Property insurance, comprising fire and marine insurance, automobile insurance, fidelity and surety bonding, tilte insurance, credit insurance, and miscellaneous forms of property insurance

Front matter

I i oU 1 j

Cornell University Library

REVISED EDITION

Preface

Like its predecessor, published in 1911, this volume aims to present, in a comprehensive and non-technical manner, the important economic and legal principles and the leading practices upon which the various kinds of property insurance are based. 'With respect to each of these kinds of insurance, special emphasis is also placed upon the nature of the coverage, types of underwriters, types of contracts and their guMiaJ application, an analysis of the policy contract, special endorsements, and the factors underlying the determination of rates. The book has been prepared chiefly as a text for students of insurance in universities and colleges, who either intend to enter that vocation or who desire to understand its nature as a business and its usefulness to owners and managers of property. It is so prepared, however, as to be equally valuable to the many who are now engaged, or contemplate engaging, in the insurance business as agents, brokers, or otherwise.

The first edition of "Property Insurance" was widely adopted as a text in our higher institutions of learning and has maintained a prominent place in that respect for an entire decade. The present volume embodies in large part the author's conclusions and method of treatment in the class-room arrived at during eighteen years of teaching this subject. It represents a complete revision and a very substantial enlargement of its predecessor. The body of the text has been increased by nearly two hundred pages, and has been brought strictly to date. New chapters have been added on "Use and Occupancy, Rent and Profits vi PREFACE

Insurance," "The Work of Fire Underwriters' Associations," "Rate-making in Marine Insurance," "Automobile Insurance," and "Miscellaneous Forms of Property Insurance." With respect to each kind of insurance, the volume presents all essential documents and forms vital to an understanding of the contractual relation involved and the practical operation of the business. These forms are inserted throughout the text, in their proper place, for the convenience of the student, instead of being grouped in an appendix. An important feature, it is believed, is the detailed classification and arrangement, and the emphasis of subject-matter with due regard to relative importance. The volume also furnishes a classified available bibliography.

The thirty-two chapters of the text are grouped into three distinct parts, dealing respectively with "Fire Insurance," "Marine Insurance" and "Other Forms of Property Insurance." The first of these parts, relating to fire insurance, is devoted to a discussion, to the extent of a chapter in each instance, of the economic functions of insurance ; the policy contract ; insurable interest and assignment ; the mortgagee clause ; types of underwriters ; agency and brokerage; description of the insured property; the risk assumed under the policy; term of the contract, renewal and cancellation; other insurance and contribution; policy provisions applying after occurrence of a loss ; coinsurance; reinsurance; policy endorsements; use and occupancy, profits and rent insurance; the reserve; rates and rating methods; underwriters' associations; fire pre^ vention; and state supervision and regulation.

Part II of the volume deals with the scientific phases of marine insurance, and the organization and practical operation of that branch of the insurance business. Where any of the principles or practices are similar to those prevailing in fire insurance, the facts are explained in Part

PREFACE vii

I under the appropriate chapters. Six chapters, however, deal with the principles and practices which pertain exclusively to marine insurance. These chapters relate respectively to "Types of Marine Insurance Policies"; "The Marine Policy Analyzed"; "Marine Perils Against Which Protection is Granted"; "Types of Marine Losses"; "Policy Endorsements in Marine Insurance" ; and "Marine Insurance Rates."

Part III of the text relates to a detailed discussion of automobile insurance, fidelity and surety bonding, title insurance, credit insurance, and miscellaneous forms of property insurance. Separate chapters are devoted to each of these branches of insurance, explaining the extent of the business, its usefulness to owners and managers of property, the nature of the coverage, types of policies, analysis of the contract, special practices and endorsements, and the factors governing the determination of rates.

Special acknowledgment is due to my departmental colleague, Mr. B. L. McKenna, who gave me the benefit of his constructive criticism, especially with respect to the choice of legal citations, in the preparation of certain chapters. Many persons connected with the management of insurance companies, or otherwise identified with the business, also gave me valuable assistance throughout the preparation of the volume. To them I desire to express my appreciation for their uniform courtesy and to acknowledge my obligation for the assistance they rendered in explaining practices and in giving other information.

