INDEMNITY FOR LOSS BY FIRE.
HISTORY; CLASSES OF COMPANIES; RISKS; RATES.
In the "Wealth of Nations" the author* expresses the philos-
ophy and purpose of fire insurance in the following: " The
trade of insurance gives great security to the fortunes of private
people, and by dividing among a great many that loss which
would ruin an individual makes it fall lightly and easily upon the
whole society/' Fire insurance makes commercial credit pos-
sible. Without it business would be restricted to a cash basis
and the future would be uncertain and unsafe.
^ re i nsurance became a necessity when people
began to accumulate property of a destructible
character. Prior to 1666, the only sort of indemnity obtainable
against loss by fire was to be secured in membership in guilds
or associations having for their object, or one of their objects,
mutual relief in case of fire loss. The great fire of London, how-
ever, which raged continuously for four days from September 2,
1666, opened the eyes of the world to the possibility of loss by
fire. Insurance by individuals, which is a common practice in
England at this time, became a business. Companies were or-
ganized and one of them established in 1696 has survived the
test of time and is in existence today. Primarily, these com-
panies were organized to extinguish fires in property belonging
to members, which property was ordinarily marked by a tin
sign. Incidentally the company assumed the loss by fire. The
"lire department" idea soon passed away, and the insurance
feature only remains; and it has become an integral part of our
modern commercial structure.
There are three kinds of insurance institutions: 1. Lloyds*
or Individual Underwriters, 2. Mutual Companies and (3)
Stock Companies. In the Lloyds system an individual, or a
group of individuals acting each in an individual capacity
through a common attorney, enter into a contract of insurance.
The insurer known as the "Underwriter" in this case, personally
receives the premium and pays the loss, and the
Lloyds contract is just as good as the man or the men
back of it. The noticeable disadvantage of this
plan of insurance is the necessity, in case of disagreement as
to the amount of the loss, of bringing legal action against each
one of the individual underwriters separately. It is also diffi-
cult to ascertain the present or future responsibility of the un-
derwriters who are obliged neither to make statements nor to
maintain reserves for unearned premiums or other liabilities.
In England, this system of Lloyds or individual insurance has
assumed large proportions and has attained a recognized stand-
ing commercially. In the United States the system is compara-
tively unknown. Whether it can adapt itself to our conditions
successfully, is yet to be seen.
In the mutual company every member assumes a portion of
every other members' risk. The policy holders are the company.
If a loss is sustained, the policy holders are assessed proportion-
ately for the loss. Theoretically, this system of
companies ^ Te insurance should be workable; practically it has
never been successful, except in a local or special
way. Mutual fire companies confining their operations to locali-
ties where values are widely distributed, as in the case of farming
* The term Lloyds originated from a coffee house kept by Edward Lloyds
In Tower street, London, about 1688, where merchants and ship-owners
were accustomed to meet, and responsible individuals would assume risks,
either severally or jointly, for a premium consideration.
356 FIRE INSURANCE.
communities, for instance, have lasted. It is also true that
mutual fire companies, making a specialty of certain classes of
isolated manufacturing properties have been successful. But
the history of mutual fire companies, with the exceptions noted,
has been unsatisfactory in the United States.
The stock company is the fire insurance company as we com-
monly know it. It is a corporation with a paid up capital.
If conservatively conducted, it will also accumulate a
considerable surplus for the conflagrations which are sure to
come. This company files and publishes annually, statements of
its condition. It is examined by the state periodically or on
occasion, if an emergency arises. Its policies are
com ames ^ a standard prescribed by law, and its agents are
licensed by the state in which they reside. The
stock company is compelled by law to set aside a specified part
of its premium income as "unearned premium." So far in the
experience of this country, this system of insurance has appeared
to be best adapted to our needs and most satisfactory for general
The legislatures of a number of the states have passed laws
prescribing the kinds of policies that companies may use in those
states. These are called standard policies. The so-called New
York Standard Policy has been adopted in a large number of
the states as the legal policy. In addition to this, many of the
states have enacted statutes making it obligatory upon fire
insurance companies to submit their books, vouchers and securi-
ties to the inspection of an examiner appointed by the governor
of the state.
The consideration in an insurance policy is called the premi-
um. The premium is calculated at so many dollars or cents per
$100 of insurance, which is known as the rate. For example, at
$1.50 rate, $3,000 of insurance gives a premium of $45. This
is the annual premium. Policies for shorter periods
than one year are written at what are called short rates. If the
annual rate is $1.00, the short rate for one month would be 20
cents; for two months, 30 cents; for three months, 40 cents, etc.,
the rate for the period becoming relatively smaller
Rates as the period approaches one year. There is an es-
tablished table of short rates showing the rate
for every possible number of days in the 365, composing
the year. On certain classes of property, term policies, or policies
for longer than one year, can be secured. On residence property,
it is the prevailing practice to write two-year policies for one
and one-half annual rates, three-year policies for two annual
rates, and five-year policies for three annual rates. The entire
term premium must be paid in advance, but the saving effected
by this plan of term insurance is considerable, and amounts to
a large interest on the anticipated portion of the premium, as
may be readily ascertained by an easy calculation.
The rate, which is the prime factor in the estimation of the
insurer, may be determined in either one of two ways. First, it
may be made arbitrarily upon the judgment of a competent
and experienced person, after a personal examination of the
property to be insured. Such rates are designated "flat rates,"
and until recently nearly all the fire insurance rates were "flat
rates." The objections to such rates were that
schedule Rates they were not susceptible of analysis or explana-
tion, and being made by different persons or the
same person under diverse influences, they were often more or
less inconsistent. Most of the fire insurance rates in late years
are the products of schedules. The schedule for frame buildings
is a comparatively simple one. There being no special points of
construction to be considered, the schedule has reference prin-
cipally to the matters of occupancy and exposure.
