Digitized by the Internet Archive in 2016 with funding from University of Illinois Urbana-Champaign Alternates https://archive.org/details/yaleinsurancelec02yale Yale Insurance Lectures BEING THE LECTURES ON FIRE INSURANCE DELIVERED IN THE INSURANCE COURSE AT YALE UNIVERSITY Year 1903-4 SPECIAL EDITION FOR THE HARTFORD FIRE INSURANCE COMPANY THE TUTTLE, MOREHOU8E & TAYLOR PRESS Copyright, 1904 By Yale Alumni Weekly °l (*5 * » Y X CONTENTS PAGE. Fire Insurance — Its Place in the Financial World — His- torical Notes. Richard M. Bissell . . .9 Theory of Fire Insurance — The Nature of Contracts — General Instructions. Richard M. Bissell . $7 Organization and Methods — Different Kinds of Mu- tuals — Taxation of Companies. Richard M. Bissell 66 Rates and Hazards. Richard M. Bissell . . .92 Losses and Adjustments — Miscellaneous. Richard M. Bissell ....... 127 Fire Insurance Engineering — Methods of Building Con- struction for the Prevention of Fire Losses. H. C. Henley ....... 155 PREFACE The lectures on Fire Insurance, contained in this volume, were delivered at Yale University and constituted one section of the larger course, entitled “Insurance,” which w'as inaugu- rated there during the year 1903-4. These lectures were primarily intended to serve as the basis of an elementary course of instruction for those who had acquired no previous knowledge of the subjects treated and, therefore, contain much that, to experienced underwriters, will serve to be rudimen- tary. Furthermore any treatise which attempts, in so brief a compass, to cover such a complex and technical subject must of necessity be incomplete and is to be considered rather as an introduction to the subject than as a complete text-book. Nevertheless an attempt has been made to indicate the broad principles upon which the business of Fire Insurance is based, and to briefly outline the more important features of history, organization and practice by which it is characterized. The business is being rapidly specialized and there are many excellent treatises concerning some of its important departments, which are readily accessible and which should be consulted by those who desire to make an exhaustive study. Fire Insurance ITS PLACE IN THE FINANCIAL WORLD HISTORICAL NOTES BY RICHARD M. BISSELL While all insurance, properly speaking, partakes of the nature of indemnity, the peculiar province of fire insurance may be indicated by the following definition: A fire insur- ance policy is a contract to indemnify the holder thereof for actual destruction, by a certain immediate cause, namely fire, of value appertaining to certain specified property owned by him. Your particular attention is asked to this statement, to which we shall return in a later lecture. In a broader sense fire insurance is a tax — a tax levied through the agency of insurance companies for the purpose of distributing over the entire community the enormous loss of property which is caused each year by fire and, by this means, of avoiding the temporary financial paralysis or total ruin which would result therefrom to the individuals or com- munities immediately afflicted. Doubtless because of this fact, it is that fire insurance companies and their business are so unpopular with many people and especially in the eyes of law-makers. The tax gatherer has never been highly esteemed however necessary to the community his services may be. From the foregoing it will be seen that fire insurance is not productive; it creates nothing and its benefits as to the com- munity at large are all indirect. One marked difference to be noted between fire and life insurance is this: that while the IO YALE INSURANCE LECTURES. premiums paid to life insurance companies are some day to be returned to the policy-holder or his beneficiaries, the holder of a fire insurance policy parts absolutely with his premium for the sake of protection against a possible but by no means inevitable or even ordinary misfortune. And yet fire insurance is indirectly a great aid to business and enterprise of every description, — a necessary conservator, one of the principal bases of credit, and a great factor in the widely extended use of capital which characterizes the mercan- tile and manufacturing operations of our day. The need for fire insurance is at once apparent when we consider the enormous value each year destroyed by fire in this country alone, the average amount destroyed for the past ten years being nearly $150,000,000 per annum, — a sum approximately equal to five-sixths of the entire amount collected by the national government through its tariff on imports. Yet, as Mr. A. F. Dean remarks: “While there have been few presi- dential campaigns in which the tariff question has not occupied the center of the stage, on the other hand the fire tax, which amounts to equal proportions, is practically ignored, not only by the political parties, but by the people at large.” The amount thus destroyed each year must be absolutely subtracted from the country’s wealth, for fire insurance does not and cannot make good these losses ; its province is merely to distribute them. As Mr. Dean in another place says: “It is true that when a building or city is destroyed fire insurance makes it possible to create another building or city in its place, but the fact remains that something has disappeared and the world is permanently impoverished by the event; but the loss escapes the attention of society at large because the material thing that has vanished in smoke and ashes is replaced by tribute gathered from the four corners of the land. The thing that has vanished forever is value, i. e., capital. This insurance cannot replace.” YALE INSURANCE LECTURES. II It was stated above that fire insurance is an aid to business, a basis of credit and a factor in the modern widely extended use of capital. Let us consider these aspects in detail: First. Insurance aids business. This follows because of the security and permanency which are assured to the merchant or manufacturer by his insurance policies. Many mercantile and manufacturing establishments of the present day accu- mulate destructible property to the value of a million or more under one roof, subject to total destruction at any time by one fire. Without the protection afforded by insurance policies most of these concerns would be irretrievably ruined by such a calamity and those not absolutely ruined would be compelled to operate in a much smaller way for many years. Should such a misfortune come to a firm properly protected by insurance policies, however, the property loss would be made up, the scope of their business would not require to be diminished, and so far as their success was dependent on the preservation of their property the permanency of their business would be assured. These considerations apply with equal force to the small operator. Second. Insurance is a basis of credit. Capitalists do not hesitate to loan money on buildings which are subject to destruction by fire when such buildings are protected by approved insurance. In most cases it is provided in the loan contract that insurance payable to the loaner shall be car- ried. Without such a provision money cannot be borrowed on real property beyond the value of the land itself. Again, in mercantile or manufacturing business a dealer may purchase goods or a manufacturer sell on three or six months’ time or even longer. Why? Because the seller knows that the property so purchased will be protected by in- surance, so that if it is destroyed by fire the purchaser, i. e., the debtor, will be able to pay his debts. Wholesale dealers 12 YALE INSURANCE LECTURES. and manufacturers watch this matter very closely. They will not ordinarily sell on credit to a tradesman who does not insure his stock, and when a fire occurs, damaging or destroy- ing the property of merchants or manufacturers, it is quite common for the creditors to step in between the property owner and the insurance companies and by legal process com- pel the payment of the debt out of the funds due from the insurance companies. In Canada it is a very common practice for small merchants to arrange with the companies when taking out insurance that, in event of loss, payment shall be first made to their creditors. Similarly a large portion of the business of banks consists of advances to merchants and manufacturers, but banks who are trustees for their depositors could not afford to loan to men who were liable to ruin by fire at any time. They may, however, and do safely loan to men whose credit is assured by the protection afforded by insurance. Third. Insurance adds greatly to the extension of enter- prise. A man whose total wealth was $100,000 and who desired to go into a mercantile or manufacturing business, would hesitate to invest the whole of that amount in his business were he liable to lose it all beyond recovery by fire. Under such circumstances he would dare to invest only a portion of his capital in active business, keeping the balance as a reserve for emergencies. But if he is protected against loss by fire insurance he may wisely do business on the largest scale which his financial strength will permit ; he may even borrow additional sums over and above his own capital to extend his business, knowing that in the event of the destruction of his property the loss will be made up to him from the funds of the insurance companies. Thus the activity and usefulness of capital are greatly enhanced, vast enterprises are undertaken, and the idle reserve funds of the mercantile community are reduced to very small proportions. YALE INSURANCE LECTURES. 