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Many believe that the supposed benefits of a seventy-fiveper-cent limit of insurance to value or loss are greatly exaggerated, and doubt its efficacy in the case of movable property. In this class of property it is frequently impossible to estimate correctly the value of stocks in sealed barrels, boxes, bottles, or packages, and while a dishonest owner may receive but three fourths of his dishonest claim, this three fourths of the loss may greatly exceed the entire value of the stock. In the case of buildings, however, which can be correctly valued, the owner should have a one-fourth interest in their protection, and the three-fourths clause may here serve a useful purpose.

CHAPTER XVI

FIRE-INSURANCE RATING

The fire waste in the United States averages annually about $200,000,000. This huge sum is gone forever, and cannot be replaced through insurance or any other means. Fire insurance is not directly productive, but the good it produces is purely negative in character. Its sole object is to distribute among all members of the community those losses through fire sustained by the individual, and its cost must therefore be regarded in the nature of a tax assessed against the many for the benefit of the unfortunate few. It is the task of fire-insurance companies to equitably assess, collect, and distribute this tax.

In all ages the task of the tax gatherer has been an unpleasant one, and the work of properly assessing taxes has always been one of the most difficult problems of government. The fire tax is no exception to this rule. Against its assessors and collectors—the insurance companies—there has been directed for years a vast amount of unfriendly criticism. Just as with other taxes, there is a constant endeavor to lessen the individual burden without, however, lessening the actual fire waste. So many factors, however, enter into the making of the fire rate, and so little does the average property owner understand why he is charged a certain sum, that the whole subject of "fire rating" has come to be regarded by the public as shrouded in mystery, marked by inconsistencies, and indeed as little more than pure guess work. Whenever many independent companies are seen to charge the same rate for the same class of risks, it is only natural, in view of the general ignorance on the subject, to hear the cry everywhere that the competing companies have formed a combine in restraint of trade. Every time some company or agent shows contempt for established rates and departs widely from the same, one hears on every hand about the "guesswork" in rate-making.1

Such instances of flagrant departure from established rates, however, are the exception, and fail utterly to show how the vast business of fire insurance in the United States is actually conducted to-day. As Mr. A. F. Dean so ably states in his "Rationale of Fire Rates": "Competitive conditions of this kind are so rare that they have no appreciable effect upon the aggregate business of the country. They have about as much influence upon average results as a shooting scrape or street brawl might have on the loss ratio of the accident companies. Where a rate war extends to an entire state, it may determine the retirement of a weak company or two at the end of the year; but, as a whole, it simply serves to increase the average cost ratio of the country by a small percentage. That these things should create the inference that fire rates are the result of pure conjecture is natural, but the inference is false. The fire rate is the farthest possible removed from guesswork. In point of equitable distribution, it puts to shame the taxes assessed by our municipalities, states, or even the National Government. As a system, it is more carefully thought out, more elabo

1For further discussion of the subject of rate making in fire insurance, see the following: F. C. Moore, "Fire Insurance and How to Build;" "The Standard Universal Schedule for Rating Mercantile Risks," edition of January, 1902; A. F. Dean, "Fire Rating as a Science," Chicago, 1901; A. F. Dean, "The Rationale of Fire Rates," Chicago, 1901; Richard M. Bissell, "Rates and Hazards," a lecture published in the Yale Insurance Lectures; Charles A. Hexamer, "Rates and Schedule Rating," in the Annals of the American Academy, September, 1905.

rate, more logical, and more just than any governmental system of taxation. As a tax, it is assessed so close to aggregate cost that for long periods the residuum of underwriting profit is hardly more than an ordinary brokerage.''

The Nature of the Hazard in Fire Insurance.—Why rate-making in fire insurance should have attained this carefully thought out and logical character becomes clear when we reflect how numerous are the elements which make up the hazard to which insured property is subject. Ordinary intelligence will recognize at once the difference between a cotton mill and a brick dwelling from the standpoint of fire hazard; and such distinctions exist between a thousand different types of property. Again, taking two risks within the same class, let us say cotton mills, one may be of wooden construction, a perfect tinder-box without any of the modern devices for preventing and extinguishing fires; the other of brick construction, with boilers and dangerous processes in separate buildings or compartments, and equipped with all the latest protective appliances. To charge the same rate on both mills would be an act of the grossest injustice, and would simply be overcharging the owner of the best mill for the benefit of the other. In other words, to treat the community justly, that is to say, charge "like rates to like hazards," the fire-insurance companies are obliged to distinguish not only between the numerous classes of property, but also between the individual risks of each class.

To carry the illustration further, each building of a given class is surrounded by an environment peculiar to itself. One factory or store may be far removed from other dangerous risks; another may be situated in the very center of a congested conflagration district. One may be in a city with poor fire-extinguishing facilities, while the other has the benefit of a first-class fire department. As a matter of fact, with reference to fire-extinguishing apparatus, some rating schedules divide cities into as many as six classes, according to the degree of efficiency. The most limited intelligence will at once perceive that a distinction must here be made if justice in rating is to be secured.

Again, with reference to a particular type of building, such as stores, for example, there exist a thousand possible hazards of occupancy. Of several buildings of like construction, one may be used as a dry goods store, another as a hardware store, a third as a drug store, etc. The buildings may be alike in construction, environment, and every other particular, yet the danger of destruction by fire to these' buildings is different, because of the different substances which they contain and the different uses to which they are put. In fire insurance there is an inherent connection between the building and its contents. It has been truly said: "The causes of fire are almost infinite in number, because every substance and almost every process of labor, manufacture, or commerce is, under certain circumstances or in certain relations to other articles or processes, productive of danger from fire." Manifestly, in the interests of justice as between one property owner and another, a distinction must be made by fire-insurance companies between all the various uses or "occupancies" of different buildings, although belonging to the same class. To be just in their premium charges it is also essential for the companies to change their rates to meet changing business conditions. Rate-making in fire insurance does not present constant factors, and justice demands that the companies should recognize the frequent changes which occur in the methods of manufacturing, commerce, heating, lighting, etc., as well as in statutory enactments and the management of property.

Considerations like these serve to show that fire rates are fundamentally different from rates in most other branches of insurance, and unless apportioned by system as contracted from chance, are bound to produce endless friction between

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