INSURANCE CONTDx + n respectively, and a' x+η is the hypothetical annuityvalue at the latter age. Mr Sprague has shown (Ass. Mag., xi. 90) that the policy-values obtained by this method will be greater or less than, or equal to, those of the net-premium method according as the “loading” is a constant percentage of the net premium or an equal addition to it at all ages, or of an intermediate character, its elements being so adjusted as to balance each other.
When the net-premium method is employed, it is important that the office premiums be not altogether left out of view, otherwise an imperfect idea will be formed as to the results of the valuation. Suppose two offices, in circumstances as nearly as possible similar, estimate their liabilities by the net-premium method upon the same data, but office A charges premiums which contain a margin of 20 per cent, above the net premiums, and office B charges premiums with a margin of 30 per cent. Then, in so far as regards their net liabilities (always supposing the sum set aside in each case to be that required by the valuation), the reserves of those offices will be of equal strength, and if nothing further were taken into account they might be supposed to stand in the same financial position. But it is obvious, that office B, which has a margin of income 50' per cent, greater than that of office A, is so much better able to bear any unusual strain in addition to the ordinary expenditure, and is likely to realize a larger surplus on its transactions. Hence it appears that in order to obtain an adequate view of the financial position of any office it is necessary to consider, not only the basis upon which its reserves are calculated, but also the proportion of “loading” or “margin” contained in its premiums, and set aside for future expenses and profits.
Valuations may be made on different data as to mortality and interest, and the resulting net liability will be greater or less according to the nature of these. Under any given table of mortality a valuation at a low rate of interest will produce a larger net liability—will require, that is to say, a higher reserve to be made by the office against its future engagements to the assured—than a valuation at a higher rate. The effect of different assumptions in regard to the rates of mortality cannot be expressed in similar terms. A table of mortality showing a high death-rate, and requiring, consequently, large assurance premiums, does not necessarily produce large reserve values. The contrary indeed may be the case, as with the Northampton Table, which requires larger premiums than the more modern tables, but gives on the whole smaller reserve values. The amount of the net liability depends, not on the absolute magnitude of the rates of mortality indicated by the table, but on the ratio in which these increase from age to age.
If the values deduced by the net-premium method from any two tables be compared, it will be seen that
Vi >, =, or < n Vχ according as j _ 1 ÷<⅛+⅝ > _ or < 1 — 1 αχ ^^ n
1 + a ’ x ’ 1 + ax i, e ., as ⅛⅛ >, =, or < ⅛ . . . (1),
1 + a x 1 + a x or as J±⅛ >, =, or < }⅛ . . (2);
1 + aχ 1 + aχ+n where the accented symbols throughout refer to one table and the unaccented symbols to the other.
We have thus the means of ascertaining whether the policy-values of any table will be greater or less than, or equal to, those of another, either (1) by calculating for each table separately the ratios of the annuity-values at successive ages, and comparing the results, or (2) by calculating at successive ages the ratios of the annuity-values of one table to those of another, and observing whether these ratios decrease or increase with advancing age, or remain stationary throughout. The above relations will subsist whatever maybe the differences in the data employed, and whether or not the annuity-values by the different tables are calculated at the same rate of interest. When the same rate of interest is employed, any divergence in the ratios of the annuity-values will of necessity be due to differences in the rates of mortality. This interesting subject is investigated by Mr Meikle in a paper on Policy Life-Lines, one of the Actuarial Society’s publications, and by Mr Sprague in the Assurance Magazine, vol. xxi. p. 77.
The following table gives examples of the reserve values of policies for £100, calculated on the net-premium method by three different mortality tables, at a uniform rate of interest, 3 per cent [table]
Something may be said here as to the data on which assurance companies make their valuations. The rates of interest assumed by different offices may be said to range between 3 and 4 per cent., being in most cases lower than 4. It is, however, in regard to the tables of mortality that the greatest diversity exists. The Northampton Table has, for valuation purposes, been all but discarded. The Carlisle Table has so far lost its ground, since the introduction of the more recent Experience Tables, as to be now used by only a, minority of the offices as the chief basis of their calculations. The different tables based on the experience of the Equitable Society, the Seventeen Offices’ Experience, and the English Life Tables have still some adherents, and (besides those offices which value by the “hypothetical method”) a few companies employ tables constructed specially for their own use. But there is an evident tendency towards the general adoption of the Institute of Actuaries (twenty offices) Tables, which have been used by a large proportion of the companies in their latest valuations. Of these, the tables chiefly employed are H m and H M(5) , the latter being used by some offices in combination with the H m pure premiums, in order to eliminate as far as possible the effects of selection. Mr King (Ass. Mag., xix. 381 and xx. 233) and Mr Sprague (Ass. Mag., xxi. 229 and xxii. 391) have shown the construction of tables which would give in a more, direct and scientific way the result that is aimed at by using the combined H m and H M(5) tables. Mr King, to illustrate the results of his method, constructs a “model office,” assuming a uniform annual influx of new business and a rate of discontinuance of policies based on the experience of the twenty offices which contributed their statistics to the formation of the Institute of Actuaries Tables, and he shows the comparative reserves required by such an office at the end of successive quinquennial periods, according to various mortality tables and at different rates of interest. As these illustrative tables afford an admirable means of comparing the results of valuing by different mortality tables, we give the following extracts. It must be borne in mind, however, in seeking to apply the figures in these tables to estimate the strength of the reserves maintained by particular offices, that the soundness of the estimate may be a good deal affected by circumstances. In particular the rates at which new business has come in and policies have been discontinued must be taken into account, and, as before stated, the amount of “margin” contained in the premiums must not be lost sight of. Moreover, the supposed liabilities do not include bonus additions, and the presence of these will of course modify any conclusions drawn from the tables. [table]
Division of Surplus.— There are various sources from which a surplus of funds may arise in an assurance company :—(1) from the rate of interest actually earned being higher than that anticipated in the calculations; (2) from the death-rate among the assured being lower than that provided for by the mortality tables; (3) from the expenses and contingent outlay being less than the “loading” provided to meet them; and (4) from miscellaneous sources, such as profitable investments, the cancelment of policies, &c.
»Supposing a valuation to have been made on sound data and by a proper method, and to have resulted in showing that the funds in hand exceed the liabilities, the surplus thus ascertained may be regarded as profit, and either its amount may be withdrawn from the assets of the office or the liabilities may be increased in a corresponding degree.
Various methods are employed by assurance companies in distributing their surplus funds among the assured. In some offices the share or “bonus” falling to each policyholder is paid to him in cash; in others it is applied in providing a reversionary sum which is added to the amount assured by the policy; in others it goes to reduce tho annual contributions payable by the policyholder. A method of more recent introduction is to apply the earlier bonuses on a policy to limit the term for which premiums may be payable, thus relieving the policyholder of his annual payments after a certain period. Another method is to apply the bonuses towards making the sum assured payable in the lifetime of the policyholder. The plan of reversionary bonus additions is most common, and when it is followed the option is usually given of exchanging the bonuses for their value in cash or of having them applied in the reduction of premiums.
