintenance and or-
ganization and exercises a more careful supervision, with a
resultant saving in losses. Naturally, also, an underwriter
is more willing to make a reduction in the case of an account
which he has carried profitably for many years than he would
be for a new customer whose business may or may not yield
a profit. In addition, a moral hazard may have to be taken
Into consideration. Some shippers persist in making unfair
claims for losses, others do not furnish the information neces-
sary to make a fair estimate of hazard, and at the extreme
are those who practice positive deception and fraud.
2. Brokers' accounts. — As the underwriter relies to some
extent upon his past experience with shippers, so also must he
place some dependency upon his past experience with brokers.
Accounts with some brokers will show far less benefit to the
underwriter than others and there will naturally be some dis-
crimination against the business offered by them.
3. Nationality. — Experience has shown that hazards of
navigation vary with the nationality of the vessel and the crew,
"7iii, chap. 13.
MARINE INSURANCE 293
some nations seeming to produce, on the average, persons
who are far better fitted to engage in ocean trade and vessel
operation than others. The standard of business honor will
also vary greatly, thus affecting the decision on the acceptance
of risks and the adjustment of losses.
Nature of the trade: — 1. Natural forces and topography.
— Experience as well as deductive reasoning shows that certain
geographic regions and trade routes offer hazards which are
non-existent or modified in others. Thus, off the British Isles
and Newfoundland, fogs are prevalent; the northern waters
contain floating ice; in the Baltic Sea, the nights are longer;
river harbors frequently have bars or shallows; the typhoons
of the Pacific and the monsoons of the Indian Ocean are pro-
verbial ; many regions are far better equipped with aids to navi-
gation than others, and the conditions of ports vary as greatly
as those of vessels, cargoes and individuals. As a result, no
matter what the vessel or cargo, the trade route and geo-
graphic region will exert an influence on the rate.
2. Seasons. — The seasons of the year and the business
"seasons" both affect the rate. The influence of winter is too
obvious to require more than mention; the cotton movement
in the South tends to a congestion at shipping ports and this in-
creases the danger from fire and bad weather. Seasonal de-
mands for tonnage will attract vessels to trades for which they
are little suited. Temperature may be an important element
in shipments of oil and grease.
3. Trade customs. — The underwriter. In order to form
satisfactory judgments of risks offered, must be acquainted
with the world's commerce. Thus, cotton is shipped from
Egypt in small bales well wrapped while American exports
of this commodity are frequently inadequately protected and
often poorly baled. At some ports cargoes are unloaded di-
rectly on the wharf or pier, while at others lighterage is used.
Rubber may be shipped from Brazil unpacked; the same
product comes from Eastern countries carefully packed.
Statistical experience. — Many of the elements in a marine
rate cannot be measured in figures but in some cases the ex-
perience acquired by years of operation is sufl^ciently broad to
afford some basis for judgment. Many companies, therefore,
maintain statistical departments designed to furnish material
which the underwriter may use to assist his general knowledge.
With respect to this information the marine insurance busi-
294 INSURANCE PRINCIPLES AND PRACTICES
ness is in about the stage which fire insurance apparently finds it
so diflficult to pass through, a stage in which the information is
regarded as a trade secret of very great value. There is, in
other words, very little exchange of information between un-
derwriters, in spite of the mutual benefit which such co-
operation, intelligently carried out, would give. As expressed
by a practical insurance man, "that is the unfortunate feature
of the marine insurance business to-day. There is no confer-
ence between the companies on the very important lines of
business. It is the one disability and perhaps the one vice
of the marine insurance business — that we, each one of us,
keep our own records and keep our own counsel and under-
write along our own individual lines."
Competition. — 1. An international market. — There is prac-
tically no cooperation between the various marine insurance
markets of the world in regard to rates, and as a result of
the cable facilities which exist and the intangible character of
the commodity dealt in, the insurance may be readily "ex-
ported." This means that the buyer may obtain his insurance
abroad if he finds a sufficient inducement, and that the
American underwriter must meet the competition of foreign
underwriters. An investigation has shown that perhaps 20
per cent of the premiums on American business has gone to
unadmitted companies and foreign underwriters, while the
proportion in the hull insurance field was as high as 50 per
cent. The broker, ordinarily anxious to do well for his client,
seeks the best market.
2. Brokers' accounts. — Since brokers occasionally follow
the practice of combining risks and offering them as a whole,
insurance companies are sometimes inclined, because of com-
petition, to give better terms than could have been obtained on
the individual units in the groups.
3. Rate agreements. — Unlike fire insurance, rate agree-
ments in marine insurance have been confined to limited classes
of business. This is partially accomplished through the me-
dium of underwriters' associations, which promulgate rates
which are purely advisory in character and which the com-
panies are free to use or not as found desirable. In practice,
of course, such rates are quite generally adopted. The or-
ganization of such associations, eight of which recommend
rates, is much more informal than the organization of fire
underwriters' associations. A second method by which uni-
MARINE INSURANCE 295
formlty In rates on certain commodities Is arrived at is through
reinsurance exchanges, where companies exchange business
which is written at agreed-upon rates. As instances, there
may be cited the "Cotton Reinsurance Agreement," the "Cot-
ton Fire and Marine Underwriters," the "Burlap Agree-
ment," "Joint Grain Certificates," "Lumber Reinsurance
Association," "Inland River Agreement," and "New Orleans
River Association." While the underwriters' associations are
principally concerned with rates on hulls, the agreements
relate primarily to cargo risks.
Policy conditions. — It has previously been explained that
various arrangements may be made to adapt the insurance
to the vessel or commodities to be covered and that the ordin-
ary provisions of the policy are generally modified by special
agreements and clauses. The underwriter's liability is thereby
extended or reduced and naturally the rate varies In accord-
ance with this fact. Obviously the hazard Is Increased con-
siderably by the addition of a "warehouse to warehouse
clause," and greatly reduced by restricting coverage to total
losses only. It is impossible and unnecessary to enumerate
all the possible variations and their effects."^
Underwriting judgment. — Finally, when we come to the end
of the specific factors which have been enumerated there
remains an interminable list of unclassified, unanalyzed and
untabulated considerations to which only an underwriter's
experience can enable him to give proper weight. The ability
to evaluate properly these considerations and to apply them
to specific cases is commonly called "underwriting judgment."
Indescribable, yet clearly recognized, it has enabled some in-
dividuals to obtain positions of preeminence in this respect, so
that testimony shows that their acceptance of a risk is sufli-
cient to induce others to write on the same risk. This factor
is present to some extent in all forms of insurance rate-
making. It would be possible to construct a list in which the
various forms of insurance were arranged in order as they
depended upon underwriting judgment as contrasted with sta-
tistics. Among those at the head of the list would appear
marine insurance and at the bottom of the list life insurance.
Underwriting judgment Is especially important in the marine
field because the event insured is uncertain, the hazards are
many and peculiarly dlflUcult to measure in figures and co-
operation between underwriters is limited.
" See appendices LXIV to C.
Part VI
OTHER FORMS OF CASUALTY INSURANCE
297
/
Chapter XX
AUTOMOBILE INSURANCE
Types of automobile coverage and types of companies. — In
order to obtain complete protection the owner of an automobile
must have five types of policies. For convenience in discussion,
however, these may be divided into three groups; 'the liability
and prope rty damage f orms,^the collision form, and the fire and^
theft lorms. The automobile insurance business is distributed
between two t^p£S_pf companies, the casualty companies and the
^,Jire companies. In very few Stat es is it possible to obtain com-
plete protection IrTa^slngte policy or company as the laws have
been framed on the assumption that casualty risks belong to
casualty companies and fire risks to fire companies. Liability
insurance is written entirely by casualty companies, fire and theft
insurance entirely by fire companies, and property damage and
collision insurance is divided, casualty- companies receiving prob-
ably the bulk of property damage and fire companies the greater
part of collision insurance. The demand for complete coverage
In a single policy Is not great and such as It Is has been largely
met by cooperative companies operating under substantially simi-
lar management, and issuing combination policies.
r Liability insurance policies.^ — Liability insurance Is insur-
/ ance against legal liability for damages because of bodily Injury
/ to others arising out of the ownership, maintenance or use of
\an automobile. This policy also promises that the company will
defend the Insured In suits, pay legal costs, make investigations
and settlements of claims and pay for Immediate surgical relief
to the Injured. The policy is designed to cover the ordinary
use of an automobile only and, therefore, contain limitations
to its scope. It applies In the United States and Canada only,
unless the territorial scope Is extended by an endorsement paid
for by an additional premium. In regard to use, the Insured
may not employ a private passenger car in carrying passengers
for hire nor is the car covered while towing a trailer, or while
* See Appendix CII.
299
300 INSURANCE PRINCIPLES AND PRACTICES
engaged In a race or speed contest. It must be operated by a
person who Is over the legal age limit. The company's liability
is also restricted in amount, the standard limits being $5,000
for Injuries to any one person in one accident, and $10,000 for
injuries to more than one person in one accident, subject to the
$5,000 per person limitation. The standard limits may be
extended by the payment of an extra premium.
Property-damage policies.^ — Property-damage insurance pro-
tects against injury or destruction of the property of others, in-
cluding loss of use, except when in charge of the person assured
or his employees, or when carried In cars covered by the policy.
,Such injury must, of course, result from an accident arising but
of the ownership, maintenance or use of the cars covered by
the policy. Loss by fire from any cause Is not covered. Prac-
tically the same limitations apply to the property-damage policy
as to the liability policy. The liability of the Insurer Is limited
to the actual cash value of the property destroyed or Injured, up
to the ordinary limit of $1,000, which may be extended by an
additional premium. It Is to be noted that a property damage
policy covers loss of use. Thus, the insured may not only be
legally liable to another for damaging his property but also for
the pecuniary loss resulting from the fact that the Injured party
Is deprived of the use of the damaged property while it Is under-
going repairs. The property-damage policy is never separate
but is written concurrently vv^th public liability or fire coverage
I by a combination policy or by endorsement.
Liability and property damage rates.-^
A. Private passenger cars. — The rate-making system may
be divided into the various factors which influence the making
of a rate.* Rates for all forms of automobile insurance are
unstable and It is doubtful how long the figures used below as
illustrations will continue In force. The system of arriving at
premiums is discussed under the following heads:
1. Territory. — The United States has been divided into
eight territories, numbered from one to eight, and ranging
from the most hazardous communities to rural sections. Thus,
territory No. 1 is New York City, where Injuries to both per-
sons and property are most frequent and severe. Using as an
illustration a medium-priced car, costing $1,495, the rates in
^ See Appendix CV.
'* Rates show relatively frequent changes. Appendices CX and CXI show
recent rates.
' See rate forms, Appendices CX, CXI and CXII.
AUTOMOBILE INSURANCE 301
this territory are found to be $103 for pr'olic liability and $28.
50 for property damage. In territory r> o. 2, including the sub-
urbs of New York City, these rates decline to $57.50 and $16
respectively; in Philadelphia (thirf^i-class territory), they are
reduced to $48 and $15 rcspectiviely ; and in strictly rural and
sparsely settled localities (teri'itory No. 8) they are as low as
$19 for public liability and, $7 for property damage insurance/
For the sake of illustration a particular car has been used, but
it is understood that/other makes have different rates, since the
list price of the A'tir is a factor.
The territon^ial grouping described is based principally upon
two factors*": ( 1 ) The population density of the particular terri-
toriec andi (2) the past experience as reflected by compiled sta-
tistics, ^'in collecting statistics of experience it has not always
been 'possible to classify the data in as detailed a manner as de-
siraKjle. In localities where there are comparatively few cars
anr'i few losses it has-been found necessary to proceed on the as-
si ftmption that what is true of automobiles in the aggregate is
t rue of particular kinds of cars. This of course is not always
strictly accurate, but the difficulty is partly obviated by the con-
stantly Increasing amount of statistics. Furthermore, except
as reflected In the statistics, the territorial grouping cannot take
Into account such factors as road conditions, topography, char-
acter of population and the local laws affecting accidents. Like-
wise, the drawing of lines delimiting territorial zones necessa-
rily must discriminate IllogIc,;/ily between two communities lying
close to and on opposite sides of the line.
2. Type of car. — Since It is apparent that different cars will
present varying degrees of hazards, it has been found necessary
to create four classes of automobiles. The "private passenger"
car is one used only for personal and business calls. "Public
automobiles" consist of "livery" vehicles rented by the hour and
day and "other than livery" vehicles, including taxicabs, etc.
"Commercial" vehicles Include principally cars used for delivery
purposes and trucks. "Manufacturers' and dealers' cars" are
those in the possession of manufacturers and dealers for demon-
strating purposes. Separate rates are made for each of these
classes of cars. Thus, while a Buick in territory No. 1 might
cost $103 for liability insurance and $28.50 for property dam-
age Insurance, a livery vehicle would cost $270 and $50 re-
spectively, a taxicab $480 and $120 respectively, and a coal
* Rates are given in this order hereafter where not otherwise specified.
\
302 INSURANCE PRINCIPLES AND PRACTICES
dealer's heavy wagoi? $340 and $120 respectively. Manufac-
turers' and dealers' cars are usually rated on a different basis.
These rates for different kinds of cars are based upon the vary-
ing ratios of losses to in^surance as shown by the statistics
compiled. i
3. Motive power. — Since i*:he electric car and the motor-
cycle present smaller degrees of hazard they are written at a
reduction from the premiums charged Spr gasoline cars. Using
as an illustration the Buick previously rerfeirred to in New York
territory the rates would be $103 for liability insurance and
$28.50 for property damage insurance, while eK'^ctric cars and
motorcycles would have a liability rate of only $2^2.50 and a
property damage rate of $6.00. It is to be noted tK^'at we arc
here using a private pleasure car of a particular make in a given
territory as an illustration. Similar allowances are macde for
electricity as motive power In public, commercial, manufa ctur-
ers' and dealers' cars. \
4. List price.^ — Under the previous rating system, vario us
makes of cars were distinguished principally upon the basis o^f
horse-power. It was found, however, that this resulted in\
many criticisms. It was argued that the legal limitation of the
speed of a car made the potential horse-power of minor consid-
eration, that higher-powered cars were better operated and that
the indicated horse-power as obtained by a formula was fre-
quently inaccurate, resulting in absurd discrepancies between
well-known cars. As a result the list price has been substituted
as a basis and cars divided into four groups partly on the basis
of list price and partly on the basis of experience. These four
groups in New York territory have rates as follows :
Property Damage
Group Liability Rate Rate
W $88.00 $24.00
X 103.00 28.50
Y 119.00 33.00
Z 134.00 37.00
5. Use of the automobile. — The manual rates above re-
ferred to apply to private passenger cars used for private use
and business calls. In territories Nos. 1 to 6, if the insured is
willing to omit the business calls and restrict the car to private
''See list of automobiles, Appendix CXII,
AUTOMOBILE INSURANCE 303
use, 8 per cent reduction in liability and property damage rates
is given, ^*
6. Driver of the automobile. — The policy at the rates
above quoted contains an omnibus coverage provision allowing
the car to be driven by any person having the insured's permis-
sion. If, however, the insured warrants that the car will be
driven only by the owner, 20 per cent reduction in liability and
property damage rates is allowed.^*
7. Limits. — The standard limitations for liability insur-
ance are $5,000 and $10,000. These rates, however, may be
varied to suit the needs of the insured and higher limits may be
obtained by the payment of an extra premium. Thus, limits of
$10,000 and $20,000 may be obtained at 120 per cent of the
manual rate. The usual property damage limit is $1,000 but
this may be extended and a $5,000 limit, for example, may be
obtained for 130 per cent of the manual rate.
8. Persons covered. — The coverage of the liability policy
extends only to the public; damages payable to injured work-
men are not recoverable. In States where this is important,
employer's liability protection may be obtained by the payment
of an extra premium.
9. Foreign coverage. — If a tourist desires to obtain a
policy applying outside of the United States and Canada, he
may obtain foreign liability, property damage, and collision
coverage for an extra premium.
B. Public automobiles. — These cars are divided into two
groups, "livery" vehicles and "other than livery" vehicles, the
former group including principally cars occasionally rented; the
second group, omnibuses, taxicabs and sight-seeing cars. The
same territorial divisions apply and the rates upon livery vehicles
range from $100 and $20 respectively in the lowest territory,
to $270 and $50 in the highest territory. Beyond this no dis-
tinction Is made between livery vehicles. Other than livery ve-
hicles are also influenced by the place of customary use, the
rates upon a hotel omnibus ranging from $200 and $35 respec-
tively in the lowest territory to $400 and $70 in the highest.
These public automobiles other than livery vehicles are further
distinguished with reference to their use and size, a taxicab in
first-class territory costing $480 and $120 respectively, a public
automobile seating not more than twelve persons $480 and $70,
^* Eight per cent reduction rates are now described as "8% restricted cover-
age" and 20% reduction rates as "20% restricted coverage" in contrast with
"basic coverage."
304 INSURANCE PRINCIPLES AND PRACTICES
and a public automobile seating over thirty persons $840 and
$125 for liability and property damage Insurance. Employer's
liability protection upon these forms of cars costs $5.
C. Commercial cars. — The same territorial grouping Is ap-
plied to commercial cars. Thus, rates on a five-ton Mack truck
used as a baggage car range from $78 and $40 in the lowest
territory to $415 and $150 In the highest. Motorcycles cost
$90 and $32 in first-class territory and in third-class territory
$SS and $22 for liability and property damage, respectively.
Gasoline commercial cars are also divided according to their
use and size. Thus, an ambulance costs more than a coal deal-
er's wagon and the latter costs more than a water company's
wagon. For the purpose of distinguishing between the various
hazards due to character of use the cars are divided into four
groups known as classes 1, 2, 3, and 4. Within these groups,
cars are sub-divided into three classes — heavy, medium and light
— on the basis of the load capacity. In first-class territory rates
for the coal dealer's vehicle for liability insurance would be $340
on a heavy car, $320 on a medium car, and $290 on a light car,
while the property damage rates are $120, $112 and $100, re-
spectively. Electric cars are written at a 10 per cent reduction
from the preceding rates. It is very important to notice, how-
ever, that where five or more cars are insured with the same
company. It is possible to obtain rates on a pay-roll basis, a sys-
tem which is explained under the next subdivision.
D. Manufacturers' and dealers' cars. — These cars, which are
principally used for demonstrating purposes, may be written on
any one of three bases, "named chauffeur," "specified car," or
"garage pay-roll." On the named chauffeur basis, the premium
paid by the dealer depends upon the number of chauffeurs
specified in the policy, it being assumed that this approximately
measures the aggregate hazard of his business. In a third-class
territory the rates are $200 and $70 lor liability and property
damage insurance, respectively. On the specified car basis, the
/ dealer lists the cars which are to be covered and the same rates
^pply to the cars as apply to the chauffeur. On the pay-
roll basis it is similarly assumed that the wages paid are an ap-
proximate index of the aggregate hazard of the manufacturer's
or dealer's business, and rates are quoted per $100 of annual
pay-roll. The liability and property damage for the first
$10,000 of pay-roll are $3.75 and $1.25, respectively and on
the pay-roll above that figure, $3.00 and $1.00, respectively.
/
AUTOMOBILE INSURANCE 305
In the same territory the dealer could obtain protection against
"inside exposure," which covers only the hazard within the
walls and on the adjacent drive-ways, at 50 cents for liability
and the same figure for property damage protection.
Collision insurance policy." — Collision insurance protects
against loss or damage sustained by collision of vehicles with a
moving or stationary object. It applies to injuries suffered by
the Insured's car, and Is sometimes called a "damage sustained"
policy. The measure of this loss is the actual intrinsic value of
the property at the time of the loss or the cost or repair or re-
placement. The policy does not cover losses by fire, or loss or
I damage to tires, unless caused by an accident which Involves
other loss or damage to the insured's automobile. The most lib-
' eral policy form provides for the payment of cash value, repairs,
or replacement cost in full, and Is known as full coverage. The
following illustrations are based upon the full coverage policy.
Collision insurance rates:
A. Private passenger cars.
1 . Territory. — The country Is divided Into eight territories
as previously described, the rates In these territories on a new
Class A car for full coverage ranging from $55 to $179.
2. List price. — ^Cars are further classified with reference
to list price, twenty classes lettered from A to U having been
created. Using New York territory as an illustration, a Class
A car with a list price of $550 costs $179, a Class B car at
$650 list price costs $205, and a Class U car costs $395. The
cost of repairs on the higher-priced cars is ordinarily greater.
$650 list price costs $205, and a Class U car costs $395.
3. Extent of coverage. — The above rates apply to the full
coverage policy. If the Insured Is willing to bear the first $50
of any loss himself and consequently to accept a $50 deductible
average clause, the rates named above are decreased to $46,
$>S6 and $237, respectively. If he Is willing to pay the first
$100 of any loss himself under a $100 deductible average
policy, these rates become $24, $25 and $171, respectively.
4. Age of car. — Rates named above are rates quoted for
ntw cars. As a car grows older and the cost of repairs and
extent of possible damage decreases, the rates are reduced; thus,
on a car between six and eighteen months old, the rates named
above will be considerably reduced. Similar reductions are made
for second-hand cars in use from six to twelve months since the
'See Appendix CIV.
306 INSURANCE PRINCIPLES AND PRACTICES
date of original purchase, and for second-hand cars in use more
than twelve months in the hands of the present owner.
5. Motive Power. — Electric cars are written at 10 per
cent discount.
B. Commercial cars. — A similar territorial division is made
for cars in the commercial class. Rates in the various territories
depend upon the list price of the chassis plus the list price of
the equipment; thus, a truck at $1,650, with a body cab and
starter costing $735, would have a rate of $280 in a first-class
territory. The same truck, with 'equipment costing $850,
would cost $294. This is the rate for full coverage. For $50
deductible the cost of the latter is $150 and for $100 deductible
the cost is $75. Electric cars receive a 10 per cent reduction.
C. Public and livery vehicles. — Livery vehicles are written
at 150 per cent of the private passenger car rate and other than
livery vehicles are written at 200 per cent of the private passen-
ger car rate, or at 200 per cent of the commercial car rate if
of the bus or commercial type.
D. Manufacturers' and dealers' cars. — Individual cars are
written at 125 per cent of the private passenger car rate but
a blanket policy covering all the cars owned by a manufacturer
or dealer during the year is written at a discount. Thus, for
less than 100 new cars, 40 per cent of the private passenger or
commercial car rates, for from 100 to 250 cars, 35 per cent of
these rates and for 250 cars or over, 30 per cent of these rates.
On used cars the original private rates apply without discount.
Fire insurance policy.^ — A fire policy is designed to protect
the insured against damage to his automobile by fire or trans-
portation perils. The various provisions of the policy are so
similar to the provisions of a policy on a building or its contents
that it is unnecessary to repeat the analysis made in the Fire
Insurance Section. One distinction may, however, be noted.
Two forms of policy are written, the non-valued and the valued
forms, the former resembling the fire insurance policy in that
the total value of the property is left to be determined at the
time of the loss, while the latter is similar to a marine insurance
policy, in that the total value of the property is agreed upon in
advance. The significance of the valued form of policy has
been fully discussed in the chapters on marine insurance. This
policy is more advantageous to the insured, other things being
equal, but an additional rate of 25 cents per $100 is charged
*See Appendix CVI.
AUTOMOBILE INSURANCE 307
for It. While the amount of insurance is left to the- judgment
of the underwriters it Is recommended that some limitation be
placed upon the amount of insurance upon low priced and older
cars. The policy also covers the hazard of transportation.
Fire insurance rates.^ — We will consider separately the vari-
ous classes of cars, I.e., private passenger cars, livery and rent-
ing automobiles, commercial vehicles and dealers' automobiles.
A. Private passenger cars. — The factors Involved In the fix-
ing of a rate are the construction of the car, the existence of
protective devices, and any contingencies covered other than fire
and transportation perils. These factors are discussed In the
order given :
1. Construction. — Allowance Is made for the construction
of the car by a system of schedule rating^ very similar to the
system described for fire insurance on other forms of property.
The various kinds of cars of different makes have been tested
at the laboratories of the underwriters and a schedule applied to
them which fixes "points of credit" for all good features found
In the cars, that is, features which tend to diminish the fire
hazard. This schedule allows a maximum of 8,000 points
credit for a perfect car and these 8,000 points are apportioned
among the following sub-divisions of hazard:
Points
1. Storage of fuel 1,200
2. Fuel feed 1,200
3. Fuel line and fittings 400
4. Carburetion 400
5. Electrical equipment 3,200
6. Exhaust system 600
7. General workmanship 1,000
Each of these main groups Is then sub-divided Into Its essential
elements. Taking the first group (storage of fuel) as an illus-
tration, we find, that 120 points are allowed for tank capacity,
600 points for the location of the tank, 240 points for the con-
struction of the tank, and 200 points for the mounting of the
,tank. To Illustrate the manner In which this schedule Is applied,
70 points credit Is allowed for a capacity of between 10 and 20
gallons, ZS points credit for a capacity of from 20 to 25 gal-
lons, 15 points credit for a capacity of from 25 to 30 gallons,
and no credit for a tank containing more than 30 gallons. A
"See Appendices CIX and CXL
° See Appendix CIX.
308 INSURANCE PRINCIPLES AND PRACTICES
tank located at the rear of the frame and not enclosed in the
body Is allowed 450 points credit, whereas for a tank located
in the cowl and filled from under the hood, no credit is allowed.
For a gravity feed system, no credit Is given, for a pressure feed
system 120 points credit, and for a vacuum feed system with
the vacuum tank on the side of the engine block opposite the
carburetor and remote from any sparking device and from ex-
haust piping, as high as 755 points is allowed. These Illustra-
tions are sufficient to show the manner In which credit Is allowed
to the various makes of cars according to their fire hazard as
measured by this schedule
The result shows that the poorest car received a credit of
about 400 points and the* best car approximately 5,200 points,
and the Interval of 4,800 points is then divided into 8 classes
and to each class a rate per $100 of Insurance Is given, as in
the schedule below :
Class Points Credit Rate
A 4,600 to 5,200 $0.40
B 4,000 to 4,600 .45
C 3,400 to 4,000 .55
D ' 2,800 to 3,400 .65
E 2,200 to 2,800 .75
F 1,600 to 2,200 1.00
G 1,000 to 1,600 1.25
H 400 to 1,000 1.50
The name and description of every type of automobile Is
given in a manual with a symbol In the form of a letter oppo-
site each car to designate the class in which It falls. Thus, a
car which received a credit of 2,900 points would fall in class
D and would be marked with this letter in the manual, and
would have a rate of 65 cents.
2. Protective devices. — Thus far the only protective device
recognized is a fire extinguisher of approved type, approved by
the Underwriters Laboratories, for which a reduction of 15 per
cent is allowed.
3. Other contingencies covered. — An extra premium of 10
cents will secure protection against damage by earthquake, ex-
plosion or accidental leakage of water.
The above rates are for New England and Eastern territory.
Other rates which follow the same system apply in Southern
territory but rates in other portions of the United States are
on a different basis.
AUTOMOBILE INSURANCE 309
The electric cars are written at rates below the average of
those of gasoline cars. On new cars the rates for fire and trans-
portation coverage range from 40 cents to $1.50 for the classes
from A to H, while a new electric would cost 75 cents.
For a valued policy, 25 cents extra is to be added. It should
be stated that the valued form will only be issued for a com-
bined fire and theft policy, and that no reductions are allowed
from the rate so found.
These rates apply for a term of insurance of one year, and
coverage for a similar period is charged a relatively higher rate.
Thus, for six months 70 per cent of the annual rate is charged.
It is recommended that insurance upon the cheaper and
older cars be limited. Thus, it is advised that on cars costing
$1,799 or less, and purchased new more than 42 months prior
to the insurance, the insurance be limited to 40 per cent of the
list price.
B. Livery and renting automobiles. — These are divided into
two classes : Class A, including sight-seeing automobiles, busses,
taxicabs, and all automobiles of the private passenger type used
entirely or occasionally for carrying passengers for hire, and
Class B, including hotel, club, and school busses. Class A is
rated by adding to the ordinary private type rate an additional
1 per cent; a clause is attached to the policy reducing the amount
of insurance at the rate of 2^ per cent per month. Class B is
written without additional charge.
C. Commercial vehicles. — These are rated in the same man-
ner as private passenger cars and assigned letters ranging from
A to I, inclusive. The rates for a new car range from 75 cents
to $2.35. Electric commercial vehicles are treated the same as
electric private passenger cars. Special rates are granted on
fleets of automobiles of commercial or livery type, embracing
10 or more cars, or a lesser number if the original cost amounts
to $15,000.
D. Dealers' automobiles. — On this type of car no valued
policy is issued. Five forms of policies are issued; Form A cov-
ering every automobile owned and for sale; Form A to cover
automobiles specifically accepted by a company; Form D, a
blanket form policy covering cars in more than one location;
Form E, a $300 minimum and initial premium policy for whose
rates special application must be made, and finally separate pol-
icies on each automobile. On the first three types of policies,
the cars are written at the rate which is fixed for fire insurance
310 INSURANCE PRINCIPLES AND PRACTICES
on the contents of the building, with a minimum rate of $1 for
non-fireproof buildings and 50 cents for fireproof buildings;
Form E requires special application to the company, and the last
named is written only at dealers' rates. Rates for policies cov-
ering a manufacturer's output away from the factory premises
may be had upon application.
Theft insurance. — This type of policy, written by an endorse-
ment on the fire insurance form, is designed to cover the loss
of property by theft. The territories are similar to those de-
scribed for fire insurance and the rate varies with the list price
of the car, very high rates being charged for cheaper cars by
reason of their greater susceptibihty to theft and disposal. Cars
are divided into groups on the basis of list price, lettered
from L to W. Thus, on a Plerce-Arrow costing over $9,000
the rate In eastern territory Is 25 cents, whereas on a Class W
car the rate is $6.85. Where there Is endorsed on the policy
a clause whereby the Insured agrees that the automobile will be
continuously equipped with an automobile locking device, an
allowance of 15 per cent is granted from the theft rate, and
where a clause is provided for the maintenance of a device of
locking spare tires of an approved type an allowance of 5 per
cent is granted from the theft rate. By reason of the unfortu-
nate experience in some cities a penalty schedule, almost doubling
the ordinary rates, has been applied. In one large eastern city
this was recently removed following a reorganization of the
police department.
Chapter XXI
TITLE INSURANCE
Land titles. — The value of real estate is dependent upon the
security of the owner's title. To safeguard and secure titles the
law prescribes certain formalities in all transactions affecting the
ownership of real estate and also provides a recording system.
The formalities thus necessitated are so detailed and so technical
that in addition to falsely recorded statements, unintentional
errors are inevitable, with the result that the title becomes
defective. Experience has shown that these defects have fre-
quently resulted in serious financial loss and everyone who buys
land or lends money on the security of land should ascertain
that the title to the property in which he has an Interest is
marketable and free from incumbrances.
The lawyer's abstract and its defects. — The old method of
obtaining the desired information concerning the title was to
have a lav/yer examine the records and either furnish an ab-
stract or give an opinion. In urban districts this method has
been supplanted by the guarantees of title companies but it is
still extensively used in rural communities. The defects of a plan
of this kind become apparent when we consider the exact sig-
nificance of the lawyer's opinion. The examination, in order to
be complete, must be a history of the land from the original
grant by the State to the time of the abstract, as shown by the
records. These records, in most counties, run for well over a
century, involve a thousand or more books containing copies
of deeds, mortgages, etc., thousands of law suits, records of
wills, administration, partition, and incumbrances of various
kinds, including tax records. In the examination of these doc-
uments, even though the lawyer is diligent In his search and
competent to pass upon the legal complications that appear, the
method is Imperfect and open to objection because (1) a deed
regular on its face may be a forgery, (2) the marital state of
the grantor may be falsely recorded, (3 ) the heirs of a deceased
owner may be erroneously entered and (4) there may be nu-
merous other false statements or errors Impossible to detect.
311
312 INSURANCE PRINCIPLES AND PRACTICES
If the lawyer is not guilty of negligence or of a dishonest
opinion he cannot be held liable even if it is later found that
the property has a bad title. Assuming, however, that he is
guilty of negligence, the probability of the client being indem-
nified for his loss is very remote, because the lawyer who renders
such an opinion usually has limited financial means. The dif-
ficulties of this method have multiplied rapidly in recent years,
particularly in connection with urban real estate, where trans-
fers are numerous and consequently the chance for error and
fraud is much greater. As a result there has developed an insti-
tution larger and more capable of handling such a proposition,
which is known as a Title Insurance Company.
Guarantee of title by; an insurance company. — Title insur-
ance companies are usually large corporations- with considerable
financial resources and equipped with adequate facilities for
searching titles. Therefore, a land owner with his title insured
by one of these companies has nothing to fear in case of dispute
because he know^s that the guarantor has adequate resources
from which to indemnify him.
The operations of a title company. — Most of the title insur-
ance companies are local in their scope and insure titles only
within limited territory, due to the enormous cost of building
up what is called an "abstract plant." This is the most impor-
tant asset of the business and consists of classified indexes of
facts which make up the history of every tract of land in the
area which the company covers and is known as the "tract" sys-
tem. All conveyances are recorded and kept up to date, and
by means of maps and locality indexes it can be quickly ascer-
tained what conditions affect any given plot of ground. When
an application for insurance is received these records are inves-
tigated and if the title is found defective the application is re-
jected or the defects are enumerated in the policy and excluded
from coverage.
Extent of the guarantee. — The guarantee given by the policy
relates almost entirely to the past and in this respect differs
from all other insurance, which deals with the future. The
losses that are insured against in a title policy must be caused
by an undisclosed defect in the title which existed at the time
of the issuance of the policy. Upon first thought this would
appear to be a great disadvantage; but it must be remembered
that defects occurring after this time are made possible by the
TITLE INSURANCE 313
wilful act or negligence of the insured, for which he should not
be compensated.
Extent of the title business. — The insuring of land titles is
a business which is comparatively young, having originated about
forty years ago and grown until at the present time there is
scarcely any well-populated district in the United States which
does not possess a title insurance company. In fact, in some of
the urban districts there are many such companies covering the
same territory, with an enormous economic waste because of the
duplication of expensive "abstract plants."
As previously mentioned, the usual scope of a title insurance
company's business is local; but during the last few years sev-
eral companies have attempted to extend the territory which
they cover so as to Include practically the entire country. It is
impossible for one company to maintain an abstract plant for
a territory so large and therefore the tract system is not used.
When a company receives an application for Insurance outside
of its regular territory It relies on the Information obtained
from local title examiners or examining organizations located in
the district in question.
The principal advantages of this plan of "national" title
Insurance accrue to persons and Institutions Investing In real
estate in different parts of the country. For example, many life
Insurance companies invest their funds in real estate, particu-
larly farm loans, and they are finding this method of title guar-
antee a very excellent way to protect their Investments.
Types of Policies
The business of title insurance has not yet been completely
standardized, and various forms of contracts exist. There are,
however, two principal types of policies, one covering the
owner's risk and the other the mortgagee's risk, although many
special policies covering certain phases of either kind of risk
are written.
1. Owner's risk. — An analysis of a typical policy of this
kind Is given below :
A. The insuring clause. — The usual policy protecting the
title of the owner of property promises indemnity
"for loss not exceeding $ which the insured sustains (1) by reason
of any defect of the title of the insured to the estate or interest described in
Schedule A hereto annexed, affecting the premises described in said schedule, or
(2) by reason of the unmarketability of the title of the insured described in said
314 INSURANCE PRINCIPLES AND PRACTICES
schedule to or in said premises, or (3) because of liens or incumbrances against
the same at the date of this Policy; excepting the defects, estates, objections,
liens or incumbrances mentioned in Schedule B, or excepted by the conditions of
this Policy, hereto annexed, and hereby incorporated into this contract, the loss
and the amount to be ascertained in the manner provided in the annexed con-
ditions, and to be payable upon compliance by the insured with the stipulations
of said conditions, and not otherwise."
The "Schedule A" referred to sets forth,
"(1) The estate or interest of the insured covered by this Policy. (2) Descrip-
tion of the property the title to which is insured. (3) The deed or other means
by which title or interest is vested in the insured."
"Schedule B" Is a statement showing
"estates. Interests, defects or objections to title, and Hens, charges and incum-
brances affecting said premises or the estate or interest insured, which do or
may now exist, and against which the Company does not insure or agree to
indemnify."
If the abstract shows defects in the title, they insert them at
this point.
B. The policy conditions. — The policy conditions contain
limitations, stipulations, definitions, promises, and explanations
which may be grouped as follows :
( 1 ) . Defend insured against suit. — The policy promises to
defend the insured in all actions or proceedings founded on a
claim of title or incumbrance prior in date to the policy.
(2) . Conditions under which loss must arise. — The specific
conditions under which loss may arise are enumerated in the
policy, which provides that no claim shall arise under the policy
except in the case just mentioned in regard to suit and
"In the following cases: (I) Where there has been a final judgment rendered
in a court of competent jurisdiction, under which the insured may be dispossessed
or evicted from the premises covered by this Policy, or from some part or un-
divided share of interest therein. (II) Where there has been a final determina-
tion adverse to the title, as insured, in such a court, upon a lien or incumbrance
not excepted in this Policy. (Ill) Where the insured shall have contracted, in
good faith, in writing, to sell the insured estate or interest, and the title has been
rejected because of some defect or incumbrance not excepted in this Policy, and
notice in writing of such rejection shall have been given to the Company within
ten days thereafter. The Company shall in that case have the option of paying
the loss, of which the insured must present proper proof, or of commencing or
defending within 30 days after receiving such notice, either in its own name or
at its option in the name of the insured, some proper action or proceeding, begun
or to be begun in a court of competent jurisdiction, for the purpose of deter-
mining the validity of the objection alleged by the vendee to the title, and only in
case a final determination is made in such action or proceeding, sustaining the
objection to the title, shall the Company be liable on this Policy. (IV) Where
in cases of insurance on the interest of a mortgagee, the mortgage has been
adjudged, by a final determination in a court of competent jurisdiction, to be a
TITLE INSURANCE • 315
lien inferior to that designated in this Policy; or where on foreclosure of the
mortgage, the purchaser under the judgment in tlie action has been relieved by
the court from his purchase by reason of the existence of some defect in the title
or from some incumbrance thereon not excepted in this Policy. (V) Where the
insured shall have negotiated a loan on the security of a mortgage on the in-
sured estate or interest, and the title shall have been rejected by the proposed
lender, the Company, if there is no dispute as to the facts, will consent to the
submission of the question of a validity of the title as insured to the Appellate
Division of the Supreme Court in the Department in which is situated the prop-
erty affected by this Policy, and upon the judgment of that court in such action
shall depend the liability of the Company. (VI) Where the insured shall have
transferred the title insured by an instrument containing covenants in regard to
title or warranty thereof and there has been a final judgment rendered in a
court of competent jurisdiction against the assured, his executors or adminis-
trators, on any of such covenants or warranty and because of some defect of
title or incumbrance against which the holder of this Policy is hereby insured."
(3). Effect of misstatement. — If any untrue statement af-
fecting the Insurance was made by the Insured or his agent, or if
there was any suppression of a material fact, the policy Is void.
(4). Assignment of policy. — No transfer of the policy is
permitted.
"Except that a policy held by the owner of a mortgage or other incumbrance may
be transferred to an assignee of the interest insured, or to the purchaser at a sale
under foreclosure where the property sold is bought by or for the insured, and
except also in such other cases as the Company may, by special agreement,
permit."
Even in these cases, the transfer must have the approval of the
company before it is vafid.
(5). Reduction of premium on new policy:
"Whenever the holder of a policy on his title as owner in fee or of a leasehold
shall, within seven years from the date of the Policy, sell or mortgage any or
all of the real estate therein described, and shall within thirty days thereafter
apply for a new Policy on the same title, to be issued to the grantee or mortgagee,
then, if the risk be again accepted by the Company, the former Policy shall be
surrendered and canceled, and one-half of the sum paid as premium therefor
will be allowed as a deduction from the premium on the new Policy."
(6). Duties of insured if title is attacked:
"In case any action or proceeding is begun, the object or effect of which shall
or may be to impugn, attack or call in question the validity of the title hereby
insured, as insured, or to raise any material question relating to a claim or
incumbrance hereby insured against, or to cause any loss or damage for which
the Company shall or may be liable under or by virtue of any of the terms or
conditions of this policy, or in case any action or proceeding is begun that
may have such object or effect, it shall be the duty of the insured at once to
notify the Company of such fact, in writing. In such cases and in all
cases where this Policy requires the Company to prosecute or defend, it shall
be the duty of the insured to secure to it the right and opportunity to main-
tain or defend the action or proceeding, and all appeals from any deter-
316 INSURANCE PRINCIPLES AND PRACTICES
mination therein, and to give it all reasonable aid therein, and to permit it to
use, at its option, the names of the insured. If such notice shall not be given to
the Company within ten days after the service of the first summons or other
process, paper or pleading, in such action or proceedings, then this Policy shall
be void. Provided, however, that an assignee for value of the Policy, with the
consent of the Company thereon endorsed, shall not be affected by any such
failure to notify, if such assignee, through ignorance of the fact of such action
or proceeding having been begun, shall have been unable to give or cause to be
given the notice required by these conditions; and provided, also, that no failure
to give such notice shall affect the Company's liability, if such failure has not
prejudiced and cannot in the future prejudice the Company. The Company will
pay, in addition to the amount of the loss, all costs imposed on the insured in
litigation carried on by it for the insured under the requirements of this Policy,
but it will in no case be liable for the fees of any counsel or attorney employed
by the insured, and the costs and loss paid shall not together exceed the
amount of this Policy."
(7). Adjustment of loss:
"In every case where the liability of the Company has been definitely fixed
in accordance with these conditions, the loss or damage shall be payable within
thirty days thereafter. Provided, however, that in every case, the Company
may demand a valuation of the insured estate or interest, to be made by three
arbitrators, or any two of them, one to be chosen by the insured and one by
the Company, and the two thus chosen selecting an umpire; and then no right
of action shall accrue until thirty days after notice of such valuation shall have
been served upon the Company, and the insured shall have tendered a convey-
ance or transfer of the insured estate or interest to a purchaser to be named
by the Company, at such valuation, less the amount of any incumbrance on said
insured estate or interest not hereby insured against, and the Company shall
have failed within that time, said tender being during that time kept good, to
find a purchaser for the estate or interest upon such terms. And provided, also,
that this Company shall always have the right to appeal from any adverse
determination; but no appeal shall operate to delay the payment of the loss, if
the insured shall give to the Company satisfactory security for the repayment
to the Company of the amount of such loss in case there shall be, ultimately,
a determination in favor of the Company. And provided, further, that in every
case the Company shall have the option of settling the claim or paying this
Policy in full; and the payment or tender of payment to the full amount of
this Policy shall determine all liability of the Company under it."
It is also provided that payments under the policy shall reduce
the amount of insurance by such amount.
(8). Subrogation:
"Whenever the Company shall have settled a claim under this Policy, it shall
be entitled to all the rights and remedies which the insured would have had
against any other person or property in respect to such claim, had this Policy
not been made, and the insured will transfer or cause to be transferred to the
Company such rights, and permit it to use the name of the insured for the
recovery or defense thereof. If the payment does not cover the loss of the
insured, the Company shall be subrogated to such rights, in the proportion
which said payment bears to the amount of said loss not covered by said pay-
ment. And the insured warrants that such right of subrogation shall vest in
the Company unaffected by any act of the insured."
TITLE INSURANCE 317
(9). Items not covered:
"Defects and incumbrances arising after the date of this Policy or created or
suffered by the insured, and assessments not confirmed at the date of this
Policy, are not to be deemed covered by it; and no approval of any transfer of
this Policy shall be deemed to make it cover any such defect, incumbrance or
assessment."
2. Mortgagee's risk. — The policy protecting the mortgagee
is somewhat different from that issued to the owner, and is
more than pure title insurance because it not only protects him
in case of title defects, but also as to payment of the principal
and interest on the mortgage. A typical contract of this type
guarantees to the insured "and to such subsequent owners of the
bond and mortgage described in Schedule A, as shall give to the
Company prompt notice and proof of such ownership" :
a. Payment of the Interest on the said bond and mortgage
at the rate per centum per annum, from when the
same becomes due under the terms thereof.
b. Payment of the principal of the said bond and mortgage
as soon as collected, and in any event within twelve months
after the same becomes due under the terms thereof, with
regular payment meanwhile of the interest at the rate hereby
guaranteed.
c. To continue this guarantee on any extension of the said
mortgage to which the Company shall consent in writing.
d. That the said mortgage Is a valid first lien upon a good
and marketable title in fee to the property described in
Schedule "A."
e. To keep the mortgaged premises Insured against fire, and
to enforce prompt payment of all fire insurance premiums and
all taxes, assessments and water rates which may become liens
thereon.
f . To conduct without expense to the Insured all actions or
proceedings that it may deem necessary to take in connection
with this guarantee, or the said bond or mortgage, and any
action that may be brought against the insured as the owner
thereof.^
On the other hand, the insured agrees:
a. That the Company is the agent of the Insured to collect
*The "Schedule A" referred to is a description of the real property
involved.
318 INSURANCE PRINCIPLES AND PRACTICES
all the interest and principal secured by said bond and mortgage,
and to exercise and enforce any right or option secured to the
Insured thereby, and by any policy of fire Insurance upon the
premises covered by said mortgage, and to bring In the name of
the insured any action that may be necessary In connection there-
with, and to receive any proceeds thereof,
b. To refrain from collecting any part of the said interest
or principal, and from exercising any right or option secured by
the said bond or mortgage, or by any policy of fire Insurance cov-
ering the mortgaged premises, and from doing anything which
in any way affects the validity, or the security, or the terms of
the said bond and mortgage.
c. To permit the Company to retain as its premium for this
guarantee all Interest collected in excess of the rate hereby guar-
anteed, and to have possession of all fire insurance policies cov-
ering the mortgaged premises.
d. To produce and deposit the saidbond and mortgage with
the Company upon its request, and to render such reasonable
assistance as the Company may require in any proceedings taken
in connection therewith.
e. To notify the Company in writing promptly of any action
or proceeding affecting saldl bond or mortgage and to forward
to the Company promptly any notice relating to any policy of
fire Insurance affecting the mortgaged premises.
f. To assign said bond and mortgage to the Company if re-
quested, upon receipt from It of the full amount due the in-
sured, whenever under the terms thereof payment of the prin-
cipal may be demanded.
3. Special policies. — Many times neither of the two policies
just explained will meet the needs of persons with peculiar in-
terests in property and special policies are therefore written.
Common illustrations of this are when it is desirable to guar-
antee a certain feature of a will relating to property or to guar-
antee that certain agreements or restrictions concerning specific
plots of land are legal. In these cases the extent of the pecu-
niary interest of the insured is usually much more difficult to as-
certain than in the ordinary owners' and mortgagees' policies.
Consequently, the companies are very careful when issuing such
contracts and charge a high premium because of the great risk.
TITLE INSURANCE 319
The Premium
The premium varies with the company and depends largely
on local conditions and the Icind of policy. The rates published
by a company doing a national title insurance business are as
follows :
OWNERS' POLICIES
Per Thousand
Up to $25,000 $5.00
Over 25,000 to $50,000, add 4.00
Over 50,000 to 100,000, add 3.00
Over 100,000, add 2.50
These fees for owners' policies are based on the actual market value of
property insured.
MORTGAGEES' POLICIES
Up to $50,000 $3.50
Over 50,000, add 2.50
The fees for mortgagees' policies are based on the amount
of the loan.
These fees are for insurance only and the cost of examina-
tion and other items, such as survey, must be added to the pre-
mium. In the case of the owners' policy one single payment at
the beginning of the policy is the only payment ever required as
long as there is no change in the title. While there is no addi-
tional insurance premium on the mortgagee's policy Its equiva-
lent is accomplished by promising to pay a stipulated rate of in-
terest to the mortgagee, while the mortgagor pays a rate some-
what higher to the insurance company. The latter payment
usually exceeds the former by about ^ of 1 per cent.
Guaranteed mortgages. — Along with the regular title insur-
ance business there has developed an investment guarantee busi-
ness of such magnitude that it deserves special mention.
The title insurance companies purchase first mortgages on
improved real estate and then guarantee and issue them in two
different forms :
1. Guaranteed First Mortgages. — From a list of mortgages
purchased by the insurance company a customer may select one,
let us say, for $10,000. When he pays for it the company
assigns to him the mortgage of record, giving him the note, the
mortgage, the assignment if he desires the same, title and fire
insurance papers, and a mortgage insurance policy which guar-
320 INSURANCE PRINCIPLES AND PRACTICES
antees a fixed net rate of interest and the return of the princi-
pal.
2. Guaranteed First Mortgage Certificates. — The mortgages
are assigned under a trust agreement to an independent trust
company and guaranteed as to principal and interest. Certifi-
cates against these mortgages are then issued in multiples of
$100 and sold to investors. Nothing could be much safer, as
the certificates represent an assignment of an interest in mort-
gages that are reinforced by:
a. Policies of mortgage insurance.
b. Certificates of appraisal, showing that the value of the
property covered is at least 50 per cent in excess of the mortgage.
c. Policies of fire insurance.
Advantages of title insiirance. — From the foregoing explan-
ation it can be seen that title insurance differs from other con-
tracts of insurance in that it deals more with the possibilities of
the past than with the future. This, however, is due to the na-
ture of the risk and does not deprive the insurance of certain ad-
vantages which may be briefly stated as follows:
1. It protects an owner against loss in case a defect appears
in the title to his property. The possibility of this circumstance
arising can be appreciated from a list of common defects that
are disclosed at inopportune times and vitally affect the title :
a. The records may not show a deed or mortgage, which
could not therefore be found in the ordinary examination, but
nevertheless may affect the title.
b. One of the deeds in the chain of title may be a forgery.
c. A deed may have been made under a power of attorney
after the death of the principal, which renders it void.
d. Another may have been made by an insane or other-
wise incompetent person.
e. Another may have been made by a person of the same
name as the owner, but having no interest.
f. A husband may not have united in the conveyance with
his wife, in which case her deed is void.
g. A wife may not have united in her husband's deed, leav-
ing her dower right outstanding.
h. A testator may have had a child born after the date of
his will, who might claim his share, notwithstanding the will.
i, A will may have been revoked by the marriage of the
testator after its date.
