Instructional materials for a unit on insurance in a business law class

Citation preview

INSTRUCTIONAL MATERIALS FOR A UNIT ON INSURANCE IN A BUSINESS LAW CLASS

A Project Presented to the Faculty of the School of Education The University of Southern California

In Partial Fulfillment of the Requirements for the Degree Master of Science in Education

by Edward Lewis Alberts August

1950

UMI Number: EP46164

All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion.

Dissertation PH&HsNng

UMI EP46164 Published by ProQuest LLC (2014). Copyright in the Dissertation held by the Author. Microform Edition © ProQuest LLC. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code

ProQuest LLC. 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106-1346

/ f e d

'S-/

4

3S ¥

T h is p r o je c t r e p o r t , w r it t e n u n d e r the d ir e c tio n o f the candidate's a d v is e r a n d a p p r o v e d by h im , has been p resen ted to a n d a ccep ted by the F a c u lt y o f the S c h o o l o f E d u c a t io n in p a r t i a l f u l f i l l m e n t o f the re q u ire m e n ts f o r

the degree

o f M a s te r of

Science in E d u c a tio n .

Date

LLj.J.S-SO

A d v is e r

Dean

TABLE OP CONTENTS CHAPTER I.

II.

PAGE

THE P R O B L E M ' ....................................

1

I n t r o d u c t i o n ..................................

1

Statement of the p r o b l e m ............

3

Justification of the s t u d y .................

4

Review of previously related studies ........

6

BASIC INSURANCE CONCEPTS .......................

8

Insurance, its size and s c o p e ...............

8

The function of insurance, definitions . . .

9

.........................

10

Types of hazards Suggested device

............

14

Insurance from the underwriters1 point of v i e w ......................................

14

Suggested d e v i c e .....................

20

R i s k ........................................

20

Degree of r i s k ..............................

21

Value of r i s k ..............................

21

Theory of expectation of l o s s .............

22

Insurable risks

...........................

23

Risk the basis of s a l e .....................

24

Suggested device ...........................

24

Premium payments as l o s s e s .................

24

Underwriters eliminate theirown risk

25

...

The law of large n u m b e r s ...................

25

iii CHAPTER

PAGE Theory of probabilities

...................

26

Suggested device ............................

27

Statistical data necessary

...........

27

...............

29

The triangle of i n s u r a n c e .................

30

Reinsurance and surplus

31

Selection of risk

Surplus funds

. . . . .

..............................

32

Suggested device ........................... Insurance versus gambling

III.

32

.................

33

Insurable interest ...................

34

Suggested device ............................

38

TYPES OP INSURANCE C O M P A N I E S ...................

39

Suggested device ..............................

40

Stock c o m p a n i e s ..............................

40

Lloyds underwriters

.................

44

.....................

46

. . . .

Pure assessment mutuals

Advanced Premium m u t u a l s ....................

.

47

Reciprocal insurance .........................

49

Fraternal organizations

53

.....................

Hospital associations and physicians and surgeons associations

.....................

54

..............................

54

State f u n d s ..................................

55

Summary of c h a p t e r ............................

55

Factory mutuals

iv CHAPTER IV.

PAGE

AUTOMOBILE I N S U R A N C E ................v ..........

58

Introduction to automobile insurance ........

58

Suggested device ...........................

59

Automobile insurance .................... Liability insurance

...

59

.........................

60

National standard f o r m ....................

.

6l

Three main sections of the standard

62

automobile f o r m ......................... Insuring agreements

.......................

62

insuring agreements, defense, settlement, .....................

other payments

Policy period, territory, purposes of use

64 .

69

E x c l u s i o n s ..................................

70

C o n d i t i o n s ..................................

73

. . . . . .

76

.......................

8l

C h a n g e s ..................................

82

Cancellation ..............................

83

Declarations ..............................

84

Financial responsibility laws Subrogation

. .

Collision insurance

.........................

Fire, theft, and comprehensive policies The comprehensive fire and theft policy Medical payments coverage

... . .

...................

Summary of automobile insurance

...........

85 89 92 93 95

V

CHAPTER V.

PAGE

AUTOMOBILE INSURANCE AND THEFINANCE COMPANY .

.

Vendor's interest only ....................... VI.

VII.

HEALTH AND ACCIDENT I N S U R A N C E ............. .

97 101

.

103

Suggested device ..............................

108

SUMMARY AND C O N C L U S I O N S ....................

BIBLIOGRAPHY

. .

109

...................................

Ilk

A P P E N D I X E S ............................................. APPENDIX A.

116

Approved mutual and reciprocal automobile insurance companies operating within the state of California

APPENDIX B.

. . .

..................

Definitions of terms frequently used in i n s u r a n c e ...............

APPENDIX C.

116

118

Specimen copy, travel and pedestrian accident policy .....................

158

CHAPTER I THE PROBLEM «* / *v * *

INTRODUCTION The purpose of this study was to develop a suitable unit of instructional material on insurance for the use of a high school business law teacher. Educated by advertising, the United States is insurance conscious, but not insurance wise.

The part

schools played in this failure to provide needed insurance training is easily understandable.

Only in recent years has

the trend toward non-vocational subjects in business educa­ tion been inaugurated.

Since the days of the business

college, business education has concerned itself with typewriting, shorthand, and bookkeeping.

There were no

courses in the secondary curriculum wherein insurance could be taught.

The commerce curriculum was strictly vocational.

It was intended to train typists, stenographers, and book­ keepers; and unfortunately its graduates were, in most cases, wholly lacking in occupational intelligence.

This lack of

understanding of the basic organization and procedures of business was soon evidenced in complaints from business men, and in the writings of progressive leaders in business education.

This evolution of thought, however, cannot be

2 described as a revolution.

The fact remains that even today

some high schools still offer only the three basic business subjects, and some of these high schools are in highly urbanized communities. As the non-vocational subjects began to assume their rightful importance, two subjects of extremely high value to high school youths began to extend their influence into the high school curriculum.

Their need was demonstrated to be

of paramount importance by business men, graduates, and educators alike.

These two subjects were salesmanship and

business law. A study of the various business law texts used in progressive high schools has shown that the teaching of insurance can still be greatly improved in the following aspects and areas of instruction:

(l) the time spent and

the material covered is not sufficient; (2) many writers still allow the student to retain the fallacious idea that some types of insurance are, in reality, good investments; (3) insurance is not presented as an immediate personal use subject; (4) little is indicated to make the student wary of the exclusions in most insurance contracts; (5) current textbooks fail to emphasize that insurance buyers are receiving protection, or not receiving it as in most cases, according to what is apparent from the large type on the

3 face of the policy, or from the advertisements; (6) students'"' still believe that insurance eliminates loss, they fail to realize that every time they pay a premium they are indeed taking a genuine and definite loss; (7) insurance is still being taught without an actual policy at hand; (8) some students still believe that insurance is gambling, that the policy holder wagers the premiums he pays that some hazard will occur to some person or object in which he has an insurable interest, and that insurance companies are organized to take the wager. Some of the other problems this study dealt with con­ cern the importance of choosing the right type of insurance company.

Special attention has been given to those types of

companies where the policy holder can be legally assessed for the insurance company's insolvency due to a catastrophe or poor management. The problem also involves determining what information is needed by students to purchase intelligently automobile insurance, health, and accident insurance. Statement of,the problem.

The purpose of this study

was to determine the kinds of insurance that should be taught on the secondary school level, what types of companies make this insurance available; and what knowledge the student must possess in order to buy insurance wisely, to be insurance

4 wise, not merely insurance conscious. Justification of the study.

As a nation this country

is insurance conscious but not insurance wise.

This state­

ment not only describes the problem this study dealt with, but also emphasizes the justification for the study. In the last analysis, insurance is a contract between the insurer and the insured.

It Is a contract containing a

multitude of verbalistic phrases and paragraphs In fine print.

A prospective insurance purchaser who carefully reads

and understands a policy before buying it is rare indeed. Equally rare is the insurance salesman who will point out the exclusions and faults of his policy to the prospective purchaser.

This creates an unfortunate situation costing

insurance purchasers literally millions of dollars.

Even

more serious than the actual cost in dollars is the fact that cheap, inadequate insurance policies are sold to consumers in the lower income brackets instead of the better policies that would provide adequate coverage when the need arose.

People in these lower income brackets are induced to

buy this type of policy because salesmen know that low premiums will have a definite appeal to low income groups. The tragic fact remains that the purchasers actually do not possess any reliable protection yet they believe they do. In February of 19^3* the Federal Life and Casualty

5 Company denied recovery on a health policy issued to a woman in Pittsburgh, Pennsylvania because during an appendectomy the doctor corrected another related condition during the operation.

This woman was insurance wise, and sued the

company for recovery for the operation. " 'To deny recovery (on the policy) in this case,1 the judge asserted, ’we must find that in the circumstances here related the patient was to have roused herself from the anaesthetic, grasped the surgeon’s arm and cried out: "Hold! Drop your knife I That part of ray body is excluded from ray insurance policy’11 11’In such a state of affairs it is our opinion that the law does not require an operative patient to retain one eye open to follow the surgeon so as to keep his scalpel away from such portions of the anatomy as may be excluded by the insurance policy.1111 The preceding case illustrates being insurance wise. Had the woman passively accepted the insurance company1s ruling, she would have received absolutely no benefit from the insurance she carried, or the premiums she paid. The justification for this study then is to develop, classify, and present facts about insurance for use as part of the subject matter of a business law class; to emphasize the good points in insurance, as well as those misrepresented and fallacious, and to train students to look for and find

"Patient Needn’t Keep Eye on the Operation," Docket, 6:5, Winter, 19^ 3 - ^ * P*

6 the undesirable features of insurance policies that they are asked to buy*

REVIEW OF PREVIOUSLY RELATED STUDIES Investigation has shown that previous studies in this area are very few.

As far as this investigator was able to

determine* there have been no actual attempts to develop a separate unit for insurance in a high school business law class.

Some high school law texts do include sections on

insurance, however, the material they present is of necessity relegated to generalizations pertaining to automobile, casualty, and life insurance.

Their material is not presented

as an actual guide, but merely as a vague introduction to the over-all subject of insurance and it is presented from the insurance company’s point of view. An unpublished thesis by A. Prudence McGuire,

p

con­

cerned itself strictly with the legal knowledge needed in buying insurance and making investments.

This study was not

intended to present the practical side of presentation material, and hence could not be interpreted as a guide for

2 A. Prudence McGuire, "A Study to Determine the Legal Information Needed Relative to Insurance and Investments in a Course in Consumer Business Information,11 (unpublished Master's thesis, The University of Southern California, Los Angeles, 19^0), pp. 13-17.

7 high school law teachers.

Through great detail, this study

justified the necessity of a business law course.

It is

evident from the title that insurance, in this instance, was part of a consumer business course, and that the author believed that commercial law and insurance should be taught in one course.

At the present time, this fact is accepted

by all progressive educators.

In brief, and despite the

title, the foregoing study was of relative little use in solving the problem of this project. The central theme of this study is the attempt to present insurance on the high school level in a manner designed to modify students1 beliefs and attitudes about insurance; to make them insurance conscious, insurance wise, and insurance cautious.

CHAPTER II BASIC INSURANCE CONCEPTS INSURANCE, ITS SIZE AND SCOPE Almost everyone, at some time or other, has a personal and vital contact with insurance; however, there are few who have an adequate idea of the great size and importance of this business. Insurance is a basic industry, ranking in importance with agriculture, commerce, banking, manufacturing, trans­ portation and communication.

In its various realms, the

business of insurance employs a vast army of workers whose coordinated efforts provide the factor of protection now regarded as essential in our scheme of industrial organiza­ tion. The institution of insurance embraces a wide field. This study was primarily concerned with presenting an accurate description of those divisions of insurance which affect the daily lives of the majority. Investments of insurance companies reach into virtually every phase of American business activity. According to Best, the total admitted assets of all United States legal reserve life insurance companies at the end of

19^1 were estimated to be $32,500,000,000 and are constantly

growing.1 Insurance companies, through investment funds, have supplied a large part of the necessary capital for the development of our now basic industries such as steel, rail­ roads, and utilities . A large measure of the merit insurance companies enjoy today is based on the repetitive productivity of its reserve funds.

It is a basic industry, and it

deserves a closer scrutiny by those to whom it is so vital, both directly and indirectly. The function of insurance, definitions. of insurance is to provide certainty.

The function

To effect this end,

insurance seeks to reduce the uncertain consequences of a known peril so that the cost of losses, as they affect Individuals, will be certain or at least relatively so. Broadly defined, it is the guarantee by one to another against accidental loss. Legally, insurance has been defined as a contract whereby one undertakes to indemnify another against loss or damage or liability arising out of a contingent or unknown

p

event.

1 B e s t 1s Insurance Guide (New York: C o ., I n c ., 1942).

Alfred M. Best

2 Insurance Code, State of California (Sacramento: State Printing Office, 1946), Section S2f.

10 Since risks and hazards constitute the sole reason for the existence of insurance, it seems advisable to start with a definition of these words. From the insurance point of view, a very good and very simple definition of risk is that "risk is the chance of loss."

Thus two things make up risk as defined above,

namely: 1.

There must be uncertainty as to the outcome of some event or events, and

2.

A loss must be possible from at least one such outcome.

A hazard is any factor which may cause or contribute to a loss. risk.

A hazard, therefore, must exist before there is

If there were nothing to cause a loss there would be

no risk. Types of hazards.

There are three distinct types of

hazard encountered in the insurance field. 1.

Physical hazard

2.

Juridical hazard

3.

Moral hazard

Physical hazards are evident. things as: 1.

Fire

2.

Lightning

These are:

They consist of such

11 3.

Earthquake

4.

Explosion

5.

Windstorm

6.

Hail

7.

Collision or upset of vehicles, particularly autos.

8.

The "perils of the sea”

9.

Burglary, theft and robbery

10.

Forgery

11.

Unemployment

12.

Personal accident

13.

Sickness

14.

Superannuation

15.

Death

Some common juridical hazards, hazards imposed by a court of law, are: 1.

The liability imposed by law for injury to the person or property of another by negligence.

2.

Liability imposed upon employers by statutory employers’ liability laws.

3.

Liability imposed upon'employers by statutory workmen’s compensation laws.

4.

The possibility that a court may interpret a

12 policy in a manner neither intended nor anticipated by the underwriter. 5.

Conflicting court decisions in similar cases.

6.

Possible misinterpretation of the facts by a jury.

7 . The possibility that a jury may be motivated by sympathy for the injured plaintiff rather than by the laws of liability. 8.

The possibility that a jury may be prejudiced against a colored man (any race other than white).

Moral hazard is strictly a human hazard which has its inception in a person’s dishonesty.

A true moral hazard

does not create risk, the moral hazard creates loss by his own deliberate act, usually for the purpose of collecting money from an insurance company.

It is a well-known fact

that the losses of fire insurance companies always increase when the number of business failures increases.

This may be

partly due to coincidence and partially due to enforced economy resulting in the removal of the customary fire safe­ guards.

There is no doubt that many of these losses are due

to arson.

If arson can be proved against an insured, the

policy does not pay for the loss. A hazard of this sort cannot be insured against, at

13 any price, if it is known to exist.

Of course, insurance

carriers often have to pay off when such a hazard i s . suspected but cannot be proved.

An experienced underwriter

who suspects a moral hazard exists will not issue a policy in the first place. There is a second and less vicious type of moral hazard which many prefer to call the "morale hazard" to distinguish it from the true moral hazard. This "morale hazard" also has its inception in the human mind, but whereas the true moral hazard deliberately sets out to create a loss, the "morale" hazard creates a risk by reason of gross and perhaps intentional carelessness. The man who asks himself "Why should I be careful?

I fve got

insurance, let the insurance company worry," is a "morale" hazard.

He does not deliberately create loss, but he creates

risk wilfully and to a degree, much higher than average. The mere possession of an insurance policy sometimes tends to create this mental hazard by making the insured less concerned about a possible loss to himself; a loss which will now be paid by the insurance carrier. "Morale" hazards do not make selected risks; they make very poor ones and are not acceptable to reliable insurance companies.

Purchasers of insurance can check the reliability

of a company by investigating the loss ratio of a company

14 before buying insurance.

Compare the number and amount of

claims paid in proportion to the number of policyholders and the type of insurance offered.

The company showing the most

claims can be assumed to be careless in accepting risks, all things being equal.

Furthermore, it can be assumed that this

company will either fail, or be forced to raise premiums.

In

both cases it would not be a desirable company from the point of view of the buyer. Suggested device. "Search for Security.”

Use the sound motion picture

Order it from the Audio-Visual

representative in any Los Angeles High School. This film portrays the history of insurance from its inception in London to the present day coverage of almost * any risk.

This film will tend to motivate student interest

in the subject of insurance, and will provide a good back­ ground for the rest of the unit that follows. Insurance from the underwriters1 point of view.’ It is essential in studying insurance that the student be intro­ duced to the insurance companies' point of view in order that a cautious and questioning attitude, and a knowledge of their interests and desired, be developed.

In warfare it is

claimed that the battle is won when the opposing General knows the objects*and aims of his enemies.

c

15 Underwriters are in business for a profit, if the profit they receive is just, if the protection they provide is adequate, and the facts they present are not misrepre­ sented, a purchaser may then buy the insurance in the know­ ledge that he is receiving a just measure of protection for the premium paid. One way to determine the measure of protection in any given policy, in addition to a comprehensive general knowledge of the subject, is to understand the basic under­ writing policy of all insurance companies. *

Like many other

businesses, underwriting has four basic rules. 1.

Get the facts

2.

Weigh and decide

3.

Take action

4.

Check the result

They are:

Before an underwriter can intelligently decide whether or not the risk he is asked to assume is one whieh is acceptable to him, he must know the facts concerning the hazards which make up the risk.

It is for this purpose that

insurance companies have developed the various "Agent's Report" forms on the reverse side of application blanks. Taking automobile insurance as an example, the standard form of application which is used requires the applicant to answer eight questions.

These questions are

16 called ’’Declarations” .

They become a part of the policy and

they must be true, otherwise the policy might be voidable on the part of the insurance company. These declarations, however, do not tell the under­ writer enough to enable him to weigh the hazards and decide whether the risk is acceptable or not.

He needs to know a

great deal more about the physical and moral attributes of the applicant and any other person who is expected to drive the car.

He also needs to know the condition of the

automobile Itself. All the information the underwriter needs can be given in- the Agent*s Report.

If the underwriter feels that

the applicant presents a borderline risk, he can always get further information from an independent reporting agency. It stands to reason that if a man has only one arm he cannot exercise the same control over an automobile as a man with two arms.

He may be a very careful driver, but he

still presents a hazard not found in the average driver.

In

fact, it may well be that he presents two abnormal hazards. In the first place there is the physical hazard of his impairment which may well prevent him from being able to exercise proper control at all times.

In the second place,

there may very well be a juridical hazard. Suppose such a driver has an accident involving

IT bodily injury.

Suppose further that the insurance company

decides to defend the claim.

It is quite possible that the

jury would be prejudiced against a one-armed driver.

That

fact could easily be enough to break down an otherwise good defense. It can readily be seen that it is far easier to weigh the physical hazards than the juridical ones.

Nevertheless,

the juridical hazard is very real and an important factor in underwriting.

The following juridical hazards are well known

to underwriters: 1.

Racial prejudice

2.

Prejudice against foreigners who cannot speak English

3.

Prejudice against persons who are known to have been drinking at the time of the accident.

4.

Sympathy for the injured claimant.

