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Home -> Orville Marcellus Powers -> Commerce and Finance -> Chapter XXXIX

Commerce and Finance - Chapter XXXIX

1. Chapter I

2. Chapter II

3. Chapter III

4. Chapter IV

5. Chapter V

6. Chapter VI

7. Chapter VII

8. Chapter VIII

9. Chapter IX

10. Chapter X

11. Chapter XI

12. Chapter XII

13. Chapter XIII

14. Chapter XIV

15. Chapter XV

16. Chapter XVI

17. Chapter XVII

18. Chapter XVIII

19. Chapter XIX

20. Chapter XX

21. Chapter XXI

22. Chapter XXII

23. Chapter XXIII

24. Chapter XXIV

25. Chapter XXV

26. Chapter XXVI

27. Chapter XXVII

28. Chapter XXVIII

29. Chapter XXIX

30. Chapter XXX

31. Chapter XXXI

32. Chapter XXXII

33. Chapter XXXIII

34. Chapter XXXIV

35. Chapter XXXV

36. Chapter XXXVI

37. Chapter XXXVII

38. Chapter XXXVIII

39. Chapter XXXIX

40. Chapter XL

41. Chapter XLI

42. Chapter XLII

43. Chapter XLIII

44. Chapter XLIV

45. Chapter XLV

46. Chapter XLVI

47. Chapter XLVII

48. Chapter XLVIII

49. Chapter XLVIX

50. Chapter L

51. Chapter LI

52. Chapter LII


Boards of Underwriters are associations composed of the
representatives, managers or agents of insurance companies
doing business within the state in which the association has
jurisdiction. Such boards are either organized under the laws
of the state, or are voluntary organizations for mutual benefit
and protection.

It is the function of Boards of Underwriters to prepare and
apply schedules for rating the risks located within their juris-
diction. At the present time, as schedule rating is little more
than in its infancy, there are many inconsistencies in rates on
similar risks in different localities. Gradually as the scheme of
schedule rating develops, the comparisons of experience of dif-
ferent localities and the suggestions from central
organizations of companies will equalize these in-
consistencies and make the schedules more uni-
form. It will not be long before the merchant or manufacturer,
who now has the satisfaction of knowing that his local competi-
tors are rated under the same schedule as himself will have the
added satisfaction of seeing his outside competition rated under a
schedule so similar that it amounts to the same for all practi-
cal purposes. Nevertheless, it will always be true that certain
classes of risks will be more profitable in one locality than in
another. This, by reason of natural advantages and the absence
of moral hazard, and this the fire insurance rate must always
take into account. Absolute uniformity in schedules throughout
a wide territory is hardly practicable on that account.


In addition to the business of making rates, the local board
of underwriters has other and important duties to perform. Its
corps of trained inspectors is constantly at work to reduce the
local fire hazard by requests, failure to comply with which, after
a reasonable time, subjects a risk to an increased rate for poor
condition. The local board of underwriters stands also as the
protector of the public water supplies, and it has not infrequently
happened that boards of underwriters, in large cities, have
brought about the separation of the fire department from politics.
Intelligently administered, a local board of underwriters can
be of large service in a public way.

With the exception of rates of insurance on residence prop-
erty, practically all fire insurance rates are now based on an
amount of insurance to be carried equal to 80 per cent, of the
actual cash value of the property insured. This agreement,
which is a special one written in the policies, is variously known
as the "80 per cent, clause" or the "reduced rate agreement."

Its present use grew out of conditions such as
co-insurance this: One merchant with a stock valued at $10,-

000 rating 1 per cent., insured his stock for $4,000
at an annual premium of $40, carrying the rest of his risk him-
self. Another merchant also with a stock valued at $10,000 and
a 1 per cent, rate would insure for $8,000 and pay an annual
premium of $80. In case of a $2,000 loss on each of these stocks,
the companies would sustain a 50 per cent, loss on
the first stock and a 25 per cent, loss on the second. That is,
the companies would be obliged to pay $2,000 on a $4,000
policy in one case and $2,000 on an $8,000 in the other. In
case of a $4,000 loss on each stock, the loss to the companies
would be total in the first case and 50 per cent, in the other. A
plan of rating which permitted such inequality was certainly
wrong. The merchant carrying 80 per cent, insurance in this
case, was twice as good a risk to the companies as the merchant
carrying 40 per cent, insurance, and it became evident that the


rate must be conditioned on some definite percentage of insur-
ance to be carried. Eighty per cent, insurance was generally
agreed upon as a fair requirement. Companies were quite willing
that the property owner should be interested in his own risk,
to the extent of taking the last 20 per cent, of fire risk, if he
desired to do so. There is nothing in the 80 per cent, agree-
ment, however, which prohibits a property owner from insuring
100 per cent, of his value, if he prefers. He may likewise, if he
chooses, carry but 70 per cent, insurance, in which case he pays
10 per cent, additional rate, for the greater liability to the com-
panies of a heavy loss. For 60 per cent, insurance, 20 per cent,
penalty is added, and for 50 per cent, insurance, the penalty is
30 per cent. With less than 50 per cent of insurance, few com-
panies would carry an ordinary risk.