S. S. HUEBNER

Part I Fire Insurance Chapteb Page

I. . The Functions of Pike and Marine Insurance 1-15

Definition of insurance, 1. Extent of fire and marine insurance business, 2. Benefits derived from fire and marine insurance, 4. Substitution of certain for uncertain loss, 4. Correct inspection and rating of risks, 7. Increased efficiency through the elimination of worry, 9. Insurance the basis of our credit system, 10. Marine insurance a national commercial weapon, 14.

II. The Policy Contract in Fire Insurance . . 16-33 The fire insurance policy a personal contract, 16. The fire insurance policy a contract for indemnity, 17. Nature of the indemnity promised, 18. Rules underlying the interpretation of the contract, 19. Benefit of doubt to the insured in case of ambiguity, 20. Endorsements control the regular provisions of the policy, 21. Each policy is an independent contract, 22. Forfeiture generally limited to the continuance of policy violation, 22. Development of the standard policy, 23. Grouping of provisions in the policy, 27. Copy of New York standard fire policy, 28.

III. The Insured — Insurable Interest and Assignment 34-48

Definition and nature of insurable interest, 34. Examples of insurable interest, 35. The time and continuity of insurable interest, 37. Policy provisions relating to ownership and interest, 40. Assignment of fire policies, 43. Assigmnent before loss without company's consent prohibited, 43. Form of the company's endorsement acknowledging consent to assignment, 44. Assignment when there has been a transfer of the property, 45. Pledging of policy as collateral security not prohibited by assignment clause, 47. .Alignment after the occurrence of a loss, 48.

rv. The Mortgagee Clause 49-62

Mortgagee and mortgagor have separate insurable interests, 49. The mortgagee may insure his own interest, 50. Mortgagee may take the mortgagor's policy by way of assignment, 51. Mortgagor's policy endorsed "loss, if any, payable to mortgagee as his interest may appear," 52. The "mortgagee clause," 53. Advantages of the mortgagee clause, 55. Analysis of the clause, 56. Payment of loss to mortgagee, 56. Mortgagee's interest not invalidated by act or neglect of mortgagor, 57. Mortgagee liable for the premium, 57. Cancellation of the mortgagee's protection, 58. Subrogation when mortgagor violates policy, 58. Special or blanket agreements, 59. Contribution under the mortgagee clause, 59.

V. Types op Undeewbiters 63-80

Classification of insurers, 68. Stock companies, 63. Local assessment mutuals, 65. State mutnals, 68. Deposit premium companies, 69. Factory mutuals, 69. Ordinary premium mutuals, 71. "Beciproeal" or "inter-insurer" associations, 71. Non-assessable mutuals, 72. Ship owners' mutual associations or clubs, 72. Lloyd's of London, 74. American Lloyd's associations, 78. Self-insurance, 79.

TL Agency and Brokerage 81-96

Importance of agency in fire insurance, 81. Method of reporting business written, 82. The daily report, 83. Statutory regulation of agents, 84. Powers and liabilities of the agent, 86. Agent's apparent powers coextensive with those of his principal, 86. Liability of company for the acts of sub-agents and employees of the agent, 86. Legal effect of agent's opinions on the meaning of policy provisions, 87. Personal liability of the agent for misconduct to hia principal, 87. An agent may not act as such for two parties in the same transaction, 88. Waiver provision in the standard fire policy, 88. Brokers distinguished from agents, 91. Definition and licensing of brokers, 91. Services of the broker, 92. Legal status of the broker, 94.

CONTENTS xi

CHAPTEB PAGE

VII. Descsbiption or the Property Insured . . . 97-106 Policy provisions relating to the subject, 97. Description of character and location of risk, 97. Different interpretations of this provision, 98. Concealment or misrepresentation of material facts, 100. Doctrine of the entirety of the eontract, 101. Examples of its application, 101. Beasons for enforcing this doctrine in certain cases, 103. Warranties and representations, 104. Distinction between warranties and representations, 105. State statutes relating to warranties, 105.

Vm. The Risk Assumed Under the Policy . . . 107-120 Definition of the insurer's liability under the policy, 107. The doctrine of proximate cause, 109. Examples of its application, 109. Doctrine of proximate cause in marine insurance, 111. Meaning of "loss and damage by fire," 112. Excluded risks, 113. Excluded articles, 116. Company's liability for loss limited to the actual cash value of the property, 117. Company's option to rebuild or replace, 118. Abandonment of property to company prohibited, 119.