TITLE INSURANCE 321
j. A conveyance by heirs of a supposed Intestate may be
defeated by the subsequent discovery of a will.
k. A retrospective assessment for taxes or reapportion-
ment of the cost of local improvements might be made.
1. An heir or other person supposed to be dead may ap-
pear and recover the property.
m. A judgment upon which the title depends may be void
by reason of some matter not appearing, e.g., service of process
on the wrong person, failure to include all proper parties, want
of authority of attorney to represent party, etc.
2. It defends the insured in case of a lawsuit involving the
title.
3. It makes property marketable. The knowledge that an
insurance company has guaranteed a title prevents the circula-
tion of harmful rumors concerning the title to property. Thus,
it not only makes the property easier to sell but also increases
the possibility of obtaining a higher price.
4. It relieves a mortgagee of all worry concerning the col-
lection of his principal and interest. Not only is he protected
against loss because of thef unmarketability of the title, but the
payment of principal and interest are guaranteed.
5. It provides a safe and profitable investment In the form
of guaranteed mortgages and mortgage certificates.
Chapter XXII
CREDIT INSURANCE
Business failures. — All well-managed business houses can de-
termine in advance and with some degree of accuracy each item
in their overhead expense except one — the credit loss due to bad
accounts. Not knowing what this loss may be, yet wishing to
make some preparation in advance, many concerns maintain a
reserve for "bad debts" or "doubtful accounts." The amount
set aside for this purpose is guessed at in various ways, usually
being the amount ascertained by experience to be the average
annual loss. This is a very satisfactory method in a normal or
average year, but just when least expected these losses fre-
quently far exceed the amount for which provision was made.
Thus, the loss of one large account may wipe out the profit on
a hundred others, and if the loss is very heavy it may result
in financial embarrassment or even ruin.
These losses are the result of the method of doing business
on credit, less than 5 per cent of our commercial transactions
being made for cash. As long as we continue our present sys-
tem and men remain human and fallible we can expect such
losses, for it has been found by experience that there are at
least as many business failures as successes. The causes for
these failures are rather numerous and have been the subject
of much investigation by the mercantile agencies. Bradstreet's
have compiled failure statistics for many years with the follow-
ing results as to the causes and their distribution.
Per Cent
Incompetence 38.2
Inexperience 5.6
Lack of Capital 30.3
Unwise Credits 1.3
Fraud 7.0
■ Failure of Others 1.7
Extravagance 1.1
Neglect 1.7
Competition 1.1
Specific Conditions 11.3
Speculation .7
100.0
Unfortunately, these figures do not alone tell the tale. If
they did possibly some specific remedies could change them.
322
CREDIT INSURANCE 323
The conditions which bring these causes to light are usually more
fundamental than the names given would indicate, and the fact-
ors underlying the axiom "when prices rise failures decrease;
when prices fall failures increase" possibly go far to explain the
primary cause of many failures. The solution would then seem
to be price stabilization, a thing which now appears impossible
and perhaps will always be so, because of our peculiar trade con-
ditions.
The conditions referred to are the periodic "trade convul-
sions" which occur in this country. Other countries have their
peaks and valleys in business conditions but nowhere else are
they so violent or so frequent as in the United States. Specula-
tion and over-extension of credit are usually blamed for these
upheavals, the speculation really resulting from the over-exten-
sion of credit. The actual process by which this takes place may
be traced somewhat as follows : Starting at the point where
money becomes plentiful and the banks are willing to loan at
a low rate of interest, we find that prices in some quarters be-
gin to rise. This stimulates confidence. Business men begin
to extend more credit to customers and these customers in turn
extend more credit to their customers and so on ad infinitum.
This means that credit is accumulating like an inverted pyra-
mid, all depending on the money and the attitude of the bankers
at the base. If the credit extended is confined to certain limits
the base can support the pyramid, but that is not the way the
American people do things. The rise in prices sets the wheels
of industry turning and suddenly everybody becomes optimistic
beyond belief; then credit is extended beyond the line of safety,
trade is expanded beyond need, prices are increased beyond rea-
son, speculation is rampant, money is spent foolishly and ex-
travagantly, and just when we conclude that a "Utopia" has
been achieved the rubber band of credit snaps and we plunge
headlong into a period of depression and pessimism.
What causes this sudden change? Somewhere along the line
the ability of some debtors to pay was doubted. This has re-
sulted in the curtailing of credit and in the withdrawal of one
of the supporting blocks at the base of the pyramid. All busi-
ness being interdependent the pestilence spreads rapidly. Con-
traction begets contraction and this results in falling prices and
increasing failures. Accounts that were thought to be the best
are found worthless. Everybody doubts everybody else, and
industry as a whole slows down to the detriment of all.
324 INSURANCE PRINCIPLES AND PRACTICES
Surely some method should be devised whereby this evil
could be eliminated. Credit insurance has been one of the
suggested means to accomplish this. Credit insurance cannot
eliminate failures nor can it prevent trade cycles, but it can at
least mitigate the usual disastrous consequences of sudden price
changes by giving merchants confidence in their book ac-
counts. Furthermore, it does not and should not foster con-
cerns with inherent defects; but it can reduce a large part of
the loss due merely to lack of confidence, which reaches many
millions each year. In fact, the total credit loss over a period
of years averages greater than the fire losses, although a
large portion of this is "normal" loss and not regarded as
within the scope of credit insurance. Nevertheless, any sys-
tem which can in any way decrease failures is an economic
benefit to the country and deserves encouragement. In order
better to understand the plan and functions of credit insurance
we will proceed with an explanation of the existing scheme.
General plan of credit insurance. — Credit insurance provides
a contract of indemnity promising to reimburse a wholesaler,
manufacturer or jobber for the unusual losses incurred by him
through the failure of his customers to meet their obligations.
This is not its sole purpose, because it is intended that it shall
promote prudent selling either ( 1 ) by insuring only those ac-
counts that have a good credit rating for a limited amount on in-
dividual debtors or (2) by charging a higher premium for in-
ferior ratings and large amounts on individual debtors. An-
other purpose is to furnish a collection service for its policy-
holders. This is conducted for the protection of the insured as
well as the insurance company, and has proven a valuable means
of minimizing losses.
Types of policies. — Two principal types of policies are be-
ing written, one known as the "Limited" and the other the
"Unlimited."
1. The "Limited" policy is one having a face value which is
the maximum total liability of the insurer. Thus, if the policy
has a face of $25,000 and the insured sustains losses aggregat-
ing $50,000 he is only partially insured even though all the
lost accounts were within conservative credit limits.
2. The "Unlimited"^ policy makes no provision for a maxi-
mum total liability and has no face value. As long as the indi-
vidual losses come within the amounts specified in the "Table
> See Appendix CXIII or CXIV.
CREDIT INSURANCE 325
of Ratings," contained in the policy they will be paid regard-
less of the total amount.
Both types arc written with many variations, of which the
more important will be explained.
a. It is now customary to provide for coinsurance on all
losses, the usual amount being 10 per cent, but this is higher
on inferior ratings.
b. Some policies provide that an account, in order to be
covered, must be placed In the hands of the Insurance com-
pany for collection within a specified time after It is past due.
Others make such action elective with the insured, and when
this is the case the policy Is termed "optional."
c. An additional premium is sometimes necessary and Is ad-
justed according to the volume of sales when they are ascer-
tained. Where such additional premiums can be collected the
policy Is called "assessable."
The effect of these different provisions will be better under-
stood from the policy analysis which follows, explaining the two
most important "unlimited" policies, either one or the other of
these containing the provisions referred to.
The policy analysis. — The analysis which follows pertains
only to the unlimited policies. Since there are two principal
policies of this kind they will henceforth be designated as policy
"A" and policy "B", and In those portions of the two policies
where there Is a material difference the clauses of each will be
discussed under these headings.
1. The application.^ — Wben credit Insurance Is desired, the
application is made to the Insurance company for a bond of in-
demnity. This application contains statements on the basis of
which the rejection or acceptance Is made. The applications are
alike for policy "A" and policy "B", and the most important
statements contained therein are: —
a. The mercantile agency whose ratings are used as a
basis for the extension of credit.
b. The line and nature of the business and how long In it.
c. Territory covered.
d. Usual terms of sale.
e. Contemplated changes in method of doing business.
f . The gross sales and losses over the last five or six years.
2. The insuring clause. — The insuring clause of policy "A"
reads as follows:
"- See Appendix CXIII or CXIV.
326 INSURANCE PRINCIPLES AND PRACTICES
"The Insurance Company hereby guarantees, under the con-
ditions and subject to the stipulations set forth on the within pages of
engaged in the business of , against loss due to
insolvency of debtors, as hereinafter defined, which shall occur within a term
beginning the day of 19 , and ending the day of
19 , and result from the Indemnified's bona fide sales of mer-
chandise shipped and delivered during said term in the usual course of business
to individuals, firms, co-partnerships or corporations, in the United States of
America, or any Territory thereof, and in the Dominion of Canada; and which
is covered, proven and allowed, as is hereinafter stipulated. From the aggregate
net loss, ascertained in adjustment as hereinafter provided, there shall be de-
ducted first ten per cent (10%) thereof as coinsurance, and from the remainder
an agreed Normal Loss of per cent., to be borne by the Indemnified, upon
the total gross sales made during said term; but such Normal Loss so to be
deducted shall be not less than $ ; and the remainder, if any, after said
deductions, shall be the loss payable by the Company."
Policy "B" is to the effect that:
"The Insurance Company hereby guarantees, under the conditions and
subject to the stipulations set forth on the within pages, of
engaged in the business of , against loss, due to the insolvency of
debtors as hereinafter defined, which loss shall result from the Indemnified's
bona fide sales of merchandise shipped and delivered during the Bond period,
beginning the day of 19 , and ending the
day of 19...., to individuals, firms, co-partnerships or cor-
porations, in the United States of America, or any Territory thereof, and in
the Dominion of Canada; and which is covered, proven and allowed, as is here-
inafter stipulated; provided the accounts have been placed with the Company
for collection before they are more than seventy-five (75) days past due under
the original terms of sale, and provided further that no account filed with the
Company after the day of 19...., shall be covered by this
Bond. From the aggregate gross loss so covered, proven and allowed, there
shall be deducted, first, ten per cent (10%) thereof as coinsurance, and then the
other amounts hereinafter provided in the method of adjustment, and from the
aggregate net loss thus ascertained an agreed Normal Loss of per cent, to
be borne by the Indemnified, upon the total gross sales made during said Bond
period ; but such Normal Loss so to be deducted shall be not less than $ ;
and the remainder, if any, after said deductions shall be the loss payable by the
Company."
Both policies cover loss due to insolvency of debtors accord-
ing to the definition of insolvency as stipulated in the policy, and
both provide for coinsurance and normal loss; but there are
great differences between the two policies. Policy "B" says that
an account in order to be covered must be placed with the in-
surance company before it is more than 75 days past due under
the original terms of sale, while policy "A" does not mention
this and makes such action elective with the policy-holder. This
is of great value where the insured does not wish to take a risk
and yet does not desire to press his debtor by placing the ac-
count in the hands of the insurance company for collection. It is
this privilege which gives rise to the name "Optional Policy."^
' See Appendix CXIIL
CREDIT INSURANCE 327
Another Important difference between the two policies Is the
coinsurance clause. Policy "A" specifies 10 per cent deduction
from the net loss and policy "B" 10 per cent deduction from
the gross loss. This will be explained in detail under the loss
adjustment.
3. The premium. — The premium in either case is calculated
in accordance with the experience of the companies and is based
on the following:
a. The statements made in the application.
b. The maximum coverage for individual debtors with
specified ratings.
c. Whether there is a provision for the adjustment of the
premium on the basis of gross sales or not.
d. The amount of coinsurance.
e. The period the policy is to run (usually one year).
f. Special riders and endorsements.
On policy "A" the entire premium for the whole period is
determined and paid in advance, while on policy "B" the pre-
mium is a specified percentage of the total gross shipments and
deliveries made by the indemnified during the period the policy
Is In force, but such amount cannot be less than the stipulated
minimum, which minimum Is payable In advance and the re-
mainder, if any, upon ascertainment of the amount. This means
that a person holding policy "B" cannot tell until the end of the
period how much the contract Is going to cost, since the total
sales will not be known before that time. It should be men-
tioned that even though refund Is made by the insurer In either
case, the adjustment provided for In policy "B" appears to be
the fairest means of fixing the premium, because losses usually
vary directly with sales and It Is sometimes impossible to accu-
rately estimate for policy "A" the gross sales for a whole year
In advance, so that the premium for the latter may frequently
be Inexact.
4. Coverage. — We have mentioned that the Insurance com-
pany's application must name a mercantile agency whose capi-
tal and credit ratings will exclusively govern the shipments
made under the policy. The insured Is allowed much freedom
of choice in this matter, the ratings of any well-known agency
being acceptable. The ratings of Bradstreet's and R. G. Dun
& Company are the most used and, because of their importance,
some explanation of them will be given.
328 INSURANCE PRINCIPLES AND PRACTICES
BRADSTREET
Estimated Wealth
Grades of Credit
G.
H.
31,000,000 and a hove \
500,000 to 31,000,000/'
AA
J 400,000 to
K 300,000 to
L 250,000 to
M 200,000 to
N 150,000 to
O 100,000 to
P.... 75,000 to
Q 50,000 to
R 35,000 to
S.
T.
U.
v.,
W.
X.
Y.
Z.
20,000 to
10,000 to
5,000 to
3,000 to
2,000 to
1,000 to
500 to
to
500,000
400,000
300,000 ■
250,000
200,000
150,000'
100,000
75,000
50,000
35,000^
20,000 1 •
io,oooJ
5,0001 .
3,000/
2,000 .
B
B
D
D
D
1,000
500
E
F
AA.
A+.
A...
B+.
B...
c+.
c...
D+
D...
E...
F...
G...
H ...
J...
K...
L ...
M..
Over 31,000,000 Al
3750,000 to 31,000,000 Al
500,000 to
300,000 to
200,000 to
125,000 to
75,000 to
50,000 to
35,000 to
20.000 to
10,000 to
5,000 to
3,000 to
2,000 to
1,000 to
500 to
Less than
750,000 Al
500,000.
300,000.
200,000.
125,000.
75,000.
50,000.
35,000.
20,000.
10,000.
5,000.
3,000.
2,000.
1,000.
500.
1
1
1
IK
IK
IK
2
2
2
2K
3
3
3
3
IK
IK
IK
2
2
2
2K
2K
2K
3
3K
3K
3K
3K
3K
3K
B
D
F
R. G. DUN & CO.
Estimated Pecuniary
General
Credit
Strength
High Good
Fair
Lt'd.
2
2
2
2K
2K
2K
3
3
3
3K
4
4
4
4
4
4
CREDIT INSURANCE
329
It will be noticed from these tables that certain letters are
used to designate the estimated wealth or pecuniary strength
of business houses. Bradstreet's give three grades of credit,
while Dun gives four. The first column of credit ratings in
either case is known as a first credit rating; the second column
as the second credit rating, etc. For example, if a firm is rated
A-Al by the R. G. Dun agency, it has estimated pecuniary
strength of from $500,000 to $750,000 and a high or first
credit rating. Or if it is rated NB in Bradstreet's it means that
the estimated wealth is from $150,000 to $200,000 accompa-
nied by a second credit rating. The heavy lines which separate
the different grades of credit indicate the ratings ordinarily re-
quired by credit insurance companies before they will cover a
loss and then only for an individual debtor to the amount spec-
ified in the "table of ratings" contained in the policy.
Practically any amount of coverage up to the capital rating can
be obtained but the premium charged for such an amount is
so high as to be prohibitive. The individual limits, which are
considered as conservative maximums, are given in the table
shown below, which is typical of the limits stipulated in a credit
insurance policy.
TABLE OF RATINGS WITH CONSERVATIVE MAXIMUM CREDIT LIMITS
(R. G. Dun & Company)
Rating
Gross
Rating
Gross
Gross
Amount
Covered
Amount
Covered
Rating
Amount
Covered
Capital
Credit
Capital
Credit
Capital
Credit
AA
Al
2100,000
AA
1
S3 5, 000
F
2K
32,500
A +
Al
75,000
A
1
30,000
F
3
2,000
A
Al
50,000
A
1
25,000
G
3
1,250
B4-
1
45,000
B
VA
20,000
G
3K
1,000
No loss is covered under a policy unless the debtor to whom
the goods were shipped and delivered shall have in the latest
published book of the chosen Mercantile Agency at the date of
the shipment, a capital rating and its accompanying credit rat-
ing as given in the table of ratings contained in the policy. If
the name of the debtor does not appear in the latest published
book, then the latest report of said agency shall govern, if that
report is within a specified time of the shipment (usually three
or four months).
330 INSURANCE PRINCIPLES AND PRACTICES
The gross amount covered on any one debtor at the date of
insolvency is limited to the amount set opposite the correspond-
ing rating of the debtor in the "table of ratings" attached to the
policy.
Coverage is further restricted by the operation of a coin-
surance clause and by the deduction of the so-called "normal
loss." Both are illustrated in the section on "adjustment of
loss."
5. Insolvency. — ^The insuring clause promises indemnity
"against loss due to insolvency of debtors as hereinafter de-
fined." Such definitions may be divided into two groups; the
first where the account is filed with the company for collection
and the second when certain action is taken which indicates the
inability of the debtor to meet his obligations. In regard to the
first group, there is a difference between policy "A" and pol-
icy "B"; in regard to the second group, both are alike. It will
be recalled that the filing of an account with the Insurance com-
pany for collection Is optional with the insured in policy "A",
and the indemnified may elect in this policy to file such an ac-
count if it is not over 60 days past due under the original terms
of the sale. In Policy "B" such an account must be filed before
it is over 75 days past due according to the original terms of
sale. Such action within the time limits mentioned constitutes
insolvency in either policy.
The second group of definitions is more or less standardized
and appears in nearly all credit insurance policies as follows:
( 1 ) . "When a petition in bankruptcy or insolvency is filed
by or against a debtor under the laws of the United States, or
any State or Territory thereof, or of Canada;
(2). When a debtor makes an offer of a general com-
promise to his creditors for less than his indebtedness;
(3). When a receiver Is appointed for a debtor;
(4). In case of the death or Insanity of a sole debtor;
(5). In case of the recording of or taking possession
under a chattel mortgage given by a debtor on his stock in trade
to a creditor or creditors;
(6). When an attachment or execution Is levied on a
debtor's stock In trade;
(7). When a writ of attachment or execution against a
debtor is returned unsatisfied;
(8). When a debtor transfers or sells out his stock in
trade in bulk;
CREDIT INSURANCE 331
(9). When a debtor absconds;
(10). When a debtor makes an assignment, or a deed of
trust, for the benefit of his creditors, either general or with
preferences;
(11). When the stock in trade of a debtor is sold under a
writ of attachment or execution;
(12). When a confession of judgment is made by a
debtor;
(13). When a debtor's business is assigned to or taken
over by a committee appointed by a majority, in number and
amount, of his creditors."
6. Adjustment of loss. — ^When a loss occurs it is necessary
to file a notification of claim within a specified time (usually
15 days) after acquiring knowledge of a debtor's insolvency,
and to place the account in the hands of the company for collec-
tion if insolvency occurs as defined in the second group. If it
occurs as per the first group it will already be in the hands of
the company. The company must also be furnished with an
itemized statement of the account and all papers, securities, or
other documents relating thereto; and if requested, furnished
with invoices, proofs of debt, affidavits, or any Information nec-
essary for the proper handling of any account in any proceed-
ing and authorized to sue if necessary. The company makes a
charge for this collection service and a schedule of the fees is
contained in the policy.
If a claim against the company arises a final state-
ment of such claim must be filed with the company within a
specified period after the termination of the policy and the
claim will then be settled. In policy "B" provision is made for
an interim adjustment of claims arising under the second group
of insolvencies; a rider of like nature can be obtained for policy
"A" if it Is desired.
The actual adjustment of the loss under policies "A" and "B"
can best be understood by illustration. Let us assume that com-
pany "X" is a manufacturer of small tools, with gross sales of
$1,000,000 a year. Suppose that on January 5th, this company
makes a shipment and delivery of $50,000 worth of tools to the
"Y" company, the terms of the sale being 2 per cent 30 days.
The "Y" company is rated as AAl by the Dun Agency and the
policy specifies a maximum Individual debtor liability of $75,000
for such a rating. On January 25th a receiver is appointed for
the debtor, which constitutes insolvency as defined in the policy.
332 INSURANCE PRINCIPLES AND PRACTICES
If the manufacturer is protected under policy "A" the net loss
payable is ascertained in the following manner:
Gross loss covered and proven $50,000
Less: (1) All discounts to v^hich the debtor would
have been entitled had the debt been paid at the
date of insolvency $ 2,000
(2) All amounts collected thereon and all
amounts which may have been obtained from any
other source 5,000
(3) The amount of goods returned or re-
plevined, when such goods are in the undisputed
possession of the Indemnified 12,000
(4) All amounts mutually agreed upon as
thereafter obtainable 1,000 20,000
30,000
Less: 10% Coinsurance 3,000
Normal Loss 2,100 5,100
Amount payable under Policy "A".. $24,900
A different result is obtained if the loss has occurred under
policy "B."
Gross loss covered and proven $50,000
Less: 10% Coinsurance 5,000
45,000
Less. (1) All discounts to which the debtor would
have been entitled had the debt been paid at the
date of insolvency 2,000
(2) All amounts collected thereon and all
amounts which may have been obtained from any
other source 5,000
(3) The amount of goods returned or re-
plevined, when such goods are in the undisputed
possession of the Indemnified 12,000
(4) All amounts mutually agreed upon as
thereafter obtainable 1,000 20,000
25,000
Less Normal Loss 2,100
Amount payable under Policy "B" $22,900
It will be remembered that the terms "normal loss" and "co-
insurance" appeared in the insuring clause, but they do not be-
come of importance unless it is necessary to adjust a loss. To
understand their meaning some explanation is necessary. The
coinsurance clause In credit insurance means that the insured is
a coinsurer to the extent of the specified percentage (usually 10
CREDIT INSURANCE 333
per cent) of any loss. It is claimed by the companies that some
coinsurance is always necessary in order to reduce the moral
hazard of taking unreasonable risks in the extension of credit.
Notice, however, the difference in the net result of policy "A" as
compared with policy "B", due to the place where coinsurance
is deducted. In policy "A" it was not deducted until the actual
loss was ascertained, while in policy "B" it was deducted from
the gross loss with the result that there is a net difference of
$2,000 in the loss payable under the two policies.
The normal loss is that amount which is normally lost in a
particular line of business due to bad accounts and is expressed
in a percentage of the gross sales. In some lines this Is very
low (less than 1/4 of 1 per cent) , and in others quite high (one
per cent). Since this normal loss will in all probability occur,
there is no reason for insuring it. The amount, being known,
can be charged against the cost of operation in the same manner
as any other overhead expense. Consequently all credit insur-
ance policies exclude the "normal lo.ss" from coverage.
Another provision in connection with the ascertainment of the
loss is to the effect that, "If the indebtedness of the debtor to
the indemnified at the time of insolvency is not fully covered,
then the deduction shall be made pro rata, ie., in the ratio which
the amount covered bears to the whole of such Indebtedness."
Thus, If the table of ratings In the tool manufacturer's policy
showed a maximum coverage of only $40,000 for an AAl rat-
ing, the gross loss covered would be immediately cut to $40,000,
and the other items correspondingly. This Is in effect a coin-
surance of 100 per cent within the ordinary usage of the term
coinsurance. When the actual settlement Is made by the com-
pany for a loss the accounts so covered are assigned to the com-
pany to be handled for the joint account of the Indemnified and
the company as their Interests may appear. If any amounts later
realized by the company exceed the sum paid to the Indemnified
the company refunds such excess.
7. Termination. — Policy "A" provides that "If, during the
term of this Bond, the Indemnified shall become insolvent, or
shall cease to continue business as heretofore carried on, or shall
go Into liquidation, or being a partnership shall be dissolved,
then this bond shall immediately terminate and if any claim
for excess loss is made, a Final Statement of Claim shall be filed
by, and an adjustment shall be made with, the Indemnified in the
same time and manner as if this Bond had originally by Its terms
334 INSURANCE PRINCIPLES AND PRACTICES
been made to expire at the date of such termination. Tempor-
ary interruption by fire or by strike, or the death or withdrawal
or admission of a member of a partnership composed of more
than two members, shall not be considered a discontinuance or
dissolution." Policy "B" makes provision for termination as in
Policy "A" and in addition by either party to the contract giv-
ing ten days' written notice to the other with a proper adjust-
ment of the premium.
This difference between the two policies is possibly the most
important of all, because under policy "B" the company can
practically sidestep liability if they find a particular line of
business is likely to get into financial difficulties; while under
policy "A" it is impossible to avoid responsibility because the
policy is non-cancellable except for the reasons given in the
termination clause.
8. Endorsements. — Special riders and endorsements are
sometimes necessary and desirable, and can be obtained for an
additional premium. The most important are those providing
for:
a. Interim adjustments of claims.
b. Coverage of additional sales prior to the payment of
the premium.
c. Coverage of inferior ratings for limited amounts.
d. Coverage of a fraction (2/3 of the indebtedness) of
the losses on inferior ratings for limited amounts.
Advantages of credit insurance. — There are many advan-
tages of credit insurance, but among the most important ad-
vanced by the different companies writing credit insurance are
the following:
1. It is equivalent to a contingent reserve to meet unexpected
business losses.
2. It gives an established value to the book accounts and pro-
tects profits.
3. It furnishes an effective and efficient collection service.
4. It relieves the credit man of the worry of handling an
overdue account.
5. It acts as collateral security against the calamities occur-
ring to preferred customers.
6. It insures customers with inferior ratings.
7. It enables the concern to grant credit to a reliable firm
without fear of loss and thus aids a healthy extension of credits.
8. It helps to prevent losses.
CREDIT INSURANCE 335
This last advantage, which the company gives under the name
"salvage," is possibly more important than any of the others,
particularly when a concern is threatened with bankruptcy by a
few of its pressing creditors because of temporary financial em-
barrassment. A credit insurance company can often prevent
failure by assuming the obligation of those creditors who are
policy-holders and taking the accounts for collection. A cred-
itor is always in a hurry to get his money if he has any question
as to the ability of the debtor to pay, and very frequently a con-
cern may be forced to liquidate at a great loss because some of
these doubting creditors compel payment when an extension of
time might have saved the company. In such cases, a credit in-
surance company, being willing to wait for its money, can take
over the bad accounts and make payment to the creditors and
prevent what might have been a disastrous failure. Such action
is often to the advantage of the insurance company because the
total loss sustained by them is less than if an expensive receiver-
ship or liquidation at a loss had been precipitated. Not only are
the losses due to receiverships and the like cut down but the in-
surance company, being a heavy creditor, has something to say
about the management of the unfortunate concern. This usually
leads to a conservative handling of its finances and resources,
with the result that the business pulls through entirely or at
least the maximum amount possible is salvaged from the wreck.
It is along this line that the efforts of a credit insurance company
can do the most good, and as the business grows, and more and
more concerns carry credit insurance, an extension of such serv-
ices will be made, much to the benefit of the entire community.
Chapter XXIII
CORPORATE BONDING
Development of corporate suretyship. — Bonding is one of
the oldest forms of insurance. As far back as history extends
it has been customary for persons to become surety for the
actions of others. The first attempt to organize a company
to perform this function appears to have been made in London
in 1720, when a society was formed to insure masters against
loss through the dishonesty of their servants. In 1840 the
first real fidelity company was organized in England, and in
1853 the State of New York authorized the formation of
companies for accepting fidelity and surety risks. In 1876
a company availed itself of this privilege but did not begin
business until three years later, although a Canadian corpora-
tion had already begun to write fidelity business in Canada.
At first it was felt that corporate surety lacked that "moral"
element which was supposed to be present in personal surety,
but corporate sureties were gradually accepted for legal pur-
poses and at the present time the total premium income from
this class of business totals over $25,000,000 annually. The
advantages of .corporate surety are now recognized by every
one who has given any thought to the subject; but many still
heedlessly subject themselves to loss by becoming personal
sureties for "friends." In order to examine the advantages
of corporate surety we must first define the contract.
Nature of suretyship. — A bond is a written contract whereby
one party promises to hold himself responsible for the acts or
neglect of another, with respect to some contract or legal re-
lation between the latter and a third party. The party hold-
ing himself responsible is called the "surety." In corporate
bonding the surety is a corporation. The party for whose
acts or neglect the surety is responsible is called the "prin-
cipal" or "obligor," and may be an employee, a public officer,
a contractor, a person acquiring a license, etc. The party
who is protected by the bond is called the "obligee," and may
be an employer, the state, a person who lets a contract, etc.
336
CORPORATE BONDING 337
There are several differences between bonding and insurance
which are worthy of note. We found insurance to be a co-
operative method of indemnifying for losses, some of which
were certain to occur and could be more or less accurately
predicted. Bonding is selling the use of the surety's name
and credit; the risks are carefully selected and it is assumed
that there will be no losses. There are, of course, some losses,
but this is because it is not always possible to distinguish safe
from unsafe risks. The insurance contract is between two
parties and may be terminated at any time by mutual consent;
a bond is given for the protection of a third party and usually
can be cancelled only with the consent of the obligee and,
where subject to statute provisions, sometimes not then. In
insurance the company is subrogated to rights which only
occasionally enable it to reduce its losses; In bonding the prin-
cipal is nearly always legally liable for the losses the surety
is called upon to pay, and the latter can always have recourse
against the former, though practically this privilege may not
be worth much. This has been well expressed by the state-
ment that "There is always a person between the surety and
its liability." In spite of this bonding companies are fre-
quently viewed by the courts as insurers rather than sureties
and regarded as liable to make good defaults under nearly all
circumstances.
Advantages of corporate bonding. — The advantages of cor-
porate, as compared with personal, bonds may be viewed from
the standpoint of the principal, the surety and the obligee.
1. From the standpoint of the principal. — The principal,
by asking a friend to become his surety, is placed in a dependent
position. The surety ordinarily receives no compensation and
considers himself as doing the principal a favor, which in
fact he is, and a very great one. If the principal is weak and
the surety unscrupulous, the latter may subsequently unduly
influence the former in the discharge of his duties. Further-
more, the principal is obligated to reciprocate by performing
some unknown favor for the surety, if required.
2. From the standpoint of the surety.
a. Without recompense the personal surety assumes a lia-
bility, the extent of which is seldom recognized. The bond-
ing company makes a business of assuming liability. The per-
sonal surety virtually becomes the endorser of a note of in-
definite term; he may create a lien on his property which ren-
338 INSURANCE PRINCIPLES AND PRACTICES
ders it unsaleable for a long period; he may become involved
in litigation. The companies transacting a bonding business
paid out millions in losses in 1920 on carefully selected
risks — how unlikely it is that an individual who becomes surety
will escape loss ! One writer has said that "the man who asks
another to sign his bond without adequately securing him is
on a par with him who borrows money from his friend without
intending to pay it back."
b. The personal surety can exercise little or no oversight
over the actions of the principal and cannot control such ac-
tions in any way, whereas the corporate surety makes it a
business to prevent losses if possible.
3. From the standpoint of the obligee.
a. The standing of an individual surety is usually very
uncertain, and the obligee usually makes very inadequate in-
vestigation of his standing, whereas the corporation is usually
a well-known institution. Where the principal proves to be
irresponsible the individual surety is generally likewise irre-
sponsible.
b. The individual surety's financial standing is subject to
change, even though good at the time the bond is given. He
may become insolvent or die. The obligee is usually unable
to watch his condition so as to prevent loss; and when the
surety is called upon he is found to have no property or a
transfer to other persons has rendered such property unavail-
able.
c. There is always the potential danger that the surety will
contest his liability and provoke a long legal dispute. The
reputation of the company depends upon the prompt settle-
ment of losses.
d. Corporations are supervised by the State and publish
periodical reports.
e. The supervision exercised by the corporate surety over
the principal and the safeguards required for a bond greatly
diminish the possibility of loss.
Divisions of the subject. — Bonding is often divided into two
sections — fidelity and surety risks. This is the classification
quite generally adopted by State insurance departments. Fi-
delity risks are considered as including chose Adhere the surety
guarantees the honesty of the principal, whereas the surety
bond guarantees the willingness and ability of the principal as
CORPORATE BONDING 339
well as his honesty. A more useful classification, however,
will be to classify risks into five groups as follows:
1. Bonds covering honesty only.
a. Fidelity bonds, usually guaranteeing the honesty of em-
ployees.
b. Bonds for assignment of accounts, guaranteeing the
character of the accounts.
2. Bonds covering financial strength only, i.e., court bonds
of various kinds, including
a. Appeal or supersedeas bonds. ^
b. Bonds for costs.
c. Attachment bonds, etc.
3. Bonds covering honesty and ability.
a. Public official bonds, covering the honesty and ability of
those holding public offices.
b. Fiduciary bonds, covering the honesty and ability of
legal representatives, such as trustees, receivers, etc.
c. License bonds, covering the honesty and ability of per-
sons licensed by the State.
d. Immigrant bonds, guaranteeing the production of im-
migrants when required.
4. Bonds covering honesty, ability and financial strength.
a. Contract bonds, which guarantee the doing of a piece
of work.
b. Franchise bonds, guaranteeing compliance with the
terms of the franchise.
c. Depository bonds, guaranteeing compliance with duties
owing to depositors.
5. Bonds covering honesty and financial strength.
a. Bonds protecting against reappearance of lost instru-
ments.
b. Miscellaneous credit guarantees, such as mechanics'
lien bond, rent guarantee, bonds for freight, bonds for future
delivery of merchandise, etc.
The reason for this classification will be made clear by the
following discussion :
Bonds covering honesty. — Fidelity honds.^ — The fidelity
bond in general guarantees honesty, and the great mass of such
bonds are issued to cover employees and persons holding posi-
tions of trust. Included in this group are cashiers, book-
keepers, bank employees, managers, conductors, drivers, treas-
* See Appendices CXV and CXVI.
340 INSURANCE PRINCIPLES AND PRACTICES
urers, collectors, union officials, officials of building and loan
associations, fraternal orders, charitable associations and social
clubs. The ordinary bond covers dishonesty in the form of
larceny or embezzlement; but some bonds are issued also cov-
ering forgery, misappropriation, wrongful abstraction and
wilful misapplication. Whether this latter coverage is appre-
ciably greater than the former is difficult to say.
The employee who is to be the principal makes application
to the company for a bond and furnishes on the application
certain information which is necessary in order to form a
judgment on the risk. This gives the dates of the principal
events in the applicant's life and some particulars about his
family, recites his experience in business, his assets and liabili-
ties, his personal habits, the amxount of insurance he carries,
and the conditions surrounding his business position in a gen-
eral way. He agrees in the application to pay the premium in
advance and to reimburse the surety for any loss it may suffer
on his account. The employer is also required to furnish a
statement which gives his knowledge of the applicant, the con-
ditions under which he is employed, his authority in financial
matters, etc. These statements furnish the surety with con-
siderable information, as well as a starting-point for its in-
vestigation.
The hazards surrounding fidelity risks may be divided into
two groups, moral and physical. As to the moral hazards
it is found, for example, as might be expected, that persons
with criminal records or "sporty" tendencies do not constitute
the best grade of risks. The applicant's personality, antecedents,
environments, habits and financial conditions are all factors
to be considered. On the other hand, the physical conditions
under which he works are equally important. The amount
of money he handles, the opportunity which is afforded for ap-
propriating it, the extent of his control over his employer's
funds, whether an inadequate wage contributes its inducement
to dishonesty, and whether the employee is personally liable for
shortages which occur, are all important considerations. For
illustration, let us assume that the employee is responsible for
shortages. In the first place, it is very difficult to tell whether
a shortage represents a misappropriation by the employee or
not; secondly, a claim will always be made for the whole short-
age without any allowances for the inevitable losses; and
thirdly, the employer will probably collect all he can from the
CORPORATE BONDING 341
employee and leave the surety with small hope of reimburse-
ment. As another illustration of the importance of the physical
elements, countersignatures and audits will frequently so reduce
both the opportunities for misappropriation and the amounts
available as to make a risk practically negligible, while the ab-
sence of these factors may make the hazard prohibitive.
Three types of bonds are issued for fidelity risks; namely,
(1) the individual form, which covers one person holding
a definite position; (2) the schedule form, where the employ-
ees covered are shown on a schedule or list, the liability of the
surety on each being indicated; and (3) the blanket form,
where any and all employees are covered up to the full amount
named in the bond. The latter Is now very little used be-
cause it is not desirable from the standpoint of the surety,
and the employer unnecessarily pays for an excessive amount
of coverage on minor employees.
In respect to the scope of the coverage fidelity bonds may
be divided into two groups, as referred to previously:
a. Bonds covering dishonesty.
b. Bonds covering dishonesty and "culpable negligence."
Culpable negligence Is defined in the bond.
The bond covers the employer for a specified period of
time and for a specified amount on each employee named In
the policy. If the employer is protected by more than one
bond on the same employees he can recover from each com-
pany only that proportion of any loss which Its Insurance bears
to the total Insurance, collectible or uncollectible. The policy
agrees to Indemnify only for embezzlement or larceny by em-
ployees and then only for such acts as are committed within the
term of the bond or its renewal and discovered within the
term of the bond or within six months after expiration of the
term, or the death, dismissal or retirement of the employee.
The employer agrees that his statements In the application
shall be considered a part of the contract, that the company
has the privilege of cancelling the bond upon three months'
notice and return of the pro rata premium, that the liability
shall cease if the employee's duties are increased, that he will
give immediate notice of the discovery of the employee's dis-
honesty or his Indulgence In speculation or gambling, that he
furnish full particulars of any dishonesty on the part of the
employee within three months after discovery of the same,
and that he will furnish all the aid and assistance In his power
342 INSURANCE PRINCIPLES AND PRACTICES
(other than pecuniary) to bring the wrongdoer to justice.
Many of the bonds referred to subsequently are somewhat
similar in their provisions, and space will not permit reference
to them in the same detail as we have given this bond.
2. Account bonds. — Where a merchant sells his accounts re-
ceivable the purchaser may demand a bond guaranteeing such
accounts. A surety may Issue a bond guaranteeing that no
wholly fictitious accounts will be intentionally sold and as-
signed. This Is small protection but It is as far as a surety
can go without invading other fields of insurance. The prin-
cipal factor involved Is the honesty of the applicant.
Bonds involving financial strength only. — Court bonds. —
1. Appeal bonds. — Where there Is a judgment at law against
an individual and he desires to appeal the case to a higher
court, It is necessary to give a bond to avoid the execution of
the judgment. The surety undertakes that the principal will
execute the orders of the court or, In the event of his failure
to do so, the surety will satisfy the resulting damages. Such
a bond is for the protection of the party who has won the case
in the lower court and the hazard varies with the financial
resources of the principal.
2. Bonds for costs. — It is frequently necessary to deposit
a bond for court costs in order to institute a suit. The surety
agrees that the litigant will pay the costs of the suit, if re-
quired, or will himself pay them. Again financial resources
are the important feature of hazard.
3. Attach^nent bonds. Under certain circumstances, as a
protection to a litigant, property may be attached in advance
of a decision on the case, but a writ of attachment Is not issued
unless a bond is furnished that if the writ is unjustifiably issued
the defendant shall be reimbursed for any damages he sus-
tains by reason of such Issuance.
4. Injunction or mandamus bond. — Where an order of the
court is requested preventing a certain act or requiring a cer-
tain act, a bond Is required to cover the possible damage to
the party against whom the mandamus or Injunction is issued,
in case same is wrongfully Issued.
5. Replevin bonds, covering damages for wrongful seizure
of property by the sheriff.
6. Bonds for distraint of rent, covering damages in case a
tenant's goods arc wrongfully distrained for rent.
7. Indemnity bonds to sheriff in seizing property.
CORPORATE BONDING 343
8. Many other such bonds might be named, such as a li-
bellant's bond in admiralty, a bond to release a libel, a bond
for the appointment of a receiver, a bond for a petition in
bankruptcy, removal bonds, bail bonds, a bond on the sale
of real estate of a deceased person before the expiration of
time for filing claims, a bond of a legatee to pay the debts of
the testator, etc.
These bonds in general are designed to protect the opposing
party in litigation from damage in case the plaintiff fails to
make out the case alleged, and the surety engages to do that
which the unsuccessful plaintiff should do, which is usually to
pay damages. Naturally the surety attempts to force the plain-
tiff to perform his legal duty, and if he is financially able to
do so, no loss falls on the surety. These bonds, therefore,
are little concerned with the moral hazard and are dependent
almost entirely upon the financial strength of the principal.
The surety usually protects itself by requiring the principal
to deposit collateral with It and. If possible, obtains collateral
up to the full amount of the bond.
Bonds involving honesty and ability. — 1. Public official
bonds. — The law requires that persons elected to fill public
positions of trust shall deposit bonds for the faithful per-
formance of their duty. We might take as an Illustration
a state treasurer, a tax collector or a sheriff. Under such
bonds the surety obviously guarantees more than on bonds of
either of the two classes previously referred to, for the first
group Involves honesty only, while the second Involves finan-
cial strength only. A bond on a public ofl'icial not only pro-
tects against fraud and dishonesty, but guarantees that he will
do those things which are required by law, and failure to do
the latter may be due to omission to perform duties specified,
commission of acts not authorized or performance In a form
other than that prescribed. These unfortunate contingencies
may happen either through his dishonesty, negligence or lack
of ability.
The risk assumed by the surety Is Increased by two facts :
a. The liability of the surety Is prescribed by law and can-
not be reduced by any provisions Inserted In the bond.
b. The bond usually covers the full term of oflice, and since
the surety is protecting the people of the State the bond can-
not be cancelled without their consent, which Is difficult to
obtain, although statutes for this purpose exist in some States.
344 INSURANCE PRINCIPLES AND PRACTICES
This type of bond, like the fidelity bond, obviously involves
two groups of hazards, the personal and the physical. The
first question relates to the honesty of the applicant. But
his efficiency is equally important and yet, in many cas^s, per-
sons are elected to offices entailing work with which they are
absolutely unfamiliar and are sometimes even taken from farms
and workshops to fill positions requiring clerical ability, ac-
counting knowledge and financial experience. If the person
has financial resources of his own the risk is greatly lessened,
because he will take more care if he runs the risk of losing
his own money. The physical aspect of the hazard includes
his opportunities, temptations and liabilities. The amount of
money handled and the system employed are obviously very
important. Take, for example, a tax collector who, before
he is required to account for the first fund collected, begins to
receive second payments. Nothing is easier than 'to supply
a shortage in the first fund by amounts collected on second
payments, and to cover second shortages by third collections,
until the defalcation reaches an enormous sum. This, in fact,
is the way in which most large losses occur, as any accountant
will testify. A similar situation arises where it is possible for
an officer to transfer sums from one fund to another, so that
any one fund audited will be found intact, any shortage being
temporarily supplied from another fund, which in turn is re-
imbursed when necessity arises. A principal may hold office
two terms and a shortage in the first term may be made good
by sums abstracted from second-term funds. The surety on
the second term would be liable for this loss. In regard to
his liabilities, the officer usually gives bond that he will account
for and pay over all moneys received. If, therefore, a bank
fails in which he deposits money, even though he exercised
care, his surety would be liable. Sometimes it is provided that
the funds must be deposited in certain named and bonded
banks and the officer relieved of responsibility; in such a case
the only supervision necessary is to see that every detail of the
law is complied with. The principal is usually liable for the
dishonesty of his subordinates; the protection against such de-
falcation is to require bonds from them. As an example of
the possibility of inefficiency we might mention the possibility
that a recorder who is unfamiliar with clerical work may fail
to record or to record properly a judgment or legal paper
and through loss to a third party his surety will become liable;
CORPORATE BONDING 345
or the liability of a surety for the inefficiency of a tax collector
and consequent failure to collect taxes due; or the inefficiency
of a sheriff, resulting in damage to a third party.
2. Fiduciary Bonds. — llicre is a great variety of these
bonds, all characterized by the fact that the principal is in
each case an individual who is entrusted with the safekeeping
of funds for the benefit of another. Thus, there are bonds
for administrators, executors, trustees, guardians, receivers,
trustees in bankruptcy, assignees for the benefit of creditors,
and conservators. Such trust relations are described as long-
term trusts and short-term trusts, the latter being duties which
can ordinarily be completed within two years.
It will be apparent that most of what has been said regard-
ing public officials is applicable to fiduciaries. A receiver, for
example, is an officer of the court riequired to administer the
property in his possession in the manner directed. The sur-
ety binds itself to see that this is done or to pay the damages.
This involves honesty and ability on the part of the principal.
The principal is required to follow the direction of the court
or the statutes of the State, but he may be entirely unfamiliar
with the method of settling debts, collecting the assets, pre-
paring an inventory of property, rendering accounts to the
court, investment of funds and releasing himself from liability.
It is very easy, therefore, for him to take some action which
will render himself and his surety liable. It is now the general
practice, however, for sureties to require of such principals
that the estate or trust fund be placed under the joint control
of the principal and the surety, in which case securities are
placed in a safe deposit box subject to their joint order, while
funds are similarly safeguarded by deposit in a bank.
3. License bonds. — In every State licenses arc required of
persons engaging in certain occupation — money lenders, em-
ployment agents, auctioneers, nurserymen, plumbers, ware-
housemen, users of explosives, electricians, draymen, theater
operators, engineers, and formerly liquor dealers. ^ The ob-
ject of these bonds and the obligation of the surety is to pro-
tect the State and the public from damage arising from the
manner in which the business is conducted. The proper con-
duct of business in these cases is usually dependent upon
the honesty and ability of the principal, which Is the
reason for placing these bonds In this class. There Is per-
haps an element also of financial responsibility, but this is a
346 INSURANCE PRINCIPLES AND PRACTICES
minor one. Of the various bonds cited above some will be
recognized as much more hazardous than others, and some
are so risky that corporate sureties almost invariably decline
them without special protection of some kind.
Bonds involving honesty, ability and financial strength. —
1. Contract Bonds.^ — The principal in this case has con-
tracted to do a piece of work for the obligee and the surety
makes itself liable if such work is not completed. This is
more of a credit and banking proposition than an insurance
enterprise, because the surety endorses the contract somewhat
as a business man endorses a note. The contractor in order
to fulfill his obligations must be honest, must make an intelli-
gent bid, and must have the ability and financial strength to
complete his contract, all of which the surety guarantees. The
latter must therefore scrutinize the nature of the work to be
done, the contract price, the proportion of completed and un-
completed work, the conditions under which the contractor is
to receive his pay, and the age and financial standing of the
contractor. It is customary to require that the available as-
sets of the contractor shall be five times the amount of un-
completed work for which he is liable.
For this purpose there are two forms of bonds in use, as fol-
lows :
a. Where the obligation of the surety is void if the con-
tractor shall "faithfully perform said contract according to
the terms, covenants and conditions thereof"; and
b. Where the obligation is void if the "principal shall in-
demnify the obligee against any loss or damage directly aris-
ing by reason of the failure of the principal to faithfully per-
form said contract." The first is a bond for specific perform-
ance, the second a bond for damages.
The ordinary provisions of a contract bond are as follows:
a. That the surety shall be promptly notified of any failure
on the part of the principal for which it may be liable.
b. That the surety shall have the right to assume and com-
plete the contract upon default of the contractor and be sub-
rogated to his rights under the contract.
c. The surety is to be liable only to the obligee, in order
that it may not be proceeded against by mechanics and material
men.
' See Appendix CXVII.
CORPORATE BONDING 347
d. That the obligee shall retain the last payment for the
work until the contract is satisfactorily completed.
e. That the surety shall not be liable for acts of Provi-
dence or damage by mobs, riots, civil commotions, public ene-
mies, strikes, fire, lightning, tornadoes or cyclones.
f. The surety must be notified of any changes in the con-
struction plans.
g. The bond does not cover efficiency, wearing qualities or
maintenance of the work.
h. That all insurance carried shall share losses pro rata.
i. That any legal action under this bond will be taken
within a limited time.
Another variety of contract bond is the "bid" or "proposal"
bond which guarantees that ( 1 ) if the bidder is successful he
will furnish a contract bond for the completion of the work
and (2) the bid bond shall serve as such final bond. In ad-
dition to the hazards of the contract bond this bond has the
disadvantage to the surety that his information is much more
restricted than under the latter form of bond.
2. Franchise Bonds. — It Is usually the practice to require
the corporation to whom a franchise Is granted for the oper-
ation of a public utility to deposit a bond guaranteeing the
construction or operation of the utility within a specified time.
The entire amount of the bond Is considered as liquidated
damages In case of default. It Is customary to require col-
lateral security for such bonds unless a contract for the work
Is given to a contractor who is bonded. The hazard Is great
because the franchise may be sold to a third party, the original
grantee may be financially or otherwise unable to produce the
utility within the time required and, in case of default, the
whole amount of the bond is usually lost. This type of bond,
like the contract bond, therefore Involves the honesty, ability
and financial strength of the principal.
3. Depository bonds. — These bonds are required by deposi-
tors to guarantee that their money will be promptly paid to
them on legal demand, the principal reason for failure to pay
on demand being the Insolvency of the bank. This insol-
vency of the bank, which is the principal, may arise from dis-
honesty on the part of the management, lack of ability or
want of financial strength. Depository bonds belong there-
fore, in the class of contract and franchise bonds. They are
usually required where public funds are deposited, and the
348 INSURANCE PRINCIPLES AND PRACTICES
State is often made by law a preferred creditor in case of fail-
ure, with the privilege of receiving its entire deposit before
all other payments. This very greatly reduces the surety's
chance of loss. There are two other instances, however,
where the surety is not so favorably treated. In the case of
the ordinary depositor the surety shares with the other depos-
itors in the distribution of the assets. A depositor whose
funds in a bank exceed the amount of the bond is entitled to
the payment of the full amount of the excess before the surety
is entitled to anything; notwithstanding the latter pays the full
amount of the bond. The surety, therefore, usually provides
in the bond that it shall be entitled to its share of any salvage.