Notwithstanding its general use, the 80 per cent, clause is
widely misunderstood by intelligent business men, the common
fallacy being that under this clause the companies agree to pay
80 per cent only of a loss. The actual operation of an 80 per
cent, agreement, in case of a loss, can best be illustrated by
examples: Suppose a stock, the cash value of which is $20,-
000, requiring $16,000 of insurance under the 80 per cent, agree-
ment, should be partially destroyed. In the first example, let there
be $10,000 insurance, the companies pay ten-sixteenths and the
owner loses six-sixteenths. In the second example, have $12,-
000 insurance, companies pay twelve-sixteenths and owner loses
four-sixteenths. In the third example, with $14,000 of insurance,
companies pay fourteen-sixteenths, owner loses two-sixteenths.
In the fourth example, there is $16,000 insurance. Here the
conditions of the guaranty are complied with, and the companies
pay all of the loss provided it does not exceed the face of the
policy. If over 80 per cent, of insurance is carried, the guaranty
is still fulfilled, and the companies pay the entire loss. In such a
case, however, the loss would be spread over a larger amount of
contributing insurance and fall lighter on each company, if
there were more than one company.


It is desirable, on occasion, for an insurer to secure a policy
covering property indefinitely located, as, for instance, covering
merchandise, being received at and shipped from freight depots
and docks. Or on rented pianos beyond the control of the owner.

Or on merchandise being manufactured and in the
insurance hands of tailors or other artisans. In such cases,

and they are numerous, it is usually possible to
secure a "floating policy," covering anywhere, with some rea-
sonable restriction as to the amount for which the company
shall be liable in one fire, and a further provision as to the per-
centage of insurance to be carried. Such floating policies are
usually at a relatively high rate, because of the uncertain and in-
definite liability assumed by the company.

It is often convenient for a merchant occupying two or more
buildings, or a manufacturer with a plant consisting of several
buildings, to secure a policy covering stock in the several build-
ings or covering the entire manufacturing plant and its contents.

This can ordinarily be done under what is termed

" a blanket policy" which is written to cover the

entire subject of the insurance in or on the several
buildings. The rate for a blanket policy is arrived at by calculat-
ing the premium on the value in or on each specific building at
its individual rate, and dividing the aggregate premium thus
obtained by the total amount of insurance. The result would be
the average rate.

An insurance contract is not, as some think, a "promise to
pay" a specified sum in case of fire. Neither is it, as some would
have it appear, a one-sided contract by which the company can
avoid a legitimate claim. In the nature of the case an insurance

contract is drawn in general terms to be used in
contract a variety of conditions, and it cannot have the

directness or brevity of a single and ordinary con-
tract between two parties. There are a few general features,
however, of an insurance policy or contract, which, if known,


would assist greatly in a clear understanding of its terms, and
do much toward the avoidance of possible differences. At the
outset let it be understood that the insurance contract is per-
sonal. It insures somebody (not anybody) against loss by fire.
Any change in ownership must be consented to by the company
in writing. The subject of the insurance must be definitely set
forth in the written portion of the contract, A policy on a
stock of boots and shoes, for instance, does not cover groceries
or dry goods. Any change in the character of the property
insured should be immediately and fully endorsed in writing
on the policy.

In lines 16 and 17 of the New York Standard Policy, it is
stated that the entire policy shall be void "if the interest of the
insured be other than unconditional and sole ownership/' "un-
less otherwise provided by agreement endorsed hereon." Failure
to conform to this provision of the contract is pro-
lifi c ^ trouble. If the ownership is not sole and un-
conditional, the character of the ownership should
be fully set forth. For illustration, if a building stands on
leased ground, if the ownership of property is partial or con-
tingent, if the property is incumbered or under contract, these
facts should be clearly stated in the policy.