1 3 Communities too are conserved and protected by insurance. The great fire of London came at a time when there was no insurance, and as a result the city was crippled for many years and recovered only after enormous effort from the blow which it had sustained. “If we compare the slow recovery of London from its great fire, with the wonderful reproduc- tion of Chicago and the substantial and rapid restoration of Boston, can we doubt that the great recuperative power of both cities was largely due to their insurance indemnity, and that without it they might still be struggling to attain the prosperity which they reached within three months after their destruction?”* Fire insurance has been likened to the balance wheel of an engine, which creates no power, operates no part of the machinery, but nevertheless insures its regular rythmic motion under varying strains and takes up the shock occasioned by the breaking of any minor part, which otherwise might result in shattering the entire engine. Fire insurance as now commonly practiced is usually con- sidered to have begun after the great conflagration of Lon- don in 1666. While marine insurance — the oldest form of insurance in existence — had been steadily developing and extending with the great expansion of trade and navigation which followed the discovery of the New World, and although merchants and ship owners from very remote times clearly foresaw and provided against the perils of navigation, very little specific attempt was made by property owners to secure indemnity for loss caused by fire prior to the date above mentioned. It is true that some forms of provision for the aid of those suffering from loss by fire and other calamitous causes appar- ently existed in very remote times, as the following quota- tion will evidence : * F. C. Moore, “ Fire Insurance.” *4 YALE INSURANCE LECTURES. “The earliest application of fire insurance known to us was in connection with communes of towns and districts. These communes flourished in Assyria and the East more than 2,500 years ago. Judges, priests and magistrates were appointed for each town and district with power to levy contributions from each member of the commune to provide a fund against sudden calamities such as drought and fire. If the judges were satisfied that the fire was accidental they empowered the magistrates to assess the members of the commune either in kind or in money, and in the event of any member being unable through poverty to meet his share of the contribution, the deficiency was made up from the common fund. These communes still exist in a modified form in China.” As early as 1240 A. D. the laws of Count Thomas of Flanders provided that the members of a community as a whole should make good a loss which fire might cause to an individual unless the incendiary who caused the fire could be discovered, in which case the loss was to be made good from his property and he was to be banished. It will be noted that the plans outlined above contemplated an assessment by the state and that all property owners were protected. We may discover here, therefore, the begin- ning of state fire insurance, which will be later more fully described and which continues in Germany and elsewhere to this day on a large scale. Another method for protection and security against loss by fire, water, robbery or other calamities, arose during the Middle Ages in connection with the various Anglo-Saxon and German guilds, the members of which made regular con- tributions toward a common relief fund. In 1609 a plan was suggested by one of his subjects to Count Von Oldenberg, wherein it was proposed that he individually should consent to insure those of his subjects, who might YALE INSURANCE LECTURES. 15 so desire, against the loss of their houses by fire upon an annual payment to him of a fee or premium of one dollar for every one hundred dollars of valuation. This suggestion was declined by the Count, though not without some hesitation, and, though he suggested that such a plan might well be undertaken by a company of private individuals, no action on his suggestion seems to have been taken. This, so far as I have been able to discover, was the first suggestion ever made looking toward the formation of a company or associa- tion for fire insurance purposes only. In England various fire insurance schemes were proposed in 1635, 1638 and 1660, but for one reason or another — largely owing to the great Civil War — none of them was fully organ- ized, and as late as 1667 there is evidence that fire insurance as we know it did not exist. In 1666 came the great fire of London, which burned for four days and nights and spread over 436 acres of territory. This was an alarming and appalling calamity. Over 85 per cent, of the buildings in London were destroyed, while the property loss is estimated to have been about ten million pounds, — a sum which has been calculated to equal over three hundred million dollars at present values. In the absence of insurance this was a blow from which London was slow to recover, as is shown by the fact that in 1673, seven years later, about one thousand buildings were yet to be replaced. Relatively, this London fire was the greatest in the history of the world, and the date of it — September 2d — was observed as a Fast Day for more than one hundred years thereafter. Immediately after the fire various plans for the protection of individuals against loss by fire began to be devised. In 1667 the first regular system for insuring buildings against fire began. In that year, one Nicholas Barbon opened an 1 6 YALE INSURANCE LECTURES. office where he individually proposed to insure houses and buildings. A few years later, in 1680, after having had some success, he formed a partnership known as 'The Fire Office.” This company, for a given consideration, engaged to pay the assured the amount of indemnity declared in the policy, or contract, should his house or building be destroyed by fire, or to repair it should it be only "damnified” — i. e., damaged. No liability, it will be noted, rested upon the assured beyond the payment of the premium. In 1681, a few years after this first company was established, an attempt was made by the City of London to establish an insurance account, or business, and funds and property were put aside and dedicated for that purpose. Houses were in- sured for any term up to one hundred years. But the enter- prise did not prosper and was abandoned in 1683. Then followed, in the same year, what was called the "Friendly Society.” This concern, which had an existence of nearly one hundred years, conducted its business upon an entirely different plan, as follows : First, the assured paid yearly a small sum, varying according as the building to be insured was brick or frame. This charge was to cover the expenses and, we may presume, the profits of those who operated the company. Second, the assured deposited with the company a sum equal to five annual payments as a guar- antee that future payments and assessments would be met as required. This money could be appropriated by the company if the assured failed to keep up his payments. Third, the assured signed an agreement to contribute his share toward the payment of any and every loss which the company might sustain up to an amount not exceeding thirty shillings for every one hundred pounds of insurance carried by him. It will be seen that all losses were to be paid from the con- tribution of the assured, upon whom, also, rested all liability YALE INSURANCE LECTURES. 17 and for whom the operators of the company or the “under- takers,” as they were termed, acted only as collectors and distributors. This was a form of mutual insurance, as it is now called; that is to say, insurance where the policy-holders are directly liable for one another’s losses. This company was also fairly successful. Another purely mutual company was organized in 1696. This company proposed a deposit to be paid back, less expenses, when contracts should terminate ; also that profits from inter- est on invested funds over and above losses and expenses should be divided among the members or policy-holders, and that each year a rate of assessment should be declared by the directors, according to which levies should be made on the policy-holders for payment of losses or for the distribution of profits to them. It was assumed that the interest or earn- ings from the accumulated deposits would pay all losses, and this seems to have been the case, for the company prospered and grew and is in existence to-day, having greatly developed in size and scope and being the oldest insurance company in existence. Its operations are limited to London and its suburbs. The original title of this company was “Contribu- tors for Insuring Houses, Chambers or Rooms from Loss by Fire by Amicable Contribution.” This was afterward changed to “Amicable Contributionship,” and in 1776 the name of “Hand in Hand” — taken from an emblem used by the company in marking and designating buildings which it insured — was adopted. The companies heretofore mentioned all confined their operations to buildings and mostly