Putnam's Handy Law Book for the Layman

Fire Insurance. - Insurance against loss by fire is now effected in companies organized for that purpose. Two kinds exist, stock and mutual. In mutual companies the persons insured act together to insure each other. The members of some of the largest mutual companies are manufacturing corporations. The more general mode of conducting them is to require each member to pay a premium in advance for the amount insured which, unless unusual losses occur, will be enough to pay all the losses for the year. If it is not all needed, the balance is returned to the parties who paid the premiums, or is credited to them for the following year. If the losses exceed the premiums thus paid in advance, then an assessment is made on each member to cover the deficiency. Generally the premium paid is more than enough to cover the losses, and a balance is returned or credited to the insured as above mentioned. As mutual companies do not take such risks as stock companies, the cost of insurance is less and therefore is carried in preference to insurance in stock companies, whenever it can be obtained.

[125]There is another way for paying for losses in mutual companies. Instead of paying cash premiums in advance, the insured gives a bond or note well secured that he will pay in cash whenever a call is made on him to cover the losses that have been incurred at the end of the year or other period. This method is in vogue in some sections, because still less money is required to keep property insured. Of course besides the money to pay losses another sum is required to pay the expense of management. It will be seen that the mutual plan is purely for protection against loss and no profit in the way of dividends is forthcoming, for the companies have no capital. It is true that some companies, instead of returning the unexpended premiums for losses retain them or a part of them and by so doing accumulate a surplus. Many companies, however, return all the contributions not expended for management or losses and have no surplus, or only a very small one.

Stock insurance companies proceed on a different principle. They are organized to make money, a capital is subscribed, the rates of insurance or premiums are fixed and after paying the expense of management and loss, the balance is paid to the stockholders in the way of dividends. The business is one of unusual hazard, and only a rich person, who can afford to lose his money, ought to invest in the stock of such companies. Their profits and losses vary greatly from year to year; and failures have been frequent. Nevertheless some companies have a fine record, enough to tempt them to continue notwithstanding their trying reverses.

As the contract of insurance is for an indemnity, the insured must have some interest in the property insured, otherwise the contract is a mere wager, [126]which the law condemns. Moreover the interest must continue and exist at the time of the loss. Who, therefore, has an insurable interest? A bailee, a carrier of goods, a consignee who has authority to sell them, a factor, pledgee, warehouseman, an assignee for the benefit of creditors, an executor or administrator, an attachment creditor, but not a general creditor, a landlord, tenant, mortgagee of real or personal property, a lienor, for example, the holder of a mechanic's lien, a receiver, residuary legatee or devisee, a trustee, vendees and vendors of real and personal property, the owner of stock in a corporation, any agent who has the care and management of his principal's property, besides many others. But a fire insurance policy may be assigned as collateral security with the company's consent, and continue valid though the assignee has no interest in the property. This rule therefore is fundamental, and if the interest of the insured in the property has been extinguished after making his contract and prior to its loss by fire, he can get nothing from the company. Likewise the property must have been in existence at the time of making the contract, if it was not, the policy is void. Many stories are told of insuring ships after learning of their loss; such conduct is a palpable fraud.

An insurance policy is a contract, of which the policy is evidence. A standard policy has been prescribed in several states by statute: in other states the parties are still free to make such terms as they please. It is usual for companies to execute blank policies in due form to be filled out and delivered by their agents. Such policies are not valid until countersigned, unless the countersigning is waived.

When does the policy become valid or binding on the insured? Says a competent authority: "Where [127]a policy has been duly executed in compliance with an application on the part of the insured, so that the minds of the parties have fully met as to the terms and conditions of the contract, a manual delivery of the policy to the insured is not essential to render it binding on the company. If the contract has become binding by the issuance of the policy and the placing it in the hands of an agent for delivery, then the fact that such delivery is not actually made to the insured until after the loss has occurred, will not defeat recovery by the insured."

The premium usually must be paid at the time of issuing the policy, unless a different agreement is made concerning it. Credit may be given, and an agent generally has authority to do this. A valid payment may also be made in other means than money; a check or note may be given for it.

An insurance policy may be assigned, though it usually contains a clause that the consent of the insurer is needful. When the policy contains this clause and the insurer without valid reason refuses to consent to an assignment, "the assignee acquires the same right as though consent had been given."

Consent to an assignment may be given by the president of the company, without formal vote by the directors. It may also be given by the secretary or by any other agent duly authorized.

When can a policy be canceled? Unless this right is reserved in the contract, or given by statute, the insurer cannot cancel the contract without the consent of the insured. It often is reserved, and if exercised, this must be done before a loss occurs, and a cancellation made afterwards, though without knowledge of it, is void. The motive for making it is not important. If, as a condition of cancellation, the unearned portion of the premium is to be [128]returned, the failure to return it renders the cancellation worthless. Nor is this effective until notice has been given to the insured.

A court of equity will reform a contract of insurance on the ground of accident, fraud, and mistake. Oral evidence is admissible to prove the fraud or mistake; it must, however, be clear before a court will grant relief. If mistake is the ground for asking relief, the insured must not have been guilty in causing it, and must act promptly after his discovery. This rule does not prevent him from seeking relief when the agent of the insurer has been negligent. Furthermore it may be granted even after the happening of a loss.