Bonds of this character may be divided into two classes ac-
cording to the scope of protection they afford.
a. Prompt payment bonds, which guarantee payment by
the surety upon the failure of the institution and involve no
waiting by the depositor.
b. Deferred payment bonds, which guarantee payment by
the surety of the eventual loss, which cannot be ascertained
until the affairs of the insolvent bank are finally adjusted and
the extent of salvage determined.
Bonds involving honesty and financial strength — 1. Bonds
for lost instruments. — When stock certificates, insurance poli-
cies, deeds and other financial papers are lost or stolen, it is
common to require a bond before issuing a new document.
The bond indemnifies the maker of the instrument against the
consequences of the instrument reappearing in the hands of
some unscrupulous person or innocent party. The liability of
the surety depends partly upon the risk of such a document re-
appearing, partly upon the willingness of the principal (the
loser) to make good any damages suffered, and partly upon
his financial ability to do so. The bond sometimes obligates
the principal and surety to reimburse the maker of the instru-
ment for the legal cost, expenses and counsel fees which may
be involved in a defense of the case.
2. Internal Revenue Bonds. — Manufacturers of alcoholic
liquids and tobacco are required to pay taxes to the Internal
Revenue Department of the Government and bonds are re-
quired to insure that such taxes will be paid. These bonds
will now decline in importance, of course. They were re
quired of distillers, warehousemen, brewers, cigar manufac-
turers, tobacco manufacturers and exporters. Such bonds are
CORPORATE BONDING 349
also required of persons distilling, warehousing and handling
denatured alcohol. The penalties imposed by law for viola-
tion of the regulations greatly diminish the risk involved, as
they operate to deter such persons from acting in other than
a legal manner.
3. Custom House Bonds. — Many different varieties of cus-
tom house bonds arc in use. Thus, bonds are required for
guaranteeing the payment of import duties, guaranteeing the
transfer of merchandise to another port for payment of duty,
guaranteeing re-exportation of certain commodities, guaran-
teeing the use of imported articles for specific purposes which
render them free of duty, etc.
4. Miscellaneous. — It is apparent that a bond may be re-
quired in any case where some guarantee is required that a
person will fulfil duties required of him by law or contract.
In addition to those already mentioned and discussed there
are, for example, bonds for mechanics liens, bonds guarantee-
ing rent, bonds given for freight charges, bonds for the future
delivery of merchandise, qualifying bonds required of insur-
ance companies, bonds of mortgagors to make improvements
on mortgaged premises, and many others, too numerous to
mention.
Factors in rate-fixing. — There are several factors in cor-
porate bonding which make underwriting judgment more im-
portant in fixing rates than is true of other forms of insurance.
Bonds which involve honesty, ability and financial resources
require much the same elements of judgment as do loans ex-
tended by banks, and a careful selection of risks is evidently
a very Important feature in underwriting success. A large
portion of the premium, furthermore, is really a payment for
service rather than a recompense for the assumption of risk.
Loss ratios on corporate bonds vary from very low figures
on certain forms where the principal deposits collateral, to
high figures on fidelity risks where no collateral is obtained
and where losses occur frequently. In addition to these fea-
tures the term of the contract is often indeterminate, being
ended by the happening of certain events, the non-payment of
premiums sometimes does not invalidate the bond, and the
surety often expects some indemnification from the principal
for any loss it is called upon to pay.
It is evident that the portions of the premium which cover
losses and expenses will vary considerably among different
350 INSURANCE PRINCIPLES AND PRACTICES
kinds of bonds. In some, most of the premium goes for
service; in others a considerable portion is required to cover
losses. Often a large part of the services rendered by the
surety consists of investigations conducted before the bond is
issued. Under these circumstances it is impossible to classify
risks and ascertain rates for such classifications by formulae.
The insurance companies cooperate in maintaining a central
bureau for promulgating rates which introduces some uniform-
ity as between the different companies. These rates are on
various bases. Rates are fixed, for example, both per unit of
exposure and per unit of penalty involved, and sometimes
also on the basis of the price involved in a contract. On
large schedule bonds the rate is reduced as the number of
principals Increases. Some rates are made for one year, and
others for the term of the bond.
Rates are based upon experience insofar that the amounts
received must approximately equal disbursements over a pe-
riod of years. But experience alone can hardly be applied to
the rates for different kinds of risks, inasmuch as new types
of bonds are frequently Introduced, statutory requirements
compel variations In the character of coverage, there Is no
standard for valuing deferred losses, and the element of moral
hazard is difficult to measure.
BIBLIOGRAPHY
SSI
BIBLIOGRAPHY
LIFE INSURANCE
1. Dawson, M. M., "The Business of Life Insurance," New York, 19n.
2. Dawson, M. M., "Elements of Life Insurance," New York, 1911.
3. Zartman, L., "Yale Insurance Lectures," New Haven, 1904.
4. Zartman, L., "Yale Readings in Insurance," New Haven, 1909.
5. Moir, Henry, "Life Assurance Primer," New York, 1907.
6. Willett, A. H., "Economic Theory of Risk and Insurance," New York, 1901.
7. Huebner, S. S., "Life Insurance," New York, 1915.
8. Dunham, H. P., "Business of Insurance," New York, 1912.
9. Gephart, VV. P., "Principles of Insurance," Vol. 1., New York, 1911.
to. American Academy of Political and Social Science, "Insurance," Philadel-
phia, 1915.
11. American Academy of Political and Social Science, "Modern Insurance
Problems," Philadelphia, 1917.
12. Hudnut, J. M., "Studies in Practical Life Insurance," New York, 1911.
13. Joyce, J. A., "Law of Insurance," San Francisco, 1919.
14. Richards, George, "Law of Insurance," New York, 1912.
is. Fackler, E. B., "Notes on Life Insurance," New York, 1907.
[6. Alexander, William, "The Life Insurance Company," New York, 1905
INDUSTRIAL LIFE INSURANCE
1 Huebner, S. S., "Life Insurance," New York, 1915.
2. Dryden, J. F., "Life Insurance and Other Subjects," 1909.
3. Zartman, L., "Yale Insurance Lectures," New Haven, 1904.
4. Zartman, L., "Yale Readings in Insurance," New Haven, 1909.
5. Henderson, C. R., "Industrial Insurance in the United States," 1909.
6. Hoffman, F. L., "Industrial Insurance," Annals of the American Academy
of Political and Social Science, Philadelphia, September, 1905.
FRATERNAL AND ASSESSMENT INSURANCE
1. Dawson, M. M., "Assessment Insurance," New York, 1896.
2. Landis, Abb, "Analysis of Fraternal Societies," Nashville, Tenn., 1906.
3. Landis, Abb, "Life Insurance Problems," Nashville, Tenn., 1910.
4. Meyer, B. H., "Fraternal Insurance in the United States," Annals of the
American Academy of Political and Social Science, Philadelphia,
March, 1901.
5. Dawson, M. M., "Assessment Life Insurance," Annals of the American
Academy of Political and Social Science, Philadelphia, September, 1905.
6. Dawson, M. M., "Fraternal Life Insurance," Annals of the American Acad-
emy of Political and Social Science, Philadelphia, Pa., September, 1905.
7. Nichols, W. S., "Fraternal Insurance in the United States," American
Academy of Political and Social Science, Philadelphia, March, 1917.
8. Hardy, C. S., "Fraternal Insurance Law," Los Angeles, 1917.
9. Huebner, S. S., "Life Insurance," New York, 1915.
GROUP LIFE INSURANCE
1. Graham, W. J., "The Story of Group Insurance." Address before the Life
Underwriters' Association of New York, N. Y.
2. Graham, W. J., "Group Insurance," Actuarial Society of America, Vol.
XVII, Part II, No. 56, Oct., 1916.
353
354 BIBLIOGRAPHY
3. Morris, E. B., "Group Life Insurance and its Possible Development," Cas-
ualty Actuarial and Statistical Society of America, Vol. Ill, Pt. 2, No. 8.
4. Huebner, S. S., "Life Insurance," New York, 1915.
5. Day, W. A., "Group Insurance," Address before the Conference on Social
Insurance, Washington, D. C, December 5-9, 1916.
6. Epsteen, S., " An Argument for Group Life Insurance," Address before
Scientific Society of the University of Colorado, March 2, 1914.
7. Dunham, H. P., "Business of Insurance," New York, 1912.
8. Trousdale, R. B., "Group Insurance," Annals of tlie American Academy of
Political and Social Scie7ice, Philadelphia, March, 1917.
ACCIDENT AND HEALTH INSURANCE
1. Mudgett, B. D., "Total Disability Provision in American Life Insurance
Contracts," Annals of the American Academy of Political and Social*
Science, Philadelphia, May, 1915. (Supplement).
2. Mudgett, B. D., "Five Years' Progress in Disability Protection," Annals of
the American Academy of Political and Social Science, Philadelphia,
March, 1917.
3. Insurance Institute of Hartford, "Accident and Health Insurance," Hart-
ford, Conn., 1915.
4. Dunham, H. P., "Business of Insurance," New York, 1912.
5. Lott, E. S., "Accident Insurance," Annals of the American Academy of Po-
litical and Social Science, Philadelphia, Pa., September, 1905.
6. Woodward, A. P., "The Disability Insurance' Policy," Annals of the Amer-
ican Academy of Political and Social Science, Philadelphia, March,
1917.
7. Flynn, B. D., "The Work of the Statistical Committee of the Bureau of
Personal Accident and Health Underwriters." Casualty Actuarial and
Statistical Society of America, Vol. II. Part II, No. 5, February, 1916.
8. King, Walter I., "Accident and Health Insurance from an Actuarial View-
point," Casualty Actuarial and Statistical Society of America, Vol. H,
Part I, No. 4, October, 1915.
9. Woodward, J. H., "Disability Benefits in Life Insurance Policies," Casualty
Actuarial and Statistical Society of America, Vol. VII, Part I, No. 15,
November, 1920.
10. Craig, J. D., "Group Health Insurance," Casualty Actuarial and Statistical
Society of America, Vol. VII, Part I, No. 15, November, 1920.
LIABILITY AND COMPENSATION INSURANCE
1. Blanchard, R. H., "Liability and Compensation Insurance," New York, 1917.
2. Rhodes, J. E., "Workmen's Compensation," New York, 1917.
3. Rubinow, I. M., "Social Insurance," New York, 1913.
4. "American Labor Legislation Review," Vol. Ill, New York.
5. Bradbury, H. B., "Workmen's Compensation and State Insurance Law,"
New York, 1914.
6. Insurance Institute of Hartford, "Liability and Compensation Lecturers,"
Hartford, Conn., 1913.
7. Beyer, D. S., "Industrial Accident Prevention," Boston, 1916.
8. Casualty Actuarial and Statistical Society of America, Vols. I-VII, New
York.
9. Downey, E. H., "The Organization of Workmen's Compensation Insur-
ance," Journal of Political Economy, Dec, 1916.
10. Annals of the American Academy of Political and Social Science, "Modern
Insurance Problems," Philadelphia, March, 1917.
11. Annals of the American Academy of Political and Social Science, "Insur-
ance," Philadelphia, Sept., 1905.
BIBLIOGRAPHY 355
12. Downey, E. H., "The Making of Rates for Workmen's Compensation In-
surance," Journal of Political Economy, Chicago, Dec, 1917.
13. International Association of Industrial Accident Boards and Commissions,
"Proceedings of Annual Meetings," 1914-1919.
14. National Workmen's Compensation Service Bureau, "Report of the Work
of the Augmented Standing Committee on Workmen's Compensation
Insurance Rates, 1917."
15. Dunham, H. P., "Business of Insurance," New York, 1912.
16. National Council on Workmen's Compensation Insurance, "Report on 1920
Revision of Workmen's Compensation Insurance Rates," New York,
1921.
17. Hoodstadt, Carl, "Comparison of Workmen's Compensation Laws of the
United States and Canada," U. S. Bureau of Labor Statistics, Bulletin
No. 275, Washington, D. C, 1920.
18. Cornelius, M. P., "Third Party Insurance," Louisville, Ky., 1920.
19. U. S. Bureau of Labor Statistics, Monthly Labor Review, Washington, D. C.
20. Michelbacher, G. F., "Manufacturers' and Contractors' Public Liability
Insurance," Casualty Actuarial and Statistical Society of America,
Vol. IV, Part I, No. 9, November, 1917.
FIRE INSURANCE
1. Gephart, W. F., "Principles of Insurance," VoL II, New York, 1917.
2. Huebner, S. S., "Property Insurance," New York, 1911.
3. Richards, Geo., " Law of Insurance," New York, 1911.
4. Deitch, G. A., "Standard Fire Policy," Indianapolis, Ind., 1909.
5. Dean, A. F., "Analytic System for the Measurement of Relative Fire Haz-
ard," Chicago, 1906.
6. Hess, H. M., "Philosophy and Methods of the Analytic System," Chicago,
1909.
7. American Academy of Political and Social Science, "Insurance," Phila-
delphia, September, 1905.
8. Moore, F. C, "Standard Universal Schedule for Rating Mercantile Risks,"
New York, 1902.
9. Zartman, L. W., "Yale Lectures in Insurance," New Haven, 1904.
10. Zartman, L. W., "Yale Readings in Insurance," New Haven, 1909.
11. Dunham, H. P., "Business of Insurance," New York, 1912.
12. Joyce, J. A., "Law of Insurance," San Francisco, 1919.
13. Riegel, Robert, "Ratemaking Organizations in Fire Insurance," American
Academy of Political and Social Science, Philadelphia, March, 1917.
14. Riegel, Robert, "Problems of Fire Insurance Ratemaking," American
Academy of Political and Social Science, Philadelphia, March, 1917.
15. Riegel, Robert, "Fire Underwriters' Associations in the United States,"
New York, 1916.
16. Riegel, Robert, "Fire Insurance Rates," Quarterly Journal of Economics,
Cambridge, Mass., August, 1916.
17. Riegel, Robert, "Protection of a Mortgagee's Interest," Journal of Political
Economy, December, 1915.
18. Hardy, E. R. and Lindner, W., "Insurance and Real Estate," New York,
1917.
19. Richards, E. G., "The Experience Grading and Rating Schedule," New
York, 1915.
20. Insurance Library Association of Boston, "Lectures on Fire Insurance,"
Boston, 1912.
21. Fire Underwriters' Association of the Pacific, "Lectui-es to Associate Mem-
bers," San Francisco, annually.
2S6 BIBLIOGRAPHY
22. Fire Underwriters' Association of the Pacific, "Proceedings of Annual
Meetings."
23. Insurance Institute of Hartford, "Lectures on Fire Insurance," Hartford,
Conn., 1914.
24. Insurance Institute of Hartford, "Lectures on Fire Insurance," Hartford,
Conn., 1917.
USE AND OCCUPANCY, PROFIT AND RENT INSURANCE
1. Hamilton Institute, "Use and Occupancy Insurance," Report No. 105. New
York, 1920.
2. Bell, E. W., "Insurance against Loss of Profits Through Fire." Address
before Insurance Institute of New South Wales, June, 1914.
3. Wright, A. B., "Insurance of Loss of Profits by Fire or Consequential Loss,"
Address before Insurance Institute of Liverpool, Jan. 19, 1920.
4. Insurance Library Association of Boston, "Lectures on Fire Insurance,"
Boston, 1912.
5. Barden, J. C, "Fire Insurance and Allied Lines," The Eastern Under-
nvriter, January 28 and Feb. 4, 1921.
6. Hooper, G. G., "Leasehold Insurance," Address before the Insurance So-
ciety of New York, January, 1920.
7. Levy, Leo, "Use and Occupancy Insurance," Address before the Insurance
Society of New York, Jan. 30, 1917.
MARINE INSURANCE
1. DeHart, E. L. and Simey, R. I., "Arnould's Law of Marine Insurance,"
London, 1915.
2. Eldridge, W. H., "Marine Policies," London, 1907.
3. M'Arthur, Charles, "Contract of Marine Insurance," London, 1890.
4. Templeman, F., "Marine Insurance," London, 1918.
5. Tyser, C. R., "Law Relating to Marine Insurance Losses," London, 1894.
6. Gow, William, "Handbook of Marine Insurance," London, 1913.
7. Gow, William, "Sea Insurance," London, 1914.
8. Lazarus, G. M., "Law Relating to Insurance of Freight," London, 1915.
9. Congdon, E. W., "General Average," New York, 1913.
10. Winter, W. D., "Marine Insurance," New York, 1919.
11. Huebner, S. S., "Marine Insurance," New York, 1920.
12. Huebner, S. S., "Legislative Obstructions to the Development of Marine
Insurance," Govt. Printing Office, Washington, D. C, 1920.
Z3. Huebner, S. S., "Report on Status of Marine Insurance," Government Print-
ing Office, Washington, D. C, 1920.
14. Subcommittee on the Merchant Marine and Fisheries, House of Representa-
tives, "Hearings on Marine Insurance," Government Printing Office,
Washington, D. C, 1920.
15. Richards, Geo., "Law of Insurance," New York, 1912.
16. Rush, Benjamin, "The Marine Cargo Form," Address before Fire Insur-
ance Society of Philadelphia, Philadelphia, 1916.
17. Rush, Benjamin, "Marine (Hull) Insurance," Address before the Insur-
ance Society of New York, New York, 1918.
AUTOMOBILE INSURANCE
1. Riegel, Robert, "Automobile Insurance," Motor Age, Chicago, March 23,
30, April 6, 1916.
2. Riegel, Robert, "Automobile Insurance Rates," Journal of Political Econ-
omy, Chicago, June, 1917.
BIBLIOGRAPHY 3S1
3. Michelbacher, G. F., "Casualty Insurance for Automobile Owners," Cas-
ualty Actuarial and Statistical Society of America, Vol. V, Part II,
No. 12, May, 1919.
4. Ryder, A., "Principles of Automobile Ratemaking," Address before Insur-
ance Society of New York, December 9 and 16, 1919.
5. Reynolds, Ralph, "Automobile Insurance," Address before the Fire Un-
derwriters' Association of the Pacific, San Francisco, February 4
and 5, 1919.
6. Small, A. R., "The Schedule Method for Automobile Classification," Ad-
dress before the Fire Underwriters' Association of the Northwest,
Chicago, October 6 and 7, 1920.
7. Dunham, H. P., "The Business of Insurance," New York, 1912.
8. Cornelius, M. P., "Third Party Insurance," Louisville, Ky., 1920.
TITLE INSURANCE
1. Huebner, S. S., "Property Ins-irance," New York, 1911.
2. Dunham, H. P., "Business of Insurance," New York, 1912.
3. Elliott, C. B., "Law of Insurance," Indianapolis, Ind., 1907.
4. American Association of Title Men, "Annual Proceedings."
5. Niblack, W. C, "Abstracters of Title Insurance," Chicago, 1908.
CORPORATE BONDING
1. Blanchard, R. H. and Moore, G. D., "Corporate Bonding," Casualty Act-
uarial and Statistical Society of America, Vol. VII, Part I, No. 15,
November, 1920.
2. Mackall, L. E., "Principles of Surety Underwriting," Baltimore, 1914.
3. Penniman, H. G., "Manual of Fidelity Insurance and Corporate Surety-
ship," New York, 1911.
4. Huebner, S. S., "Property Insurance," New York, 1911.
5. Towner, R. H., "Surety Rates," Address before the Annual Convention of
the South Carolina Underwriters' Association, May 20, 1915.
6. Towner, R. H., "Contract Bonds," Address before the Annual Convention
of the National Association of Casualty and Surety Agents, Detroit,
August 27, 1916.
7. Elliott, C. B., "Law of Insurance," Indianapolis, Ind., 1907.
8. Frost, T. G., "Treatise on Guarantee Insurance and Suretyship," Boston,
1909.
9. Zartman, L. VV., "Yale Insurance Lectures," New Haven, 1904.
10. Walker, M. B., "Law of Fidelty Bonds," Baltimore, 1909.
CREDIT INSURANCE
1. Dunham, H. P., "Business of Insurance," New York, 1912.
2. American Credit Indemnity Co., "Collateral on Merchandise Accounts,"
American Credit Indemnity Co., New York, 1911.
3. American Cerdit Indemnity Co., "Credit Insurance Explained," American
Credit Indemnity Co., New York, 1911.
4. Prendergast, W. A., "Credit and its Uses," New York, 1906.
5. Ettinger, R. P. and Golieb, D. E., "Credits and Collections," New York,
1917.
6. Irving, R. A., "Credit Insurance," London Accident and Guarantee Com-
pany, Philadelphia, May, 1911.
7. London Accident and Guarantee Company. Various pamphlets issued from
time to time by the company.
8. American Credit Indemnity Company. Various pamphlets issued from time
to time by the company.
APPENDICES
3S9
APPENDIX
APPLICATION FOR LIFE INSURANCE— PART I
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366 INSURANCE PRINCIPLES AND PRACTICES
II — Continued
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flmoimt of
JimtMaxif
35
illBtUTitpM
enMttmttrt
Heta ^fotlit
Ktcn {>a;a&I^
.^^f^.^Soy.*!?.!?.^
-BoUarsf
Wiete flafi
JDott Cfftci
Jtuontcstobilitp
at (fte Home Office of the Company in Hartford, Connecticut, to
iaftpBot, _ J?®.!'?....
of the Insured, immediately oa receipt of due proofs of the death of
5obn J3oe
the Insured,
...CDnnettituL
of. JwrtforlJ , Coonty of ...^Sar.Korb state of.
rfurfnt the continuance of this contract and before its tnaturityas an endowment.
TTw iHscred, ff HWng ort the. Jf.'M rfay of. ..._... Jftbruari' 19.39.
fnA, d the premiums required under this contract shall have been paid, shall receive the amount of this
iftducance.
■ftj& ccwrttact b Issned in consJderatJbn of the signed application tor this tasnrance w;W:h is mad'* a {nrt
b^rasf 4rttf f^^^ full' years shall have Ibeen paid of
f the Insured, bat no such payment wflf be required during permanent totaf
eipt by the Company of due proof thereof
?hall be paid in advance at fR« Hoiwc Olfifce <*^ ten an authorized agent of the Company.
msurance shall be effective frorai.. .„ jFebCUarp.tfit 19.19. The Insurance Years,
anir'all subsequent provisions for Caih' Loans, Cash Vaiucs, Paid-up and Aotomatic Term Insurance
are computed from that date.
This contract shall be incontestable after one year Itosn date of issue, except for non-payment of pre-
miums. It is free from conditions as to residence, occopation, travel or place of death, rncludmg mili-
tary or naval service unlcsssuch serviceshall be restrtcted by indorsement hereon at the time of issuance
ofl the contract.
This contract is subject to the privileges and conditions recited on the subsequent pages hereof.
Iitn;£S tSS^rtof THE aNSURANCE- company has caused this mstrunwnTta be «igocd by Ms
President and a Secretary, at . ,1 ' * " ■ * .^his.. ., -. .^^^^^.-,.,.^'?.^."- _„. —
day of. Jftbruarj I9...V9..,
f^tti
titntn^ ^_^ . ''^'^
Vefarimtia Sccritary.
_2P__YEAR ENDOWMENT. PREMIUMS PAYABLE FOR 20 VEAftS. NOW-PAHTrCWATlKIO.
IN EVENT OF PERMANENT TOTAL DISABILITY PREMIUMS WAIVED ANO MONTHLY INCOME PAiYAfllE WrTHOOT
DEDUCTION FROM INSORArNCE.
368 INSURANCE PRINCIPLES AND PRACTICES
III — Continued
Options at ^latavitp
The Insured if living at the maturity ot this contract as an endowment may select in lieu o( the endowment tlien payable, one ol tilt
following options:
1. Receive a cash payment ot %....^.S.l4^oa and a paid-up contract payablK at death for $.._f.0,0C(J-0fl ._..
2. Receive a paid-up contract payable at death for S.'..- £5^Jo*DjQ
3. Receive an annual income o( i jglL4.0 payable during the natural lite of the Insured, first payment at maturity.
Options 1 and J are tonditiooed upon evidence of insurability satisfactory to the Company.
Special ^iMXm^
Ca£^ Haantf — On demand m writing to the Hom^ Office of tlie Company, after two full years' premiums shall have been paid, the Insured
may borrow at any time during the year on the sole security of this contract art amount not exceeding the cash value at the end of the current
insurance year as specified in the table of cash values hereinafter set forth, provided: interest in :\dvanceat the rate of five and one-half ptt- centum
per annum shall be payable and the initial interest shall be deducted from the loan; the contract shall be a-^igned to the Company by all of the
parties in interest thereunder; the premiums shall be fully paid to the end of the current insurance year, or if not already so paid shall be deducted
in.the adjustment of the loan; the amount available at a:iy time shall include any previous loan ihei*. unpaid. Loans other than to pay premiums
CM jjifc contracts in this Company may be deferred for not exceeding sixty days after the application therefor is made. If the total indebtedness
shall equal or exceed the cash value at the time of failure to repay any such loan or to pay interest when due, such failure shall render this coptract
null and void at the expiration of one month after due notice shall have been mailed by the Company to the last known address of the person
to whom the loan shall have been made and of the Insured, or assignee, if any.
^CflCC (n ^Ispmotl of ^cmiumg.— a grace of thirty-one days during which the contract will remain in full force will be allowed in the
payment of all premiums except the first. If death shall occur within the grace period the unpaid premium, if any, for the then current insurance year
will be deducted from the amount payable hereunder.
JBUfnfitalcment ot Contratt.— In case of default in the payment of any premium or interest the Company will reinstate tKe contract at
ftny time, if not previously surrendered for its cash value, upon written application by the Insured to the Company at its Home Office with
evidence of insurability satisfactory to the Company, paymer.t of all premiums that would have been paid in the intervening time if no default
had been made, with interest thereon at llie rate of five and one-half p)cr centum per annum computed from the premium due date, and payment
or reinstatement, with interest a' like rate, of any indebtedness existing at the time of default.
Cfjangt 0( JSfneficiarp.- flsattctfa on.— Provided this contract is not assigned, the Insured may at any time and frtjm time to tima
during its continuance change th* Beneficiary, to take effect only when such change and the written consent of the Company thereto are indorsed
upon the contract at the Home Wee of the Company, or attached thereto, whereupon all rights of the former Beneficiary shall cease. If the
Insured shall survive the Beneficiary or Beneficiaries or any of them named herein, the proceeds of the contract or the share of the deceased Bene-
ficiary or Beneficiaries, as the case may be, shall be paid to the executors, administrators or assigns of the Insured, unless otherwise provided ia
or by indorsement upon this contract.
instalment <£)pt(on,— The proceeds of this contract, if not less than SI ,000, may.be placed in trust with the Company to pay to the Bene*
ficiary from the time when such proceeds are payable, an annual income limited to a period ol years, or an annual life income, according tO-tho
accompanying tables. The Insured if living at the maturity of the contract as an endowment may exercise the same option.
CtnitteJl 3nxiUI».— AMY ONE OF THE NUMBER OF INCOMES MAY BE SELECTED.
Number or Annual Incoues
i
6
7
8
9
10
11
12
13
14
IS
16 17 13
19
20
21
22
23
24
25
26
27^
28
29
30
AuouKT CF Each Annual Incobu
PER $1,000
»2H
1
5,3,
S,5S
S!40
$127
$1,6
$107
$100
$94
$S8
$84
$S0 $76 $73
$70
$68
$65
$63
$61
$60
$58 $57
$55
$54
$53
$51
AnintnJ ttaem* tax Slfr.— mcOME
HOV/EVER, TO BE PAID FOR NUMBER OF YEARS STATED IN CASE OF PRIOR DEATH.
WlHIMuy NvuBEit OF Pavmbnts 20 1 18 1 17
,4 1 IS
AcB Attained When Proceeds are Pava&lb
16
S44
17
TO
21
22
TO
24
25
TO
27
S47
28
TO
30
$4S
31
AND
32
S^9
33
ANO
34_
$50
35
AUB
36
^^1
37
AND
38
5S?
39
ASD
40
41
AND
42
43 44 4S 46
=55 $>6 1 SS7 1 SSS
47
SS9
43
«ftn
49
S6I
50
"si
$63
52
«A4
53
54
867
Si
MiNiuuM Number or eAVMSNTs
■U
tT
12 1 11
1 ,0 i 9
?=•
AOE ATT.UNBD WnSN PaOCIEDS ARE PAVA.bLB | ^7 5^ 59
00
S7<1
62 1 63 ] 64J 6j
06 1 67 1 68 1 69
jnj 7,
Si02|s,04
72 1 73 1 74 1 75 1 76 1 77 1 78
79 80:7,
Akountop Each Annual PAYMENt PE![$l,000l 572 $7J S7S
s:7
JSO
S.'-.4
Ss5
s»i_
S91
S9J
i'.sUioi)
8,12
$l,J
s,is
s,,;
SI2;
S,JalSI32
$145$, 4S
tSraSt ^unb (Option. — The proceeds of this contract may similarly be placed in trust with the Company, to pay to the Beneficiary,
during the continuance of the trust, interest on such proceeds at the rate of three and one-half per centum per annum, such proceeds to be returned
at the termination of tlic trust, or to be paid to the execut >rs, administrators or assirns of the Beneficiary in event of death prior to such termina*
tion. The Insured if living at the maturity of the contract as an endowment may exercise the same option.
If any premium shall not be pSid on or before the date when due, and^ if
there shall be no indebtedness to the Company, the insurance will automati-
cally continue from eaid due date as term insurance during the term, including
the period of grace, specified in column 3 of the accompanying ta le and the
amount of cash specified in column 4, if any, will be paid as a pare endow-
ment at the end of the period, if the Insured is then living; or in lieu
thereof, upon written request made by the Insured within three months
from said due date and surrender of the contract the Company will, as the
Insured may elect, either issue a contract for the amount of paid-up insurance,
J( any. specified in column 2, or pay the cash value, if any, specificd'in column I.
If there shall be an indebtedn^ to the Company, and if any premium
shall not be paid on or before the date when due, an amount of insurance,
equal to the face amount of this contract less the indebtedness, will auto-
matically continue from said du5 date as term insurance, for the term, including
the period of grace, but not extending beyond the endowment period which
the exce.
%
C
YUaS DATS
ni__ji,..
...9.._. 322.
.11— ..43> .
IS =_
.14._ _■=..
12.„ _— .,
_S_J=:_
..l._ ..r-„
ftp II
-139.14.-
,.216.72_
$._...292.02..
S,._36S.37.,.
-i06_3i-
.SZi.9S.-
S....639J9_
$.-_7Q3.79._
< 76'i 07
$....817.49...
i_&i6.54_.
$.._.913.J1..
S..Ji7.23_
*Pa/ftb(e at the am] ol eniowmvitt period oc iirior ileub d tha Imw
WMI4 VALUCS AVAILABU DURING CONTtACT VBAIL
CNBOWMCttT.
APPENDIX
III — Continued
369
Settlement in Cbent of permanent tlTotal i^i^afiilitp
After one full annu^il premium stiall have been paid upon this contract and before a default in the payment of any lubsequent premjum,
if the leisured shall furnish the Company with due proof that he has since such payment, prior to the maturity of the endowment and before
having attained the age of 60. become wholly disabled by bodily injuries or disease, and will be permanently, continuously and wholly prevented
thereby for life from engaging in any occupation or employment for wage or proht. the Company will waive the payment of any future premiums
which may fall due on this contract during vich disabihty. and the premiums so waived will not be deducted in any settlement o( the contract.
Beginning six months after receipt of due proof of permanent total disability sustained as aforesaid the Company will pay to the Insured each
month. so long as he shall live and suffer such disability, an amount equal to SlOfor each $1,000 of insurance stated on the first page hereof.
such payments to be io addition to all other benefits hereunder provided. The Insured shall not have the right to commute such monthly in-
stalment payments
If the Insured shall furnish proof of like disabihty occurring after he shall have attained the age of 60, the Company will allow all premiums
falling due after rtjccipt of such proof, so long as he shall suffer such disability, to accumulate without interest as an indebtedness on this coo-
tract and the values in the table on page 2 shall increase in the same manner as if the premiums were being paid by the Insured.
In addition to or independently of all other causes of permanent total disability the Company will consider the entire and irrecoverable loss
of the sight of both eyes, or of use of both hinds, or of both feet, or of one hand and one foot, as permanent total disability within the meaning
of this provision
Upon written request signed by the Insured and upon return of this contract to the Company for proper indorsement, the Company will
annul this provision and thereafter the annual premium shall be reduced by the amount charged tor this benefit as stipulated on the first page
hereof. In any event any annual premium payable after the Insnred shall have attained the age of sixty years shall be reduced by the amount
charged for this benefit
(general Conbitionfi
iJIoMfitattonfl, ett.— No agent can make, alter or discharge this contract or extend the time for payment of premiums, nor can this contract
t« varied or altered or its conditions waived or extended in any respect, except by the written agreement of the Company, in compliance with
the law of the sute in which the contract is issued, signed by the President, or one of the Vice-Presidents or Secretaries, whose authority will not
be delegated.
itliSBlatemmt ot Sse. — If the age of the Insured was incorrectly stated in the application for this contract, the amount payable hereunder
diall be the insurance which the actual premium paid would have purchased at the true age of the Insured. Age will be admitted on satisfactory
proof.
.^an-lpapnicnt o( PtemfumS.— If any premium shall not be paid on or before thedate when due the liability of the Company sbalJ be only
SS hereinbefore provided.
9SB<511inml. — No assignment hereof shall be binding upon the Company unless made by an instrument in writing indorsed upon this con-^
tract or attached hereto, nor unless a duplicate shall be furnished to the Company forthwith upon its execution. The Company shall not be held
responsible for the validity of any such assignment Any claim made under an assignment shall be subject to proof of interest and extent thereof.
HInttbtCllnctid. — ^Any indebtedness to the Company on account of this contract will be deducted in any settlement hereunder. Any part
Ol the premium for the insurance year remaining unpaid at the death of the Insured shall be considered an indebtedness to the Company hereunder.
^ulciTie In case of suicide committed while sane or insane within one year from the date on which this insurance shall become effective
Gl6 limit of recovery hereunder shall be the premiums paid
Ctttire Conlrart.— This instrumenmnd the application constitnte the endrtf contract between the parties hereto, and all statements
purporting to be made by the Insured shall in the ab^nce of fraud be deemed representations and not warranties and no such statement shall
a\'oid the contract or be used in defence to a claim under the contract unless it be contained in the application herefor and a copy of such applica-
Gfis u 3S{as:h£slj!£!Jto-
370 INSURANCE PRINCIPLES AND PRACTICES
IV
DISABILITY CLAUSE
If after one full year's premium has been paid in cash and while this policy
is still in full force without default and not as paid-up or extended insurance
under the non-forfeiture provisions and before the anniversary date of the
policy nearest the Insured's attained age of 60 years the Company receives at
its Home Office due proof, in such form as it may require, that the Insured has
became totally and permanently disabled as hereinafter denned, the Company
will, without further apportionment of surplus to this policy and without de-
duction from the face of the policy at death of maturity and without affecting
the cash and other values.
Pay to the Insured ten dollars per month per $1,000 of insurance, said
monthly payments beginning six months after the receipt of such proof and
terminating with the last payment preceding the maturity of or settlement under
this policy whether by the death of the Insured or otherwise ; or such monthly
payments shall terminate with the last payment preceding cessation of such dis-
ability if that is prior to such maturity or settlement; and will also,
2. Pay the premiums under this policy as they become due during the life or
disability of the Insured, beginning with the premium due on the anniversary
date of this policy next succeeding the receipt of such proof.
Total and permanent disability hereunder is defined to be:
(a) The entire and irrecoverable loss of the sight of both eyes, or the sever-
ance of both hands at or above the wrists, or of both feet at or above the ankles,
or of one entire hand and one entire foot; or
(b) The total and permanent inability through bodily injury or bodily or
mental disease on the part of the Insured then and at any time thereafter to
earn or obtain any wages, compensation or profit at any kind of work, occupation,
business or profession.
Interest due on any outstanding indebtedness while this policy is in force by
virtue of the disabilit}' provision shall be paid to the Company in cash or, if
not so paid, shall be deducted from the monthly payments. All indebtedness on
this policy shall be deducted in the settlement at maturity whether by the death
of the Insured or otherwise.
Prior to and after having approved proof of the disability the Company may
from time to time, but not oftener than once a year, demand proof of the exist-
ence and continuance of such disability and a physical examination of the Insured
by an examiner appointed by the Company; and upon failure of the Insured to
furnish such proof or to permit such physical examination to be made, or
upon the Company being satisfied that the disability as above defined does not
exist, the monthly payments and payment of premiums by the Company shall
cease and determine and premium payments by the Insured under this policy
shall be resumed. If thereafter the premium payments are not so resumed the
liability of the Company under this policy shall cease and determine unless
otherwise provided in this policy.
The liability of the Company under this disability clause shall terminate:
(a) If the extra premium for the disability benefits is not paid in accordance
with the terms of this policy; or
(b) If this clause shall have been cancelled in writing by the Insured; or
(f) If the Insured shall voluntarily or involuntarily engage in military or
naval service in time of war, or in any ambulance, hospital or relief service in
a civilian capacity involving actual field service.
This disability benefit is given in consideration of the application therefor
and of the payment of an additional annual premium of $ , which
amount is included in the premium stated on the first page of this policy. Said
APPENDIX 371
IV — Continued
additional premium shall be paid with the premium otherwise required under
this policy and for the same period or until the anniversary date of this policy
nearest the Insured's attained age of 60 years, should that be prior; but the
payment of such additional premium and the liability of the Company under
this disability clause shall terminate on the anniversary date of this policy
nearest the Insured's attained age of 60 years, except that if the Insured shall
furnish due proof to the Company that he has become totally and permanently
disabled as hereinbefore defined after the anniversary date of this policy near-
est such attained age of 60 years, the Company will, without further action
on the part of the Insured, allow the subsequent premiums under this policy to
accumulate with interest thereon at 5 per cent, compounded annually as an
indebtedness and Hen against this policy until such time as the total indebted-
ness under this policy shall equal or exceed the cash value thereof at which
time this policy shall become null and void, subject to the notice provided for in
the loan clause of this policy; but no monthly payments shall be payable
hereunder if the disability occurs after the anniversary date of this policy
nearest the Insured's attained age of 60 years.
372 INSURANCE PRINCIPLES AND PRACTICES
V
AGENT'S CONTRACT
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374 INSURANCE PRINCIPLES AND PRACTICES
V — Continued
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APPENDIX
375
V — Continued
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APPENDIX
381
IX
POLICY LOAN AGREEMENT
I
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S3SS3NJ.IM
382 INSURANCE PRINCIPLES AND PRACTICES
(ORIGINAL)
RELEASE OF INTEREST
The consideration for which polic No _ , »..-__,...«,„ —..-<
open the life of_ _ _ „ _......_ ,
issued by THE MUTUAL LIFE INSURANCE COMPANY weU assigned to 'S having been fully saUsfied
and discharged, we being of legal age, hereby release all right, title and interest In said polic
fiHUttPHB fZ hand and seal at .^ _ ^ .in the Sute of
..-day of._ _ _ 19..
Signed, Scaled and Delivered
in Presence of
I.
f). B, — This OrlglaBl should be attached to the policy,
NOTE— DUPLICATE OF THIS IS FILED IN HOME OFFICE.
It- .J
XI
SURRENDER OF POLICY
./9/_
riLU IM PLJtCB AMD &ATC
For a Valuable Gonsiderafion* the receipt whereof is hereby ac]cnowIer«<>oi> In .Thr«r Dlanka >In«t Be Dlatlnrtlr •»<] FoIlT ABalTcr*d, «b4 Ikr C«mp*V7 R*a*rr*a Ik* RIckt t* R«««tT*
fkrv iBformallon MhoDld l< U« Deemed N>resMir7<
B«for« Maklns Oat Thia Slafcmcnl, Read Carefullj the laalmeflaBa on Pas« 4 *' TkU BlaBk..
1.— «. Nam« of Claimants in full. (Write namn Irgibly.)
— .
"
b. Agt of ClaimaMs.
c. Rcsidtntt of Claimants. (P. 0. Address.)
^
. — Name and residence of every physician who attended or
preacribed for the deceased during the year prior to death.
_ _...
9. — !• Ibe laid policy in jour possession?
141. — a. Has the policy ever been assigned? If »o, to whom
and when?
"■
*. Are there any endorsements on the polic>', other than
those made by the Company? If so, furnish a
* - ----
-
iworn copy.
JU — Was a Coroner's inquest held? If so, furnish the Com-
pany with a certified copy of the verdict.
12^—4. In what capacity, or by what title, do you make the
claim?
„ ..^ „.
b. Are yoD legally entitled to receive the entire amount
payable on the Policy?
13^— Was the deceased, at the time of hii death, insured in any
other Companies? If so, in what Companies, and
for what amount in each Company?
|4y— Are there any proceedinga in bankruptcy now pending
against the msurrd or any of the claimants?
Having been duly s%Torn, —
knowledge and belief.
Witoeaa- -..hand this—.-..
• hereby depose and say that the answers to the above questions arc true, and full, to the best of-
Stale of ..:
Courtly of .
>ss.
Cn ikit.
..day of..
../p..
personally appeared before me the above named
•o me known, who subscribed the foregoing statement in my presence inj made oath that the answers Jo the questions therein made by are
Iroe atnl full, i.i ihe best of — knowledge, recollection -any belief-
Each affidavit mu)it be miule before a noiair pnblle or other ofttccr duly authorized to admliJster oaths aud his ofllclal
•ral attached, or, if he li.i»-o no seal, his authorltx JubI ttte gcnuineoesa ot his alKnatnre must be attested by the clerk of a couat
ol record.
384 INSURANCE PRINCIPLES AND PRACTICES
(B)
XII — Continued
STATEMENT OF THE UNDERTAKER
The Undertaker's Certificate is to be executed by the undertaker or sexton who interred the deceased. II necessary, H
may, with slight change, be executed instead by the clergyman who officiated at the interment
In Proof of the Death of..
1.— d. Name of Drcfaied.
b. Rcsidfnce and occupaiioD,
t. Age of deceased.
Were you penooaUy acqi^inted with the deceased?
h. U so, state for bow loDg.
r. Do you know the body interred by you to be that of
the person described in the accompanying statement
of the claimant in this case?
].— Place and Dale of Death.
4.— 'Place and Date of Intermeot.
e. Year^..
Moiuhf.
Day»
Place. Dale
Place.-
Dsle
Having been duly twom, I bereby depose and make oatb thai the answers to the foregoing questions are true, to the best of ay knowledge
and belief.
Dated at
-, tbi»-
-.day of-
..1»~
State 0/
County of .
On this.-
• day of-..
..19 :, personally appeared Ibefore me ibe above named
-« — ." to rae known, who, being by roe duly sworn, deposed that the answers (o the
Obove questions arc full and true, to the best of his knowledge, iofonsatioa and belief, and subscribed the same in my presence.
'mpiom5, its history, and the symptoms present
during its progress.
State the immediate cause of death.
Cr tl death was not due to disease, state whether it was
Caused by suicide, atfcidcni or any other agency.
Civr full particu1ar9.
di Was a Post-Morttm exaniinaiion niadc;'by whom, and
with what results?
#, Had deceased any other disease, acute or chronic, or
had he ever had any injury, infirmity or surgical
operation?
/. Was there anything m the habits, or mode of life or
residence of deceased, predisposing him to disease?
if. Stair the apparent age of deceased,
]0.-*S!atf whether, in your opinion, the disease or death was
superinduced by intemperance of any kind.
11.*- Did the deceased have any hereditary predisposition to
ihr disease of which he died? If so, please state the
farliculjrs.
T"*' " ■ - ■ ■ -.w i i— i i»w ■- "• -■ .— ' ^. — .■ I. .I,-^—...,. ,
Having been duly sworn, t hereby depose and say thai the statements in the furrtzcing ;.nswers aic true, and fu!l, to ihe best of fOf
knowledge and belief; and that iheie arr no nuterial facts in the case ^vhich are rot d^sclcKed.
Dated ai«
this— — •^» day of
..19-.
State of ,:.«».^ „„ 1
County o/ ..:..-...- J
Attending Phyijcian.
P. O. Address- .
Oa itiii
^■.,day of—
...J^— ^ prrsonatly appeared before me, the above
jiamed ..-.—.«. -.j...„...™..*™ '. —...-.- -.«.«...„..._—...« -.... to me Irown as a physician in regular sfandtn;*. who being
tiy mc duly sworn, deposed iha* the answers, to the above queiiions are full and true, lo ihc besi of his knowledge, informat'oit and belief, anJ-
VUbscrihed the $.;nic in ir.y pretrnce'.
Earh nflMHvlC must be inado before a riotAry public or e»ther officer duly nuthorixed to administer oalh-* nnd Ms ofTirlal
mo] aetnrhert, ur, U lie hn\e no scnl, his authorUy and tho genuineness of lUs signature must be attcslrd by the clerk of a court
of record.
386 INSURANCE PRINCIPLES AND PRACTICES
XII — Continued
^
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:
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J
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ttrance
th
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m Pai
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lli 1
•S Cl 5 «^ Ot
)
1 i
:::::! 1
:::::;:
Premium Notes $
Interest on do
Automatic Loan
Deferred Premium
Option Settlements
Interest on do
<^ ««i w
^1
•5 "2 " 5
a ^ •? ^
2 ^ \, *^
4 oi Q OS
0.
^5 cJ;
as
«2
(DO NOT WKPTB OR PASTE AMTTBINO ON TBI9 PACS.)
Tht Proofs of the Claim under Policy No „.„... ....»
i I.
19
...insuring tht lift «/
Dollars, have teen duly examined, and settlement thereof is hereby authorited.
CORJRECT
Saft. Claimt.
President.
Medical Director.
INSTRUCTIONS
READ CAREFULLY
It th« policy bmrs data prcTinu t» Jane 1, 1871, furnish a copy or the written portion of the policy, and atate the number of tk*
form upon which It Is written (thla can be found under the Revenue Stamp).
The Claimant's Certificate Is to be executed by the person legally entitled to receive the money, who must state by what title h»
or she makes the claim, whether as the bencHclary named In the policy, or as executor or administrator, or as guardian, or other legaj
representative of a minor, or as a trustee, or as assignee. In caae of onuisnment. interest must be proved, and a copy of the assign-
ment furnished. Executors, qdmlnlntmloro and Gpaar4lans must send certified copies of their appointment and certificate of qualifica-
tion. Trustees must exhibit their authority. Where policies are payable to heirs evidence as to heirship must bo submitted for wblcb
purpose blanks will be furnished.
Every question must be distinctly and fully answered, all being legibly written in ink. The company reserves the right to
ask any further questions necessary under the circumstances of any particular case.
All papers in a foreign language must be accompanied by a sworn translation, and if the oath be administered in a foreign
country, the official character of the person administering the same, or of the clerk or other officer of a court certifying tbereta
must be authenticated by a Consul or Minister of the United States, residing in such foreign country.
APPENDIX
387
XIII
PROOF OF DEATH (AGENT'S STATEMENT)
m
The
Policy No.
Mutual Life Insurance Co.
AGENT'S STATEMENT ^
Date of Policy-
rr IS IMPORTANT THAT AGRNT' SHOtTLD FILL OUT THIS BLANK 'niTH CARE, ■■ the Companr Kile* mach span tk«
ftBnrera b1t«ii by tbr AjcrnC to the qacal na propoonded. 'Whrn thej connot anawpr the qarstlooa from pemonal knovrledge, they are
reqveated to do ao apoa their l>es< kno^vledKe, Information or belief, atatlns the ^ronnda of aarh koowledce. Information or belief.
Agents can greatly facilitate the settlement of Claims if they will see, before forwarding proofs, that all blanlcs have been
properly filled and every question answered; also that the instructions have been strictly carried out.
In many cases a letter from the Agent, giving the information in his possession regarding the claim, will clear up doubtful
points and prevent delay in settlement.
1.— tj. Name of Deceased*
a „
b
c. Occupation.
c
2.— Place and Date of Death.
Place Date
3. — Have you seen the body of the person deceased, and
is it to your knowledge the body of the person de-
scribed in the above named policy of insurance?
4. — If you have not seen and identified the body, have
you satisfied yourself by other evidence, and if so.
what, as to the identity of the decedent, with the
person insured under the above policy?
5. — State all the facts and circumstances within your
knowledge relating to the cause of death.
6. — Is there any circumstance within your knowledge,
information or belief, or have any facts come to
your knowledge, inconsistent with the statements
made in the application of the insured?
7. — Had the deceased, within your knowledge, violated
any of the conditions of said Policy of Insurance?
8. — a. Give date of last Premium payment on said policy.
b. Amount of last premium paid.
c. State whether Annual, Semi-Annual or Quarterly.
b. Gross $ Dividend $ Net $ -
9. — Do you know of anything invalidating the right of
the parties in interest to recover the amount in-
sured by said Policy?
10. »^Have you examined the proofs, and do
they conform to the instructiona on the back
of the proof blanks?
11. — Do you believe all the statements in the certificates,
marked A, B, C and D, to be true and correct?
Paled aC-
Jhit.
jday o/_
./9_
Atait.
CounlenlgneJ by-
Cer.trat AgenL
388 INSURANCE PRINCIPLES AND PRACTICES
XIV
WISCONSIN VALUATION REPORT ON FRATERNAL SOCIETIES
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XIV — Continued
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390 INSURANCE PRINCIPLES AND PRACTICES
XV
SUMMARY OF OPERATIONS OF WAR RISK INSURANCE BUREAU
(LIFE)
June 30, 1920.