to dwellings only, but the need for insurance upon goods and stocks of merchandise was very great. About 1706, one Charles Povey opened an office for insuring such property in London. He was without back- 2 i8 YALE INSURANCE LECTURES. ing or support of any kind and furnished merely his promise to pay in event of loss. This venture was apparently greeted with ridicule and the proposal to insure personal property seems to have been commonly considered impractical. Never- theless Povey persisted and soon began another enterprise designed to insure personal property throughout Great Britain and Ireland, but finding his first venture unprofitable devised the scheme (which would seem to be quite in accord with some very modern methods of corporate finance) of organiz- ing a third institution to take over the other two. This was accomplished. The new concern was at first called the “Lon- don Insurers,” but almost immediately after its formal in- augury in 1710 it adopted the name of the Sun Fire Office, and under this name began its successful career which still endures, making that office the oldest non-mutual company in existence as well as the first company which ever undertook the insur- ance of movables or personal property. It has continued to be a partnership, i. e., not a corporation, and is almost unique among insurance companies in that respect. The first con- tracts of the Sun provided for payment of losses out of a reserve to be made up of one-half the premiums paid, the liability of the company ceasing when that reserve should be exhausted. Later the company, doubtless under stress of com- petition, made its promise to pay absolute, and in 1726 a capi- tal fund of 48,000 pounds was created as additional security for policy-holders. Another curious feature of the contracts made by this first company doing general business was the proviso that in case of loss 5 per cent, should be deducted from claims for defray- ing the expense of the company’s officers in investigating and settling the loss. This was reduced to 3 per cent, in 1716, and abandoned altogether not later than 1794. This feature seems to have been quite common among insurance companies dur- YALE INSURANCE LECTURES. *9 in g the early history of the business, but was too obviously open to objection and criticism to endure after serious com- petition arose. Between 1710 and 1720 numerous insurance schemes were launched, modeled after one or the other of those described above. Some succeeded; more failed or were wound up. In 1720 the first chartered companies or corporations made their appearance. In that year two companies — the Royal Exchange Assurance Company and the London Assurance Corporation — were granted charters, first to do a marine insurance busi- ness, and in the following year to also transact fire and life insurance business. This date then, 1720, marks the advent of modern stock companies in fire insurance. One of the first announcements, or “broadsides” (as such notices were then styled) of the Royal Exchange Assurance contains the fol- lowing as one of the arguments which should persuade insurers to patronize it rather than the mutual association or contributionships theretofore doing most of the business: “For the security of all persons insured by this Corpora- tion, their capital stock or fund is by their charter established and made liable and shall always be ready to pay and make good to the assured the amount of all losses by fire.” Later in the same paper appeared the following: “And whereas persons assured by other societies not incor- porated, are subject to calls in case of a loss or a deduction out of the money due to the sufferer, those that are assured by this Corporation are not liable to any calls (i. e., assess- ments), or deductions whatsoever.” These considerations — namely, freedom from all personal liability on the part of the assured beyond payment of a fixed premium and the fact that in the case of stock com- panies their entire capital stock and accumulated funds are pledged to the payment of losses — have no doubt chiefly caused 20 YALE INSURANCE LECTURES. the commercial world to favor stock companies or corpora- tions up to this date, when such companies do a very large proportion of all the fire insurance business, the figures for 1902 in the United States being approximately: Premiums taken by stock companies $202,000,000 Premiums taken by mutual companies... 22,000,000 In other words, the stock companies receive about 90 per cent, of the entire amount of premiums collected. This may be said to bring the history of fire insurance in Great Britain down to modern times. During the last three- quarters of the eighteenth century fire insurance companies, both mutual and stock, but chiefly the latter, were organized in very considerable numbers and for the most part copied the methods, contracts and practices of the earlier companies. Many of these companies still survive; indeed, some of the largest English companies in existence date from that period. The early histories of these first ventures in fire insurance contain much curious and interesting matter, but time and space do not permit a study of their plans and methods. One feature of their early operation, however, has developed to such great proportions and has become of such great import- ance as to demand mention here, namely, the protection of property against fire. It was a natural and immediate out- come of the first attempt at fire insurance by Nicholas Bar- bon that his interest in fires and their prevention should be greatly augmented. Accordingly his and the other early offices devised metal house plates to be securely fastened to those buildings which might be covered by their policies, and then hired men and provided some simple apparatus for extin- guishing the fires which might arise in or near the buildings so marked. These house plates were also considered as a mark of acceptance and assumption of liability by the com- YALE INSURANCE LECTURES. 2 1 panies. Some offices even stipulated that liability should not begin until their plate had been affixed to the building which the policy was to cover. This it was thought tended to hinder fraud and prevent disputes. Moreover, because they brought a building under the protection of the company’s firemen and because they evidenced to the public the fact that the property owner would not be ruined by fire, these plates were esteemed as desirable and valuable by policy-holders. They became in fact a sort of basis of credit, and the custom of using these plates endured, especially in smaller places, long after their original use had disappeared. In fact, such plates are used in some foreign countries to-day. In America their use was very common until about twenty-five years ago ; they may still be seen over the door of many New England homes and are not yet entirely obsolete among the farmers in some sections of the country. The ordinary method of preventing the spread of fire at that period seems to have been by blowing up buildings by gun- powder, and this work was commonly done by the artillery or Royal Gunners. The early insurance companies used also bucket brigades and hand-pumping engines. Each company had its own liveried firemen, who were expected to guard its interests. Later some of the companies organized corps of watchmen and patrolmen who should discover fires in their incipiency, give the alarm and summon the firemen of the company for whom they worked. Still later, when the practice of insuring personal property began, it was found advisable by the Sun office — the first, it will be remembered, to transact that class of business — to provide a body of men for the purpose of removing insured goods from burning buildings and for protecting them when so removed from thieves and pilferers. As companies multiplied, so did their private fire and salvage corps increase in number, until in 22 YALE INSURANCE LECTURES. 1808 fifty fire engines were kept up by the companies in Lon- don alone. In 1825 a number of these companies consolidated their fire brigades. In 1833 all were united, but not till 1866 was the establishment turned over to the city. It seems very strange that private corporations should have so long been allowed to control and direct this important branch of civic administration. Inasmuch as modern fire insurance had its genesis and early development in Great Britain, whence also American ideas and practices were derived, we have devoted most of our limited time to the early history of the business there and can give but slight and incidental attention to the subject in other foreign countries. This course has seemed to be proper, not only for the reason just mentioned, but because English fire insurance companies have developed more rapidly and, following the track of English ships and commerce, have carried their operations throughout the world to a far greater extent than the companies of any other country. There is no quarter of the globe where fire insurance may not be obtained from English offices. The insurance companies of other coun- tries for the most part confine their operations to their own country, with the exception perhaps of Germany, the com- panies of which country have in later years also embarked in the world-wide business. In the various kingdoms and provinces which now consti- tute the German Empire, as has been mentioned before, the various communal guilds had provided some crude form of insurance for their members, and in many places this function was transferred to the various municipalities as the guilds dis- appeared. One writer describes this process as follows: “As the absolute monarchical police-state constitutes the bridge between the middle ages and modern times, so too the transi- tion from the mediaeval guild plan of mutual help to the YALE INSURANCE LECTURES. 