IX. Term op the Contract — ^Renewal and Cancellation 121-133

Policy definition of "the term," 121. When the policy takes effect, 121. The "binding" of insurance, 122. Retroactive insurance, 124. ' ' Open policies, ' ' 125. Renewal of the contract,

125. A renewal policy legally a new contract,

126. Description of the property in renewal contracts, 126. Right of cancellation and reasons for, 127. Cancellation clause of the standard policy, 127. Tender of the unearned premium, 128. Notice of cancellation, 129. Short rate tables explained, 130. Sample short rate tables, 131.

X "Other Insurance" and "Contribution" . 134-148 Definition of other insurance, 134. Purpose of policy provisions relating to other insurance, 134. History of the other insurance clause, 136. Significance of the words "valid or invalid," 138. significance of the words "covered in whole or in part," 138. Other insurance in relation to renewal and substitution, 138. The other insurance clause in marine insurance, 139. Contribution in fixe insurance, 140. Apportionment of xii CONTENTS

CBAPTEB loss when the policies are concurrent, 141. Significance of the words "whether valid or not and whether collectible or not," 142. Contribution when the policies are non-concurrent, 143. Illustration of apportioning compound insurance, 145.- Numerous rules in use for the apportionment of loss among compound and specific policies, 146.

XI. Provisions which Apply after a Loss Has

Occurred 149-157

Two-fold classification of provisions in this respect, 149. Notice of loss and proofs of loss, 149. Meaning of "immediate notice," 151. Exhibition of property and records and examination of the owner, 152. Appraisal clause of the standard policy, 152. Interpretation of the clause, 154. Form of appraisal agreement, 155.

XII. Coinsurance 158-177

Meaning of coinsurance, 158. Wording of different clauses, 158. Application of coinsurance illustrated, 159. Seasons justifying coinsurance, 162. Justice between property owners secured, 162. Bates of premium similar to tax rates, 166. Protection of smaE against large owners made possible, 168. Anti-coinsurance laws, 169. Graded rate systems, 170. Special coinsurance clauses, 173. Other leading clauses distributing loss or limiting the insurer's liability, 174. Pro rata clause, 174. Pro rata distribution clause, 174. Two-thirds vacancy clause, 175. Three-fourths value clause, 176. Three-fourths loss clause, 176.

XIII. Eeinsurance 178-191

Definition of reinsurance, 178. Extent of reinsurance, 179. Reasons for reinsurance, 179. Conditions required in effecting reinsurance, 182. Sample reinsurance form, 184. Types of reinsurance agreements, 185. Agreements covering specific risks, 185. Eeinsurance "clearing houses" or "exchanges," 185. "Share or participating arrangements," 186. Eeinsurance "pools" or "syndicates," 187. Excess reinsurance, 188. Eeinsurance covering excess loss, 188. Application of the reinsurance contract to the original insured, 189. State regulations pertaining to reinsurance, 189.

CONTENTS xiU

CBAI^EB PAGE

XIV. Policy Endorsements in Fike Insdkance . . 192-201

Standard policy not adapted to meet all kinds of circumstances, 192. Forms or clauses descriptive of the property or interest insured, 193. Clauses describing the property, 193. Clauses describing the insured's interest, 194. Clauses permitting changes in the location of the property, 195. Clauses allowing an adjustment in the insurance coverage, 195. Clauses extending the insurance coverage, 195. Endorsements limiting or distributing the indemnity, 196. Endorsements decreasing the hazard, 196. Permits, mostly suggested by the policy, which increase the hazard, 198.

XV. Use and Occupancy, Profits, and Bent In-

sukance 202-216

The standard fire policy incomplete in its coverage against loss by fire, 202. Use and occupancy insurance, 203. Meaning and application of use and occupancy insurance, 203. Items usually constituting the value of use and occupancy, 206. Policy definition of buildings, machinery and equipment, 206. Company's liability under use and occupancy insurance, 207. Other leading provisions and endorsements, 208. Profits and commissions insurance, 210. Leading differences between profits insurance and use and occupancy insurance, 210. Nature of the protection under profits insurance, 210. Nature of the protection under commissions insurance, 210. Policy provisions under profits and commissions insurance, 211. Bent, rental value, and leasehold insurance, 213. Nature of seaTfiee performed by rent insurance, 213. Meaning of the several types of rent coverage, 214. Leasehold insurance, 214. Ground rent insurance, 215. Different degrees of coverage obtainable under rent and rental value insurance, 216.

