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The Company's Liability for Loss Limited to the Actual Cash Value of the Property.-A very important provision of the standard policy is that which limits the company's liability to the actual cash value of the property at the time of the loss. The clause reads (lines 1 to 4 inclusive):

"This company shall not be liable beyond the actual cash value of the property at the time any loss or damage occurs, and the loss or damage shall be ascertained or estimated according to such actual cash value, with proper reduction for depreciation, however caused, and shall in no event exceed what it would cost the insured to repair or replace the same with material of like kind and quality; said ascertainment or estimate shall be made by the insured and this company, or, if they differ, then by appraisers, as hereinafter provided; and, the amount of loss or damage having been thus determined, the sum for which this company is liable pursuant to this policy shall be payable sixty days after due notice, ascertainment, estimate, and satisfactory proof of the loss have been received by this company in accordance with the terms of this policy."

This policy provision conforms with the true object of the fire-insurance contract, namely, to furnish indemnity for the destruction of actual property values. In other words, even though the face value of the policy is for a larger amount, the insurance company should never be held liable for more than the actual cash value of the property at the time of the fire. As explained in the chapter on "The Policy Contract," many causes operate to decrease the value of property during the interval between the time of the issuance of the policy and its maturity. Again, it should be borne in mind that even though values did not fluctuate, it is impossible for companies to make absolutely accurate inspections of the property at the time the risk is assumed. Experience shows that only about one in every ten claims represents a total loss. Out of every 100,000 properties insured only about 3,333 suffer a loss, and only about 333 suffer a total loss. Where partial losses occur, an adjustment

must be made in any case. Is it not much more desirable, therefore, from the standpoint of expense, to defer a thorough investigation, as to actual value, to the 333 cases of total loss, when the losses occur, than to make the same originally in the case of the 100,000 properties?

Despite the fundamental principle of indemnity in fire insurance, and the much greater economy in deferring careful examinations to the time of the loss, it is a most regrettable fact that nearly one half of the states of the Union have seen fit to pass laws which, in the case of realty, make the company liable for the face value of the policy in case of a total loss. Thus the recent Minnesota law (1907, Chap. 446) is to the effect that every company insuring any building against loss, shall cause the same to be previously examined and to have its insurable value determined. The law further provides that in the absence of any increase in the risk without the consent of the insurer, in which the burden of proof shall be upon the company, and in the absence of intentional fraud upon the part of the insured, the company shall be liable upon the whole amount mentioned in the policy in case of total loss. Such so-called "valued policy laws" are opposed to the very principles underlying fire insurance, and furnish a motive for fraud, resulting in the payment of dishonest claims out of the premium contributions of the honest. They have proved exceedingly expensive to the policy-holders of the states which have enacted the same, and are sure greatly to increase the moral hazard.1

The Option to Rebuild or Replace.-Following the clause just explained, lines 4 to 6 of the standard policy read, "it shall be optional, however, with this company to take all or any part of the articles at such ascertained or appraised value, and also to repair, rebuild, or replace the property lost or damaged with other of like kind and quality within a

1See Mr. Dean's discussion of valued policy laws contained in pp. 103 to 111 of "The Rationale of Fire Rates," Chicago, 1901.

reasonable time, on giving notice within thirty days after the receipt of the proof herein required, of its intention so to do; but there can be no abandonment to this company of the property described."

According to this provision, insurance companies may settle a claim by paying the loss, by taking all or any part of the property damaged or undamaged, or by repairing or replacing the property lost or damaged. When the company has elected one of these alternatives, its decision becomes an absolute agreement, and fixes the rights and duties of the parties.1 Insurance companies, however, do not desire to exercise the option of repairing or replacing the property unless they deem it absolutely necessary, as, for example, when a satisfactory adjustment of a loss cannot be made. Where the insured claims what the insurance company regards as an excessive demand, the company may determine whether it would not be cheaper to restore the goods or buildings to their original condition at the time of the fire. Certainly the insured cannot object to this. Since the cost of materials varies considerably at times, the insurance company may profitably exercise this option. In numerous states, however, disputes have arisen as to what constitutes a restoration, especially since the insurance company must replace the property with property of "like kind and quality," and the courts have been severe in their rulings against the companies. Partly for this reason and partly because the insurance companies are not in the business of buying materials or constructing buildings, they prefer, whenever possible, not to exercise this option. Mention should also be made of the fact that in fire insurance, unlike marine insurance, the insured cannot abandon the property to the company and demand payment for the same."

'Fire Assoc. vs. Rosenthal, 108 Penna., 74.

2 For an explanation of abandonment in marine insurance see the chapter on "Marine Losses."

CHAPTER IX

THE TERM OF THE CONTRACT-RENEWAL AND

CANCELLATION

THE TERM OF THE CONTRACT

ONE of the necessary elements in any complete contract is the agreement as to the duration of the term. In fire insurance most contracts are written for one year or less, but the term is often made to extend over two, three, and five years, and even longer. The New York Standard policy seeks definitely to state the limits of time within which the policy shall be in force by providing that the insurance shall extend for the term of.. from the. ..day

of.

66

191.., at noon, to the..

.day of 191.., at noon. Some have argued that a later hour than twelve o'clock would be more convenient, since then the termination of the policy could be made to coincide with the close of a business day. By invariable custom, however, all fire-insurance policies are made to begin and end at noon.

As regards the beginning of the term, it is well settled in law that the policy takes effect on the day when it is applied for and dated. Any act on the part of the company which signifies that it accepts the risk operates to complete the contract, and the actual delivery of the policy to the applicant is relatively unimportant. An excellent illustration of this principle is afforded in the case of the Hartford Steam Boiler Insurance Company vs. Lasher Stocking Company, 66 Vt., 439. Here the defendant made application to

the company on May 7th for insurance and the negotiations were conducted by mail. On May 13th the company mailed the policy, but enclosed an "exhibit," which recommended that certain changes be made on the premises. The policy was received by the defendant on May 15th, but regarding the suggestions of the company as mandatory, which they were not, he returned the policy on June 1st. On June 5th, the company returned the policy to the defendant and insisted on the payment of the premium, amounting by this time to $100. The court was now called upon to fix the time when the policy began, and decided to the effect that "the law is now well settled that if an offer of a contract is made and accepted by letters, sent through the post, the contract is complete the moment the offer is posted, and this upon the ground that the post-office is regarded as an agent of the one making the proposition.

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When policies cannot be delivered at once, it is common for the representative of the company to make the insurance binding in favor of the insured by issuing a so-called "binder." (See Fig. 4.) While not necessary legally to make insurance binding in the absence of the policy itself, the "binder" has the advantage of affording written evidence of the contractual relation between the parties. According to its terms, however, it is mutually agreed that it shall at once terminate and become void upon delivery of the policy in substitution, or upon the day following that upon which notice is given to the applicant or broker that the risk is declined.

In Hallock vs. Commercial Union Insurance Company, 26 N. J., 268, we have an instance where the insurer was held liable for a loss occurring before the contract was even accepted by the company. The application provided that if the risk proved acceptable the policy was to be antedated so as to be of even date with the application, namely, March 12th. On the next day the company mailed the policy to

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