2 3 modern system was bridged by state insurance. The guilds of the middle ages lost their importance and private indus- try was not rapid enough to supply the void left by them, and so the state was forced to step into the breach.”* Such public fire insurance outside of Germany is still to be found in German-Austria, Denmark, Switzerland and Scandi- navia. At a comparatively recent date about 40 per cent, of the outstanding insurance in Germany was carried by the institu- tions conducted by the government or by various municipalities. Thoughout Germany and Switzerland to-day all buildings of ordinary occupancy are assured by the government as soon as built. Each owner is assessed pro rata, according to the appraised value of his own insured buildings, for the losses within the state. Money payments are not made by the state in event of loss, but the damage is repaired or the building replaced by the government. The necessity for insurance on other classes of property than buildings caused the formation of the first stock company in Germany in 1812, since which time many companies, both stock and mutual, have arisen, also various local associations similar to the old guilds and perhaps descendants from them. In France, while various insurance companies were set on foot during the second and third quarters of the eighteenth century, all perished during the general financial collapse which accompanied the French Revolution. The first regular stock company organized thereafter seems to date from 1818. In other European countries fire insurance seems to have had even a later development — thus in Austria the first stock company was organized in 1822, and the first mutual company in 1825. In Russia the first company appeared in 1827. In all civilized countries there are now fire insurance com- panies, even in China. * J. S. Bloomingston, Ph.D., “ Fire Insurance.” 24 YALE INSURANCE LECTURES. Methods and plans vary in different parts of Europe. In France, under the Code Napoleon, every individual is liable for loss or damage which may happen to others through his fault. In case of fire the law holds that the fault rests with the tenant or owner on whose premises the fire originates, unless he can prove himself without fault; in other words, the burden of proof is on him. Hence a tenant, for example, takes out insurance first on his own personal property; sec- ond, to protect him against possible claims to be made by his landlord, and third, to protect him against possible liability to his neighbors for damages resulting from fires attributable or attributed to his carelessness or negligence. It would be highly instructive to more completely compare the varying conditions and methods under and by means of which the business of fire insurance is conducted in different parts of the world, but we cannot attempt it here. In the city of Philadelphia, where fire insurance was first practiced in this country, there were in 1752 seven fire com- panies with two hundred and twenty-five members, seven engines, thirty-six ladders and ten hundred and fifty-five buckets. Yet despite the frequent fires which were responsi- ble for the organization of these companies, no method of safe-guarding individual interests by means of fire insurance seems to have existed. It is a curious fact, worth noting, in passing, that until 1870 Philadelphia was dependent upon private organizations for the extinction of fires. The volun- teer fire companies were succeeded by a paid fire department in that year. On April 13, 1752, certain subscribers or contributors, among whom was Benjamin Franklin, organized under a deed of settlement the “Philadelphia Contributionship” for the in- surance of houses from loss by fire. The first policy was issued June 1st of that year. This institution was closely YALE INSURANCE LECTURES. 2 5 modeled after the English contributionships, and even adopted the house badge of one of the leading English societies. Its early contracts provided for a fixed deposit from every assured, according to the amount of insurance carried and the nature of the building insured. Policies were issued for seven years, and the theory was that the interest on the accumulated funds would pay for losses and expenses, so that at the expiration of seven years the de- posit could be returned intact to the assured. Nevertheless, the deposit itself was liable for the payment of losses and expenses should the income from investments prove to be insufficient. No liability seems to have been incurred by the contributors beyond the amount of the deposit and provi- sion was made in case of overwhelming conflagration for a pro rata division of the assets as a complete liquidation of claims. When the interest earnings exceeded the losses and expenses, a dividend was to be allowed to contributprs. As the institution gained experience it was found necessary to abandon the division of profits, which, after March, 1763, were allowed to accumulate, thus forming a permanent fund for the payment of losses and expenses. “Such/’ to quote the historian Fowler, “was the first enunciation in America of the great principle of insurance- accumulation,” for it will be remembered the original plan did not contemplate a permanent fund. On the contrary, the deposits and surplus income derived therefrom, if any after payment of losses and expenses, were all to be returned to the contributors. The company survived the trials of the Revolutionary War, including the financial stringency and depreciated currency which resulted therefrom, and has continued to exist and prosper to the present day. In 1902 its interest and dividends, wisely invested, had accumulated to the amount of over four 26 YALE INSURANCE LECTURES. millions of dollars. It still continues to insure only brick buildings, and its insurance transactions to-day are very limited, the income during the past year from this source being but $11,000. It now issues exclusively what are known as perpetual policies, which will be later described. A curious event in the history of this company was respon- sible for the second and similar company in Philadelphia. Possibly because, as was claimed, the house of a contributor was set on fire by an adjacent shade tree but more probably because of the difficulties experienced in throwing water on or placing ladders against houses closely -surrounded by trees, the society in 1782 resolved to thereafter prohibit the insur- ance of houses “having a tree or trees planted before them. ,, Indeed, this hazard was for a time considered to be so serious that a law forbidding the planting of shade trees in streets and lanes and providing for the removal of those already so planted was passed by the Pennsylvania Legislature. This law, however, did not last but a year. As a result of this prohibition a new company was organized by “a great num- ber of citizens of Philadelphia, who . . . have found it con- venient and agreeable to them to have trees planted in the streets before their houses.” The new company was modeled very closely after the senior organization except that an extra * deposit was required for insuring houses having trees planted adjacent to them. It was called the Mutual Assurance Com- pany for insuring houses from loss by fire, though it was commonly called “The Green Tree” from the house mark which it adopted. It also had a prosperous career, which still endures. Other mutual companies and contributionships were organ- ized in New York in 1787; in Maryland in 1794; in Vir- ginia and Connecticut in 1794, and in Massachusetts in 1795, — several of which still exist. YALE INSURANCE LECTURES. 