5 . A tendency to award unreasonably high verdicts if the defendant is known (or believed) to carry insurance. 6.

Prejudice against persons in certain occupations.

7.

Prejudice against persons with obvious physical impairments.

Moral hazards are the most insidious of all because

18 they are the hardest to detect.

Frequently they are not

even suspected until after the loss* and very often there is no actual proof, but merely a strong suspicion. Certain conditions clearly encourage moral hazards. Take the case of an "orphan11 car, one that has not been manufactured for many years.

Suppose that something goes

wrong with the oil pump resulting in serious damage to the motor.

Replacement parts are essential for the repair, but

there are no new parts.

Maybe the owner is lucky and can

find some good used parts in a junk yard, but suppose he can't.

His car is absolutely useless.

How convenient a

fire would be if the car were insured! This is not meant to impute dishonesty to any owner of an “orphan” .

It is merely an illustration of how a moral

hazard may unexpectedly develop. “Morale” hazards are easier to detect.

If a policy­

holder develops a high frequency of losses, it is a good indication that he is careless and content to let the insurance carrier pay for his carelessness. The kind of insurance applied for may also indicate a possible “morale” hazard.

If a man wants full collision

coverage on a new Cadillac, this is understandable; the owner wants the car kept in perfect shape at all times, and probably can easily afford the high premium.

However, if a

19 man asks for full collision coverage on a ten-year-old auto­ mobile, the underwriter may well raise his eyebrows and ask himself why.

If any insurer has cancelled any automobile

insurance to the applicant during the past year, there was probably some good reason.

Very likely he is a careless

driver, a "morale” risk. If the applicant has been involved in several accidents during the last three years there is some reason to suspect carelessness and a possible'Vnorale" hazard.

If

he has had his driver1s license revoked, or suspended, it may well be that he has the wrong mental outlook, and presents a "morale” hazard. In summary, from the underwriters’ point of view, the purely physical hazard is the easiest to weigh, and to decide whether it creates too much risk or not.

A juridical hazard

is much harder to weigh, but in those cases where experience has shown it to exist, it plays an important part in the underwriters decision.

True moral hazard is very hard to

detect until after a loss, and even then it may be impossible to prove that the loss was the result of a deliberate act on the part of the insured.

Finally, it has been shown that

the "morale” hazard can often be detected, sometimes before the policy has been issued, but more frequently after a loss or losses.

20 Suggested device.

After adequately discussing

physical, juridical, and "morale11 hazards, divide the class into three sections.

If possible allow for individual

differences by assigning the slower students to make up cases illustrating physical hazards.

Assign average

students to develop illustrative cases pertaining to juridical hazards, and assign the above average students to devise cases covering the "morale" hazard. Collect the papers, pick out good cases, read them to the class and ask for their decision and discussion as to the type of hazard illustrated by the case. Ris k .

Risk can be divided into two main types.

In

the first place, there is a risk that may result in loss but may also result in profit. new business enterprise.

An example of this would be any It may be successful, and result

In a profit on the investment; or it may fail, resulting in the loss of the investment.

Insurance is not designed to

carry this type of risk. In the second place, there is what is often called "pure risk".

A pure risk cannot result in gain; it can only

result in loss.

An example of this is the ownership of any

form of destructible property.

You cannot be certain that

it may not at some time be destroyed.

If it is destroyed,

you suffer a loss, whereas the mere preservation of the

21 property does not of itself make any profit o r _gain. the kind of risk with which insurance deals.

This is

Risk is the

chance of loss. Degree of risk. depending If a

upon

There are different degrees of risk,

theuncertainty or the probability of loss.

loss is impossible, there is no risk.

It is difficult

to imagine Hoover Dam being destroyed by fire.

Prom a

practical point of view, such a loss is impossible, hence there is no risk. Value of risk.

This expression has two meanings

depending on whether an Individual Is considering purchasing insurance or underwriting it.

From the point of view of the

purchaser, the value of a risk has two factors: 1.

The

2.

The

amount of possible loss resources available to pay for a possible

loss. a.

For example:

"A” has $2,500.00 in the bank and a modest income.

He pays $2,400.00 cash

for a brand new car, leaving himself with a bank balance of $100.00.

The risk

created by ownership of this car, has a high value.

If it Is stolen or completely

destroyed the owner cannot replace it. He needs insurance.

22 b.

The same man under the same circumstances pays $100.00 cash for an old automobile, leaving himself with a bank balance of $2,400.00.

The risk created by ownership

of this car has a low value.

If it is

stolen or wrecked the owner can replace it without undue hardship.

He does not

actually need insurance. In both of the above examples, of course, the man should carry bodily injury and property damage insurance. In saying that "b" does not need insurance, the reference was strictly to material damage insurance. Theory of expectation of loss.

From the point of view

of an insurance carrier, the value of a risk is the "expecta­ tion of loss".

The expectation of loss in any particular

case is obtained by multiplying the amount of possible loss by the probability of loss. To illustrate the theory of expectation of loss, suppose that statistics prove that one house out of every thousand burns to the ground every year.

For the sake of

simplicity, let us imagine that there are no partial fire losses; the houses either burn to the ground or they do not burn at all.

Assume that an insurance company is asked to

insure one thousand houses for $5*000.00 each.

What is the

23 value of each Individual risk to the underwriter? According to our imaginary statistics, the probability is that one of these thousand houses will burn down during the ensuing year, and the remainder will n o t . How much money is the insurance company probably going to lose?

If the statistics hold good, it will lose $5,000.00.

This loss must be borne by the owners of 1,000 houses.

Con­

sequently, the value to the underwriter of each individual risk is $5.00 for one year, or $1,00 per $1,006.00 of insurance.

In practice, of course, the company would have

to load this premium to pay for business overhead. Insurable risks.

Insurance deals only with those

risks which can be measured in terms of money. losses, or occurrences, cannot be insured.

Sentimental

It is not an

occurrence which is insured against; it is the actual monetary loss resulting from an occurrence.

Since this is

the case, it is necessary that the risk can be appraised in terms of money.

In order to do this properly, it is neces­

sary to have data regarding losses. For this reason such risks as the possible failure of a new business venture are uninsurable.

Suppose a man

invests $50,000.00 in a new business venture.

There is a

chance that it may fail, and that he may lose his entire investment.

Hence he has risk.

The amount of his possible

24 loss is known, $50,000.00.

But the risk cannot be measured;

it is largely a matter of personal judgment and business acumen. Risk the basis of sale.

Before a person can be

induced to buy insurance he must realize that he has risk from some hazard or hazards over which he has little or no control.

He must also realize that if a loss occurs, no

matter how unlikely the occurrence may be, it may be sufficiently large to seriously harm, or ruin him.

This is

the basis for selling insurance from the underwriter's point of view. Suggested device.

Show the sound film flYours truly,

Ed Graham11 which is ordered from the Audio-Visual representa tive in any high school. This film illustrates what people want from life, namely, health and security.

The part insurance plays in

satisfying these desires is shown in this film. Premium payments as losses. premium to the insurer. insured's loss.

The insured pays a

The premium is the extent of the

It is usually very small in comparison with

the possible loss that the insurer may have to bear if the event insured against Materializes.

It is a certain loss;

the extent of it is fixed and known in most cases.

(See

25 section of this study on "Pure assessment mutuals", p. 46.) Underwriters eliminate their own risk.

In return for

the premium, the carrier agrees to indemnify the insured for any further loss he may suffer as a result of any of the perils insured against.

The possible liability of the

carrier is limited by the terms and conditions of the policy, but the carrier has, nevertheless, assumed a risk.

How can

the carrier eliminate this risk to itself? Three principal factors enable a carrier to eliminate its own assumed risk; they are: 1.

The law of large numbers

2.

Statistical data

3.

Careful and intelligence selection of risk.^

The law of large numbers.

Theoretically, if a coin

is flipped there is a fifty-fifty chance that it will come down heads.

It can only come down one of two ways, and

there is no particular reason why it should come down one way rather than the other.

Therefore, again theoretically,

if you flip a coin twice it should come down heads once and tails once. In practice this is far from certain to happen; in

3 j. Edward Hodges, Practical Fire and Casualty Insurance (New York: National Underwriter Company, 1§43), p. 8.

26 fact, it is not likely to happen.

However, if a coin is

flipped one hundred times there is a good possibility that it will come down one way at least forty times.

If you flip

it a thousand times, there is a good chance that it will come down one way at least four hundred and fifty times. Theoretically one hundred flips should come down heads fifty times and one thousand flips should come down heads five hundred times.

In practice, this may not happen,

but it is a well-recognized principle that you are more likely to get closer to 50$ heads from a thousand flips than you are to get 50$ heads out of one hundred flips. Theory of probabilities.

This tendency of mass

phenomena toward regularity has been proved by many experi­ ments and has been formulated into the law of large numbers. This law is the basis for all application of that branch of mathematics known as the theory of probabilities.

The law

may be briefly and simply stated as follows: As the number of trials increases, the actual results approach more closely the underlying probability. An experiment in flipping a coin is given below to k

illustrate this.

This experiment was conducted by members

^ John H. Magee, General Insurance (Chicago: D. Irwin Co., 1942), p. 124.

Richard

27 of three college classes.

Each student tossed ten coins ten

times (equal to tossing one coin one hundred times each). Here are the results: Number in Class

Number of Tosses

Heads

% Heads

232

23,200

11,821

50.95

325

32,500

16,582

51.02

152

15,200 "

7,450

49.01

709

70,900

35,853

50.57

The probability, of course, was an even 50$ heads.

It can

easily be seen how closely the actual results approached the underlying probability. The law of large numbers and the theory of probabilities is the foundation of the insurance business, but it is not sufficient in itself. triangle.

It Is the base of the

The two sides of the triangle are statistical

data and selection of risks. Suggested device.

To illustrate the two preceding

theories, the law of large numbers and the "theory of probabilities, ask the students to flip coins as illustrated above. Statistical data necessary.

In order to develop a

premium which will be equitable to the insured and insurer

28 alike, it is essential to have data which will enable the insurer to determine the probability of loss. Such data can only be acquired over a period of time. Whenever a new risk presents itself it cannot be insured under a real insurance plan because there are no data available to determine the probability of loss.

It is quite

true that insurance plans are sometimes started with inadequate data.

But these cannot be true plans of insurance

until statistical information becomes available. For example, when Workmen’s Compensation was first introduced into the United States no data was available for the determination of rates.

In certain instances, the stock

companies offered to sell policies at four times the existing rates for Employers’ Liability insurance.

This exorbitant

rate led to the formation of a number of mutual companies for the sole purpose of writing Workmen’s Compensation at a more reasonable price.

These mutuals, like the stock

companies, also had to guess at the requisite rate, but their guess was much lower than that of the stock companies. As statistical data was gradually developed from actual experience over a number of years, it became evident that the guess of the mutuals was a much better one than that of the stock companies.

This is not intended as a

criticism of the stock companies, since the mutuals always

29 had a possible assessment in case their earned premiums were not sufficient to pay their losses.

The example is cited

merely to show that no true plan of insurance can be evolved without statistical data; guessing at rates is not a true plan of insurance, even if it does shift the burden of risk from the public to a professional risk carrier.

It should

be remembered, however, that underwriters cannot stay in business, or offer satisfactory protection, if they are losing money constantly. Selection of risk.

Statistical data are collected

from many sources and are analyzed by actuaries for the purpose of rate making.

The important thing to remember

concerning statistical data is that they reflect the actual experience of all kinds of people. Most people are reasonably careful; some are unusually careful.

Unfortunately many people are careless, some of

them even wantonly so.

Statistical data reveal the losses

suffered by all these people, the careful and the careless alike, all combined into one grand total. From this data, rates are developed which indicate the premium necessary to assume the risk created by the person of average carefulness.

Since some of the policy­

holders will undoubtedly be unusually careful, the rates will permit the assumption of the risk created by some people who

30 are careless.

No rates are designed to assume the risk

created by persons who are wantonly careless. Every applicant for insurance has to be put through the underwriting sieve.

If he creates an average degree of

risk, he passes through and is accepted.

If he creates less

than the average degree of risk, he is highly acceptable. If he creates more than the average degree of risk he does not go through the sieve, he is rejected. The degree of risk above average which may be safely assumed by a risk carrier depends upon the business policy of the Individual carrier.

The more money a carrier charges

for the assumption of risk, the more risk it can safely assume. The triangle of insurance.

Three factors, then, are

essential for a true insurance plan which will enable the risk carrier to assume the risk of others, and at the same time eliminate risk to itself. 1.

They are:

Statistical data to enable the carrier to determine the value of each individual risk (the necessary premium to assume the risk)

2.

An underwriting sieve to determine the degree of risk created by the person applying for the insurance

3.

A large number of risks of a similar nature

31 Reinsurance and surplus.

Theoretically, if the

preceding three factors are present, the premiums will pay for the losses.

It should be borne in mind that the law of

large numbers is not absolute.

It is high in probability,

but still is not absolutely certain. Two elements sometimes upset the law of large numbers. They are catastrophes and trends.

If a conflagration burns

down an entire section of a city, it is a catastrophe.

Few

insurance companies can stand a catastrophe loss by them­ selves .

For this reason they reinsure with other carriers

any amount which seems to them to be beyond their means.

In

its turn, the carrier which reinsures the original carrier will frequently reinsure a part of the risk which it has assumed.

That may continue until half a dozen or more

carriers are all assuming a part of the original risk.-* Trends, or changes in conditions, usually come about rather slowly and can thus be foreseen in time for under­ writers to make the necessary adjustment in rates.

However,

they occasionally come about quite suddenly and unexpectedly. As a result, it sometimes happens that the premiums charged are not sufficient to pay for the losses.

5 Lewis A. Froman, Introduction to Business (Chicago: Richard D. Irwin, Inc., 19^d), p. 2b4.

32 The- trend in automobile accidents right after rtV J M Day went up with alarming rapidity.

The premiums being

charged were all based on our restricted war-time driving experience, and according to insurance companies were totally inadequate to meet the rapidly changing conditions.

Insurance

company losses were very heavy until they were able to get the benefit of adjusted premiums. Surplus funds.

To guard against trends, carriers

usually maintain a surplus fund.

This acts as a shock

absorber, and enables the carrier to pay losses as they occur in spite of the fact that the premiums charged may be insufficient.

When a trend develops, rates are adjusted to

meet it, but it may be many months before the rates match the increased losses.

Surplus takes care of this situation.

Thus reinsurance and surplus become strengthening braces within the triangle of insurance, as indicated by the following diagram. Suggested device. the blackboard.

Place the triangle on page 33 on

Discuss and ask students to discuss the

various aspects shown.

33

The Law of Large Numbers, Theory of Probabilities Insurance versus gambling.

There is no gambling in­

volved in a true plan of insurance.

Many people have the

idea that if they pay an insurance company twenty dollars to insure their house for a year against a possible five thousand dollar loss by fire they are wagering the company twenty dollars that their house will burn down, and the company is betting them five thousand that it will not. This is far from the case.

Gambling creates a risk

which did not exist before the wager was m ade.

Insurance

eliminates an existing risk. The mere ownership of a house creates risk. a chance that it may be destroyed by fire.

6 Hedges, 0£. cit., p. 6.

There is

This risk exists

34 until it is eliminated by transferring it to a professional risk carrier.

As previously mentioned, this is achieved by

paying a known loss (the premium) to a carrier.

If your

house is subsequently destroyed by fire, you cannot make a gain.

You can only recover the actual cash value of the

house (or your interest therein) at the time of the destruc­ tion.

You have still suffered a loss, and that loss was the

premiums paid during the life of the policy preceding the fire. Thus, wagering creates a risk which did not previously exist; insurance eliminates a risk which already exists. The two procedures are far apart.

They cannot be termed

comparable under any connotation. Insurable interest.

Insurance has been defined as a

contract of indemnity against loss, damage, or liability arising from a contingent or unknown event.

Consequently,

only such persons may acquire insurance as are in a position to lose money as a result of the consummation of the event insured against.^ For example, it is not possible to buy a fire insurance policy on a neighborfs house.

If it were possible to buy a

7 Insurance Code, State of Callfornla (Sacramento: State Printing Office, 194b), Section 2t51.

35 fire insurance policy on a neighbor*s house for a premium of twenty dollars, to pay the insurer five thousand dollars if the house burned down within a year, would obviously con­ stitute gambling.

In such a case it would literally be

wagering the insurance company twenty dollars that the neighbor*s house would burn within a year, and the company would wager five thousand dollars that it would not.

If the

company were right the purchaser would lose twenty dollars. If the buyer were right he would make a clear profit of four thousand, nine hundred and eighty dollars.

Not merely would

this be gambling, but it would create a considerable moral hazard.

If the house were still intact near the elose of the

policy term, there would obviously be a temptation to commit arson. Insurable interest is not limited to ownership of property.

Any relationship towards the property which might

result in a direct loss of any sort to the insured constitutes Q

an insurable interest.

The simplest form of insurable

interest in property is the sole and unconditional ownership thereof, but some other examples of insurable interest are: 1.

In buying real estate on time, a mortgagee has an insurable interest in the mortgaged property

Q

° Hedges, o£. c i t ., p. 84.

36 to the extent of the mortgage. 2.

A lessee is frequently required by the terms of his lease to surrender the property in as good condition as when he first rented it (without any exemption in the case of fire damage).

Clearly such a person has an

insurable interest in the property. 3.

A lessee or tenant may have to sign a hold harmless agreement with his landlord agreeing to relieve the latter of any liability arising out of the premises.

Such a lessee has a

definite insurable interest. 4.

A motion picture producing company has an insurable interest in the life, limbs, and features of its stars beeause the death, dis­ memberment, or disfigurement of such persons could clearly result in severe financial loss to the company.

Such a company, however, has

no insurable interest in its extra players (beyond its liability under workmen's com­ pensation or employers' liability laws) because the death of such persons could not cause the company financial loss.

5 . An outdoor sports promoter has an insurable interest in the weather and can purchase

37 insurance against the eventuality of rain. 6.

The lessee of a building has insurable interest in any improvements he may make to i t .

7.

The lessee of a building has insurable . interest in the increased value of his lease.

8.

A bailee or a common carrier has an insurable interest in the total value of all property in his care since he may be held liable if it is destroyed or stolen.

9.

The legal owner of property has an insurable interest to the extent of the total value of the property* regardless of the amount of any encumbrance which may be upon it, since if the property should be destroyed or stolen, the owner will be deprived of it, but none the less, have to pay the mortgage or encumbrance. For example, suppose a man owns a car which has a fair value of $1,000.00.

Largely on

the strength of his honesty and known character he is able to borrow $900.00 from the bank with the car as security.

His

insurable interest in that car is $1,000.00. If it should be stolen or wrecked it will cost him $1,000.00 to replace it, and he will still have to repay the $ 900.00 loan to the bank.

38 Suggested device.

After discussing insurable interest

as explained on page 3^* and using the illustration on the same page, develop interest by explaining item 4 on page 36 . Ask for discussion of the registered owner!s insurable in­ terest in an automobile using item 9 on page 37 as a basis. Apply the same factors as were brought out by the discussion of item 9 to item 1, page 35*

Continue in the same vein for

the remaining items in this section. *

CHAPTER III TYPES OP INSURANCE COMPANIES There are four principle types of insurance carriers operating in the United States.

They are:

1.

Stock Companies

2.

Lloyds Underwriters

3.

Mutual Companies (advance premium type)

4.

Reciprocal or Inter-Insurance Exchanges1

In addition to these there are, in some states: 3.