Not only are there different modes of applying surplus, but the basis on which it is divided among the assured also varies in different offices. In some the reversionary bonus is calculated as an equal percentage per annum of the sum assured, reckoning back either to the commencement of the policy in every case, or (more commonly) to the preceding division of profits. In others the rate is calculated, not only on the original sums assured, but also on previous bonus additions. In others the ratio of distribution is applied to the cash surplus, and the share allotted to each policy is dealt with in one or other of the ways above indicated. The following are some of tho ratios employed by different offices in the allocation of profits:—(1) in proportion to the amount of premiums paid (with or without accumulated interest) since the last preceding valuation; (2) in proportion to the accumulated “loading” of the premiums so paid; (3) in proportion to the reserve values of the policies; (4) in proportion to the difference between the accumulated premiums and the reserve value of the policy in each case.
Some offices have a special system of dealing with surplus, reserving it for those policyholders who survive the ordinary “expectation of life,” or whose premiums paid, with accumulated interest, amount to the sums assured by their policies. This system is usually connected with specially low rates of premium.
The various bonus systems which have been mentioned yield different results to policy holders of different ages, and whose assurances have been in force for longer or shorter periods. A person seeking to effect an assurance may exercise a wise discretion in selecting that office whose bonus system appears most advantageous, considering his own age and circumstances.
From a paper by Mr A. ∏ewat in the Assurance Magazine (xxii. 286) it appears that , the average amount of surplus annually divided among the assured by seventyseven offices which have rendered valuation accounts to the Board of Trade since the passing of the “Life Assurance Companies Act, 1870,” has been £2,285,000, cr 23 per cent, of the annual premium income of the offices. The following average specimens of reversionary bonuses are taken from the returns of forty-one of those offices, whose average rate of annual premium is shown in the second column. [table]
Surrender Values.— In those branches of insurance where the contract is one of indemnity against loss, the risk remaining the same from year to year—and where the consent of both parties, insurer and insured, is required at each periodical renewal—no question of allowance in respect of past payments can anse when one party or the other determines to drop the contract. It is quite recognized that the premiums are simply an equivalent for the risk undertaken during the period to which they apply, with a certain margin for expenses and for profit to the insurer, and that therefore a favourable issue of the particular contract supplies no argument for a return of any part of the sums paid. In life assurance, however, we have shown that the premiums contain a third element, namely, the portion that is set aside and accumulated to meet the risk of the assurance when the premium payable is no longer sufficient of itself for that purpose.
When a policyholder withdraws from his contract with a life assurance office, the provision made for the future in respect of his particular assurance is no longer required, and out of it a surrender value may b. allowed him for giving up his right to the policy. If there were no reasons to the contrary, the office might hand over the whole of this provision, which, as we have seen, is in fact the reserve value of the policy. No more could be given without encroaching upon the provision necessary for the remaining policies. But the policyholder in withdrawing is exercising a power which circumstances give to him only and not to the other party in the contract. The office is bound by the policy so long as the premiums are duly paid and the other conditions of assurance are not infringed. It has no opportunity of reviewing its position and withdrawing from the bargain should that appear likely to be a losing one. The policyholder, on the other hand, is free to continue or to drop the assurance as he pleases, and it may fairly be presumed that he will take whichever course will best serve his own interest. If he is in failing health he is the more likely to make an effort to keep the assurance on foot; if he has also fallen into adverse circumstances, his friends may aid him to maintain his policy for the benefit of those dependent on him, or he may dispose of it to some one who, knowing the circumstances, may be willing to give a high price for it, speculating on the chance of its becoming an early claim. All these things do happen, and the tendency obviously is that policies on deteriorated and unhealthy lives are kept in force, while those on lives having good prospects of longevity are more readily given up. Again, the retiring policyholder, by withdrawing his annual contribution, not only diminishes the fund from which expenses are met, but lessens the area over which these are spread, and so increases the burden for those who remain. Considerations like these point to the conclusion that, in fairness to the remaining constituents of the office, the surrender value to be allowed for a policy which is to be given up should be less than the reserve value. The common practice is to allow a proportion only of the reserve value. Some offices have adopted the plan of allowing a specified proportion of the amount of premiums paid. This plan is not defended on any ground of principle, but is followed for its simplicity and as a concession to a popular demand for fixed surrender values.
Another mode of securing to retiring policyholders the benefit of the reserve values of their assurances is that known as the nonforfeiture system. This system was first introduced in America, whence it found its way to the United Kingdom, where it was gradually adopted by a large proportion of the assurance companies. In its original form it was known as the “ten years non-forfeiture plan.” The policies were effected by premiums payable during ten years only, the rates being of course correspondingly high. If during those ten years the policyholder wished to discontinue his payments, he was entitled to a free “paid-up policy” for as many tenth parts of the original sum assured as he had paid premiums. The system, once introduced was gradually extended first to assurances effected by premiums payable during longer fixed periods, and ultimately, by some offices, to assurances bearing annual premiums during the whole of life. The methods of fixing the amount of paid-up policy in the last-mentioned class of cases vary in different offices, but the principle underlying them all is that of applying the reserve value to the purchase of a new assurance of reduced amount.
Conditions of Assurance.— An office, in entering on a contract of life assurance, does so in the faith that all circumstances material to be known in order to a proper estimate of the risk have been disclosed. These circumstances are beyond its own knowledge, and as the office for the most part (except as regards the result of the medical examination, which may reveal features of the case unknown to the proposer himself) is dependent on the information furnished by the party seeking to effect the assurance, it is proper that the latter be made responsible for the correctness of such information. Accordingly it is made a stipulation, preliminary to the issue of every policy, that all the required information bearing upon the risk shall have been truly and fairly stated, and that in case of any misrepresentation, or any concealment of material facts, the assurance shall be forfeited. In practice, however, this forfeiture is rarely insisted on unless there has been an evident intention to deceive. The other usual conditions of life assurance policies may be shortly noticed.
1. As to Payment of Premiums.— A certain period of grace is allowed, most commonly thirty days, after each premium falls due. If payment is not made within that time, the presumption is that the policyholder intends to drop the contract, and the risk of the office comes to an end. It may, however, be revived on certain conditions, usually the production of evidence of health and payment of a fine in addition to the premium. An impression used to prevail among the public that the offices were interested in encouraging the forfeiture of policies. If any such impression was ever shared by the offices themselves it must have long since passed away, as it will be found that every reasonable effort is now made on their part, not only to secure assurances but to retain them, and to afford all the facilities that can be extended to policyholders with that object.
2. As to Foreign Travel and Residence, and as to Hazardous Occupations.— When Mr Babbage wrote his Comparative View of Assurance Institutions in 1826, voyaging abroad was scarcely permitted under a life policy. The Elbe and the Garonne, Texel and Havre, Texel and Brest, the Elbe and Brest, were the limits prescribed by most of the English offices. Even at a much later period the extra premiums charged for leave to travel or reside abroad were very heavy. But improved means of conveyance—in some places better sanitary appliances, and habits of living more suited to the climatic conditions—and, more than all perhaps, the knowledge that has been gained by experience as to the extent of the extra risks involved and the relative salubrity of foreign climates—have enabled the offices to modify their terms very considerably. The limits of free residence and travel have been greatly widened, and where extra premiums are still required these are, as a rule, much lower than formerly. The assured are now commonly permitted to reside anywhere within such limits as north of 35° N. lat. (except in Asia) or south of 30° S. lat., and to travel to and from any places within those limits, without extra premium.
Military men (when on active service) and seafaring men are of course charged extra rates, as are also persons following specially dangerous or unhealthy occupations at home.
