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ance that if the reinsured policy is canceled or reduced in amount, this policy shall be canceled or reduced in like proportion, and that the reinsured company is to retain at its own risk (exclusive of any and all reinsurance) under the policy hereby reinsured an amount equal to the proportion which the amount of this policy bears to the amount of the particular policy hereby reinsured at the date this reinsurance is effected."
Tlie Application of the Reinsurance Contract to the Original Insured.—By the weight of authority the original insured is regarded as a stranger to the contract of reinsurance, unless it is specifically agreed that he shall have an interest therein. In other words, when one company reinsures the risk of another, the contract is considered as having been made only between these two companies, and the reinsuring company is liable only to the reinsured company, and not to the policy-holder. Thus if property owner A insures his property for $10,000 with Company B, and B reinsures $5,000 of this risk with Company C, Company C will be liable only to B and not to the policy-holder A. In case B should be insolvent, it follows that A, in case of total loss, cannot collect the $5,000 directly from C. This sum will be paid to B, and when merged with the assets of this company for the general benefit of creditors, will somewhat enlarge the dividend paid to A as a creditor, but will nevertheless result in a loss. The case, however, is different where the policy-holder has been promised in the reinsurance contract that losses will be paid to him. Under such an agreement the policy-holder is entitled to collect his indemnity directly from the reinsurer.1
1A few recent cases hold the contrary view, and regard the reinsurance contract written for the benefit of the policy-holder. See Hunt vs. New Hampshire, etc., Assn. (68 N. H., 305), and Shoaf vs. Palatine Ins. Co. (127 N. C, 308).
THE ASSIGNMENT OF FIRE POLICIES
In a former chapter reference was made to a section in the standard fire policy which relieves the company of all liability, unless it has given its consent, in case the insured property is sold, or there has been a change in title, interest, or possession. The fire policy, we saw, is essentially a personal contract, and this provision is, therefore, necessary and reasonable as a precautionary measure against fraud. For the same reason the standard policy contains another provision which prevents the assignment of the policy without the company's consent to a vendee of the property or to a creditor, or other interested party. The provision reads: "That this entire policy shall be null and void if without the consent of the company there be an assignment of the policy before a loss takes place.''
It is a common practice for companies to consent to the continued validity of the policy as far as the purchaser of the insured property is concerned, where they are satisfied with his character. But the frequent extension of such acts of grace to the insured should not be interpreted as creating a general usage which compels the company to accept the purchaser as the insured. In life insurance the courts of many states have decided that, in the absence of restrictive provisions, the policy is assignable. But in fire insurance, on the contrary, it is a well-established legal principle that the policy, since it is a personal contract, can be assigned only with the consent of the company. In case of the transfer of the insured property, the company may refuse its consent to the transfer of the policy, and will be relieved of all further liability. The policy form usually provides two assignment blanks on the reverse side, which must be properly filled by the insured and insurer to effect an assignment.
ASSIGNMENT OF INTEREST BY INSURED
The interest of as owner of property
covered by this policy is hereby assigned to
subject to the consent of the Company.
Date (Signature of the insured.)
CONSENT BY COMPANY TO ASSIGNMENT
The Company hereby consents that
the interest of as owner of the property
covered by this policy be assigned to
Date (Signature for company.)
Assignment of the Policy when There Has Been a Transfer of the Property.—In discussing the legal nature of an assignment of a fire policy, it is essential to distinguish between those cases where there has been an actual transfer of the property and those where there has not. Thus where a policy is assigned to a mortgagee as his interest may appear, we have already seen that the mortgagee is not absolutely protected, because in law the mortgagor is still regarded as the owner of the property and the holder of the policy, and it is, therefore, his conduct which will control the validity of the policy. The policy may be valid at the time of assignment to the mortgagee, but may be rendered null and void thereafter by the mortgagor's improper conduct. Or, the mortgagor may already have violated the policy so as to make it void at the time of the assignment, in which case he cannot convey to the mortgagee more than he himself possesses, and the mortgagee, as assignee, cannot receive more than the mortgagor was in a position to give. To overcome this obstacle, it has already been explained that it is the general practice of companies to protect the mortgagee by indorsing on the policy a special mortgagee clause which promises to indemnify him as his interest appears, and especially provides that he shall be protected against any act on the part of the mortgagor which may invalidate the insurance.1
Where, however, there has been an actual transfer of the title, and the policy has been assigned with the company's consent, it is the general rule to view the assignment as constituting a new and independent contract between the assignee and the company. The assignee will thus be protected against the acts of the original policy-holder, and this is true even though the company lacked knowledge of some improper conduct of the assignor with reference to the policy conditions. With the transfer of the policy by assignment, consented to by the company, the purchaser is considered by the courts to be protected in the same way as if the company had reissued to him a new policy, similar in all respects to the policy held by the person originally insured. Mr. Ostrander, in summarizing the various legal decisions which define the character of an assignment where there is a transfer of the property, gives the following explanation: "The assignment in such case has no other legal effect than to acquit the company as to the party first insured. This might be done in a different, and perhaps better, form, but the method chosen is sufficient to accomplish the object sought. It is a short, simple process to release the insurer as to one party, and bind it as to the other. In Continental Insurance Co. vs. Munns (120 Ind., 30; 22 N.E., 781) the
1 See Chapter on the "Mortgage Clause."
property had been mortgaged in violation of the conditions of the policy, which was subsequently assigned, on sale of the property, with the consent of the company, who had no knowledge of the forfeiture occasioned by this circumstance. The court said 'that the policy expires with the transfer of the estate, so far as it relates to the original holder; but the assignment and consent of the company constitute an independent contract with the assignee, the same in effect as if the policy had been reissued upon terms and conditions therein expressed. . . . The contract of insurance thus consummated arises directly between the purchaser and the insurance company, to all intents and purposes the same as if a new policy had been issued, embracing the terms of the old. In such a case no defense predicated on the supposed violations of conditions of the policy by the assignor will be available against the assignee.' " 1
Where the Policy is Assigned as Collateral Security for Loans.—Unless provided in the policy to the contrary it is the general rule that an assignment of the policy for collateral security will not invalidate the policy, even though this may have been done without the company's knowledge. The assignor continues to be the owner of the property and is still the insured, although the assignee has a lien on the insurance which will protect him in preference to other creditors.
Mention should here be made of the practice which many companies pursue of enabling a policy-holder to protect his creditors quickly with insurance. In many lines of business, for example, large quantities of produce, such as grain and cotton, are bought on borrowed funds, which must have as security not only the goods purchased, but also the promise of indemnity in caee of loss through fire or marine disasters. Thus in the grain, cotton, and other produce
1Ostrander on "Fire Insurance," pp. 502, 503.