Pure Assessment Mutuals

6.

Fraternal Organizations

7.

Hospital Associations

8.

Physicians and Surgeons Associations

9.

Factory Mutuals

Finally, in a number of states there are: 10.

State Funds.

These are principally for Work­

men's Compensation Insurance.

In some states,

the State Fund for Workmen's Compensation is monopolistic; private carriers may not sell Workmen’s Compensation.

In the majority of

states which have such Funds, the Funds

1 Lewis A. Froman, Introduction to Business (Chicago: Richard D. Irwin, Inc., 1948), p. 287 .

40 compete with private carriers. Suggested device.

The following pages, 40 to 56

present the various types of insurance carriers operating in this country today.

The advantages and disadvantages plus

the main characteristics of each type of company are dis­ cussed . After presenting the advantages, disadvantages, and main characteristics of types 1 , 2 , 3, 4, and 5 on the black­ board, and requesting each student to take careful notes, assign groups of students to act as salesmen in each type of company.

Each group is to present its type of company in

its best possible light, and to develop counter arguments when other members of the class raise points disadvantageous to the particular type under discussion. Stock Companies.

Stock companies are organized for

the sole intention of making money for the stockholders, rather than for any particular benefit to the policyholders. In order to stay in business, these companies have to sell good policies and settle claims in a fair and equitable manner.

Therefore they provide good insurance, but their

price is usually high. Stock companies are managed in the same manner as any other corporation.

The stockholders elect a board of

directors, and the board of directors appoint officers.

The

41 elected officers manage the affairs of the company, subject to the supervision of the board of directors. The principle arguments put forward by stock company representatives in favor of buying insurance through their companies are: 1.

The cost of insurance is definite and fixed. Once the premium has been paid the policy­ holder cannot be assessed any more even if the company loses money.

This is quite true.

On the other hand, if the company makes a large profit out of assuming its policyholders' risks, the policyholders do not share in this profit.

(See mutual companies in this

chapter* p. 47.) 2.

Paid-in capital and the surplus guarantee the company's ability to pay claims.

This also

is usually quite true, but stock companies do not, as a rule, pay losses out of capital; they pay them out of earned premiums and surplus.

If a stock company has to dip into

its capital to pay losses, it is considered insolvent and is taken over by the insurance commissioner.

It cannot reasonably make any

difference to a policyholder whether he is insured in a stock company with a paid-in

42 capital of $ 500,000 and a surplus of $ 3 *500,000 or in a mutual company or interinsurance exchange with no paid-in capital, but a surplus of $4,000,000 of free money for the added protection of the policyholders in case the premiums should prove inadequate as they become earned. 3.

Stock companies further claim that the fact that stockholders have money invested, (which will be lost if the company fails) insures good, sound management. argument.

This is a spurious

The percentage of stock companies

that have failed is about the same as the percentage of mutuals.

Furthermore, the

paid-in capital is usually only a small fraction of the surplus after the company has been doing business for any length of time. In most cases, it is surplus rather than capital that provides the safety factor. The principle objection to stock companies is their method of selling insurance.

With very few exceptions, they

operate through what is known as the “American Agency Plan” . Their agents are all independent contractors who are re­ munerated on a commission basis, the commission being a percentage of the premium.

43 These agents It

are not associated with any one company.

is not at all uncommon to find one agent representing half

a dozen companies all selling the same lines of insurance. The companies need the services of these agents since sales are the lifeblood of insurance. 'Consequently, the companies compete for the services of the agents by offering high comp missions, in some cases as high as forty per cent. There may be no objection to paying the agent forty or even fifty per cent of the first y e a r ’s premium, and then decreasing to five or ten per cent on renewals.

In general

insurance, however, the agent would obviously renew the policy in a different company every time it expired, thus getting a high commission every time. There may be no objection to paying a high commission on

the first y e a r ’s premium.

The original sale is often

difficult to make, and may take considerable time and skill. Renewing a policy which is already in force frequently in­ volves nothing more than a telephone call. Another objectionable feature of the ”American Agency Plan” is that often an underwriter finds himself faced with the alternative of accepting an undesirable risk, or of losing a remunerative account to some other company, which

2 S. B. Ackerman, Insurance (New York: Press Company, 1941), p. 485•

The Ronald

44 may not be quite so selective in its underwriting.

This

type of risk inevitably tends to keep rates high. Lloyds Underwriters♦

This type of risk carrier is

permitted to operate in some states, but the original Lloyds of London are only admitted in Illinois.

They engage in

business In other states through surplus line brokers. This limits their operations to reinsurance, navigation and transportation insurance, aircraft and inter-state railroad insurance, and such other insurance as cannot be obtained from a majority of the admitted insurers. Lloyds of London is not an insurance company.

They

have nothing to do with the actual business of insurance beyond exercising the strictest control over the affairs of their underwriting members. The underwriters at Lloyds of London are individuals who have formed syndicates for the purpose of writing insurance.

The actual underwriting is done by an attorney-

in-faet, who stamps the name of each underwriting member of his syndicate on the policies.

Beside each member’s name is

the fraction or percentage of the risk that he is assuming. The policy states that every individual underwriter

3 William R. Spriegel, and Ernest Coulter Davies, Principles of Business Organization (New York: Prentice Hall, Inc., 194b), p. 257.

45 is responsible for his own share of the losses “each for himself and not one for another” .

Thus if one member of a

syndicate should become insolvent, recovery of his portion of a loss cannot be had from the other members of the -syndicate.

However, excellent safeguards are provided against

such a contingency. In the first place, only persons of the highest character and good financial standing are permitted to become underwriting members of Lloyds.

Every underwriter has to

pledge his entire personal fortune to the payment of losses in the event that these exceed earned premiums. The minimum capital that a person must have to be admitted as an underwriting member is 20,000 pounds.

Most

of them have considerably more than that. Their affairs are examined at frequent intervals by the Lloyds Corporation.

If any member or syndicate shows the

slightest sign of financial instability, that member or syndicate is immediately suspended and may not resume opera­ tions until the Lloyds Corporation is entirely satisfied that such member or syndicate is once more financially sound. Finally, there is a reinsurance pool to which every individual underwriter must subscribe.

This pool is controlled

by the Lloyds Corporation, and is maintained for the sole purpose of paying losses in the event that any member or syndicate should become insolvent.

At the present time, there

46 are literally millions of pounds In this pool.

lL

The underwriters at Lloyds of London are the largest marine insurers In the world.

Some of the syndicates confine

their activities solely to marine risks, hut a large number of them write all kinds of general insurance.

A few write

spectacular types of risks, such as insuring a musician's hands for a million dollars. The underwriters at Lloyds sell only through brokers who are members of the organization.

They do not compete

for the services of these brokers; to be a broker authorized to transact business through Lloyds Is one of the most sought after prizes in the insurance business in England.

They do

not have to pay such high commissions as are prevalent under the “American Agency Plan” . Pure Assessment Mutuals. not eharge any premium.

Pure assessment mutuals do

Every time there is a loss, each

policyholder is assessed his pro-rata share.

Frequently,

such associations attempt to keep on hand a supply of cash sufficient to pay promptly any loss which may reasonably be anticipated within a certain time.

Then, when the loss has

been settled, the members are assessed a sufficient amount to restore the fund to its original amount.

^ Ackerman, o£. cit., p. 489.

^7 In this plan, the sole insurance is the right to levy the required assessments.

It seems doubtful that such a

scheme can properly be called a plan of insurance, since it does not substitute certainty for uncertainty.

The members

of such an association have no idea of how much they may be assessed in any given period of time.

Furthermore, those

members who have losses cannot fully rely on being paid off; the other members may be literally unable to afford to pay the assessment at the time of the loss.

The volume of

business written by such organizations is not large. Advanced Premium Mutuals.

This type of carrier

operates like a stock company, the only difference is that the policyholders take the place of the stockholders. is no paid-in capital. directors annually.

There

The policyholders elect a board of

The directors appoint the officers who

manage the comp any.^ If the business makes a profit, the policyholders are paid a dividend.

If the business suffers a loss, the policy­

holders are assessed.

Most of these companies accumulate

surplus funds over a period of time.

Occasionally they start

out with a contributed surplus which is repaid when they have accumulated sufficient surplus of their own.

5 Ackerman, 0£. c i t ., p. 486.

In most states

48 these mutual companies are permitted to write non-assessable policies when they have a sufficient surplus to justify such a course.

Nearly all advance premium mutuals which have been

in the business any length of time write non-assessable policies. Some of these companies employ salesmen on a salary basis; others pay their agents on a commission basis.

The

commission paid by mutual companies is usually much less than that paid by stock companies, and this saving in sales cost is passed on to the policyholder in the form of dividends, lower rates, or both. Since mutual companies are formed primarily for the benefit of the policyholders, they frequently select their risks with more care than is the case with stock companies. Greater selectivity of risks tends to reduce losses which, in turn, results in still lower premiums or larger dividends. This type of insurance carrier does not appeal to those agents whose first thought is "How much is there in it for me?"

Many agents find that although they make less money

per sale, they can sell so much more that the increased volume of business actually Increases their annual income. A well-managed mutual company offers the policyholders distinct advantages over stock company insurance.

Neverthe­

less, mutual companies have certain weaknesses common to all corporations.

^9 In the first place, the overhead is not limited.

The

cost of operating the company is whatever the officers and board of directors decide it should be.

This has led to

considerable abuse, particularly in the case of some small life and disability companies, which paid exorbitant salaries to friends and relatives of the founders. In the second place, it has sometimes happend in small mutual companies that a clique of policyholders voted out of office a competent board of directors, replacing them with incompetent relatives or friends.

This has ruined a

number of such companies which might otherwise have developed into large and financially strong institutions. Thirdly, unscrupulous promoters with nothing to lose (there is no paid-in capital in a mutual) have formed mutual companies for the sole benefit of themselves and their friends. Reciprocal Insurance.

This is a plan of insurance

whereby each member of a reciprocal exchange, acting through an attorney-in-fact, becomes an insurer of, and is insured by, every other member of the exchange.

The members are

known as "subscribers”, which is Latin for "underwriters” . The subscribers exchange contracts for insurance between one another through an attorney-in-fact who manages all the business affairs of the exchange for them.

This is

50 the principle difference between a mutual company and an exchange. Each subscriber signs a power of attorney giving the attorney-in-fact power to do 11in his name, place and stead”, those things which the subscriber could do himself in the conduct of the business.

The power of attorney describes

what the attorneyfs duties are, and what his remuneration shall be.

The power of attorney is strictly limited, and

the attorney1s powers pertain solely to the conduct of the business. The attorney-in-fact may be an individual, partner­ ship, association, or corporation.

In the larger reciprocals,

the attorney, is usually a corporation.

Frequently, in the

better reciprocals there is a board of governors elected by the subscribers from among themselves, whose duty is to see that the attorney-in-fact acts within the powers granted to c.

him by the power of attorney. The power of attorney is of vital importance to the subscribers.

It may put too much power in the hands of the

attorney-in-fact.

Before subscribing to reciprocal

insurance, the power of attorney should be carefully studied. This plan of insurance has, on occasions, been abused

^ William R. Spriegel, and Ernest Coulter Davies, Principles of Business Organization (New York: Prentice-Hall, Inc., 194b), p. 157.

51 by unscrupulous individuals who started exchanges with them­ selves as attorney-in-fact.

Such persons, if high pressure

salesmen, could start a reciprocal and charge their prospects whatever they felt they would stand for to manage the exchange for them.

Sooner or later, of course, the ex­

change 1s share of the premium proved inadequate to pay the losses and it became insolvent.

But by that time, the

attorney had probably made enough for himself to be able to retire in comfort for the rest of his life. In recent years, most states have regulated recipro­ cal exchanges in such a way as to remove this possibility. In California, for example, an exchange must at all times maintain a clear surplus of at least $ 50*000 over all liabilities; if it is writing public liability or workmen's compensation, it must maintain a clear surplus of at least $100,000 over all liabilities.^

That means that before an

exchange can start in business, somebody must lend it at least $ 50,000 or $ 100,000 depending upon the class of insurance to be written.

This loan is usually made by the

attorney-in-fact who stands to lose his money if the exchange 8 fails before it can repay him.

7 Insurance Code, State of California (Sacramento: State Printing Office, 19^6), Section 5050.

8

° Ackerman, o p . cit., p. ^8 9 .

52 In addition to the loan, the attorney is usually re­ quired to furnish a penal bond which can be drawn upon by the exchange if the attorney misappropriates the exchange's funds.

In California, this bond is in the amount of

Furthermore, the laws of California require that an exchange must maintain exactly the same legal reserves as an in­ corporated carrier issuing non-assessable policies. When managed by an honest, competent and experienced attorney operating under an equitable power of attorney, reciprocal insurance is one of the best plans of insurance in existence.

The overhead is limited to the amount stated

in the power of attorney, consequently the subscribers know in advance what the cost of managing their affairs is going to b e . In the case of reciprocals writing policies subject to an assessment, each individual policyholder may be held liable only for his own pro-rata share of the losses; he is not liable for any other policyholder's share.

Most state

laws provide that this possible additional liability may be limited to an amount equal to one additional premium.

Over

a period of years, reciprocals usually accumulate a large surplus.

In most states, when they have acquired a

sufficiently large surplus, they are permitted to write non­ assessable policies.

53 Fraternal Organizations.

Fraternal organizations

confine their business principally to life and disability insurance, however, in some states they are permitted to write fire insurance.

Fraternals are non-profit organiza­

tions operated for the benefit of members of lodges, chapters, et cetera.

Around 1900, these organizations possibly

insured the lives of more persons than the regularly organized companies.

Several factors, however, tended to

decrease this volume of business. The advent of the automobile, movies, and other forms of modern entertainment lessened the social attraction of these lodges.

Group life insurance, with the employer

paying part of the cost also lessened the number of prospects.

Many of such organizations conducted their

business on unsound, non-actuarial lines, resulting in dis­ appointment to the members, consequently, many of them passed out of existence.

Many such orders are still active

in the business, some of them having assets in excess of a hundred million

d

o

l

l

a

r

s

.

^

They still form an important part

of the life and disability field.

9 Education Committee of the National Insurance Research and Review Service, Fraternal Life Insurance (New York: Fraternal Congress of America, i§38J * P • 25.

54 Hospital Associations and Physicians and Surgeons Associations,.

As the names imply, these associations

provide hospital, medical and surgical care for the sick and injured.

These associations, at present, write only a small

percentage of the disability and hospitalization insurance in force, but there seems to be a definite trend towards expansion.

This will probably develop when the various

organizations get together and agree upon some more or less standard policy form and rates. Factory Mutuals. parts of the eountry. and mills.

Factory mutuals are found in many

They write fire insurance on factories

Prevention is their primary object, insurance

being secondary.10

They insist upon the highest standards

of construction and maintenance before they will accept a risk.

They maintain a staff of highly trained fire preven­

tion engineers who inspect all their insured premises at frequent intervals. Their policies usually contain a provision to the effect that the insurance may be suspended immediately if the requisite standards of maintenance are not kept u p . When one of their fire prevention engineers notes the slightest irregularity, he merely hands a notice of

10 Ackerman,

ojd.

clt., p. ^86.

55 suspension to the owner of the factory, and the insurance is suspended at once.

It remains suspended until the engineer

is satisfied that the condition has been completely remedied. This high degree of precaution results in a minimum of losses, with correspondingly low rates. State Funds.

State funds for insuring workmen’s

compensation are found in a number of states.

In some of

these states the fund is monopolistic, which means that private carriers are not allowed to write this insurance. In a majority of the states having a fund, the fund is competitive with the private carriers.

A few states also

have state funds for hail insurance. Generally speaking, the state gives no guarantee beyond the limit of the fund itself.

In California the law

provides that "The State shall not be liable beyond the assets of the State Compensation Insurance Fund for any obligation in connection therewith".11 Summary of chapter.

No matter what type of carrier

assumes the risk, the premiums paid by the policyholders have to cover the losses plus the necessary cost of operat­ ing the business.

Premiums should also be sufficient to

11 Insurance Code, State of California (Sacramento: State Printing Office, 19^6), Section 11771.

56 build up a surplus to absorb the unforeseen losses which may result from an unexpected adverse trend in conditions.

Since

the premiums have to pay the losses* it may reasonably be stated that all insurance is essentially mutual. The carrier acts in a purely fiduciary capacity. When a policyholder pays his first premium, no part of it belongs to the carrier.

The full amount is set up in a

reserve for unearned premiums. for the payment of losses.

This reserve may not be used

With the passing of time, the

premium gradually becomes earned until, at the end of the policy period, the full amount belongs to the carrier.

For

example, in purchasing a fire insurance policy for $12.00 for a period of one year, at the end of the one month $1.00 belongs to the carrier losses, or may be put

and may be used for the payment of into the surplus fund.

$11.00 is held in a fiduciary capacity.

The remaining

If the carrier

should decide to cancel the policy at the end of the first month, it would have to return $11.00. does not belong to the carrier.

The eleven dollars

Assuming that the carrier

keeps the risk, at the end of the second month it may take another dollar, and soon until at the the company has earned

end of twelve months

the full amount of the premium in

return for having assumed the risk.

It is at this point that

the real difference between a stock company and a mutual or reciprocal, becomes apparent.

57 In the case of a stock company, once the premium becomes fully earned the surplus belongs to the corporation and may be retained as surplus or distributed to the stock­ holders as the directors deem advisable.

The policyholders

have no further claim on this money. In the case of a mutual or reciprocal, once the premium becomes fully earned the surplus belongs to the policyholders.

In the case of a mutual, the policy usually

provides that the board of directors shall decide how much of this surplus shall be retained for the sake of safety, and how much shall be distributed to the policyholders in the form of dividends.

CHAPTER IV AUTOMOBILE INSURANCE INTRODUCTION TO AUTOMOBILE INSURANCE The following section of this study is devoted to the types of protection available to purchasers of automobile insurance.

Liability, or third party insurance, is stressed

because this type of insurance is of great importance to all automobile owners.

Direct loss insurance reimburses the

owner for damage or destruction to the automobile.

This

type of loss never exceeds the actual cash value of the vehicle.

On the other hand, liability insurance protects

the owner when he is legally liable for bodily injury to other persons, or damage to property belonging to others. Court action brought against the automobile owner for bodily injury of others may result in a judgment for many thousands of dollars.

Direct loss coverage entails only the value of

the owner's investment in the automobile, while liability coverage protects the owner for possible judgments many times over the cash value of the automobile. The following section is based on the National Standard Automobile Policy form. reliable insurance companies.

This form is used by all

Since the policy Is materially

the same for all companies, and since practically all

59 automobile insurance is written in the National Standard form, no special footnotes are needed.

Direct paragraphs

from the policy will be indented and single spaced, under­ lining will indicate direct quotations which are under consideration. Suggested device. to automobile insurance.

The following section is devoted Before starting this section, ask

each student to go to an automobile insurance company and secure a sample policy.

Policies may also be secured from

any insurance broker. Since almost all automobile insurance is written on the National Standard form, the sample policies obtained will be practically identical. Starting with the first paragraph guide the discus­ sion along the lines presented in the following section. Explanations and items that require special attention will be found in the following pages.

AUTOMOBILE INSURANCE Automobile insurance probably affects more of the population than any other type of personal property carrying an Insurable interest.

Many automobile owners recognize the

need for insurance; however, most states emphasize this need by enactment of special responsibility laws aimed at the

60 elimination of the irresponsible driver from the public highways. The risks involved in insuring an automobile are evident.