3. As to Suicide.— The policies of most companies contain a proviso that the assurance shall be void in case the person whose life is assured dies by his own hand. This proviso is analogous to that which renders void a fire policy if the insured becomes guilty of arson, or a policy of marine insurance if the vessel is wrecked intentionally by the owner. The event contemplated in the policy being brought about by the voluntary act of the assured, and not in the natural course of events, is a contingency not included in the scheme of insurance. In the case of life policies the general rule of law appears to be (see The Law of Life Assurance, fy C. J. Bunyon) that the contract will be avoided unless the suicide takes place when the assured is insane and not accountable for his acts. Sometimes the proviso “whether insane or not” is inserted in policies. In the case of policies bona fide assigned, or otherwise held by a third party for an onerous cause, it is usual to exempt the assurance from forfeiture to the extent of the interest of such third party. The practice of assurance offices, however, in regard to suicides, is more liberal than a strict application of legal principle, or of the conditions attached to life policies, would require. A few offices have abolished the suicide clause from their policies. A number of others, acting, we think, on a sounder principle, now limit its operation to a fixed period, the extent of which varies in different offices from six months to seven years from the date of issue of the policy. In cases happening within those periods, or when there is no express exemption from forfeiture, offices are usually ready to grant any relief which circumstances may seem to warrant, such as an allowance of the surrender value or a return of the premiums paid under the policy.
The practice of rendering policies indisputable and free from restriction as to foreign travel or residence, after a certain period, has tended greatly to simplify the contract between the office and the assured, by setting at rest many points on which difficulty might arise. A declaration of indisputability covers any inaccuracies in the original documents on which a policy was granted, unless these inaccuracies amount to fraud, which the law will not condone under any circumstances.
History.— It does not appear that the principles of insurance were applied in any definite form to transactions depending on human life until about the 16th century. At that time, and for long afterwards in England, the private underwriters who carried on the business of insurance sometimes undertook risks upon lives for short periods, to cover contingencies of a temporary character. The premiums were very high, but this was in part necessary for two reasons—first, the insurers had no sufficient data upon which to estimate the risk they incurred; and secondly, the transactions were probably not numerous enough to secure anything like a regular average in the occurrence of claims. About the end of the 17th century several “annuity” schemes were formed, notably that of the Mercers Company of London, for the benefit of the widows and orphans of subscribers. These sche∏)es, however, and numerous others of similar character promoted in the succeeding century, failed for lack of correct data and sufficient knowledge of the principles which should have guided their operations. But the idea of uniting the contributions of a number of persons in order to make a provision available on the death of each had taken some hold on the public mind. Its first practical embodiment in the direction of life assurance, but still far short of that system as it is now understood, was the foundation in 1706 by royal charter of “The Amicable Society for a perpetual Assurance Office.” The scheme was simply to raise a fixed contribution from each member, and from the proceeds to distribute a certain sum each year among the representatives of those who died during the year. No one was to be admitted under the age of twelve nor above fifty-five (afterwards altered to forty-five), but all were to pay the same rate of contribution. .In 1734 the society made arrangements for guaranteeing that the dividend for each deceased member should not be less than £100. This was the first approach to an “assurance” of a definite sum at death, whenever that might occur. The minimum dividend was afterwards increased, but still the society adhered to the plan of rating all members alike, irrespective of age. It was not until 1807 that the Amicable, under a fresh charter, began the practice of rating new members “according to the age and other circumstances.” But that essential step in the development of assurance had been taken long before in another quarter. The theory of life contingencies had made considerable progress, chiefly through the labours of Halley, De Moivre, Simpson, De Parcieux, and Dodson, when in 1756 was projected “The Society for Equitable Assurances on Lives and Survivorships.” Mr Dodson, wishing to have his life assured, found himself excluded from the Amicable on account of his being more than forty-five years old. This led him to the determination “to form a new society upon a plan of assurance on more equitable terms than those of the Amicable, which takes the same premium for all ages,” and he secured the support of various persons who were willing to join him if the intended society could be established by charter. He did not live to see his purpose accomplished. The petition for a charter of incorporation was presented in 1757, and after a delay of four years it was finally refused, whereupon a remnant of the original subscribers set about constituting the society under a deed of settlement, and business was commenced in 1762. The Equitable possessed from the outset all the essential features of a life assurance office. It was to issue policies for the assurance of fixed sums on single or joint lives, or on survivorships, and for any term. Premiums were to be regulated according to age. Lives were to be admitted with due regard to their state of health and other circumstances. Provision was made for the investment and accumulation of the funds, and also (although imperfectly) for the disposal of any surplus that might arise. As may be supposed, the original scheme was defective in many points of detail, but under the teachings of experience there was soon initiated that course of improvement in the system of assurance which has continued to the present day.
More than forty years before the foundation of the Equitable, charters of incorporation had been granted to ι two companies which have ever since held an honourable ' position among assurance institutions, the Royal Exchange and the London Assurance. These included life assurance in their schemes, but appear to have at first transacted it only to a limited extent and in the form of temporary risks such as were taken by the private underwriters.
Before the close of last century the labours of Price and Morgan had developed in an important degree the theory of life contingencies; the Northampton Table had supplied what was then esteemed a sound basis for such calculations; and the career of the Equitable Society had demonstrated the practicability of conducting life assurance business on a large scale. Within the period mentioned other four life offices were established, one of which, the Pelican, founded in 1797, is now in existence. The present century thus commenced with eight offices transacting, in a more or less complete form, the business of life assurance in Great Britain and Ireland. But the success which attended those older societies, particularly the Equitable, soon led to the formation of other offices, and as these increased in number and activity public attention became more and more attracted to assurance, both as a means of employing capital and as an advantageous form of co-operation for mutual benefit.
Up to the year 1844 over one hundred and forty companies and societies had been established on a more or less solid footing for the purpose of transacting life business, either alone or in connexion with other forms of insurance, and of these offices upwards of one hundred remained in existence. But abuses had taken place in connexion with all kinds of joint-stock enterprises, and this led to a parliamentary inquiry which resulted in the Joint-Stock Companies Act of 1844. This Act provided specially for the regulation of insurance companies, and among other things imposed upon them the duty of giving in annual statements of their affairs to be placed upon public record. Not many years passed, however, before the attention of parliament was again called to life assurance in consequence of the exposure of certain unwise and fraudulent schemes. A select committee was appointed to make inquiries and they reported to the House in 1853, having examined several public officials and many leading actuaries of the day. They found that the law as it then stood was very defective, that it did not afford the security which was contemplated by the Act of 1844, and that the provisions of that Act had been very imperfectly carried out. In particular the financial returns had not been satisfactorily made. No special form of accounts had been prescribed by the Act, nor was there even any authority provided by it to compel the returns to be made. As a matter of fact, the Act had been followed by the promotion of a large number of bubble insurance schemes of various kinds.
The committee had very fully before them the whole question as to the policy of Government interference in matters relating to life assurance. Their conclusion was that assurance differed so much from ordinary business as to call for separate and special legislation; and in that view they made certain recommendations—(1) as to precautions to be taken in regard to the formation of new associations, and (2) as to requiring the publication of valuation returns and accounts giving information on specified particulars. Assurance companies were excepted from the next Government bill relating to joint-stock companies, but nothing was done in the shape of legislation, such as that proposed by the committee, until the passing of the Life Assurance Companies Act, 1870, in the framing of which the assurance companies took a considerable share.