Should there be a conflict between the written and printed portions of a policy, the written portion will be presumed to represent the intent of the parties. If, therefore, the printed portion excludes certain articles from the risk, and the written portion covers them, they are included. Conditions also written or printed on the margin or back of the policy are regarded as portions of it, and these too will control the printed portions. Besides, the written application is usually considered a part of the contract and the policy is construed or interpreted in connection with it. This is especially so where the proposals and conditions are attached to the policy. If the intent of the policy is not clear from the language used, the surrounding circumstances may be shown for the purpose of ascertaining the intent of the parties. The known usage of trade may also be taken into account in construing the language of a policy.

The language of the policy should be so construed as to cover the property within the intention of the parties, and support, if possible, the contract of [129]indemnity. Mere clerical errors or mistakes in describing it may be corrected even after it has been destroyed. The location is an essential element, and the policy will not be stretched to cover property not within the description. If a building is described this does not include separate structures used in connection with it, nor fixtures constituting no part of the structure. Unless expressly excepted, however, insurance covers those things which have been so annexed as to become a part of the realty but none others. The term store fixtures covers fittings, fixtures, furniture used in the course of trade, whether they are part of the realty or not. Likewise the term "stock" used in a mercantile business includes everything usually kept for sale, in that business, but nothing more; while household furniture includes all articles necessary and convenient for housekeeping. With respect to future additions these are covered by the policy unless it is so drawn as to show a clear intent to exclude them.

The risk usually begins with the date of the policy, unless it is effected by a preliminary contract. In such a case the risk begins from the date of the preliminary contract, and continues for the period fixed in the policy, or, if none has been fixed, for a reasonable time.

A misrepresentation voids a policy generally. It must not only be false in fact, but the insured must have known that it was false when making it in a substantial and material respect. The misstatement of an agent of the insured will have the same effect. Indeed, any fraud of the insured in procuring the policy has the effect of voiding it if the insurer chooses to do so. Of course, the wrongful facts or acts of the insured possess a varied character. His conduct in concealing facts that ought to have [130]been made known to the insurer may have that effect. Thus to conceal a fact of which the insured had knowledge, and which, if known by the insurer the risk probably would not have been taken, is a fraud rightly available to the insurer.

The parties to an insurance contract may agree that the questions put by the insurer and the answers given by the insured shall become a warranty. This, as experience has shown, is a simpler way of effecting a policy of insurance. When this is done a misrepresentation constitutes a breach of warranty and the contract becomes void.

The modern policy provides that it shall be void if the insured "now has or shall hereafter make or procure any other contract of insurance, whether valid or not, on property covered in whole or in part by this policy." If the insured effects other insurance he must not forget to obtain consent of the insurer, and should he forget his good intention will not preserve his policy. Nor can the insured protect himself by canceling the prior policy if he breaks the condition. Nor does its expiration revive the subsequent policy. An overstatement of existing insurance under an express warranty will also violate the policy. While forgetfulness or good intention will not save the insured in such cases, insurance obtained by a third person without the knowledge of the insured on the same property will not endanger his rights under his policy.

If a fire occurs and a loss results, this may be total or partial. In every case of loss fire must be the proximate cause of the loss. What loss is covered by a policy has been the subject of frequent controversy. Damage by water used to extinguish a fire is usually covered; also damage to or loss of goods removed to prevent their destruction from [131]fire in the insured or another building. Likewise the loss caused by blowing up a building to check a fire, likewise damage from an explosion which is the direct result of a fire, "but an explosion due to the ignition of a match or spark of an explosive substance, no fire resulting, is not within the terms of an ordinary fire policy." The standard policies contain a clause relieving the insured from liability to pay for property stolen during the progress of a fire, or during the removal of property necessitated by fire.

An exception of liability from lightning, unless followed by fire, excludes recovery unless there is loss from burning, but it is quite common to insure against loss from lightning as well as fire.

Unless there is a stipulation in the policy the insurer is not relieved from liability by mere negligence or carelessness of the insured or his servants though directly contributing to the loss; on the other hand, the insured who does not take reasonable care to avoid loss from his negligence or that of his servants may defeat recovery under his policy. This rule is not easy of application, cases of clearly proved negligence are numerous, also cases free from negligence, a third class of a doubtful nature. The field of the law is open in every direction to these.

For a total loss the insurer is liable for the entire value of the property to the limit covered by the insurance. Thus the loss of a building is total though some of the walls remain standing, but not when the remnant can be restored. In some states the statutes provide that in case of total loss the insurer shall be liable for the full amount of insurance, and shall not be allowed to show that the property was of less value than the amount insured.

[132]When the loss is partial the insurer is liable only for the amount of the loss, not exceeding the insurance. The policy may limit the amount of recovery to the cost of restoring or replacing the property, and in such cases this is often done instead of paying the loss in money. If each of several classes or items is separately valued, thereby separating the liability for them, the recovery for any one class or item is limited to the damage to the same.

Lastly, in fixing the loss the distinction between open and valued policies must be explained. A fire policy is generally written in such a way that the liability of the insurer depends on the amount of the loss to be determined after the loss has occurred. When this is done, the valuation of the property in the application for a policy or in the policy, does not fix the liability of the insurer, even though the loss be total. This is called an open policy. On the other hand the loss may be fixed by a stipulation in the policy, and which binds the insurer to pay the whole sum insured in case of total loss. This is called a valued policy. A policy is regarded as an open one, unless it appears to have been the intention of the parties on a fair and reasonable construction of its terms, to value the loss and so fix by contract the amount that may be recovered.

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