Policies Amount
Term insurance (temporary) policies issued 4,617,593 $40,155,148,000
Terminated by expiry 125,110 1,141,438,000
Revoked 7,100 58,589,000
Converted policies issued 152,979 511,821,500
To officers 19,479
To enlisted men 133,500
Average size of converted policies, $3,346.
Converted policies terminated by death and disability, 378,000
Ratio of death losses to American Experience Table, 40 per cent.
Classification of converted policies issued:
«
Policies Amount
Ordinary Life 17,462 $ 77,986,000
20-Payment Life 45,208 182,830,500
30-Payment Life 4,184 19,859,500
20-year Endowment 17,011 168,276,000
30-year Endowment 8,925 35,353,500
Endowment at age 62 6,189 27,516,000
Total 152,979 $511,821,500
APPENDIX
391
XVI
ACCIDENT AND HEALTH POLICY
TEN DOLLAR ACCIDENT AND SICKNESS POUQ"
Paying indemnity for Lou of Life by Accidental Means a< prorided by Part V and for lot*
of Life, Limb, Limbt or Sight by Accidental Mean* as Provided in Part I, and for
Lots of Time by Accidental Means, and Sickness, and Indemnity for Cer-
tain Fractures and Identifying Service, to the extent herein provided.
MAXIMUM DEATH BENEFIT
Under Part I
$7500.00
No-
maximum WEEKLY ACCIDENT INDEMNITY
Under Part II
$50.00
WEEKLY SICKNESS INDEMNITY
$25.00
(Eafiualtg (Enmpang
(HEREINAFTER CALLED THE COMPANY)
4ltl Ql'IlttStUPrSIlOtt Ot the sutements in the application, a copy of which is endorsed hereon and made psrt hereof, tad
OF TEN DOLLARS ($10.00) PREMIUM
fiprpbg ilnaurpB ~
subject to all the provisions and limitations herein contained, for the term ot ONE YEAR from noon, standard time of the day and
at the place this policy is dat^d, against the effecu of BODILY INJURIES caused directly, solely and independently of all other
causes by External, Violent and Accidental means, which bodily injuries or their effects shall not be caused wholly or in part, directly
or indirectly, by any disease, defect or infirmity, and which shall irom the date of the accident result in continuous disability and
also against the effects of SICKNESS, as follows:
ACCIDENT BENEFITS
PART 1 Value First Year Annual Increase Value After Fifth Year
Under Part 1 Under Part 1 Under Part I
For Loss of Life $5,000.00 $500.00 $7,500.00
For Loss of Both Eyes 3.500.00 350.00 5.250.00
For Loss of Both Hands 3,500.00 350.00 5,250.00
For Loss of Both Feet 3,500.00 350.00 5,250.00
For Loss of One Hand and One Foot 3,500.00 35000 5.250.00
For Loss of One Hand 875.00 8750 1,312.50
For Loss of One Foot 87500 87.50 1.312.50
For Loss of One Eye 375.00 35.00 550.00
Resulting within thirty days from date of accident solely from such injuries, but only when such injuries are sustained whils
actually riding as a passenger in a place regularly provided for the transportation of passengers only, within a railroad car, elevated
subway or interurban railroad car, street car or steamboat, provided by a common carrier for passenger service by reason of the
wrecking of any such car or steamboat; or
PART II FOR LOSS OF TIME— FIFTY DOLLARS (50.00) PER WEEK
Not exceeding ten consecutive weeks if injury sustained in the manner specified in Part I shall not cause any of the Losses
in Slid Part I mentioned, but shall from the date of the accident continuously and wholly prevent the Insured from attending to
any and every kind of business or labor
WEEKLY INDEMNITY
t>ART m. FOR LOSS OF TIME— TWENTY-FIVE DOLLARS $(25.00) PER WEEK
Not exceeding ten consecutive weeks, if such injuries shall from date of accident continuously and wholly prevent thS
Insured from attending to any and every kind of business or bbor. but only when such injuries are sustained in the manner specified
in Clauses 1 to 16 of this Part III.
1. WHILE ACTUALLY RIDING AS A PASSENGER IN A PLACE regularly provided for the transportation of passeif
gers only, within a railroad car. elevated, subway or interurban railroad car, street car or steamboat, provided by a common carrier for
passenger service ; or
2 WHILE A PASSENGER WITHIN AN ELEVATOR provided for passenger service only; or
3. BY THE BURNING OF A DWELLING, HOTEL, OFFICE BUILDING. THEATRE, SCHOOL, CHURCH, LODGE
SOOM, CLUB HOUSE, STORE OR BARN, in which the Insured may be burned by lire or JuSocated by smoke, provided the Insured
shall not be assisting or acting as a watchman, policeman, or a volunteer or paid fireman ; or
4. WHILE WALKING ON A PUBLIC HIGHWAY, by being injured by actual contact with a bicycle or any moving con-
veyance or vehicle, provided the Insured is not or has not been employed or engaged on or about the conveyance or vehicle or is not
•topping or attempting to stop a runaway ; or
5. WHILE RIDING WITHIN A PRIVATE AUTOMOBILE,- not being used for any business purpose or any work what-
soever and provided that the Insured shall not be a hired operator thereof (but this exception shall not apply to any physician or
aargeon then employed in the practice of his profession or any commercial traveler or buyer selling or buying goods from sample for
future delivery only, collectors of accounts, or regularly licensed real estate and insurance agents in their pursuit of business) ; and
only in case of accident which shall materially injure the automoiiilc; or
6. WHILE RIDING UPON A BICYCLE (not a motorcycle) and caused solely and directly by reason of a collision with
another bicycle or any moving conveyance ; or
7. WHILE RIDING UPON A MOTORCYCLE and caused solely and directly by reason of a collision with any moving
conveyance, except another motorcycle, and not being used for any business purpose or any work whatsoever (but this exception shall
not apply to any physician or surgeon then employed in the practice of his profession, or any commercial traveler or buyer selling or
buying goods from sample for future delivery only, collectors of accounts, or regularly licensed real estate and insurance agents in their
vsual pursuit of business) : or
e. AT THE HANDS OF ANY BURGLAR. HIGHWAYMAN OR ROBBER when robbing the Insured by force; or
9. BY THE EXPLOSION OF A STEAM. STATIONARY. LOCOMOTIVE, OR MARINE BOILER, when such explo-
Sioit causes destruction of such boiler; or
10. BY A REGULARLY LICENSED PHYSICIAN, SURGEON. DENTIST. UNDERTAKER OR NURSE accidentally
cutting or wounding himself while holding an autopsy or performing a surgical operation and simultaneously therewith becoming inocu-
lated with poison; or
392 INSURANCE PRINCIPLES AND PRACTICES
XVI — Continued
n. WHILE RIDING WITHIN A CONVEYANCE drawn by horse power, provided that the Insured shall not then be a hired drivef
«hereof nor be riding or dnving in or upon any conveyance conuining any merchandise or used for any business purpose or any work whatsoever
(bnt this exception shall not apply to any physician or surgeon then employed in the practice of his profession or any commercial traveler or buyer
■eUing or buying goods from sample lor future delivery only) and only in case of an accident which shall materially injure the conveyance ; or
12. By being KICKED BY A HORSE OR GORED BY A BULL OR COW; or
13. WHILE GETTING ON OR OFF OR BEING ON THE STEP OR PLATFORM OF ANY CONVEYANCE specified in Part I: or
14. WHILE ACTIVELY ENGAGED IN FARMING, by actual contact with and while operating a THRESHING. MOWING REAPING
or BINDING MACHINE. HARROW or PLOW: or
15. BY BEING STRUCK BY LIGHTNING. CYCLONE, or TORNADO, as defined by the United States Weather Bureau; or
16. WHILE WALKING ON A PUBLIC STREET OR SIDEWALK, by being struck by a falling sign-board, awning, brick, stone, or
other debris falling from a building (except buildings in process of construction, repairs or demolition
PART IV
FRACTURE OF BONES BY ANY ACCIDENT
FOR LOSS THROUGH THE COMPLETE FRACTURE OF ANY BONE IN THIS PART MENTIONED BY ANY ACCIDENT IN
OR OUT OF BUSINESS, except if covered under Parts I. II or III, as follows:
SkuU $150.00
Pelvis, haunch bone 150.00
Jaw. upper or lower 50.00
Femur, thigh 50.00
Radius and Ulna, fofearm, both bones. . 50.00
Radius or Ulna, either 25.00
Spine, Vertebrae $100.00
Scapula, shoulder blade 100.00
Humerus, upper arm 50.00
Sternum breast bone 25.00
Ribs, one or more 25.00
Patella, knee bone ; $50.00
Tibia and Fibula, lower leg, both bones 50.00
Tibia or Fibula, either 25.00
Clavicle, collar bone 25.00
Coccyx, end of spine 25.00
But in case of more than one such fractures, payment shall only be made for one thereof, the Insured having the right to elect for which fracture
payment shall be made
PART V.
The C^pany will pay Tor loss of life of the Insured which results within thirty days from date of accident, solely from sucRSnjuries caused
by an accident in or out of business if not otherwise covered by this policy, and which shall have caused continuous total disability from date of
acddest to date of loss, the sum of ONE HUNDRED DOLLARS ($100.00).
PART VI.
II the Insured shall in consequence of ANY ACCIDENT IN OR OUT OF BUSINESS not otherwise covered by the policy be continuously
con6ned within the house and regularly visited therein by a Licensed Physician, not leaving it at any time for any purpose whatsoever and shaU
be wholly prevented from attending to any and everv kind of work or business, for a period of not less than thirty (30) consecutive days from date
of the accident, the Company will pay the sum of TWENTY-FIVE ($25.00).
PART VIL
HOSPITAL BENEFITS
FOR LOSS FROM CONFINEMENT IN A PUBLIC OR PRIVATE HOSPITAL in his home town or in a hotel or hospital away Irom his
borne town, for not more than five consecutive weeks, resulting fropi such injuries caused by ANY ACCIDENT IN OR OUT OF BUSINESS
■for which no other indemnity is provided by this policy, and which causes continuous total disability from its date.
TWENTY-FIVE DOLLARS ($25.00) PER WEEK
S^ART VIII
SURGEON'S FEES— NON-DISABLING INJURIES
If the Insured suffers injury in any manner described in Parts II or III hereof, and such injury shall not result in either disability or death,
Vut shall require medical or surgical treatment by a legally qualified physician or surgeon, the Company will reimburse the Insured for the cost
thereof in an amount not to,^exceed TEN DOLLARS ($10.00), the attending physician's or surgeon's receipt for services being deemed sufficient
proof under this clause, but such receipt must be furnished the Company within 90 days from the date of accident.
PART IX.
SICKNESS BENEFITS
If the Insured shall be continuously confined within the house, not leaving it at any time or for any purpose whatsoever, and regularly
visited therein at least once in every seven days by a Licensed Physician and be wholly prevented from transacting any and every kind of
business solely by
Abscess of Brain
(when operated upon)
Achondroplasia
Acne
Acromegaly
Acute Lead Poisoning
Acute Yellow Atrophy
of Liver
Addison's Disease
Aneurism of Aorta
Appendicitis
initial attack and only
when operation for
removal o f appendix
is performed
Asiatic Cholera
Anaemia or Chilblain.
Barber's Itch
Boils (Furuncle)
Bubonic Plague
Calentura Fever
Cancer
Carbuncle
Charcot's Joint Disease
Chicken Pox
Chorea (St. Vitus Dance)
Contagiosum
Darien's Disease
Dengue Fever
Diphtheria
Eczema
Elephantiasis
(due to filiari san-
guinis hominis)
Epilepsy
Felon
General Paresis
Goitre
Hemophilia
Hives
Hordeoluin
Hydrophobia
Ichthyosis
Impetigo Contagiosa
Ivy Poisoning
Leprosy
Lichen Planus
Lockjaw (Tetanus)
Locomotor Ataxia
Malignant Pustule
(Anthrax)
Malta Fever
Measles
Molluscum
Morphea
Mumps (Parotitis)
Mushroom Poisoning
Myositis Ossificans
Myzedema
Noma
Osteomalacia
Pertussis
Phlebitis
Pityriasis Rubra
Pneumonia (lobar)
Pruritus
Pseudo Hypertrophic
Paralysis
Psoriasis
Purpura Hemorrhagica
Rhinoscleroma
Rothein
Rubella
Scabies
Scarlatina
Scarlet Fever
Shingles (Herpes Zoster)
Scleroderma
Scurvy
Small Pox
Spinal Meningitis
Tape Worm
Trachoma
Trichinosis
Typhoid Fever
Typhus Fever
Vaccinia Fever
Varicella
Varioloid
Verruca
Von Recklinghausen's
Disease
Yellow Fever
Yellow Jaundice
not including their complications And consequences, provided tlaat ^"his insurance shall have been in continuous force for thirty days from its date
prior to the contraction of the disease, the Company will pay ^or such confinement alter the first seven days and not exceeding ten weeks a
weekly indemnity of TWENTY-FIVE DOLLARS ($25.00).
PART X.
EMERGENCY BfeNEFIT— REGISTRATION, IDENTIFICATION AND FINANCIAL AID
The Company will register the person insured hereunder and if he shall by reason of such injuries or sickness be physically unable to commn-
olcate with friends, will, upon receipt of a message giving this Policy Number, the number of the Key Tag, or the number on the card in the card case,
■which are famished with this Policy, immediately transmit to such relatives or friends as may be known to it. any information respecting him. aod
will defray any expenses necessary to put him in communication with and in the care of friends, not exceeding^
ONE HUNDRED DOLLARS
APPENDIX 393
XVI— Continued
GENERAL PROVISIONS
The loss of any member or members specified herein shall mean the loss by actual and complete severance at or above the wrist or ankle; loss of
tyt or eyes shall mean the irrecoverable loss of the entire sight thereof.
This Policy may be renewed by the payment of annual premiums in advance, and a receipt signed by the Secreury and countersigned by a licensed
agent of the Company shall be the only evidence binding upon the Company of the payment of a renewal premium.
I This insurance does not cover (1) an employee of a common carrier, news company or the Government, while on duty, excepting only em-
ployees whose duties call them solely in the office and away from track, train, yard, roundhouse and repair shop; (2) while in or on a balloon or other
aerial machine or conveyance; (3) miners while at work; (4) suicide or an attempt thereat while sane or insane; (5) while intoxicated or under the
influence of or affected by or resulting directly or indirectly from intoxicants or narcotics, anaesthetics, gas, corrosives, poison, infec-
tion, or poisonous substances except provided in Clause 10 of Part III; (6) while riding or driving in races or sustained by professional motorcycle
or bicycle riders; {?) the result of the intentional att of the Insured or any other person, except as provided by Clause 8 of Part III; (8) any loss
contributed to or caused by any mental or bodily infirmity or venereal disease, vertigo or exposure to unnecessary danger; (9) while violating law;
(10) while walking over or on the roadbed or bridge of any railway, except while crossing at a public street or highway; (11) injuries, fatal or
non-fatal, except drowning, of which there shall be no visible mark or contusion on exterior of the body at the place of injury, the body iuelf in ca^e
of death not to be deemed such (12) while engaged in military or naval seri-ice; (U) while engaged in playing football or handling explosives or
firearms; (14) sickness contracted prior to the date of this policy or from any disease or sickness not named in the policy, or complicated with
• disease not specifically covered by this policy, or (15) unless sustained in the United' States, Canada, Europe or Mexico.
No recovery may be had under more than one of the provisions hereof and in no event shall th« Company be liable under Part I for more than
one of the specific losses named therein, and any payment hereunder, other than for weekly Indemnity, or as provided by Parts IV, VI, VII, VIII,
or X, shall terminate this policy. No assignment of this policy or change of beneficiary shall be valid unless approved by an. executive officer of the
Company end an endorsement shall be made hereon as provided by Standard Provision Number 2.
Strict compliance on the part of Insured and Beneficiary with all provisions of this Policy is a condition precedent to recovery hereunder, and
•ny failure in this respect shall forfeit to the Company all right to any indemnity.
Between the ages of sixty and seventy all benefits hereunder shall be reduced one-third.
No provision of the charter or b^-laws of the Company not incorporated in full herein shall avoid the Policy or be used in evidence in an^
tegal proceeding. The Authority of the General Agents or Special Agents of this Company, including the Agent issuing or countersigning this
Policy, is limited to securing applications for personal Accident and Health Insurance, and to the execution or countersigning of the same, wher«
written authority is given therefore, and for the collection of premiums upon such executed policies. The authority of all attorneys in fact for thi»
Company is limited to the acts to be performed as set forth in the Power of Attorney appointing such Attorney-in-Fact. This Section relates to
and limits the authority and power of every Agent and other representative of this Company in the manner set forth in this paragraph.
STANDARD PROVISIONS
1. This Policy includes the endorsements and attached papers, if any, and contains the entire contract of insurance. No reduction shall be
made in any indemnity herein provided by reason of change in the occupation of the Insured or by reason of his doing any act or thing pertaining
to any other occupation.
2. No statement made by the applicant for insurance not included herein shall avoid the Policy or be used in any legal proceeding hereunder.
No agent has authority to change this Policy or to waive any of its provisions. No chahge in this Policy shall be valid unless approved by an
executive officer of the Company and such approval be endorsed hereon.
3. If default be made in the payment of the agreed premium for this Policy, the subsequent acceptance of a premium by the Company or by
any of its duly authorized agents shall reinstate the Policy, but only to cover accidental injury thereafter sustained and such sickness as may begin
more than ten days after the date of such acceptance.
4. Written notice of injury or of sickness on which claim may be based must be given l!o the Company within twenty days after the date of
the accident causing such injury or within ten days after the commencement of disability from such sickness. In event of accidental death
immediate notice thereof must be given to the Company.
5. Such notice given by or in behalf of the Insured or beneficiary, as the case may be, to the Company at Philadelphia, Penna., or to any
authorized agent of the Company, with particulars sufficient to identify the Insured, shall be deemed to be notice to the Company. Failure to give
notice within the time provided in this policy shall not invalidate any claim if it shall be shown not to have been reasonably possible to give such
dotice and that notice was given as soon as was reasonably possible.
6. The Company upon receipt of such notice will furnish to the claimant such forms as are usually furnished by it for filing proofs of loss. If
Such forms are not so furnished within fifteen days after the receipt of such notice, the claimant shall be deemed to have complied with the require-
ments of this Policy as to proof of loss upon submitting within the time fixed in the Policy for filing proofs of loss, written proof covering the
occurrence, character and extent of the loss for which claim is made.
7. Affirmative proof of loss must be furnished to the Compa ny a t its said office in case of claim for loss of time from disability within ninety
days after the termination ol the period for which the Company is liable, and in case of claim for any other loss, within ninety days after the date
cf such loss.
8. The Company shall have the right and opportunity to examine the person of the Insured when and so often as it may reasonably require
during the pendency of claim hereunder, and also the right and opportunity to maice an autopsy in case of death where it is not forbidden by law.
9. Ail indemnities provided in this policy for loss other than that of time on account of disability will be paid immediately after receipt,
cldue proof. 4
10. Upon request of the Insured and subject to due proof of loss all accrued indemnity for loss of time on account of disability will be paid'
at the expiration of each thirty days during the continuance of the period for which the Company is liable, and any balance remaining unpaid at'
the termination of such period will be paid immediately upon receipt of due proof.
, II. Indemnity for loss of life of the Insured is payable to the beneficiary if surviving the Insured, and otherwise to the estate of thelnsured.
All other indemnities of this Policy are payable to the Insured.
' • 12. If the Insured shall at any time change his occupation to one classified by the Company as less hazardous than that stated in the Policy, the
Company, upon written request of the Insured and surrender of the Policy,will cancel the same and will return to the Insured the unearned premium.
13. Consent of the beneficiary shall not be requisite to surrender or assignment of this policy, or to change of beneficiary, or to any other
changes in the Policy.
14. No action at law or in equity shall be brought to recover on this Policy prior to the expiration of sixty days after proof of loss has been
filed in accordance with the requirements ol this Policy, nor shall such action be brought at all unless brought within two years from the expiration
of the time within which proof of loss is required by the Policy.
15. If any time limitation of this policy with respect to giving notice of claim or furnishing proof of loss is less than that permitted by the law
of the state in which the insured resides at the time this policy is issued, such limitation is hereby extended to agree with the minimum period penoit*
ted by such law.
16. The Company may cancel this policy at any time by written notice delivered to the insured or mailed to his last address, as shown by the
records of the Company, together with cash or the Company's check for the unearned portion of the premiums actually paid by the insured, and such
cancellation shall be without prejudice to any claim originating prior thereto.
17. If the Insured shall carry with another company, corporation, association or society other insurance covering the same loss without giving
written notice to the Company, then in that case the Company shall be liable only for such portion of the indemnity promised as the said indemnity
bears to the total amount of like indemnity in all policies covering such loss, and for the return of such part of the premium paid as shall exceed the
pro rata for the indemnity thus determined.
20. The insurance under this policy shall not cover any person under the age of sixteen years nor over the age of seventy years. Any premium
paid to this Company for any period not covered by this policy will be returned upon request.
3n Hilttraa 131|rrP0f the casualty company has caused this policy to be signed by its President and Secre.
tary in the City of , Penna., but the same shall not be binding on the Company until signed by its authorized A^eat.
Not valid if issued or dated after
Dated this -, day of.
Countersigned by ,,,,.. Licensed Agent at...
394 INSURANCE PRINCIPLES AND PRACTICES
XVI— Continued
COPY OF APPLICATION
f hereby apply for Limited Accident and Sickness Insurance in tlie Casully
Company to be basefl upon the following representation oT facts:
What is your name* Age?
Race?
What is your weight? Jbs. and Height?
feet
Inches.
Where do you reside? No.
Street
Town State
What is your occupation?
To whom is Policy to be payahle in case of death under its provisions?
Full name Relationship
Residence Age
Have you ever had fits, diabetes, kidney disease, syphilis, Iieart disease, hernia or any disease of the
nervous system?
Have you lost a hand, foot or eye or the use of either?
Are you in whole and sound condition?
Have you had medical attendance within the past twelve months?
Have you any insurance in this Company?
Are you now carrying or have you applied for any other Accident or Health Insurance?
Has any application ever made by you been declined, or has any policy issued to you been cancelled
or renewal refused by any Life, Accident or Health Insurance Association, Company or Society?
Dated at. this day of .19. ^ . ,*
Signed .....a
In the event of any acxident or any sickness full particulars
should be given inunediately to the Compemy at
Penna. It is not necessary for the insured or the Beneficiary to
omploy any person to collect any indemnity provided in this policy.
APPENDIX 395
XVII
ACCIDENT AND HEALTH POLICY
Form XHD. This Policy provides for loss of Life, Limb, Sight and Time, caused by accidental
bodily injuries effected through external violence, and for disability caused by
disease, to the extent herein provided*
THE
Insurance Company
Does Hereby Insure
under cUisificaiion. -„, , , ■ —by occupation •
against loss resulting from Bodily Injuries, effected directly and independently of all other causes, through External. Violent and Accidental means
(Suicide, sane or insane is not covered), and against disability by Disease, as specified in the following Schedules, respectively, subject (0 tho
proviftioiu and limitations hereinafter contained.
Schedule of Indemnities — Accident Insurance
rW Principal Sam <^ this Policy U $
f>«irt A. Death, Dismemberment and Loss of Sight — Single Indemnity
If such injuries shall wholly and continuously disable the Insured from the date of accident from performing any and every kind of duty per-
taining to his 6ccupation, and during the period of sudi continuous disability, but within two hundred weeks from date of accident, ehall result
independently and exclusively of all other causes in any one of the Josses enumerated in this part, or within ninety days from the date of the
accident, irrespective of total disability, result in like manner in any one of such losses, the Company will pay the sum set opposite such loss and
in addition weekly indemnity as provide.
Elective Benefits
The Insured, if he so elect m writing within twenty days from date of accident, may taSe, in lieu of the weekly indemnity hereinbefore pro*
vided for total and partial disability, indemnity in one sum, according to the following Scb^ule, if the injury is one set forth in such Schedule,
but not more than one Elective iKneHt &h.ill be paid for injuries resulting from ooe accident. When Che Insured is entitled to double indemnity
the Elective indemnity shall be doubled in like manner.
396 INSURANCE PRINCIPLES AND PRACTICES
XVU— Continued
ACCIDENT AND HEALTH POLICY
Schedule of Elective Benefits
If the (ingle weeldy indemnity for total loss of time payable under this Policy is $50.00. the amounts named below shall be payable: if such weekly indemniiy
is greater or less than $50.00, the amounts to be paid shall be increased or reduced proportionately.
FOR LOSS FOR THE COMPLETE FI^CTURE OF BONES
Of one or more Fingers (at least one entire phalanx) $300 Of the Skull, both tables , $650
Of one or more entire Toes " 40O Of the Lower Jaw ... 150
Of the Collar Bone '. . .- 300
Of the Pelvis 500
FOR COMPLETE DISLOCATION Of the Thigh , , 600
Of the Shoulder 200 Of the Leg 400
Of the Elbow 200 Of the Knee Cap 400
Of the Wrist 250 Of the Arm. between Elbow and Shoulder . 600
Of the Hip 600 Of the Forearm, between Wrist and Elbow . , . 300
Of the Knee 300 Of two or more Ribs 20O
Of any Bones of Foot, other than Toes .... 300 Of the Foot, other than Toes -250
Of the Ankle 300 Of the Hand, other than Fingers 250
Of MO or more Toes . 100 Of two or more Toes 200
Of two or more Fingers 100 Of two or more Fingers . " 20O
Schedule of Indemnities — Health Insurance
Part & ^
(1) For the period of continuous disability during which the Insured shall, independently of a!I other causes, be wholly disabled
Tanporarg and prevented by bodily disease, not hereinafter excepted, from performing any and every kind of duty pertaining to his occupation,
Disahiiitu *^^ Company will pay a weekly indemnity of $ ; and if following such a period of total disability, he shall be
' continuously wholly disabled and prevented by bodily disease, not hereinafter excepted, from performing at least half the work
essential to the duties of his occupation, the Company will pay during the period of such partial disability, a weekly indemnity
of one-half of the weekly amount provided for total disability; but no payment shall be made for disability of cither or both
kinds in excess of fifty-two consecutive weeks' duration.
(2) If the Insured shall suffer the entire and irrecoverable loss of the use of both hands or both feet, or of one hand and one
Permanent foot, or the sight of both eyes, as the result of such disease the Company will continue to pay him in lieu of all other indem*
DisohilUy nity, except for surgical or hospital I.idemnity, the weekly indemnity specified in Section 1 of this Part during such period as the
Insured shall independently of all other causes be thereby wholly and continuously disabled and prevented from engaging in any
occupation or employment for wage or profit, but no payment under this Section 2 shall be made (or any period of disability in
excess of one hundred (100) weeks.
The Payment jor Permanent Disability shall end this Policy.
No payment shall be made for disability resulting from any disease for which the Insured is not treated by a physician or from disease beginning within
fifteen days from noon of the date oi this Policy-
Surgical Benefits — ^Accident and Health Insurance
If an operat-ion named in the Schedule of Operations which forms a part of this Policy shall be performed by a surgeon on account of a bodily injury or
disease covered by this Policy and within ninety days from the date of accident or commencement of such disease, the Company will pay the sur-
gical benefit specified in the Schedule for such operation in addition to any other indemnity to which the Insured may be entitled. If more than one such
operation shall be performed on account of injury sustained in one accident or on account of one illness the Insured shall receive the largest surgical benefit
specified in the Schedule for any one of the operations so performed. If an accidental bodily injury shall be sustained which shall not result in death or other
disability, oi necessitate an operation named in the Schedule, but which shall require surgical treatment the Company will pay the amount actually expended
for such treatment, but not exceeding the amount of the single indemnity hereunder for total loss of time for one week.
parto. Hospital Indemnity — Accident and HecJth Insurance
If on account of a bodily injury or illness for which weekly indemnity is payable under this Policy, the Insured shall be removed to a hospital within ninety
days from thedateof accident, or commencement of disability by disease, the Company will pay 50 Pet Cent, additional -single weekly indemnity for the period
during which he shaH be a patient resident in the hospital but not exceedmg twenty consecutive weeks.
Identification and Registration
Part M.
If the Insured by reason of injury or illness shall be physically unable to communicate with friends, the Company, upon receipt of a tclegrarn or other
meesage giving the number of this Policy, will immediately transmit to his relatives or friends any information respecting him and will defray all expenses
necessary to put the Insured in the care of friends, provided such expense shall not exceed the sum of One Hundred Dollars.
Standard Provisions
1. This Policy includes the endorsements and attached papers, if any, and contains the entire contract of insurance except as ft may be modified by the
Company's classification of risks and premium rates in the event tliat the Insured is injured after having changed his occupation to one classified by the Com-
pany as more hazardous than that stated in the Policy, or while he is doing any act or thing pertaining to any occupation so classified, except ordinary duties
about his residence or while engaged in recreation, in which event the Company will pay only such portion of the indemnities provided in the Policy as the
premium paid would have purchased at the rate but within the limits so hxed by the Company for such more hazardous occupation.
If the law of the State in which the Insured resides at the time this Policy is issued requires that prior to its issue a statement of the premium rates
and clii.>sification of risks pertaining to it shall be filed with the state official having supervision of insurance in such state, then the premium rates and classifi-
cation of risks mentioned in this Policy shall mean only such as have been last filed by the Company in accordance with such law, but if such fiUng is not required
by such law then they shall mean the Company's premium rates and classification of risks last made effective by it in such state prior to the occurrence of the
loss for which the Company is liable.
2. No statement made by the applicant for insurance not included herein shall avoid the Policy or be used m any legal proceeding hereunder No agent
has authority to change this Policy or to waive any of its provisions. No change in this Policy shall be valid unless approved by an executive officer of the
Company and such approval be endorsed hereon.
3. If default be made in the payment of the agreed premium for this Policy, the subsequent acceptance ol a premium by the Company or by any of its
duly authorized agents shall reinstate the Policy but only to cover accidental injury thereafter sustained and such sickness as may begin more than ten days
after the date of such acceptance.
4. Written notice of injury or of sickness on which claim may be based must be given to the Company within twenty days after the date of the accident
causing such injury or within ten days after the commencement of disabihty from such sickness. In event of accidental death immediate notice thereof must
be given to the Company.
5. Such notice given by or in behalf of the Insured or Beneficiary, as the case may be, to the Company jt ^, or to
any authorized agent of the Company, with particulars sufficient to identify the Insured, shall be deemed to be notice to the Company Failure to give notice
within the time provided in this Policy shall not invalidate any claim if it shall be shown not to have be-en reasonably possible to give such notice and that
notice was given as soon as was reasonably possible.
6. The Company upon receipt of such notice, will furnish to the claimant such forms as are usually furnished by it for filing proofs of loss. If such forms
are not so furnished within fifteen days alter the receipt of such notice, the cl.iimant shall be
Located at _.„ _ _ Street, Town of State of_.
G. State fully your occupation — position, nature of business engaged in andthe duties performed?
•H. To whom shall Policy J Name _ JVddresa .'
^ P^^^deatir? *^^ "*' { ^^e Height ft io. Weight lbs.
What IS relationship of the beneficiary to you? , „ - ■ -
I. Do your average weekly earnings exceed the aggregate single weekly indemnity payable under this Policy and all other similar pcttcies now carried by you?
J. What life, accident or health insurance have you in this Company? _ — .
What accident or health insurance have you in other companies or associations? . ., .- ■ — —
Have you ever received indemnity for any injury or illness? „
K. Have you ever been declined or postponed for life, accident or health insurance?..
Have you ever made application for life, accident or health insurance upon which you have not been notified of the action thereon?._.„ — — ^
Has any life, accident or health policy issued to you been canceled or has any renewal thereof been refused, by this or any other company or assodatioa?
L. Have you in contemplation any special journey or hazardous undertaking?^
Do you ever engage in motorcycling or aeronautics? . —
Do you own or operate an automobile?
M. Have any of your relatives ever been insane or had tuberculosis?.-
N. Are your habits temperate? „
O. Are you maimed or deformed?..
Is your sight or hearing impaired? «
Have you ever had a hernia or worn a truss?. « — , _ -—
Have you ever had any of the following: Epilepsy? — Syphilis?.-
Vertlgoor Dizziness? .* Diabetes? _ — „ Tuberculosis? —
Mental disorder?. „ _ Disease of Brain or Nervous System?.,
Disease of Tonsils, Nose or Throat? „ _ - — ^
P. Have you within the past five years had medical or surgical advice or treatment or any departures from good health? If so, state when and what, and
Of oaib — Vcu) (tiaUUK of AJImrBi) (DunUoa ol A
Q. Have you ever had, or ever been advised to have, an of>eration?
(If Ajuwcr li "Vm". five (uU ttutioiUn)
R. Have you been exposed during the last ten days to any contagious or infectious disease?^
S. Do you agree that the falsity of any answer in this application for a Policy shall bar the right to recover thereunder if such answer is made with intent lo
deceive or materially affects either the acceptance of the risk or the hazard assumed by the Company? ^
Policy applied for this day of 19
•l/Bobe«fittaPDlicTJorIoMo/lilewriU"NodMibbeoefiftoie«l»oH. Signature of Applican*f:^>", —_— - — — — »
398 INSURANCE PRINCIPLES AND PRACTICES
XVII— Continued
Schedule of Operations — Surgical Benefits
If the single weekly indemnity for tout loss of time payable under (his Poiiry is $50 00, the amounts named below shall be payable. H (ucb
weekly indemnity is greater or le« than $50.00 the amounts to be paid shall be increased or reduced proportionately.
ABSCESS. Incision 110
ABDOMEN. Cutting into Abdominal Cavity for diagnosis or
treatment of organs therein 200
AMPUTATION OF
Entire Hand, Forearm, or Foot 51,
Leg or Arm . 100
Thigh 150
Finger or Fingers . 20
ANEURISM. Operation for tying of Artery 70
APPENDICITIS. Abdomen 200
BONE. Injuriestoordiseascof. Removal of diseased portion
of bone 50
CANCER OF LIP. Removal of, by cutting operation . . 50
CARBUNCLE. Incision 10
CHEST. Cutting into thoracic cavity for diagnosis or treat-
ment of organs therein . . . , 50
DISLOCATION. Reduction of
Hip or Knee 70
Shoulder, Elbow, or Ankle 50
Wrist or Lower Jaw 30
Thumb 20
Fingers 10
EYE, EAR, NOSE OR THROAT. Any cutting operation . 20
EYE. Removal 100
EXCISION. Removal of
Shoulder or Hip Joint 200
Knee Joint ISO
Elbow, Wrist, or Ankle Joint 100
Toe or Toes . .*.... M
l/RACTURES. Reduction of
Nose, Lower Jaw, Collar Bone, or Shouldv Blade ... 50
Breast Bone or Riba . ' 20
Upper Arm . . • . 70
Forearm ?.. 4^ -«. i 50
Wrist ,../«•«...»■. ,...,... SO
Hand .. ^ ,'. ^ ,,...<...' 30
Fingers .,,,.. . . . . r . 10
Bones of the Pelvis (except Coccyx) 150
Coccyx 20
rhigh ISO
Knee Cap or Leg , 100
Bones of Foot • ...» 30
Toes . . K . V . , 20
GOITRE. Cutting operation for permanent cure . . . ,
GUNSHOT WOUNDS. Treatment of, not necessitating am.
putationor any cutting operation into AbdomiQal Cavity
HYDROCELE. Incision and treatment of Sac . . . .
HYDROPHOBIA. Pasteur treatment
INFLAMMATION OF JOINT. Incision into Joint . . .
INTESTINAL OBSTRUCTION. See Abdomen
KIDNEY. See Abdomen
LOCKJAW. Injection of Antitoxin into Skull
Injection of Antitoxin into Spinal Canal
MASTOIDITIS. Cutting operation for removal of diseased
bone
NERVE. Cutting operation for stretching
RECTUM. Operation for radical cure
Hamiorrhoids, external
" internal
Prolapsed
Fistula in Ano
tts»
M
50
lOO
9»
200
lOO
too
SO
30
50
50
40
Malignant Stricture 200
SKULL. Cutting into cranial cavity 200
SPINE OR SPINAL CORD. Operation with removal of frac-
tured vertebra . 20O
STRICTURE CESOPHAGUS. Cutting operation (external)
lor permanent cure of tOO
STONE IN BLADDER. Removal of. by cutting or crushing
operation ...« ISO
TAPPING OF.
Abdomen . SO
Bladder SO
Chest 30
Ear Drum 20
Hydrocele p)
Joints 20
TRACHEA. Cutting into for removal of foreign bodies or iot
relief of difhcult breathing 70
TUMORS. Removal of, by cutting operation
Malignant lOO
Benign 30
VARICOCELE. Cutting operation for permanent cure . . SO
VEINS, VARICOSE. Cutting operation for permaaept cure SO
WOUNDS. Suturing 10
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APPENDIX
399
XVIII
ACCIDENT AND HEALTH POLICY
Tim policy provides indemnity for los> of life or time through accidental means,
and for loss of time by sickness; to the extent herein provided.
THE
INSURANCE COMPANY
(HEREIN CALLED COMPANY)
HEREBY KSURES
•nd Jcsulx j J in tlw Application), aubject to all proviaiocs Bud IsmitatioDa herein contained:
(herein called luureJ
Agarnat loaa of Kfe resulting directly and independently of all other catsaea,
of thia policy aoMy duongb accidental meana; and
Againet dis^ality commencing while thia policy is in force
means; and against disability commencing while this poll*
cases, to be such as will result in continuous total loaOibi
Part A. The Company will pay_
should loss of life as ddSned above
Part B. The Compemy will
per month dining the continuanc^^f
(ul oco^aabDn, providedL however; that
first*
y injury effected during the tena
ng V^pf bodily injury effected through accidental
^d resulting from sickness; such disability, in both
follows:
DoHan
hundred and twenty days from date-of the accident
Disability
nity at the rate of Dollars
disability as defined above until such time as the Insured engages in a gain-
indemnity shall be paid urrder this Part B or under Parts C D or E, for the
of any period of disability.
Loss of Both Hands. Both Feet, Hand and Foot or the Sight d Both Eyes
F^rt G dboold the Insured suffer, as a direct result of such injury or such sickness, the loss of both entire hands by
complete severance at or above the wrists, or the loss of both entire feet by complete severance at or above the ankles, or the
loss of one entire hand by complete severance at or above the wrist and one entire foot by complete severance at or above
the ankle, or the irrecoverable loss of the entire sight of both eyes, he shall be deemed to have sustained a [>ermanent disabil-
ity resulting in continuous total loss of his business time and the Company will pay indemnity at the rate per month specified
in Part B as kng as he shell Uve. or;
Loss of One Hand or One Fool
Part D. SbouU the Insured suffer, as the direct result of such injury or such sickness, the lo3s of one entire hand by
comi^ete severance at or above the wrist, or the loss of one entire foot by complete severance at or above the ankle, the Com-
pany will pay indemnity at the rate per month specified in Part B for the period for which such loss causes disability as defined
above, and at the termination of such disability will consider such loss to have caused a permanent disability of 25%, and will
pay the iBSUied, m long as he shall live, monthly indemnity at the rale of 25% of the amount specified in Part B, or;
Loss of the Sight d One Eye
fVrt E. Should the Insured suffer, as the direct result of such injury or such sickness, the irrecoverable loss of the entire
sight of oi>e eye, the Company will pay indemnity at the rate per month specified in Part B for the period for which such loss
causes disability as defined above, and at the termination of audi disability will consider such loss to have caused a permanent
disability of 10%. and will pay the'lnsured, as long as he shall live, monthly indemnity at the rate of 10% of the amount
specified in Part B.
*No indemnity is payable under this policy for the specified first part of any period of disability.
Renewable through age 65.
400 INSURANCE PRINCIPLES AND PRACTICES
XVIU— Continued
Standard Provisions
I. This policy include* the endorsements and attached papers, if any, and contains the entire contract of insurance
«xcept as it may be modified by the Company's classification of risks and premium rates in the event that the Insured is
injured or contracts sickness after having changed his occupation to one classified by the Company as more hazardou<
than that stated in the policy, or while he is doing any act or thing pertaining to any occupation so classified, except ordi-
nary duties about his residence or while engaged in recreation, in which event the Company will pay only such portion of
the indemnities provided in the policy as the premium paid would have purchased at the rate but within the limit* so fixed
by Jie Company for such more hazardous occupation.
If the law of the state in which the Insured resides at the time this policy is issued requires that prior to its issue a state-
ment of the premium rales tind cUissification of risks pertaining to it shall be filed with the state official having supervision
of insuremce in such state, then the premium rates and classification of risks mentioned in this policy shall mean only such
as have been last filed by the Company in accordance with such law, but if such filing is not required by such law then they
shall mean the Company's premium rates and classification of risks last made effective by it in such state prior to the
occurrence of the loss for which the Company is liable.
2. No statement made by the applicant for insurance not included htrein shall avoid the policy or be used in any legal proceeding hereunder. No
.agent has authority to change this policy or to waive any of its provisions. No change in this policy shall be valid tmless approved by an executive officer of
the Company and such approval be endorsed hereon.
3. If default be made in the payment cf the agreed premium for this policy, the subsequent acceptance of a premium by the Company or by any of
its duly authorized agents shall reinstate the policy but only to cover accidental injury thereafter sustained and such sickness as may begio more than ten day«
after the date of such acceptance.
4. Written notice of injury or of sickness on which claim may be based must be given to the Company ^vithin
twenty days after the date of the accident causing such injury or within ten days after the commencement of disability
from such sickness. In event of accidental death immediate notice thereof must be given to the Company.
5. Such notice given by or in behalf of the Insured or beneficiary, • as the case may be, to the Company at its Home Office, ' i . ^
In the city of or to any authorized agent of the Company, with particulars sufficient to identify the Insured, shall be deemed to
te notice to the Company. Failure to give notice \vIthio the time provided in this policy shall not invalidate any claim if it shall be shows 0*1 to have beeo
Teasonably possible to give such notice and that notice was given as soon as was reasonably possible.
6. The Company upon receipt of such notice, will furnish to the claimant such forms as are usually Furnished by it for filing proofs of loss. If nich
Conns are not so furnished within fifteen days after the receipt of such notice, the claimant shall be deemed to have complied with the reqairements of this
policy as to proof of loss upon submitting withio the time fiaed in the policy for filing proofs of loss, written proof covering the occurrence, character and exteot
of the loss for which claim is made.
7. Affirmative proof of loss must be furnished to the Company at its said office in case of claim for loss of time from disability withm ninety days
after the termination of the period for which the Company is Hable, and b case of claim for any other loss, within ninety days after the date of nich Ion.
g^ TTie Company shall have the right and (jpporttmity to examine th^ person of the Insured when and so often as it may reasonably require duriog
tile pendency of claim hereunder, and also the right and opportunity to make an autopsy in case of death where it is not forbidden by law.
9. * All indenmides provided in this policy for loss other than that of time on account of disability will be paid immediately after receipt of due proof.
0. Upon request of the Insured and subject to due proof of loss all of the accrued indemnity for loss of time on account of disability will be paid at
piration of each month during the continuance of the period for which (he Company is liable, and any balance remaining unpaid at the lenninatioD of
such period will be paid immediately upon receipt of due proof.
I I . Indemnity for loss of life of the Insured is payable to the beneficiary if surviving the Insured, and otherwise to the est^ of the Insured. All
other indemnities of this pohcy are payable to the Insured.
12. If the Insured shall at any time change bis occupation to one classified by the Company as less hazardous than that stated in the policy, the
Company, upon written request of the Insured and surrender of the policy, will cancel the same and will return to the Insured the unearned premium.
\ 3. Consent of the beneficiary shall not be requisite to saiiender or assigiuncot of this policy, or to change of beneficiary, or to any other diaaeea id
y the Company.
27. The beneficiary under this policy is
whose relationship to the Insured is that of . No assignment of interest under tlus
policy and no change of beneficiary shall bind the Company unless consent thereto, duly signed by an executive officer of
the Company, is formally endorsed hereon. The Company shall not be responsible for the validity of any m**! ^^!^!. -!!! or
change of beneficiary.
28. This insurance is effective in consideration of the payment in advance of the premium
of DoUar»
and of the payment of a like premium on the Jay of in e^ch year
during the continuance of this Policy, and in further consideration of the statements made in the application for this policy,
copy of which application is endorsed hereon or attached hereto, and is hereby made a part of tliis Policy. The falsity of
any statement in the application, materially affecting either the acceptance of the risk or the hazard assumed hereunder, or
made with intent to deceive shall bar ail right to recovery under this policy. No provision of the chortef, constitution at
by-laws of the Company not herein set forth shall be used in defense of any claim arising under this policy.
IN WITNESS WHEREOF, THE COMPANY has, by its proper oflScers. signed this Contract in the Gty of
and caused same to be countersigned by its authorized Agent or Manager, as^ofUi^i
day of • 19
EXAMINED
SEICRETARY
COUNTERSIGNED
Al/THORIZEO AGENT OR MiUS^iCEK
402 INSURANCE PRINCIPLES AND PRACTICES
XIX
ACCIDENT AND HEALTH RATES
Class
Monthly Acci-
dent and Illness
Indemnity
Yearly Premiums
Accidental
Death, Loss of
Ages 18 to 50
Ages 51 to 55
Both Limbs
or Eyes
Select and
Preferred
$50 00
76 00
80 00
90 00
100 00
100 00
100 00
100 00
100 00
50 00
$21 00
31 50
33 60
37 80
42 00
43 50
45 00
46 50
48 00
24 00
S26 50
39 75
42 40
47 70
53 00
54 50
56 00
57 50
59 00
29 50
$500 00
750 00
800 00
900 00
1000 00
2000 00
3000 00
4{X)0 00
5000 00
2500 00
Extra
Preferred
$40 00
50 00
60 00
80 00
100 00
100 00
100 00
100 00
100 00
50 00
§18 85
23 30
28 00
37 17 '
4G 60
48 70
60 80
52 90
55 00
27 50
$23 25
28 80
34 56
45 97
57 60
59 70
61 80
64 00
66 10
33 00
$500 00
500 00
600 00
750 00
1000 00
2000 00
3000 00
4000 00
5000 00
2500 00
Ordinary
$40 GO
40 00
60 00
60 00
60 00
60 00
80 00
90 00
100 00
50 00
$23 70
25 95
31 50
37 05
40 80
44 65
59 40
64 95
74 25
37 12
$28 10
30 35
37 00
43 65
47 40
51 15
68 20
74 85
85 25
42 62
$'i00 00
1000 00
1000 00
1000 GO
2000 00
3000 00
4000 00
4000 00
5000 00
2500 00
Medium
$35 00
35 00
40 00
50 00
50 00
$24 60
28 17
31 45
38 00
43 25
$28 35
32 02
35 85
43 50
48 7.5
$300 00
1000 00
1000 00
1000 00
2000 00
Special
$30 00
35 00
40 00
45 00
60 00
$85 20
40 87
46 56
52 81
58 48
Not Sold to
IMen Over 50
$400 00
450 00
600 00
600 00
650 00
Hazardous
$25 00
30 00
35 00
40 00
$34 38
41 90
48 61
55 33
Not Sold to
"Men Over 50
$300 00
400 00
450 00
500 00
Amoimts for Select, Preferred and Extra Preferred Class
may be doubled.
ANNUAL PREMIUM ONLY
APPENDIX
403
XX
SCOPE OF COMPENSATION LAWS OF THE UNITED STATES'
, Inclusions:
A. Both hazardous and non-hazardous employments 32
B. Hazardous employments only 13
. Exclusions:
A. Numerical exemptions 22
B. Agriculture 33
C. Domestic Service 29
D. Casual labor and employment not for employer's business 34
E. Employments not conducted for gain 11
F. Public employments 19
G. Other employments of certain kinds 25
Total 45
* Including Alaska, Hawaii, Porto Rico.
XXI
COMPENSATION STATES CLASSIFIED ACCORDING TO WHETHER
LAW IS COMPULSORY OR ELECTIVE
Compensation compulsory (14)
Insurance Insurance not
required (13)
California
Hawaii
Idaho
Illinois
Maryland
New York
North Dakota
Ohio
Oklahoma
Porto Rico
Utah
Washington
Wyoming
required (1)
Arizona
Compensation elective (31)
Insurance Insurance not
required {26)
Colorado
Connecticut
Delaware
Indiana
Iowa
Kentucky
Maine
Massachusetts
Michigan
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
Oregon
Pennsylvania
phode Island
South Dakota
Tennessee
Texas
Vermont
Virginia
West Virginia
Wisconsin
required (5)
Alabama
Alaska
Kansas
Louisiana
Minnesota
404 INSURANCE PRINCIPLES AND PRACTICES
XXII
COMPULSORY INSURANCE STATES, CLASSIFIED AS TO DIFFERENT
KINDS OF INSURANCE ALLOWED
State Fund (17)
Exclusive (8) Competitive (9)
Nevada
North Dakota
Ohio
Oregon
Porto Rico
Washington
West Virginia
Wyoming
California
Colorado
Idaho
Maryland
Michigan
Montana
New York
Pennsylvania
Utah
Private insur-
ance (31)
California
Colorado
Connecticut
Delaware
Hawaii
Idaho
Illinois
Indiana
Iowa
Kentucky
Maine
Maryland
Massachusetts
Michigan
Missouri
Montana
Nebraska
New Hampshire
New Jersey
New Mexico
New York
Oklahoma
Pennsylvania
Rhode Island
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Wisconsin
Self-insur-
ance (31)
California
Colorado
Connecticut
Delaware
Hawaii
Idaho
Illinois
Indiana
Iowa
Kentucky
Maine
Maryland
Michigan
Missouri
Montana
Nebraska
New Hampshire
New Jersey
New Mexico
New York
Ohio
Oklahoma
Pennsylvania
Rhode Island
South Dakota
Tennessee
Utah
Vermont
Virginia
West Virginia
Wisconsin
APPENDIX
405
XXIII
UNIVERSAL STANDARD WORKMEN'S COMPENSATION POLICY
(Hereinafter called the Company)
HEREBY AGREES WITH THE ASSURED
N?mctl in the Declarations attached hereto and forming part hereof, as respects personal injury sustained by
employes, including death at any time resulting therefrom.