Xvi. The Beserte in Fire Insurance 217-230

The reserve defined, 217. Eeal purpose of the reserve, 218. Legislative and state departmental requirements for a reserve, 219. Ascertainment of the reserve on the yearly basis,

220. Abstract of a company's financial report,

221. State insurance department's recapitulation of fire risks and premiums, 222. Computation of the reserve by months, instead of by years, 338,

XIV

CHAPTER PAGE

XVII. Fire Instieancb Bates 231-244

Importance of the subject, 231. Fundamental factors underlying rate mailing, 233. Difference in hazard between classes of risk, 233. Difference in hazard between individual risks of the same class, 233. The exposure hazard, 234. The occupancy hazard, 234. The element of time, 235. Development of rating systems, 236. Personal judgment rating, 237. Schedule rating, 238. Experience rating, 239. Services rendered by schedule rating, 241. Gives systematic treatment of the numerous features which differentiate one risk from another, 241. Tends to reduce the fire waste, 241. Secures more thorough inspection and rating, 242. Bate classifications, 243. According to subject-matter of the insurance, 243. According to term of the policy, 243. According to type or location of risk, 244.

Xyill. Schedule Bating in Fire Insurance .... The Universal Mercantile Schedule, 245. Standards used by this schedule, 245. The "basis rate," 246. The "key rate," 246. Additions or deductions for variations from the standard building, 247. Addition to cover the occupancy hazard, 247. Addition to cover the exposure hazard, 247. Bating stock within the building, 248. The Analytic system, 249. Ordinary type of building selected as a standard under this system, 250. Optional selection of a basis rate, 250. Additions and deductions for bad and good features in percentages, 251. Occupancy table classified under "cause," "media" and "effect," 252. Contents tables, 254. Treatment of the exposure hazard, 255. The experience grading and rating schedule, 255. Copy of the Universal Mercantile schedule for non-fireproof buildings, 259. Sample page of occupancy table used in connection with the Universal Mercantile schedule, 272. Sample of basis tables used under the Analytic schedule, 273. Example of the calculation of a building rate under the Analytic system, 274. Sample section of the alphabetical occupancy table used under the Analytic system, 275. Sample illustration of a contents table used in connection with the Analytic system, 276.

245-277

CONTENTS XV

XIX. Undebwriters' Associations 278-293

Insurance inherently a cooperative enterprise,

278. Fire underwriters' associations classified,

279. Local associations, 280. Sectional associations, 280. National associations, 280. Membership and government, 281. Services rendered, 281. Fixing and standardization of rates, 281. Supervision of brokers and agents, 283. Economy in the conduct of business, 283. Uniform practices and forms secured, 283. Prompt and equitable adjustment of losses, 284. Elimination of objectionable practices, 284. Improvement in legislation, 284. Standardization and improvement of building laws, 284. Beduction in the fire waste, 285. Education of the public, 286. Anti-compact legislation, 287. State regulation of underwriters' associations, 288. Marine underwriters' associations, 289.

XX. FntE Prevention 294-309

American fire waste compared with that of Europe, 294. The per capita fire tax in the United States, 295. Expenditures for fire prevention a good investment, 296. Carelessness and thoughtless indifference as a factor in increasing fire loss, 297. Essential factors in fire prevention, 300. Management or housekeeping, 301. Equipment, 301. Construction, 301. Occupancy, 304. Prevention facilities, 304. Exposure hazard, 805. Necessity for fire prevention education in the schools, 306. Necessity for public regulation, 307.

XXI. State Supervision and Eegulation .... 310-323 Full supervisory control over insurance possessed by the several states, 310. Powers of the Insurance Commissioner, 311. Begulation of insurance by statute, 313. Incorporation, organization, and operation of companies, 314. Investment of capital, surplus and other funds, 315. Classes of insurance the companies may write, 317. Taxation of insurance, 319. Eeinsurance restrictions, 322. Begulation of agents and brokers, 322. Enforcement of standard policy provisions, 323. Imposition of liability for causing fires, 323.

XVI

CHAPTEL

XXII.