Responsibilities are two-fold:

first, to the

other person, and second, to the owner for the protection of his own investment in the automobile.

Since the automobile

owner1s responsibility to the other person is far more important than is the protection of his own investment, this study will deal more comprehensively with liability insurance than with collision, fire or theft coverages.

LIABILITY INSURANCE The driverfs responsibility to the other person is provided for in what is termed liability, or third party insurance.

These coverages are for bodily injury and

property damage.

The protection of the owner's investment

is in the form of fire, theft, comprehensive, and collision insurance. The seriousness of a driver's responsibility to the other person is reflected in the fact that thirty-six of the forty-eight states have found it desirable to enact legisla­ tion in the form of Financial Responsibility Laws. California is one of them.

Briefly stated, the Financial

Responsibility Law requires all automobile owners to carry

61 sufficient liability insurance that will cover any normal claim arising out of any accident for which a driver may be held legally liable. The automobile Insurance policy itself is a personal contract between the company and the named insured.

It

cannot be assigned to another party without the consent of the company.

The reason for this is obvious, the original

policy holder may be a valued selected risk, while the assignee may be a poor risk with a record of many accidents. National Standard F o r m .

If the company is a

reputable one, the policy will be a National Standard Form. The National Standard Form provides the basis for protection, and each company may make additions to, but no omissions from, the coverages as provided.

An agent or insurance

company attempting to sell policies not in the National Standard Form warrants the closest Investigation by the prospective buyer. The declarations, or insuring agreements, as made by the applicant at the time of application, become a part of the policy.

It is very important, therefore, that these

statements be true.

If at any time false statements appear

on the application, and the misrepresentations be discovered, the policy is void.

In filling out an application for any

Insurance, never misrepresent any material fact.

*

62 Three Main Sections of the Standard Automobile F o r m . The policy is made up of three general sections: 1.

The insuring agreements, saying what the company will do;

2.

The exclusions, saying what the company will not do;

3.

The conditions, saying what the insured must do to benefit from the policy.

The condi­

tions also define the rights of both parties to the contract. Insuring Agreements.

The insuring agreements follow

immediately after the introductory paragraphs in the National Standard Automobile Insurance Policy.

These state­

ments indicate what the insurance company will do under the contract.

It should be remembered that underwriters may

include more coverage, but may not delete any of the follow­ ing coverages from the insurance agreement. The following pages will present the insuring agreements found in the national form, plus an explanation of any item that might prove difficult for the average high school student to comprehend. Coverage A — Bodily Injury Liability To pay on behalf of the insured all sums which the insured shall become obligated to pay by reason of the liability imposed upon him by law for damages, including damages for care and loss of services,

63 because of bodily injury, including death at any time resulting therefrom, sustained by any person or persons, caused by accident and arising out of the ownership, maintenance or use of the automobile. Coverage B — Property Damage Liability To pay on behalf of the insured all sums which the insured shall become obligated to pay by reason of the liability imposed upon him by law for damages because of injury to or destruction of property, including the loss of use thereof, caused by accident and arising out of the ownership, maintenance of the automobile. The statement to pay on behalf of the Insured indi­ cates that no actual loss, or payment, by the insured is necessary previous to settlement by the insurance company. In case of suit, the underwriter will assume the liability before any payment or loss on the part of the insured is encountered. All sums which the insured shall become obligated to pay does not infer every sum or the total of all sums.

It

does mean, however, that all sums within the limits of the policy will be paid. Liability imposed by law indicates that only those liabilities under which the Insured is held legally, not morally, will be paid. The phrase, ownership, maintenance, or use, specifies that the owner is covered regardless if he is the operator or n o t . Including the loss of use thereof indicates that the policy covers the insured should he injure the property of

64 someone, and that person no longer could use the property. If, for example, the insured smashed his automobile into a house, thereby precluding use of the property by the owner, the house owner could collect for the damages to the house, plus a reasonable amount of rent that he paid, or will pay, during repairs to the house. Insuring Agreements, Defense, Settlement, Other Payments.

The second section of the insuring agreements

outline the company1s undertakings in respect to the defense of suits against the insured, the payment of premiums on bonds to release attachments and those required on appeal, the payment of expenses, and the repayment of the insured for first aid furnished an injured person. Defense, Settlement, Supplementary Payments It is further agreed that as respects insurance afforded by this policy (under coverages A and B) the company shall (a) defend in his name behalf any suit against the insured alleging such injury or destruction and seeking damages on account thereof, even if such suit is groundless, false or fraudulent; but the company shall have the right to make such investigation, negotiation and settlement of any claim or suit as may be deemed expedient by the company; (b) pay all premiums on bonds to release attachments for an amount not in excess of the applicable limit of liability of this policy, all premiums on appeal bonds required in any such defended suit, but without obligation to apply for or furnish such bonds, all costs taxed against the insured in any such suit, all expenses incurred by the company, all interest accruing after entry of judgment until the company has paid,

65 tendered or deposited in court such part of such judgment as does not exceed the limit of the company's liability thereon, and any expense tincurred by the insured, in the event of bodily injury, for such immediate medical and surgical relief to others as shall be imperative at the time of accident. The company agrees to pay the expenses incurred under divisions (a) and (b) of this section in addition to the applicable limit of liability of this policy. The defense clause, defend in his name and behalf shows that it is the duty of the insurance company, not the insured, to defend a law suit wherein the insured is the defendant.

Naturally, suits brought against the insured,

not the insurance company, therefore the agreement is to defend in his name and behalf. Again, the defense clause states even if such suit is groundless, false, or fraudulent.

This statement indicates

the underwriter's obligation to defend the defendant even if it can

be proved that all claims are false or fraudulent.

The defense clause also states that it is the company's prerogative to settle suits out of court after an investiga­ tion. The supplementary payment clause indicates the company's agreement to pay premiums on bonds to release attachments during a law suit.

The usual procedure in a

suit at law is for the plaintiff's attorney to attach sufficient property of the defendant to insure payment of the expected judgment.

Attached property cannot be used or

66 removed under court order.

The favorite object of attachment

is the defendantfs bank account.

To release the attached

property, it is necessary to provide a bond in the amount equal to the attached property.

The insurance company agrees

to pay the costs of maintaining the bond, but not to furnish the bond itself. The National Standard Form states that all premiums on appeal bonds will be paid by the underwriter.

The word

all should be emphasized because if a judgment against a policyholder is adjudged by the court, even if it is above the limits of the policy, and the underwriter decides to appeal the case, he must pay all premiums on the appeal bonds. Few realize that the insuring agreement included in National Form definitely states that expenses by the insured in the event of bodily injury, for such immediate medical and surgical relief to others as shall be imperative at the time of accident shall be paid by the underwriter.

This

element can best be explained by the fact that when a person is injured, the humane thing to do is to provide immediate first aid.

Rather than praise the insurance company's

humane philosophy for offering to pay for first aid treat­ ment, regardless of the lack of fault of its named insured, it should be remembered that in many cases it is possible to secure a waiver of any further action by the immediate

67 payment of a small settlement sum.

It should also be

remembered that immediate first aid often minimizes the injury, and consequent damage and liability of the insurance company.

It Is important to realize that this payment is

confined to relief to others, and does not include any pay­ ment to the named insured in case he is injured in the accident.

In some medical payment policies, as explained

later, the insured is covered, however, in this particular type of coverage, the insured is not covered. The fact that the company agrees to pay the expenses in addition to the applicable limit of liability of this policy means that after all expenses of investigations, court costs, supplemental payments, et cetera, have been met, the policy holder is still entitled to the full coverage as set forth in the limits of the policy.

To illustrate this

point, assume that ffA M was involved in an accident with nB 1f. "h's" insurance company has paid $200.00 first aid costs for " B ’s" injuries, but could not induce "B” to sign a waiver. "B” is awarded a judgment of $5,000.00 from r,A tf which the insurance company decides to pay.

In' the meantime, it has

cost " A ^ " insurance company $600.00 to fight ,fB 1s” claim in court.

Before actually paying the judgment, $5,000.00, it

has cost the underwriter: $200.00

300.00

for first aid to f,B n for investigating all phases of the accident

68 $ 600.00

attorney's fees and court costs

$1,100.00

total costs before the judgment payment

According to the clause above, this $1,100.00 cannot be deducted from the $5,000.00 limit of "A's" policy.

In

actuality, in this case, the limit of r,A's" policy was $6,100.00 rather than $5,000.00 as set forth on the face of the policy. Automatic Insurance for Newly Acquired Automobiles If the named insured who is the owner of the automobile acquires ownership of another automobile, such insurance as is afforded by this policy applies also to such other automobile as of the date of its delivery to him, subject to the following additional conditions: (1) if the company insures all automobiles owned by the named insured at the date of such delivery, insurance applies to such other automobile, if it is used for pleasure purposes or in the business of the named insured as expressed in the declarations, but only to the extent applicable to all such previously owned automobiles; (2; if the company does not insure all automobiles owned by the named insured at the date of such delivery, insurance applies to such other automobile, if it replaces an automobile described in this policy and may be classified for the purpose of use stated in this policy, but only to the extent applicable to the replaced automobile; (3) the in­ surance afforded by this policy automatically termi­ nates upon the replaced automobile at the date of such delivery; and (t) this agreement does not apply (a) to any loss against which the named insured has other valid and collectible insurance, nor unless the named insured notifies the company within ten days following the date of.delivery of such other automobile, nor (c) except during the policy period, but if the date of delivery of such other automobile is prior to the effective date of this policy the insurance applies as of the effective date of this policy, nor (d) unless the named insured pays any additional premium required because of the application of this insurance to such other automobiles.

69 This section specifies that the named insured must merely acquire an interest in an automobile, not absolute ownership.

The fact that the automobile is being purchased

under a conditional sales contract does not void this coverage. Automatic insurance coverage is transferred to the newly acquired automobile regardless if the transfer is actual or constructive.

If title has passed,.but not the

automobile, the insured is covered under this clause. Automatic coverage is subject to the following: 1.

If the underwriter insures all automobiles owned by named insured

2.

If all are not insured by the same company, then automatic coverage is extended to the newly acquired car _if it replaces the one covered by the underwriter.

Policy Period, Territory, Purposes of U s e .

The final

section of the insuring agreements pertains to where the automobile can be driven and still be covered by the insurance contract. Policy Period, Territory, Purposes of U s e . This policy applies only to accidents which occur (and to direct losses to the property insured which are sustained) during the policy period, while the automobile is within the United States in North America (exclusive of Alaska) or the Dominion of Canada, or while on a coastwise vessel between ports within said territory,

TO and is owned, maintained and used for the purposes stated as applicable thereto in the declarations. Exclusions.

The National Standard Automobile

Insurance Policy definitely states uses, operations, and liabilities which are not covered by the policy.

Prom the

point of the purchaser, a knowledge of these exclusions is extremely important.

Under certain circumstances, as

described in this section, the normal automobile owner will tend to be more cognizant of the need for caution when he knows that his insurance is not in effect. This policy does not apply: [Under any of the above coverages,) while the automobile is used in the business of demonstrating or testing, or as a public or livery conveyance, or for carrying persons for a consideration, or while rented under contract or leased, unless such use is specifically declared and described in this policy and premium charged therefor. The introduction, this policy does not apply cannot be misunderstood.

It means simply that insurance never

attaches to any of the succeeding paragraphs of exclusions. While the automobile is used in the business of demonstrating or testing applies to new, or used car dealers. It does not apply to an individual demonstrating his own automobile to a friend. Ordinary insurance never applies when the vehicle is used as a public or livery conveyance.

It stands to reason

that the probability of accident is enhanced when an

71 automobile is rented or leased.

Insurance is provided,

however, for this type of risk at much higher rates. This policy does not apply: while the automobile is operated by any person under the age of fourteen years, or by any person in violation of any state, federal or provincial laws as to age applicable to such person or to his occupation, or by any person in any prearranged race or competitive speed test . . . The above exclusion applies to all parts of the policy including collision.

Insurance companies will not

insure a driver under fourteen years of age.

This clause is

also enforced by the underwriter even though the driver is legally entitled to drive. The driver is also excluded from coverage whenever the law so states in reference to age, condition, or suspension of license.

The reason for this is obvious, if

the driver is operating an automobile against the law it is definite evidence of negligence for which the insuring company, if not for this exclusion, would be liable without recourse. The phrase in the exclusions, or b£ any person in any prearranged race or competitive speed test indicates that a chance race, or passing another car, do not constitute acts that would fall under this exclusion. Underwriters will not assume undertain and unknown risks.

They will not assume hazards that cannot be appraised

in advance, hence, the National Form states the following

72 exclusion, to any liability assumed by the insured under any contract or agreement.

Insurance afforded is protection

against liabilities imposed by law. . . . to bodily injury to or death of any employee of the insured while engaged in the business of the insured, other than domestic employment, or in the operation, maintenance or repair of the automobile; or to any obligation for which the insured may be held liable under any workmen1s compensation law: The liability between employer and employee is much greater than liability to the public.

In addition to that

fact, most employees are covered by Workmen*s Compensation Insurance.

These types of losses are not figured in the

rates for automobile insurance.

They are exclusions in the

National Form Policy. It should be noted that domestic help is not excluded in the National standard exclusions.

This type of help is

not considered to be part of the business of the insured. For example, if the maid was a passenger in the insured’s automobile, and was injured in an accident, the insured’s policy would pay all legal obligations within the limits of the policy. It should be noted that all employees hired for operation, maintenance or repair of the automobile, whether domestic or not, are excluded by the National form.

The

hazard in these occupations is greater than intended to be covered by automobile liability insurance.

73 Another exclusion is stated as follows:

or to any

obligation for which the insured may be held liable under any workmen1s compensation l a w . This exclusion serves a double purpose.

It makes

clear that the policy does not insure any obligation of the insured to his employees under workmenfs compensation laws. It also excludes any obligation for which the insurer might be held under these laws. In the two cases above, it is assumed that the insuredfs workmen’s compensation policy would cover such cases.

Insurance of this type is not contemplated by

automobile insurance companies, and is not figured in their actuarial rates. Conditions.

Conditions of the National Standard Form,

as the term indicates, refer to all general provisions of the policy. Automobile Defined — Two or More Automobiles Except where specifically stated to the contrary, the word ’automobile’ wherever used in this policy shall mean the motor vehicle, trailer or semi-trailer described herein; and the word ’trailer’ shall include semi-trailer. When two or more automobiles are insured hereunder, the terms of this policy shall apply separately to each but as respects limits of bodily injury liability and property damage liability a motor vehicle and a trailer or trailers attached thereto shall be held to be one automobile. The paragraph above defines the word "automobile”, trailer, and semi-trailer.

Defining this word sets up a

74 description of the unit exposed to risk.

A trailer designed

to be pulled by a vehicle presents little risk if parked in the ownerfs yard, however, on the highway it entails a definite hazard, and must be covered by insurance to protect the owner. Limits of Liability The limit of bodily injury liability expressed in the declaractions as applicable to 'each person' is the limit of the company's liability for all damages, including damages for care and loss of services, arising out of bodily injury to or death of one person in any one accident; the limit of such liability expressed in the declaration as applicable to 'each accident1 is, subject to the above provision respecting each person, the total limit of the company's liability for all damages, including damages for care and loss of services, arising out of bodily injury to or death of two or more persons in any one accident. Regardless of the variety of coverages appearing in the policy, this condition always applies to bodily injury liability coverage and to no other.

In the declarations,

the limits of liability of the company are set forth for each person and to each accident.

This condition is set forth to

define its counterpart in the declarations. The limit of liability expressed in the declarations as applicable to each accident is defined as the total limit for all damages arising out of bodily Injury t o , or death of, two or more persons in any one accident.

This means that no

matter how many are hurt or killed in any one accident, the liability of the company is limited to the amount set forth in the declarations for any one accident.

75 The following clause in the definition of the limit applicable to each accident, to the effect that this limit is subject to the above provision respecting each person is of extreme importance.

Assume that a person covered by

liability insurance in the limits of $ 5 ,000.00 each person and $ 10 ,000.00 each accident injured three people and all three were awarded judgments as follows: A

received

a

$ 7>500

judgment

B

received

a

$1,500

judgment

C

received

a

$500 judgment

$ 9>500 total judgments for one accident. Since the upper limit on insured's policy states the

any one accident of the

sum $10 ,000.00and since the

judgments awarded equal only $ 9 ,500 .00 , it appears that the insured is fully covered byinsurance, and writer will have to pay all true I

the judgments.

that the under­ This is far from

The condition expressed, subject to the above

provision respecting each person, literally means that despite the fact that judgments awarded equal less than the upper limits of the policy no one judgment can exceed the liability as expressed in the declarations for any one injured person.

In the example stated, "A” will receive

$ 7 >500 , of which the insurance company will only pay $ 5 >000.00 and the named insured must pay the remaining $ 2 ,500 .00 .

76 Judgments awarded to ,!B I! and "C11 will be paid entirely by the underwriter because they were each under $5*000.00 Financial Responsibility Laws Any insurance provided by this policy for bodily injury liability or property damage liability shall conform to the provisions of the motor vehicle financial responsibility law of any state or province which shall be applicable with respect to any such liability arising from the use of the automobile during the policy period, to the extent of the coverage and limits of liability required by such law, but in no event in excess of the limits of liability stated in this policy. The insured agrees to reimburse the company for any payment made by the company on account of any accident, claim or suit, involving a breach of the terms of this policy and for any payment the company would not have been obligated to make under the provisions of the policy except for the agreement contained in this paragraph. The statement, any insurance . . . shall conform to the provisions of the motor vehicle financial responsibility law of any state or province, brings the policy into conformity with the law of the state wherein the policy is issued.

It does not, however, change any of the exclusions

or conditions. The limits of the policy are not altered by the following in the responsibility clause, but in no event in excess of the limits of liability stated in this policy. It is very important to realize that financial responsibility laws are enacted in the interest of persons who may be injured.

As a whole, these laws deprive the

insurers of certain defenses in order that collection by judgments by injured persons be certain.

This fact might be

77 construed to free the insured from his obligations to the insurer.

If the insured causes a loss to the underwriter,

which ordinarily could set up a defense at suit, but is, however, denied by the responsibility law, then the insurer may force the insured to make restitution for the sum paid by the underwriter as was obligatory under the force of the responsibility law.

Stated simply, the following paragraph

in the National Standard Form indicates that the insured is not freed from his obligations to the insurer in case of bodily injury.

The insured agrees to reimburse the company

for any payment made by the company on account of any accident Involving a breach of the terms of this policy and for any payment the company would not have been obligated to make under the provisions of this policy except for the agreement contained in this paragraph. Notice of Accident — Claim or Suit U p o n ^ h e occurrence of an accident written notice shall be given by or on behalf of the Insured to the company or any of its authorized agents as soon as practicable. Such notice shall contain particulars sufficient to identify the insured and also reasonably obtainable information respecting the time, place and circumstances of the accident, the name and address of the injured and of any available witnesses. If claim is made or suit is brought against the insured, the insured shall immediately forward to the company every demand, notice, summons or other process received by him or his representative. This condition designates two distinct obligations of the insured:

78 1.

To notify the underwriter of the occurrence of an accident

2.

To notify the underwriter if a suit or claim is initiated.

It should he stressed that this condition demands the cooperation of the insured.

The securing of witnesses*

names and addresses is important to the company as well as to all policyholders.

This information tends to lessen the

cost of handling the claim which* in turn* tends to provide insurance at lower cost to all.

No witness should be

omitted simply because of his statement that he did not see what happened. The second part of the insured's obligation is his agreement not to do certain acts.