The schedule for brick buildings is a more complicated affair.
In this case there is a basis rate for a standard building not over
a stated height and specified ground area. The figure set for this
standard building is known as the "basis rate," and it is intended
358 FIRE INSURANCE.
to measure the sufficiency of the local water supply and fire pro-
tection, together with other conditions calculated to affect the
general fire risk of the locality. To this basis rate
Basis Rate is added charges (made according to carefully pre-
pared tables compiled from the best obtainable ex-
perience) for the following items entering into the fire risk.
The items here given are from the schedule for brick mercantile
buildings of ordinary construction in use at present in the City
of Chicago, Illinois.
1st. Height. For each story over the standard height, a
charge is made; this charge increases with the stories, because
the difficulty of reaching and extinguishing a fire increases in
proportion to the height of a building.
2d. Area. The risk of spreading fire increases directly as
the area of the building and a charge is made for area, over
3d. Walls. To protect the building from adjoining build-
ings and to bear the weight of its contents, a building should
have walls of certain strength, and deficiency in that respect is
charged for in the schedule.
4th. Communications. An opening into an adjoining build-
ing makes possible the communication of a fire. If the com-
munications are unprotected, the buildings are rated as one risk.
If the communications are protected by proper iron doors, there
is a charge made on the theory that the doors may not be shut
in case of fire; this charge increases with the number of such
5th. Exposures. Charge is made for exposure based upon
the seriousness of such exposure, its nearness and the precau-
tions taken to guard against the exposure.
6th. Elevator shafts. Unless built of non-combustible ma-
terial with fire-proof doors at each floor, an elevator shaft acts
as a flue to carry a fire to every floor in the building, and is
heavily charged for under such circumstances.
7th. Floor openings. Stairs and other minor floor open-
ings act much as an elevator shaft, though in less degree, and
they are charged for accordingly.
8th. Condition. It is becoming more and more the prac-
tice in schedule rates to charge for unsafe condition of premises.
These charges are intended to be temporary in their nature, and
are supposed to measure the hazard existing by reason of poor
condition of premises. As soon as the premises are put in safe
condition the charge is removed. By reason of careless man-
agement, however, charges for condition often amount to a
permanent charge, and become an unnecessary tax on the
Credits are allowed for protection intended to prevent the
inception or the spread of a fire. Stand pipes with ladders on
buildings, giving assistance to firemen, are the basis for a credit
of one cent for each story. Automatic fire alarm service, or
telephone watch service reporting to a central station is a
large measure of protection, and for these a credit of ten per
cent, of the building rate is ordinarily allowed.
Credits Special construction, such as open mill construc-
tion, and other superior construction, is encour-
aged by an allowance in the rate. Automatic sprinklers (a sys-
tem of piping through a building with faucets which are opened
by the melting of a fusible link, back of which are adequate
water supplies in gravity or pressure tanks), afford the best
protection known at this time against the spread of fire, and for
this system of protection a very considerable credit is allowed in
the insurance rate.
There are other charges and credits, but the ones cited will
suffice to explain the theory on which the unoccupied building
rate is constructed in the process of schedule rat-
Building Rate ing. After the unoccupied building rate is ascer-
tained, a charge is made for the occupancy, accord-
ing to the hazard of such occupancy, and the result is the rate
360 FIRE INSURANCE.
at which the building insurance is written. Applying these
principles for an example, we might find such a case as this:
"Basis rate" (4-story) $0.40
Height (6 stories) .15
Area (5,000 ft. excess) 10
Walls (deficient 2 stories) 04
Communications (one protected) 10
Exposure (frame no shutters) 15
Elevator Shaft (lath and plaster) 10
Floor Openings (6) 06
Gross unoccupied building rate $1.10
Credit for standpipe and ladder. . . .$0.06
For automatic alarm (10 per cent.). . .11 .17
Unoccupied building rate 93
Occupancy Crockery with packing 10
Occupied building rate $1.03
Having ascertained the rate on the building (which in this
case is made more than ordinarily complex, for the purpose of
illustration) the next step is to calculate the rate on the contents.
On the theory that any brick building is better than its con-
tents, there is added to the occupied building rate a certain sum
intended to measure the susceptibility of the contents to damage
by fire or water. For example: Boots and shoes
contents i* 1 cases would classify twenty-five cents more than
the building. An open stock of dry goods, 50
cents; a millinery stock, 80 cents, and a stock of tobacco, $1.00.
Taking the crockery stock, for example, there would be added
to $1.03 (the occupied building rate) 45 cents for a crockery
stock, making the rate on the contents, $1.48 per $100 of in-
surance per annum.
If there is more than one tenant in the building, on the
theory that each additional occupant introduces some moral
and physical hazard, there is a charge made, the amount of which
charge is determined by the nature of the occupation. If a
stock of merchandise occupies but one floor in a build-
ing, it is charged for location. The grade floor is standard, with
no charge for location. In the basement, ten cents are added
for liability to water damage, while above the first floor, the
"loading"* for each floor is the square of the floor occupied. For
example the loading for the second floor is four cents, the third
floor nine cents and so on. The loading for stocks occupying
more than one floor is obtained by striking an average for the
floors occupied. When the entire building is occupied by a
single concern no floor loading is made.
For buildings of fire-proof construction there is a "fire-proof
schedule," designed to meet the different and complex conditions
found in this important class of risks. Likewise for manu-
facturing risks, there are special schedules intended to measure
the hazards existing in the different processes of manufacture
with credits for safeguards calculated to eliminate or reduce such
*Loading is a term used for additions to the basis rate on account of
location or ot v er special conditions.