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fer to the company such rights and to permit it to use the name of the assured for the recovery or defense thereof. If the payments do not cover the loss of the assured, the company shall be interested in such rights or claims with the assured in the proportion of the amount paid to the amount of the loss not covered thereby. The assured warrants that such rights of subrogation shall vest in the company unaffected by any act of his. In all cases where the company is called upon to pay the full amount insured by this policy, it shall have the right to purchase the insured estate at an appraised value to be ascertained by arbitrators as above provided.

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CHAPTER XXXI
CREDIT INSURANCE

CREDIT insurance may be defined as that form of insurance which seeks to indemnify extraordinary losses in credits suffered by manufacturers, wholesalers, and jobbers through the insolvency of their customers. It is essential to bear in mind that this form of insurance does not insure against the expected losses occurring in any business, but covers only the unexpected losses, i.e., those in excess of the average loss.

This form of insurance may be regarded as scarcely out of the experimental stage. Thus far the companies have lacked the extensive statistical data necessary to place any system of insurance upon a scientific basis. In fire insurance we have seen that risks are carefully classified, and that full records of losses exist, which serve as a guide in the charging of premiums. But in credit insurance no such attempt has been made to reduce the underwriting of risks to a scientific basis, and the companies are obliged at present to issue their policies on the policy-holder’s own statement as to the losses he has suffered for the last few years. Whereas fire-insurance premiums have shown a tendency to decrease during the last few decades, the rates in credit insurance have shown a tendency to rise; until in some instances they are nearly twice as high as formerly.

But whatever may be the difficulty under which credit insurance is laboring, it must be conceded that there is need for this type of insurance. Every merchant concedes the necessity of carrying fire insurance on his stock, yet the total sales of every merchant each year—sales made largely on the basis of credit—exceed the value of his stock on hand by many times. Statistics also show that the annual loss of credits in the United States by insolvency of debtors exceeds the total fire loss. The following table comparing the annual fire loss with the insolvency loss, as compiled by Bradstreet's, makes an interesting showing:1

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The foregoing table clearly demonstrates that losses through insolvency are not only very large, but that they vary greatly from the average loss, especially in panic years. A further analysis of commercial failures shows that a very large proportion of the loss is traceable to causes, such as disasters, which could not be foreseen. A classification of the failures in the United States during 1907 by causes shows the following:4

1 "Collateral on Merchandise Accounts," issued by The American Credit Indemnity Company of New York, p. 19.

2 The year of the San Francisco disaster.

3 The Baltimore fire occurred this year.

4 "Collateral on Merchandise Accounts," issued by the American Credit Indemnity Company of New York, p. 20.

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DUE TO FAULTS OF THOSE FAILING
Num- Liabil-
ber.

- ities. 1. Incompetence (irrespective of other o .... 22.6% 8.9% 2. Inexperience (without other incompetence). . . . 4.9% 3.2% 3. Lack of capital................................ 37.1% 18.4% 4. Unwise granting of credits. . . . . . . . . . . . . . . . . . . . 2.3% 3.1% 5. Speculation (outside regular :* - - - - - - - - - 0.7% 4.9% 6. Neglect of business (due to doubtful habits)... 2.5% 0.5% 7. Personal extravagance............ . . . . . . . . . . . . . 0.9% 0.5% 8. Fraudulent disposition of property. . . . . . . . . . . . . 10.1% 5.1%

Totals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81.1% 44.6%

NOT DUE TO FAULTS OF THOSE FAILING
Num- Liabil-
ber iti

- es.

9. Specific conditions (disaster, etc.)............. 16.3% 51.7% 10. Failure of others (of apparently solvent debtors) 1.4% 3.3% 11. Special or undue competition................... 1.2% 0.4% Totals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.9% 55.4%

It is clear that in the granting of credit to purchasers by manufacturers, wholesalers, and jobbers, there is a sufficient uncertainty in the loss from year to year, and a sufficient lack of control over the causes which underlie those losses to make the granting of credit a fit subject for insurance. In promising indemnity for loss of credits, credit insurance benefits the insured by giving him “substantial collateral on every merchandise account.” It insures him against the loss of his profits, because, when he sells on credit, the price includes his profit as well as the cost of production. In fact, credit insurance differs from fire insurance in two important respects, viz., that it insures against the loss of profits, and that it covers the insured’s interest in goods after they have left his possession. Lastly, the credit-insurance policy can serve as a conservative guide in the extension of credit to customers. The credit bond, as has been said, “is valued and respected by both the credit and sales departments, and consequently tends to induce perfect harmony between the two by arbitrating differences of opinion as to the line of credit to be extended to any customer. Its influence in this capacity is beneficial in any business.” " Methods of Safeguarding the Company Against Unnecessary Losses.—Credit-insurance companies must carefully restrict the risk which they assume, because the giving of unlimited protection against loss from bad debts would greatly increase the recklessness with which credit would be extended. The object of credit insurance is merely to indemnify losses which cannot be foreseen, and which are not brought about by the deliberate carelessness of the insured. To prevent recklessness on the part of the insured, all credit-insurance policies contain at least six provisions which define the extent of the company’s liability. They are as follows: 1. The Initial Loss.-Every credit-insurance policy provides that the insured must first himself bear the so-called “initial loss” or “own loss” before the company becomes liable for the excess. This initial loss represents the annual expected or “normal loss” which the business has experienced over a period of years. As shown by the application blank this average or expected loss is determined by comparing the net losses to the gross sales of the business for the last five or six years. The average loss, since it is expected to occur, may be viewed as a part of the cost of operating the business. It is not considered a fit subject for insurance, since it can be easily shifted to the consumer in the form of higher prices. In the policy, the “initial loss” is expressed in the form of a percentage of the gross sales. It differs for nearly every type of business, and even differs for different firms in the same line of business. Conditions are seldom alike, and

* “Collateral on Merchandise Accounts,” p. 13.

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