goods the wholesaler may pay only 10 per cent of the purchase price in cash, the remaining 90 per cent being advanced as a loan by the banker or manufacturer, the security for the loan being the goods themselves, but only when insured against loss by fire. Of course the wholesaler or retailer, as the case may be, must pay for the insurance, but the reduced price at which he gets the goods, or the favorable rate of interest at which he secures the credit, pays for this insurance over and over again. As an insurance policy may be made to cover all stock that goes into a store from time to time during the term of the policy, $10,000 of insurance may, in the course of a year, have under its protection from $50,000 to $75,000 worth of merchandise, thus distributing the cost of the insurance over large property values.

It may be shown in another way that fire insurance enables a man with limited capital to transact a business much larger than he otherwise could. Assume a grain dealer to be the possessor of $40,000 capital. With this capital he purchases wheat in the West at $1 a bushel, with a view to selling it in the East or storing it in a warehouse for a more favorable market. If this grain dealer's transactions were limited to cash purchases of wheat, he would probably be obliged to wait several weeks before he could sell his grain and liberate his capital for a new purchase, and his profit would be exceedingly small, since modern competition in that business enables him to realize a profit of only one to two cents per bushel. Grain dealers cannot afford to transact business on this basis, and all are obliged to resort to the use of credit. Instead of limiting his purchases to 40,000 bushels, our dealer will at once have this wheat inspected, graded, represented by warehouse receipts, and will have it insured against loss by fire in a reliable company. Then he will take the warehouse receipts, representing the wheat, and the insurance policy to his banker as collateral security for a loan, and the banker will lend him money, probably, to the

extent of 90 per cent of the value of the wheat, or $36,000. If wheat remains at $1 a bushel, the dealer can at once purchase 36,000 bushels more with the proceeds of this loan. This new purchase of wheat will again be represented by new warehouse receipts, and again protected by a fire-insurance policy, and the warehouse receipts and the policy covering the 36,000 bushels can be offered to the banker as collateral security for a new loan of 90 per cent of the value, or say, $32,400. With this new loan the dealer can at once purchase more wheat, can insure it, and with the new warehouse receipts and the fire-insurance policy as collateral obtain another loan, and with this loan buy more wheat. By repeating the operation until his original capital has been absorbed in margins, it becomes clear that this grain dealer, though he started with only $40,000 capital, is nevertheless enabled, through the use of fire insurance, to do a $300,000 business, and accordingly makes seven or eight times the profit he could realize if his business were restricted to cash transactions. The banker is willing to extend the credit, partly because he knows that wheat always has a ready market on our big produce exchanges, thus in case of a decline in price, giving him a chance to sell the wheat' efore the margin of ten points on the loan is exhausted and partly because the fire-insurance policy protects him against the loss by fire of the security back of his loans. Likewise the exporter of a cargo of cotton may insure it under a marine policy, and with the policy and bill of lading as collateral may at once command money at the usual rate of interest, with which to buy another cargo and repeat the operation.

[Insurance also helps to build homes, since the owner of ground who wants to build a home can borrow a larger sum of money on the building, if insured, and at a more favorable rate, than he could if there were no insurance. Mortgagees, as we shall see in another chapter, invariably have their interest in the mortgagor's property protected by an

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 cottón, 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 the 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," New York, 1902.

CHAPTER II

THE POLICY CONTRACT IN FIRE INSURANCE

A FIRE-INSURANCE 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 property but the persons who own the property or have an insurable interest therein. The importance of the personal factor in fire insurance cannot 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 as different as day is from night, if the one is owned by an honest man, and 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, to pay the full value stipulated in the policy, irrespective of the lower actual value, the policy-holder would