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After the offi

of farmers or by property owners in villages and small cities to secure the lowest possible rates. The business is begun by issuing policies to the original members. cers have been elected, and the organization perfected, the business is usually entrusted to the care of a secretary,) who in many instances, if the company is small, may also pursue some other vocation, such as law, banking, or storekeeping. In this way the expense item is reduced to a minimum. The valuation of the property to be insured, and the desirability of the applications is usually left to the decision of the board of directors or an executive committee.

(Both the merits and demerits of local mutuals are found in the fact that they operate in restricted districts. Because of their local nature they are able to eliminate much of the moral hazard so frequently found in fire insurance. If the company is small, most of the members are acquaintances. (It is easier therefore to avoid overvaluation, and it becomes exceedingly difficult for a dishonest man to obtain insurance. Moreover, a man usually does not bring the same loose moral code to bear on his actions when dealing with his neighbors and friends, as he does when dealing with an unknown corporation having headquarters in a distant locality.

But the writing of insurance in a restricted territory also constitutes an element of danger in that it loses sight of the inevitable law of average in insurance. So long as the fire loss record of the locality is sufficiently low or uniform, the mutuals may prosper, but upon the advent of a conflagration they too frequently break down. The number of mutuals that have gone insolvent is an exceedingly large one, and the cause in probably a majority of cases has been a conflagration or an unexpected series of large fires. The system of assessments provided for such contingencies, while ideal in theory, will in practice often utterly fail because of the difficulty or impossibility of collecting the assessments. Some of these companies have been conspicuously successful, and

are past the half-century mark of their existence, but it has been mainly due to their strict policy of insuring only a limited number of comparatively non-hazardous risks, or their luck in avoiding a conflagration or rapid series of fires.

Many of the state laws relating to local mutuals recognize the necessity of protecting their members against just such contingencies. Thus in some states, especially New York, they cannot operate in large cities. The New York, Chicago, and Boston conflagrations made bankrupt nearly all the local mutuals operating in those cities, and showed the wisdom of such legislation. Other states limit their activity to the insuring of non-hazardous risks, such as dwellings, farm buildings, and stores when situated in a given district. Many states provide that their business must be confined to a single town or county, or at most to a limited number of counties, such as three or five. In most of the states, before their organization is complete they must produce evidence of having procured applications for a considerable amount of insurance, usually from $50,000 to $200,000, and that a certain portion of the premiums on this amount of insurance, usually 25 per cent, has been advanced in cash.

State Mutuals.-Many attempts have been made, usually with unsuccessful results, to apply the mutual plan of fire insurance over one or more states. (But these state mutuals, while retaining the objectionable features of the local mutuals-namely lack of assets, small volume of business, and assessments also lack their elements of strength. The moral hazard is increased as the territory within which a mutual company does business increases. When such mutuals attempt to write insurance throughout an entire state they necessarily come into competition with the wealthier and more firmly established stock companies, and cannot secure business except at inadequate premiums. They also lack the business organization and the trained staff of experts possessed by the stock companies, and to secure business in

sections far removed from the home office, must depend upon agents for the soliciting of insurance and the selection of risks. The result is that the service is not of the best, and the supervision over the selection of risks is woefully inferior to that of the local companies.

As long as the company grows and policy-holders are not called upon to pay assessments, the management hears few complaints, and few members find occasion to trouble themselves about its affairs. The officers in too many instances, ambitiously strive to rapidly increase their business, and in doing so depend upon agents, whose interest it is to write as much insurance as possible. But in the course of time, the poor selection of risks begins to bear fruit. The low premiums are found woefully inadequate, and assessment after assessment must be collected from the policy-holders to meet the ever-increasing claims. It is then that the policy-holders begin to rebel against what they regard as unreasonable charges. As the claims against the company become more pressing, it in turn must resort to pressure, and even litigation, to collect the assessments, and then follows wholesale withdrawals and at last bankruptcy.

This has been the story of the great majority of state mutuals. By extending their activities over too large a territory personal supervision could not be exercised over the risks accepted, and powers delegated to employees were too often abused or inefficiently exercised. (The rates were too low and the hazardous risks too many, and the result could not be other than failure. We are informed that at a recent date only two or three out of the seventy-four state mutuals in New York in 1853 were still in existence. To insure their greater safety a number of states have passed laws with special reference to their organization and operation. The number of applications for insurance which must be in hand before their organization is perfected is usually much larger than is required for local mutuals. The class of business

which they may accept is carefully limited in certain states while in others a limit is placed upon the amount of insurance which may be written on any one risk.

The Factory Mutuals.-There remains to be considered a class of mutuals, usually called the "factory mutuals," which by their conservative methods and careful management have attained an enviable reputation. Beginning with the Providence Manufacturers' Mutual Company, established by Zachariah Allen in 1835, this plan of underwriting has steadily developed until recently there were eighteen such companies in operation in Massachusetts and Rhode Island, as well as others in different sections of the country, writing over $1,000,000,000 of insurance. (The success of these organizations, as contrasted with other mutuals, is chiefly to be attributed to their policy of preventing fire losses, rather than merely paying claims. In the words of Mr. Edward Atkinson, one of the pioneers in this type of insurance, "the only persons who can prevent loss by fire are the owners or occupants of the insured premises. Upon them rests the responsibility for heavy loss, if any occurs, in nearly every fire. All that the insurance company can do is to pay indemnity for loss, which, if large, in nine cases out of ten, is due to the lack of apparatus for preventing loss or to lack of care and order in the conduct of the work. It has always been the practice of the mutual companies and of late, with excellent results, the practice of the stock insurance companies, to instruct owners and occupants regarding their duties to their own property, and to keep them up to the mark by constant supervision and by refusing to grant contracts of indemnity to those who neglect their own duty." 1

When factory owners came to a realization of the importance of reducing the fire waste, they first tried to co-operate

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1Quoted from Edward Atkinson's "The Prevention of Loss by Fire," Boston, 1900.

with the stock companies in reducing the fire loss, and consequently the premium charge, but the companies in the main assumed the attitude that they were insuring against fire losses, and not in business to prevent them. Then occurred the Chicago and Boston conflagrations, which made necessary an increase of from 50 to 60 per cent in the rates charged by the stock companies. Factory owners, finding such charges too burdensome, sought relief through efforts at mutual co-operation. Low cost insurance was to be obtained through an organization which would have for its object the twofold purpose of ascertaining and eliminating the causes of fire, and providing the means for extinguishing it, with a minimum of loss, when it should occur.

To this end the factory mutuals have made careful investigations into the different kinds of factory hazards, into methods of lighting and heating, and into the separation and isolation of dangerous processes. It was the factory mutuals which were most active in bringing about the introduction of automatic sprinkler systems, which, as will be explained later, have so radically revolutionized the methods of fire protection. These companies also set an extremely high standard for construction and fire-extinguishing appliances, with which factory owners must comply before being entitled to become members. As explained by Mr. Richard M. Bissell: 1

"In their efforts to ascertain and eliminate the causes of fire, these companies have investigated and endeavored to safeguard all processes used in manufacture. They have investigated methods of illuminating, heating, and lubricating; have devised elaborate plans for the safe construction and arrangement of factories in order that the spread of fire may be retarded and that especially dangerous processes may be isolated; and, finally, have tested and

'Quoted from lecture on the “Organization of Companies," printed in the "Yale Lectures on Insurance, Fire, and Miscellaneous."

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