The insured shall not*

except at his own cost* voluntarily make any payment * assume any obligation or incur any expense other than for such immediate medical and surgical relief to others as shall be imperative at the time of accident. Every policyholder should realize that if he voluntarily makes any payment for damages* or assumes any expense connected with the accident, he does so at his own cost I

He may be forced to assume all the cost of the

accident.

Payments by insured* or assumptions of obligations,

are frequently considered as admissions of liability by courts.

It can easily be seen that insurance companies

79 could term this a lack of cooperation on the part of the insured, and thus void the insurance contract. Action Against Company No action shall lie against the company unless, as a condition precedent thereto, the insured shall have fully complied with all the conditions hereof, nor until the amount of the insured's obligation to pay shall have been finally determined either by judgment against the insured after actual trial or by written agreement of the insured, the claimant, and the company, nor in either event unless suit is instituted within two years and one day after the date of such judgment or written agreement. Any person or his legal representative who has secured such judgment or written agreement shall thereafter be entitled to recover under the terms of this policy in the same manner and to the same extent as the insured. Nothing contained in this policy shall give any person or organization any right to join the company as a co-defendant in any action against the insured to determine the insured's liability. Bankruptcy or insolvency-of the insured shall not relieve the company of any of its obligations hereunder. These conditions relate to defining and limiting the rights of the insured.

The conditions that no action shall

be against the company unless . . . the insured shall have fully complied with all conditions hereof sets up a condition precedent to this contract of insurance.

The condition

precedent indicates that before the company must assume liability on the contract, the insured must comply with certain conditions. Examples: 1.

The insured fails to notify the company of the accident in accordance with the condition in the contract pertaining to notification.

80 Neither the insured nor the judgment creditor can maintain suit against the underwriter. 2.

If the insured fails to testify at the trial, he cannot collect from the company.

3.

If the insured promptly reports the accident, but fails to forward to the company the summons, neither he nor the judgment creditor can collect from the company.

In the condition mentioned above, the statement, written agreement of the insured, the claimant, and the company justifies the company*s privilege to settle any claim out of court.

Suits based on such an agreement are very rare.

It is through this method that most claims are settled.

As

long as the agreed amount is within the policy limits of the insured, this is the best method of consummating a claim from the standpoint of the insured.

In many cases, it is

also most favorable on the part of the claimant also. While making this study, the investigator found a case filed in 19^7 in Orange County against W. S. Sebastian and the Orange County Mutual Insurance Company.

Abridged, the

details of the case indicated that the vehicle owned by W. S. Sebastian, and driven by his son Stanley, was involved in an accident wherein the claimants all (3 ) received severe bodily injuries.

Since the accident happened in a dense fog,

the insurance company, and W. S. Sebastian, offered to settle

8l all claims with the three claimants for $20,000 cash.

This

offer was refused by the claimants, and the case, defended by joint attorneys for the underwriter and the insured, came to trial.

At this point it should be stated that the insured

was a man of considerable means, yet he carried only $5*000 bodily injury insurance on his automobile.

It is considered

sound practice to carry bodily injury insurance in equal amounts to the wealth possessed.

The insured, in this case,

was offering the claimants $ 15*000 of his own personal cash, while the insurance company joined in the offer for the full amount of Mr. Sebastianfs policy, $5,000.

At the trial it

was stressed that fog, plus the fact that the claimants were either parked, or traveling at such a low speed, the result­ ant collision was due, in part, to their own contributory negligence.

They were denied any judgment.

During an inter­

view with Mr. Sebastian after the trial, this investigator learned that Mr. Sebastian had increased his liability insurance policy to $100,000.00. Subrogation In the event of any payment under this policy, the company shall be subrogated to all the insured's rights of recovery therefor and the insured shall execute all papers required and shall do everything that may be necessary to secure such rights. This condition makes it obligatory under the insurance contract for the insured to cooperate with the insurer if an event indicating the use of subrogation is

82 presented.

Subrogation, in this case, indicates that a third

party received payment from the underwriter under a policy, and the insurer desires to recover through court action from whoever caused the loss.

Under ordinary court proceedings,

the insurer would have this right, however, as stated above, it serves to make it mandatory for the insured to cooperate in any subrogation matter.

It becomes part of the contract

of insurance.1 Changes No notice to any agent, or knowledge possessed by any agent or by any other person shall be held to effect a waiver or change in any part of this policy nor estop the company from asserting any right under the terms of this policy; nor shall the terras of this policy be waived or changed, except by endorsement issued to form a part hereof, signed by . . . This condition of the policy indicates that no change in the policy can be made except by the company itself and signed by a duly authorized executive.

It is very important

to purchasers of a policy to know that no one, except an executive of the insurance company, can change any portion of the coverage conditions, exclusions, or insuring agree­ ments.

In many cases, an over zealous salesman will assure,

a prospective purchaser that certain parts of the contract can be changed, or that he will be glad to make the contract

1 Charles Sunderlin, On Automobile Insurance (Albany, New York: Matthew Bender ancf"Company, 192*9), "p. 241.

83 conform with the desires of the prospect.

He cannot.

Only

changes signed by an authorized executive of the company in the form of an endorsement are legally obligatory on the part of the underwriter. Cancellation This policy may be canceled by the named insured by mailing written notice to the company stating when thereafter such cancelation shall be effective* in which case the company shall, upon demand, refund the excess of premium paid by such insured above the customary short rate premium for the expired term. This policy may be canceled by the company by mailing written notice to the named insured at the address shown in this policy stating when not less than five days thereafter such cancelation shall be effective, and upon demand the com­ pany shall refund the excess of premium paid by such insured above the pro-rata premium for the expired term. The mailing of notice as aforesaid shall be sufficient proof of notice and the insurance under this policy as aforesaid shall end on the effective date and hour of cancelation stated in the notice. Delivery of such written notice either by the named insured or by the company shall be equivalent to mailing. The companyfs check or the check of its representative similarly mailed or delivered shall be a sufficient tender of any refund of premium due to the named insured. If required by statute in the state where this policy is issued, refund of premium due to the named insured shall be tendered with notice of cancelation when the policy is canceled by the company and refund of premium due to the named insured shall be made upon computation thereof when the policy is canceled by the named insured. Any contract, including a contract of insurance, can ‘ be canceled by mutual consent of the parties.

If it were not

for the preceding condition, an insured could not cancel his policy and receive a rebate if the company would not agree to the cancelation and vice versa.

The standard short rate

premium computation is used to figure the rebate due the

84 insured when the insured cancels the policy.

At all times

the insured is penalized when the policy is canceled at his request because: 1.

Of the expense of issuing the policy

2.

Of the losses that the underwriters would suffer if insureds changed companies often.

The company may cancel the policy by written notification to the insured.

It is the duty of the under­

writer to return all unearned premiums,, but not

condition

precedent to cancelation. Declarations By acceptance of this policy the named insured agrees that the statements in the declarations are his agree­ ments and representations, that this policy is issued in reliance upon the truth of such representations, and that this policy embodies all agreements existing be­ tween himself and the company or any of its agents relating to this insurance. This is the final condition of the National Standard Automobile Insurance Form.

The named insured makes three

specific agreements, the first of which is, that the state­ ments in the declarations are his agreements and representa­ tions .

Policies are issued on the basis of representations

of the insured.

This condition eliminates a signed statement

of declarations by the insured since it is incorporated in the policy contract itself. The statement, and that this policy embodies all agreements existing between himself and the company or any

85 of its agents relating to insurance, precludes the insured from stating later that the policy does not set forth the agreement which was made between himself and the company. It is imperative that all statements made by the insured be completely accurate.

If any untruths be dis­

covered by the insurance company at any time, the coverage becomes void.

If, for example, an insured owned a home in a

sparsely settled area where insurance rates are low, and also a home in some urban area where rates were high and spent over 50 P©** cent of his time in the urban area he must pay the higher urban rates for his automobile insurance.

COLLISION INSURANCE If occupants

an accident occurs

wherein a driver injurs the

of another automobile he is liable, if it can be

proved that he was negligent, for bodily injury, property damage, plus liability

the loss to his

is determined by a

own automobile.If his suit-at-law, itis possible

that a judgment will be levied against him for many thousands of dollars.

It is easy to see that third party insurance,

where the driver could be forced by law to pay a large amount of money as the result of an accident, is much more important than direct loss insurance whereby the insurance company pays only for the damage to the insured*s automobile.

86 There is a trend* at the present time, for many drivers who own their automobiles outright* not to carry collision insurance of any kind.

Extremely high collision insurance

rates and increased knowledge of insurance itself, are directly responsible for this trend.

Automobile owners who

refuse to carry collision insurance must, of necessity* own their vehicles outright.

If the automobile is being

purchased on a conditional sales contract, the finance company* or bank* will demand collision insurance on their collateral.

Inadvertently* the underwriters are losing

their choicest desired risks because, in most cases* the automobile owner who will not carry collision insurance probably has had no* or very few* minor accidents.

He does

not feel that the cost of collision insurance is justifiable in his case* and indeed* it is not. There are two additional reasons why the careful driver* and outright owner of his automobile, may not carry collision insurance.

In the first place* the fact that he

owns his automobile outright may indicate his ability to pay for any direct loss.

Secondly, and more important* this

type of individual is probably more versed in insurance than the ordinary automobile owner. To explain the latter reason, in California and many of the other states* Driver's Responsibility Laws have been enacted.

These laws require all drivers to carry liability

87 insurance, or furnish proof of ability to pay losses to the other party.

Furthermore, they set up certain procedures to

make collection certain, and to eliminate various preceding defenses.

In other words, in states that have enacted this

type of law, it is comparatively simple to force insurance companies to pay the damage to the owner of an automobile who carries no collision insurance.

It is, of course,

necessary to show that the accident was wholly, or in part, the fault of the other person; however, the principle of contributory negligence tends to operate in favor of the owner who does not carry collision insurance. In view of the fact that the insuring agreements, conditions, and exclusions, as explained in the “Liability Insurance" section of this study, are the same for collision insurance, they cover the entire policy; this section on collision protection will be abridged to show the coverage offered by collision insurance, the deductible clause, rates for deductibles, and what collision insurance to carry. Collision insurance is designed to indemnify the automobile owner for damages sustained to his car as a result of collision with any stationary or moving object, or from damage due to the automobile turning over.

Claims

under this type of insurance are paid whether the insured is at fault or n o t . For all purposes and intent, there is no such thing

88 as full coverage in reference to collision insurance. Delimited from collision, there is no such thing as full automobile insurance coverage.

This will be explained in

summation of this automobile insurance section. There are very few companies that will write one hundred per cent coverage for collision.

There are still

fewer purchasers willing to pay the tremendous premiums for this type of collision coverage.

Insurance companies

realize that the great majority of collision damage never exceeds $100.00.

A little more frequently, the damage

amounts to $ 50 .00 , and still very seldom does the damage reach $25.00.

The most popular types of collision insurance

are the "deductibles,f.

"Deductibles11 simply means that the

sum set forth in the insuring agreements is deducted from the amount of the damage.

For example, assume "A" had a

$ 25.00 deductible insurance policy, and that a minor mishap to his automobile cost $20.00 to repair. company would pay nothing. $25.00 from $20.00.

The insurance

It is impossible to deduct

Assume the accident cost "A” $30.00.

The insurance company would deduct $25.00 from $30.00 and pay "A" the remaining $5.00, but "A”, regardless of the fact that he had collision insurance, would still have to pay $25.00.

It should be remembered that, at the present time,

"A" is paying an insurance collision premium of approximately $60.00 per year for the privilege of paying the $ 25.00 his

89 $30.00 accident cost.

It is difficult for this investigator

to see value in a $ 25.00 deductible collision insurance policy. Rates for the different "deductibles" vary. higher the amount deductible, the less the premium.

The On a

new, or good used car, the $100.00 deductible policy purchased by a careful driver, is the least of the collision insurance evils.

A poor driver, on the other hand, one prone

to get involved in numerous accidents, would be wise to purchase $25.00 deductible collision insurance.

It should

be remembered, however, that this type of driver is a poor risk to the company, and it is the underwriter’s right to cancel the policy at any bime.

This is done very often.

Finally, if collision insurance is deemed necessary, it is suggested that the policy be purchased from a mutual or dividend paying company.

(See Appendix A, p. 116.)

FIRE, THEFT, AND COMPREHENSIVE POLICIES The hazards of bodily injury and property damage are the most serious of those associated with the owning and driving of an automobile.

That type of insurance Is termed

liability or third party protection.

Collision, fire, theft

and comprehensive policies protect the owner’s investment in the automobile and are termed direct loss coverages.

It

90 cannot be overly emphasized that thirty party insurance is many times more important to the owner of an automobile than is direct loss coverage.

If, after securing liability

insurance, the automobile owner desires to protect his own interest in the vehicle, then collision, fire, theft, and comprehensive coverages are designed to fit this need. Fire and Theft insurance affords protection to the owner of an automobile for loss due to smoke, lightning, and fire.

This policy also applies to damage of smoke or smudge

due to any stationary heating appliance in a garage.

The

fire section of the policy also covers damage to the automobile during transportation.

As in the preceding

section, the National Standard Form applies to the coverages discussed in this section; it states: To pay for direct and accidental loss of or damage to the automobile caused by fire or lightning, smoke or smudge caused by any sudden, unusual, and faulty operation of any fixed heating equipment serving the premises in which the auto is located, or the stranding sinking, burning, collision, or derailment of any conveyance in or upon which the automobile is being transported on land or water. Theft insurance, usually written as a part of the fire policy, covers loss or damage to the automobile caused by theft, larceny, robbing, or pilferage.

Theft coverage

applies to all equipment pertaining to the automobile, and attached to it.

It never covers robes, clothing, or other

personal effects of the owner.

It should be noted that the 'policy (National Standard Form) states loss or damage to the automobile.

The word

•’damage1' makes the company liable if the vehicle is destroyed or damaged due to attempted or actual theft, robbery, or pilferage.

For example, assume that a thief damaged the

metal surrounding a spot light that he was trying to steal. The policy would pay for the loss of the spotlight, if it were removed, plus the cost of repairing the damage to the metal. Theft insurance will, in addition to paying the loss of the automobile, reimburse the policyholder for expenses involved in hiring another automobile or taxi.

Almost all

policies pay up to $5*00 per day, beginning the third day after the theft Is reported, for this service.

Most policies

limit this type of payment to $150.00 maximum, or the actual cash value of the car whichever is less.

These payments

cease immediately when the whereabouts of the car become known to the insured or to the company. According to the National Standard Form, these pay­ ments may not be deducted from the final settlement.

If the

automobile,was worth $ 500.00 when stolen, and the insured received $ 150.00 in payments for hiring another auto, it is the duty of the company to reimburse the insured the full $500.00.

They may not deduct $150.00, and settle for $350.00.

92 The Comprehensive Fire and Theft Policy.

Almost

every type of damage to the automobile is insured against under this type of policy except collision, war invasion, civil war, insurrection, revolution, or confiscation by any governmental or civil authority, wear and tear, mechanical breakdown, damage to tires unless by fire or theft, or

.

unless coincident with other loss that is covered by the comprehensive policy. Other than the exceptions listed above, comprehensive covers any loss or damage.

An almost endless list of

possibilities can be seen to come under the protection of this type of policy, for example, comprehensive fire and theft will protect against any of the following hazards:

1 . Fire 2.

Theft

3.

Smoke damage

4.

Scorching

5*

Staining

6.

Spotting

7.

Riot

8 . Civil commotion 9.

Vandalism

10.

Malicious mischief

11.

Strikes

12.

Wilful damage

93 13.

Submersion

14.

Abnormal tides

15.

Rain

16 .

Sleet

17.

Snow

18 . Sandstorm 19.

Duststorm

20.

Theft by employee

21.

Theft by member of family

22.

Every form of embezzlement

23.

All transportation losses

24.

Missiles

25.

Falling objects, aircraft or not

26.

Glass breakage

27.

Et cetera

It is suggested that when purchasing fire and theft insurance, the buyer ask for the rates on comprehensive fire and theft.

In many case^ the premiums will be the same, or

only slightly higher than combined fire and theft!

MEDICAL PAYMENTS COVERAGE Related to bodily injury and property damage insurance, but not truly a part of it, is coverage for medical payments. This is a relatively inexpensive coverage costing

9^ approximately four dollars per year.

This investigator

believes it to be a valuable and important addition to the insurance that should be carried by all automobile owners. The National Standard Form states: “To pay all reasonable expenses incurred within one year from the date of the accident for necessary medical, surgical, ambulance, hospital, professional nursing, and funeral services to or for each person who sustains bodily injury, sickness, or disease caused by accident, while in or upon, entering or alighting from the automobile if the automobile is being used by the named insured or with his permission.” Medical payments insurance grew from an undesirable situation known as the "guest” hazard.

Underwriters were

plagued with a multitude of claims from passengers, and sometimes direct members of the family, for reimbursement of minor sums paid for medical attention due to accidents. Many of these claims were partial or outright fraud.

To

- eliminate this condition, insurance companies devised medical payments coverage, and charged low rates for its protection. This type of coverage is usually written in multiples of $250.00.

The four dollars a year cost of this policy, as

previously mentioned, is the price of the second multiple or $500.00.

This investigator believes such a sum is sufficient

for most accidents, and represents the multiple wherein the insured receives proportionately the most coverage for the least premium.

95 It should be stressed that under this coverage the benefits apply to all passengers in the automobile whether one or ten.

Furthermore*, it covers the named Insured* plus

his spouse, when riding in any other automobile. With the inclusion of bodily injury and property damage* plus medical payments* the National Standard Form affords all these coverages for the use of any other non­ owned automobile being operated by, or in behalf of* the named insured or spouse.

In the same manner* liability

insurance applies to the named automobile while being driven by another party with the insured's permission. provides a two way effect:

This

the insurance following the car*

and the insurance following the driver.

The only stipula­

tion is infrequent use of the vehicles by other parties.

SUMMARY OF AUTOMOBILE INSURANCE In summarizing this section on automobile insurance, It has been shown that liability insurance Is by far the most important coverage needed by the automobile owner.

This

type of policy covers accidental bodily injury or property damage to third parties u£ t^o the limits of the policy. Practically no collision insurance is written that will pay one hundred per cent of any claim.

Underwriters do

not like to assume such risks* purchasers are most reluctant

96 to pay the very high premiums it necessitates.

Other types

of collision insurance indemnify the insured u£ t£ the limits of the policy. Fire insurance indemnifies the owner for loss due to fire up to the limits of the policy.

Its accompanying

coverage, theft, covers the entire loss of the automobile, or any part permanently attached to it, u£ jbo the limits of the policy. Comprehensive fire and theft provides protection

.

against many hazards, however, many are deleted from its coverage. There is no such thing as "full coverage automobile insurance” .

Read the policy.

CHAPTER V AUTOMOBILE INSURANCE AND THE FINANCE COMPANY To the finance company, insurance serves a two-fold purpose: 1.

It produces profit

2.

It serves to protect their collateral.

At the present time, no automobile dealer will sell on credit, and no finance company will finance, an automobile not covered by direct loss insurance.

This type

of insurance protects the dealer and finance company. offers no liability protection to the purchaser.

It

Under the

above circumstances, wherein the finance company and the automobile dealer both demand insurance when an automobile is purchased on a time payment plan, the opportunity for the dealer, finance company, and the insurance company to combine goals in forcing the prospective auto purchaser to buy insurance mutually profitable to all three, is a situation conducive to the well-being of the companies at a very high cost to the buyer.