27 So far as can be ascertained, the first fire insurance policies issued in America, other than those of the mutual companies, were issued in Hartford, Connecticut, in 1794, by a firm styled Sanford & Wadsworth, on behalf of what seems to have been a partnership or voluntary association, called the Hartford Fire Insurance Company. This company issued contracts of indemnity for a fixed premium, with no liability on the part of the insured, and counted among its members some of the wealthiest and most prominent citizens of the State. Two policies of this company are still extant. Little is known of its history. None of its records are preserved, but the fact that the names of several of the original partners appear as subscribers to the capital stock of the incorporated stock company now known as The Hartford Fire Insurance Com- pany, which was incorporated in 1810, would seem to indicate that the latter was an outgrowth of the original partnership. In 1794, also, the first incorporated stock company made its appearance. It was called The Insurance Company of North America, and, in addition to marine business, for the transac- tion of which it was chiefly organized, soon took up the business of fire insurance. The same company also issued the first policies insuring merchandise in America in the same year, 1794. This company still exists after a long, honorable, and successful career, and still continues to be an important factor in both fire and marine insurance affairs. Another Philadelphia stock company, The Insurance Com- pany of the State of Pennsylvania, was also organized in 1794. In all, about ten mutual and four stock companies and partnerships transacted business in the United States prior to 1800. In 1820 there were seventeen stock companies in New York City alone, six in Pennsylvania, two in Connecticut, one in Rhode Island, one in New Jersey, and one in Massa- chusetts, of which twelve still continue in business, viz., five 28 YALE INSURANCE LECTURES. in Pennsylvania, two in New York, two in Connecticut, and one each in New Jersey, Massachusetts and Rhode Island. The first foreign company to do business in America was the Phoenix Fire Insurance Company of London, in 1806, followed in 1807 by the Pelican Fire Insurance Company of London. Almost immediately efforts were made to prohibit by law the operation of foreign companies, and, after several attempts, laws were passed in New York State and in Pennsylvania in 1810 and 1814, respectively, forbidding such companies to transact business. However, after the conflagration of 1835, the dearth of insurance capital brought about the repeal of these laws. Nor have foreign companies since that time been seriously molested. The data and experience tables by means of which the busi- ness of fire insurance might be wisely conducted, are very imperfect to this day. At the beginning of the nineteenth century and during the early part of it, they were practically non-existent, and, as has been well said, the business was purely an empiricism. Forms of contracts were copied from those in use abroad and rates of premium were also frequently so copied, but more often were based upon crude assumptions concerning the hazards inherent to the construction, occu- pancy, or exposure of the buildings insured. The fact that shade trees were considered to create an almost prohibitive “jeopardy,” while the liability on buildings with such danger- ous occupants as distillers was assumed at very low rates of premium, is an indication how blindly the early insurers groped for proper rules or methods. Little or no attention was paid to the amounts which any particular company might properly carry on a single risk or in a given area. It is true an advance in the rate of premium was sometimes made, when large amounts of insurance were desired, but the law of YALE INSURANCE LECTURES. 2 9 average and the necessity for a proper distribution of liability were subjects of little or no concern to the companies that first undertook to furnish indemnity for loss by fire in this country. In some cases practically the entire assets of a company were risked in one contract, and it was common to put out single policies for amounts far in excess of the annual income of the company issuing them. It followed, as a matter of course, that the early history of the business was full of vicissitudes, surprises and disasters, and the persistency of some of the older companies under such condi- tions is not the least noteworthy fact of their early history. It was but a natural and inevitable result of such conditions that every brief period of success should be followed by reckless competition for business. Since company officials had little or no knowledge of the fire cost of any class, the danger of low prices was not apparent. These conditions, it may be said in passing, have not been to this day by any means wholly cured, as will be seen later. Moreover, the fact that fire insurance contracts are almost always made for comparatively short terms — in the great majority of cases for one year — has always tended and still tends to encourage reckless underwriting. Companies frequently take on busi- ness at rates known to be inadequate, and excuse such action to themselves by the assumption that the contracts so obtained will be renewed at expiration at adequate rates — an assump- tion by no means always justified by facts. Early in the century, the Insurance Company of North America began to extend its business to wider fields and, indeed, as early as 1807 the President was authorized “to ap- point suitable and trusty persons at such places as he shall think advisable, to act as surveyors and agents of the com- pany.” Accordingly, agents were promptly appointed in Penn- sylvania, New Jersey, Ohio, Tennessee, Kentucky and else- 3 ° YALE INSURANCE LECTURES. where. This was probably the beginning of the American system of fire insurance through agencies, which has grown to enormous proportions; to such an extent, in fact, that there is hardly a town, village or hamlet in the United States so small that some agent or solicitor of a fire insurance company cannot be found in it. The agency system brought about competition among com- panies of different States, which caused in Pennsylvania the passage of a law in 1829 prohibiting all companies of other States from doing business therein. Outside companies, however, were re-admitted in 1849, and other States did not take similar restrictive action. Concerning the volume of business transacted, the number of companies operating, and the general results attending the business of fire insurance in the United States prior to 1850, there is little reliable or exact information available. By 1835 there were twenty-six local stock companies in New York City, besides others located at interior points and a considerable number in other States ; also a large number of mutual companies doing, for the most part, a purely local business. In December of that year came the first great conflagration and destroyed property to the value of twenty million dollars in New York City. Of the tw r enty- six local companies, all but three were bankrupted; also a large proportion of the companies from other States doing business in New York. Two results followed from this fire: first, people distrusted the local companies with their congested liability; second, capital could not readily be found to start new stock companies, hence people looked to mutual associations for protection and many such were formed and took on large liabilities in the city. But in 1845 another con- flagration occurred in New York which destroyed, virtually, all the mutuals doing any considerable business in the city YALE INSURANCE LECTURES. 3 1 and a large proportion of the re-organized or new stock com- panies. The necessity for the broad and stable foundation afforded by a widely distributed liability had not yet been learned. The business of fire insurance as a whole was greatly de- moralized by these and subsequent smaller conflagrations in Pittsburg, Philadelphia and St. Louis, and, in the absence of proper regulating laws, became the favorite field for the exploits of deliberate swindlers and visionary gamesters. So that for some years after 1845 vast numbers of irre- sponsible concerns, short-lived for the most part, flourished and failed; while the few older surviving stock companies, though sorely beset at times, gradually secured a firmer hold of the business of the country and extended their agencies throughout the United States. Gradually, too, more favorable conditions as to fires in New York City obtaining, local stock and State mutual companies sprang up there and flour- ished. The first New York State Official Report, issued in 1853, shows sixty-five New York State stock companies; seventy- four New York State mutual companies; twenty-two stock companies of other States, seven mutual companies of other States, and three foreign companies, all doing business in New York. By this time local stock and mutual companies had been organized in all parts of the United States. The Civil War at first depressed the business of insurance, with all other business, but during the period of inflation which followed and despite the warning of a ten million dollar conflagration in 1866 at Portland, Maine, by which many companies were ruined or temporarily disabled, the business was pursued under conditions of reckless competi- tion, and companies were organized in great numbers. It is said that nearly four hundred charters were taken out in the years 1866 to 1869 inclusive. 3 2 YALE INSURANCE LECTURES. In October, 1871, came the great Chicago fire, which en- dured three days, and destroyed property variously estimated to be worth from one hundred and twenty-five to one hun- dred and sixty-five millions. By this fire sixty-eight com- panies were ruined. The losses incurred by insurance com- panies amounted to $91,300,000, of which about 52 per cent., or $50,100,000 was paid, leaving the balance of $41,000,000, which the sixty-eight bankrupt companies were unable to make good and which, therefore, fell on property owners, who also had to bear the loss of property worth about $60,000,000, not covered by insurance of any kind. The unwisdom of relying upon the promises of indemnity offered by companies doing business in a restricted field is shown by the fact that, of twenty-two Illinois companies, seventeen were put out of existence by this fire and Illinois companies as a whole paid but 15 per cent, of their losses. At the same time more than fifty Eastern companies paid the entire amount of their losses, as did the six foreign companies who were at that time oper- ating in the United States. Nearly one-third of the entire amount of insurance in the burnt district of Chicago was carried by Illinois companies, very few of which transacted a widely distributed business. Hardly had the surviving companies collected from their stockholders the assessments made necessary by the Chicago fire, when, one year later, occurred the Boston conflagration, which caused claims of $56,000,000 more to be made upon them. Fifty companies were bankrupted by this fire, includ- ing twenty-two Massachusetts companies. Since 1872 there have been no conflagrations which have seriously affected any considerable number of companies, and, owing largely to the knowledge born of the bitter experiences of those two disastrous years and to a steadily growing appre- ciation of the fundamental principles of underwriting, con- YALE INSURANCE LECTURES. 