This Act requires a deposit of <£20,000 to be made in the Court of Chancery by every new company proposing to transact life assurance business; requires (in the case of companies transacting other kinds of business) the receipts under assurance and annuity contracts to be kept separate from other receipts, in order to form a security for the policyholders and annuitants; prescribes forms for annual accounts and for periodical valuation reports and stàtements, to be rendered to the Board of Trade and to be annually laid before parliament; forbids the transfer or amalgamation of companies without judicial authority, which is not to be given until the policyholders concerned have been fully informed as to the nature and terms of the arrangement, nor if policyholders representing one-tenth or more of the total sums assured dissent; and provides for the winding-up of any company (1) in case of default in complying with the requirements of the Act, or (2) on its being proved to the satisfaction of the court, in view of the contingent or prospective liabilities, that the company is insolvent. In the latter case the court may, if it thinks fit, reduce the amount of the contracts of the company in place of making a winding-up order.
It will be seen that the principle upon which the Act proceeds, in so far as it regulates the management of existing offices, is to require full particulars to be furnished as to their financial condition, and to leave all concerned to form their own judgment upon these. The Government attempts no supervision of the companies further than to see that they comply with the requirements of the Act. But the very publicity now given to their affairs exercises a most wholesome influence, wherever that is needed, on institutions which are peculiarly dependent for their success on the estimation in which they are held by the public. It cannot be pretended that the material furnished by the returns under the Act for forming an estimate of the condition of offices is such as to be wholly intelligible to the mass of those interested in it Nor was this to be expected. The principles of life assurance, which we have endeavoured in some measure to explain in the present article, are such as to require considerable study, and even special training, for their full appreciation. But the material required by the Act is there, to be interpreted by those who have made themselves familiar with its import and bearing, and the public have themselves to blame in great measure if they remain in ignorance as to the real condition of any offices in which they may be interested. The provisions of the Act in regard to amalgamations and to the formation of new companies have also had their effect. It is now no longer practicable to commence a life assurance company without a substantial guarantee for the good faith of those engaged in it; and the possibility of ruinous amalgamations, such as those which aided so materially in bringing about the collapse of the famous Albert and European offices, may be regarded as a thing of the past. Unfortunately the provisions of the Act in regard to winding-up have more than once been brought into requisition, but it is safe to say that since it came into effect no one who had sought competent advice need have been involved in loss by joining any of the offices which have thus passed under its operation.
On the whole, the Life Assurance Companies Act of 1870, although not without its defects, may be regarded as in many respects a satisfactory measure. In some unimportant particulars it has been amended by two subsequent Acts in 1871 and 1872.
The year 1870 witnessed the passing of another Act which has an important bearing on life assurance. Under clause 10 of the Married Women’s Property Act, 1870, assurances may be effected by married women on their own lives or the lives of their husbands, for their separate use, and by married men on their own lives for the benefit of wife, or wife and children, free from the claims of creditors. In 1880 the Scottish life offices prepared a short bill containing similar provisions in regard to assurances, but with certain improvements on the English Act, and it was passed into law as the Married Women’s Policies of Assurance (Scotland) Act, 1880.
The Blue-Books containing the returns made under the Life Assurance Companies Act afford a vast amount of information as to the financial condition of British life offices. From an abstract in Mr White’s Insurance Register for 1881 we gather the following particulars in regard to one hundred and seven companies which furnished returns during the year 1880. The premiums received in one year by those companies amounted to <£13,174,848, and the interest and dividends on investments to £5,342,988. The sums paid in claims during the same period were £11,149,730; for surrenders of policies£720,406; and as cash bonus or in reduction of premiums £763,704. The total amount of funds held by the companies(including, however,£6,151,479 of fire insurance funds)was £143,813,793. Of this sum £120,131,541 represented the life assurance and annuity funds. The amount of paid-up share capital embarked in these enterprises was £10,961,744, in addition to which (but also included in the above sum of £143,813,793) there were reserve and other funds amounting to £6,569,029. These statistics include the business of “industrial assurance,” transacted by a few offices—a system by which small sums are secured on the lives of persons in the humbler ranks of life by the payment of weekly or monthly contributions. The premium income from this source was upwards of £1,600,000; the claims reached fully £600,000; and the funds in hand in connexion with this description of business amounted to upwards of £1,100,000.
The Act does not require an annual statement of the existing business of assurance companies, nor does it render compulsory the publication of the amount of new assurances annually effected with them; and, as the companies do not all give those details in their published reports, it is impossible to state with accuracy the amount of assurance business transacted by the British offices. Of the 107 companies whose accounts are summarized above, 63 reported in the year 1880 new assurances amounting to £22,551,626, including however, in many cases, sums reassured with other offices. It is roughly estimated that the total assurances in force with all the companies amounted in 1880 to £420,000,000.
Besides the business transacted by British assurance companies there is a scheme of Government life insurance authorized by the Act 27 & 28 Vict. cap. 43, and worked in connexion with the Post-Office. By a recent parliamentary return it appears that from the commencement of the scheme in 18G4 to 31st December 1878 there had been issued 5844 policies insuring in all .£460,000, and there had been paid on the death of nominees about £25^000.
In the United States of America, life assurance has attained a greater relative importance among financial institutions than in any other country. Its history there extends back to an early period, but the system has received its main development in comparatively recent times. During the years which immediately followed the close of the civil war it grew with unparalleled rapidity. The social disorders of the period excited anxiety for the future, and directed earnest attention to institutions which promised exceptional security. The general Government, by its financial administration, and especially by its issues of paper money, furnished a powerful stimulus to the speculative tendency in this as in every branch of business. New companies were established in great numbers; new plans and features of assurance contracts were devised; thousands of energetic agents canvassed the community with their solicitations; and the published reports of the assurance companies reflected, in a high degree, the fictitious prosperity of the period of inflation. The financial crisis of 1873 applied to the companies a test of great severity. The mushroom institutions of recent growth fell rapidly; and, while tha standard societies, which were administered with wise conservatism, and which had always held the greater part of the business, were unshaken, their growth was seriously checked.
The following figures (for which we are indebted to the Insurance Year Book, Chicago, 1880) give in outline the history of this period. They represent the aggregate business of the companies reporting to the New York insurance department. The figures for 1879 include “industrial assurance/’ a branch of business but recently developed in America. [table]
From 1873 to 1879 the number of companies and the aggregate amount at risk steadily decreased. Since then, although no new companies have been organized, there have been no failures, and a healthy and natural increase has been observed in the business of the existing offices. The following table shows the aggregates of the principal items in the business of the forty-two most important companies in the United States for the years 1879 aud 1880, as compiled by the Hew York Spectator :— [table]
A subject of special interest in connexion with life assurance in America is the legislation by which it is regulated. While the national Government, under the constitution of the United States, has supreme control over all commerce between the States, the courts hold that insurance in its Various forms is not commerce, and that corporations created by a State have no corporate powers 'beyond the limits of that State, and can transact no business beyond those limits^ except on sufferance of the local Government. Hence the life assurance companies are the creatures of State law, and are controlled by the legislatures of the States in which they operate. The first systematic attempt to regulate the business by Government supervision was made by the State of Massachusetts under a statute passed in 1858 establishing an “insurance department.” New York adopted a similar law in 1859, and the example has since been followed in nearly all the States, even in those which have no important assurance companies of their own. Each State has its own peculiar laws, and these undergo frequent changes in detail as successive legislatures attempt to improve or to reform the business, but the general character of the supervision exercised is the same in the different States, and is as follows. A company may be organized at any time for the business of assuring lives and granting annuities, by obtaining from the proper officers of the State the approval of its name and fundamental law or charter, and by depositing with the insurance department a stated sum, usually $100,000, in prescribed securities, as a guaranty of good faith. Since no charters are now granted except under this general law, it is no longer possible to establish a company except by the deposit of a considerable sum in advance,—so that purely mutual companies cannot now be founded j but it is customary to limit the amount of profit upon the capital to a reasonable rate of interest, and all surplus beyond goes to the policy-holders. In some instances, the capital stock of these “mixed companies” has been redeemed, after their successful establishment, leaving them purely mutual.