This is usually termed "rebating to

originator". Insurance companies are very willing to make rebates to dealers and finance companies for two reasons: 1.

The acquisition cost of such business is negligible

98 2.

It produced the high volume of business insurance companies needed to insure the operation of the “law of large numbers".

It should be remembered that the cost of securing low business, the acquisition cost, is extremely high in the insurance business.

Under the American Agency Plan, as

previously discussed, the agent may receive as much as fifty per cent of the first premium paid on a new account, and up to fifteen per cent on all renewals!

On the other hand,

when a finance company on its own volition offers business to an insurance company, the latter can easily afford to rebate part of the profit because the acquisition cost was, for all intent, nothing. The second reason for the willingness of insurance companies to make rebates to dealers and finance companies is the theory of probabilities and the law of large numbers. The more policies they could write, the more secure their position in underwriting, and the more profits they could realize.

The theory of probabilities and the law of large

numbers are the basis for actuarial computations, the setting of premiums, and the realization of profits. Some of the better insurance companies, however, will not grant large rebates to finance companies.

In fact,

there are some who refuse this type of business altogether. The reason for this lies in the fact that those insurance

99 companies that accept all the risks offered by finance companies, must of necessity, acquire a great many hazardous policyholders.

This type of risk is unselected.

costly to underwriters.

It is

Because of the cost involved, this

type of insurance company must charge premiums high enough to cover claims, plus its rebate to the finance company.

It

is the purchaser buying an automobile on time that pays the rebate.

The only recourse is for the purchaser to demand

that the dealer place the contract with a bank, or a reliable finance company, that will allow the buyer to place insurance with the company selected by him. There is a decided difference between insurers whose business originates from a desire and need for protection, and those to whom insurance is secondary to financing an automobile.

This difference is evidenced in the rates of

the two types of companies, the amount of the' premiums the insured must pay. There is another very decided lever finance companies use to prod their customers into taking insurance from the companies that grant the largest rebates.

This lever is

simply to combine into the monthly payments the amount of the insurance.

Seldom do even the more reliable finance

companies designate how much the insurance amounts to in the monthly payments.

Occasionally, this sum is combined into

the "carrying charge" which equals the insurance premium,

100 interest, plus miscellaneous charges.

Under these plans,

the finance company can easily hide large insurance premiums. Assume, however, that the purchaser has demanded an account­ ing of the cost of insurance and has complained about it. The finance company has three alternatives, if it desires to keep the deal: 1.

Grant insurance coverage in another company rebating less of the premium

2.

Offer to allow the purchaser to select and pay for his own insurance providing it meets the finance company's standards

3.

Offer "Vendor's interest only" insurance.

Alternative number one is used only as the last recourse.

Such action on the part of the finance company

decidedly lowers its profit on the transaction. At first it seems strange that alternative number two, the customer's right to choose the insurance company, is usually offered to those customers whose credit summary definitely shows them to be of the lower income group, the type needing the extra savings that more reasonable insurance would provide. It is not so strange, however, when it is known that the finance company will demand that the customer choose a company approved by them, and then pay a y e a r 's premium in advance.

This type of customer usually does not have the

101 necessary cash to pay a y e a r ’s premium in advance, hence they are forced to accept insurance at the discretion of the finance company. Vendor’s Interest O n l y .

The third alternative,

offering vendor’s interest only insurance, deserves particular attention.

In the first place, few of the general

automobile purchasing public have ever heard of, or know the operations of vendor's interest only insurance.

This type

of policy is also known as ’’one interest coverage”, "single interest only”, "vendor's coverage", et cetera.

As the name

implies, "vendor's interest only", insures only the interest of the finance company.

It does not in any way protect the

interest of the customer. Vendor's interest only insurance mhy be of value to the customer, it may be of value to the finance company, or it may be mutually valuable to both.

The determinant is the

underlying use of this type of policy and the disclosures made to acquaint the purchaser with i t . Single interest insurance is of value to the purchaser when he is fully aware of its limitations.

This

type of insurance is considerably less costly than regular deductible collision coverage.

If the customer fully

recognizes the fact that liability insurance must be carried separately, that his equity in the automobile Is not covered

102 by insurance in any way, and if the customer desires to save money on his insurance, then single interest coverage may be acceptable from the customer’s point of view. , Vendor’s single interest insurance not only provides collision protection, but also

includes comprehensive fire and theft

coverage but only on the vendor's interest in the automobile. Single interest coverage can be illustrated in the following example.

Assume that a purchaser of a $1,000.00

automobile has paid $ 500.00 on his contract, and still owes the remaining $500.00.

Assume further that the vehicle has

been completely demolished.

This type of policy will

reimburse the dealer or finance company $500.00.

It will

not reimburse the customer in any way or for any amount. Ven d o r ’s interest only insurance is particularly vicious when a dealer or finance company, in order to consummate the sale, offers the customer this type of insurance knowing full well that the customer considers his interest is being protected, and that he is receiving a special low insurance rate as a favor to him.

CHAPTER VI HEALTH AND ACCIDENT INSURANCE While health and accident insurance is the youngest of the insurance family, it is of tremendous size and exhibiting the most rapid growth.

Along with this rapid

growth, however, comes the disadvantage prevalent in many undeveloped and immature fields affecting the public interest. As yet it is comparatively unregulated as far as legislative restrictions are concerned.

Despite the fact that most

policies offer little or no protection, and that many are almost fraudulent, still the need for protection in this field is evidenced by the fact that 50,000,000 Americans own some type of health and accident insurance. As stated before, this type of coverage offers, in most instances, little actual insurance to the purchaser. The reasons why extremely limited policies can be written and sold are twofold: 1.

There is no actual standard form policy

2.

There are too few governmental regulations of health and accident insurance companies

Ostensibly, accident and health insurance provides indemnity to the insured for time lost because of accident, illness, medical and hospital payments.

In addition,

benefits are usually provided for death due to accidental

104 means within the limits of the policy. There is no standard accident and health policy.

The

chance for high profits has brought scores of new companies into the market. coverages.

Some stress broad, almost satisfactory

They have been the leaders in the field.

Others

have stressed low premium, and these offer contracts flagrantly abusing the name of reputable coverages.

In the

latter type of contract, the coverage is limited and obscured, and misinterpretive clauses are extremely prevalent.

The

most illustrative example of this was a court order restrain­ ing a policy qualifying payments to certain hours between 12:01 and 6:00 A.M. and occurring, under practically impossible circumstances.

The gullibility of the American public was

illustrated by the many policyholders listed by the company; assets had risen to over $ 500 ,000 .0 0 . Today the field is under a little closer supervision, but a majority of the policies still written offer inadequate protection covering unlikely circumstances.

Double indemnity

clauses are still written in the policy to make the insured feel he is receiving more than he actually is.

Such clauses

provide doublt indemnity for such specified circumstances as: 1.

While the insured is a passenger in or upon a public conveyance provided by a common carrier for passenger service

2.

While he is a passenger in an elevator car

105 provided for passenger service only 3.

While he is in a burning building whose outer walls collapse while he is therein

4. . Or if the insured is struck by lightning Medical coverage, when offered, varies with different policies, and then only to specified, usually inadequate limits.

The lack of proper medical protection often defeats

the actual purpose of the contract, for such expenses will rarely be covered even by the weekly, or lump sum, indemnity provided by the contract. General accident policies are written with weekly or lump sum benefits ascribed to a strict schedule of accidents covered.

Still further restrictive coverages are written to

cover particular risks.

These are:

1.

The ticket accident policy for common carriers

2.

The automobile policy, limited only to injury arising from auto accidents

3.

A death or dismemberment policy

The latter coverage applies only if the insured is killed or dismembered as the result of an accident.

These

latter three are even more restrictive than the general accident policy.1

1 Edwin J. Faulkner, Accident and Health Insurance (New York: McGraw-Hill Book Company, 19*10), p. 6 7 •

106 The nearest approach to a standard accident policy is to be found in the requirements laid down in the Standard Provisions Act, now adopted by some states.

The purpose of

the Standard Provisions Act is to effect a reasonable degree of uniformity, and make the contract understandable.

They

also seek to eliminate the possibilities of writing obscure limitations and exclusions into the contract. According to the insurance agreement as written, there is no intent to cover losses arising from other than accidental means.

To constitute an accident there must be

some occurrence both unforeseen and beyond the control of the insured.

There can be no accident as a consequence of

the performing of an act completely as intended. In contrast to accident insurance, health insurance provides indemnity for loss due to sickness and disease. The policy is designed to supplement the accident policy so that income may be continued whether disability arises from an accident or illness.

The general terms of the contract

closely follow those of the accident policy.

Settlements

are also similar, being payable either in a lump sum, or in weekly or monthly indemnity payments. In the case of health insurance, a waiting period is generally stipulated before payments start.

This eliminates

an excess volume of small claims and discourages malingering. Surgical indemnities are often provided in the health

107 coverage and Is an additional indemnity to defray expenses incurred by necessary surgery.

Benefits are usually paid as

a stipulated sum according to a strict schedule of various operations.

In almost every instance, they are insufficient.

In addition, hospital benefits are included to defray the various expenses incurred by virtue of confinement.

In­

variably they are insufficient. A very important and fast developing aspect of health and accident insurance is group plans.

Employees, while

cognizant of the benefits arising from Workmenfe Compensation see the need for expending protection beyond the scope of their work.

The employees form groups and extend their

coverages through various plans of health and accident insurance.

The premium is collected from the employer who

may pay it entirely, deduct it from the pay of the employee, or work out a division of cost between the employer and the employee.

In many cases, the protection offered in group

plans is far superior than in any policy purchased singularly. To provide complete protection under the group policy, there should be written a combination of the accident and health policies together with hospitalization benefits. Summarily, the field of accident and health insurance is an important and expanding o n e .

A word of caution should

be offered to produce an awareness to the possibilities of incomplete protection.

The fact that things are not always

108 what they seem to be is more in evidence in health and accident insurance than in any other type. Suggested device.

After discussing the material

presented in this section, with emphasis on the limited protection offered by this type of insurance, use the sample policy, Appendix C, as a basis for class discussion. to call specifically to the attention of the class are underlined in red.

Points

CHAPTER VII SUMMARY AND CONCLUSIONS The purpose of this study was to develop a unit of instructional materials on insurance for the use of a high school business law teacher.

It was emphasized that

insurance purchasers in the United States are educated in insurance by salesmen and by advertising, and that neither of these methods of instruction are compatible with the best interests of the buyers of insurance. Recently, the latest business law textbooks have included sections on insurance, however, this investigator found that at least three, and in most cases all of the ✓

following faults were evident in each of the textbooks studied:

(l) insufficient material covered;

(2 ) insurance

was presented as a good investment; (3 ) lack of emphasis on the “exclusions 11 section of each policy;

(4) insurance was

not presented as an immediate use subject despite the fact that many students owned automobiles;

(5 ) students were

allowed to believe that insurance eliminates loss; (6 ) no mention was made of the fact that actual insurance policies should be in the student's hands when studying the subject; and (7 ) some textbooks allowed the student to maintain the belief that insurance is gambling. This study attempted to present instructional

110 materials for the teacher of insurance in a business law class.

The first section explained the basic concepts of

all types of insurance.

The function of insurance was

developed as providing certainty and the basic definition of insurance was presented as a contract where one party under­ takes to indemnify another against loss arising out of an unknown event.

Hazards were defined and discussed, and the

difference between morale and "morale" hazards was emphasized. The moral hazard embarks on a plan to create loss; the "morale" hazard creates a tendency toward loss by negligent actions. All insurance is based on the theory of probabilities and the law of large numbers.

A teaching device was included

that required the active participation of the entire class. Students were asked to flip coins to help demonstrate the theory of probabilities.

When a coin is flipped this theory

states that heads should appear fifty flips out of one hundred.

The law of large numbers was illustrated by showing

that the more times coins were flipped, the more nearly the average approached the fifty per cent mark. The ten different types of insurance companies were discussed with emphasis on the four principle types, namely: (l) Stock Companies (2) Lloyds Underwriters (3) Mutuals (k) Reciprocals.

Stock companies are organized for the sole

purpose of making profits for the stockholders.

Cost of

Ill insurance sold by stock companies is usually higher than the rates charged by mutuals or reciprocals.

Mutuals may charge

comparable rates* however* they usually issue rebates to the insured at the end of a specified period.

Earned surplus of

the stock type of company belongs to the stockholders. Lloyds of London is not an insurance company. an association of underwriters.

It is

The Lloyds Corporation does*

however, maintain strict control over the actions of its members. The mutual type of company operates like a stock company* the only difference is that policyholders take the place of stockholders. rates.

The policyholders enjoy reduced

They receive the profits which* in the case of a

stock company* would revert to the stockholders. The reciprocal plan of insurance is that type whereby each member* acting through an attorney-in-fact* becomes an insurer and is insured by every other member of the exchange. Practically all automobile insurance sold in California is written on a standard form.

In other words*

insurance offered by one company is substantially the same as that offered by all other companies.

With this fact in

mind, a standard form liability insurance policy was explained* line by line.

The stated exclusions were thoroughly dis­

cussed as were the stated coverages and limits of coverage. The multitude of conditions excluding the insured from

112 protection were emphasized. The close cooperation between finance companies and insurance companies were discussed. insurance serves two purposes: (2)

To the finance company

(l) it produces profit;

it protects their collateral.

Often insurance companies

rebate to the finance company part of the premium paid by the time payment purchaser of an automobile.

The end result

of this close inter-company cooperation is extremely high insurance and finance costs. V endorfs interest only insurance was pointed out as a possible danger to the time-plan purchaser of an automobile. This type of insurance protects only the sellerfs equity in an automobile. equity.

It does not cover any part of the buyer's

The danger exists when the buyer has been led to

believe that he has secured special low insurance rates, and that his vehicle is covered by insurance. Approximately 50*000,000 Americans own some type of health and accident insurance.

Very few of these policies

offer acceptable protection, while the great majority provide meager coverage at high rates.

There are two. reasons why

poor coverage health and accident policies can be written and sold:

(l) there^ is no actual standard form; (2) there are

too few governmental regulations of health and accident insurance companies. The best health and accident insurance plans are those

113 commonly called group plans.

Group plans may cover employees

in a plant, or may consist of group medical plans. Ordinarily, the premium in industrial group plans is shared by the employer and employee. Health and accident policies are more misleading than any of the other policies commonly affecting individuals.

A

glance at, or a cursory examination of, health and accident insurance policies invariably leads to assuming fallacious ideas concerning the adequacy of the protection offered. Health and accident policies must be very carefully read and understood. There is no doubt that training in insurance is essential.

The logical course wherein this training could

be effective is the high school business law class.

Insurance

is a basic industry; it requires more time and study in the public schools. theoretically.

Insurance should be taught practically, not Emphasis should be placed on developing the

studentfs ability to determine accurately the value of any policy he is asked to buy.

Insurance should be taught as an

Immediate personal use subject.

Students must be made aware

of the fact that insurance is a contract, and that every printed word on the policy must be read and understood.

BIB L I 0 G RAP

H Y

v

BIBLIOGRAPHY A. Ackerman, S. B., Insurance. Company, 194l~ 734 pp.

BOOKS New York:

The Ronald Press

Cagan, Maxwell S., Door Openers on Parade. Cincinnati: National Underwriter Company, 1947. 232 pp. Crobaugh, Clide J., Handbook of Insurance. Prentice-Hall, Inc., 1931. 1413 pp.

The

New York:

Faulkner, Edwin J ., Accident and Health Insurance. McGraw-Hill Book Company, 1940. 3^7 PP. Froman, Lewis A., Introduction to Business. Richard D. Irwin, I n c ., 194F7 501 pp.

New York:

Chicago:

Gordis, Philip, How to Buy Insurance. New York: Norton and Qompany, Inc., 1947. 352 pp.

W. W.

Hedges, J. Edward, Practical Fire and Casualty Insurance. Cincinnati: The NationalUnderwriter Company, 1943165 pp. Magee, John H., General Insurance. Irwin, I n c ., 1942. $84 pp.

Chicago:

Richard D.

Sawyer, Elmer Warren, Automobile Liability Insurance. York: McGraw-Hill Book Company, 1938. 317 PP •

New

Spriegel, William R,, and Ernest Coulter Davies, Principles of Business Organization. New York: Prentice-Hall, Inc. T541d I 564 PP * Sunderlin, Charles, On Automobile Insurance. York: Matthew Bender and Company, 1929 .

B.

Albany, New 6l4 pp.

PERIODICAL ARTICLES

"Patient Needn't Keep Eye on Operation,11 Docket, 6:4-5* Winter, 1943-44.

115 Van Nortwick, Hose Tinder, "Beginner’s Luck,” The Business Education World, 29:98-101, October, 1948.

C.

GOVERNMENT PUBLICATIONS

State of California Department of Insurance, Insurance Manual. Sacramento: California State Printing Office. Insurance Code, State of California. Printing Office, 19¥ 6"!

D.

PUBLICATIONS

Sacramento:

State

OF LEARNED ORGANIZATIONS

Fraternal Life Insurance, Educational Committee of the National fraternal Congress of America. New York: 245 p p .

E.

1938.

UNPUBLISHED MATERIALS

Joyner, Schuyler Colfax, "School Automobile Liability Insurance." Unpublished doctoral dissertation, University of Southern California, Los Angeles, California, 1941.

62 -pp. McGuire, A. Prudence, "A Study to Determine the Legal In­ formation Needed Relative to Insurance and Investments in a Course in Consumer Business Information." Un­ published thesis, University of Southern California, Los Angeles, California, 1940. The California National Standard Form Automobile Insurance Policy.

A P P E N D I X E S

APPENDIX A APPROVED MUTUAL AND RECIPROCAL AUTOMOBILE INSURANCE COMPANIES OPERATING WITHIN THE STATE OF CALIFORNIA

APPROVED MUTUAL AND RECIPROCAL AUTOMOBILE INSURANCE COMPANIES OPERATING WITHIN THE STATE OP CALIFORNIA All of the following companies either write insurance at less than standard rates, or return dividends to policy­ holders .

Some may charge full rates the first year, and

allow discounts on all subsequent years. 1.

Allstate Insurance Company, Chicago, Illinois (May be applied for in any Sears, Roebuck Retail store, or through their general catalogue).

2.

American Mutual Liability Insurance Company, Boston, Massachusetts.

3.

Celina Mutual Casualty Company, Celina, Ohio.

k.

Employers Mutual Liability Insurance Company of Wisconsin, Wausau, Wisconsin.

5.

Factory Mutual Liability Insurance Company of America, Providence, Rhode Island.

6.

Farmers Insurance Exchange, Los Angeles, California.

7*

Hardware Mutual Casualty Company, Stevens Point, Wisconsin.

8.

Liberty Mutual Insurance Company, Boston, Massachusetts.

117 9.

Lumberman's Mutual Casualty Company, Chicago, Illinois.

10.

Security Mutual Casualty Company, Chicago, Illinois.

11.

State Farm Mutual, Bloomington, Illinois. (Largest automobile underwriter in the world.)

12.

Utica Mutual Insurance Company, Utica, New York.

APPENDIX B DEFINITIONS OF TERMS FREQUENTLY USED IN INSURANCE

DEFINITIONS OF TERMS FREQUENTLY USED IN INSURANCE Acceptance.

An agreement, either expressly or by

conduct, to the act or offer of another, so that a contract isconcluded and the Accident. unforeseen result Accidental

parties become bound. An unforeseen and unintentional act.

The

of an intentional act. Bodily Injury.