PAET II

MAKINE INSUEANCE

Types of Makine Insdbance Policies . . . Definition of mariae insurance, 327. Absence of a standard policy, 328. "Valued," and "Unvalued" policies, 329. "Voyage" and "time" policies, 330. "Interest" and "policy proof of interest" policies, 330. Classification of hull policies, 331. Policies adapted to the type of vessel, 331. Fleet insurance, 332. "Full form" and "total loss only" policies, 333. "Port risk only" policies, 333. Builders' risk insurance, 334. Protection and indemnity insurance, 335. Classification of cargo policies, 336. "Named" and "floating" policies, 336. Open cargo policies, 336. Blanket policies, 337. Transit floaters, 338. Marine insurance certificates, 338. Parcel post insurance, 339. Eegistered mail insurance, 340. Tourist baggage insurance, 340. Freight policies, 341. Specimen of marine insurance certificate, 343. Copy of Lloyd's form of policy, 344.

XXIII. The Marine Policy Analyzed

"On account of" and payee of the loss, 345. "Lost or not lost" and "at and from," 347. Description of the subject-matter, 348. Description of vessel and master, 349. Beginning and ending of the venture, 350. Deviation, 352. Valuation of the subject-matter insured, 353. Sue, labor and travel clause, 354. The consideration, 355. Settlement of the loss, 356. Capture, seizure, detention, blockade or prohibited trade, 357. The memorandum clause, 358. Subrogation clauses, 362. The collision clause, 363. The disbursements warranty, 364. The "Inchmaree Clause," 364. Specimen hull policy, 366.

XXTV. Marine Perils against Which Protection

Is Granted 374-;

Types of losses not assumed under marine policies, 374. The "perils clause" of the policy, 374. "Perils of the sea," 375. Fires, 376. Pirates, rovers and thieves, 376. Jettison, 377. Barratry, 378. Perils of war, 378. "All other perUs, losses and misfortunes, ' ' 380. Additional xvu risks assumed by endorsement, 381. Explosion, damage to machinery, and latent defects, 381. Theft, pilferage, non-delivery and breakage, 381.

XXV. Types op Marine Losses 383-393

Classification of marine losses, 383. "Actual" and "constructive" total loss, 383. Abandonment, 385. Definition and purpose of general average, 386. Procedure in adjusting general average losses, 388. General average legally independent of marine insurance, 390. Definition and nature of particular average, 391. Salvage, 393.

XXVI. Policy Endorsements in Marine Insurance 394-403 Multitudinous character of such endorsements,

394. Endorsements varying the memorandum,

395. Exempting underwriters from certain types of losses and expenses, 398. Prohibiting, restricting or regulating the carrying of certain commodities, 399. Defining the areas within which insured vessels may operate, 399. Defining the war hazard or otherwise modifying the enumerated perils, 400. Eelating to valuation of the subject-matter of insurance or adjustment of losses, 401. Extending underwriters' liability to additional or special risks, 402. Defining the duration of the risk, 402. Waiving important marine insurance principles in the interest of the insured, 403.

XXVII. Marine Insurance Bates 404-415

Judgment rating a necessity in marine insurance, 404. Importance of the individual insurance account, 405. Hull rates, 407. Natural forces and topography, 407. Construction, type and nationality of the vessel, 408. Classification societies and classification registers, 408. Policy conditions, ' 410. Cargo rates, 410. Character of the commodity, 410. Hazards and customs connected with the particular route, 411. Quality and suitability of the vessel used as carrier, 412. Duration of the voyage and policy conditions, 413. Operating record of the carrier as a factor in cargo rates, 413. Marine insurance rates subject to international competition, 414.

XVUl

PAET ni

AUTOMOBILE INSURANCE, FIDELITY AND COEPOBATE BONDING, TITLE INSUEANCE, CEEDIT INSURANCE, AND MISCELLANEOUS FORMS OF PEOPERTY IN- SUEANCE

CHAPTEB PAGE

XXVIII. Automobile Instjkance 421-457

Extent and general nature, 421. Public liability coverage and leading conditions governing the same, 422. Property damage coverage and leading conditions governing the same, 424. Factors governing public liability and property damage rates, 424. Collision coverage, 430. Definition of the coverage and leading conditions governing the same, 430. Factors underlying the determination of rates, 431. Fire and transportation coverage, 435. Definition of the coverage and leading conditions governing the same, 435. Factors underlying the determination of rates, 435. Endorsements relating to protective devices, restrictions on the underwriters' liability, and additional coverage, 438. Theft insurance, 439. Definition of the coverage, 439. Factors underlying the determination of rates, 440. Sample policy forms of the five types of coverage, 442.