In New York and some other States the insurance department may receive further deposits, representing the reserve or present value of policies, and hold them accumulating in trust, for the security of those particular policies, which are “registered” in the State treasury. This scheme was pressed with vigour a few years ago, as offering peculiar protection, but several companies which adopted it have failed, and the settlement of the claims of creditors upon the funds held by the State has been the cause of much delay and costly litigation.
In each State there is a superintendent or commissioner of insurance whose powers and duties towards the companies are varied and important. The companies must return to him under oath every year full statistics of their business in all departments, showing the precise investments of their funds, the amount and sources of their income, the expenditure for every purpose, and a schedule of policies with the elements for valuing them. It is the superintendent’s duty to see that the investments are made in accordance with the laws, which limit the companies to securities popularly regarded as the safest; to make every inquiry which he deems it “desirable for the public interest” to have answered; to make a valuation of the policies of each company by the legal standard j and to report to the legislature every year in full the results of his inquiries and calculations. It is his duty, “whenever he shall deem it expedient so to do,” and in particular whenever he shall suspect any statement made by the officers, to “investigate” the affairs of each life assurance company,—that is, to overhaul its books and accounts, examine its muniments of title, and test and scrutinize every part of its administration. No company chartered by any other State or government can do any business within the State, except under his licence and certificate that it has complied with all the laws; and exclusion from the State is the penalty for neglect to answer any question concerning its business which he may ask. In several States he is required to exclude any company which shall take an appeal from the courts of the State to a court of the United States, in a case arising between it and a citizen.
The most important duty imposed on the superintendent is the administration of the legal test of solvency. In New York and most of the other States, his valuation, according to the legal standard, must be made by the net-premium method, and if any company is unable to meet this test by actual possession of the requisite amount of funds, he must commence legal proceedings for its dissolution, and the distribution of its assets as in bankruptcy. The Act making this course imperative in New York was passed in 1879, but many years earlier the practice had become fixed of requiring a company to meet a net valuation of its obligations, or be deemed insolvent. The fairness of this unbending application of the net-premium mode of valuation as a test of mere solvency, and the efficiency of the check supplied by a too exclusive reliance on such a test, have often been called in question.
When an insolvent assurance company is wound up, the rule commonly followed by the courts of equity in distributing the proceeds is to recognize each policyholder as a creditor for the amount of reserve corresponding to his assurance at the time of the declared insolvency. The representatives of a policyholder who dies before the actual distribution may claim for the amount of the policy, discounted back to the date of insolvency. The whole process of winding up would be much less unsatisfactory than it has proved, if the courts and the departments could make a prompt and inexpensive distribution. But in practice there is too much danger of the distribution being delayed until the available assets have been largely dissipated in receivership and legal expenses.
In New York, and several other States, the legislature has interfered to prevent the forfeiture of assurances by the failure to pay a premium, and has undertaken to regulate the payment of surrender values and the grant of paid-up policies in such cases. There is not, however, any general agreement among the different States as to the basis on which such allowances are to be computed. It is too soon to judge finally of the effect of these non-forfeiture laws upon the business; but the impression is believed to be growing among thoughtful policyholders that they are too favourable to withdrawing members, and tend to weaken the companies, by encouraging the retirement of the most healthy and profitable lives. Laws of this kind usually proceed upon the theory (which we venture to think an erroneous one) that the reserve for each particular assurance is to be looked upon as in some sense the property of the individual policyholder.
The American Experience Table adopted by New York State as the official standard of valuation was constructed by Mr Sheppard Homans from the statistics of the Mutual Life Insurance Company of New York City. Other valuable tables of American experience have been published, such as that given by Mr W. S. Nichols (Ass. Mag., xix. 28) from the experience of the Mutual Benefit Insurance Company of New Jersey, and a later collection of the experience of the Mutual Life, more extensive than the first, to which Professor Bartlett has devoted great attention. Some years ago the Chamber of Life Insurance in America (an association formed among the American assurance offices) undertook the collection and arrangement of the experience of a number of the companies in the States. Their labours when completed will no doubt throw much additional light on the value of assured life in America. Meantime Professor Bartlett brings out in his tables a longer duration of life than that indicated by experience in England, and Mr Nichols points out a higher relative mortality among young lives in America. If the latter peculiarity be well established, it will follow that the reserves required by American offices may be smaller than those required by English offices, even if the same rate of interest be employed in the calculations.
An interesting feature in the practice of many American offices is their dividing profits on the “contribution method,” so called because it aims at returning to each class of policyholders a share of the surplus proportionate to the amount contributed to its formation. An explanation of this method by Mr Homans, by whom it was originated, will be found in the Assurance Magazine, vol. xi. p. 121. Bonuses, or “dividends,” as they are called in America, are largely taken in cash, but they may be applied in augmentation of the sums assured.
The “Tontine” system of assurance has come into prominence of late years. The policyholders under this plan agree that no dividend, return-premium or surrender value shall be received for a term of years called the “tontine period”; but that the entire surplus from all sources, including lapses, shall be accumulated to the end of that period, and then divided among all who have maintained their assurances in force. The tontine companies usually offer this plan as an alternative with the ordinary mode of assurance, and large numbers of applicants select it.
In Canada the course of legislation with regard to assurance has brought about a state of the law very much resembling that in the United States. After the passing of the latest Act in 1877,—which, among other things, requires all companies to keep separate assets in Canada against their liabilities there,—several British and American offices withdrew from transacting new business in the Dominion. From the report of the superintendent of insurance for the year 1879 it appears that the number of companies licensed for the transaction of life assurance business in Canada for that year was thirty-six. Of these thirteen did not transact new business. The following are the Canadian statistics for the year referred to. [table]
In Australia <and New Zealand there were in 1879 (including the New Zealand Government Insurance Department) ten institutions for life assurance business. The total amount of new assurances granted by them was between £3,000,000 and £4,000,000, upwards of £2,000,000 of which was transacted by one office, the Australian Mutual. The ten offices had in force at the close of the year nearly 70,000 policies, assuring upwards of £23,000,000.
In India, at the Cape of Good Hope, and in the West Indies there are native assurance offices, but the business in those places is largely transacted by companies whose headquarters are in Great Britain.
On the continent of Europe the practice of life assurance has not as yet become so widespread as in English-speaking countries. There are assurance companies in various Continental countries, but it is chiefly in France and Germany that any extensive development of the system has taken place.
In France-life assurance was later in taking root than in Great Britain, and its development has been much slower. There are, however, several large and solid life offices in that country dating back for a considerable period, besides a number of more recent growth, and the business is now making remarkable progress. The oldest French company, La Campagnie d’Assurances Générales, founded in 1819, issued in the year 1880 policies to the amount of 81,000,000 francs,—a year’s business unequalled in magnitude in the experience of any British office. The following figures, taken from the Moniteur des Assurances, shows the rapid increase of business among the French life offices in recent years. They represent the total amount of new assurances effected in each year :— [table]
There are now twenty companies in France, the aggregate of whose existing assurances must considerably exceed 2,000,000,000 francs.