One. (a) To Pay Promptly to any person entitle^! thereto, under the Workmen's Compensation Law and
in the manner therein provided, the entire amount of any sum due, and all installments ttercof as they become due,
(/) To suck ptncn because of the obligation fcr compensation for any surh injury imposed upo't or accepted by this
Employer under such of certain statutes, as may be applicable thereto, cUed and described in an endorsement
attacked to this Policy, each of which statutes is herein referred to as the Workmen' s Cmipensation Law, and
() For the benefit ofsueh person the proper cost of whatever medxcal. surgical, nurse or hospit-ai servf^e^ medical or
surgical apparatus or appliances and medicines, or. in the event of fatal injury, whatever fum^
required by the provisions of such Workmen's Compensation Law.
It is agreed that all of the provisions of each Workmen's Compensation Law covered hereby stifell
a part of this contract as fully and completely as if written herein, so far as they apply t
benefits for any personal injury or death covered by this Policy, while this Policy i,hzilAuKMfi\i
herein contained shall operate to so extend this Policy as to include within its terms a^vfrOA/^fc^^ s
Law, scheme or plan not cited in an endorsehient hereto attached.
One. (b) To Indemnify this Employer against loss by reason of
for damages on account of such injuries to such of said employes as are leg
be sustained within the territorial limits of the United States of America or
the bankruptcy or insolvency of this Employer the Company shall nd
r,ity hereunder as would have been payable but for such bankn!^*3y
insolvency, an execution against this Employer is returned /ipnsatis
another person claiming by, through or under the injured, ti
such other person claiming by, through or under the injured,
the amount of the judgment in said action not exceedip^
Two. To Serve this Employer (a) by the insp^ctioi
desirable by the Company and thereupon to suRjfS^t^XltiisVfimployer such changes or improvements as may operate
to reduce the number or severity of injuries Svi?i*(g.itofk, and, (b) upon notice of such injuries, by. investigation
thereof and by settlement of any resultin3:S&ipV5>n-3;Ccordaijce with law
xpeiists art
ba am] remain
ion or other
rce. Nothing
Compensation
iposed upon him by law
wherever such injuries may
inion of Canada. In the event of
from the payment of such indem-
If, because of such bankruptcy or
action brought by the injured, or by
an aAtTCn'may be maintained by the injured, or by
sK'ihe Company under the terms of this Policy for
'.e anrrontlt of this Policy.
work places covered by the Policy when and as deemed
Three. To Defend, i
at any time be instituted aga:
injuries and demanding damage
demands are wholly groundl^Js^ f^
Four. To Pay
interest accruing after
defense.
behalf of this Employer, any suits or other proceedings which may
of such injuries, including suits or other proceedings alleging such
nsation therefor, although- such suits, other proceedings, allegations or
raudulent
cl against this Employer in any legal proceeding defended by the Company, all
gment and all expenses incurred by the Company for investigation, negotiation or
ement shall apply to such injuries sustained by any person or persons employed by this
'remuneration shall be included in the total actuat remuneration for wi.ich provision is herein-
remuneration the premium for this Policy is to be computed and adjusted, and, also to such
bedUy the President, any Vice-President, Secretary or Treasurer of this Employer, if a corporation.
?ron of any such designated officer shall not be subjected to a premium charge unless he is actually
performing such duties as are ordinarily undertaken by a superintendent, foreman or workman.
Six. This agreement shall apply to such. injuries so sustained by reason of the business operations described
in said Declarations which, for the purpose of this insurance, shall include all operations necessary, incident or appur-
tenant thereto, or connected therewith, whether such operations are conducted at the work places defined and
described in said Declarations or elsewhere in connection with, or in relation to, such work places.
Seven. This agreement shall apply only to such injuries so sustained by reason of accidents.occurring during
the Policy period- limited and defined as such in Item 2 of said Declarations.
THIS AGREEMENT IS SUBJECT TO THE FOLLOWING CONDITIONS :
A. The premium is based upon the entire remunera-
tion earned, during the Policy period, by all employes of
this Employer engaged in the burliness operations described
in said Declarations together with all operations necessary,
incident or af^urtenant thereto, or connected therewith
whether conducted at such work places or elsewhere in
connection therewith or in relation thereto ; excepting
however the rAnuneration of the President, any Vice-
President, Secretary or Treasurer of this Employer, if a
corporation, but including the remuneration of any one or
more of siicl)^(;lesignated officers who are actually perform-
ing such duties as are ordinarily undertaken by a superin-
tendent, foi-eman or workman. If any operations as above
defined are undertaken by this Employer but are not de-
scribed or rated in said Declarations, this Employer agrees
tf> pay the premium thereon, at the tirr.e of the final ad-
justment of the premium in accordance with Condition C
hereof, at the rates, and in compliance with- the rules, of
IheManualof Rates in use by the Company upon the date
of issue of this Policy. At the end of the Policy period the
actual amount of the remuneration earned by employes
during such period shall be exhibited to the Company, as
provided in Condition C hereof, and the earned premium
adjusted in accordance therewith at the rates and under
the conditions herein specified. If the earned premium,
thus computed, is greater than the advance premium paid,
this Employershall.immediately pay the additional amount
to the Company, if less, the Company shall return to this
Employer the unearned portion, but in any event the
Company shall retain the Minimum Premium stated in
said Declarations. All premiums provided by this Policy,
or by any endorsement hereon, shall be fully earned
whether any such Workmen's Compensation Law, or any
j>art of such, is now or shall bercafier.be declared iavalid
or unconstitutional.
B. This Policy may be cancelled at any time by either
pf.lhe parties upon written notice to the other party statias
406 INSURANCE PRINCIPLES AND PRACTICES
XXlll— Continued
when, not less than ten days thereafter, cancellation shall
be effective. The effective date of such cancellation shall
then be the end of the Policy period. The law of any state,
in which this Policy applies, which requires that notice of
cancellation shall be given to any Board, Commission or
other state agency is hereby made a part of this Policy
and cancellation in such state shall not be effective except
in compliance with such law. The remuneration of em-
ployes for the Policy period stated in said Declarations
shall be computed upon the basis of the actual remunera-
tion to the date of cancellation determined as herein pro-
vided. ]f such cancellation is at the Company's request,
the earned premium shall be adjusted pro rata as provided
in Condition A. If such cancellation h at this Employer's
request, the earned premium shall be computed and ad-
justed at short rates, in accordance with the table printed
hereon, but such short rate premium shall not be less than
the Minimum Premium stated in said Declarations. If this
Employer when requesting cancellation i.s actually retiring
from the business herein described, then the earned pre-
mium shall be computed and adjusted pro rata. Notice of
cancellation shall be served upon this Employer as the
law requires, but, if no different requirement, notice
mailed to the address of this Employer herein give.i shall
be a sufficient notice, and the check of the Company,
similarly mailed, a sufficient tender of any unearned
premium.
C. The Company shall be permitted, at all reasonable
times during the Policy period, to inspect the plants, works,
machinery and appliances covered by this Policy, and to
examine this Employer's books at any time during the
Policy period, and any extension thereof, and within one
year after its final expiration, so far as they relate to the
remuneration earned by any employes of this Employer
while this Policy was in force.
D. »The obligations of Paragraph One (a) foregoing
are hereby declared to be the direct obligations and prom-
ises of the- Company to any injured employe covered
hereby, or. in the event of his death, to his dependents;
and to each such employe or such dependent the Com-
pany is hereby made directly and primarily liable under
said obligations and promises. This contract is made for
the benefit of such employes or such dependents and is
enforceable against the Company, by any such employe
or such dependent in his name or on his behalf, at any
time and in any manner permitted by law. whether claims
or proceedings are brought against the Company alone or
jointly with this Employer. If the law of any state in
which the Policy is applicable provides for the enforce-
ment of the rights of such employes or such dependents
by any Commission, Board or other state agency for the
benefit of such employes or such dependents, then the
provisions of such law are made a part hereof, as respects
any matter subject thereto, as fully as if written herein.
The obligations and promises of the Company as set forth
in this paragraph shall not be affected by the failure of
this Employer to do or refrain from doing any act required
by the Policy ; nor by any default of this Employer after
the accident in the payment of premiums or in the giving
of any notice required by the Policy or otherwise ; nor by
the death, insolvency, bankruptcy, legal incapacity or in-
ability of this Employer, nor by any proceeding against
him as a result of which the conduct of this Employer's
business may be and continue to be in charge of an exec-
utor, administrator, receiver, trustee, assignee, or other
person.
E. As between the employe and the Company, notice
to or knowledge of this Employer of an injury or death
covered hereby shall be notice or knowledge, as the case
tnay be, of the Company; the jurisdiction of this Employer
for the purposes of any Workmen's Compensation Law
covered hereby shall be jurisdiction of the Company and
the Companv shj In all things be bound by and subject
to the findi.ig's, judgments, awards, decrees, orders or de-
cisior rendered against this Employer in the form and
manner provided by such laws and within the terms, limi-
tations and provisions of this Policy not inconsistent with
such laws.
F. This Employer, upon the occurrence of an accident,
shall give immediate written notice thereof to the Com-
pany with the fullest information obtainable. He' shall
give like notice with full particulars of any claim made on
account of such accident. If, thereafter, any suit or other
proceeding is instituted against this Employer, he shall
immediately forward to the Company every summons,
notice or other process served upon him. Nothing else-
where contained in this Policy shall relieve this Employer
of his obligations to the Company with respect to notice
as herein imposed upon him.
G. No action shall lie against the Company to recover
upon any claim or for any loss under Paragraph One (b)
foregoing unless brought after the amount of such claim
or loss shall have been fixed and rendered certain either
by final judgment against this Employer after trial of the
issue or by agreement between the parties with the writ-
ten consent of the Company, nor in any event unless
brought within two years thereafter.
"H. If the method of serving notice of cancellation, or
the limit of time for notice of accident or for any legal
proceeding herein contained is at variance with any
specific statutory provision in relation thereto, in force in
the stale in which any of the business operations herein
described are conducted, such specific statutory provision
shall supersede any such condition in this contract incon-
sistent therewith.
I. No assignment of interest under this Policy shall
bind the Company unless the consent of the Company
shall be endorsed hereon.
J. If this Employer carries any other insurance cover-
ing a claim covered by this Policy, he shall not recover
from the Company a larger proportion of any such claim
than the sum hereby insured bears to the whole amount
of valid and collectible insurance.
K. The Company shall be subrogated in case of any
payment under this Policy, to the extent of such payment,
to all rights of recovery therefor vested by law either in
this Employer, or in any employe or his dependents
claiming heraunder, against persons, corporations, associ-
ations or estates.
L. No condition or provision of this Policy shall be
waived or altered except by endorsement attached hereto
signed by the President, a Vice-President. Secretary or
an Assistant Secretary of the Company, nor shall notice
to any agent, nor shall knowledge possessed by any agent,
or by any other person, be held to effect a waiver or change
in any part of thiscontract. Changes in the written portion
of the Declarations forming a part hereof (except Items
2,'3 and 4) may be made by the agent countersigning this
Policy, such changes binding the Company when initialed
by such agent. The personal pronoua herein used to
refer to this Employer or to an injured employe or de-
pendents, shall apply regardless of number or gender.
M. The statements in Items 1 to 6 inclusive in the
Declarations hereinafter contained, are true ; those stated
as estimates only are believed to be true. This Policy is
issued upon such statements and in consideration of the
provisions of the Policy respecting its premium and the
payment of the premium in such Declarations expressed.
IN WITNESS WHEREOF, the INSURANCE COMPANY OF has
caused this Policy to be signed by its President and Secretary at Pennsylvania, and countersigned by
a duly authorized Agent of the Company.
Seerelary
Prtstdent
Counleriigntd. by^
Agenl
APPENDIX
407
XXUl— Continued
Short Rate Cancellation Table
For Tmtu of One Year
UNIVERSAL STANDARD
WORKMEN'S COMPENSATION POLICY
EzpiBxa.
Pexkhtm, $
1 dar 2 per cent, of anniul premlam
J
165 •• 65 "
180 •' or 6 months ... 70 " ■- "
195 " 73 •' •• "
210 " or 7 months ... 75 " " "
225 " 78 " •• ••
240 " or 8 months ... 80 " " *•
266 •• ffi •• " "
270 ■' or 9 months ... 86 " " "
286 •• 88 "
300 " or 10 months . . 90 " •' ••
816 " 93 " •• '»
880 " or 11 months . . 95 "
880 " or 12 months . . 100 " •' "
AmrsED
No.wc_
Wi^om^
c,^^
Please Read your Policy
408 INSURANCE PRINCIPLES AND PRACTICES
XXIV
SAMPLE CLASSIFICATION SHEET OF COMPENSATION MANUAL
Revised Edition — Basic Manual June 30, 1920.
Classification No. P.L. Teams
COAL MERCHANTS:
Coal Merchants — receiving or shipping by
water or by land and water, including
stevedoring operations, if any 8220 ZH QA
Drivers and their Helpers 7212 *
Chauffeurs and their Helpers 7385 *
This classification not available to con-
cerns engaged exclusively in stevedoring.
Coal Merchants — receiving or shipping by
land only 8230 ZH QA
Drivers and their Helpers 7221 *
Chauffeurs and their Helpers 7393 •
Cocoa Mfg 2042 ZA R
Cocoanut Shredding and Drying (N. P. D.)
(rate as Tood Sundries") 6504 ZA R
Coffee Cleaning, Roasting and Grinding (rate
as "Food Sundries") 6504 ZA R
COFFIN AND CASKET MFG.:
Coffin and Casket— (wood) mfg. and as-
sembling (including metal fittings) 2804 ZA R
Coffin and Casket— (metal) mfg. and as-
sembling 3074 ZA R
Coffin and Casket— (concrete) m.fg. and
assembling 4035 ZA R
Upholstery Work and Mfg, Burial Gar-
ments 9525 ZA R
Coke Mfg.— (bee-hive) .•• 1469 ZD QA
Coke Mfg. — by-product ovens — no refining
of by-products 1470 ZD QA
Cold Storage Warehouses — operation 8291 ZG R
Collar and Cuff Mfg.— including laundry... 2520 Z R
♦Payroll must be included in the Public Disability polic3\
APPENDIX
409
XXV
SAMPLE RATE SHEET OF COMPENSATION MANUAL
NEW JERSEY.
RATE SHEET.
The Compensation Rates and Minimum Premiums for this State are
shown below opposite the Code Numbers of the various classifications.
Note: Symbol (a) means "refer to Home Office."
Code
No.
O004.
0005.
0000.
0008.
0050.
0100.
0101.
0251.
0301.
0302.
0400.
0401.
1102.
1120.
1121.
1154.
11G4.
1165.
1200.
1201.
1217.
1301.
1321.
1410.
1413.
1420.
1421.
1438.,
1430.
1452.
1463.,
1465.
1470.,
1471.
1472.
Rate
.42.
: .72.
.95.
.42.
3.83.
2.18.
2.18.
.05.
1.39.
2.32.
1.58.
3.24.
2.78.,
4.38.
4.38.
6.36.
3.56.
3.56.
2.51.
4.74.
3.67.
1.24.
2.88..
.83.,
1.22.
2.51.
3.63.
2.17..
2.00.,
2.30.,
1.44..
1.70.,
1.72..
2.16.,
1.54.,
Min.
Code
Prem.
No.
8.
1602..
11.
1020. .
14.
1021..
8.
1022..
42.
1023..
26.
1040..
20.
1654..
14.
1701..
IS,
1703..
27.
1710..
20.
1741..
30.
1742..
1743..
32.
1744..
48.
1745..
48.
1748..
70.
1750..
1802..
40.
1803..
40.
1852..
29.
1853..
50.
1859..
1800..
40.
1924..
16.
2000. .
32.
2001..
12.
2002..
2014..
16.
2015..
29.
2016..
40.
2020..
26.
2021..
25.
2030..
28.
2040..
IS.
2041..
2042..
21.
2045..
2054..
26.
2001 . .
19.
2062..
Rale
3.86.
3.80.
3.86.
3.86.
3.86.
2.92.
3.86.
1.76.
1.59.
3.13.
1.59.
1.59.
1.59.
1.59.
.74.
.65.
1.79.
1.27.
1.27.
1.24.
.74.
.78.
.82.
1.38.
1.11.
1.11.
o on
1.42.
1.24.
1.11.
.99.
1.14.
2.09.
.81.
.81.,
.81.,
.61.,
I.IS.
1.18.,
Min.
Piem.
42.
42.
42.
42.
42.
34.
42.
22.
. 2o!
36.
20.
20.
20.
20.
11.
11.
22.
17!
17.
10.
11.
12.
12.
IS.
15.
15.
27.
IS.
10.
14.
15.
25.
10.
12.
12.
12,
10.
10,
10.
Code
No.
2003.
2005.
2007.
2081.
2090.
2091.
2092.
2101.
2102.
2105.
2110.
2111.
2112.
2114.
2121.
2125.
2130.
2143.
2150.
2101.
2105.
2173.
2174.
2175.
2176.
2210.
2211.
2210.
2220.
222'*
2200.!
2203.
2204.
2209.
2280.,
22S0.
22SS.,
2291.
2300.
Rale
1.18
1.18
1.18
2.24
.90
.90
.90,
1.18,
.87,
.54.
1.35.
1.00.
.75.
.75.
1.52.
1.52.
1.72.
1.35.
2.00.
2.43.
1.35.
.41.
4,70.
.41.
.11.
3.07.
1.41.
2.48.
.61.
,01 .
t>o
,23.
,18.
1
1
1
2.48.
1.10.
.41.
1.73.
.41.
.34.
Min.
Prcm.
10,
10.
10.
26,
13.
13,
13.
10.
13.
9.
18.
14,
12.
12.
19.
19,
21,
18,
24,
28.
18.
8.
50.
S,
6.
34.
IS,
29,
10.
10.
10.
io.
10.
29.
15,
s.
21.
S.
7.
Code
No.
Rale
2.301.
. .20. .
2302.
. .20..
2303.
. .20. .
2320.
. .61..
2348.
.78..
2.349.
1.28..
2350.
.78..
2351.
.61..
2301.
.19..
2302.
.36..
2380.
.32..
23S2.
.32..
23S3.
.34..
23S4.
.32..
2386.
. .30. .
2387.
.32..
23S8.
.30..
2390.
.32..
2402.
.62..
2410.
1.48..
2413.
.82..
2415.
.82.,
2416.
.53.,
2417.,
.75. .
2501.,
.21..
2502..
.21..
2503..
.21..
2520..
.21..
2521..
.21..
2530. .
.33..
2531..
.21..
2532.,
.21..
2533.,
.19.,
2534,,
.21..
2535.,
.21.,
2536.,
.35..
2551.,
.21..
255-2.,
.19.,
2553.,
.21..
2554.,
.21..
Min.
Prem.
6.
6.
6.
10.
12.
17.
12.
10.
6.
8.
7.
I'
7.
7.
7.
7.
7.
10.
19.
12.
12.
9.
12.
6.
6.
6.
6.
6.
7.
6.
6.
6.
6.
6.
S.
6.
6.
({.
6.
I
410 INSURANCE PRINCIPLES AND PRACTICES
XXVI
COMPENSATION SCHEDULE RATE
PENNSYLVANIA Elevator Definitions
(4) The following items only, apply to cranes having manu-
ally operated travel and hoist:
166.
(5) The following items only, apply to I-Beam or monorail
hoists with cage or cab:
163, 164, 165, 166.
(6) Locomotive Cranes shall not be considered under this
section.
170 Elevators
Definitions
(1) Elevator
An elevator is a hoisting mechanism, either manually or
mechanically operated, equipped with a car, cage or
platform, which moves in guides in a vertical direction
and which is designed to carry passengers or freight. This
definition does not apply to dumbwaiters.
(2) Passenger Elevator
Passenger elevator is an elevator used primarily for the
canying of persons.
(3) Freight Elevator
Freight elevator is an elevator used primarily for the
carrying of freight.
(4) Elevator Shaftway
Elevator shaftway shall mean any shaft opening in which
an elevator car operates.
(5) Elevator Machinery
Elevator machinery shall mean all mechanism and equip-
ment directly used in the operation of the elevator.
(6) Elevator Car
Elevator car shall mean the car, cage or platform which
is operated in an elevator shaft or hoistway.
(7) Dumbwaiters
A dumbwaiter is a hoisting mechanism used for trans-
ferring freight only and constructed as follows:
Not more than nine (9) square feet platform area, car
not over four (4) feet high, and not used to carry over
five hundred (500) pounds.
APPENDIX 411
XXVI— Continued
Blevalors PENNSYLVANIA
(8) Hand Hoists
A hand hoist (whip hoist) is a hoisting mechanism manu-
ally or mechanically operated without a car, cage or
platform operating in guides and is generally operated
through one or more floor openings inside the building
or near a wall opening on the outside of a building.
(9) Hand Power Elevators
Hand power elevators are elevators which are raised and
lowered entirely by manual effort.
(10) Auxiliary Power Attachments
Elevators equipped with grip or other auxiliary power
attachments shall be considered as power elevators.
171 Charge for each Elevator where there are any Beams,
Floors or other projections in Shafts which form a Shear with
floor of passing Elevator.
1.0 point under item 119.
Rule
(1) This item shall not apply to:
Hand Power Elevators
Hand Power Sidewalk Elevators.
Definition
(2) A shear in a shaftway is formed by an ofTset or projection
such as floors, supports, beams, bolts or other fixed con-
struction so located that an article extending two (2)
inches beyond the edge of th,- car platform may strike it
when the car js ascending.
Standard
(3) Sides of elevator shafts shall be smooth and free from
projecting objects.
(4) Beams, floors and other projections, forming a shear
with floor of passing elevator, shall be beveled.
(a) Substantial beveled metal or wood plates shall "be
installed under all projections, extending into shaft
to within two (2) inches or less of fioor of passing car.
4.12 INSURANCE PRINCIPLES AND PRACTICES
XXVII
FINANCIAL STATEMENT OF A COMPENSATION MUTUAL
Premium Income $ 985,031.08
Assets 1,578,997.82
Liabilities * ' V 1,085,661.09
Surplus 493,336.73
Loss Ratio ^9.37%
Expense Ratio ^'^•^^2'
Earnings 39.68%
COMPARATIVE EXPERIENCE BY FISCAL YEARS ENDING JUNE 30
Premiums Expense
Assets JVrhtcn Ratio Loss Ratio Surplus Dividend
1 $ 90,747.77 $144,280.03 27.40% 36.78% $ 39,446.08 25%
2 186,918.06 184,603.84 17.69% 56.19% 64,621.92 25%
3 327,257.26 341,195.30 16.08% 72.23% 78,300.16 10%
4 1,130.648.05 777,362.32 15.75% 47.06% 310,000.00 *20%
5 li578,997.82 985,031.08 14.71% 49.37% 493,336.73 t27^%
*First half,
f Second half.
XXVIII
STATEMENT OF FINANCIAL CONDITION OF A STATE WORK-
MEN'S COMPENSATION INSURANCE FUND
ASSETS Dec. 31, 1916 Doc. 31, 1917
Investments ■. $402,823.00 $1,904,370.32
Cash on Deposit 56,713.72 85,957.49
Net Deferred and Uncol-
lected Premiums 22,466.28 85,143.67
$572,003.00 $1,375,471.4$
Interest Accrued 6,935.51 10,780.47
Gross Payroll Audit Addi-
tions 163.510.32 401,015.05
Gross Merit Rating Addi-
tions 8,918.08 14,430.47
TOTAL $751,566.91 $1,802,597.47
LIABILITIES
Reserve for Claim Losses
to Maturity. $404,825.55 $971,425.13
Reserve for Possible De-
preciation on Investments 25.000.00
Reserve for Re-insurance
Premium Payable 2,377.35 12,234.72
Reserve for Outstanding
Accounts Payable
Reserve 'or Dividends
Payable 93,162.04 135,659.57
TOTAL RESERVES. $500,364.94 $1,144,319.42
Premiums Paid in Advance $22,857.97 $21,220.34
P.iyroll Audit reductions.. 42,020.18 41,013.75
Merit Rating Reductions.. 41,962.52 63,525.94
Catastrophe Surplus.... 68,049.84 144,707.84
Fluctuation Surplus . .
General Surplus 76,004.28 882,541.27
TOTALS. ; . .'. ;'. . «750,259.73 »1,797,328.56
Dee. 31, 1918
$2,772,583.58
107.095.02
Dec. 31, 191d
$3,985,105.19
256.677.00
108,011.98 142,984.00
$2,987,690.66
35,002.15
616,275.45
10,910.37
$4,384,668.25
60,793.18
387,580.05
23,762.63
$3,649,878.53 $4,846,802.10
$1,355,717.00
75.000.00
6,122.00
5,311.36
296,233.96
$1,771,218.6*
lOO.OOO.OO
18.081.98
6,376.23
328.199.08
1,738.384.32 $2,222,875.19
$14,931.67
44,366.25
135,573.99
268,355.69
600,000.00
948,266.71
$138,217.11
104,875.09
66,607.69
368,436.00
600,000.00
1,445,791.08
$3,649,878.63 $4,846,802.10
APPENDIX 413
XXIX
EXTRACT FROM PAMPHLET OF PHILADELPHIA CONTRIBUTION-
SHIP FOR INSURANCE
At the time the policy is issued, the insured makes a cash deposit with
the company, according to the rate upon the amount insured, which on dwell-
ings varies from 2% to 3J/2% dependent upon construction and location —
whether in the city or country. No further payments of any kind are required,
the interest earned by the company on the deposit taking the place of annual
premiums on term insurance. This saves the insured all trouble of renewals
and eliminates the danger of having the policy lapse.
If the policy is cancelled after five years, either by the assured or by the
company, the deposit money is returned in full (prior to five years there is a
deduction of 5% or 10%).
Wh en a loss comes the company either rebuilds or settles on a cash basis —
but \n either event the policy is not affected (unless the loss be total) but
continues in force, without additional deposit, for tlie~full amount as before the
fire. ~ ~~~
When the deposit money has remained with the company for ten years, it
participates in any dividends that may be declared, which, for the past sixteen
years, have been at the rate of 10% per annum.
^1
414 INSURANCE PRINCIPLES AND PRACTICES
XXX
NEW YORK STANDARD FIRE POLICY
STOCK COMPANY
Amount $.
and of
T?ale.
TVcmmm $.
In Coiisideralion oi" the Stipulations herein named
Dollars Pi-eniium
does insure-
and legal representatives, to the extent of the.actiial _ca§h_ value (ascertained with proper deductions for
depreciation) of the property at the time of loss or"~3arnage, but not exceeding the amount which— it— wo«Hd
cost to repair or replace the same with material of like kind and quality within a reasonable time after such
loss or damage, without allowance for any increased cost of repair or reconstruction by reason of any ordinance
or law regulating construction or repair and without compensation for loss resulting from interruption of
business or manufacture, for the term of..— - - — -
from the - day of..
to the- - day of..
.19 at noon,
.19 at noon,-
against all DIRECT LOSS AND DAMAGE BY FIRE and by removal from premises endangered by fire, except
as herein provided, to an amount not exceeding, _ Dollars
to the following described property while located and contained as described herein, or pro rata for five days
at each proper place to which any of the property shall necessarily be removed for preservation from fire,
but not elsewhere, to wit:
This policy is made and accepted subject to the foregomg stipulations and conditions and to the stipulations
and condil^ons printed on the back hereof, which are hereby made a part of this policy, together with such
other provisions; stipulations and conditions as may be endorsed hereon or added hereto as herein provided.
Jn Ullnpfla BJtjPrrof, this Company has executed and attested these presents, but this policy shall not bf
iralid until countersigned by the duly authorized Agent of- the Company at
SECRETARY.
Countersigned at
this day cf
PRESIDENT.
19.
..Agent
APPENDIX
415
XXX— Continued
I __ . _....„ This enure policy shill bt void il Iht insured
Z „*"j!;„!r -""^ "i" <:on««led or miirepresenled »oy ma-
'*" Icrlal fact or circumstance concerning this
•cnKDon. etc.
4 infcurance or the subject thereof; or in case of any fraud or false
5 swearing by the insured touching any matter relating to this
6 insurance or Ihp subject thereof, whether before or after a loss
-, . . , This p'-ilicy shall not cover accounts, bills.
UninnwiDie currency, Heeds, evidences of debt, monev.
„ *" . ■ ^. notes or securities, nor, unless specitncaUy
Excepted prop«rty. „,^^j ^^^^^^ ,^ writing, bullion, manu-
scripts, mechanical drawings, dies or patterns
H dc not This Company shall not be liable for loss
covercl-
or damage caused directly or indirectly by
invasion, insurrection, not, civil war oi
15 commotion, or military or usurped power, or by order of any
16 civil authority; or by theft; or by neglect of the insured to use
17 all reasonable means to save and preserve the property at and
18 4fter a fire or when the property is endangered by lire in
19 neighboring premises
20 This entire policy shiU be void, unless otherwise provided
21 bjr iXTcement in writing added hereto,
Z2 r\ I,' ti- (a) if the intercsiof the insured be other than
23 wwnennip, etc. unconditional and sole ownership, or \h) if
24 the subject of insurance be a building on ground not owntd by
25 the insured in fee simple; or (c) i(, with the knowledge ol tht
26 insured, foreclosure proceedings be commenced or notice given
27 of sale o( any property insured hereunder by reason of any mort-
28 gage or trust deed, or (J) if any change, other than by the death
29 of an insured, take place in the interest, title or possession of
30 the subject of insurance (except change of occupants without
31 increase of hazard), or (e) if this policy be assigned before a loss
32 Unlees otherwise provided by agreement in writing added
33 hereto this Company shall not be bable for loss or damage
34 occurring
*3S <-. u (*) while the insured shall have any othei
36 Other insurance. (-oniracl of insurance, whether valid or not
37 on property covered in whole or in part by this policy; or
38 (b) while the hazard is increased by any
39 Increase of hazard, means within the control or knowledge ol
40 the msured, or
41 p ■ (c) while mechanics are employed in building
42 Kepairs, etc. altering or repairing the described premises
43 beyond a period of fifteen days; or
44 _ I . (d) while illumuialing gas or vapor is gener-
45 '•"P'o^'^^s, 2,jj Qj, ,),j described premises, or while
46 ^*^' ^^^' (any usage or custom to the contrary not-
47 withstanding) there is kept, used or allowed on the described
48 premises firew-orks. greek hre. phosphorus, explosives, benzine.
49 gasolene, naphtha or any other peiroleum product of greatei
M) inflammability than kerosene oil. gunpowder exceeding twcnty-
51 five pounds, or kerosene oil exceeding five barrels, or
52 p _. - (e) if the subject of insurance be a manufac-
53 ''"'°''"*- tunng .establishment while operated in
54 whole or in part between the hours of ten P M and live .\ M,.
55 or while it ceases to be operated beyond a period of ten days; or
56 ,, (f) whOe a described building, whether in-
57 ijno'cupancy. (,nded for occupancy by owner or ten.ml, is
58 vacant or unoccupied beyond a period of ten days, or
59 p_„i.,:-. (g) by explosion or lightning. imUss^e
60 "-."Plfo"' ensue, and. in that event, for losS'biTtfm
61 LighUimg. jg^ j^y (,^^ ^„ly . ■
62 ,.. .... _ . _ "Vnless oiTierwne provided by agreement in
^3 l,hattel mortgage. ^,.r„,ng jj^^j hereto this Company shall
64 not be liable for loss or damage to any properly insured here-
65 under while incumbered by a chattel mortgage, and during the
66 time of such incumbrance this Company shall be liable only
67 for loss or dajnage to any other property insured hereunder.
68 Tf.ii „/ i,,,:ij:_„ If a building, or any material part thereof
69 "" *" omiQing. j^,, „^^p, ^^ ,,,^ result of fire, all insurance
70 by this policy on such building or its contents shall immediately
71 cease.
^^ AHH^H riaiifl^a "^1^^ extent of the application of insurance
7j «aaea v,iauies. ^^^^^ ^^^^ policy and of tlie contribution to
74 be made by this Company in case of loss or damage, and any
75 other agreement not inconsistent with or a waiver of any of
76 the conditions or provisions of this policy, may be provided for
T! by agreement jn writing added hereto.
78 yf^^^f No one shall have power to waive any pro-
79 ■ vision or condition of this policy except such
80 as by the terms of this policy may be the subject of agreement
81 added hereto, nor shall any such provision or condition be held
82 to be waived unless such waiver shall be in writing added hereto.
a nor shall any provision or condition of this policy or any for-
84 fciture be held to be waived by any requirement, act or proceed-
85 ing on the pan of this Company relating to appraisal or to any
86 examination herein provided for; nor shall an\- privilege or per-
87 mission affecting the insurance hereunder exist or be claimed by
88 the insured unlcs granted herein or by rider added hereto
5? CancellatioB This policy shall be cancelled at any time
o? of policy. *** *^^ request of the insured, in which case
^' ' . the Company shall, upon demand and sur
92 render of this policy, refund the excess of paid premium above
93 the customary short rate» for the expired tune This policy
94 may be cancelled at any time by the Company by giving to the
95 insured a five days' written notice of cancellation with or with
96 out tender of the excess of paid premium above the pro rate
97 premium for the e.vpircd time, which exve.ss. if not tendered
98 shall be refunded on demand Notice of cancellation shall state
99 that said excess premium (if no: tendered) will be refunded on
100 demand.
"' Pro rata Uabilitv ^'''* Company shall not be liable lor a
Q2 rioi»i« u»uiuiy. greater proportion of any loss or damage
03 than the amount hereby insured shall bear to the whole
04 insurance covering the property, whether valid or not and
05 whether collectible or not
"6 Noon. ^*" word noon" herein means noon of
07 standard time at the place of loss or damage
08 Mortgage. " '°** °' ■''"lage is made payable, in whole
0<) interests °^ '" P'"- '° ' mortgagee not named herein
10 as the insured, this policy may be cancelled
11 as to such interest by giving to such mortgagee a ten days'
12 written notify pi c;^ ficj-haiion LVuii fjllurf or 111* insured tj
13 KHder proof ol loss such morigagee shall, as if named as insurea
14 hereunder, but within sixty days after nonce of such failure, ren-
15 der proof ol loss and shall be subject to the provisions hereof as
16 to appraisal and times ol payment and of bringing suit On pay-
17 mem to such mortgagee ol any sum for loss or uamage here-
18 under. ifthisCluncanysha^l^UjniJtiat as to the mortgjiar^pf
19 owner, Btr-ttSbility"eXlil*d, 'it shall. .Jo 'JTTf exKiit ufsuchpay-
20 meiM be subrogate!) to the mortgagee's right of recovery and
21 claim upon the collateral of the mortgage debt, but without
21 impairing the mortgagee's right to sue. or it may pay the mort-
Zi gage debt and require an assignment thereof and oi the mortgage.
24 Other provisions relating to the interests and obligations of such
25 mortgagee may be added hereto by agreement in writing
-S, Requirements in "^^^ '"*""'' shall giveinjjne44aM-not.ce. in
case of loss writing, to this Com(I>ny. ot Iny toss or
28 'damage, protect the properly from further
29 damage, forthwith separate the damaged and undamaged
JO personal property, put it in the best possible order, furnish a
Jl complete inventory of the destroyed, damaged and undamaged
J2 property, staling the quantity and cost of each article and the
33 amount claimed thereon; and. the insured shall, within sixty
34 days after the fire, unless such time is extended in writing by
35 this Con\pany, render to this Company a proof ol loss, signed
36 and sworn to b'y" iHe'insured: slating the knowledge and belief
}>7 of the ins ired as to the following ithe time and origin of the fire,
38 fKe interest of the insured and ol all others in the properiy,-thc
39 cash value of each item thereof and the amount of loss or damage
40 thereto, fall incumbrances thereon. ;alT other contracts of m-
41 surance.' whether valid or not, coCenng any'' of said pr'opc'ri^ |
42 any changes in the title, use, occupation, location, possessicfn, or '
43 exposures of said property since the issuing of this policy. Vy
44 whom and for what purpose any building herein described and
45 the several parts thereof were occup^jed at the lime of fire, and
46 shall furnish a copy of all the descriptions and schedules in all
47 policies and it required.'VtfTTTTe'g p t a * / -s j iitt-specrfiea i tftt isr Of any
48'huircling," fixtures or hiachincry destVoyed or damaged. The
49 insured, as often as may be reasonably required, shall exhibit
50 to any person designated by this Company all that remains of
51 any property herein d.»jcribcd. and submit to examinations
52 under oath by any person named by this Company, and
53 subscribe the same; and. as often as may be reasonably
54 required, ^all produce for examination ail books ol account,
55 bills, invoices, aiij i5!hei VViu'cK^r;. rr cemffftj C'uples llieTcuf.
56 H-ewf?fH»a-l»-be-4ost. at such reasonable lime attifl""(ifl^"ce as may
57 be designated by this Company or its representatives, and shall
58 permit extracts and copies thereof to be made
59 A__„:„i In case the insured and this Company shall
60 "PP'*'»3'- fail to agree as to the amount of loss or
61 damage, each shall, on the writien demand of either, select
62 a competent and disinterested appraiser The appraisers
63"^IialI first select a competent and disinterested umpire; and
64 failing for fifteen days to agree upon such umpire then, on
65 request of the insured or this Company, such umpire shall be
66 selected by a ^udge of a court of record in the state in which
67 the property insiired is located The appraisers shall then
68 appraise the loss and damage stating separately sound value
69 and loss or damage to each item, and failing to agree, shall
70 submit their differences only, to the umpire An award m
71 writing, so itemized, of any two when filed with this Company
72 shall determine the amount of sound value and loss or
73 damage. Each appraiser shall be paid by the party selecting
74 him and the expenses of appraisal and umpire shall be paid
75 by the parties equally.
5^ Company's '', ^^^'I "" "P'^O"'' with this Company to
- options '* ^ ■ "'' *"^ part, of the articles at the
"8 P ' agreed or appraised value, arid also to
79 repair, rebuild, or replace the property lost or damaged with
RO other of like kind and quality within a reasonable time, on
81 giving notice of its intention so to do within thirty days*
82 •Sfrer rhe receipt of the progf of loss herein required; Juit-
there can bc^no abandonment to this Coin*
Abandonment.
When loss
g; payable.
pany of any property
*THe a'mount of loss' or damage lor which
this Company may be liable shall be pay-
able sixt^days after proof of loss, as herein
f*.S piovided, is received by^his^'CmiTpa'riy^ri'T'ascertaTnment of
89 the loss or dam..ge is madc_jut.h£r by agreement between the
90 insured and tins Cpnipany cxpres's^d' in*\vrrtTng or by tlj4
91 filing with this Company" oF an aNvafd -Li ]io*#i:\, pro\-ideJ
'"Suit. ^° ^"'^ *"^ action on this policy, for the
9-5 ' recovery of anv claim, shall be sustainable
94 in any court of law or equity unless all the requirements of
95 this policy shall have been complied with, nor unless com-
''ft'menced within twelve months next after the fire.
" Subrogation. Xhh Company may require from the insured
93 * an assignment of all right of recovery
99 against any party for loss or damage to the extent that pay-
200 mem therefor is made by this Company.
416 INSURANCE PRINCIPLES AND PRACTICES
XXX— Continued
ASSIGNMENT OF INTEREST BY INSURED
The interest of - „ - _
covered by this Policy is hereby assigned to ._
subject to the consent of THE INSURANCE COMPANY, NEW YORK.
......as owner of the property
(SifSAture of the lomrcd)
Dated„
..I9„..„..
CONSENT BY COMPANY TO ASSIGNMENT OF INTEREST
THE INSURANCE COMPANY. NEW YORK, hereby consents that the interest of
._ . „ _ „ as owner of the property
covered by this Policy be assigned to
_..- - - — ».-,,.,;,^^«..,.,,. Agent.
Dated..
„...19..
No. of Policy-^ ,
No. of Renewal
Amount Insured „ _
Date of Cancellation
" Policy •
Time in force
Premium Paid
YEAR
MO.
DAY
Earned at rate $^
Returned, 9-
I» Pxo Rata, State RxasOn Why.
Receipt for Return f^remium
To be signed by the Assured
THE INSURANCE COMPANY
-Agency—..
19-
IN CONSIDERATION OP
_ ...Dollars
return premium, receipt of which is hereby acknowledged, this Policy is
hereby cancelled and surrendered to the Company
Assured:
APPENDIX 417
XXXI
REDUCED RATE CLAUSE (CO-INSURANCE)
In consideration of the reduced rate of premium for which this Policy is
written the standard 80 per cent. Co-insurance Clause of the State of New
Jersey is attached to and made a part of this Policy.
NEW JERSEY STANDARD PERCENTAGE CO-INSURANCE CLAUSE
If at the time of fire the whole amount of insurance on the property cov-
ered by this Policy shall be Less than per cent, of the actual cash value
thereof, this Company shall, in case of loss or damage, be liable for only such
portion of such loss or damage as the amount insured by this Policy shall bear
to the said per cent, of the actual cash value of such property.
If this Policy be divided into two or more items, the foregoing conditions
shall apply to each item separately.
Attached to and forming part of Policy No of the
Agency of The Insurance Company,
Agent
XXXII
MORTGAGEE CLAUSE
N. Y. and Neiv Jersey Standard
Loss, or damage, if any. under this Policy, shall be payable to.
as mortgagee, [or trustee] as interest may appear, and
this insurance, as to the interest of the mortgagee [or trustee] only therein
shall not be invalidated by any act or neglect of the mortgagor or owner of
the within described property, nor by any foreclosure or other proceedings or
notice of sale relating to the property, nor by any change in the title or owner-
ship of the property, nor by the occupation of the premises for purposes more
hazardous than are permitted by this Policy; Provided, that in case the mort-
gagor or owner shall neglect to pay any premium due under this Policy, the
mortgagee [or trustee] shall on demand pay the same.
Provided also, that the mortgagee [or trustee] shall notify this Company
of any change of ownership or occupancy or increase of hazard which shall
come to the knowledge of said mortgagee [or trustee] and unless, permitted
by this Policy, it shall be noted thereon and the mortgagee [or trustee] shall,
on demand, pay the premium for such increased hazard for the term of the use
thereof; otherwise this' Policy shall be null and void.
This Company reserves the right to cancel this Policy at any time as
provided by its terms, but in such case this Policy shall continue in force for
the benefit only of the mortgagee [or trustee] for ten days after the notice to
the mortgagee [or trustee] of such cancellation and shall then cease, and this
Company shall have the right, on like notice, to cancel this agreement.
Whenever this Company shall pay the mortgagee [or trustee] any sum
for loss or damage under this Policy and shall claim that, as to the Mortgagor
or owner, no liability therefor existed, this Company shall, to the extent of
such payment, be thereupon legally subrogated to all the rights of the party
418 INSURANCE PRINCIPLES AND PRACTICES
to whom such payment shall be made, under all securities held as collateral
to the mortgage debt, or may at its option, pay to the mortgagee [or trustee]
the whole principal due or to grow due on the mortgage with interest, and
shall thereupon receive a full assignment and transfer of the mortgage and
all such other securities; but no subrogation shall impair the right of the
mortgagee [or trustee] to recover the full amount of claim.
Attached to and forming part of Policy No issued at
Agency of The Insurance Company,
Dated
Agent
XXXIII
MORTGAGE CLAUSE WITH FULL CONTRIBUTION
N. Y. and Neiv Jersey Standard
Same as above with the addition of the following clause:
In case of any other insurance upon the within described property this
Company shall not be liable under this policy for a greater proportion of any
loss or damage sustained than the sum hereby insured bears to the whole
amount of insurance on said property, issued to or held by any party or parties
having an insurable interest therein, whether as owner, mortgagee or other-
wise
XXXIV
EXCESS FLOATER
On merchandise, chiefly own, or held by in trust or
on commission, or on joint account with others, or sold but not removed, and
not under the protection of a Marine Policy, while contained in all or any
of the brick or stone storage warehouses, and while in transit in or on any
of the streets, depots, yards or wharves in the City of , and in any
ship or vessel in the port of said city, subject to the following conditions: —
REDUCED RATE AVERAGE CLAUSE
In consideration of the reduced rate at which this policy is written, it is
expressly stipulated and made a condition of this contract that this company
shall be liable for no greater proportion of any loss than the amount hereby
insured bears to the actual cash value of the property described herein at the
time when such loss shall happen, nor for more than the proportion which this
policy bears to the total insurance thereon.
If this policy be divided into two or more items, the foregoing conditions
shall apply to each item separately: and if two or more buildings or their con-
tents be included in a single item, the application of the provision as to special
inventory or appraisement shall be limited to each building and its contents.
EXCEPTION CLAUSE
It is understood and agreed that goods on which the insured shall have
a specific insurance are not covered by this policy except so far only as relates
to any excess of value above such specific insurance, and that this policy shall
be liable only for its proportion of any loss, on such property, which exceeds
such specific insurance.
APPENDIX 419
XXXV
HOUSEHOLD FORM
On Household and Kitchen Furniture of every description, useful and
ornamental, Beds, Bedding, Linen, Wearing Apparel, Printed Books, Pictures,
Paintings and their frames. Sculpture, Works of Art, Silver and Plated Ware,
China and Glassware, Mirrors, Musical and Scientific Instruments, Watches,
Jewelry, Sewing Machines, Gas Fixtures, Family Stores, Tools, Bicycles and all
other Sporting Implements, Awnings contained in or attached to the Building
and all articles generally used in housekeeping, the property of the Assured, or
any member of his family, while contained in Brick Building as a dwelling
situate No Street, Philadelphia
In case of loss or damage to Paintings, Statuary or Works of Art no one
subject to be valued at more than the actual cash price paid for the same by
Assured.
Privilege of other insurance without notice until required; to make addi-
tions, alterations and repairs and this policy to cover in same; to use gas and
kerosene oil for light, heat and cooking; for building to remain unoccupied
during any part of the year, and to keep and use not exceeding one quart
of gasoline or benzine for cleaning purposes without prejudice to
this policy.
XXXVI
LIGHTNING CLAUSE
(Excluding Damage to Electrical Apparatus.)
This policy shall cover any direct loss or damage caused by lightning
(meaning thereby the commonly accepted use of the term lightning and in no
case to include loss or damage by cyclone, tornado, or wind-storm), not ex-
ceeding the sum insured, nor the interest of the insured in the property, and
subject in all other respects to the terms and conditions of this policy. PRO-
VIDED, however, that if there shall be any other insurance on said property
this company shall be liable only pro rata with such other insurance for any
direct loss by lightning, whether such other insurance be against direct loss by
lightning or not; and provided further that, if dynamos, wiring, lamps, motors,
switches or other electrical appliances or devices are insured by this policy,
this company shall not be liable for any loss or damage to such property re-
sulting from any electrical injury or disturbance, whether from artificial or
natural causes, unless fire ensues, and then for the loss by fire only.
Permission is granted under this policy for the use of electric current
after Certificate of approval has been issued by the Philadelphia Fire Under-
writers Association and while it remains unrevoked by said Assocation.
Attached to Policy No The Insurance Company
of Philadelphia. Secretary.
420 INSURANCE PRINCIPLES AND PRACTICES
XXXVII
LOSS PAYABLE CLAUSE
Loss, if any, payable to Mortgagee, as
......interest may appear, subject nevertheless to all the conditions of this
Policy.
Attached to and forming part of Policy No of The Insurance
Company, issued to at the Agency
Date of Endorsement 19
Agent
XXXVIII
GASOLINE, ETC., PERMIT
Permission is hereby given to keep and use not more than quarts
of in any one day, it being warranted by the insured that, in con-
sideration of the reduced rate at which this policy is issued, not more than
one quart of will be kept or used by the insured in any one
story of the building in any one day; that the will be kept in and
used from approved safety cans (or pots) and kept outside of the building
at night.
XXXIX
SPRINKLER LEAKAGE FORM
Does insure for the term of from the day
of 19 , at noon, to the day of 19
at noon, to an amount not exceeding
dollars, to wit: Against all direct loss or damage caused by the accidental
discharge or leakage of water from the automatic sprinkler system, including
tanks supplying it. except as hereinafter provided, in or on the buildings now
erected and occupied wholly or partly by the assured (whether the accident
occurs in the portion occupied by the assured or not), described and located
as follows
And the company shall be liable under this contract for all direct loss or
damage sustained by the assured occasioned by such discharge or leakage,
provided same is caused by any accident (including freezing), and applying
to all property, real or personal owned by the assured, or to the property of
others held by the assured in trust or on commission, or sold, but not removed,
and for which the assured is legally liable, while situate upon the premises
above described, but this company shall not be liable for loss or damage occa-
sioned by such discharge or leakage, when such discharge or leakage is
caused by fire, lightning, earthquake, explosion, invasion of foreign enemies,
civil commotions, riots, any military or usurped power, order of civil authority,
or any fraudulent act of the assured. It is further understood and agreed that
the entire liability of this company under this contract shall under no circum-
stances exceed the sum insured, for any loss, claim, or damage whatsoever,
and that this company shall not be liable under this contract for any loss or
damage to the automatic sprinkler system itself.
APPENDIX 421
XL
BUSINESS INTERRUPTION INDEMNITY
Use aiid Occupancy Insurance.
On th« U8C and occupancy of ..,....„ff..,...,, ., «...,-i
situate TottTi of , — ^ —
state of and occupied for ..,.„'....'..... ..■,..-.„i..-.„ _..„
The word 'Inisincss" wlicrcvcr used iu this contract shall lie cpusidered and held to have tlio follow lug meaning accord-
ing to the class of property insured:
(a) In a MANDFACTuniNo property: "The production of goods.".
(I)) In a MKRCANTILE property: "The sale of t;oods."