A bodily

injury which is

not intentionally self-inflicted. Accidental Means.

A restrictive phrase found in the

insuring agreement of many personal accident policies.

If

an insured attempted to lift a heavy weight and as a result injured his back there would be no coverage under an "accidental means” policy.

Although the injury was accidental

the means which caused the injury (lifting a heavy weight) was intentional, not accidental. Accommodation L ine.

Some insurance companies will

accept a poor risk from an agent who gives them a good deal of business.

This is done to curry favor with the agent and

get a large part of his profitable business.

It is against

the principles of the more reliable companies to accept accommodation lines. Acquisition C o s t .

The cost to the Insurance Company

of getting business. Act of God.

An occurrence which results from natural

119 causes without any human intervention. Actual Cash V a l u e .

The amount that the property in

question could have been sold for by the insured on the date of the loss.

This Is not the same as the retail selling

price, since the retail selling price includes the dealer’s profit. Actuary. rates.

A mathematician who develops insurance

This is done largely from past loss experience,

though future probable trends are also taken into account. Additional Insured, or Additional Interest.

Some

person, other than the named insured, to whom the benefits of the policy are extended.

For example, the automobile

liability policy extends protection to most persons who drive the car with the permission of the named insured. Additional Living Expense Clause.

A rider added to a

fire insurance policy agreeing to pay for T,the necessary additional living expense incurred by the insured, in order to continue as nearly as practicable the normal conduct of the insured’s household, resulting from damage by fire of the dwelling or contents.11

If a house were badly damaged by

fire (or one of the perils of the extended coverage endorse­ ment), the insured might have to move his family into a hotel for a time, and eat all meals in restaurants.

This would

involve heavy additional living expense. Adjacent Property.

Property which is close to the

120 property insured.

This may increase the exposure and change

a desirable risk into an undesirable one. Adjoining Property.

Property which is in actual

physical contact with the property insured. Adjuster.

A person whose duty is to determine whether

or not a loss is covered under the terms of a policy; and if so, how much the company should pay. Admitted Company.

A company which has been authorized

by the state insurance department to transact business within the limits of that state. Advance Premium, or Deposit Premium.

The premium for

many policies depends on payroll or some other factor which can only be determined accurately at the end of the policy period.

In such cases an estimated premium is charged in

advance and an adjustment made at the close of the policy term. Adverse Selection.

Insuring persons who present a

higher degree of risk than normal.

Adverse selection causes

high loss ratios. Affirmative Warranty.

One in which the applicant

merely states that something is true at the present time, without guaranteeing that it will remain so in the future. Aggregate Liability.

The maximum total amount that a

policy will pay during the policy period.

For example, a

policy might be written with bodily injury liability limits

121 of 5/IO/ 2 5 .

That means the policy would not pay more than

$ 5,000 to any one person injured in one accident, nor more than $ 10,000 to two or more persons injured in one accident, nor more than $ 25,000 total during the policy period. Anniversary D a t e .

The date every year on which a

policy was originally written, or renewed after lapse. Application.

A questionnaire designed to show

whether or not the person seeking insurance meets the under­ w r i t e r ^ requirement.

Strictly speaking, an application is

an offer by the insured to transfer his risk to the insurance company. Apportionment Clause.

This clause provides that if

there is other insurance covering the loss, the policy to which the clause is attached will not pay more than its pro­ rata share of the loss.

If a policyholder carried $2,000

fire insurance with "A" company and $3,000 with !lB n company and had a loss of $ 1 ,000 , nA ,f company would pay 2/ 5ths, or $400, and the "B** company would pay 3/5ths, or $600. Appraiser. value of property.

A person whose duty is to determine the Most policies insuring against damage to

property provide that if the insured and the insurer cannot agree on the amount of a loss, each shall appoint a competent and disinterested appraiser.

The appraisers choose an

umpire and the decision of any two determines the amount of the loss.

122 Arson.

This originally meant wilfully and maliciously

setting fire to someone else's dwelling.

It is now generally

applied to the wilful, felonious and malicious burning of property, regardless of who the owner is. Assessment.

The right of a mutual or reciprocal

company to levy additional premiums if the premiums previously collected are not sufficient to pay losses and expenses incurred. Assets.

All funds, property, goods, securities and

resources of any kind owned by the insurance company.

Non­

admitted assets are those which the insurance commissioners will not approve, such as premiums due but not paid within ninety days.

Such assets are deducted from the annual

statement. Assignee.

The person (firm or corporation) to whom a

policy is assigned. Assignment. to another.

The transfer of a policy from one person

Generally speaking, a policy may not be assigned

without the consent of the insurance company. Assignor.

The person (firm or corporation) who

assigns his policy to someone else. Assured.

Same as Insured.

British companies

generally use the word "assured”, while American usage favors 11insured” . Attractive Nuisance.

Any object,.place or condition

123 »

that is attractive to children and may prove harmful to them. People may be held liable for injuries to children caused by an attractive nuisance even if the children were trespassing when they got hurt. Automatic Reinstatement Clause.

A clause providing

for the automatic restoration of the full face value of the policy after the payment of a loss.

If a man has a $5,000

fire policy and suffers a $1,000 loss, he only has $4,000 of .insurance left. Bailment Lease.

A method by which someone who wants

to purchase an article but cannot afford to pay cash for it, may get possession of it with the right to use and enjoy it as long as he pays stipulated rentals.

After completing

these installment payments he becomes the absolute owner by paying an additional sum, which may be nominal.

This trans­

action differs from a conditional sale, since in a conditional sale there is a debtor-creditor relationship. Beneficiary.

The person to whom the benefits of a

life or disability policy will be paid in the event the insured dies. Binder.

A preliminary agreement, frequently verbal,

to provide immediate insurance until a regular policy can be issued. Blanket Insurance.

A policy which covers several

different properties of several different types of hazards

124 under one form instead of under separate policies. Bodily Injury Liability.

The liability imposed by

law on one person for negligently injuring or killing another. Borderline R i s k . underwriting rules.

One which scarcely complies with the

Risks of this sort are not selective

underwriting and are not wanted by most insurance companies. Broker.

A person who acts as the representative of

the applicant for insurance.

Although brokers are

remunerated by a commission from the insurance company (just like agents) they do not represent the company.

Their sole

duty is to get the best possible coverage for their clients at the lowest possible cost. Building R a t e .

In fire insurance this means the rate

for the building itself.

This is often not the same as the

rate for the contents. Burglary.

Breaking into and entering the premises of

another with intent to commit larceny.

Under a burglary

insurance policy, there must be visible marks of force used to gain entry to the premises, vault, or safe. Business Interruption Insurance.

Business may have

to be suspended while repairs are being made following a

x fire or other cause of damage to the premises.

The owner of

the business will probably still have certain fixed expenses, and will also lose the profits he would otherwise have made. Business Interruption Insurance covers this risk.

125 Cancellation.

The termination of an insurance policy

before its expiration date by either the insured or the insurer. Capital S u m .

The amount paid to an insured under an

accident or disability policy if the insured suffers the loss of limb, sight or hearing. Casualty Insurance.

This is a broad term which

includes nearly every form of insurance except life, fire and its allied lines and marine. Certificate of Insurance. a policy has been issued.

A memorandum stating that

The certificate states the

coverage afforded in general terms.

A mortgagee usually

insists upon holding the fire insurance policy on the mort­ gaged property, so a certificate of insurance is sent to the mortgagor. Civil Authority Clause.

A clause in a fire policy

which protects the insured in case any civil authority has to damage his property to check the spread of a f ire.

For

example, it has sometimes been necessary to dynamite a whole row of houses to check a conflagration. Civil Commotion. Claim.

A disorderly uprising.

The amount due under a policy upon the

occurrence of the event insured against. Claimant.

Strictly speaking, anyone who makes a claim,

though the term is more usually applied to a third party

126 making a claim against the policyholder than the policyholder himself. Classification.

The underwriting or rating group into

which a particular risk must be put. Clause.

Any specific part of a policy or endorsement.

Co-insurance Clause.

A clause which requires the

policyholder to maintain at all times a certain percentage of insurance to the actual value of the property insured. If he fails to maintain the required percentage he has to pay part of every loss himself. Collision. A violent meeting of two or more objects (or persons). Collusion.

A secret agreement between two or more

persons to defraud a third party.

Collusion with intent to

defraud an insurance company voids the coverage. Common Carrier.

One who undertakes to carry goods or

persons for hire and for all persons indifferently. Common Carrier1s Liability.

A common carrier is

liable for goods at all times unless the injury results from an act of God, the shipper’s negligence, or a public enemy. Common L a w .

Law based upon, custom and usage of the

courts during the past several hundred years, as distinguished from Statute Law which is passed by the State Legislature or Congress. Common Law Defenses.

Pleas which may defeat an

127 injured employee's suit against his employer in cases where Workmen's Compensation or Employers' Liability Statutes do not apply.

They are: 1.

Contributory negligence on the part of the employee

In most

2.

Assumption of risk by the employee

3.

Injury

caused by a fellow employee

states, if an employer is permitted to reject the

Compensation Law, and does reject it, he loses hiscommon law defenses. Comprehensive.

This means having a wide scope.

does not mean including everything.

It

Thus a comprehensive

liability policy is not an all-risk liability policy; there are a number of exclusions.

However, it does provide for

more protection than a scheduled policy. Concealment. risk or a loss.

Withholding material facts concerning a

Concealment usually voids coverage.

Concurrent Insurance.

Two or more policies covering

the same interest in exactly the same manner are said to be concurrent. Conditional S a l e .

A sale in which transfer of title

to the buyer is made dependent upon the performance of some condition, usually the payment of weekly or monthly installments until the full purchase price has been paid. Consequential L o s s .

A loss which results indirectly

128 from a hazard insured against.

Loss of rent or rental value

if a building burns is an example. Constructive Total L o s s .

A partial loss of such

severity that the cost of repairing the damaged property is more than the property was worth prior to the loss. Contents H a t e .

The fire insurance rate on the

contents of a building as distinguished from the rate on the building itself. Contingent Liability.

The liability which may be

imposed on one person as a result of an act or omission of another.

For example, an employer may be held liable for

the negligent acts of his employees in the scope of their employment. Continuing Warranty.

A warranty that a certain

condition will exist in the future.

For example, M . . . the

automobile will be principally garaged . . . .11 Contractual Liability. contract or agreement.

Liability assumed under any

This kind of-liability is excluded

by the automobile liability policy and most other liability policies. Contributory Negligence.

Lack of care by the injured

person when such lack of care helps to cause the accident. Under common law contributory negligence bars the right to recover damages. Conversion.

The wrongful use or disposition of

129 another person's property by someone who is in lawful possession of it. Coverage.

The specific protection provided by the

policy against the results of the hazards insured against. Declarations. relating to the risk.

Statements made by the applicant In casualty insurance the declarations

are frequently made a part of the policy. Deductible Clause.

A clause which provides that the

insured will pay his own losses below a specified amount per loss (as with $25 deductible collision on automobiles) or that he will pay a certain percentage of every loss (as with

80/20 automobile collision). Depreciation.

The decline in value of property due

to age, use, wear and tear, et cetera.

Depreciation is a

very important item in adjusting of property losses. Direct L o s s . the

Loss of or damage to property which

immediate result of a hazard insured against.

is

It is

frequently very difficult to determine whether a loss is direct or consequential. Disability Insurance.

Pays losses due to accident or

sickness. Distribution Clause.

When blanket insurance is

written to cover at several locations the policy is usually endorsed to provide that the proportion of insurance available at each location shall not exceed the proportion which the

130 value of the property at each location bears to the value of the entire property insured. Dividend.

In insurance this means a refund to the

policyholder of that portion of his premium which is not needed to pay his share of the losses and expenses incurred during the policy period.

Dividends are paid by mutuals*

participating stock companies and sometimes by reciprocals. Divided Coverage. more companies.

Insuring the same risk in two or

In burglary insurance "divided coverage"

means separating the property into different groups, such as jewelry, watches, precious stones and articles of gold, silver and fur on the one hand, and all other personal property on the other hand. Effective D a t e .

The date upon which the protection

afforded by the policy starts. Elective Benefits. insurance.

A term used in disability

The insured may elect to take a lump sum in lieu

of any weekly payments for certain specified disabilities. Employers1 Liability.

Under common law an employer

has three strong defenses if he is sued by an injured employee.

Under statutory employers' liability laws these

defenses are usually abrogated. Encumbrance.

Any outside interest in property, such

as a mortgage, conditional sales contract or mechanic's lien. Endorsement.

A supplementary agreement attached to

131 an insurance policy for the purpose of making some change in the policy.

An endorsement supersedes the terms of the

policy.

•• Enure.

To be applied.

The standard automobile

policy provides that coverage for fire and theft (or comprehensive) and collision shall not enure directly or indirectly to the benefit of any carrier or bailee liable for loss to the automobile.

In other words, the protection

does not apply to any carrier or bailee who is liable for loss.

The policy would pay the insured and the insurance

company could then sue the carrier or bailee responsible for the loss. Equipment.

As used in automobile insurance, this

means those things which, though not necessarily essential, are useful or convenient in the operation of the car, or are ornamental.

It includes such things as spot lights, fender

pants, spare wheel, hub caps, jacks and so on. Equity.

1.

A branch of law designed to correct the injustice sometimes inflicted by common law

2.

The actual value of a piece of property less the amount of any encumbrances on it.

Excess Insurance.

Coverage which becomes available

to the insured only above a stipulated amount of loss, or only after any other applicable insurance has been exhausted.

132 Exclusion.

A condition of the policy by which the

insurance company denies liability under certain stated circumstances. Expense Constant.

A flat charge added to the premium

for a Workmen’s Compensation policy in many states.

This

Constant (often $10.00) is added when the anticipated annual premium is less than a certain specified sum.

The purpose

of this constant is to cover the expense of writing the policy in cases where the premium would scarcely justify the cost involved. Experience.

The loss record of an insured or of some

class of coverage over a period of years. Experience Rating.

A special rate for casualty

insurance, particularly Workmen's Compensation, in which a deviation from the manual rate is made because of the experience of the risk involved. Expiration D a t e .

The date on which coverage ceases.

The exact time is usually 12:01 A.M. on liability and automobile material car damage policies, and twelve noon on fire and burglary policies.

It is a good idea to check an

existing policy on this point. Exposure.

1.

In fire insurance this means the surrounding property.

Even a fire­

proof building might be an undesirable risk if it had a lumber yard on one

133 side and a paint factory on the other. 2.

In casualty insurance it means the amount of risk created by the subject matter of the insurance.

Thus in

rating a store for a public liability policy the unit of exposure Is each 100 square feet.

The rate, applied

to each such unit, gives the premium. Extended Coverage Endorsement.

An endorsement added

to the standard fire policy giving protection against a number of hazards other than fire, such as windstorm, hail, explosion, falling aircraft. Face Sheet.

A form attached to the policy identifying

the insured, the subject matter of the insurance, the policy limits, et cetera.

In casualty insurance the face sheet is

very often a copy of the declarations. Face Val u e .

The amount/s stated in the policy as

being the limit/s of the insurance companyfs liability. Fallen Building Clause.

A clause in California and

Iowa fire policies which provides that if any material part of the building falls, except as a result of fire, the policy immediately ceases to cover. Fidelity B o n d .

Guarantees an employer against loss

caused by dishonesty of employees. Fiduciary.

Holding In trust.

A person upon whom a

134 trust has devolved.

When an agent collects an Insurance

premium he holds the money in a fiduciary capacity.

The

money does not belong to him, and he should turn it over to the Insurance company as soon as possible. Financial Responsibility Law.

A law requiring

motorists to furnish proof of their ability to pay damages to a stipulated amount (usually 5/10/1)* Fire.

The courts have held that actual ignition,

accompanied by flame or glow, is necessary to constitute a fire under the terms of the fire policy.

(See also Friendly

Fire and Hostile Fire.) Fire Clause.

A provision in a lease providing for

cancellation in case the property is destroyed by fire or some other hazard. Fixed Charges.

Expenses which a business incurs as

long as it remains in existence, such as interest on debts, taxes and the requirements of sinking funds. Fixtures.

Such things as shelves, showcases, counters

and so on, which are more or less permanently attached to the property. Flat Cancellation.

Cancellation as of the inception

date of the policy for non-payment of any premium by the Insured. Fleet Policy.

A single policy covering a number of

automobiles all owned by the same person.

When five or more

135 cars are covered a discount is allowed.

A policy of this

sort covering cars owned by different persons and written at a discount is called a fictitious fleet. Floater Policy.

One which covers movable property,

such as the personal effects floater, camera floater, personal property floater, et cetera. Form.

A sheet attached to a fire (or other property

insurance) policy describing the property covered, and limiting, extending or varying the printed conditions of the policy itself. Fraternal Insurance.

Non-profit insurance sold by a

fraternal order or lodge to its members.

It is often on a

pure assessment basis. Free on Board (F. 0. B . ) .

The seller agrees to deliver

the goods to the conveyance which is to transport them to the buyer.

Once the goods are on board the conveyance the

seller's responsibility ends. Friendly F i r e . intended place.

One which stays in its proper and

A fire in a stove might get too hot and

scorch the adjacent wall.

Unless the wall caught fire there

would be no coverage under the fire policy since the fire in the stove is a friendly fire, and the courts have held that the fire policy does not cover damage caused by a friendly fire*. Full Coverage Policy.

One that provides for full

136 payment of all losses, with no deductible amount. General Liability Insurance.

This expression usually

refers to public liability insurance of any kind other than auto. Grace Period.

Additional time allowed for payment of

renewal premium after such premium is due.

The insurance

remains in force during this period. Group Insurance.

An insurance plan by which a large

number of persons are protected under one master policy. Each individual insured usually receives a certificate of insurance. Hazard.

Any factor which may cause or contribute to

a loss. Hired C a r .

An automobile of which the exclusive use

and control has been temporarily acquired for a consideration. This is not the same as contract hauling, since in the latter case the owner retains control over the movements of the vehicle and merely agrees to furnish transportation. Hold Harmless Agreement.

An agreement by which one

party assumes the liability of another.

Hold harmless

agreements are often found in leases, the lessee (tenant) agreeing to assume the lessor’s (landlord’s) liability if members of the public are injured through some faulty condition in the premises.

Railroad side-track agreements,

permits from a city to erect a marquee or sign over a

137 sidewalk and so on, often contain hold-harmless agreements. Hospital Benefits.

Additional benefits payable under

an accident or disability policy in case the insured is confined to a hospital. Hostile F i r e .

One that becomes uncontrollable or

breaks out from its container. Identification Benefit.

An additional payment under

an accident or disability policy which pays the cost of putting the injured policyholder in the care of friends if the insured is unable to do this for himself. Impaired R i s k .

One which presents an unduly high

probability of loss. Impairment of Capital.

If a stock Insurance company

has to start paying losses out of capital, the capital is said to be impaired.

In most states this results in the

company being deprived of its licence and liquidated by the Insurance commissioner. Improvements and Betterments Insurance.

Coverage of

a tenantfs interest in additions or alterations made to leased property at his. expense. Incontestability Clause.

A provision found in most

life policies and some disability policies.

It stipulates

that after the policy has been in force for a certain period of time (often one or two years) it shall be incontestable except for non-payment of the premium.

138 Increase In Hazard.

Any change in the circumstances

of a risk which may make a loss more probable.

Most fire

policies are automatically suspended while there is any increase in hazard within the knowledge or control of the insured. Indemnify.

To reimburse for a loss actually sustained.

Independent Contractor.