In Germany (including German Austria and German Switzerland) there are fifty companies transacting life assurance business, whose aggregate new assurances in the year 1879 amounted to 275,787,828 marks. At the end of that year the number of lives assured was 797,343, for sums amounting to 2,534,764,076 marks. There is now in progress an extensive investigation as to the mortality of assured lives in Germany, to which upwards of twenty German offices have contributed their experience, (g. μ. l.) III. Marine Insurance.
Marine insurance is a contract by which one party, the “insurer” or “underwriter,” engages for a stipulated premium to protect another party, the “assured,” against loss arising from certain perils, or sea risks, to which his ship, goods, or other interest may be exposed during a specified voyage or period of time.
The policy of insurance, or instrument which contains the contract, is a printed form, with spaces left blank for the insertion in writing of the particulars of the agreement. The form in general use appears to have been introduced with the earliest practice of British marine insurance. Although worded in a confused and ambiguous manner, its meaning has been clearly defined by a series of legal decisions on the debatable points; and in all cases the written conditions overrule any of the printed clauses that might seem inconsistent with them.
The stamping of policies is at present regulated chiefly by the Customs and Inland Revenue Act, 1867, 30 Viet, c., 23. This Act provides that no contract or agreement for sea insurance shall be valid unless expressed in a policy; that all policies must be stamped before signature; that no policy shall be pleaded or admitted as evidence in any court, unless duly stamped; and that no policy can be made for any time exceeding twelve months. The stamp duties are—
On Voyage Policies.— For every £100 insured and for any fractional part of £100, 3d.
On Time Policies.— For every £100 insured, and for any fractional part of £100, where the time does not exceed six months, 3d.; where the time exceeds six months, and does not exceed twelve months, 6d.
If the separate interests of two or more persons be insured in one policy the stamp must cover each fractional part of £100, in the amounts of such separate interests, as if it were a full sum of £100. Where insurance is made for a voyage, and also for time, or to cover any time beyond twenty-four hours after the ship’s arrival at her destination, the policy is chargeable with duty as a voyage jκ>licy, and also with duty as a time policy. The penalty exigible from any person engaged in effecting or subscribing policies which have not been duly stamped is £100.
By the Act 33 & 34 Vict. c. 97, § 117, it is provided that policies made abroad, but in any manner enforceable within the United Kingdom, are liable to the duty, and may be stamped at any time within two months after they have first been received in the United Kingdom. Further, by the Act 39 Vict. c. 6, § 2, it is now provided that, for the purpose of being given in evidence, any policy may be stamped after execution, on payment of the penalty of £100.
In practice it is usually desirable to conclude an agreement for insurance at once, lest some subsequent intelligence should induce either party to recede; and it is customary for the underwriter to sign a “slip,” or short memorandum of the insurance, until the stamped policy can be completed. But such memorandums, however obligatory in good faith, are not legally binding. The assured, however, is under no obligation to communicate to the underwriter a material fact coming to his knowledge between the date of the slip and that of the policy. And, when a valid policy exists, the slip is admissible in evidence to throw light on the circumstances under which the risk was offered and accepted.
In order to give validity to the contract, it is necessary that the assured have a right of property, or “interest,” in the thing assured. A policy without interest is held to be a wager; and it is declared by the 19th Geo. II. c. 37 that policies bearing the words “interest or no interest,” or “without further proof of interest than the policy,” or “without benefit of salvage to the insurer,” or any policies made by way of gambling or wagering, shall be null and void. The expected profits of a sea adventure may be included in the value of the property for insurance; but an unwarrantable or fraudulent over-valuation might render the policy void even in respect of the value actually proved.
By the Act 31 & 32 Vict. c. 86 it is provided that, “whenever a policy of insurance on any ship, or on any goods in a ship, or on any freight, has been assigned so as to pass the beneficial interest in such policy to any person entitled to the property thereby insured, the assignee of such policy shall be entitled to sue thereon in his own name, and the defendant in any action shall be entitled to make any defence which he would have been entitled to make if the said action had been brought in the name of the person by whom, or on whose account, the policy had been effected.”
A valued policy is one which contains a specific valuation of the interest insured. This valuation forms an essential element in the adjustment of all claims under the policy, and cannot be set aside except on the ground of fraud. The burden of proof, in any averment of fraudulent overvaluation, lies on the underwriter.
An open policy is one in which the value of the interest insured is not specified. In claims under such policies the assured must prove the value of the thing insured. The value of a ship for insurance is what she is actually worth at the commencement of the voyage, including all her stores, provisions, and outfit, money advanced for seamen’s wages, and costs of insurance. The difficulty of proving a precise value in the case of ships is sufficiently obvious , and, to avoid disputes, policies on them ought always to be valued, as is the usual practice. The value to be proved under an open policy on goods is their first cost, including the expenses of shipment, with any portion of the freight that may have been prepaid, and the costs of insurance. The value to be proved in open policies on freight is the amount of the manifest or freight list, excluding such freight as may have been paid in advance.
When the value proved under an open policy falls short of the sum originally insured, the difference, which is technically termed an over-insurance, is treated as a deduction to be made from the amount of the policy. On this footing a proportionate part of the premium is returnable to the assured, who, on his part, can make no claim on the underwriter for loss or damage beyond the value of his interest as actually proved. If, on the other hand, the value proved exceed the amount of the policy, the assured is regarded as “his own underwriter” to the extent of such excess; and the amount of loss or damage, if such has arisen, is apportioned on this footing between the parties relatively to their several proportions of the total value.
A “short interest” arises when only a part of the interest? insured has been exposed to risk, as when some portion of the goods specified in the policy have not been loaded on board of the ship. This case is treated in the same manner as that of over-insurance, from which indeed it does not essentially differ.
Double insurance takes place when the same interest has been insured twice or oftener. This frequently occurs, either through mere inadvertence, or from the want of definite information on the part of the respective persons concerned in the transaction. In such cases, the usual practice is that all the underwriters make a return of premium, in proportion to the amounts of their respective subscriptions, for the excess of the sum insured above the actual value of the interest,—the liabilities of the several underwriters under the different policies being of course proportionally diminished. To this rule, however, there are two important exceptions. One of these occurs when two or more persons insure the same thing, in order to protect the distinct interests which they may individually have in it; the other, when the circumstances are such that a claim for loss might have been brought against one set of underwriters before the other set had become liable at all.
Reinsurance was formerly illegal in England except in the event of the death, insolvency, or bankruptcy of the original insurer. This law subsisted for about one hundred and sixty years, but it was repealed by the 27 & 28 Vict. c. 65, and the subject of reinsurance was further regulated by the 30 & 31 Vict. c. 23. Reinsurance is now recognized by these statutes as a perfectly legal contract.
The risk on the ship, in voyage policies, commences “at and from” the place specified in the policy, and continues till she arrive at the destination specified, and have been there moored twenty-four hours in good safety. On goods the risk begins with their loading and ends with their discharge at the specified ports. On freight the risk usually commences with the shipment, and terminates with the landing of the goods; but if there be a contract of affreightment, under which the goods have been provided for shipment, the risk is held to commence as soon as the ship is in readiness to take them on board. After the risk has once commenced, the whole premium is earned, even although the voyage should not be prosecuted, and the actual risk of the insurers be thereby confined to the mere lying of the ship at the port where the insurance was to commence. But if the risk should not commence at all, or, in technical phrase, if the “policy should not attach,” the premium must be returned to the assured.