33 ditions as to stability and strength sufficient to meet sudden abnormal demands have, on the whole, greatly improved. It is true there are still a very large number of weak companies and every period of prosperity witnesses the appear- ance of a large number of new enterprises, most of which do not survive the inevitable period of unprofitableness which follows. Ruinous, widespread competition in prices has been avoided, though scattered disturbances are of constant occur- rence, as must always be the case, no doubt, in a business where to the ordinary and severe competition of well ordered and fairly conservative companies is, in every season of pros- perity, added the unreasonable and unintelligent competition of the temporary companies just mentioned, and where the natural competitive tendency toward the shading of adequate prices is stimulated by the efforts of legislators and the public, who, because they believe the rates charged by fire insurance companies to be arbitrarily fixed, instead of infal- libly controlled by the rate at which property is destroyed by fire, endeavor to prevent all efforts looking toward the establishment and maintenance of rates proper and necessary alike for the protection of insured property owners and stock- holders of insurance companies. Nevertheless, the business to-day is characterized by a solidity of assets, strength of reserve, distribution of liability and widely scattered sources of income never before known in its history, and each year the companies successfully meet demands for losses larger than those made by the conflagrations of Chicago and Boston. For instance, in the year 1902, insurance companies paid losses amounting to nearly three times those paid in settlement of claims arising from the great Chicago fire. The rapid and enormous accumulation of wealth, largely invested in destructible property, and the tremendous fire waste, which has made comparatively high rates necessary, 3 34 YALE INSURANCE LECTURES. have combined to make the United States easily the world’s leader in the volume of premiums annually collected and in the number and variety of institutions which compete for the business. The volume of business transacted by insurance companies has kept pace with the material and commercial growth of the country. Early statistics are not available, but from i860 the results of the business of the stock companies reporting to the Insurance Department of the State of New York, and these may fairly be held to include all companies except those doing a purely local business, have been carefully tabulated and show the following results : Year. No. of Cos. Assets. Amount at Risk. Premiums. Losses. i860 132 $44,272,196 $1,379,818,274 $13,407,701 $8,460,469 1870 173 94,869,589 4,509,617,329 43,237,521 25,619,430 1880 153 145,619,359 7,102,706,955 53,899,092 29,772,356 1890 148 222,478,122 I3 i 558,569,954 105,255,417 58,h7,399 1902 145 34°,397,4 l8 23,287,035,900 196,246,018 94,176,592 The business, as a whole, has probably been done at a loss, the failures far exceeding the successes in number. As above stated, the records of the first half of the century are incom- plete. The following quotation from the Report of a Com- mittee of Underwriters who were appointed partly for the purpose of investigating the results of business in 1850, may be taken as being the most reliable statement of results obtainable : “The statistics of fire insurance in the United States will show that in the period of twenty years, commencing with 1811 and ending with 1830, it did not produce an aver- age profit of 3 per cent, per annum on the capital employed. “The business in the twenty years, commencing with 1831 and ending with 1850, exhibits a very discouraging result. The whole of the premiums received for the insurance of property in the United States, and in the provinces of British YALE INSURANCE LECTURES. 35 North America during this period, and many millions of capital, were required to meet the losses. Many of the stock companies, and nearly all of the mutual companies, were ruined. “The whole of the premiums received in Western New York, and in the Northwestern and Southwestern States, in the last ten years have not paid the losses by 25 per cent.” From i860 to 1902 the record has been as follows : Premiums $3,225,241,531 Losses 1,898,907,094 Expenses 1,199,473,333 from which it will be seen that losses and expenses have amounted to 58.87 per cent, and 35.12 per cent., respectively, of the premium receipts, leaving an apparent profit of 6 per cent. However, from this must be deducted the outstanding lia- bilities of companies as of December 31, 1902, amounting to $176,765,002, so that the net result indicates an apparent profit of $16,749,490, or about one-half of 1 per cent, on the total premium income. The above figures, however, are complete as to surviving and existing companies only. If to their record could be added the completed figures of the companies who have failed or retired, the results of whose business are not now obtain- able, the final accounting would be even less favorable. The total number of stock companies — American and foreign — now doing business and reporting to the New York State Insurance Department, is one hundred and forty-five. There have been, however, in the history of the business in the United States over sixteen hundred companies which have failed or retired, and of these companies about nine hundred were stock com- panies. 36 YALE INSURANCE LECTURES. The amount of liability carried by fire insurance companies is enormous, exceeding that carried by the life insurance companies. The assets and income of fire insurance com- panies, however, are disproportionately small when compared with the figures of the life insurance companies. This is because, first, the average premium collected by fire insurance companies is very much smaller than that col- lected by life insurance companies. Second, because fire in- surance companies must accumulate reserves, not for a pay- ment to be made under every contract, but — as experience shows — to only one out of thirty policy-holders, and then, on the average, only for a part of the amount insured. Theory of Fire Insurance THE NA TUR E OF CONTRACTS— GENERAL INSTRUCTIONS BY RICHARD M. BISSELL The whole theory of fire insurance is logically derived from the axiom that insurance is a means of providing indemnity for loss. In the preceding lecture this principle as applied to the operations of fire insurance was illustrated as follows: “A fire insurance policy is a contract to indemnify the holder thereof for actual destruction, by a certain immediate cause, i. e., fire, of value appertaining to certain specified prop- erty owned by him. ,, The first thing to be noticed is that indemnity for actual loss sustained is the measure and limit of the duty or obliga- tion of the insurance company, hence under no circumstances should the payments made by the company exceed such actual loss ; that is, insurance should lead to no profit to the insured. A policy is, therefore, a limited contract, the limit being the actual loss sustained by the policy-holder, and is not properly a promise to pay a certain sum in the event of the destruction of the property insured. Failure to comprehend this basic principle is responsible for many of the misunderstandings which arise between companies and their patrons. At first sight nothing seems more reasonable or proper than that an insured should receive the full amount upon which he has paid a premium if his insured property is totally destroyed. The earliest contracts, indeed, provided that total payment should be made under such circumstances. 