Any person who renders

service for a specified recompense for a specified result, under the control of his principal as to the result of his work only and not as to the means by which such result is accomplished. Inherent Explosion.

One caused by some condition

existing in the premises or property as opposed to an explosion occurring elsewhere. In K i n d .

To settle a claim by replacing the damaged

or stolen property with other of like kind and quality instead of making a cash settlement. Insurable Interest.

A condition which exists when the

person concerned will suffer a financial loss if a certain event occurs;

Insurance may only be sold to persons who

have an insurable interest. Insurance.

A contract whereby one undertakes to

indemnify another against loss, damage, or liability arising from a contingent or unknown event. Insurance Carrier. otherwise.

The insurer, incorporated or

139 Insurance Commissioner.

The official who regulates

the business of insurance within the state. Insurance Company.

A corporation chartered under

state laws to act as an insurer. Insurance Exchange.

An unincorporated insurance

carrier. Insurance Policy.

The basic contract, as distinguished

from the forms and endorsements which may be added to it. Insured.

The person to be indemnified in case of

loss or liability. Insurer.

The person guaranteeing to provide

indemnity in case of loss or liability. Insuring Clause.

That part of the policy which states

what the insurer agrees to do. Inter-Insurance, or Reciprocal Insurance.

A plan of

insurance whereby each policyholder exchanges contracts of insurance.with every other policyholder in the group. is done through an attorney-in-fact.

This

Thus each policyholder

in an Inter-insurance exchange becomes an insurer of and is insured by all the other policyholders. Interstate Commerce. more states.

Business carried on in two or

Under a recent ruling of the U. S. Supreme

Court, Insurance has been declared to be commerce. Invitee.

A person who comes upon your property at

your express invitation, and is there principally for your

140 benefit.

A customer in a store, a patron in a restaurant or

theater are examples. Joint Tenancy. estate.

You owe them a high degree of care. The tenure by two or more persons of

If a husband and wife own a house as joint tenants,

when one dies the entire property belongs to the other. Key M e n .

Those persons whose work is vital to the

success of a business venture.

The lives of such persons

may be insured in favor of the organization. Lapse.

The termination of a policy because of the

failure of the insured to pay the renewal premium. Larceny.

The unlawful taking and carrying away of

things personal with intent to deprive the rightful owner of the same.

Larceny usually involves stealth, since if.force

is used, or even threatened, the crime becomes robbery. Law of Average. Large Numbers).

(more correctly called the Law of

The reasonable certainty with which the

number of occurrences of certain events can be forecast in a large group of similar risks.

It is the foundation of

insurance. Legal Liability.

Liability imposed by law or

assumed by contract or agreement.

It Is important to remember

that most public liability policies exclude coverage for an assumed or contractual liability. Legal Representative.

A person appointed by law to

take charge of the assets of another.

The term Includes

141 executors, administrators, receivers, trustees, guardians, et cetera.

Most insurance policies protect the legal

representative of the named insured. Legal Reserves.

The amount of money which most

insurance carriers are required by law to set aside for the payment of claims and for unearned premiums. Legal Reserve Company.

An insurance company which

maintains the reserves required by law, as distinguished from an assessment company. Liabilities.

All debts owed by a person, whether

immediate or contingent. Liability Insurance.

Any form of insurance which

protects the insured against claims of others from specified causes. License.

Formal permission from the proper

authorities to perform certain acts or conduct a certain business which without such permission would be illegal. Licensee.

A person who comes upon your property with

your permission, either express or implied, but who is there for his own benefit rather than for yours.

Some authorities

hold that you owe ordinary care to a licensee; others hold that you owe him no care except that you must not wilfully harm him. Lien.

A charge upon real or personal property for

the satisfaction of some debt or duty.

The right to detain

142 the property of another until a claim against that person has been satisfied. Limited Accident Policy.

One which protects only

against certain specified accidents. Limited Collision Insurance.

A form of collision

insurance which provides no coverage in case of collision with a stationary object. Limits of Liability.

The maximum sums of money which

an insurance company agrees to pay in the event of a loss covered by the policy. Loading.

An amount added to the pure premium to

cover the expense of securing and managing the business. Loss.

In insurance this usually means a valid claim

for recovery under a policy. Loss Constant.

A flat sum added to the premium for a

Workmen!s Compensation policy in many states when the anticipated premium is less than a stipulated amount.

The

reason for this charge is to help defray the cost of settling losses in cases where the amount of premium developed does not-justify this cost. Lower Limit.

The term used in liability insurance to

indicate the maximum amount the company will pay for death or injury of one person in any one accident. Loss R a t i o .

The proportion which the losses and

expenses incurred bear to the amount of premium earned.

143 Master Policy. A basic policy which extends protection to a number of different persons usually by the issuance of certificates of insurance.

Group life insurance

is usually written on a master policy, the individual insureds receiving only certificates. Material P a c t .

Any circumstance which might affect

the probability of loss and hence might influence the under­ writer in his acceptance or rejection of the risk. Maturity.

The state which exists when an obligation

becomes due. Medical Payments.

Payments made to or on behalf of

the insured for the cost of medical, surgical, hospital, ambulance or professional nursing services necessitated by the injury.

In automobile insurance, medical payments

include the reasonable cost of a funeral in case of death. Membership P e e .

A flat sum charged in addition to

the premium to cover the acquisition cost of the policy. Membership fees are not permitted in all states. Merit Rating.

A system for measuring the difference

between some specific risk and the average risk of the same type in order to adjust the manual rate for that particular risk. Minimum Premium.

The smallest amount for which an

Insurance company will write a

particular policy.

It is

intended to cover the expense of issuing a policy, for which

144 a lesser amount of premium might prove inadequate. Misrepresentation.

This usually means a false

statement as to a material fact. Moral Hazard.

The dishonesty, carelessness or immoral

habits of the insured. Mortgagee Clause. insurance policy.

A provision attached to a property

It states that loss shall be payable to

the mortgagee as his interest may appear, and that his right to recover shall not be affected by any act or omission of the insured. Mutual Insurance Company. without capital stock. stockholders.

An incorporated insurer

The policyholders take the; place of

They share in any profits and (in some cases)

may be assessed in case of any loss. Named Insured.

The person specifically mentioned in

a policy as being insured, as distinguished from other persons who though not named in the policy, are protected under some circumstances. Negligence.

Failure to use that degree of care which

an ordinary person of reasonable prudence would use under the circumstances.

Negligence may arise out of acts of omission

or commission. Non-Assessable Policy.

A policy under the terms of

which the insured cannot be required to pay more than the stipulated premium.

145 Non-Ownership Automobile Contingent Liability Insurance.

This protects the policyholder against claims

for bodily injury or property damage liability arising out of the use of automobiles not owned by him but used by his employees (or other people) in the course of his business. Vehicles usually rented by the insured. Non-Participating Policy.

One under which the

insured is not entitled to dividends or other refunds. Non-Valued Policy.

A property insurance policy, which

does not guarantee to pay any specified sum in case of loss, but only the actual cash value at the time of loss.

The

policy may provide for a maximum limit of indemnity. Occupancy.

The type and character of the use of the

property in question. Omnibus Clause.

The clause in the automobile

liability policy extending coverage to anyone using the car or anyone legally responsible for its use, provided that such use is with the permission of the named insured. Open Policy.

One in which the value of the subject

matter is not agreed upon, but is left to be ascertained in case of loss. Ordinary C are.

That degree of care which an ordinary

person of reasonable prudence would use under the circumstances. Other Insurance Clause.

A provision found in most

146 policies stating what is to be done in case there is any other insurance covering the same loss. Ownership.

The legal title to property.

Possession

is not essential to ownership. Partial Disability. policies as:

Defined in many accident

"inability to perform one or more important

duties of o n e ’s occupation .11 Partial L o s s .

In property insurance, a loss which

does not either (l) completely destroy the property, or (2 ) exhaust the insurance applying thereto. Participating Policy.

One under which the insured

shares in the saving resulting from good underwriting and favorable loss experience.

Such policies are usually

written by mutuals, sometimes by reciprocals, and only occasionally by stock companies. Person.

Under California Insurance Law this means

any person (i.e., human being), association, organization, partnership, business trust, or corporation.

The term

"natural person" is often used to distinguish a human person from some other kind of person. Personal Effects Floater.

A policy providing broad

coverage against loss of or damage to the personal effects of the insured.

It covers against almost all risks anywhere in

the world, except in the permanent residence of the insured. Personal Property.

Generally, any movable property.

Ik7 Personal Property Floater.

This is similar to the

personal effects floater, but it may be written on any kind of personal property, and it covefs property in the principle residence of the insured as well as elsewhere. Physical Hazard.

That part of any insurance risk

which is contributed by the nature of location of the insured property or the bodily or mental condition of the insured. Pilferage.

Petty theft, especially theft of articles

in less than package lots.

In auto insurance this would

include the theft of such things as hub caps, spot-lights, spare wheels, and so on. Police Power.

The right of a nation, state, country

or city to make regulations for the protection of public health,

safety, comfort, well-being or morals. Policy. 1. 2.

A written contract of insurance. A settled course or method followed

by

management. Policy F e e .

A flat sum charged in addition to the

premium when a small policy is written.

This is to pay the

cost of writing the policy when the amount of the premium involved does not justify this expense. Policyholder.

The person in whose favor the policy is

issued. Policy Limit/s.

The maximum amounts which the

148 insurance company undertakes to pay. Policy Period 5 or Policy T e r m .

The length of time

for which an insurance policy agrees to afford protection. Policy-^Writing A g e n t . An agent who is authorized to fill out and sign insurance policies on behalf of the companies he represents. Policy Y e a r . Pool.

The year in which a policy is written.

A group of insurance companies who join

together for the purpose of jointly insuring large or dangerous risks.

At present, most aviation insurance is

written through pools. Possession.

The right of usage and control over

property in question.

It does not necessarily involve

ownership. Premises.

1.

The extent of real property owned or occupied by a person.

2.

In many insurance policies, that part of the insured's property to which the protection extends, as defined in the policy.

3.

Matters previously stated or set forth; provisions in a legal document, especially a deed.

Premium.

The consideration paid by the insured to the

insurer for the protection provided by the latter.

1^9 Presumption.

An inference as to the existence of one

fact not certainly known, from the known existence of another fact, founded on a previous experience or general knowledge of their connection. Principal S u m .

In accident or disability insurance,

the amount paid in the event of accidental death or dismemberment. Prior Insurance.

Insurance in force at the time a

particular policy is written. Producer.

In Insurance, this refers to any person

engaged in the production of business, i.e., other forms of business, the producer

sales. In

most

is the manufacturer

who turns out the product to be sold. Prohibited R i s k .

Any class of business which an

insurance company will not insure under any condition. Proof of L o s s .

A sworn statement which usually must

be furnished by the insured before any property insurance loss will be paid. Property Damage Liability.

The liability imposed by

law on one person for negligently damaging or destroying the property of another. Property Insurance.

Insurance which is afforded with

respect to losses to property of the insured, as distinguished from insurance afforded against liability losses. Pro-Rata Distribution Clause.

A form usually attached

150 to a fire policy covering several buildings.

It provides

that the insurance shall apply to each building only in the proportion that the value of such building bears to the total value of all buildings covered under the policy. Protection.

Same as coverage.

Proximate Cause.

That which in ordinary natural

sequence produces a specific result.

To be proximate a

cause need not be direct, but it must be that upon which the sole blame can be placed. Public Carrier.

A person who undertakes to transport

people or goods for a consideration.

In the strict sense of

this term, a public carrier must accept all persons for whom it has the necessary facilities and who are willing to pay for the service, at the same rates for each class. Public Liability. Public Policy.

See bodily injury liability.

The legal doctrine that the government,

particularly the courts, will administer the law and interpret statutes and contracts in the manner best calculated to protect the interests of the majority of the people.

Many

rulings pertaining to insurance are based upon this doctrine. Pure Assessment Mutual. premium is charged.

One In which no advance

As each loss occurs every policyholder

is assessed his pro-rata share.

This is not a bona fide plan

of Insurance, since no one knows how much or how often he is going to be called upon to pay.

151 Pure Premium. losses alone.

The amount of premium required to pay

To this must be added a percentage to pay the

cost of acquiring and managing the business. Rate.

The factor used to determine the premium.

Rates may be based on each $100 of insurance, each $100 of payroll or receipts, each 100 square feet of area, et cetera. This word is often used to denote premium, but strictly speaking, premium is the actual amount paid by the insured and the rate is the factor used to determine this amount. Rating Bureau.

An organization maintained by a

number of insurance companies (or in some cases by the State) for the purpose of computing rates or premiums. Real Property.

(Real Estate:

Realty).

Fixed or

immovable property such as land and buildings attached thereto. Rebate.

Any return o f ’money or its equivalent from a

seller to a buyer.

In insurance, the term applies most

frequently to a refund of all or part of a producer’s commission to the insured. Recovery.

In most states this is unlawful.

Payment made by the insurer to the insured

in settlement of a loss. Reform.

A court of equity may change an insurance

policy under certain circumstances, particularly if it is evident that there was a mutual misunderstanding on the part of the contracting parties.

152 Reinstatement.

1.

Putting a policy back into force after it has lapsed.

Policies

may.not be reinstated retro­ actively. 2.

Restoring a policy to its face value after a loss has been paid.

Release.

An instrument signed by an insured or a

third party claimant relieving the insurance carrier of any further liability (or any liability at all) with respect to a specific claim. Rid e r . Risk.

Another word for endorsement. The chance or uncertainty of loss.

Also

commonly used to denote the subject matter of the insurance. Schedule Policy.

A policy covering only against

certain specified hazards or on certain specified property as distinguished from a comprehensive policy. Schedule Rating. Compensation Insurance.

A term used principally in Workmenfs The basic manual rate is modified

to suit the conditions prevailing in some particular plant. The basic rate may be either increased or decreased under this plan. Self Insurance.

Periodically setting aside sums of

money which in time will cover losses as they occur.

Only

very large concerns with widely scattered property can safely afford to self-insure.

153 Short Rate Cancellation.

When a policyholder cancels

before the end of his policy term his premium is figured at the short rate.

This is higher than the pro-rata premium.

The additional charge is intended to compensate the insurance company for the cost of putting the policy on the books. Sound V a l u e .

Same as actual cash value.

Specific Conditions.

Usually, if there are two

contradictory clauses covering the same matter, one being a general clause and the other a specific clause, the specific clause governs. Stated Value Policy.

A policy of property insurance

which states the maximum amount the company will pay in case of loss.

If this amount should turn out to be greater than

the actual cash value at the time of the loss, the company is only liable for the actual cash value. Stock Company. A company owned and controlled by the stockholders.

Profits go to the stockholders.

Subrogation.

The right of an insurance company to

recover from a negligent third party the amount it has paid to its policyholder. Substandard R i s k .

One which does not measure up to

the company's underwriting requirements. Surplus. liabilities.

The excess of all assets over all

154 Term.

The period of time for which an insurance

policy is issued. Theft.

"The word ’theft 1 comprehends the wilful

taking of one person's property by another, wrongfully.

To

recover indemnity, an intent permanently to deprive the owner of his property need not be established. ’theft' under the policy."

There was

The foregoing definition was

given by the Superior Court of Ohio on November 21, 19^5• Some courts might disagree, but the tendency is to be more and more liberal in construing the policy In favor of the insured. Three Fourths Loss Clause.

A clause attached to some

fire policies which provides that the insurance company shall not be liable for more than three quarters of the amount of any loss.

This considerably reduces the moral hazard.

Three Fourths Value Clause.

A clause attached to some

fire policies which provides that the insurance company, shall not be liable for more than three quarters of the value of the property insured.

This also reduces moral hazard.

Title Insurance.

A policy insuring the owner of real

estate against loss which might arise from a defective title to his property. Total Disability.

Frequently defined as the inability

to perform any of the duties of one's occupation.

Some

disability policies narrow their coverage to "inability to

155 perform any of the duties of any occupation.” Total Los s .

In most kinds of property insurance when

the cost of repairs, plus the value of the salvage, exceed the actual cash value of the property, the loss is considered to t a l . Twisting.

Generally, any form of misrepresentation

made by an agent in an effort to sell insurance.

More

particularly, misrepresenting a policy or an insurance company to try to influence a policyholder to drop his insurance in one carrier and place it with another.

Most

states make twisting a misdemeanor. Unearned Premium.

That portion of the premium which

has not yet been earned and which is consequently owed to the policyholder if the policy is canceled. Unearned Premium Reserve.

Reserves required by law

to be set up for the purpose of repaying unearned premiums on policies that may be canceled. Upper Lim i t .

In liability insurance, the maximum

amount the company will pay for death or injury of two or more persons in one accident. Underwriter.

One who determines the risks to be

solicited and plans programs of insurance.

The term is also

applied to those persons who actually accept or reject risks. Thus an agent is often referred to as a ”field underwriter” in contrast to the home or branch office underwriters.

156 Valued Policy.

A form of policy in which the amount

of indemnity to be paid in case of loss is fixed by the terms of the policy itself and does not depend on adjustment. This should not be confused with a Stated Value Policy. Vandalism.

Wilful damage to or destruction of

property. Waiting Period.

The period which must elapse before

disability payments begin under the workmen*s compensation laws of most states.

A waiting period is also usually found

in health policies and occasionally in accident policies. Waiver.

The voluntary surrender of a right which is

known to exist. Warranty.

A statement made by the applicant and

written into the policy so as to form a part of it.

Strictly

speaking, a false warranty voids the policy even if it is not material j ^ I n practice, U. S. courts are inclined to be lenient towards a policyholder who has made a false warranty which does not materially affect the risk, but British courts still insist upon the truth of warranties. W orkmen1s Compensation.

The benefits (weekly pay­

ments, medical, hospital, et cetera bills) which an employer is bound by law to provide for his employees who are injured on the job, regardless of whose fault the accident was. Every state in the U. S. now has a workmen*s compensation law. These laws vary in detail but the general intent is the same,

157 namely, to make sure that an employee who is disabled through his work shall not become a public charge.

APPENDIX C SPECIMEN COPY TRAVEL AND PEDESTRIAN ACCIDENT POLICY

Travel and Pedestrian A ccident Pol T h i s P o lic y P ro v id e s I n d e m n ity for Loss o f Life, Lim b, S ig b t or T im e b A c c id e n ta l M ean s, to tb e E x te n t H e re in L im ited a n d P ro v id e d .

CHICAGO,ILLINOIS A STOCK COMPANY (Hereinafter called the Company)

IN CONSIDERATION of the payment of the annual premium of One Dollar does hereby insure the person whose name and address appear in the Schedule of Policy Information on the filing back of page four hereof (hereinafter called the Insured), subject to the terms, conditions and lim­ itations herein contained against Death or Disability resulting directly and independently of all other causes from bodily injuries effected through external, violent and accidental means and sustained by the Insured only in the manner described in the following Parts, for a term of twelve (12) months, beginning at Noon, Standard Time, at the place of residence of the Insured, and on the day this policy is dated. PART I. If the Insured shall, during the term for which this policy is issued or any renewal thereof, and as herein provided, (a) By the wrecking of any Railroad Passenger Car, Street Railway Passenger Car, or Elevated or Subway Railroad Passenger Car in which such Insured is traveling either as a fare-paying passenger or on a pass regularly issued by the above named common carriers, in a place regu^ larly provided for passengers only; or * (b) By the wrecking of any passenger steamship or steamboat^ in or on which such Insured is traveling either as a fare-paying passenger or on a pass regularly issued by the said common carrier, in a place regularly provided for passengers only,