If the ship should deviate from the regular and usual course of the specific voyage insured without necessity or reasonable cause, the underwriter is thenceforth discharged from all liability under the policy. The insurance becomes void as soon as such deviation begins; and consequently it is quite immaterial whether a subsequent loss of the ship should happen during the actual deviation or after the ship had returned to her course, the insurer being no longer concerned. It is also immaterial whether the assured was or was not cognizant of the deviation. A mere intention to deviate will not vitiate the policy; but if the ship have sailed on a different voyage from that specified, the insurer is discharged, although the loss should happen before reaching the point of divergence in the two voyages. An unjustifiable delay in the prosecution of the voyage operates as a deviation. The causes which justify deviation are such as to refit the ship after she has been disabled, to avoid an enemy or an impending storm, or to save the lives of seamen in distress.
In all voyage policies it is an implied condition of the contract that the ship shall be seaworthy at the commencement of the risk. By this is meant that the ship shall be in a fit state, as to repairs, equipments, crew, and all other respects, for encountering the ordinary perils of the voyage insured, at the time of sailing on it. Seaworthiness is a condition precedent to the contract; and, therefore, where the ship is originally unseaworthy, the underwriter is discharged even although the loss should result from causes independent of the particular deficiencies constituting the unseaworthiness. It is not material whether the assured is or is not cognizant of the defects rendering the ship unseaworthy; and this rule applies indiscriminately to the owners of the ship and the proprietors of the goods on board. There is no engagement that the vessel shall continue to be seaworthy after the voyage has been commenced; but it is the owner’s duty to take all reasonable means to keep her so. The burden of proof in any averment of unseaworthiness lies on the underwriter, unless where the ship, without adequate cause, becomes leaky soon after sailing. It is now settled law that in time policies there is no implied warranty of seaworthiness at any period of the risk. This was decided in the cases of Gibson υ. Small (June 1853), and Fawcus v. Sarsfield (March 1856), and more recently by the House of Lords in Dudgeon v. Pembroke (March 1877).
The contract of insurance being pre-eminently one based on the assumption of perfect good faith between the parties, it is the duty of the party· wishing to effect the policy to make a true disclosure of every circumstance likely to affect the underwriter’s estimate of the risk. The concealment or misrepresentation of material facts, or the representation of anything not consistent with the facts, will render the policy void. This rule holds good even where the concealment or misrepresentation may have resulted from a mistake, without the intention to deceive. If the underwriter has actually been deceived, whether wilfully or by mistake, the risk is different from that understood and intended to be run; and on this ground he is discharged. The materiality of a concealment or misrepresentation depends, not on its eventual influence on the result of the risk, but on its immediate influence on the judgment of the underwriter at the time of effecting the insurance. The loss may arise from causes totally unconnected with the facts concealed or misrepresented, but the policy may nevertheless be void, because a true disclosure of the facts at the time of effecting it might have led the underwriter to decline the insurance altogether, or to accept it only at a higher premium. If an agent be employed to effect the insurance, he is bound to communicate to the underwriter, not only all the material facts disclosed to himself by his principal, but also any other material facts which may have come to his knowledge from other sources. If either the principal or the agent fail to communicate such facts, the policy will be void. Should any material fact come to the knowledge of the parties wishing to effect the insurance after they have sent away an order to have it effected, they are bound to intimate such fact without delay, so that the underwriter may be informed of it (if there should still be time) before he has accepted the risk. The suppression of information tending to show that the ship was overdue, or that there were rumours current as to her having met with some accident (even though it afterwards appeared that these rumours were Unfounded), is concealment fatal to the validity of the contract. It has also been held that a policy was void because the agents employed to effect it failed to inform the underwriters that their principal had instructed them to wait the arrival of the ship for a certain number of days before acting on the order to insure. Misrepresentations of the terms on which other underwriters have agreed to accept the insurance will be fatal to the validity of the contract, as well as misrepresentation of the risk itself. It may be observed generally that every circumstance represented to the underwriter ought to be at least substantially true. A mere expression of opinion or expectation does not of course amount to a positive representation of facts; but the opinion or expectation expressed must itself be genuine, since, if it appeared that it had been only a pretence, or inconsistent with anything within the actual knowledge of the assured at the time, the policy might be vitiated. When an express “warranty” is given, its terms must be literally complied with, otherwise the policy will be void. The chief distinction between a warranty and a representation is that the former is always inserted in the policy, while the latter is never so inserted; and the effect of this is that, while a representation affects the contract only in so far as it may be found to have been material to the risk, a warranty precludes all questions as to materiality, its express terms superseding any such inquiry.
The perils insured against are described in the printed form as the “adventures and perils of the seas, înen-of-war, fire, enemies, pirates, rovers, thieves, jettisons, letters of mart and counter-mart, surprisals, takings at sea, arrests, restraints, and detainments of all kings, princes, and people, of what nation, condition, or quality soever, barratry of the master and mariners, and all other perils, losses, and misfortunes that have or shall come to the hurt, detriment, or damage of the said goods, merchandises, and ship, &c., or any part thereof.” It may be observed that, as a general rule, the underwriters are liable only for such losses as are proximately caused by the perils insured against. For the remote consequences of these perils, such, for instance, as the loss of markets through delay, they are not responsible. But, on the other hand, if a loss has been proximately caused by a peril insured against, the underwriters are not relieved from liability, although such loss may have been remotely occasioned by the acts or negligence of the assured or his agents. The reason for this rule, as given by Lord Bacon, is that “it were infinite for the law to consider the causes of causes, and their impulsions one on another; therefore it contenteth itself with the immediate cause.”
Losses resulting from breaches of the revenue laws or of the law of nations, or from illegal voyages generally, are not covered by the policy. The risk of “thieves” applies only to plunder committed by open violence, and does not cover losses by secret theft. The illegal acts of the master and crew, if committed without the privity of the owners, will amount to barratry, so as to render the underwriters responsible for them; but if the master be also owner of the ship, none of his acts will be held as barratrous. A shipmaster, however, who is only part owner may commit barratry as against his co-owners and their underwriters. If the assured be the subject of a foreign state, British underwriters will not be liable for the acts of that state, unless it appear from the form of the policy or from the .circumstances of the case that the intention was to insure against such risk. Losses by the ordinary wear and tear of the ship, or by the natural deterioration or decay of perishable goods, are not chargeable to the underwriters.
The printed form of the policy declares that “in case of any loss or misfortune it shall be lawful to the assured, their factors, servants, and assigns, to sue, labour, and travel for, in, or about the defence, safeguard, and recovery of the said goods and merchandises, or ship, or any part thereof, without prejudice to this insurance: to the charges whereof, we, the assurers, will contribute, each one according to the rate and quantity of his sum herein insured.” The object of this clause is to permit the assured to take measures for the recovery of the property without losing any right of abandonment he might have in the circumstances. Although the language of the clause is only permissive, it is a settled rule that the assured is bound so to labour for the recovery of the property. The best practical rule for the assured to follow in cases of partial loss or damage is to act in the circumstances as a prudent man would do if uninsured.
