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insurance policy. In a hundred ways it can be shown that fire and marine insurance have become absolute necessities of trade, without the assuring protection of which the large undertakings of to-day would be a gigantic gamble, and would never be attempted if liable to miscarry through a single fire or marine disaster. As it is, enormous sums are borrowed on stocks and bonds and warehouse receipts; merchants sell their wares on credit; investors furnish millions for the upbuilding of vast industries supporting whole towns; capitalists make loans on buildings worth many times the value of the ground on which they are built—all being willing to do this because they know that the insurance policy stands as collateral between them and loss. "All in all," as Mr. Campbell writes, "no statistics would be possible to show the extent of the fire-insurance business as now practised, for those figures would need to be as large as those of all trade. There is practically no combustible property that is not insured against fire; every car of grain, every scowload of lumber, every bale of cotton, every package of manufactured goods, from the time it assumes merchantable shape until it is entirely consumed, is thus conditionally the property of insurers. Without such a system, modern commerce would be impossible. The fire-insurance policy, or the assignment of certain interests in it, is attached to the mortgage given by the farmer for money to build his new barn; the fire-insurance policy is as necessary to the banker as is the warehouse or shipping receipt on the strength of which he advances funds for that magic of commerce 'moving the crop'; fire insurance is as important to the manufacturer as is th» foundation under his factory; fire insurance is, in fact, the very backbone of that part of our social life which has to do with making, moving, and keeping material things.''1
1A. C. Campbell, "Insurance and Crime," p. 131. Putnam, New York, 1902.
THE POLICY CONTRACT IN FIRE INSURANCE
A Fiee-insueance policy is a personal contract which promises, in accordance with the restrictions expressed in the policy, to indemnify those who have an insurable interest against all actual direct loss or damage by fire to property as described in the policy. According to the above definition a fire-insurance policy should be viewed as a contract, which, strictly speaking, does not insure the properly but the persons
J who own the property or have an insurable interest therein. The importance of the personal factor in fire insurance can
^not possibly be overemphasized. If, for example, we assume two buildings to be alike in all respects except ownership, the insurance company will have to regard these two risks
Jb& different as day is from night, if the one is owned by an honest man, arid the other by a crook. Dishonest carelessness and actual incendiarism are playing a large share in the enormous annual fire waste of the country, and there is scarcely a business which offers such temptations for gain through criminal procedure as fire insurance. In fact, there is probably no type of contract in which one party (the insurer) is so absolutely at the mercy of the other (the insured). Overinsurance must by all means be guarded against, and yet for the benefit of the general public the company cannot obtain an accurate valuation of the property at the time of insurance. Only an approximate estimate can be made at best, for to do otherwise in the case of all properties insured, would involve a very considerable expense and an unnecessary increase in the rate of premium.
Since the fire-insurance policy must of necessity be regarded as a personal contract, it is clear that the policy does not follow the property unless the company gives its consent. Any other rule would mean that a given property would remain insured even though it passed from an honest and careful owner to a dishonest or careless one, and was thus changed from a good to a bad risk. It is only fair to the company and the public that when a policy is assigned to another person, the company should have an opportunity to know the insurable interest back of the assignment, and to give its consent. Likewise it is only fair that the policy should become null and void if any change takes place in the interest, title, or possession of the subject of the insurance, / unless the company has been made acquainted with the fact, and has given its consent to the change.
The Fire-Insurance Policy a Contract for Indemnity.— It is a fundamental principle of fire insurance, often lost sight of by our law-making bodies, that the contract is one of indemnity for actual loss. This means that no matter what the stated value of the property may be in the policy, the insurance company is never liable for more than the actual value of the property at the time of the fire. Observation will show that any other rule will work the greatest injustice and make possible wholesale fraud. Values of real estate, and especially of personal property, are constantly changing, and frequently great depreciation in value occurs between the issuance of the policy and the time of loss. Stocks of goods may go down in value because out of season or because of a change in style. Machinery may depreciate through wear and tear, and buildings may be worth less when destroyed because of cheaper labor and building materials, or because they cannot command the same rental as formerly. Now if an insurance company were obliged, in case of a total loss, fo pay the full value stipulated in the policy, irrespective of the lower actual value, the policy-holder would
actually be in a position to benefit from fire. This is contrary to the very idea of "indemnity," because that term implies that the insured should be compensated for loss actually incurred, but should never find the insurance contract a source of profit.1
In the next place, it should be stated that the fire-insurance contract indemnifies only for actual destruction of material values, i.e., for the fair cash market value of the property at the time of the loss. In other words, the company j is not liable for sentimentalIs2luea, such as are frequently associated with gifts, portraits, objects of art, documents, heirlooms, etc.
Furthermore liability under the fire-insurance policy is limited to loss or damage which is traceable directly to fire, i.e., where "the damage accrues directly from fire as a destroying agency in contrast to the remoteness of fire as such an agency.'' There are many instances, for example, where fires of very small size cause enormous loss because of a peculiar chain of circumstances, such as a small fire reaching charged wires, or a spark coming in contact with explosives. The interesting question arises as to the extent of the insurer's liability for such losses. This can only be answered by determining whether or not the loss is directly traceable to fire. Is fire the real cause, and if so, is the sequence of events between the origin of the fire and the destruction of the property (the two may involve locations distantly separated from each other) an unbroken one, or has some outside force, such as an act of God, intervened to bring about or increase the loss? This question is of the greatest importance to both parties in innumerable cases, and will be discussed in greater detail in another chapter.'
'Will be discussed at greater length in the chapter on "The Risk Assumed." ,
2 See that part of the chapter on "The Risk Assumed" which deals with "The Doctrine of Proximate Cause."
The Rules Underlying the Interpretation of the Contract. —Referring to our definition of a fire-insurance contract, we find that "indemnity" as outlined above is promised only "in accordance with the restrictions expressed in the policy." Nearly all of the insurance contract consists of a large number of promissory and restrictive provisions which aim to govern the conduct of the insured in the safeguarding of the property, or to protect the company against the payment of unnecessary or dishonest losses. In considering these provisions, it should be borne in mind that the fireinsurance contract is general in its nature, and was drawn up to meet a general situation, and not with reference to a particular case. And yet there are scarcely two fires in which the circumstances are exactly alike. Innumerable cases arise which require a special application of the general terms of the contract in order to realize the purpose for which the contract was written, viz., to protect against loss.
There is scarcely a provision in the policy to-day which at some time or another was not the subject of interpretation by the courts, and there are few provisions concerning which, largely because of ambiguity in the wording, varying circumstances surrounding the loss, or statutory requirements, there are not conflicting opinions. The principles of fire insurance are but little understood by the general public. The interests of the insured often seem at variance with the interests of the insurer, and the attitude of state legislatures has too often been one of hostility. Nothing seems fairer, for example, than that the company should not pay more than the actual value of the property at the time of the fire. Yet this basic rule, which underlies the very idea of indemnity, is not appreciated or understood in many sections of the country. Its application has actually been prohibited by the legislatures in a large number of the states, and the courts have seen fit to uphold the law. Under these conditions, it is not astonishing to find that disputes should fre