(e) In OTiiKU ci,ARsi:s of property: "The carrying on of the business operations usual to the class."
The word "day," liowcver modified, wherever used in this contract shall be held to cover a period of twenty-four (24)
hours.
If the said Iniilding , of machinery or erpiipineiil or stoilc cont.nined tlicreiu be dcftroycd or damaged by fire occurrinp;
d'.iring llie life of this policy so as lo nceessilale n lolal or parliil suspension of hiisinoss, this Com[inny shall be li.ihlc under
(his policy for the actual lo.^is Eusljiined of net pnifiis ou Ihe hii.sincss which is Iherehy prevented, and for such fixed chnrTCs and
expenses as must iieces. business day rrora..„.^....„......,„.._..,.,»«..lo noon the following...„...r,.„j,,,.,...,,... (incl.) $ , ,„,„
For cadi business day from.._.v »-.— ..c- 'o nomi "ic following „».,.,.,..„„,.,.„._.. .(incl.) $ — i
For each business day from .'., lo noon the following .,^..„i..,..,....(incl.) $ ..i..... i,
For each business day frorrL to noon the following ,.., (incl.) $ .,
For each liusiness day from .;. to noon the following ., (incl.) $ .,
For each business day from to noon Uie following , (incl.) $ ,. «
For each business day from : to noon the following , (incl.) $ _..„ „
For '■ach busincsS day from ^...to noon the foUoHdug (incl.) $ *
For each business day from to noon the following (inol.) $ -i ..»
For each tmsincss day from _ to noon the following (incl.) $ n.
For each business day from to noon the following _ (incl.) $ ,. ..,•
For each business day from ,. to noon the following _ (incl,) $ j,.»
For each business day from to noon the following (iacL) % : „,
During the time of a partial suspension of business, the per diem liability under this policy shall not exceed that pro-
.porlion of the per diem Ii;i])ility which would have been incurri'd by a total sn.-pcnsion which Uie decrease in production (or
business) bears to the full daily production (or business) at the time Of the fire.
It is a condition of this lusurance that the daily production (or business) at the time of the fire shall be baaed upon
the average daily production (or business) of all plants or properties herein described for the. ,„. days
of full oijcraliou next preceding the fire.
Liability ^hereunder shall not exceed the amount of insurance by this policy nor a greater proportion of any loaa than
the insurance hereunder eholl bear to all insurance, whether valid or pot, covering in any manner the loss insiired against by
tJus policy.
422 INSURANCE PRINCIPLES AND PRACTICES
XL — Continued
It ft a eondilion of this insurance that the assured shall not be entitled to compeiwation oh accounf of delay «liich may
bo occasioned by any ordinance or law regulating construction or repair of buildings, or by the euspension, lapse or cancellatJQil
o( ^y license, or for any other consequential damage.
It is a condition of this insurance that if covering on replacement of stock in a manufacturing property! '•'
First— That no liability is assumed on account of damage to tlie finished product or for the tin^e reqlired to repf633ffl
aOj finished product which may be damaged.
Second — That liability for curtailpient of production due to damage to, or loss of, raw materials shall be limited to
that period of time for which the damaged or destroyed raw materials would have furnished operatmg conditions for the plant.
No liability shall exist on this account, unless or until actual curtailment of production shall have occurred through the
assurcd's inability to procure suitable materials to take the place of those damaged or destroyed.
It is a condition of this insurance that as soon as practicable after any loss, the assured shall resume complete or partial
operation of the property herein described and shall make use of other property, if obtainable, if by so doiuj the amount of
loss hereunder will be reduced, and in the event of the assured continuing business, in whole or in part, at some other location
or using other property during the time occupied in repairing or reconstructing the property named herein, the net profits so
earned shall be applied to the reduction of the loss and adjustment shall be made as provided herein for partial losses.
Surplus machinery or duplicate parts thereof, equipment or supplies, surplus or reserve stock, which may be owned,
controlled or used by the assured shall, in the event of loss, be used in placing the property in condition for the resumption of
business.
In case the assured and this Company are nnable to agree as to any question affecting the amount of loss under this
policy, the same shall he determined by appraisers in the mamier provided by the policy to which this form is attached, the
provisions of which policy shall govern in all matters pertaining to this insurance, except as herein otherwise provided.
Other concurrent insurance permitted.
Permission- is granted under this policy for the use of Electric Current after certificate of approval has been issued
by the ' Fire Underwriters' Association and while it rema.ina unrevoked by 6ai4 Association.
Permit for Alterations- and Repairs. — In addition to the privilege contained in the printed conditions of this policy
perraiseioii is hereby given to make ordinary alterations and repairs in the within-described premises, but this shall J^gt bo
held to include the reconstruction or the enlargement of the same.
Permit to Cease Operation. — Permission is hereby granted to cease operation not eiceediiig sixty (60) cons^mtive
days, in addition to the period of ten (10) days granted under the printed conditions of this policy, but this shall not Ija held
to annuf the privilege to cease operations for a period of ten (10) days at any one time.
Warranty: In consideration that no additional premium is charged for this permit to cease operations, it is war-
ranted by the insured and made a condition of the insurance that all fire extinguishing appliances and apparatus installed on
said premises shall be maintained in complete working order and that one or more watchmen shall be continuously on duty
day and night during the time named in this permit, and be required to make hourly rounds of inspection, recording same oa
watchman's time recording clock.
Lightning Clause. — Except as provided in the Electrical Exemption Clause below, this policy shall cover use and
occupancy loss caused by lightning (meaning thereby the commonly accepted use of the term lightning, and in no case to
include loss or damage by cyclone, tornado or wind-storm) not exceeding the sum insured, nor the interest of the assured in
the property. Provided, however, if there shall be any other, use and occupancy insurance on said property, this Company
shall be liable only pro rata with such other insurance for any use and occupancy loss by lightning, whether such insurance to
§gainst loss by lightning or not.
Electrical Exemption Clause. — It is a special condition of this policy that this Company shall not be liable foil
Any use and occupancy loss resulting from damage to dynamos, exciters, lamps, switches, motors and other electrigal appliwjcei
or devices caused by electrical currents, whether artificial or natural, including lightning.
Attached to and made a part of Policy No _. of the. _ ,....,..«i>,.nn»••••••
It is understood and agreed that this binder continues for a period of Ten
Days from date of issue, or until the issue of a Standard Policy covering said
property, or until twelve o'clock noon of the second business day after written
notice of cancellation to the assured, or to the broker placing this insurance,
whichever of said three events first occurs.
Remarks
Agent
XLII
CANCELLATION NOTICE TO MORTGAGEE FOR NON-PAYMENT OF
PREMIUM
(^^ I, the undersigned, do hereby certify that the Original of this Copy was
registered by me to the party named in this notice, on the day of
, 19
The Insurance Company,
Agency at
Date , ig.
Because of non-payment of the premium of $ , we cancel the
Mortgage Agreement attached to and made a part of our Policy No ,
Issued to on , 19 ,
covering on at , and
made payable to you as mortgagee (or trustee), in the event of loss, and hereby
give you ten (10) days' notice thereof, as provided by the terms of said mortgagee
clause and the Policy.
Please take notice that on the day of , 19 ,
at twelve o'clock noon, or, if that date is not ten (10) days from the receipt
hereof, then at the expiration of ten (10) days from its receipt, the said Agree-
ment will cease to be in force.
Yours truly,
THE INSURANCE COMPANY,
Per
Agent
^24 INSURANCE PRINCIPLES AND PRACTICES
XLIII
RENEWAL RECEIPT
Amount, $ Premium, $
The Insurance Company of
Insured
In Consideration of Dollars being the premium
on Policy No is hereby renewed
and continued in force for to wit, from the
day of 19 , at noon until the
day of 19 , at noon.
Dated
THE
. INSURANCE COMPANY,
Per
Agent
XLIV
SHORT RATE TABLE FOR ONE YEAR POLICIES
Percentage
Percentage
Percentage
Time
to be Charged
Time
J
'.0 be Charged
Time to
1 be Charged
Days
or Retained
Days
or Retained
Days (
or Retained
1
2
19
16
135
56
2
4
20
17
150 (5 mo.)
60
3
5
25
19
165
66
4
6
30 (1
mo.)
20
180 (6 mo.)
70
5
7
35
23
195
73
6
8
40
25
210 (7 mo.)
75
7
9
45
27
225
78
8
9
SO
28
240 (8 mo.)
80
9
10
55
29
255
83
10
10
60 (2mo.)
30
270 (9 mo.)
85
11
11
65
33
285
88
12
11
70
36
300 (10 mo.)
90
13
12
75
37
315
93
14
13
80
38
330 (11 mo.)
95
15
13
85
39
345
98
16
14
90 (3
mo.)
40
360 (12 mo.)
100
17
15
105
46
18
16
120 (4
mo.)
50
APPENDIX ^ 425
XLV
AGREEMENT FOR SUBI^1ISSI0^ TO APPRAISERS.
|t t5 htetbB afltt'fl by - -^
of the first part, and the.. - Ins. Co. of
or companies whose name or names are signed hereto, of .the second part, each for itself and not jointly, they
having failed to agree as to the amount of loss or damage by fire, .which occurred on the... —
day of - »90 to property described in policy No.. issued to said party
of the first part by the party of the second part', which policy isTiereby referred to and made a part of this
agreement, that — - — -• • ■ ■
(together with a third person to be first appointed by them, as required by said policy of insurance, who shall
act as umpire upon matters of difference only) shall appraise and estimate the actual cash value of, and' the
loss and damage by fire to, the property as enumerated in schedule or description herewith, which loss or
damage shall be ascertained or estimated according to such actual cash value with proper deduction for
depreciation however causetl, and shall in no event exceed what it would then cost the assured to repair or
replace the same, which appraisement and estimate by them, or any two of them, in writing, as to the amount
of such value and loss or damage shall be binding on both parties, it being understood that the appointment
is of binding effect only so far as regards the actual cash value of, and loss or damage to, said property.
The property on which sound value and damage is to be estimated and appraised is described in the
policy above mentioned as follows:
Goods damaged by removal shall be specified separately.
It is expressly understood and agreed that in entering into this agreement the said Insurance Company
shall not be held to have waived any provisions or conditions of this policy, or any forfeiture thereof, by any
requirement, act or proceedings on its part relating to the appraisal.
'SBiltncss our hands at _ i
\ — "
this. day of. — , 1 90 )
426 INSURANCE PRINCIPLES AND PRACTICES
XLY— Continued
APPOINTMENT OF AN UMPIRE.
We, the undersigned, do hereby select and appoint..
ss Umpire, to decide upon matters of difference only, as provided for in the within agreement.
^ ^ 190
[ Appraisers.
DECLARATION OF APPRAISERS.
State of —
County of .
We, the undersigned, do solemnly swear that we have no interest as employees, relatives, creditors or
otherwise in either of the parties to the foregoing Agreement, and that we will act with strict impartiality in the
discharge of our duties as Appraisers, rendering an award to the best of our knowledge, skill and judgment.
Witness our signatures hereto.
>• Appraisers.
...Umpire.
Stibscribed and sworn to before me this-
-day.
.190
AWARD OF APPRAISERS.
We, the undersigned, pursuant to the within appointment, do hbreby certify that we have truly and
conscientiously performed the duties assigned ns, agreeable to the foregoing stipulations, and have appraised and
determined the actual cash value of said property on the - -day of - 190
and the actual damage thereto by the fire on that day. to be as follows, to wit;
Valua before the FliY.
On _ _
On .:.-
On ...:n.=
Total amount of award..
Damage.
$ —
as per Schedule herewith.
Witness our hands, this ...
. day of
.190.
II
Appraisers.
.Umpire.
APPENDIX 427
XLVI
SWORN STATEMENT IN PROOF OF LOSS
POLICY
No
AGENCY AT
ComtrSttrut
AMOUNT OF POUCY
DATE OF EXPIRATION
19_
BY YOUR POLICY OF INSURANCE ABOVE DESCRIBED
YOU INSURED
(hereinafter called the Assured), according to the terms and conditions contained therein, the written portion
thereof and all endorsements, transfers and assignments thereon, being as follows :
$
(Copies of all endonements. transfertv assigntnenta and all the deacriptions and schedules m all other Policies will be furnished on demand.)
A fire occurred on the _day of„
and belief of Assured, originated
, 19 , which, to the be^ knowledge
The property thus insured belonged to_
and no other person or party had einy intere^ therein except-
The building was occupied for the following purposes :
and for no -other purpose whatever.
The whole value, the whole amount of loss, and the whole insurance, on above described
property, is as follows, viz. ;
WHOLE VALUE
WHOLE LOSS
WHOLE INSURANCE
AMOUNT NAMED IN
THIS POLICY
AMOUNT CLAIMED
UNDER THIS POLICY
Item of Policy
.... , Item of Policy
Item of Policy ,
,
Other Items of Policy
TOTALS
Total Amount Claimed of this Company under above-named Policy,
1^
The said fire did not originate by any a<5l, design or procurement on the part of assured, of this
affiant ; nothing has been done by or with the privity or consent of the assured or this affiant, to violate the
conditions of the Policy, or render it void ; no articles are mentioned herein or in tinnexed schedules but such
as were in the building deimaged or de^royed, and belonging to, and in possession of the said assured at time
of said fire; no property saved has been in any manner concealed, and no attempt has in any manner
been made to deceive this Company as to said loss.
Any other information that may be required will be furnished on call, and considered a part hereof.
If is expressly tuidersfood and agreed, that the furnishing of this blank to the assured or the preparing
of Proofs by an adjuster, or any agent of this Company is an act of courtesy and is not a waiver of any rights
of tbis Company.
MitttTBB hand at— )
this.- day of
State of ...
I9_
Assured
County of
^rrBUnally optirarFb before me, the day emd date above written.
Signer of the foregoing ^atement, who made solemn oath to the truth of same, and that no materijj ia€t is
withheld of which this Compciny should be advised.
Notary Public Justice of the Peace.
(SEAL)
428 INSURANCE PRINCIPLES AND PRACTICES
XLVI— Continued
SCHEDULE A
J*e Of COMPAW
SCHEDULE B
STATEME!r
living nearest the property hereinbefore described, hereby certify that I am not intereiled in the loss or claim above set
forth, either as a creditor or otherwise, nor related to the'insurcd oj sufferers; that' I have .examined the circum^ances
attending the fire, or damage alleged, and that I am well acquainted with-4he character and circum^ances of the insured,
and do verily believe that ha. by misfortune, '^nd without fraud or evil practice, su^ained loss and
damage on the property insured to the amount of —..., ; ■ - Dollars.
3In UrpBtimony IHIjprrof, I have hereunto set pay hand and seal this T-^ay of
A. D. 19-
This Certificate is in all cases te be made hy the Magi^talc sr Notary Public living nearest the place of Are.
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DIAGRAM
Arrets »31 plttse wKwcrAtL these qnettions.
EXPOSURES.
Jlortb^
South.
East
— „
Wc:t
.
^__
_.,, ,...
.,
Po) Nd
EXPOSING
LINES.
<■
-
■•
.,
•■ .._
—
"
OCCUPANCY OF THE PREMISES.
M Policy covprs store bulldisg, lUle cliii cf icercluaditt kept.
Basement — -> - - — — — — ■■ — -■
1st Sicry, «.„._™^ — . — -■^■-^■■.- -■ . ■
l.VVhcn was building erccied?, liaichaU^-,
is it in eooj
R»»r.»rk» .■
2 TIow Lighted? ., . ,
4. Do all the Stove Pipct discharge into substantial brick Chimneys?. — -.
5. Have you persooally and carefully inspected the Stoves, Furnaces, Pipci.
Flues and Chimneys' —_— -> - — —
C If so, do you consider tlicm sale? . .. ..— ..
7. What is ihc present Cash V^lue of Building above foundation? g—— -
8 What is the Value of Stock? $. -
9^ T*- thfrfropcrty mortgaged? • For what amoonl? $.- i. — — .
10 Wli:*t Is th:- vr.lur o\ the whole property roorleaged? $ — — .
II. Do yoj fully rccommtrd the risk as being free frqin all finoBcial or moral
liazard? ,_..^ — _. , , . . ■■■ — ■ i-
ir How long has the assured rcfidsd in )0(v phcc?,,..^^ .^ — .. _,,•
13«Arc iSe preml:^?^ nov7 occbpitJ ar>d prodtioivt?.^ .. ■ ■. ..i — . — -.
\% How fw to n^*ajfi» T'utlic hfe hydrant? , .,. — — ■- — —
• II To ocarest Cre company? — , ■ ..■ .- ■ — . — - — . ■ ^ ..— . ^-
430 INSURANCE PRINCIPLES AND PRACTICES
XLVIII
MONTHLY REPORT
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STANDARD
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UNDERWRITERS, 1917
APPROVED BY THE
N*tion«t AtiocUtioD of Iniuraoc* Afenl^ 1917
Month of .
-19-
THE
INSURANCE COMPANY
NEW YORK
•-20-2&a-U iiil
APPENDIX
431
XLIX
AGENTS' CONTRACT
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I III
432 INSURANCE PRINCIPLES AND PRACTICES
MAPS OF FIRE UNDERWRITERS' ASSOCIATIONS
%uu of Nft/Yorn
N[W YORK
PENNSYLVANIA
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APPENDIX
433
LII
BASIC TABLE, DEAN SCHEDULE
100 — Protection
Height Class Class Class Class Class Class Class
12 3 4- iVi 5 6
1 story $0.54 $0.61 $0.69 $0.78 $0.86 $0.94 $1.00
2 stories 57 .64 .73 .82 .91 .99 1.05
3 stories 60 .67 .76 .86 .95 1.04 1.10
4 stories 63 .72 .81 .92 1.01 1.10 1.17
5 stories 69 .78 .88
6 stories 76
Increase for each additional story .12 .12 .12 .12 .12 .12 .12
Decrease if no basement 03 .03 .04 .04 .04 .05 .05
LIII
CONTENTS TABLE, DEAN SCHEDULE
Third-Class Protection
Location oj Contents Dl DlYz Ds D2yz D3 DsVz D4
Basement $0.26 $0.33 $0.40 $0.49 $0.57 $0.66 $0.75
Ground floor 18 .25 .31 .39 .47 .56 .64
Second floor 26 .33 .40 .49 .57 .66 .75
Third floor 31 .39 .46 .55 .64 .74 .83
Fourth floor 36 .44 .52 .61 .70 .80 .90
Fifth floor and over 41 .49 .57 .67 .77 .88 .98
LIV
OCCUPANCY TABLE, DEAN SCHEDULE
/
195. Bolt, Nut and Screw Stocks 5%
196. Bonnet and Hat Frame Factories 15%
1. Additional labor, power, heat, etc. (C. 3J4)
197. Book Bindery (no printing) 25%
1. Additional labor, power heat, etc. (C. 3J^)
2. Book Bindery with Printing. See Printing.
198. Book Binders' Supplies 5%
199. Book and Stationery Stocks 5%
200. Bootblacking Parlors 3%
201. Boot and Shoe Stocks (retail) 5%
202. Boots and Shoes (wholesale), including Rubber
Goods 3%
2
10%
20%
40%
3
D2
D3
D3
10%
D2
10%
D3
> > > >
D2
10%
D2
5%
Dl
434 INSURANCE PRINCIPLES AND PRACTICES
LV
CALCULATION OF A BUILDING RATE— DEAN SCHEDULE
Brick Building
60 Table — Third Class Protection
Basis — four stories, no basement ($0.49-.02) $0.47
Area — 4,000 square feet, four floors 14% less one-tenth or 1% for
interior wall 13%
Walls — sides are 16-12-12-12 average 13 in., should be 20-16-16-12,
average 16 in. deficient each 3 in., at 3% ^ 6%
One wall party, add 4%
Parapets — one deficient in height 4%
Iron and Glass store front first story, over 25 feet 6%
Ceilings and walls wood sheathed — 2 floors 6%
Skylight — one 70 square feet, not standard 4%
Floorways grade "B" with two "below a" openings each floor
(6%x3) 18%
Partitions — one wooden lath and plaster, basement and first floors,
between tenants 6%
Exterior Attachments — one metal-clad frame roof house over
elevator 5%
Occupancy (assumed) 48%
Total charges added and extended 120% .56
Occupied building rate $1.03
LVI
CALCULATION OF A BUILDING AND CONTENTS RATE-
DEAN SCHEDULE
Municipal Protection — Class 3
Building: 4 stories and basement, basis $0.49
Charges
Area: 50 x 100 feet equals 5,000 feet, 5 floors 20%
Walls : (2) each deficient 3 inches 6%
One party wall not standard 4%
Parapets: one deficient in height 4%
Front wall on first story all of iron and glass 6%
Wooden sheathed ceiling and walls on first floor 3%
Skylight: one 70 sq. ft. not standard; heavy glass in wooden frame 4%
Floor Openings: one open elevator and one open stairway each floor
Floors grade B B B B
Retinue grades — a — a — a • — a
Number of openings 2 2 2 2
Charges +6% +6% +6% +6%= 24%
Metal-clad roof house over elevator 5%
Occupancy charge (see detail) 272%
Total percentage charges added, applied to basis rate and
extended 348% 1.71
Occupied building rate $2.20
APPENDIX 435
INl— Continued
Deduct for standard fire escape 2%
Deduct for approved equipment of fire extinguishers 5%
Total credits 7% .15
Building rate $2.05
Exposures — none • • • •
Final building rate 2.05
Contents rate 2.64
Contents grade D3 on bst, 1st, 2d, 3d and 5th floors.
Add the differentials as follows 57 + 47+ 57 + 64 + 70 = 2.95.
Divide by number of floors, four and basement (5)^ 59 cents.
Building rate $2.05 plus contents differential .59 = $2.64.
DETAIL OF OCCUI-ANCY
12 3
John Buck & Co., Candy Factory 25% 40% D3
Average number hands, 125.
Additional labor, 120 hands, CZVz 63%
Boiler and engine — high pressure boiler with brick stack;
concrete floor — in separate room with brick walls and
joisted ceiling not cut-off. Boiler grades as "medium"
furnace, for which charge in open is 70%; 70% x 80%
for location equals 56%
Coke-heated candy furnaces (4).
Charge for one furnace as "low" 25%; 25% x% as addi-
tional to boiler furnace = 5% and multiply by four for
number of furnaces, equals 20%
Kettles connected with candy furnaces (4) charge for one
30% increased % for additional kettles equals 48%
Gas engine, in open 20%
Total first column charges 232%
Add charge in column 2 40%
Total occupancy charge 272%
436 INSURANCE PRINCIPLES AND PRACTICES
LVII
RIOT AND CIVIL COMMCmOM POUCY
Amount, 9
Does Insure
Rat»
3n CmtatifraJum of the stip\d^$^
lum, 9
from the day of
to the day of
AGAINST ALL DIRECT LOSS OR DAMAGE
(1) Riot; (2) Insurrection; (3) Civil Commotion I
of the foregoing; (5) Explosion occurring from
from such explosion) whether origioatiiig on the pren
Except as hereinafter provided, to an amoust
to the following described property while
tiamed and of
Dollars Premium,
19 , at noon,
19 , at noon,
D BY ANY OF THE FOLLOWINQi
ike; (4) Explosion directly caused by any
above described (excluding fire rraultii^
ed or elsewhere.
DoOaxs
tained as described herein, and not elsewhere, to wit:
This policy is made and accepted subject to the foregoing stipulations and conditions, together with such other pro-
visions, agreements or conditions as may be indorsed hereon or added hereto, and no officer, agent, or other representative
of this Company shall have power to waive or be deemed or held to have waived such provisions or conditions unless such
waiver, if any, shall be written upon or attached hereto, nor shall any privilege or permission affecting the insurance under
this pohcy exist or be claimed by the insured unless so written or attached.
Provisions required by law to be stated in this policy. — ^This pohcy is in a stock corporation.
3n BilttTBfl ffil|frenf.jSis Company has esecuted and attested these presents; but this polin^^ll
Talid until countereigned ^ the duly authorized manager or agent of the Company at %r^
not be
Secrelary
_, IMs-
c
PraideiU
-,19 —
Agent.
APPENDIX 437
UVll— Continued
This entire policy shall \tc void iinlrsfl the premium above Btated shall be received by this Company or by a duly author*
Jkn4 tprnt of this CVimpiuiy within thirty (M)) iIrvh of the N-^iininK of the term hereof.
Damage rauboii l»y rxpltrnion on^inHtiitf; within fit«im Unlera, pipefl, fly whoein, engines and mnohincry connert/yl thrro-
With and opcrnte(|ueiitiHl losi*, or for CiHifisojilioii or author-
ized desTruclion liy duly eoiiNti(ut<*iieh liijilding, t>ut in no event .sliall tlii8 Company t>c liable for a grmt^T profxirtion of such lofw or dam-
age than the iimoiint which tlii.s policy Ixiirs to the tot-'d nniouiit of ail ftiinilar insurants whether or not such other in.-^unu>ce
ahall inctuile Iiriliility for loss or tiainnge to g1a.sa.
This C'om|>any ahnll not l>o linlile lieyoud the aetiinl ea-ih value of the property at the time any low or dam.'ige oceuru,
and the lo.ss or «lainage shall he ai^eertjiined or ef^timateil aeerirding t.** Riich actual cash value, with proper diiluction for de-
preciation however caiiKed, and shall in no cx'cnt exce<*d wh.nt it would then e^ist the insuriHl to rejinir or rcpliwe the same with
material of like kind and quality; said ascertainment or estimate shall In- mmie hy the insured and this Company, or, if they
differ, then by npprais^TS, as hereinafter provided; and, the amount of h>s.s or damage having Iteen thus (h'leriiiine*!, the Aura
f<»r which this Company is luible pur>*iinnt to this jwlicy shall he payable sixty days after licy It shall
lie optional, however, with this Company to take all, or any part of the articlca at Kiich a.sccrtaiiuvl or appraisec void if the insured has concealed or misrepresented, in writing or olhorwi.ie, any material
fact or circumstance concerning this insurance or the suliject thereof; or if the interest of the iiisurfvl in the property lie not
truly .stated herein; or in case of any fraud or false swearing by the insured touching any matter relating to this insurance or
the subject thereof, whether l»efore or after a loss
This Company shall not be liable for loss to accounts, bills, currency, deeds, evidences of debt, money, notes or securi-
ties; nor by theft; nor unless liability be specifically assumed hereon for loss by interruption of business, manufacturing pro-
cess's, or otherwise.
This Comjiany shall not lie liable for loss or damage covered under any fire or other kind of insurance contract; nor for
Ions or damage caused by mihtary or naval forces of foreign enemies, any conditions of this policy to the contrary not-
withstanding.
This policy shall not fie subject to cancellation by the insured or by this Company for a period of ninety days l,eginning
with the date of this policy, but thereafter this policy shall be cancelled at any time at the request of the irisurey tbe insttred uaiese so writtea or aUwbed.
438 INSURANCE PRINCIPLES AND PRACTICES
LVIII
APPLICATION FOR MEMBERSHIP IN A RECIPROCAL
Inbemnit)^ Excbange
The undersigned, hereinafter called subscriber, being the owner of the Automobile hereinafter described
and not used for coiruncrcial purposes, hereby applies for indemnity through the ' Indemnity
Exchange for one year from the date of the policy issued hereunder, upon the said automobile and the body,
machinery and equipment thereof, while attached thereto, and warrants the following statements to be true •
Name of Subscriber,
Residence, No
Business Address
street
Street
City or Town
CitT or Town
CouDtr
CouotT
Business, « Purchased New ? ...
(Give Name of Firm and Position in Same)
Location of Garage, - Number of Chauffeurs
Public or Private f
Car Owned Solely by Subscriber? -
Cost to Owner of Automobile Described Herein, $
8. Accident Record to Dale, ., „..
9,
Purchased, i9,.„
Trade Name ol
Automobile
No. of
Engine
NV>-of
Car
^'ffr°'
No. ol
Cylinders
Hor3e
Power
Model
Letter
Yeat-i
Model
Motive
Power
Character of Insurance applied for : (indicate iuuraiUf desired by crouios out "Yea" or "No,")
Fire and Theft Yes — No Amount $ -.- Premium $
Collision Ye.- — No Premium $
Property Damage.. ..Yes — No Premium $ ..„
Personal Liability.. ..Yes — No Premium f.
Total Premium $
!3nll ^or anti in ConSt^tratiOtl of tllt t>enefit3 to be derived therefrom and the covenants herein contained, the
undersigned Subscriber hereby covenants and agrees with the other Subscribers applying for metnt>er5hip in the
iNSEilNtTY Exchange and their, and each of their, Attorney-in-Fact, the Company, a corporation
tuidcr the laws of the State of Pennsylvania, as follows:
First: The Subscriber agrees to pay the premium as herein provided and to exchan'ge'with other Sul>scribers reciprocal
or inter-insurance contracts providing automobile indemnity among themselves for any loss insured against, as provided by
Acts of Assembly, and set forth in said contracts of insurance.
Second: The Subscriber hereby designates, constitutes and appoints the said Company, herein-
after called "Attorney," to be Attorney-in-Fact for Subscriber and in Subscriber's name, place and stead, to do all things
which he/she/they. Subscriber or Subscribers, might or could do with reference to this contract, or any renewal or transfer
thereof, and especially to exchange contracts of indemnity with Subscribers of the Indemnity Exchan(;e ; and
in the Subscriber's name to make, issue, modify or cancel contracts therefor containing such terms, warranties and agree-
ments as Attorney-in-Fact shall deem best ; to procure reinsurance ; to collect, receive and receipt for all money due from or to
becredited to the Subscriber's account by reason of this contract, to give, waive or receive all notices or proofs. of loss; to adjust
and settle all losses and claims under Subscriber's Indemnity Contracts ; to appear for. compromise, prosecute, defend or adjust
any claims, suits or proceedings on Subscriber's Indemnity Contracts, to do any act with reference to 'Subscriber's liability under
Inter-insurance Indemnity Contracts, which Subscriber' could do, with power of su!)Stitution. The power of attorney hereby
given is strictly h'mited to the uses and purposes herein expressed and to the provisions, agreements and conditions con-
tained in the Contract of Indemnity issued hereunder and any renewals or transfers thereof. The Subscriber and
Subscribers further agree to execute and deliver to the Attorney-in-Fact all papers necessary to carry out the purpose and
provisions hereof.
Third: Subscriber agrees that Twenty-five per centum (25%) of the premium provided for in the. Indemnity Contract
or renewal contracts given hereunder shall be retained by and paid to the Company as compensa-
tion for and in consideration of its becoming Attorney-in-Fact for Subscriber as aforesaid. The remaining Seventy-five per
centum (757o) shall be applied to the payment of losses or repaid to Subscriber as provided in said contracts.
This agreement can be signed upon any number of counterparts with the same effect as if the signatures of all Subscribers
were upon one and the same instrument, and wherever the word Subscriber is used the same shall mean Subscriber or
Subscribers to this or any duplicate agreement, and shall be and is binding upon the parties hereto, their Executors,
Administrators, Successors and Assigns severally and ratably as provided in said Contract of Indemnity.
3n Wiitntii 3BI)treof, the Subscriber hereunto sets his hand and seal, this - _.day of
— „ _ A. D, I9X
^Accepted, Philadelphia,
•191
Indeunity Company,
Attorney-in-Fact.
..-^1^
By..
r:o.„
No.
APPENDIX
LIX
POLICY OF RECIPROCAL
439
IFnbemnit^ lEjccban^e
COMBINATION AUTOMOBILE INDEMNITY CONTRACT
Section I.
Insurers.
Considera*
tion.
Section 11.
Agreement.
Section IIL
Fire.
Theft.
Collision.
THE SUBSCRIBERS to the EXCHANGE, severaUy,
but not jointly, each ratably with other subscribers, but not one for the other, and represented by the
Company, Attorney-in-Fact,
IN CONSIDERATION- (1) of the payment in advance of the premium deposit herein provided,
(2) the statements made in the application for this Indemnity Contract, a copy of which is attached
hereto and made a part hereof, and (3) the execution of a power of attorney to the
Company, authorizing it to execute reciprov
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APPENDIX
443
LX
LLOYDS ASSOCIATION
UNDERWRITERS COMPOSING ASSOCIATION
Name and Address
Liability
assumed
Frederick Loeser & Co., Brooklyn, N. Y $40,000
Lamson & Hubbard Co., Brooklyn, N. Y
Lord & Taylor, New York
Arnold, Constable & Co., Fifth avenue. New York
R. H. Macy & Co., Broadway, New York
Stern Brothers, 37 West Forty-second street. New York...
Abraham & Strauss, 422 Fulton street, Brooklyn, N. Y
Woodward & Lothrop, Washington, D. C
B. Altman & Co., New York
R. H. White Co., Boston, Mass
Strawbridge & Clothier, Philadelphia, Pa
The Pittsburg Dry Goods Co., Pittsburgh, Pa
Emery-Beers Co., New York
The John Shillito Co., Cincinnati, Ohio
John Wanamaker, New York
C. F. Hovey & Co., Boston, Mass
Best & Co., New York
N. Snellenburg & Co., Philadelphia, Pa
Wheeler & Motter, Mercantile Co., St. Joseph, Mo
Brooks Brothers, New York
American Lithographic Co., New York
Carson Pirie Scott & Co., Chicago, 111
Kaufman Dept. Stores, Pittsburgh, Pa
Sibley, Lindsay & Curr Co., Rochester, N. Y
L. Bamberger & Co., Newark, N. J
Fownes Bros Co., New York
Cooper, Coate & Casey Dry Goods Co., Los Angeles, Cal.
James McCreery & Co., New York
Campbell, Metzger & Jacobson, New York
Kaufman & Baer Co., Pittsburgh, Pa
National Cloak & Suit Co., New York
Wm. Taylor, Son & Co., Cleveland, Ohio
J. L. Hudson Co., Detroit, Mich
L. F, Dommerich & Co., New York
Passavant & Co., New York
L. Grief & Bro., Baltimore, Md
The Halle Bros. Co., Cleveland, Ohio
Wm. Islin Co., New York
John Taylor Dry Goods Co., Kansas City, Mo
Hy Sonneborne Co., Baltimore, Md
Schefer, Schramm & Vogel, New York
Gimbel Bros., New York
Western Dry Goods Co., Seattle, Wash
Greeff & Co., New York
$20,000
each
444 INSURANCE PRINCIPLES AND PRACTICES
LX — Continued
Gimbel Bros., Incorporated, Milwaukee, Wis
Lesher, Whitman & Co., 670 Broadway, New York
The May Department Stores Co., St. Louis, Mo
The May Co., Cleveland, Ohio
H. C. F. Koch & Co., 132 West 125th street. New York.
W. M. Whitney & Co., Albany, N. Y
Frank & Dugan, New York
Bloomingdale Bros, New York
Fleitman Co., New York
The H. and S. Pogue Co., Cincinnati, Ohio
Boggs & Buhl, Incorporated, Pittsburgh, Pa
Endicott, Johnson & Co., New York
Stern & Stern, New York
W. H. McElwain Co., New York
J. H. & C. K. Eagle, New York
The Fair, Monroe and State streets, Chicago, 111
The M. O'Neil Co., Akron, Ohio
Stix, Baer & Fuller Dry Goods Co., St. Louis, Mo
J. Kridel Sons Co., New York ,
Longley & Michaels Co., San Francisco, Cal
Bullocks, a corporation, Los Angeles, Cal
L. S. Donaldson & Co., Minneapolis, Minn
The Denver Dry Goods Co., Denver, Colo
S. Kann Sons & Co., Washington, D. C
Jones, McDuffie & Stratton Co., Boston, Mass
Browning, King & Co., 16 Cooper square. New York
Frederick Victor & Achelis, New York
Weinstock, Lubin & Co., Sacramento, Cal
Hochchild, Kohn & Co., Baltimore, Md
Dives, Pomery & Stewart, Harrisburg, Pa
Emery Bird Thayer Dry Goods Co., Kansas City, Mo.. .
The Hunter & Tuppen Co., Syracuse, N. Y
R. H. Stearns & Co., Boston, Mass
Aitken, Son & Co., New York
McGibbon & Co., New York
Hager & Bro., Lancaster, Pa
Rosenbaum Co., Pittsburgh, Pa
J. K. Stifel & Co., New York
Hahne & Co., Newark, N. J
Sharp & Dohme, Inc., Baltimore, Md
L. Herzog & Bros. Dry Goods Co., St. Louis, Mo
Meier & Frank Co., Portland, Ore
Greenshields, Ltd., Montreal, Can
Adams, Flanigan Co., New York
Susquehanna Silk Mills, New York
A. Lisner, Washington, D. C
Gladding Dry Goods Co., Providence, R. I
$10,000
each
$5,000
each
APPENDIX 445
LX — Continued
INCOME
Gross premiums $121,329.95
Deduct return premiums 1,710.88
Total net premiums written $119,619.07
Interest;
Bonds $16,084.95
Deposits 1,765.48
Total 17,850.43
Total Income $137,469.50
Ledger Assets December 31 of previous year 430,595.62
Total $568,065.12
DISBURSEMENTS
Losses less discounts $349.84
Expenses of adjustment and settlement of losses 28.00
Commissions or brokerage 17,942.85
Salaries, fees and other charges of officers, directors, attorneys in
fact and home ofiice employees 146.20
Legal expenses 500.00
Fire department, patrol and salvage corps assessments, fees, taxes
and expenses 738.82
State taxes on premiums 495.19
Insurance department licenses and fees 139.00
All other licenses, fees and taxes 980.97
Miscellaneous 102.13
Dividends to subscribers 41,220.10
Gross decrease by adjustment, in book value of ledger assets, viz.:
Bonds 9,390.00
Total Disbursements $72,033.10
Balance $496,032.02
LEDGER ASSETS
Book value of bonds $401,720.00
Deposits in trust companies and banks on interest 93,805.17
Agents' balances representing business written subsequent to Octo-
ber 1, 1918 506.85
Total $496,032.02
NON-LEDGER ASSETS
Interest accrued on bonds 4,514.34
Market value of bonds over book value 2,500.00
Total Assets $503,046.36
446 INSURANCE PRINCIPLES AND PRACTICES
LX — Continued
LIABILITIES
Unearned premiums $59,016.30
Contingent commissions or other charges due or accrued 905.59
Liabilities $59,921.89
Surplus 443,124.47
Total $503,046.36
RISKS AKO PREMIUMS
Fire Risks Premiums
In force December 31, 1917 $26,892,000 $91,360.08
Written or renewed in 1918 31,234,000 121,329.95
Totals $58,126,000 $212,690.03
Deduct expirations and cancellations 24,494,700 94,657.44
In force December 31, 1918 $33,631,300 $118,032.59
RECAPITULATION OF FIRE RISKS AND PREMIUMS
Gross
Premiums
Year
Amount
Charged, Less
Fraction
Premiums
Written Term
Covered
Reinsurance
Unearned
Unearned
1918 One year or less..
. $33,631,300
$118,032.59
Yz
$59,016.30
APPENDIX 447
LXI
MARINE INSURANCE BINDER
BLANK & CO. No.
Insurance
To Blank Insurance Co
Insure for John Jones
For account of. . . .Henry Smith Loss payable to John Jones.
on (description of subject matter)
Valued at. .
Per
At and from.
To
.(Here clauses and warranties).
Bill of Lating dated: Time of J.
f Sailing . .
Arriving
IQ2
Rate per cent. Premium approved
Form No.
448 INSURANCE PRINCIPLES AND PRACTICES
LXIl
MARINE CARGO POLICY
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449
LXII — Continued
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450 INSURANCE PRINCIPLES AND PRACTICES
LXII — Continued
CARGO FORM MARINE OPEN POLICY ON EXPORTS
JOHN JONES & COMPANY
1. For account of whom it may concern.
2. Loss, if any, payable to Them or Order.
3. To cover all goods and/or merchanidse shipped by John Jones & Company,
(hereinafter referred to as the Assured), or by others for their account, or
in which they may have an interest, or for which they may receive instruc-
tions to insure; said instructions to be given in writing prior to sailing of
vessel and prior to known or reported loss or damage.
4. Per steamer and/or steamers including vessels propelled by oil, gas and/or
electric machinery and/or connecting railroad conveyances.
5. Sailing on and after February 13th, 1919.
6. To be Insured at and from Philadelphia, Pa., to
7. To cover on merchandise, consisting principally of
subject to the following conditions;
8a. While Watereorne:
Subject to 3% Particular Average on each Shipping Case or Package.
Subject to 5% Particular Average on each Shipping Case or Package.
Free of particular average, unless the vessel be stranded, sunk, burned
or in collision.
8b. While on Land:
While goods are on railroad or other land conveyance, only the risks of
fire, collision, derailment and loss occasioned by rising navigable water are
covered under this policy.
While goods are on wharf, the risks of fire and rising navigable water
only are covered by this policy.
9. It is understood and agreed that this insurance attaches from the time the
goods leave factory, store, or warehouse at initial point of shipment and
covers thereafter continuously, in due course of transportation, until same
are delivered at store or warehouse at destination, but only from and to the
ports and/or places as declared to this Company; but that on shipments to
River Plate Ports the risk hereunder shall cease upon arrival of the goods
at any shed (transit or otherwise), store, custom house or warehouse or
upon the expiry of ten days subsequent to landing, whichever may first
occur, and that on shipments to Russia, Siberia, China, India, East Indies,
North and West Coast of South America and Mexico, the risk hereunder
shall terminate upon discharge of the goods from the vessel.
10. Valued, for insurance purposes at
11. This policy shall not be vitiated by any unintentional error In description of
voyage or interest, or by deviation, provided the same be communicated to
the insurers as soon as known to the assured, and an additional premium
paid if required, but it is understood and agreed that this clause does not,
in any way, cover the risk of war, riot or civil commotion, or prejudice the
printed wording of the policy excluding risks of this nature.
12. Including risk of lighterage to and from the vessel, each craft or lighter to
be considered as if separately insured.
13. 'Fhe presence of the Negligence Clause and/ or latent Defect Clause In the
Bills of Lading, and/or Charter Party, not to prejudice this insurance.
APPENDIX 45 1
LXU— Continued
14. Seaworthiness of vessel and/or vessels and/or craft is hereby admitted
as between the Underwriters and Assured.
15. The risks covered by this policy are to include loss, damage or expense
resulting from explosion, howsoever or wheresoever occurring but it is
specially understood and agreed that the above wording is not intended
to cover the risks of war, riot or civil commotion or to in any way prejudice
the printed wording of the policy excluding risks of this nature.
16. This policy also covers the customs duties chargeable upon the merchandise
insured hereunder upon arrival and entry; and in case of particular aver-
age to the charge of the Company, the same percentage of damage will be
made good upon the amount of duties so insured as on the amount of goods,
for which insurance a premium as agreed upon is to be charged. It is also
agreed that the assured shall, when the insurer so selects, surrender the
merchandise to the customs authorities and recover duties thereon as
provided by law. In which event the claim under this policy shall be for
a total loss of such portion at insured value as provided therein, and
expenses only.
17. In case of damage affecting labels only, loss to be limited to an amount
sufficient to pay the cost of new labels an(f relabelling the goods.
18. Machinery Clause:
In case of loss or injury to any part of a machine, consisting, when com-
plete for sale or use, of several parts, the insurers shall only be liable, for
the insured value of the part lost or damaged.
/Warranted that this insurance shall not inure to the benefit of any
carrier.
19. This Company not to be liable for more than $ , per any one vessel
or conveyance, or in any one place at any one time, unless otherwise agreed
upon.
20. This policy to be deemed continuous, and to cover all shipments as herein
pjovided, until cancelled by either party giving the other thirty days' written
notice to that effect. However, such notice of cancellation shall not preju-
dice any risk then pending.
It is expressly understood and agreed, anything to the contrary in this
Policy notwithstanding, that on shipments to ports and/or places on the
Continent of Europe, in countries at war, the risk hereunder shall cease
upon discharge of the merchandise from the vessel at seaport.
The effect of this stipulation to terminate is ^o any country upon the estab-
lishment of peace therein.
Warranted not to cover the interest of any partnership corporation, asso-
ciation or person, insurance for whose account would be contrary to the
Trading with the Enemy Acts, or other statutes or prohibitions of the
United States.
452 INSURANCE PRINCIPLES AND PRACTICES
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lJi.\\l— Continued
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454 INSURANCE PRINCIPLES AND PRACTICES
IXIU— Continued
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456 INSURANCE PRINCIPLES AND PRACTICES
LXIII — Continued
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APPENDIX 457
LXIV
MARINE PROTECTION AND INDEMNITY CLAUSE
And we further agree that if the assured shall become liable to pay and shall
pay any sura or sums in respect of any responsibility, claim, demand, damages
and/or expenses, or shall incur any other loss arising from or occasioned by
any of the following matters or things during the currency of this Policy in
request to the ship hereby insured, that is to say: —
Loss or damage in respect of any other ship or boat or in respect of any
goods, merchandise, freight or other things or interests whatsoever, on
board such other ship or boat, caused proximately or otherwise by the
vessel insured in so far as the same is not covered by the running down
clauses hereto attached.
Loss or damage to any goods, merchandise, freight or other things or
interests whatsoever, other than as aforesaid, whether on board said steam-
ship or not, which may arise from any cause whatever.
Loss of life or personal injury and from payments made on account of
life or other salvage.
Loss or damage to any harbor, dock, graving or otherwise, slipway, way,
gridiron, pontoon, pier, quay, jetty, stage, buoy, telegraph cable, or other
fixed or movable thing whatsoever, or to any goods or property in or on the
same, howsoever caused.
Any attempted or actual raising, removal or destruction of the wreck of
the said steamship or the cargo thereof, or any neglect or failure to raise,
remove or destroy the same.
Any sum or sums for which the assured may become liable or incur from
causes not hereinbefore specified, but which are or have heretofore been ab-
solutely or conditionally recoverable from or undertaken by the
Protective Association, Limited, and/or
Association.
We will pay the assured such proportion of such sum or sums so paid, or
which may be required to indemnify the assured for such loss as our respective
subscriptions bear to the Policy value of the ship hereby assured, and in case
the liability of the assured has been contested with the consent in writing of two-
thirds of the Underwriters on the ship hereby insured in amount, we will also
pay a like proportion of the costs which the assured shall thereby incur or be
compelled to pay.
Notwithstanding the foregoing this Policy is warranted free from any claim
arising directly or indirectly under Workmen's Compensation Acts of any State
or Nation.
Attached to and forming a part of Policy No , of the
Insurance Company, of
Agent
458 INSURANCE PRINCIPLES AND PRACTICES
LXV
WAR RISK CLAUSE
It is agreed that this insurance includes the risk of capture, seizure or destruc-
tion or damage by men of war, by letters of mart, by takings at sea, arrests,
restraints, detainments and acts of kings, princes and people, authorized by and
in prosecution of hostilities between belligerent nations; but excluding claims
for delay, deterioration and/or loss of market and warranted not to abandon in
case of capture, seizure or retention, until after condemnation of the property in-
sured, nor until ninety days after notice of said condemnation is given to these
Assurers. Also warranted not to abandon in case of blockade, and free from
any claim for loss or expense in consequence of blockade or of any attempt to
evade blockade; but in event of blockade, to be at liberty to proceed to an open
port, and there end the voyage.
Foregoing clause does not cover any luar risks on shore.
LXVI
ALIEN ENEMY WARRANTY
Warranted not to cover the interest of any partnership, corporation, associa-
tion or person, insurance for whose account would be contrary to the trading
with the enemy acts or other statutes or prohibitions of the United States and/or
British Governments.
LXVII
EMBARGO WARRANTY
Warranted free from claim for loss, damage or expense in consequence of
any prohibition, restriction or embargo of or by the Government of the United
States of America or of any violation or attempted violation thereof.
LXVIII
WARRANTY AGAINST CAPTURE
Warranted free from claim arising from capture, seizure, arrest, restraints,
pre-emption or detainments by the Government of the United States.
LXIX
EXPLOSION CLAUSE
The risks covered by this policy are to include loss, damage or expense result-
ing from explosion howsoever and wheresoever occurring.
APPENDIX 459
LXX
DEVIATIOxN CLAUSE
This policy shall not be vitiated by any unintentional error in description of
voyage or interest, or by deviation of vessels from voyage described, provided
the same be communicated to assurers as soon as known to the assured, and an
additional premium paid if required.
LXXI
WARRANTY OF USE
Warranted to be used solely for private pleasure purposes and not to be hired
or chartered unless approved and permission endorsed hereon.
LXXI I
AVERAGE CLAUSE
It is understood and agreed that no average is to be deducted in case of total
loss payment where the vessel does not remain in specie, or where there is such
payment with the transfer of all salvage as provided for in the Policy.
LXXIII
EXTENSION OF COVERAGE
Should the vessel at the expiration of this policy be at sea or in distress or at
a port of refuge or of call, the interest hereby insured shall, provided previous
notice be given to the Underwriters, be held covered at a pro-rata monthly
premium to her port of destination.
LXXIV
F. P. A. CLAUSE
Warranted free from particular average, injury, death, mortality, loss jetti-
son, and/or washing overboard, unless caused by stranding, sinking, burning or
collision, but to pay landing, forwarding and special charges if incurred, and
general average as per Foreign Statement or York-Antwerp rules if so made up.
Warranted free from any claims for prohibition and/or interdiction of trade
and/or enforcement of sanitary regulations.
LXXV
EXTENDED COVERAGE
To cover from the time of leaving consignor's office until delivered to con-
signee at the place of address.
460 INSURANCE PRINCIPLES AND PRACTICES
LXXVI
WARRANTY OF SAFETY
Warranted in safety on
LXXVII
WARRANTY OF NEUTRALITY
Warranted neutral ship and neutral property.
LXXVIII
WARRANTY NOT TO ABANDON
The assured warrants not to abandon in case of capture, seizure or detention,
until after the condemnation of the property insured; nor until ninety days after
notice of said condemnation is given to this company.
LXXIX
REDUCTION OF POLICY
Any and all sums paid hereunder shall reduce this policy by the amounts so
paid, unless restored by the payment of new premium, and then this policy shall
be in force for the original amount.
