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exposed risk absorbs some ratio of this radiated exposure; (3) that every risk transmits some ratio of the hazard it absorbs; and (4) that radiated, absorbed, and transmitted exposure is modified by structure, clear space, and firedepartment protection.'' Mr. Dean next submits elaborate tables of alternative standards, with recommendations as to their application in the case of different classes of property, with reference to the clear space between the exposing and exposed buildings, and the grade of municipal fire protection. CHAPTER XVIII


The modern stability of fire-insurance companies and their ability to cope with even large conflagrations is largely due to their policy of limiting their "lines" of insurance. As was explained when we considered the organization of companies, the officers are equipped with special maps of towns and cities, which show the character of the fire department and water supply, the width of the streets, the class, construction, and occupancy of buildings, and the nature of the exposure hazard. These maps also show the "lines" of insurance in force on a building, or in an entire block or conflagration district. To make the application of the law of average reasonably certain, it is the policy of companies first of all to place a limit or so-called "line" upon the amount of insurance that they will carry on a building. Next a "block limit" is fixed, which represents the amount of insurance a company will carry on all the buildings within the block; and, finally, to afford protection against large conflagrations, companies will fix a "conflagration limit,'' which represents the amount of insurance the company is willing to carry on all the property situated within the area considered subject to sweeping fires.

In this connection it should be stated that companies very frequently have offers to accept much larger amounts of insurance on a given building or within a given area than they care to assume. Such "surplus lines" are distributed among other companies, i.e., are "reinsured." It is a common practice for groups of companies, where there is a mutual feeling of reliability, to assist each other in the distribution of risks. Thus one company may write a policy for $100,000 on a given property, although it may desire to retain only $10,000. In that case the company will place the remaining $90,000 with other companies, and these reinsuring companies, in turn, may again divide their risk by having a portion reinsured in other companies. By thus carefully restricting their "lines," and having all surplus lines reinsured, the liability of the companies is so well distributed that even large conflagrations like those in Baltimore and San Francisco will result in but few failures, and in most instances will not even lead to a reduction of the dividends to stockholders.

Conditions Required in Effecting Reinsurance.—Line 100 of the standard fire policy provides that "liability for reinsurance shall be as specifically agreed hereon." While this provision leaves the arrangement of conditions governing the reinsurance contract to the companies interested, certain precautions are almost invariably taken. In the first place, reinsurance should be effected for a company only when its line is too large for it to carry, and not when its desire to reinsure is prompted by a knowledge that the rate is too low or that the risk is too hazardous or otherwise undesirable. Reinsurance should especially be avoided where a moral hazard is found to be involved. Precaution should be taken to prevent the reinsuring company from separating the risk, retaining the best portion, and, through reinsurance, relieving itself of the most hazardous portion at the rate charged for the combined risk. It is also essential that the reinsuring company should not insure a policy for more than is retained by the reinsured company, even though the excess can be placed with other companies. To do otherwise may simply mean that the reinsuring company is guaranteeing the policy of a weaker company. The reinsurance of a portion of the excess amount assumed with other companies will not necessarily protect the reinsuring company. In law it is held liable for the full amount assumed, and runs the chance of not being able to collect the portion which it in turn reinsured in another company. Thus, supposing that Company A writes a policy of $30,000 on a building, and, not wishing to carry so large a risk, induces Company B, a very reliable company, to reinsure it for $25,000. Company B, however, desiring to limit its loss, reinsures one half of its risk ($12,500) with Company C. Now let us suppose that owing to a conflagration, involving the loss of the insured building, Company C becomes insolvent. In that case Company B is legally liable to Company A for the entire $25,000 it assumed, and takes its chances of collecting only a portion of the $12,500 which it reinsured with Company C.

The importance of the foregoing considerations is generally recognized, and reinsurance agreements almost invariably contain conditions which seek to protect the reinsuring company from such contingencies. While the wording of the agreements for reinsurance is not always alike, the following two agreements are representative of those in general use:



This Policy No reinsures the

Insurance Company of in the sum of

$ of its liability as insurers under its Policy No

issued in the sum of $ in the name of

covering the property described in the form attached to this policy. This reinsuring policy is subject to the same risks, conditions, indorsements, assignments, valuations, and modes of settlement as are or may be assumed or adopted by the reinsured company.

Loss, if any, to be paid pro rata with the reinsured, and at the same time, and upon the same terms and conditions.

It is understood and agreed that the company reinsured retains

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at its own risk at least an equal amount on the identical property reinsured by this policy.

Other reinsurance permitted without notice until required.

Attached to and forming a part of Policy No of the

Insurance Company of issued

at its Agency.

Dated 191... Agent



In consideration of the premium to be paid as set forth hereon does hereby reinsure the

on such property, for such amounts and for such period as shall be referred to and specified upon the reverse of this card.

It is a condition of this reinsurance that the reinsured company is to retain at its own risk, on the property on which this reinsurance applies, an amount equal to the amount of this policy, or failing to do so, this company shall not be liable for an amount greater than that for which the reinsured company may be liable for its sole account.

It is further understood and agreed that such reinsurance is a pro rata part of each and every item insured by the policy of the reinsured company and is subjected to the same risks, valuations, conditions, and mode of settlement as may be taken or assumed by said company; it being expressly agreed, however, that notice of any change in the risk or additional privileges granted shall be at once given to this company. Loss, if any, payable at the same time and in the same manner and pro rata with amount paid by said company. Other reinsurance permitted subject to the aforesaid conditions.

In Witness Whereof, the said Insurance

Company of has caused these presents

to be executed and attested, in upon the

day of But the same shall not be valid until countersigned by its


In other instances the form of reinsurance agreement contains the stipulation that "it is a condition of this reinsur

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