3 » YALE INSURANCE LECTURES. As a matter of fact many causes may operate to decrease or increase the actual value of property. Where personal property is concerned the case is simple. Every one knows that stocks of merchandise, for instance, are constantly varying in value as goods are bought and sold, and while skilful merchants endeavor to keep some fairly constant ratio between the value of their goods and the amount of insurance they carry on same, yet this ratio unavoidably varies, and it very frequently happens when fire occurs that the amount of insurance is found to be larger than the value of the property covered. Furthermore, there are a great number of merchants and manufacturers who do not keep their books and accounts in such a way as to actually set forth the value of what they may have on hand at a given time. The science of expert accounting has made great strides in this country within the past few years, but accurate and scientific inventories and records are by no means uni- versal, hence, frequently, the careful investigations, which are a part of every loss settlement, reveal a condition of affairs as to values and quantities which are quite unexpected by the property owner. People commonly recognize this possibility of over-insurance where personal property is concerned. Though attempts have been made in several States to pass laws requiring the full amount of policies to be paid in event of total destruction by fire of personal property covered by insurance, no such law is in force. Where buildings are concerned the case is not so simple. It is hard to persuade the average man that he is not entitled “to the amount his policy calls for,” as the saying is, when his building is totally destroyed. Indeed, many men of intel- ligence believe that he is so entitled — probably the majority of people in many sections of the country. Yet the values of buildings are by no means stable. A building costing YALE INSURANCE LECTURES. 39 $10,000, and built at a time when labor and material are at high prices, may be worth much less a few years later when these commodities are at low prices and when the building itself has depreciated from use and lack of proper repair. Again, a building not well designed for its proposed occu- pancy, or, through bad judgment, so located as to be useless for the purposes for which it was intended, may become practically worthless — without value. Every city, almost every village, contains such buildings. So that the insurance carried, which was taken out in good faith, may, when the fire comes, exceed the value of the building. No fewer than twenty-one States have laws providing that where the insured building is totally destroyed by fire the insurance companies shall in every case pay the full amount of their policies, unless, of course, the contract has been in some way invalidated. Nor in such States are companies allowed to present any evidence tending to prove a smaller value than the amount of insurance. Hence such laws are called “Valued Policy” laws — because policies affected by them are “valued” — i. e., the value of the property insured is fixed by the contract and cannot be disputed. The thought ordinarily back of such laws seems to be some- thing like this : The insurance company has accepted pre- miums on a certain amount, thereby recognizing the value of the property to be at least as much as the insurance, for no company wants to insure property for more than its worth; therefore, having accepted the premium on, say $1,000, and having carried that amount of insurance on a building for several years, it is unjust for a company to claim, after a fire, that the building was worth only $800 and that the insured has lost and is entitled to recover that amount only. It must be remembered, however, that the information upon which the amount of the insurance was based came from the insured. He furnished the data for this purpose, which ordinarily 40 YALE INSURANCE LECTURES. the insurance company has not actually verified. Were it practicable and advisable for insurance companies to accurately and rigidly determine the value of every piece of property which is insured, and were that value (once ascertained) fixed and not subject to fluctuation, it might with some justice be held that an insured, in the event of the total destruction of the property covered, was entitled to receive the total amount for which his policy had been issued. But values are not stable, neither could such investigations be made by companies without an expense which would excessively increase the cost of insurance. Nor as a matter of fact are they necessary. A calculation based upon the experience of some 350,000 policies indicates that about one policy in thirty results in a claim, large or small. Of these claims not over 10 per cent, are for total losses so far as the policies are concerned, and a considerably smaller percentage of course, so far as the property is concerned. Therefore, we may assume that, of 100,000 buildings of all kinds insured, not more than 3,333 suffer loss and not to exceed 333 are totally destroyed, hence only under 333 out of 100,000 contracts can the question arise whether the value is less than the insurance. To actually determine in advance the value of the entire 100,000 buildings would cost probably more than the losses arising from them, and, of course, this additional cost would have to be added to the price paid by the property owner for his insurance. Moreover, since insurance policies are usually issued for short terms, and since buildings undergo frequent changes from various causes, this extra cost would have to be met every time the insurance was transferred from one company to another, and every time for any reason the value of the build- ings suffered change. On the other hand, the cost of fixing the value on the 333 buildings totally destroyed is, com- paratively speaking, insignificant. Furthermore, the owner of YALE INSURANCE LECTURES. 41 the property is supposed to know and ought to know the value of his building, and since all fire insurance contracts are based on good faith, companies have a reasonable ground for relying on the statements of the owner when issuing policies, and should not in equity be compelled to make a payment which by causing a profit to the insured violates one of the fundamental principles on which the business is founded, even though they may have been led by the state- ments of the owner to issue a policy for more than the actual worth of the property. Where valued policy laws have been passed they have resulted in disaster to the property owner. Since they make fraud easy by securing profit to those who secure policies in excess of the value of their property, they operate to largely increase the fire waste and therefore and inevitably increase rates. The case against such laws is vigorously stated by Hon. W. S. Matthews, formerly Superin- tendent of Insurance in the State of Ohio : “The objection to a valued policy law is that it ignores the fundamental principle of insurance, which is that of indemnity pure and simple, and compels the company to pay the full amount named in the policy, although the actual loss may be but one-half or two-thirds that amount. To put this construction upon the obligation of the insurance contract is to convert the whole scheme of insurance into a money- making and gambling transaction. It is a statute that may make it more profitable to destroy property than to keep it. It is a statute that places before every evil disposed person the temptation to over-insure and then burn his property for the gain there is in it. And even where the assured is honest, he is liable to be made more indifferent as to the care he should take of his property by over-insurance. Every prop- erty owner should at least carry some of the risk which attaches to property. It is not a statute in the interest of 42 YALE INSURANCE LECTURES. honest policy-holders, but only in the interest of the dishonest man. The honest policy-holders of the State, therefore, lose in two ways on account of this law. First, because of the increased rate of insurance on account of the increased moral hazard superinduced by the valued policy law. And, second, because of the increased fire exposure on account of the incentive to burn or to be careless of excessively insured property. It is very evident that if valued policy laws increase the fire loss, they must necessarily increase rates of insurance, for rates increase or decrease in proportion to the increase or decrease of fire loss. The only protection a company has against adverse conditions, whether in legislation or society, is the adjustment of rates. The extra loss to companies on account of the valued policy law is certainly shifted from them on to the honest policy-holders of the State. The policy- holders, therefore, are the ones to pay these extra losses, and instead of this law being a benefit to them it is an expen- sive and costly experiment. I can conceive of nothing that the State, in its legislative capacity, can do, more dangerous to the prosperity of the State, and to public morals, than to pass a law that invites wilful and malicious destruction of property, or encourages carelessness in the care of property. ,, There is, of course, some cause for the passage of such laws. They have been passed usually in States where the farmer class predominate, and in most cases at the request of farmers. There was a time when the insurance of farm property was eagerly sought after by insurance companies. It afforded the largest class of safely distributed and, apparently, least hazard- ous class of property in the market. It is unfortunately true that some insurance companies (not a large number) habit- ually urged farmers to take out policies for as large amounts as they could be persuaded to purchase, the companies rely- YALE INSURANCE LECTURES. 