LXXX
SAILING WARRANTY
Neiu York Harbor — To include Upper and Lower New York Bays, inside a
line drawn from Sandy Hook to Norton's Point, North River as far as Piermont,
East River as far as Throggs Neck, and tributary inland waters, and the adja-
cent inland waters of New Jersey.
LXXXI
P. P. I. CLAUSE
"Policy Proof of Interest."
LXXXII
INCEPTION OF RISK CLAUSE
Risk to commence on expiry of previous policies.
APPENDIX 461
LXXXIII
F. P. A. CLAUSE
Free of all particular average under (5) per cent, on each case Including
breakage, if caused by the vessel being stranded, sunk, burnt, or in collision.
LXXXIV
LOADING WARRANTY
Warranted not to load or carry crude petroleum, naptha, benzine or gasoline.
LXXXV
RETURN OF PREMIUM
To return for each 30 consecutive days the vessel is laid up and
out of commission.
LXXXVI
GOODS IN ENEMY TERRITORY
// is hereby mutually understood and agreed that this policy ceases to apply
on goods in any country with which the United States and/or Great Britain
May be at war, or to goods in territory in occupation of any hostile power.
LXXXVII
LIGHTERAGE CLAUSE
To cover the risk of lighterage to or from the vessel — each craft or lighter to
be considered as if separately insured.
LXXXVIII
MACHINERY CLAUSE
In case of loss of any part of a machine consisting, when complete for sale or
use, of several parts, the Insurers shall only be liable for the insured value of
part lost.
462 INSURANCE PRINCIPLES AND PRACTICES
LXXXIX
LATENT DEFECT CLAUSE
This insurance policy is also specially to cover (subject to the free of average
warranty) loss of, or damage to, hull or machinery, through the negligence of
master, charterers, mariners, engineers, or pilots, or through explosions, burst-
ing of boilers, breakage of shafts, or through any latent defect in the machinery
or hull, provided such loss or damage has not resulted from want of due dili-
gence by the owners of the ship, or any of them, or by the managers, masters,
mates, engineers, and pilots or crew not to be considered as part owners withia
the meaning of this clause should they hold shares in the steamer.
XC
CANCELLATION CLAUSE
This policy is deemed continuous, but either party may cancel it by giving
fifteen days' written notice thereof to the other, but said cancellation shall be
without prejudice to any risk then pending.
XCI
VALUATION CLAUSE
The said ship, etc., for so much as concerns the assured, by agreement between
the assured and insurers in this policy, are and shall be valued as follows: hull,
tackle, apparel and furniture $ , machinery and boilers $
Average payable on each valuation separately, or on the whole.
XCII
LOADING WARRANTY
Warranted not to be loaded in excess of her registered tonnage with either
lead, marble, stone, coal or iron; also warranted not to be loaded with lime
under deck; and if loading with grain, warranted to be loaded under the inspec-
tion of the Surveyor of the Board of Underwriters, and his certificate as to the
proper loading and seaworthiness obtained.
XCIII
F. P. A. A. C. CLAUSE
Warranted free of particular average unless caused by stranding, sinking,
burning or collision.
XCIV
WARRANTY AGAINST CAPTURE
Warranted free from any claim arising from capture, seizure, arrests, re-
straints, pre-emption, detainments or confiscation by the British Government or
their allies or by the' Government of the United States of America.
APPENDIX 463
xcv
F. P. A. E. C. CLAUSE
Free of particular average unless the vessel be stranded, sunk, burnt or in
collision.
XCVI
SAILING WARRANTY
Warranted not to ply on the Great Lakes between December 2nd. and April
15th.
XCVII
LEAKAGE CLAUSE
Not liable for leakage unless the vessel be stranded or in collision, or it be
caused by forced discharge of cargo at a port of distress, or the same be caused
by explosion, or by the vessel coming in contact with any floating or stationary
object; provided that in all the above cases the leakage shall amount to over one
per cent of the entire cargo on board. A deduction to be made from all settle-
ments of one-fourth of one per cent allowance for ordinary leakage.
XCVIII
F. P. A. CLAUSE
Subject to per cent., Particular Average.
XCIX
RIOT AND CIVIL COMMOTION CLAUSE
In consideration of an additional premium of per cent (such premium
being subject to revision from day to day), it is agreed that this policy shall
also cover destruction of the property insured or damage done to it by strikers,
locked-out workmen, or persons taking part in labor disturbances, or riots, or
civil commotions, but warranted free of claim for loss, damage, or expense
arising from deterioration, loss of market or delay, or from extra handling or
storage.
SUBROGATION WARRANTY
Warranted by the assured that this insurance shall not enure directly or
indirectly to the benefit of the carrier or other bailee, by stipulation in bill of
lading or otherwise, and any breach of this warranty, and any act or agreement
by the assured, prior or subsequent hereto, whereby any carrier or party liable
for or on account of loss of or damage to any property insured hereunder, is
given the benefit of any insurance effected thereon, shall render this policy of
insurance null and void.
464 INSURANCE PRINCIPLES AND PRACTICES
CI
STATEMENT OF MARINE INSURANCE MUTUAL
THE MUTUAL INSURANCE COMPANY
INCOME
Gross premiums $6,684,891 55
Deduct reinsurance premiums $1,450,658 09
return premiums 306,278 92
1,756,937 01
Total net premiums written $4,927,954 54
Interest:
Bonds and stocks $418,106 66
Deposits 94,547 09
From other sources 25,463 75
Total 538,117 50
Rents 361,876 35
Miscellaneous 194 15
Gain on exchange 740 13
Income tax withheld at source 3,739 93
Certificates of profits acquired 4,310 00
Sundry fees 160 00
Gross profit on sale or maturity of ledger assets,
viz.:
Bonds $2,034 93
Stocks 61,538 40
6S,573 33
Total Income $5,900,665 93
Ledger Assets, December 31 of previous year 19,361,364 77
Total $25,262,030 70
DISBURSEMENTS
Losses less discounts $4,105,973 64
Deduct salvage $239,186 51
reinsurance 1,947,733 08
2,186,919 59
Net losses paid $1,919,054 05
Loss adjustment expense 7,369 25
Agents' compensation including brokerage 340,278 47
Agent's allowances 2,750 00
Salaries and fees 428,546 14
Rent 53,542 51
Furniture and fixtures 5,582 76
Inspections and surveys 5,404 80
Federal taxes 151,562 39
APPENDIX 465
CI — Continued
Taxes, licenses and fees:
State, county, municipal $83,081 37
Insurance department 139 87
All other except real estate 6 00
83,227 24
Postage, telegraph, telephone, exchange, express 5,521 25
Legal expense 8,072 20
Advertising and subscriptions, $35,854.02; printing and station-
ery, $10,713.25 46,567 27
Miscellaneous, including $23,961.18 discount on premiums;
$4,532.28 expense and charges of foreign bankers; $11,644.92
taxes on cotton premiums; $3,135.96 income tax witheld at
source; $992.81 suspended notes charged off 44,747 14
Scrip or certificates of profit redeemed in cash 3,270,000 00
Interest to scripholders 343,000 00
Real estate repairs and expense, $121,981.24; taxes, $92,260.60.. 214,241 84
Total Disbursements $6,828,467 3 1
Balance $18,433,563 39
LEDGER ASSETS
Book value of real estate $3,975,000 00
Book value of bonds, $7,385,153; stocks, $2,424,213.15 9,809,366 15
Cash in company's office 197 36
Deposits in trust companies and banks not on interest 150,000 00
Deposits in trust companies and banks on interest 2,822,612 25
Bills receivable taken for,marine and inland risks 1,380,222 88
Funds with foreign bankers 286,904 00
Certificates of profits owned by company 4,320 00
Statutory deposit with state of Queensland, Australia 4,765 00
Suspended notes 175 75
Total $18,433,563 39
NON-LEDGER ASSETS
Interest due and accrued:
Bonds $76,497 72
Other assets 19,392 73
Total 95,890 45
Rents due and accrued 23,106 40
Market value of real estate over book value 63,700 00
Market value of bonds and stocks over book value 805,807 81
Reinsurances recoverable on paid losses 62,734 31
Gross Assets $19,484,802 36
DEDUCT ASSETS NOT ADMITTED
Company's certificates of profits $4,320 00
Bills receivable, past due, taken for risks 175 75
Total 4,495 75
Total Admitted Assets $19,480,306 61
466 INSURANCE PRINCIPLES AND PRACTICES
CI — Continued
LIABILITIES
Losses and claims for losses:
Adjusted and unpaid $307,654 70.
Unadjusted 4,229,374 30
Resisted 20,000 00
Total $4,557,029 00
Deduct reinsurances in companies authorized
in New York 399,450 00
Net unpaid losses and claims $4,157,579 00
Unearned premiums 914,521 45
Principal on scrip ordered redeemed 266,581 48
Interest due or accrued 50,121 27
Salaries and miscellaneous accounts due or accrued 12,283 18
Estimated amount of taxes hereafter payable 400,000 00
Contingent commissions or other charges due or accrued 127,012 92
Reinsurance and return premiums due other companies 503,939 46
Income tax withheld at source 3,739 93
Surplus on redemption of withheld certificates of profit 22,592 54
Outstanding certificates of profit (scrip) 6,140,100 00
Liabilities $12,598,471 23
Surplus to policyholders 6,881,835 38
Total $19,480,306 61
RISKS AND PREMIUMS
Marine Risks Premiums
In force December 31, 1917 $174,606,430 $1,069,550 96
Written or renewed in 1918 778,646,862 6,684,891 55
Totals $953,253,292 $7,754,442 51
Deduct expirations and cancellations 884,296,448 6,753,508 18
In force December 31, 1918 $68,956,884 $1,000,934 33
Deduct amount reinsured 16,913,189 86,142 88
Net amount in force $52,043,655 $914,521 45
APPENDIX
467
CII
AUTOMOBILE (PRIVATE TYPE) P. L., P. D. L. & COLL (FULL
COVER) POLICY
{Hereinafter called the Corporation) Joes hereby agree with the Assured named in the Declarations attached hereto, and herehy
made a part hereof, as follows :
liwimace Provided
Definition oT Assured.
liniuUoD of LiabUitj
fixdusioDiL
Boakniptc;.
ABBJgMttenU
Sobroeatioo.
TheFc
Agreement I. To pay any loss by reason of the liability imposed by law upon ihe Assured for damages on account of bodily injuries
including death at any time resulting therefrom, accidentally susuined duriqg the policy period by any person or persons, other than employees
engaged m operatmg or caring for the automobiles covered, as the result of the owuersbip, maintenance or use of any of the automobiles
coumcraied and described in Item 8 of the Declarations.
Agreement II. To pay any loss by reason of the liability imposed by law upon the Assured for damages on account of injury to, or
destruction of property of any description (other than property of the Assured or property of others used by, or in charge of the Assured or any of
the Assurcd's employees, or carried in or upon the automobiles covered hereby) as a result of the ov^ncrship, maintenance or use of any of the
automobiles enumerated and described in Item 8 of the Declarations, excluding, however, loss of use of property so injured or destroyed.
Agreement III. To pay the Assured for actual loss by reason of injury to or destruction of any of the automobiles enumerated and
described in Item 8 of the Declarations, including its operating equipment whde attached thereto, if caused solely by accidental collision, during
the policy period, with another object, either moving or stationary, excluding, however, injury or destruction by fire from any cause whatsoever,
and injury to or destruction of tires due to puncture, cat, gash, blow-out, or other ordinary lire trouble, and excluding in any event injury or
destruction of lires unless caused by an accidental collision, which al^o resulted in other injury or destruction of the insured automobile.
^oregoing Agreements are Subject to the Folloiving Conditions:
Condition A. The Assured, wherever referred to in this Policy, shall include the Assured named in the Declarations and any person or
persons while nJing in or operating any of the automobiles enumerated and described m Item 8 of the Declarations for private or pleasure
purposes or for making busmess calls, CKcluding commercial delivery, with the permission of the said named Assured or with the pcrmissiotj
of any adult member of said named Assured's household who is not a chauffeur or a domestic servant.
<1'^ The Corporation's liability under this Policy is Lmited as expressed in Item 9 of the Declarations, which limits shall apply to each
automobile covered hereby.
(2) In addition to the limits expressed in Item 9 of the Declarations the Corporation will pay all expenses resulting from claims upon
the Assured on account of loss as aforesaid, and all costs taxed against the Assured, together wuh interest thereon, in any legal proceedings
defended by the Corporation according to the agreements and conditians of this Policy, and ail interest accruing after entry of judgment to date
of w»lisfaction thereof, upon such part of said judgment as is not in excess of the limits of the Corporations liability as expressed in Item 9 of
the Declarations, but ^he Assured shall not voluntarily assume any liability nor shall the Assured without the written consent of the Corporation
previously given incur any expense or settle any claim except at his own cost or interfere wuh any negotiation for settlement or any legal proceed-
ing, except that the Assured Ttay provide at the Corporation's expense at the. time of the accident such immediate surgical relief as is
imperative. Whenever requested by the Corporation, the Assured shall aid lo securing information and evidence and the attendance of witnesses
and in effecting settlements and in prosecuting appeals.
Condition B. This Policy does not cover as regards any automobile under any of the following conditions ; (i) While being operated or
osed by any person contrary to law as to age, or any person under the age of sixteen (i 6) years where no statute restricts the age, (2) while being
operated on used in an^ race or speed test, (3) while any of the automobiles insured under this Policy are being used for towmg or pro-
pelling any trailer or any other vehicle used as a trailer, (4) injuries to any employee of the Assured while engaged in or operating or caring
for the automobiles covered hereby ; (5) while being operated or used elsewhere than within the limits of the United States of America or the
Dominion of Canada ; (6) loss by reason of the liability under any Workmen's Compensation Law.
Condition C. Upon the occurrence of an accident covered by this Policy, the Assured shall give immediate written notice thereof,
with the fullest information obtainable at the time, to the Corporation's Home Office at or to the Corporation's authorued ageat
If a claim IS made on account of such accident the Assured shall give like notice thereof with full particulars. The Assured shail at all times
render to the Corporation all co-operation and assistance in his power.
Condition D. If thereafter any suit, even if groundless, is brought against the Assured to enforce a claim for damages on account of ao
accident covered by this Policy, the Assured shall immediately forward 10 the Corporation every summons or other process as soon as the same
shall have been served on him, and the Corporauon will, at its own cost, and subject to the liniitatiODS referred to in Condition A hereof, defeod.
or at its option, settle such suit in the name and on behalf of the Assured.
Condition E. (1) The insolvency or bankruptcy of the Assured shall not relieve the Corporation from the payment of damages for
injuries susuined or loss occasioned during the policy period. In case of such insolvency or bankruptcy an action may be mainuined by
the claimant against the Corporation, subject to the terms of this Policy, for an amount not exceeding the amount of this Policy. (2) No assign-
ment of interest under this Policy shall bind the Corporation unless the consent of the Corporation shall be endorsed thereon. If the death, *
insolvency or bankruptcy of the Assured shall occur during the policy period, this Policy, during the unexpired portion of such period, shall cover
the legal repiesentative of the Assured.
Condition F. In case of payment of loss or expense under this Policy the Corporation shall be subrogated to alt lights of the Assored
to the extent of such payment, and the Assured sh41 execute all papcts required and sball cooperate with the Corporation to icctire lo tba
CorporatJOQ its rights.
468 INSURANCE PRINCIPLES AND PRACTICES
CII — Continued
Odnrlaaonncft Condition O. If the Assured has other ittsoraoce tgaina the low covered by this Policy, ihe Aiwred shall noi be enritM to i
ftom the Corporation (bra larger proportion of the entire lou than the proportion that the amount of this PoUcy bears to the loul arrtount of bis
vahd and collectible insurance agauut such lo».
AppraU. Condition H. In'tho event of injury to or deatractlon of any of the Assurer's automobiles the nature and expense of the injury t^r
which the Corporation is liable or the value of the automobile destroyed raiy be determined by the parties hereto, if possible ; otherwise by two
Appraisers, one lo be chosen by tire Assured and one by llie Corporation. The two Appraisers so chosen, if they are not able to agree, may select
the third and tne award in writing of any two of the Appraisers shall determine the nature and expense of the repairs to be made at the cost of
the Corporation or the value of the automobile destroyed The Corporation and the Assured shall pay the Appraiser respectively selected by
each and shall bear equally the other expenses of the Appraisal and of the third Appraiser if one is selected. The Corporation may accomplish
any repairs determined by the Appraisers by such means as it may elect, or, at the option of the Corporatiun, may replace the lulomobile oc pay
in money the amount of the loss as fixed by the Appraisers.
Condition I. The Corporation shall have reasonable time and opportunity to examine any tlanuRed automobile or its equipment coveiwj
hereby before repairs are undertaken or physical evidence of the damage removed, but the Assured shall not be prejudiced hereunder by any act
on his pan or in his behalf undertaken for the protection or salvage of the damaged automobile or its equipment.
OneellittoD. Condition J. This Policy may be cancelled at any time at the request of the Assured, or by the Corporation, upon written notice t»
the other party, slating when thereafter cancellation shall become effective, and the date of cancellation shall then be the end of the policy period.
If such cancellation is at the Corporations request, the earned premium shall be computed and adjusted /r^ rata. If such canceUation is at the
Assured's request, the earned premium shall be computed and adjusted at short rates, in accordance with the table printed hereoD. Notice of cao'
cellatton mailed to the address of the Assured as given herein shall be a sufficient notice, and the Corporation's check, similarly-mailed a sufhcieat
tender of any unearned premium
dugeg in Policy. Condition K. No condition or provision of this Policy shall be waived or altered, except by endorsement attached herettf, signed by the
Manager and Altorney of the Corporation for the United Slates, nor shall knowledge possessed by any Agent or by any other person be held t»
effect a waiver or change in any part of this contract. Changes in the written portions of the Declarations made a part hereof (except XteoM
7, 8 and 9) may be made by the Agent countersigning this Policy, such changes binding the Corporation when initialed by wch Agent.
Ageni. Condition L. No person shall be deemed an Agent of the Corporation unless such person is authorized in writtog as racfa Agent by Che
Manager and Attorney of the Corporation for the United Sutes.
Special .SueutM. Condition M. If any of the terms or conditions of this Policy conflict with the law of any Sute within which coverage is granted, rnxk
conSictuig terms and conditions shall be inoperative in such Sute in so far as they are in conflict with such law. Any specific statutory proviiiao
in force in any Sute within which coverage is granted shall supersede any condition of this Policy inconsistent therewith
Aocsptaoca. Condition N. The Assured by the acceptance of this Policy declares the several Statements in the Declarations to be tiwe, ml thi» PoKof
is issued in considetation thereof, and of the provisions of the Policy respecting its premium, and the payment of such premium.
In XHUneSS TlCIbereof, the Corporation has caused this Policy to be execoted by its amJiorued Monger, acting under power of attorney, btil it ikaB Mt
be in force tutil countersigned by a duly antborized General Agent of the Corporation.
OO'
Couvlersigned at_
iP«-*
,\*«-'
v_0"
.^^
Bmagva
Snagv gad AlUmtf/trtuVmlii dim
Oateral ^gntt^
This space is for the attaciuaect of the Declaratioiu a* in the PoGcy provided, whicii; when attached, to be
I a part of the Policy.
APPENDIX . 469
cm
AUTOMOBILE CERTIFICATE OF INSURANCE
Policy No Entry No
Assured,
Date of Entry , 19 Amt. Insured, $
Model Year Trade Name
Type of Body (If Truck, state Tonnage) Factory No. Motor No.
New or Second Hand Cost Date Acquired
$
Will be stored at
No. Street City State
Contents Rate, Rate for this entry,
THE INSURANCE COMPANY
This is to Certify, That the party or parties whose name or names appear
above, as the Assured under this Certificate, is insured subject to the stipulation
and conditions of
Open Policy No.
to an amount not exceeding Dollars
on the Body, Machinery and Equipment of the Automobile described herein, for
not exceeding Three Months from the date of commencement of this Certificate,
or until this Certificate is canceled in accordance with the terms of the Open
Policy under which it issued.
Any loss that may be ascertained and proven to be due the assured under this
Certificate shall be held payable to.
as interest may appear, subject, nevertheless, to all the terms and conditions of
this Policy.
This Certificate is made and accepted subject to the stipulations and condi-
tions of the Open Policy mentioned herein, which is hereby made a part of this
contract.
In Witness Whereof, this Company has executed and attested these presents;
but this Certificate shall not be valid unless countersigned by the duly authorized
Agent of the Company at
President
Marine Secretary
Dated , 19
Agent
470 INSURANCE PRINCIPLES AND PRACTICES
CIV
AUTOMOBILE ENDORSEMENT
COLLISION ENDORSEMENT
($100.00 Deductible)
Agency , IQ2
In consideration of an additional premium of $ but subject to all
conditions of this Policy, the Perils Insured Against hereunder are extended to
include Accidental Collision, where the damage from such collision to the auto-
mobile and/or equipment herein described is in excess of $1000.00, each accident
being deemed a separate claim and said sum to be deducted from the amount of
each claim when determined; excepting:
(1) Loss or damage to any tire, due to puncture, cut, gash, blowout or
other ordinary tire trouble; and excluding in any event loss or damage to
any tire, unless caused in an accidental collision which also causes other
loss or damage to the insured automobile;
(2) Loss or damage ocurring while the automobile insured is engaged in
any race or speed contest or while, being operated by any person under the
age limit fixed by law or in any event under the age of sixteen years.
In the event of loss or damage to said automobile whether such loss or dam-
age is covered by this Policy or not, the liability of this Company under this
Policy shall be reduced by the amount of such loss or damage until repairs have
been completed, but shall then attach for the full amount as originally written,
without additional premium.
The amount recoverable for accidental collision under this endorsement shall
not exceed the actual cash value of the property at the time of any loss or
damage, but shall not be limited by the amount of insurance named in the Policy
to which this endorsement is attached.
All other terms and conditions of this Policy remaining unchanged.
Attached to and forming part of Policy No , of the
INSURANCE COMPANY,
Agent
APPENDIX 471
cv
AUTOMOBILE ENDORSEMENT
PROPERTY DAMAGE ENDORSEMENT "B"
(Including Omnibus Coverage)
Agency , lg2
In consideration of an additional premium of $ but subject to all
the conditions of this Policy, this insurance is extended to cover the assured's
legal liability to other persons for the injury to or destruction of the property
of such persons (including resultant loss of use of such property), and in addi-
tion thereto the legal expenses incurred by the assured with the consent of the
Company in connection with such injury or destruction, resulting solely and di-
rectly from the ownership, maintenance or use of the automobile herein described,
provided such injury or destruction occurs during the period covered by the
Policy; subject, however, to the following limitations and exclusions:
(1) The property of the assured, or in charge of the assured or of any
of his employees, or carried in or upon the automobile described herein, is
excluded from this coverage;
(2) This Company's liability for injur}' or destruction is limited to the
actual value of the property destroyed at the time of its destruction and/or
the actual cost of the suitable repair of the property injured, but in no case
shall this Company be liable with respect to claims (including claims for
loss of use) arising from one accident for more than $ , and in
addition thereto the legal expenses incurred by the assured with the consent
of the Company.
(3) The insurance under this endorsement does not attach or cover while
the automobile insured is engaged in any race or speed contest, or while
being operated by any person under the age limit fixed by law or in any
event under the age of sixteen years.
It is a condition of this endorsement that if action be brought against the
assured to enforce a claim for damage covered hereby, he shall immediately
notify the Company and promptly forward to It every summons or other paper
or process served on or received by him in connection therewith.
It is a condition of this endorsement that the assured whenever requested by
the Company, shall aid in effecting settlement, securing information and evi-
dence, and the attendance of witnesses; but the assured shall not voluntarily
assume any liability or interfere in any negotiation for settlement or in any
legal proceeding, or incur any expense or settle any claim except at his own
cost, without the written consent of the Company previously given.
The indemnity provided by this endorsement is so extended as to be available,
in the same manner and under the same conditions as it is available to the
named assured, to any person or persons while riding in or lawfully operating
any of the insured automobiles, and to any person, firm or corporation legally
responsible for the operation thereof, provided such use or operation is with the
permission of the named assured, or, if the named assured is an individual, with
the permission of an adult member of the named assured's household other than
the chauffeur or a domestic servant.
The unqualified term "Assured" wherever used in this endorsement shall in-
clude in each instance any other person, firm or corporation entitled to indemnity
under this endorsement, but the qualified term "named Assured" shall apply
only to the assured named in the Policy.
If any person, firm or corporation other than the named assured carries valid
and collectible insurance covering a claim also covered by this endorsement,
such other person, firm or corporation shall not be entitled to indemnity under
this endorsement.
All other terms and conditions of this Policy remaining unchanged.
Attached to and forming part of Policy No , of the
INSURANCE COMPANY.
4 gent
472 INSURANCE PRINCIPLES AND PRACTICES
cvi
FIRE, THEFT AND TRANSPORTATION AUTOMOBILE POLICY
(Approved by the National Convention of Insurance Commissioners at their
December, 1919, meeting in New York.)
No.
Form No. 2
Snaurattr? §ompng
IN CONSroERATION OF THE PREMIUM HEREINAFTER MENTIONED
Bdrs SflHitrP the Assured named herein, and legal representatives, for the term herein specified, to an amount not exceeding the
amount of insurance herein specified, against direct loss or damage, from the perils insured against, to the Body, Machinery
and Eqaipment of the Automobile described herein while within the limits of the United States (exclusive of Alaska, the
Hawaiian Islands and Porto Rico) and Canada, mduding while in building, on road, on railroad car or other conveyance, f eny
or inland steamer, or coastwise steamer between ports within said limits. The following are the perils insured against:
Peifll insured (A) Fire, arising from any cause whatsoever; and Lightning;
against (B) While being transported in any conveyance by land or water, the stranding, sinking, colUs!on«
burning or derailment of such conveyance, including general average and salvage charges for which the Assured
is legally liable.
(C) Theft, robbery or pilferage, excepting by any person or persons in the Assured's household
or in the Assured's service or employment, whether the theft, robbery or pilferage occur during the hours of such
service or employment or not, and excepting also the wrongful conversion, embezzlement, or secretion by a
mortgagor or vendee in possession under mortgage, conditional sale or lease agreement, and excepting in any case.
Other than in case of the theft of the entire Automobile described herein, the theft, robbery or pilferage of tools
and repair equipment.
Amount, $-.
Rate.
Premium, $.
Kame of Assured..
Address of Assured -^wii-
no. eTBxrr
The term of this Policy begins at noon on the — — .day of , 19 ,
and ends at noon on the day of , 19. _« Standard time.
Amount of Insurance^- - Dollars ($ .)
WARRANTIES
1. Assared's occupation or business is
2.
The following is the description of the AutomotUe:
uooa
van
LIST ffllCE
TRADE NAME
nPE Of BODY
(ir TflUCK. ST«TE TOIPUeO
FACTORr on SERIAL
nUMBER
MOTOR NO.
NO. Of
CYLINDERS
ADVERTISED
HORSE POWEB
3. The farta with respect to the purchase of the Automobile described are as follows :
PUBCMASED BY THE ASSURED
ACTUAL COST TO ASSURED
mCLUDINS EOUIPMENT
THE AUTOUOBH.E OESCRIBEO IS FULir PAID FOR By THE ASSUREO AM*
IS NOT MORICAGEO OR OTHERWISE EHCUMBEREO. EXCEPT AS FOlLCWSl
Month
Teab
NEW OR SeCONO-MAND
4. The uses to which the Automobile described is and will be put, are.
6. The Automobile described is usually kept in...
(StMe whetber private or public)
...garage, Ioeated>
The Assured's occupation or business where the subject of this insurance is used in connection therewith, the
Warranties by the description of the Automobile insured, the facts A^ith respect to the purchase of same, the uses to which it is and
will be put, and the place where it is usually kept, as set forth and contained in this Policy, are statements of
facts known to and warranted by the Assured to be true, and this Policy is issued by {he Company relying upon the truth thereof
This Company shall not be liable for:
(a) Loss or damage to robes, wearing apparel, personal effects, or extra bodies;
(b) Loss or damage caused directly or indirectly by invasion, -insurrection, riot, civil war 6t COmmotiOB|
militajy, naval or usurped power, or by ordar of any civil authority.
No recovery shall be had under this Policy, if at the time a loss occurs there bo any other insurance COTering
such loss, which would attach if this insurance had not been effected.
This Policy shall be canceled at ajny time at the request of the Assured, in which case the Company shall, upaa
demand and surrender of this Policy, refund the excess of paid premium above the customary short rate premium
ft* the expired term. This_ Policy may be canceled at any time by the Companr by giving to the Assured a five (5) days'
wriuea notice of cancellatioo with or without tender of the excess of paid prem^ am above the pro-rata premium for the expired
Pr«i»erty
CKCtaded.
War, riot, etc
Other insurance.
CancettaGoa.
APPENDIX 473
CWl— Continued
Umn, which excess if not tendered shall be refunded on demand. Notice of cancellation shall state that ^id excess premioia
(if not tendered) will be refunded on demand Notice of cancellation mailed to the address of the Assured stated in the Policy
shall be a sofflcient notice
This Company shall not be liable beyond tho actual cash value of the property at the time any loss or damag«
Limitation ot lia- occurs, and the loss or damage shallbe ascertained or estimated accordingly, with proper deduction for deprecia^
''j"*"^'"' ^^'>^ tion however caused, (and without compensation for the loss of use of the property), and shall in no event exceed
,._. what it would then cost to repair or replace the Automobile or such parts thereof as may be damaged with
other of like kind and quality; euch ascertainment or estimate shall be made by the Assured and this Company,
or if they differ, then by appraisal as hereinafter provided
It shall be optional with this Company to take all or any part of the property at the appraised value where
AOanaonmeni. appraisal is had as hereinafter. provided, but there can be no abandonment thereof to this Company; and
where theft is insured against the Company shall have the right to return a stolen Automobile or other property with compensatioo
for physical damage, at any time before actual payment hereunder.
This Company shall not be liable for loss or damage to any property insured hereunder while in the possession
Loss for Wnicfl of a bailee for hire under a contract, stipulation or assignment whereby the beneht of this insurance is sought
UMe '^ ''* ^^e available to such bailee. Where loss or damage occurs for which a bailee may be liable and which
would otherwise be covered hereunder, this Company will advance to the Assured by way of loan the money
Equivalent of such loss or damage, which loan shall in no circumstances affect the question of the Company's liability hereunder
and shall be repaid to the extent of the net amount collected by or for account of the. Assured from the bailee after deducting
cost and expense of collection.
Neon. The word "Noon" herein means noon of standard time at the place the contract was made.
This entire Policy shall be void if the Assured has concealed or misrepresented any material fact Or circumstance
Misrepresentation concerning this insurance or the subject thereof; or in case of any fraud, attempted fraud, or false swearing by
the Assured touching any matter relating to this insurance or the subject thereof, whether before or after a loss.
This entire Policy shall be void unless otherwise provided by agreement in writing added hereto;
(a) If the interest of the Assured in the subject of this insurance be other than unconditional and sole owner-
Tliie ana ship; or in case of transfer or termination of the interest of the Assured other than by death of the Assured or
in case of any change in the nature of the insurable interest of the Assured in the property described herein
either by sale or otherwise; or
(b) If this Policy or any part thereof shall be assigned before loss.
Unless otherwise provided by agreement in writing added hereto, this Company shall not be liable for loss Of
ancOt damage to any property insured hereunder,
(a) While encumbered by any lien or mortgage.
(b) While the Automobile described herein is frequently or habitually used as a public or livery conveyance
um lai 00 or use* ^^^ carrying passengers for compensation, and for one week after the termination of said use; or while being
rented nnder contract or leased, or operated in any race or speed contest.
In the event of loss or damage occasioned by a peril insured against herein the Assured shall protect the property
Prolection OI from further loss or damage and any such further loss or damage occurring directly or indirectly from a failure
° ■ to protect shall not be recoverable under this Policy. Any such act of the Assured or this Company or its
agents in recovering, saving and preserving the property described herein, shall be considered as done for the benefit of all
concerned and without prejudice to the rights of either party, and aU reasonable expenses thus incurred shall constitute a claim
under this Policy; provided however that this Company shall not be responsible for the payment of a reward offered for tho
recovery of the insured property unless authorized by the Company.
In the event of loss or damage the Assured shall give forthwith notice thereof in writing to this Company; and
Notice ano praoi within sixty (60) days after such loss, unless such time is extended in writing by this Company, shall render
* a statement to this Company signed and sworn to by the Assured, stating the place, time and cause of the loss
or damage, the interest of the Assured and of all others in the property, the sound value thereof and the amount of loss or damage
thereon, all encumbrances thereon, and all other insurance whether valid or not covering said property; and the Assured, as often
83 required, shall exhibit to any person designated by this Company all that remains of the property insured and submit to
examinations under oath by any person named by this Company, and subscribe the same; and as often as required, shall produce
for examination all books of account, bills, invoices, and other vouchers, or certified copies thereof if originals be lost, at such
reasonable place as may be designated by this Company or its representative, and shall permit extracts and copies thereof to be made.
In case the Assured and this Company shall fail to agree as to the amount of loss or damage, each shall, on the
nppraisau written demand of either, select a competent and disinterested appraiser. The appraisers shall first select »
competent and disinterested umpire; and failing for fifteen (16) days to agree upon such umpire then, on request of the Ass\ired
cr this Company, such umpire shall be selected by a judge of a court of record in the County and State in which the property insured
was located at time of loss. The appraisers shall then appraise the loss and damage stating separately sound value and loss or
damage to each item; and failing to agree, shall submit their differences only, to the umpire. An award in writing, so itemized,
of any two when filed with this Company shall determine the amount of sound valuo and loss or damage. Each appraiser shall
be paid by the party selecting him and the expenses of appraisal and umpire ■shall be paid by the parties equally.
This Company shall not be held to have waived any provision or condition of this Policy or any forfeiture thereof
raymeni Ol OSS. ^^ ^^^ requirement, act, or proceeding on its part relating to the sppraisal, or to any examination herein
pK^vided for; and the loss shall in no event become payable until sixty (60) days after the notice, ascertainment, estimate and
verified proof of loss herein required have been received by this Company, and if appraisal is demanded, then, not untO six^ (60)
days after an award has been made by the appraisers.
This Company may require from the Assured an assignment of all right of recovery against any party for loss
dUDTOBaiicn. ^ damage to the extent that payment therefor is made by this Company.
. _ Ko suit or action on this Policy or for the recovery of any claim hereunder shall be sustainable in any court of
^tagaintl law or equity unless the Assured shall have fully complied with all the foregoing requirements, nor unless
^* cOBJHienced within twelve (12) months next after the happening of the loss; provided that where such limitation
474 INSURANCE PRINCIPLES AND PRACTICES
CYl— Continued
of time is prohibited by the laws of the State wherein this Policy is issued, then and in that event no suit or action tinder this*
Policy shall be sustainable unless commenced within the shortest limitation permitted under the laws of such State.
This Policy is made and accepted subject to the provisions, exclusions, conditions and warranties set forth herein or endorsed
liereon, and upon acceptance of this Policy the Assured agrees that its terms embody all agrecnents then existing between himself
and the Company or any of its agents relating to the insurance described herein, and no officer, agent or other representative of
this Company shall have power to waive any of the terms of this Policy unless such waiver be written upon or attached hereto;
nor shall any privilege or permission affecting the insurance under this Policy exist or be claimed by the Assured unless so
•written or attached.
Provisions required by law to be stated in this Policy. — This Policy is in a stoc^ corpbratioa.
3)n 13Iitn?B9 IBtjftTOf, this Company has. executed and attested these presents; but this Policy ehall not be valid luiless
countersigned by a duly authorized ageut of the Company at
Marine Secretary
Pfesmeri
Countersigned at„
This. jday of-
,19
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APPENDIX 475
CVII
AUTOMOBILE ENDORSEMENT
VALUED POLICY CLAUSE
Agency , iq2 .
Valued policy and In consideration of the increased rate at which this Policy
automatic loss re- is written the Automobile described herein (body, machinery
instatement and equipment), is valued at the sum insured.
In the event of loss or damage to said Automobile whether
such loss or damage is covered by this Policy or not, the liability of this Com-
pany under this Policy shall be reduced by the amount of such loss or damage
until repairs have been completed, but shall then attach for the full amount as
originally written, without additional premium.
All other terms and conditions of this Policy remaining unchanged.
Attached to and forming part of Policy No , of the
INSUIL^NCE COMPANY,
Agent
CVIII
AUTOMOBILE ENDORSEMENT
LOCK WARRANTY— PRIVATE PLEASURE TYPE CARS
Agency , 192 .
In consideration of a reduction in premium, it is warranted by the Assured
that the Automobile insured under this Policy will be continuously equipped with
a locking device known as (approved by the Underwriters*
Laboratories, Inc., and bearing their label) and a device for locking spare tires
known as (similarly approved and labeled).
The Insured undertakes during the currency of this Policy to use all diligence
and care in maintaining the efficiency of said locking devices and in locking the
Automobile and spare tires when leaving the same unattended.
All other terms and conditions of this Policy remaining unchanged.
Attached to and forming part of Policj' No , of the
INSURANCE COMPANY,
Agent
476 INSURANCE PRINCIPLES AND PRACTICES
cix
AUTOMOBILE SCHEDULES FOR FIRE, COLLISION AND THEFT
HAZARDS
SECTION I
Schedule for Classification as to the Fire Hazard:
This schedule assumes a practicable device with the rainimurn of protection.
To provide ample range and to employ an enlarged scale a rating of 8,000 points
is assigned to such a car. When improvements as outlined by the individual
items of the schedule are found incorporated in individual makes of cars sub-
mitted for classification, credits of indicated amounts are assigned, resulting in
a final rating for each such individual make, type or model of car, in each case
less than 8,000 and of a definite amount designed to measure the extent of
hazard as compared to the assumed car of minimum protection or maximum
hazard.
The features considered are built-in or integral to the car itself. The fire
exposure, the moral and other hazards are not capable of analysis in this
manner.
To each group of hazards is assigned a percentage of the total of 8,000 points
resulting in a group total available for further proportioning among the sec-
tions, sub-sections and items comprising each group.
The object of this schedule is to provide a measure of the relative degrees of
fire hazard presented by the integral features of individual makes or models
of cars. To this end the schedule provides approximately 75 individual items
for consideration. Manufacturers employing features in their design, assembly
or equipment practice not recognized in schedule to have definite protective value
should submit them for consideration and test vyhen recognition will be given
accordingly.
The word "standard," as employed in this schedule referring to devices or
methods is to be understood as signifying that the Standards of the Society of
Automotive Engineers apply. The word "listed" signifies a proprietary device,
material or method which has been examined by Underwriters' Laboratories and
classified as suitable for the specific service indicated.
The results of the Underwriters' Laboratories' Application of the schedule to
individual makes and models of cars will be reported to the subraittors thereof
and to insurance organizations. Before the release of such reports they will
be reviewed by the Automobile Council of Underwriters' Laboratories. Sub-
mittors who desire to make appeal on conclusions reached by the engineering
staff of the Laboratories as to technical matters may resort to the Fire Council
or if preferred to committees, if any, created for the purpose within the Society
of Automotive Engineers. In either case the findings of the appeal body are
to be accepted both by the submittor and the Laboratories.
APPENDIX 477
CIX— Continued
Group 1 of the Fire Hazard Schedule (1,200 Points)
Storage of Fuel (gasolene) including Sections, Capacity of Tank; Location of
Tank; Construction of Tank, and Tank Mounting
Capacity of Tank (120 points)
Points
Item No. Description of Item Credit
1. Capacity more than 30 gallons none
2. Capacity over 25 gallons and not over 30 gallons 15
3. Capacity over 20 gallons and not over 25 gallons 35
4. Capacity over 10 gallons and not over 20 gallons 70
5. Capacity not over 10 gallons none
Total credits to Tank Capacity 120
Location of Tank (600 points)
6. Tank located in cowl and filled from under hood none
7. Tank located in cowl but filled without opening hood , . 30
8. Tank located under front or rear seat 120
9. Tank located at rear of frame and not enclosed in body 450
(See also items Nos 16 and 17)
Total credits to Tank Location 600
Construction of Tank (240 points)
10. Tank of listed construction with all seams and fittings of substantial
design and good workmanship including all provisions of items
Nos. 1 1-14, inclusive 240
11. Fill opening on tank of size to accommodate nozzle of service station
pump (not less than 1.5 in L D.) 60
12. Fill opening on tank located to permit convenient use and to avoid
spilling during the operation 50
13. Free venting of tank during filling operation provided for in a listed
manner 60
14. Provision made for draining tank when desired without removal
from mounting 25
Total credits to Tank Construction 240
Mounting of Tank (24.0 points)
15. Tank securely mounted to prevent its becoming loose or injured
from vibration and road shocks, according to method employed.. 0-145
16. At rear location, and standard load on body, no part of tank below
road clearance of rear axle housing including differential hous-
ing if combined with rear axle housing 25
17. At rear location tank is protected from injury in rear end collision 70
Total credits to Tank Mounting 240
Total credits to Group 1 Fuel Storage 1200
478 INSURANCE PRINCIPLES AND PRACTICES
CIX — Continued
Group 2 of the Fire Hazard Schedule (1,200 Points)
Fuel Feed System, Gravity, Pressure or Vacuum Feed
Points
Item No. Description of Item Credit
18. Gravity Feed System none
19. Pressure Feed System 120
For Vacuum Feed System according to conditions as follows:
(a) When vacuum tank has capacity of 1 quart or less:
20. Vacuum tank listed construction 215
21. Vacuum tank placed to avoid increase of hazard when fire occurs.
Usual preferred location on side of engine block opposite car-
buretor and remote from any sparking device and from exhaust
piping. According to degree 0-755
(b) When vacuum tank has capacity of more than 1 quart:
22. Vacuum tank of listed construction 190
23. Vacuum tank location as detailed in item No. 21. According to
degree 0-570
Total points for vacuum system 1080
Total points for Fuel Feed System 1200
Group 3 of the Fire Hazard Schedule (400 Points)
The Fuel Line and Fittings: Tank to Carburetor, including Sections, Tubing
and Connectors; Gauges; Strainer Fittings; Shut-offs
Tubing and Connectors (200 points)
24. Tubing of annealed metal and seamless 40
25. Tubing of ''non-corroding" material such as brass, bronze or copper 10
26. When items 24 and 25 apply and tubing is protected in a listed
manner at all chafing points 30
27. Feed line above road clearance at all points 20
28. Feed line remote from or protected at all points from contact with
exhaust piping or muffler 40
29. All connector fittings are standard or of a listed pattern 60
Total points to Tubing and Connectors 200
Gauges {60 points)
30. A gauge or indicator, of quantity of fuel in tank, of listed pattern
and properly installed 60
Strainer Fittings (60 points)
31. Strainer fittings of listed pattern installed in feed line between tank
and carburetor 60
(See also item No. 38)
APPENDIX 479
CIX— Continued
Shut-off in Feed Line (80 points)
Points
Item No. Description of Item Credit
To shut-off supply of fuel from storage tank to carburetor:
32. Shut-off valve provided when vacuum feed is used 10
33. Shut-off valve provided when pressure feed is used IS
34. Shut-off valve provided when gravity feed is used 25
35. Shut-oflt valve of listed pattern 10
36. With pressure or gravity feed shut-off valve located between car-
buretor and strained fitting 10
37. With either feed system if shut>.off valve is operable from driving
compartment 20
Total points of credit to Shut-off 80
Total points to Group 3 400
Group 4 of the Fire Hazard Schedule (400 Points)
Carburetion
38. Carburetor of listed make or pattern 200
39. Carburetor located remote from magneto or other spark or flame
emitting device 60
40. Carburetor provided with attachment insuring direct draining to
ground without traps or similar hazard under hood of carburetor
overflow or flooding 140
Total points to Group 4, Carburetion 400
Group 5 of the Fire Hazard Schedule (3200 Points)
Electrical Equipment:
IFiring (2400 points)
Materials (y^o points)
41. High tension ignition wires provided with insulation of listed qual-
ity and standard thickness 75
42. All low tension wiring provided with insulation of listed quality
and standard thickness 400
43. All low tension wiring of ample copper capacity for current load
(N. E. Code Table, Rule 18, 1918 Edition) 275
750
Installation
Connections (650 points)
44. All splices or joints in wiring made and finished in a standard
manner 325
45. All terminal connection to fittings, etc., made in a standard manner
or with listed fittings 325
650
480 INSURANCE PRINCIPLES AND PRACTICES
CIX — Continued
Supports (350 points)
Points
Item No. Description of Item Credit
46. All wires suitably supported at frequent points so as to avoid
drooping, chafing, excess vibration, etc 175
47. Supporting clamps and similar fittings such as bushings to be stand-
ard or of listed makes and properly secured 175
350
Protection (650 points)
48. Wires protected from mechanical injury in a standard manner or
with approved fittings 200
49. Wires located to avoid damage to insulation from heat 200
50. Wires protected from exposure to or contact with oil, grease or
gasolene or other fuel 250
650
Devices (600 points)
51. Switches for lighting, ignition, horn and starting circuits and other
switches, if any, of patterns listed for the specific service and
properly installed 125
52. Standard fuses in proper bases or other automatic overload pro-
tective devices listed for the specific service installed in all low
tension circuits except the ignition and starting motor circuit... 125
53. Ammeter or other current flow indicator of listed type installed in
all low tension circuits 150
54. Ignition system listed and properly installed 100
55. Starting and lighting system listed and properly installed 100
600
Circuits (200 points)
56. All low tension circuits except ignition circuit of the 2-wire insulated
return type 50
57. Provision made for extension lamp circuit assisting car inspection 100
58. Ignition system not of multiple spark plug type 50
200
Group 6 of the Fire Hazard Schedule (600 Points)
exhaust system hazards
Position
59. Exhaust pipe and mufller above road clearance at all points. Stand-
ard load on body, clearance at either front axle fly wheel housing
or rear axle or differential housing according to low point in ex-
haust line 35
60. Exhaust pipe extends past rear of car frame and body including
fuel tank 30
61. Exhaust pipe has at least 1 inch clearance from nearest point of
fuel tank, measured with full load on body 30
62. Exhaust is not exposed to accumulations of grease and drippings in
mud pan or elsewhere 270
APPENDIX 481
CIX — Continued
Temperature Rise Tests
Points
Item No. Description of Item Credit
The temperature rise tests specified below for items Nos. 63 and 64
will be made in a closed room at 70 deg. Fahrenheit with car
standing still, spark regularly advanced and motor running at
speed equivalent to 30 miles per hour. Readings to be taken after
1 hour run, thermometer to be wired in place with bulbs held to
surface of material by 1 ounce of glazier's putty.
63. Temperature rise not exceeding 60 deg. Fahrenheit nearest point of
tank or other part of Fuel Storage or Feed system to exhaust
or muffler. (Not including pre-heaters at air intake manifold
of carburetor) 30
64. Temperature rise not exceeding 80 deg. Fahrenheit. Woodwork
or other unprotected combustible material exposed to exhaust
pipe of muffler 30
Muffler Cutout
65. No muffler cutout 30
66. Muffler cutout used but not operable from driving compartment. ... 10
67. Discharge of muffler cutout, if used, or of exhaust directed away
from body or any combustible material 25
Exhaust Heater
68. Exhaust heater not furnished 120
69. Exhaust heating system of listed make and properly installed avoid-
ing temperature rise in surrounding material as specified in item
No. 64 .- 60
Group 7 of the Fire Hazard Schedule (1000 Points)
Mud Pan (soo points)
70. No mud pan 500
71. Vertical side pans only 300
•7
Horizontal side plated only 150
73. Sod pan not extending to rear beyond fly wheel housing 75
Gas and Oil Lighting (2$o points)
74. No gas lights used 125
75. No oil lights used 125
General Workmanship as Indicated by Price of Product
16. Lisi Price $600.00 none
77. " " 1,100.00 25
78. " " 1,600.00 50
79. " " 2,100.00 75
80. " " 2,600.00 100
81. " " 3,100.00 125
82. " " 3,600.00 150
83. " " 4,100.00 175
84. " " 4,600.00 200
85. " " 5,100.00 225
86. " " 5,600.00 or over 250
482 INSURANCE PRINCIPLES AND PRACTICES
CIX — Continued
SECTION II
Schedule for Classification as to the Collision Hazard:
This section considers only those matters affecting damage to the automobile
under consideration and which are integral in its assembly. Questions of in-
jury to persons or of damage to other property are not pertinent.
The problem of protecting an automobile from damage in collision with other
vehicles or with fixed objects has two principal phases, the first of which is posi-
tive, tending to avoid collisions. The second phase considers minimization of
damage when collisions occur. This schedule treats of these phases separately
and in addition takes account of items classed under a heading Miscellaneous.
As in the Fire Hazard schedule a practicable car with minimum protection is
assumed as the basis for classification, a total of 5,000 points is distributed
among various items recognized. Ample range in classification is thereby
secured and the relative importance of various details of design, assembly or
equipment is more readily indicated.
The general procedure in applying the schedule is described for the Fire
Hazard Schedule.