The policy also provides that any change in title or posses-
sion of the property will render the policy void unless consent
of the Company is first obtained in writing. The object of this
requirement is to place the Company in possession of all facts
relative to each risk. If a change is made for any cause then
the party insured should notify the Company through its local
agent and obtain written consent to the change.
^ the party insured disposes of his interest in any

property covered by a policy of insurance it is
absolutely necessary that the policy should be assigned to the
purchaser and consent of the Company obtained to the transfer
or the policy will become void. A change from an individual


ownership to that of a copartnership, or to an incorporated
company, or where one partner retires from a firm or a new
partner is admitted to the firm, is a change of ownership of firm
property and affects the insurance at once, making the policy
void unless the company is notified and its consent obtained in

In lines 39 to 44, inclusive, of the New York Standard
Policy are set forth certain articles which are not insured unless
specifically named:

"Unless liability is specifically assumed hereon, no loss to
awnings, bullion, casts, curiosities, drawings, dies, implements,
jewels, manuscripts, medals, models, patterns, pictures, scientific
apparatus, signs, store or office furniture or fixtures, sculpture,
tools; nor property held on storage or for repairs; nor, beyond the
actual value destroyed by fire; nor loss occasioned by ordinance
or law regulating construction or repair of buildings; nor by in-
terruption of business, manufacturing processes, nor otherwise;
nor for any greater proportion of the value of plate glass, fres-
coes, and decorations than that which this policy shall bear to the
whole insurance on the building described/'

If any of these are to be insured, they must be incorporated
in the written portion of the policy. With the exception of
certain floating policies, already described, an insurance policy
covers property "all while contained," in a certain specified
building or buildings. Any change of location therefore should
be at once endorsed on the policy.

Lines 11 to 30 of the Standard Policy set forth certain con-
ditions under which the policy is voided, unless consent is en-
dorsed in writing. Generally stated (and excepting reference
to title, already explained) these conditions are: The procure-
ment of other insurance, the operation of a factory after 10 P. M.
or ceasing to operate for more than ten consecutive days, any
increase of hazard within the control or knowledge of the in-
sured, the making of extraordinary alterations or repairs, the use


or storage of volatile products of petroleum or other explosive
or highly inflammable substances, the vacancy or non-occupancy
of a building for more than ten consecutive days. Permission
for any of these may be obtained, in ordinary cases, on applica-
tion to the agent of the company, which permission should be
fully endorsed in writing on the policy. It should always be
remembered that a fire insurance policy is a contract, subject to
the general law of contracts, that usage does not nullify its
conditions and that once voided, it can only be revived by the
consent of both parties.

"When it is desired to place a policy of fire insurance as
collateral security with a bank, or with a mortgagee no written
assignment is necessary, but in such cases the policy should
contain a clause "loss, if any, payable to -

as his interest may appear." This is the "loss
payable clause" and is usually made in favor of
the trustee of the trust deed securing the loan. This clause
must be inserted by the company or its agent.

Among Insurance Companies it is the custom for some com-
panies to issue a policy for a larger amount than they desire to
carry themselves and in order to reduce their line on the risk
they ask some other company or companies to re-insure their
liability under the policy for a certain amount, and for this
they pay the other company a consideration called the pre-
mium. The original insured has no claim on the re-insurance,
his contract being with the company whose policy he holds.

Comparatively few policy holders sustain a fire loss. Other-

wise the companies could not afford to issue $1,000 policies at an

average premium of about $10. There must be a goodly per-

centage of "safe risks." Nevertheless there is but

LOSS claims one way to transact fire insurance business, i. e.,

on the theory that there will be a loss and at once.

A fire insurance company conducting its business on any other

theory would become insolvent and a merchant or manufacturer


who is careless, negligent or tardy about his fire insurance
will very likely come to grief. It behooves a man to place in-
surance at once when the need for it arises, have the policy is-
sued, examined, paid for and put away for safekeeping with the
same care and promptness that marks his banking or other im-
portant business.

When a loss comes, there is a natural and regular order to
pursue, attention to which will save time and expense to the
insured and company alike. First, notify the company or its
agent. Then set about diligently to protect the property from
further loss. After doing this set out to carefully ascertain the
amount of the loss. If the property is a building, have com-
petent persons furnish an estimate of the cost of repairing the
damage. If the property is personal, prepare a schedule, setting
forth in one column the sound value, and in the other your
opinion of the loss or damage. With specific information of
this character in your possession you are in a position to ne-
gotiate with the company's adjuster intelligently and promptly.
In case of disagreement with the company as to the amount of
loss the policy provides for an appraisal by three competent and
disinterested persons; one to be selected by the insured; one by
the company, the two thus selected choosing the third. If the
property is personal and totally consumed by fire, the value of
a good set of books and a complete inventory cannot be over-

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