XXIX. COKPORATE Bonding ■ 458-492

Definition and general nature, 458. The foUy of personal suretyship to the bondsman, 459. Advantages of corporate suretyship to the principal and obligee, 460. Development of corporate bonding, 463. Classification of bonds, 464. Fidelity bonds, 464. Public ofScial bonds, 464. Contract bonds, 465. Court bonds, 465. Customs and internal revenue bonds, 466. License, franchise, and permit bonds, 466. Depository bonds, 466. Miscellaneous group, 467. Factors governing the writing of fidelity bonds, 468. Considerations underlying the acceptance of the risk, 468. Salvages, 469. Punishment of defaulters, 470. Policy conditions, 470. Factors governing the writing of contract bonds, 471. Factors governing the writing of court bonds, 472. Factors govemingthe writing of depository bonds, 474. The premium, 474. Specimen copies of applications and policies, 476.

XXX. Title Insurance 493-524

General nature of the protection offered, 493. Known defects not assumed, 493. Term of the

XIX contract, 494. The premium, 494. Examination of titles by title insurance companies, 495. Losses paid by title insurance companies, 496. Types of policies, 497. Leading provisions of owners' policies, 497. The insuring clause, 497. Conditions under which the company becomes liable, 499. Excluded risks, 500. Prohibited acts invalidating the policy, 501. Duties of the insured, 502. Settlement of claims, 503. Leading provisions of mortgagees ' policies, 504. Nature of the coverage, 504. Obligations of the company, 505. Obligations of the insured, 505. Services rendered by title insurance, 506. Guaranteed first mortgages, 508. Mortgage certificates secured by individual mortgages, 508. Mortgage certificates secured by groups of mortgages, 511. Guaranteed first mortgages, 511. Safety of guaranteed mortgage investments, 512. Specimen copies of policies, 513.

ZXXI. Credit Insurance

525-562

Definition and purpose, 525. The need for credit insurance, 525. Benefits derived from credit insurance, 528. Eecent development of the business, 529. Methods of safeguarding the company, 531. The normal loss, 531. Coverage, 534. Coinsurance, 539. Different types of policies, 539. "Limited" and "unlimited" policies, 539. "Collection" and " noncoUection " policies, 540. Other leading policy provisions, 544. The application, 544. Term and renewal of the policy, 545. Definition of insolvency, 546. Method of adjustment, 547. Collateral benefits, 549. Termination, 549. Special endorsements, 549. The premium, 551. Specimen copy of application and policy, 552.

XXXII. Miscellaneous Forms op Property Insurance 563-576 Combined importance of such forms, 563. Burglary and theft insurance, 563. Plate glass insurance, 566. Steam boiler insurance, 567. Plywheel and engine breakage insurance, 568. Windstorm and tornado insurance, 569. Hail insurance, 570. Bain insurance, 571. Sprinkler leakage insurance, 572. Explosion insurance, 573. Biot, strike and civil commotion insurance, 574. Earthquake insurance, 575. Live stock insurance, 575.

Bibliography

577-584 585-601

PART I FIRE INSURANCE

Chapter I The Functions Op Fire And Marine Insurance 1

Definition of Insurance. — Fire insurance has been defined as "that social device for making accumulations to meet uncertain losses of capital through fire, which is carried out through the transfer of the risks of many individuals to one person or a group of persons. ' ' ^ The same definition is also applicable to marine insurance, except that the perils against which protection is granted comprise not only fire, but in addition, the perils of the sea, enemies, thieves, jettison, barratry, and other hazards of a like nature.

All industry involving the ownership of property is more or less subject to risk of loss through fire and the elements, and in all business enterprises it is the desire of the capitalist to eliminate this risk as far as possible. Three methods of elimination may be used: either the

*The best treatment of this subject is found in Allan H. Willett's "The Economic Theory of Risk and Insurance." Excellent brief discussions are also found in P. C. Moore's introductory chapter to his work on "Fire Insurance and How to Build," and in Biehard M. Bissel's lecture on the "Place of Fire Insurance in the Financial World." These sources, especially the first two, have been drawn on to a considerable extent in this chapter.