Group 1 of the Collision Hazard Schedule (3000 Points)
Prevention of Collision Damage
The items under this phase of the analysis of the Collision Hazard may be
divided into four sections acording to the following headings:
Braking System; Steering System; Visibility, Lighting and Warning
Equipment; Road Clearance
Braking System (1500 points)
Points
Item No. Description of Item Credit
1. Brake lining material of listed type 375
Area of Braking Surface
(a) Service brake:
2. Area standard ""
3. Area 90 to 100% of standard 145
4. Area 75 to 90% of standard 90
5. Area 50 to 75% of standard 4^5
6. Area less than 50% of standard none
(b) Emergency brake
7. Area standard 120
8. Area 90 to 100% of standard 95
9. Area 75 to 90% of standard 60
10. Area 50 to 75% of standard 30
11. Area less than 50% of standard none
Lugs on Pedals or Equivalent Protection Against Foot Slip Combination "A"
12. Clutch pedal protected 90
13. Service brake pedal protected 135
APPENDIX 483
CIX— Continued
Combination "B"
Points
Item No. Description of Item Credit
14. Combined clutch and service brake pedal protection 135
15. Emergency brake pedal protection 90
Brake Linkage Leverage
(a) Service brake leverage
16. Leverage standard 180
17. Leverage 90-100% of standard 145
18. Leverage 75-90% of standard 90
19. Leverage 50-75% of standard 45
20. Leverage less than 50% of standard none
(b) Emergency brake leverage
21. Leverage standard 120
22. Leverage 90-100% of standard 95
23. Leverage 75-90% of standard 60
24. Leverage 50-75% of standard 30
25. Leverage less than 50% of standard none
Emergency Hand Brake Location
25. Grip of emergency hand brake not forward of lovper edge of dash
when brake is in released position 40
27. Grip of emergency hand brake when in released position not more
than inches from low point of steering wheel rim 80
28. Access to hand brake not interfered with by gear shift lever or other
obstruction 30
29. For adequate means of preventing lubrication reaching brake
linings 75
30. For two independent braking systems 75
The Steering System (goo points)
31. Steering gear of listed pattern 135
32. Steering gear provided for at least V/z revolutions of steering wheel
between left and right-hand stop position of the front wheels. ... 90
33. No part of steering gear mechanism lower than road clearance of
front axle 90
34. Castellated nut and cotter pin or other method of positive fasten-
ing used in securing all essential bolts, sods, etc., in steering
mechanism 135
35. Left-hand drive 225
36. Standard practice of front wheel steering 225
484 INSURANCE PRINCIPLES AND PRACTICES
CIX— Continued
Visibility, Lighting and Warning Equipment (joo points)
Visibility, as employed in this schedule, has to do with the ability of the
driver of the car being classified to see the road and objects therein by
day or night.
Points
Item No. Description of Item Credit
37. Headlight lenses of listed pattern and headlights suitably arranged
with regard thereto 75
38. Equipment included windshield cleaner of listed pattern IS
Lighting, as employed in this schedule, has to do with the signalling to
drivers of other vehicles of the presence on the road of the car being
classified.
39. Rear light and lens equipment of listed pattern 90
40. Light in driving compartment in series with tail light 15
. 41. Side or front lights below level of top of rim of steering wheel 45
Warning, signifies means of signaling to following traffic intentions
of driver with regard to stopping or turning.
42. Equipment included warning signal of listed make properly in-
stalled 60
Road Clearance (joo points)
Road clearance to be measured from a plane surface to th:; center point
front axle drop oil case, fly wheel housing or differential housing on rear
axle. Brake drums on rear wheels and steering knuckle connections if
not outside of brake drum line not to be regarded.
43. Clearance not less than standard (9 inches) 300
44. Clearance not more than 8^ inches 225
45. Clearance not more than 8 inches 150
46. Clearance not more than 7J^ inches 30
47. Clearance 7 inches or less none
Group 2 of the Collision Hazard Schedule (1000 Points)
Minimization of Damage:
Fenders
48. Fender crowns of one piece 40
49. Front fenders not projecting beyond tire of other part which might
protect them (not including bumpers if used) 100
50. Fenders without moulded bowls for headlights or other special
shapes 60
Radiator Protection
51. Listed radiator guard used or special location of radiator or in its
absence 200
Frame Cross Braces
52. Substantial front cross frame brace built in within 6 inches of
spring shackle 225
53. Substantial rear cross frame brace or equivalent device located to
protect tank or body or other light parts 75
Bumper Equipment
54. Equipment included front bumper of listed make 225
55. Equipment included rear bumper of listed make 75
APPENDIX 485
CIX.— Continued
Group 3 of the Collision Hazard Schedule (1000 Points)
Miscellaneous or General Items
Points
Item No. Description of Item Credit
56. Equipment included listed self-starting system 750
Workmanship and Stability as Indicated by Price of Product
57. List Price $600.00 none
58. " " 1,100.00 25
59. " " 1,600.00 50
60. " " 2,100.00 75
61. " " 2,600.00 100
62. " " 3,100.00 125
63. " " 3,600.00 150
64. " " 4,100.00 175
65. " " 4,600.00 200
66. " " 5,100.00 225
67. " " 5,600.00 or over 250
SECTION III
Schedule for Classification as to the Theft Hazard:
Experience to date indicates that the chief factor influencing the theft of auto-
mobiles is the readiness with which they may be disposed of and put to subse-
quent use without recognition as stolen property. In other words, the greater
the number of cars in service of a given model and design the more attrac-
tive an individual car of that model becomes to persons contemplating theft.
To some extent the number of thefts of automobiles is regulated by the density
of population. These and other considerations prevent detailed analysis of
individual makes or models of cars as to physical features of design and assem-
bly for the purpose of classification as to the theft hazard.
Makers of automobiles may assist in some measure in retarding theft and
may assist in the reduction of insurance losses from theft by providing for more
ready and positive identification of individual units of production. To encour-
age their cooperation in these directions, automobiles submitted to Underwriters'
Laboratories for classification as to the Fire and Collision hazards under the
foregoing schedules will be classified as to features bearing on the Theft
Hazard, as follows:
Theft Retardants
Built-in or Integral Equipment of Listed Locking Device
1. Transmission type. Class A 20%
2. Steering wheel type. Class B 17.5%
3. Combined gasolene and ignition type, Class C , 15%
4. Ignition only type. Class D 12.5%
5. For stock equipment consisting of listed spare tire lock either inte-
gral or accessory in addition to either 1 or 4 above 5%
Identification
6. For standard marking of frame 7.5%
7. For standard marking of engine block 7.5%
8. If both items Nos. 6 and 7 apply 5%
Deductions according to the foregoing to be successive in the order of above
listing as they apply. Credits for one item only Nos. 1 to 4, inclusive.
486 INSURANCE PRINCIPLES AND PRACTICES
SAMPLE PAGE OF AUTOMOBILE LIABILITY, PROPERTY DAMAGE
AND COLLISION RATES
LIABILITY AND PROPERTY DAMAGE RATES
PRIVATE PASSENGER AUTOMOBILES
(Gas or Steam)
BASIC COVERAGE
(See the "Basic Coverage" Rule in the Private Passenger Section)
Terr.
Symbol W
Symbol X
Symbol Y
Symbol Z
P. L.
P. D.
P. L.
P. D.
P. L.
P. D.
P. L. P. D.
1
2
3
4
5, 5A
6
7
$100.00
55.00
47.00
38.00
28.50
23.00
17.00
12.00
$22.50
15.50
15.00
13.00
10.00
10.00
8.00
6.00
$119.00
65.00
56.00
45.00
34.00
27.00
20.00
14.00
$25.00
17.50
16.50
14.50
12.00
12.00
10.00
7.00
$144.00
79.00
68.00
55.00
41.00
33.00
25.00
17.00
$29.00
20.00
19.00
16.50
13.50
13.50
11.00
8.00
$176.00
97.00
82.00
67.00
50.00
40.00
30.00
21.00
$33.50
23.00
22.00
19.50
15.50
15.50
12.00
8
9.00
COLLISION RATES— PRIVATE PASSENGER AUTOMOBILES
(Gas or Steam) (Age Group 1)
Full Coverage
Collision
Symbol
Terr,
land 2
Terr.
3 and 4
Terr.
5 and 6
Terr.
7
Terr.
8
A
$179
205
245
274
296
395
$163
187
222
248
269
360
$117
139
170
186
194
238
$62
74
90
98
104
126
$55
B
65
C
79
D
87
E
91
U
112
$50 Deductible
Collision
Symbol
Terr.
1 and 2
Terr.
3 and 4
Terr.
5 and 6
Terr.
7
Terr.
8
A
$46
56
76
91
109
237
$42
50
67
88
99
216
$24
29
36
44
50
108
$18
22
30
36
43
93
$17
B
21
c
28
D
33
E
37
U
81
$100 Deductible
Collision
Symbol
Terr.
1 and 2
Terr.
3 and 4
Terr.
5 and 6
Terr.
7
Terr.
8
A
$24
25
29
37
45
171
$21
23
27
35
41
156
$11
12
16
19
22
88
$11
12
14
17
21
'77
$10
B
11
C
12
D
15
E
17
U
66
APPENDIX
487
CXI
SAMPLE PAGE OF AUTOMOBILE FIRE AND THEFT RATES
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S— FINAL STATEMENT OF CLAIM— If any claim for excess Io6s is made under this Policy, a Final Statement of Claim, duly sworn
to shall be made by the Insured upon blank forms which will be furnished by this Company upon application, and such Final State-
ment must be received b;' this Company at its office in - within thirty (30) days after the expiration of tnis Policy;
otherwise there shall be no liability upon the part of the Company under this Policy.
The adjustment shall be' had within forty-five (45) days after the receipt by this Company of such Final Sut»nea^ and the
amount, if any, then ascertained to be due on covered proved losses shall at once become payable.
*— METHOD OP ADJUSTMENT— To ascertain the net loss in any adjuetment under this Policy, there shall be deducted from each
gross loss covered and proven under this Policy:
(1) All discounts tp which the debtor would have been entitled had the debt been paid at the date of insolvency:
(2). All amounts collected thereon and all amounts which may have been obuined from any other source;
(3) The amount of goods returned or replevined, when such goods are in the undisputed possession of the Insured:
(4) All amounts mutually agreed upon as thereafter obuinable.
If no mutually satisfactory agreement should be reached, as to the amounts thereafter obtainable on any loss, this Company shall
allow the unpaid part of such loss, so far as covered. The Insured shall assign to this Company all accounts admitted in adjust-
ment, together with all securities and guarantees relating thereto, except those accounts upon which the amount thereafter obtainablo
is mutually agreed upon. Such assigned accounts shall be handled by the Company for the joint account of the insured and the Cpm»
paoy as their interests may appear.
If the indebtedness of the debtor to the Insured at the time of the insolvency is not covered in full by this Policy, then said dedu»
tlons shall be made pro-rata, vij: in the ratio which the amount covered bears to the whole of suci indebtedness.
From the aggregate amount of the net covered and proven losses thus ascertained, there shall be deducted, (first), ten per eeiit.
(10%) thereof, as co-insurance: (second), the agreed Normal Loss, and the balance, if any, shall be the amount due the Insured. »' the
net amounts realized by the Company on the claims assigned to it, as above provided, ohall in the aggregate exceed the sum paid ta
the Insured, the Company shall refund the net excess.
7— COLLATERAL BENfeFlTS— This Policy Is not negotiable but the Company will, upon written request of the Insur^, -prtwide thai
any excess loss, that may become due and payable under its Conditions and Stipulau'ons, shall be paid to any Bank or Trust Company
designated by, and for account of the Insured.
8— TERMINATION— If," during the term of this Policy, the Insured shall be-,,-ne insolvent, or shall cease to continiie business as
heretofore carried on, or shall go into liquidation, or being a partnership shall l>e dissolved, then this Policy shall im-nediately terminate and
if any claim for excess loss is made, a Final Sutcment of Claim shall be filed by, and an adjustment shall be'made with, the Insured
in the same time and manner as il this Policy had originally by its terms been made to expire at the date of such termiiiation.
Temporary Interruption by fire or by strike, or the death or withdrawal or admission of a member of a partnership composed of more
than two members, shall not be considered a discontinuance or dissolution.
9— GENERAL PROVISIONS— The premium on this Policy shall be paid by check to the order of the
Company
This Company will acknowledge the receipt of all Notifications of Claim and the Final Statement of Claim, but neither the
acknowledgment nor the retention thereof by this Company, nor its failure to acknowledge receipt, shall be deemed an admission of
liability or a waiver of any of the provr.ions of this Policy by this Company.
The representations and warranties made in the application ol the Insured arc the basis of, and a part of, this Policy. Misrep-
resentation, concealment "or fraud in obtaining this Policy or any Policy of Credit Insurance heretofore issued by this Company to the
Insured, or In the proof or adjustment ol any claim for ]ms under this Policy, shall void this Policy from its beginning and the premium
paid shall be forfeited. The Insured shall permit this Company to examine and t.ikc extracts Irom the books, securities and papers.
of the Insured bearing upon any matter involved in .iny adjustment under this Policy, or upon any representation or warranty made in
the application for this Policy or any prior Policy of Credit Insurance issued by this Company to the Insured, or upon any claim made
either by the Insured or by this Company under this Policy.
No Agent is authorized to make any alteration in, or addition to, this Policy: and no addition to, or alteration of, this Policy
eball be valid unless signed by the General Manager of the Company for the United States.
All provisions of this Policy arc to be deemed conditions precedent to any claim by the Insured.
No suit or action on this Policy shall be brought or be sustainable until after compliance by the Insured with the terms of this
Policy, nor, in the abseoce ol any statutory provision to the contrary, unless commenced within twelve months after its expiration.
492 INSURANCE PRINCIPLES AND PRACTICES
CXIII— Continued
Application.
We, the undersigned, hereby make application to the
for a Policy of Credit Insurance; said Policy, if issued, to be on the withlr> form, the terms, conditions and
stipulations whereof are agreed to by us. We herewith tender our check for $ to the order of said
Company in payment of the premium on said Policy.
We agree that the ratings of the Mercantile Agency shall govern exclusively shipments
under this Policy: We have been subscribers to said Mercantile Agency during the past years.
Our answers to the following questions are true:
1. What is your line of business? How long in it? years.
2. Are you Jobbers or Manufacturers? .
3. What territory do you cover? -. ,
4. To what territory do you make your principal shipments?
5. What are your usual terms of sale? What are your longest terms of sale?
6. About what percentage of sales to Manufacturers? Jobbers? Retailers?-
7. Have you any information detrimental to the credit or responsibility of any individual, firm, co-partnership
or corporation to whom you have made, or contemplate making, any sale to which said Policy^ if issued, will apply?
8. Have you within the past year made, or do you contemplate making, any material change in the manner
of conducting your business, terms of sale or territory mentioned above? . . — — —
As a basis of the Policy hereby applied for, and of any Policy which may hereafter be issued to us, we warrant
the following statement of our gross sales, losses, and amounts of accounts owing by debtors under general extension*
to be correct:
TFRM CROS«^ SAF F*:; all LOSSBS (after deducUna AMOUNTS OP ACCOUNTS
^ . , f, "^'JL ,. V>K.f the .bas caused this
Policy to be signed by its authorized General Manager for the United States of America, acting under power of attorney,
but the same shall not be binding upon the Company unless countersigned by its Assistant General Manager in thc^
City of tiiis day of 192 .
COPY OF POLICY APPLIED FOR IN APPLICATION ON FOURTH PAGE
494 INSURANCE PRINCIPLES AND PRACTICES
CXIV— Continued
Conditions and Stipulations
1 — PREMIUM — ^The earned premium fnr the full Policy period shall be per cent of the total gross shipments and deliveries made
by the Insured during said period, but shall not be less than ($ ) Dollars, minimum, which shall
be payable to the Company when application is rtiade for this Policy, and the remainder of the earned premium, if any, shall be paid immediately upoa
ascertainment of the amount, and the Insured shall, when requested, furnish the Company with the amount of the aforesaid shipments and deliveries,
J— COVERAGE — No loss is covered by this Policy unless the debtor to whom the goods were shipped and delivered shall have in the latest published
book of the Mercantile Agency, at the date of the shipment, a capital rating and its accompanying credit rating, as
tabulated below.
The books of the said Mercantile Agency shall respectively govern shipments from the first day of the month named by said book to the first day
of the month nam'ed by the next subsequent book, except that where the said Mercantile Agency increases or reduces a rating by report, compfte4
during the currency of the latest published book or within thirty (30) days prior to the date thereof, shipments made ?*»er the Insured has received
such report shall be governed by the rating in such report, the same as if the said rating had appeared in the latest published book.
The gross amount to be covered on any one debtor at the date of insolvency shall be limited to the amount set opposite the corresponding
lating of the debtor in the subjoined "Table of Ratings:"
The aggregate gross amcunt covered on the acccnnts of any one debtor shall not exceed the imount owing by the debtor, nor exceed the limit
applicable to such debtor as specified above.
The total amount covered on the indebtedness of a debtor having~ffiS?e thanDne governing rating shall be limited to the amount set opposite the
debtor's highest governing rating, except that where the debtor's highest gpveming rating is reduced, shipments made thereafter shall not be covered s*
kjiig as the debtor owes the amount set opposite the reduced governing rating in the "Table of Ratings^' If, however, the debtor owes less than the said
amount, the total amount covered on all governing ratings shall not exceed the limit set opposite the said reduced rating.
(NAMES NOT IN BOOK) — A shipment toa debtor, whose name does not appear in the said latest published book at the date of the shipment,
ehall be governed by the rating in the latest report -of said Agency on such debtor compiled within four months prior to the shipment, and if no such
report was compiled within four months prior to the shipment, then by the first report of said Agency on such debtor compiled within four months
after the shipment. Every such governing rating shall have the same effect as if contained in said latest published book at the time of shipment.
3 — INSOLVENCY DEFINED — For the purpose of this Policy a debtor shall be deemed to be insolvent:
(1) When the Insured files with the Company for collection, an account that is due and payable at the time of filing, but not over serent;^
frre (75) days past due, under the original terms of sale;
(2) When a petition in bankruptcy or insolvency is filed by or against a debtor under the laws of the United States, or any State or T«f»
ritory thereof , or of Canada ;
(3) When a debtor makes an offer of a general compromise to his creditors for less than his indebtedness;
(4) When a receiver is appointed for a debtor:
(5) In case of the death or insanity of a sole debtor;
(6) In case of the recording of or taking possession under a chattel mortgage given by a debtor on his stock in trade to a creditor or creditors;
<7) When an attachment or execution is levied on a debtor's stock in trade;
(8) When a writ of attachment or execution against a debtor is returned unsatisfied;
(9) When a debtor transfers or sells out his stock in trade in bulk;
(10) When a debtor absconds;
(11)
When a debtor makes an assignment, or a deed of trust, for the benefit of his creditors, either general or with preferences;
(12) When the stock in trade of a debtor issold under a writ of attachment or execution;
(13) When a confession of judgment is made by a debtor;
(14) When a debtor's business is assigned to or taken over by a Committee appointed by a majority in number and amount of his creditora;
Provided that the Insured shall take no action in respect of any indebtedness against a debtor, insolvent under any of the lilefinitions of insolvency
above set forth, that would preclude its prompt collection by the Company unless the Company's consent thereto in writi»g is first obtained.
4 — NOTIFICATION OF CLAIM — When an account is placed with the Company for collection under Subdivision 1 of Condition 3 of this Policy, tbe
Insured shall file with it a Notification of Claim, on the form prescribed by the Company.
Within fifteen (15) days after acquiring knowledge of a debtor's insolvency under Subdivisions 2 to 14, inclusive, of Condition 3 of this Policy, Jtbt
Insured shall file Notification of Claim and forthwith place the account against such debtor with the Company for collection.
An accounts for collection and all Notifications of Cliim shall be filed with the Company at , ■
The Company will supply the blank foims for filing Notifications of Claim.
All claims filed with the Company under this Policy, shall be handled upon the Conditions and Stipulations as provided in Condition S of this
Policy.
5 — COLLECTION OF ACCOUNTS AND SCHEDULE OF FEES — Each Notification of Claim filed with the Compart^ in accordance with the pro-
visions of Condition 4 shall be accompanied by an itemized statement of the account showing fully the true condition thereof, together with all notes
or other papers evidencing the same, and any guarantees, securities, or other documents relating thereto; and the Insured shall upon request, promptly
furnish duplicate invoices, proofs of debt, affidavits, or any other documents, or any information necessary for the proper handling of any account in any
proceeding.
Where an account is disputed, in whole or in part, or where the Company deems it necessary to enforce collection, or to enable the Insured to
participate in any proceeding involving the estate of the debtor, the Insured shall authorize suit or other proceedings, and shall promptly advance the
necessary costs.
If any payment or return of merchandise is made by the debtor direct to the Insured, or if the account is withdrawn by the Insured, the
costs and fees as herein provided shall be paid to the Company by the Insured, the same as if collection had been effected.
The receipt, retention or the handling by the Company of any account filed by the Insured under this Policy shall not constitute a waiver of any
of its Conditions and Stipulations.
The Company assumes all responsibility for moneys collected by its agents and correspondents in the United States, or any Territory t]iereaf»
and Canada, and will promptly remit all amounts due the Insured as collections are made.
APPENDIX 495
CXIY— Continued
On each acconnt 6ted vith the Company under Condition 4 of this Policy, the following fees shall govern on collections effected :
O) When the Company effects collection without placing the account with an attorney:
Seven and one-half (7)^%) P«' cent o( the first Three Hundred ($300 00) Dollars or lea*.
Four (4%) per cent, on the next Seven Hundred ($700 00) Dollars
Two (2%) per cent, on the excess over One Thousand ($1,000 00) Dollars.
Minimum lee Two Dollars and Fifty Cents ($2.50.)
(3) Where the Company deems it necessary to secure the services of an ottomey*
Fifteen (15%) per cent o( the first Three Hundred ($J00 00) Dollars or less.
EiRht (8%) per cent on the next S8
Bjr
»»
Cqftntenigfied at.
Ifanager and Mtomty/or tha United Safc/.
4tn
♦
O
a
o
"3
I
the Principal at the time of such default,
or to become due thereafter by the terms and dates of the contract.
JFljirJL— That in'no event shall the Surety be liable for a greater sum than the penalty of this Bond,
or subject to any suit, action or other proceeding thereon that is instituted later than the ;. _.—
day of . \. D. 19
^^imrtlf. — (a) ' That the Surety shall not be liable for damages for injuries to. the person of anyone,
tinder or by authority of any statutory provision for damages or compensation to any employe, or otherwise;
aad
(b.) Shall not be obligated to furnish any bond or obligation other than the one executed.
9n trfitunong mlirrrof. the said Principal has caused these presents to be sealed with its corporate seal,
attested by the.signature of its duly authorized officers, and the said Surety has caused these presents to be sealed
With its corporate seal.duly attested by the signature of its Attorney-m-tact, the day arid year first above written.
.,. (SEAL)
Signed, sealed and delivered in the
presence of. . (SEAL)
: . (SEAL)
IFilteltlg anil ^mtrantg GIimt|mng.
jittomey-in-faet.
INDEX
Abandonment, fire, 208
marine, 28+
"Abstract plant," 312
Accident and health insurance, 138-152
analysis of policies, 145-148
compulsory health insurance, 150-
152
losses due to accidents, 138-13f
rates, 149-150, app. XIX
reserves, 150
types of policies, 141-145
Account bonds, 342
Actual cash value, meaning of, 205-206
Actual loss ratii, 181
Actual total loss, marine, 284
Adjustment of face value, life, see
Face Value
Adjustment of losses, credit insurance,
331-333
fire insurance, 261-265
marine insurance, 282-283
title insurance, 316
Adjustment of premiums, life, see
Premiums
Advantages and disadvantages are
discussed under the subjects
to which they pertaia
Adverse selection, 107
Agents, life
contract, 42, app. V
general agents, 40-41
soliciting agents, 41
property
contract, 42, 43, app. XLIX
general agents, 42
local agents, 42-43
special agents, 42
Agreements, rate, 295-296
Alterations, of building, 215
Amounts covered by fire policy, 205-
210
Analyses of policies, see under the
various types of insurance
Analytic system, 239-240, app. LII-
LVI, also see Dean Schedule
Annual premiums, life, 82-83
Annuities, last survivor, 69
life, 65
reversionary, 69
Annuit}' due, 82
Appeal bonds, 342
Application, for life insurance, 124,
app. I and II
Apportionment of surplus, 111, 112
Apportionment and contribution, fire,
262-265
Appraisal, fire, 259-260
Assessment insurance, 128-129
Assignment, fire
after a loss, 197-198
before a loss, 196-197
method of assigning, 195-196
necessity for, 194-195
policy provision relating to, 195,
219-220
life
form, app. VIII
method, 123-124
purpose, 122-123
title, 315
Associations, underwriters',
fire, 44
local, 47-50
Lloyds, 34-35, app. LX
marine, 294-295
national, 46-47
National Board of Fire Under-
writers', 45
sectional, 47-50
Assumption of risk, 157
"At and from," meaning of, 278
Attachment bonds, 342
Automatic sprinkler system, 230
Automobile insurance, 299-310
collision insurance policy, 305, app.
CIV
collision insurance rates, 305-306
commercial cars, 304, 306, 309
fire insurance policy, 306-307, app.
CVI
fire insurance rates, 307-310, app.
CIX, CXI
liability and property damage rates,
300-305, app. CX, CXII
liability policies, 299-300, app. CII
manufacturer's and dealer's cars,
304-305, 306, 309
SOS
506
INDEX
private passenger cars, 300-301, 305-
309
property damage policies, 300, app.
CV
public automobiles, 303-304, 306, 309
theft insurance, 310
types of companies, 299
types of coverage, 299
Average clause, 233-244
Average, law of, its operation in in-
surance, 22-26
B
Balance sheet, fire insurance company,
247-248
life insurance company, 96
marine mutual, app. CI
Barratry, 270
Beneficiaries, compensation insurance
schedule of benefits, 164-166
Beneficiary, life, 120-121
change of, 121-122
Benefits of insurance (uses), 3-18
Benefits, schedule for compensation
insurance, 164-166
Binder, fire, 210, app. XLI
marine, app. LXI
Blanket policies, fire, 224-225
marine, 272
Bonding, see Corporate Bonding
Bonds, see Corporate Bonding
Bradstreet's, 328
Branch office system, 41
Brokers, 43-44
Builder's risk, 274-275
Burial expenses, 165
Business failures, 322-324
Business interruption indemnity, 209
Business uses of insurance, see Uses,
3-18
Calculation of premiums, see Pre-
miums
Calculation of reserves, see Reserves
Cancellation of fire policy, 211-213
Cancellation notice, app. XLII
Cargo policies, 271, app. LXII
Cash surrender values, 103-105
developments of cash value clause,
104-105
Certificates of insurance, automobile,
app. cm
fire, 196
Chattel mortgage, 216-217
Children, insurance on, 130
Claims, settlement of, compensation
insurance, 166-167
life insurance, 125
Classes of marine policies, 271-273
Classification, of insurance organiza-
tions, 28-38
of underwriters' associations, 44-45
see also under particular subjects
Clauses endorsed on fire policies
decreasing liability or hazard, 229-
230
emergency clauses, 230-231
limiting amount payable, 231-233
permits waiving policy provisions,
229
pertaining to title or interest, 230
Clauses, marine, see app. LXII-C
fire, 222-233, app. XXXI-XL
Co-insurance clause, credit insurance,
332-333
fire insurance, 231-232, app. XXXI
Collision insurance, automobile
policy, 305, app. CIV
rates, 305-306
marine, 290-291
Collision of vessels, 290-291
Combination accident and health, 143,
app. XVII, XVIII
Commercial cars, 304, 306, 309
Commission form, 223
Commissions, 43, app. V, XLIX
Community benefits of insurance, 15-18
Companies, t>'pes of, 28-38
Compensation laws
accidents covered, 163-164
classification of, app. XXI, XXII
insurance requirements, 167-168,
app. XXII
methods of insurance, 168-171
nature of, 162-163
Compensation policy, 171-173, app.
XXIII
Compensation reserves, 178-183
Compound interest, 75-76
Concurrent policies, 262-263
Consequential damage clause, 229
Constructive total loss, 284-285
Contingent or survivorship insurance,
68-69
Contract bonds, 339, 346-347, app.
CXVII
Contribution, fire losses, 262-265
Contributory negligence, 151
Convertible feature, 58, 134-135
INDEX
SOI
Corporate bonding
bonds covering honesty, 339-342,
app. CXV, CXVI
account bonds, 342
fidelity bonds, 339-342
bonds involving financial strength
only, court bonds
appeal bonds, 342
attachment bonds, 342
bonds for cost, 342
bonds for distraint of rent, 342
indemnity bonds to sheriff, 342
injunction or mandamus bonds,
342
replevin bonds, 342
bonds involving honesty and ability
fiduciary bonds, 345
license bonds, 345-346
public official bonds, 343-345
bonds involving honesty, ability,
and financial strength
contract bonds, 346-347, app.
CXVII
depository bonds, 347-348
franchise bonds, 347
bonds involving honesty and finan-
cial strength
custom house bonds, 349
internal revenue bonds, 348-349
lost instrument bonds, 348
miscellaneous bonds, 349
development of, 336
divisions of the subject, 338-339
nature of suretyship, 336-337
rate making, 349-350
Corporation insurance, 120
Cost, elements of in life insurance, 72
Court bonds, 342
Coverage — see under the various
types of insurance
Credit insurance, 322-335
analysis of policy, 325-335
adjustment of loss, 331-333
application, 325, app. CXIV
coverage, 327-330
endorsements, 334
insolvency, 330-331
insuring clause, 326-327
premium, 327
salvage, 335
termination, 333-334
business failures, 322-324
credit ratings, 327-328
general plan, 324
limited policies, 324
normal loss, 332-333
"optional" policy, 327
policy limits, 329
types of policies, 324-325,
unlimited policies, 324-335, app.
CXIII, CXIV
Credit, insurance as a basis of, 8-10
Credit ratings, 327-328
Cross liabilities, 290-291
Custom house bonds, 349
D
Daily report (fire agents), app.
XLVII
Dangerous article, 229-230, app.
XXVIII
Dealers cars, 304-305, 306, 309
Dean schedule
basis rate, 239-240, app. LII
calculation of building and con-
tents rate, 240, app. LVI
calculation of building rate, 240,
app. LV
contents table, app. LIII
occupancy table, 240, app. LIV
Deductible average clause, 288
Deferred dividends, 115-116
Definition of insurance, 19
Depository bonds, 339, 347-348
Depreciation, 205, 207
Description of property, 224
Development of corporate suretyship,
336
Deviation, 270
Diagram — showing fire insurance re-
serve, 250
Diagrams showing investment ele-
ment in life insurance
endowment, 64
limited payment life, 62
ordinary life, 61
term insurance, 59
Diagrams showing loading of life
insurance premiums
combination loading, 87
flat loading, 86
Diagrams showing reserves on differ-
ent types of policies, 93
Differences between life and other
forms of insurance, 26-27
Direct loss, by fire, 202-203
Disability, 70, 139-141, app. Ill, IV
partial, 147, 165
total, 146-147, 164
Distribution of cost by insurance, 7-8
Distribution of dividends, 115-116
Distribution of surplus, 112-113
508
INDEX
Dividends, life
illustrative, 114, 116
nature of, 113
options, 117-118
size and importance, 113-114
sources of, 116-117
special types, 116
Divisible surplus, 113
Doctrine of entirety of contract, 214-
215
Dynamo clause, 229
Effect of premiums on reserve, 89-93
E. G. Richards, 240
Electric cars, 309
Electricity, 230
Employers' liability — see Liability
Endorsements — see Clauses
Endowment policies, 63-64, app. Ill
Entirety of contract, 214-215
Events covered by fire policy, 202-205
Excess floater, 225-226
Exemption from liability under fire
policy, 203-205
Expenditures, marine, 289-291
Expenses, life insurance, 83-84
Experience, grading and rating sched-
ule, 240-242
Experience rating — compensation in-
surance, 177
fire insurance, 235, 240-242
Face value, adjustment of in life in-
surance, 69
decreasing, 69
disability, 70
multiple indemnity, 69
Fellow servant doctrine, 157
Fidelity bonds, 339-342, app. CXV,
CXVI
Fiduciary bonds, 339, 345
Fire insurance, 185-266
Fire insurance binder, 210, app. XLI
Fire insurance contract, analyzed,
199-221
coverage, 202-210
N. Y. Standard policy, app. XXX
Fire insurance policy, automobile,
306-310, app. CVII
Fire insurance rates, 234-244
Fire underwriters' associations, juris-
diction, 44-45, app. L
maps showing jurisdiction, app. L
Fixed loss ratio, 181-183
Fleet policies, 272
Floater, excess, 225-226
Floating policies, fire, 224-225
marine, 272
Forms and clauses used in fire insur-
ance, 222-233, app. XXXI-
XLVIII
descriptive forms, 222-225
covering more than one location,
224-226
description of property, 224
location of property, 224
ownership, 222-223
those covering other than direct
loss, 226-228
profit insurance, 228
rent insurance, 228
sprinkler leakage insurance, 228
use and occupancy, 226-228, app.
XL
Formula, compensation insurance
premium, 175
life insurance reserve calculation,
98-99
use and occupancy, 227
Franchise bonds, 339, 347
Fraternal insurance
compared with old line insurance,
128
description, 126-128
history, 126-128
valuation, app. XIV
Fraud, effect of, 217, 257-258
Free of particular average, 287, app.
LXXIV, LXXXIII, XCIII,
XCV, XCVIII
F. P. A. A. C, 287, app. XCIII
F. P. A. E. C, 287, app. XCV
Freight policies, 271
Functions of insurance, see Uses, 3-18
Gains, from forfeitures, 117
from investments, 117
Gasoline and gas permits, 230, app.
XXXVIII
General agents, life insurance, 40-41
property insurance, 42
General average, 281-283
General expenses, 84
General or unlimited accident poli-
cies, 142-143, app. XVIII
Government insurance, 3 5-38
Gross premiums, 83-88
INDEX
509
Group insurance
method of insuring, 132
nature of plan, 132
the premium, 133-135
Guaranteed mortgages, 319-320
Guaranteed mortgage certificates, 320
Guaranteed values, 103-107
H
Household form, app. XXXV
Hull, see Vessels
Hull marine policy, app. LXHI
I
"Illustrative" dividends, 114, 116
Immigrant bonds, 348-349
Inception and termination of fire
policy, 210-213
Incontestable clause, 124
Indemnity bonds, 342-343
Indemnity, double, 69
multiple, 69,
principle of, 187
Industrial accidents
diseases, 157
distribution of, 156
extent of, 155-156
prevention of, 156-157
Industrial life insurance
origin and purpose, 129-130
rates, app. VII
the system explained, 130-132
Industrial or corporate accident and
health policies, 144-145
Injunction bonds, 342
Insolvency, 330-331
Installment insurance, 65-68
Insurable interest, in fire insurance,
187-198
classification of insurable inter-
ests, 189
in general, 21-22
in life insurance, 119-120
in marine insurance, 269
Insurance
as a provision for old age, IS
associations, 44
brokers, 43-44
certificates, 196, app. CIII
definition of, 19
government, 35-38
in general, 3-50
investment feature, 13, 14, 59, 61, 62,
64
kinds of
accident and health insurance,
138-152
automobile insurance, 299-310
corporate bonding, 336-350
corporation insurance, 120
credit insurance, 322-335
fire insurance, 185-266
liability and compensation insur-
ance, 153-184
life insurance, 51-137
marine insurance, 267-295
mortgage insurance, see Title in-
surance
partnership insurance, 120
profit insurance, 228
rent insurance, 228
riot and civil commotion insur-
ance, 204, app. LVII
sprinkler leakage insurance, 228,
app. XXXIX
title insurance, 311-321
use and occupancy insurance, 226-
228, app. XL
organization of business, 39-50
office organization, 39-40
prerequisites of, 19-21
principles underlying, 19-27
purposes, 3-18
uses of, 3-18
Insurance organizations, tj'pes of, 28-
38
Interest, compound, 75-76
policies (marine), 271, app. LXXXI
Interinsurers, app. LX
Internal revenue bonds
Investment element in life insurance
endowments, 64
limited payment life, 62
ordinary life, 61
term insurance, 59
Investment expenses, 84
Investments, permitted classes, 108
Joint life insurance, 68
K
Key rate, 238
Kinds of insurance, see Insurance
policies, see insurance concerned
premiums, see Premiums and Rates
Land titles, 311-312, see Title insur-
ance
Lapse, 105-107
Last survivor, 68
Last survivor annuities, 69
510
INDEX
Latent defect, 288, app. LXXXIX
Law of average, 23-24
operation of, 24-26
Law of negligence, 157-158
Laws, compensation, see Compensa-
tion Laws
non-forfeiture, 104-105
Laws of probability, 22-23
Lawyer's abstract, 312
Legal reserve, life insurance, 95-100
Level premium, 82-83, 90-91
Liability and compensation insurance,
153-183
Liability and property damage rates,
automobile, 300-305, app, CX,
CXI, CXII
Liability, employers
insurarice, 158
policy, 158-159
rates, 159-160
Liability policies, automobile, 299-300,
app. CII
License bonds, 345-346, 339
Life compared with other forms of in-
surance, 26-27
Life insurance, 51-137
Lighterage clause, app. LXXXVIII
Lightning clause, 205
Limited accident policies, 142, app.
XVI, XVII
Limited payment life insurance, 61-63
Limited policies, accident and health
insurance, 143, app. XVI
credit insurance, 324
Lloyds Associations, 34-35, app. LX
Loading, of premium, 83-88
savings from, 117
Loan values, 104
Loans, on life policies
described, 106
extent and nature, 106-107
Local associations, 47-50
Location of property, 224
Loss payable clause, 191, 195, 230, app.
XXXVII
Loss reserves, compensation insurance,
178-183
Loss settlement, fire, 256-265
agreement and appraisal, 259-260
classifications of policy provisions
relating to, 256
estimation of amount of loss, 257-
259
net liability of company, 261-265
preservation of property, 256-257
Lost instrument bonds, 342
M
Mandamus bonds, 342
Manual rate, compensation insurance,
172, app. XXV
Manufacturer's cars, 304-305, 306-309
Maps of Fire Underwriters' Associa-
tions, app. L
Marine insurance, 267-295
analysis of policy, 277-281
associations, 294-295
different classes of policies, 271-273
endorsements, app. LXV-C
factors affecting marine insurance
rates, 291-295
competition, 294-295
nature of the trade, 293
policy conditions, 295
statistical experience, 293-294
subjects of insurance, 291-292
the insured, 292-293
underwriting judgment, 295
factors essential to valid contract,
269-270
mutuals, 270, app. CI
nature of contract, 269
types of losses, 281-291
types of underwriters, 270-271
uses of policies, 273-277
Medical aid, 165
examination, app. II, 59, 130
Memorandum clause, app. LXII
Merit rating, compensation insurance,
175
Methods of loading, 83-85
Minimum rates, fire insurance, 235-
237
Mobile bill, 127
Modified preliminary term reserve
valuation, 102
Monthly report, (fire agents), app.
XLVIII
Mortality savings, 116-117
Mortality tables
American Experience, 73-74
National Fraternal Congress, 73,
127
Mortgage — chattel, 216-217
clause, 192-194, 230, app. XXXII,
XXXIII
Mortgage insurance, see Title insur-
ance
Mortgagee, policy provision relating
to, 212, 219, 258, 261
protecting his interest, 189-194
Mortgagee's risk, title insurance, 317-
319
INDEX
511
Mutuals, 30-32, 169, 270, app. XXVII,
CI
N
Named policies, 272
National associations, 45
National Board of Fire Underwriters,
45
National Fraternal Congress Table,
127
National title insurance, 319
Natural premium, 76-77
Nature of suretyship, 336-337
Negligence, contributory, 157
Net cost, 114
Net single premium, 78-83
New York Conference Bill, 127
Non-cancellable accident and health
policies, 143-144, app. XVIII
Non-concurrent policies, 263-265
Non-forfeiture laws, 104-105
Non-participating policies, 110-111,
114
Noon, meaning of, 210
Normal loss, 332-333
Obligee, 338
Occupancy table — Dean Schedule, 240,
app. LIV
Universal Mercantile Schedule, 238
Occupation, classification for accident
rates, 149
Open cargo forms, 272, app. LXII
Open or unvalued policies, 272
Operation of law of average, 24-26
"Optional" policy, credit insurance,
327, app. CXIII
Ordinary life, 59-61
Organization of insurance business,
39-50
Organizations, types of insurance,
28-38
Origin of surplus, 110
Owner's risk, title insurance, 313-
317
Ownership of property, 218-219, 222-
223
Paid-up insurance, 60-105
Partial disability, 147-165
Partial losses in marine insurance,
285-289
cargo, 285-287
freight, 289
vessel, 287-289
Participating policies, 110-111
tables comparing participating with
non-participating, 114
Particular average, 283
free of, 287, app. XCV
Parties to fire contract, 201
Partnership insurance, 120
Passenger cars, 300-301, 305-309
Payment of claims (life), 124
Pecuniary interest, 120
Perils covered by marine policies,
279-281
Perpetual policy, 245, app. XXIX
Personal insurance, 39-40, Part II
Philadelphia Contributionship, plan
of, app. XXIX
Policies, see under the kind of insur-
ance concerned
Policy loans, 106-107
Policy proof of interest, marine, 271,
app. LXXXI
Policy provisions, see classifications
and analyses under various
types of insurance
Port risk, 274
Preliminary term reserve valuation,
101
Premiums, accident and health, 149-
150
Premiums, credit insurance, 327
Premiums, fire
calculation, etc., see Rates
policy provisions concerning, 201-
202
Premiums, life, 71-78
adjustment of, 69
decreasing, 69
return of, 69
waiver, 69
calculation of
annual level premiums, 82-83,
app. VI
gross premium, 83-88
net single premium
endowments, 80-81
term policy, 78-79
whole life, 79-80
efi^ect of premiums on reserve, 89-93
group insurance, 133-135
industrial insurance, 130-131, app.
VII
loading, methods of, 83-88
sub-standard lives, 137
table of annual rates, 54, 72, app. VI
Premiums, liability, 159-160
Premiums, marine, see Rates
512
INDEX
Premiums, title insurance, 319
Premiums, workmen's compensation,
172-177
Prerequisites of insurance, 19-21
Preservation of property, 256-257
Principal, in corporate bonding, 337
Principles of compensation insurance,
161-162
Principles of insurance, 19-27
Principles of probability, 22-23, 73-75
Private passenger cars, 300-301, 305-
309
Probability, application of theory of
probability to insurance, 22-23,
73-75
Profits insurance, 228
Proof of loss, fire, 258, app. XLVI
Proofs of death, 125, app. XII, XIII
Proper policy, 53
Propertv damage policies, 300, app.
CV
Property damage rates, 300-305, app.
CX, CXI, CXII
Prospective reserve, 98-99
Protection and indemnity associations,
271, app. LXIV .
Public automobiles, 303-304, 306, 309
Public official bonds, 343-345
Pure premium, 160, 173-175
R
Rates, accident and health, 149-150,
app. XIX
Rates, automobile insurance
collision, 305-306
fire, 306-310
liability and property damage, 300-
305, app. CX, CXI, CXII
theft, 310, app. CXI
Rates, corporate bonding, 349-350
Rates, fire insurance
analytic system, 239-240
calculation of
Dean Schedule, 240, app. LV, LVI
Universal Mercantile Schedule,
237-239
classification of, 235
Experience Grading and Rating
schedule, 239-242
experience rating, 235
factors involved, 234
judgment rating, 235
minimum rates, 236-237
schedule rates, 23
schedule rating, 235
short rate, 212, 236
Universal Mercantile Schedule, 237-
239, app. LI
Rates, marine insurance, factors af-
fecting
competition, 294-295
nature of the trade, 293
policy conditions, 295
statistical experience, 293-294
subjects of insurance, 291-292
the insured, 292-293
underwriting judgment, 295
Rates, life, see Premium
table of annual life insurance rates
on various policies, 54, 72, app.
VI
Rebates, 48
Reciprocals, 32-33, app. LVIII-LX
Reduced rate clause, app. XXXI
R. G. Dun & Company, 328
Regulations (state) fire
(state) life, 107-109
Reinsurance reserve, 245-246
Release of interest, 124, app. X
Renewable feature, 57-59
Renewal commissions, app. V, XLIX
Renewal receipt, app. XLIII
Rent insurance, 228
Replevin bonds, 342
Representations, 124
"Requirements for insurance, 19-21
Reserves, accident and health insur-
ance, 150
Reserves in fire insurance
calculation of, 249-253
definition, 245
diagram showing reserve, 250
illustration of reserve calculation,
251
importance of
financially, 247
to premium payments, 246-247
object of, 245-246
state legislation relating to, 253-255
Reserves, liability and compensation
insurance, 178-183
Reserves, life, nature of, 89
calculation of, 97-100
diagram showing growth of re-
serves on various policies, 93
preliminary term reserve tables, 102
prospective, 98-99
retrospective, 90-92, 99
select and ultimate table, 101
size and importance, 95-97
special methods of valuation, 100-
103
INDEX
513
table comparing net reserve with
cash and loan values, 104
table comparing terminal reserves
at different rates of interest, 94
table of aggregate and individual
terminal reserves, 91
table of reserves on different kinds
of policies, 92
valuation of, 98-99
Reserves, surrender values and loans
(life), 89-109
Retrospective reserve, 90-92, 99
Reversionary annuities, 69
Riot and civil commotion clause, ma-
rine, app. XCIX
Riot and civil commotion insurance,
205, app. LVII
S
Salvage, credit insurance, 335
marine insurance, 290
Saving, made possible by insurance,
12-13
Schedule rates, 237
Schedule rating, automobile insur-
ance, app. CIX
compensation insurance, 175-177,
app. XXVI
fire insurance, 235, app. L-LVI
Seaworthiness of vessel, 269-270
Sectional associations, 47-50
Select and ultimate reserve valuation,
102-103
Selecting proper policy, 53
Self-insurance, 28-30
Services, of insurance, see Uses, 3-18
of national associations, 46-47
of sectional and local associations,
47-50
Settlement expenses, 84
Settlement of claims, compensation
insurance, 166-167
fire insurance, 256-265, see Losses
life insurance, 125
Short rate table, compensation insur-
ance, app. XXIII
fire insurance, 212, 236, app. XLIV
Single premium policy, 54-55
calculation of premiums, see Pre-
miums
Social insurance, 155
Special contracts, life insurance, 68-
70
Special forms of life insurance, 126-
137
Special methods of life insurance re-
serve valuation, 100-103
Special types of marine policies, 272-
273
Spontaneous combustion clause, 229
Sprinkler leakage insurance, 228, app.
XXXIX
Sprinkler system, 230
Standard building, 238
Standard city, 238
Standard fire policy, 199-221
classification of provisions, 200-201
extent of protection, 202-213
parties to the contract, 201
rate, premium and consideration,
201-202
suspension and voidance, 213-221
Standard mortgagee clause, 192-193,
app. XXXII, XXXIII
State fund, 36, app. XXVIII
State insurance, 36-38
State regulation of fire insurance
rates, 242-244
State supervision and regulation, fire,
242-244, 253-255
life, 107-109
Statement of income and disburse-
ments, life insurance company,
97
Stock companies, 33-34
Subrogation, 261-262, 281, app. C
Sub-standard lives
description, 136
method of rating, 136-137
Sue and labor clause, 289-290, app.
LXIII
Suits, 261
Surety, see corporate bonding, 337-
338
Surety bond, individual, app. CXV
schedule, app. CXVI
Suretyship — see corporate bonding
Surplus and dividends, 110-118
Surplus, in life insurance
apportionment, 111-112
distribution, 112-113
origin, 110
Surrender charges, 103-104
Surrender of policy, app. XI
Surrender values, 103-105, app. Ill
Table of life insurance rates, 54, 72
Table of ratings, credit insurance,
329
Table of surrender values, app. Ill
514
INDEX
Tables comparing participating and
non-participating policies, 114
Tables of mortality, 72
American experience table, 74
Tables of reserves
aggregate and individual terminal
reserves, 91
comparison of terminal reserves at
different rates of interest, 94
individual terminal reserves on
different kinds of policies, 92
net reserves compared with cash
and loan values, 104
preliminary term reserve, 101
select and ultimate reserve, 102
Term insurance, diagram showing in-
creasing premium on term pol-
icy, 59
life, 56-59
Termination of policies, fire, 211-213
life, 125
Theft insurance, automobile, 310
rates, 310, app. CXI
Theory of probability, 22-23
Three-fourths loss clause, 231
Three-fourths value clause, 231
Ticket accident policies, 141-142
Time policies, 272, app. LXIII
Title insurance, 311-321
abstract plant, 312
extent of business, 313
extent of guarantee, 312-313
guaranteed mortgages, 319-320
lawyer's abstract, 311
mortgagee's risk, 317-318
operations of title company, 312
owner's risk, 313-317
premium, 319
special policies, 318
tract system, 312
types of policies, 313-319
Tontine policies, 116
Total disability, 146-147, 164
Total loss in marine insurance
actual, 284
constructive, 284-285
Tract system, 312
"Twisting," 108
Type of vessel, 291-292
Types of insurance, see insurance,
kinds of
Types of insurance organizations,
28-38
Types of marine losses, 281-291
Types of marine policies, 271-277
Types of policies, see kinds of in-
surance
U
Uncertainty, elimination of by insur-
ance, 3-5
Underwriters' associations, 44
Universal Mercantile Schedule, 237-
239, app. LI
Unlimited policies, accident and
health, 143
credit insurance, 324
Unoccupancy, 216
Use and occupancy insurance, 226-
228, app. XL
Uses of insurance, 3-18
Uses of marine policies
blanket policies, 276-277
fleet policies, 276
floating and named policies, 275-
276
open cargo forms, 276
ordinary and special hazards, 277
special time policies, 274-275
time and voyage policies, 274
valued and open policies, 274
vessel, cargo and freight policies,
273
V
Vacancy, 216
Valid and collectible insurance, 214,
262
Valuation, of fraternals, app. XIV
of life reserves, 98-99
of life reserves by special methods,
100-103
Valued policies, automobile, 309
fire, 204, 206
marine, 272, app. LXIII
Valued policy laws, 206
Vessel, partial loss of, 287-288
policies, 271, app. LXIII
Voidance of fire policy, 217-221
Voyage policies, 272
w
War risk bureau
statement of operations, app. XV
War risk insurance, 36-38, 277
Warehouse to warehouse clause, 279,
app. LXXV
Whole-life insurance, see Ordinary
Life
Workmen's collective insurance, 145
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