An important clause in the printed policy is what is called the “memorandum,” which is as follows :—“Corn, fish, salt, fruit, flower, and seed are warranted free from average, unless general, or the ship be stranded. Sugar, tobacco, hemp, flax, hides, and skins are warranted free from average under 5 per cent. And all other goods, also the ship and freight, are warranted free of average under 3 per cent., unless general, or the ship be stranded.” The effect of this clause, as interpreted by legal decisions, is to free the underwriter from claims for particular average (or partial damage), or from such claims if under the rates specified, unless the ship be stranded. But if the ship be stranded, he is liable for such claims, whether caused by the stranding or not. For losses of the nature of general average the underwriter is liable whether the ship be stranded or not, and whether the amount be over or under the rates mentioned in the memorandum.
It is frequently a matter of some difficulty to determine whether a ship has been stranded within the meaning of the memorandum. A mere touching or striking, whether on a rock, bank, reef, or other object, will not constitute a stranding, unless the ship settles down and remains fixed for some definite time. The amount of damage sustained is not material to the question either way. Where a vessel takes the ground in the ordinary and usual course of the navigation in a tidal river or harbour, on the ebbing of the tide, or from natural deficiency of water, this is no stranding. It is essential to a stranding that the ship should take the ground by reason of some unusual or accidental occurrence. A voluntary stranding to save the ship from sinking is within the meaning of the memorandum, although the ship should be run into a tidal harbour for the purpose.
When an absolute total loss occurs, the assured is entitled to recover the amount of the policy, without giving notice of abandonment. When the subject insured, without being wholly destroyed, is so seriously injured, through the perils insured against, that its recovery might involve greater expenses than its eventual value would cover, it forms a “constructive total loss,” and the assured is entitled to give notice of abandonment to the insurers, and to claim the amount of the policy. (See Abandon- ment.) It is only, however, when the circumstances seem to involve a virtual loss, as distinguished from a deterioration of the property, that notice of abandonment can be competently given; and, unless the abandonment be accepted, the ultimate state of the facts will alone determine the question whether it can be insisted on. The principle upon which losses are settled, when abandonment is validly made, is that the underwriter becomes the proprietor of the subjects abandoned on payment of the sum insured. The effect of an abandonment of the ship is to transfer the ownership to the underwriters, so that whatever freight she may thereafter earn belongs to them; and, although such freight is thereby lost to the original owners, the insurers of the freight are not liable to them for loss in respect of it, because it is lost only by their own act of abandonment, and not by the perils insured against. When goods are so damaged by the perils insured against that they are necessarily sold at any place other than the original destination, they are constructively lost, and the underwriter is liable for their insured value, under deduction of the net proceeds of the sale. But this rule is not applied to goods warranted “free from average unless stranded,” if there has been no stranding of the ship,—if being only in that event that the underwriter is responsible for damage to such goods. A constructive loss of freight occurs when the ship is prevented by any peril insured against from completing her voyage, or when the goods on which the freight is to be earned have received such damage that they cannot be conveyed to their destination; but if the ship can proceed with other goods, the freight earned for these must be deducted from the claim for loss.
Partial loss or damage, arising from the perils insured against, is usually, though somewhat loosely, designated by the term “particular average.” Under this head are included the damages suffered from the accidental or voluntary stranding of the ship, or by her getting into collision with another vessel, by lightning, fire, hostile attacks, or the violence of the sea under any extraordinary circumstances. Damages to the ship’s upper works, sails, spars, and rigging are included under particular average if occasioned by the direct force of the sea; but if caused merely by the force of the wind they are treated as wear and tear, and are not chargeable to the insurers. The loss of anchors and cables parted from by the vessel riding hard, or by the anchor hooking to any object at the bottom, is regarded as wear and tear; and the same rule applies to the repairs of the ship consequent on her becoming leaky through working and straining in a heavy sea. The general principle upon which damages of the nature of particular average are distinguished from those falling under the class of wear and tear is that the former must be caused by the immediate operation of some extraordinary accident, while the latter are only the ordinary incidents of navigation, and as such are not within the scope of the underwriter’s contract. But the practical application of this principle is a matter of much nicety, and must usually be left to the judgment of a professional Average stater.
In adjusting claims for particular average on ships, certain deductions are made for the difference between “new and old,” unless the ship be on her first voyage, either outward or homeward, or the repairs be only temporary. On this footing one-third is deducted from the costs of the materials and labour required for the ship’s repairs, excluding, however, the charges for dock dues, surveyor’s fees, or similar accessories, which are allowed in full. No deduction is made for anchors (unless in so far as they may be fitted with Wood), and the deduction for chain cables is only one-sixth. When a ship has to be recoppered at the expense of the underwriters, the practice is to allow in full the difference of price between old and new metal, to the extent of the weight of the old copper stript off; and if any sheets have been lost by being rubbed off, the cost of replacing these is further allowed, under deduction of one-third. If the ship has not been stranded, the underwriters are not liable for claims for particular average amounting to less than 3 per cent, on her insured value, independently of the accessory expenses, such as survey fees, &c., which are not taken into account in making up the 3 per cent. Two or more averages occurring in the course of a voyage may, however, be taken together to make up 3 per cent, on the value of the ship, so as to render the insurers liable.
Particular average on goods occurs when they arrive at their port of destination damaged by sea-water, or by its effects in heating or otherwise deteriorating them, although in actual contact only with other portions of the cargo. The amount of compensation recoverable from the insurers for such damage is regulated by comparing the “gross” market price, which the goods would have produced if landed in sound condition, with the actual gross price obtained for them in their damaged state, and by charging to the insurers the same rate of deterioration on the value insured, with the addition of the extra charges specially occasioned by the damage, such as surveys, <fcc. By this mode of adjustment the assured recovers either more or less than the actual depreciation of the goods, according as the insured value may exceed or fall below the sound market value at the port of destination; but as the latter value generally includes freights, duties, and other charges, besides profits, it is in most cases in excess of the insured value, and to the extent of such excess the indemnity of the assured is incomplete. The equity, however, of this mode of adjustment is obvious, when it is considered that the insurer receives his premium only on the value insured, and ought therefore to be liable only in respect of that value, while at the same time the gross market values of the goods in their sound and damaged condition furnish the only true criterion of the actual depreciation, because these are the only values with reference to which, ultimately at least, purchasers could be influenced. It is, however, customary to adjust particular average on a comparison of bonded instead of duty-paid prices in claims for damage to tea, tobacco, coffee, wine, and spirits imported into the United Kingdom.
As already indicated, claims for particular average on goods must amount to 3 per cent, or upwards, or in the case of the goods specified in the second clause of the memorandum to 5 per cent, or upwards, otherwise the underwriters will not be liable unless the ship has been stranded; and it is only when there has been a stranding of the ship that the insurers are liable for any such claims on the goods specified in the first clause of the memorandum, or on other goods specially warranted “free of particular average.”
The subject of general average has been treated under the heading Average (g-.t>.). But it may here be remarked that, in the very recent case of Attwood v. Sellar (March 1880), it has been decided, contrary to the usage of seventy or eighty years, that the expenses of warehousing and reshipping the cargo at a port of refuge, and of the ship in quitting that port, are the subject of general average contribution.
On the general subject of marine insurance the best book of reference is Arnould’s Treatise (5th edition), which embraces the leading cases decided in the law courts down to a very recent period. Amongst the minor works beâring on the subject may be mentioned Mr Μ. Hopkins’s Manual of Marine Insurance, and Mr Charles M ‘Arthur’s Policy of Marine Insurance Popularly Explained, and especially Mr R. Lowndes’s Practical Treatise on the Law of Manne Insurance (1881). (j . WA)