•Allan H. WiUett, ' ' The Economic Theory of Risk and Insurance, ' ' MacmiUan Co., New York, 1901, p. 106.

capitalist may adopt measures for preventing the origin and spread of fire; or he may decide to carry the risk himself, and as a consequence pay a higher rate of interest on the capital he borrows and puts into the business ; or he may buy insurance, and for a definite sum, called the premium, transfer the risk to some other person, or group of persons, called the insurer.

All three of these methods are used by the capitalist of to-day, and the cost of each enters into the cost of production. The extent to which each is used will depend chiefly upon its relative cost. Statistics, however, show that during each succeeding decade a larger proportion of the country's wealth, subject to the uncertainty of loss through fire or marine perils, has been protected by insurance placed with corporations.

Extent of Fire and Marine Insurance Business. — The fire and marine insurance business of the country, and for that matter insurance along all important lines, has had a most remarkable development during the last twenty-five years. Less and less of the total risk is borne by the capital in the industry, and more and more reliance is placed upon insurance and fire prevention. Competent estimates " place the value of property in the United States protected by fire insurance in excess of $100,000,000,000. About ninety per cent of the insurance written in the United States, it is estimated, is reported to the Insurance Department of the State of New York, and at the close of 1918 this business was distributed approximately as follows: American stock companies, $58,000,000,000, foreign stock companies, $21,- 000,000,000, and mutual companies (all classes) $6,000,- 000,000. It is also estimated that at the close of 1918 the

"Report of Special Committee on Fire Waste and Insurance to the Chamber of Commerce of the United States, 1918.

factory mutuals of the country carried risks aggregating approximately $5,000,000,000, and farmers' mutuals about $6,000,000,000. A special Committee on Fire "Waste and Insurance recently reported to the Chamber of Commerce of the United States that "the total cost of the fire hazard in the United States cannot be far from $750,000,000 a year." Of this total the value of property burned per iyear averages approximately $300,000,000, whereas in years of catastrophe the total rises to $500,000,000. But to this actual loss there must be added another quarter of a billion dollars to eover the expense of operating the insurance business in all its forms. There must also be added the heavy costs involved in the equipment and maintenance of fire departments and other similar agencies. To quote the Committee's report: "In 1918 one hundred forty-six of the two hundred twenty-seven cities of the United States exceeding thirty thousand in population spent $52,000,000 for operation of fire departments alone, or more than one-fourth of the sum they spent for schools. Sixty-nine of these cities had, in addition to $115,000,000 invested in buildings and equipment for fire departments, $1,200,000,000 invested in watersupply systems, a portion of which (perhaps one-fourth) should be chargeable to fire fighting."

Marine risks written and renewed during 1918 by all companies, domestic and foreign admitted, operating within the United States, exceeded $66,000,000,000. Of this total, branch offices of admitted foreign companies wrote or renewed 58.4 per cent, American companies controlled abroad through stock ownership, 5 per cent, and American companies, 36.6 per cent. These figures, however, do not reflect the total marine insurance originating in the United States. Competent underwriters estimate that at least 20 per cent of all marine insurance originating in this country is exported directly abroad by brokers and others to be placed with non-admitted underwriters or with the home offices of admitted foreign companies.*

Benefits Derived from Fire and Marine Insurance. — "Substitution of certain for uncertain loss." — Viewed from the standpoint of society in general, as contrasted with the individual property owner, the economic value of fire and marine insurance is indirect rather than direct in character. It is apparent that the insurance of property does not in the least reduce the amount of fire waste. During the last fifteen years, 1906 to 1920 inclusive, over $3,680,000,000 worth of property, representing an average annual loss of $245,000,000, was destroyed by fire in the United States. This enormous amount of property, wasted annually by fire, is gone forever. It is not replaced by insurance, since the insurance company has merely collected premiums from the many whose property is not destroyed, in order to indemnify the unfortunate owners whose property is lost.

If insurance, therefore, does not prevent the destruction of property, and does not directly increase the wealth of the community, to what shall we attribute its principal value? The answer is that the real gain derived from insurance is due to the combination of a large number of separate risks into a group, thus making possible the "substitution of certain for uncertain loss." The larger the number of separate risks combined in a group, the less uncertainty will there be as to the amount of loss, since the law of average will apply with greater precision ; and the less uncertainty of loss, the smaller is the accumulation of money necessary from the many to meet the losses of the few. In fact, if the aggregate of risks combined in a group were so large as to make the application of the