43 ing upon the law to keep the claims down to actual values. When a loss occurred under such a policy the indignation of the farmer was aroused and as a remedy and safeguard he secured the passage of a valued policy law. Insurance com- panies and, incidentally, the public are suffering because of the faults of a few of their number, but this fact does not inter- fere with the truth of the statement that such laws are vicious in that they encourage and legalize fraud by making it possi- ble for the insured to derive a profit from the destruction of his property; unjust since they victimize insurance companies, and extravagant and wasteful since they have been conclu- sively proven to have increased the fire waste and the cost of fire insurance in the States where they are enforced. The history of their operation clearly shows that they help none but the fraudulent or unreasonable claimant, while they bring serious financial loss to the insurance companies and insuring public as well. Such a law was passed by the Legislature of Iowa in 1900. In his message vetoing the law, Governor Shaw, now Secretary of the Treasury, gave perhaps the clear- est and most convincing indictment of it that has yet been penned. A study of that document is highly recommended. The next thing to be noticed in our definition is that there must be actual destruction of material value, and that the liability of the company is only for such material value; that is, value which can be measured in money or other commod- ities. Usually this is called the fair cash market value of the property affected, being the actual value at time of fire. This principle is also very important and not always clearly appre- hended. It puts out of the reckoning any sentimental value, such as pertains, for instance, to heirlooms, gifts, family por- traits, documents, etc., and limits the claims which there may be made on account of the loss of such articles to a fair cash market or exchange value. It is manifest that to the 44 YALE INSURANCE LECTURES. individual owner a family portrait or heirloom may be of inestimable value, even though the painting may be a bad one, or the heirloom useless and ugly. Such values, however, are not inherent in the articles themselves, but rather spring from the history of them. They cannot be measured in dol- lars and hence are not proper subjects for insurance. The value which is contemplated by an insurance policy may perhaps be best shown by a few examples. The value of a building is what it would cost to reinstate it in the same condition as before the fire, subject to a reasonable deduction for depreciation from use or neglect. The value of the man- ufacturer’s goods is made up of the cost of his raw material at the time of the fire, plus transportation charges and cost of manufacture. The value of his machinery could be meas- ured by what it would cost at the time of the fire to purchase and set up machines similar to those destroyed, with a suita- ble deduction for the difference in value between old and new machinery. The list might be prolonged indefinitely, but the above examples will suffice. It will be seen that the value is limited by the cost of replacement at the time of fire. This may be more or less than the original cost to the owner. If a grain dealer buys wheat at 70 cents per bushel, and his storehouse burns at a time when a similar grade of wheat commands a price of 90 cents per bushel in the open market, then 90 cents per bushel is the limit of his claim. If, on the contrary, the price has fallen to 50 cents per bushel, that is the limit. So, also, the value of a building increases and decreases with the cost of labor and material. In many cases, in fact in most cases, some deduction from the market cost must be made for depre- ciation in arriving at present values. This subject of depre- ciation is the cause of much dispute in the settlement of losses. All things depreciate. Some, like fire-proof build- YALE INSURANCE LECTURES. 45 ings, very slowly; others, such as perishable commodities, and delicate and frail articles, very rapidly. Complicated, delicate and fast-running machinery furnishes a good example. For instance, automobiles and threshing machines. These are high priced and receive hard usage, and their value vanishes rapidly. An automobile which is three years old has lost a large part of its value, and a threshing machine five years old is practically valueless. Depreciation from use simply means that things wear out. But there are other kinds of depreciation. Change of fashions is a most effective depreciator. Who will at Easter time this year attribute any particular value to a last year’s Easter bonnet? Fire cannot destroy its fair cash value, for the mandate of Parisian fashions has obliterated that. Changes in processes often destroy or lessen the value of machinery. Old-fashioned nail machines and old-fashioned flour mill machinery have no present value; they have been thrown on the rubbish heap or the scrap pile by all progressive manufacturers. The next thing to be noticed is that only actual immediate damage is covered by insurance; that is, damage which is attributable directly to the fire, or which is the immediate re- sult of fire. Thus a fire insurance company insuring a stock of merchandise would in case of loss be liable for the value of the property actually consumed, and also damage to the remaining property caused by fire, smoke and the process of extinguishing the fire. It would not be liable, however, for any loss caused by the interruption or derangement of busi- ness and consequent loss of profit. An insurance policy is a personal contract. It does not fol- low the property, nor, properly speaking, insure it at all, though the language of the day gives a contrary impression. It is an agreement to indemnify a policy-holder for the 4 6 YALE INSURANCE LECTURES. loss accruing to him personally by reason of the destruction or damage of certain property. Accordingly, no person who is not the owner of the property burned, or who has no interest in it, can be a claimant against an insurance com- pany. Nor can an owner make claim on account of any other property than that directly mentioned or logically im- plied in the policy itself. All policies, therefore, should clearly set forth the description of the property to be insured and the interest of the policy-holder therein. While no one can insure property unless he has a valuable interest therein, any kind of an interest which can be valued in cash may be insured. Accordingly, a man who loans money on a building acquires an interest in it, and he may insure that interest, either separately, or, as is the custom, in conjunction with the owner of the building, both interests being covered by one contract. A purchaser who has paid in part for property which he may not receive until full payment is made, acquires an interest which may be protected by insurance. A life interest in property, also the reversionary interest of the final legatee, may be insured. In fact, any tangible, valua- ble interest in any kind of property may be made the subject of an insurance policy. It is a maxim of the business, how- ever, that the value of all such interests must not exceed the actual cash value of the property itself. In addition to the interests already mentioned, it is possible to insure against the loss of almost any ascertainable value which is subject to obliteration or depreciation by fire. Thus, the rental income of a building may be insured by a contract which will make good the loss of rent during the time the building is rendered untenantable by fire. So, also, in certain cases, what is called the use and occupancy of a manufacturing plant; that is to say, its ability to turn out the appropriate finished product in regular quantities, may be insured against interruptions by fire. YALE INSURANCE LECTURES. 47 The property to be insured must be definitely described. A policy so written as to cover a stock of boots and shoes will not also cover dry goods, nor will a policy insuring a building also insure outbuildings or awnings. The written description forming part of every policy must either specifically mention everything to be insured, or must be couched in such broad terms as to include everything for which protection is desired. Thus a contract insuring merchandise would protect every- thing kept for sale, the word “merchandise” being very broad in its connotation; whereas a contract, as above, insuring a stock of boots and shoes, would cover nothing else. In order to appreciate the relations which exist between a fire insurance company and the insured we must bear in mind the following facts, which will also indicate the reasons for the carefully drawn and somewhat stringent contracts by which insurance is undertaken. In the first place, property covered by insurance is not only for the most part in the custody of the insured, but is usually occupied, operated or handled by him. Moreover, and this is even more important, the information upon which the insur- ance is predicated is furnished by the insured, hence the obvious opportunities for fraud which the stringent policy conditions are intended to prevent — an intention which is only partially accomplished, as the experience of every company will demonstrate. In this connection a comment from a New York court will be appropriate: “In negotiating a contract of insurance the parties are not upon a level, nor do they deal at arm’s length. The insurer, i. e., the company, is presumed to be ignorant, and the insured informed in respect to the subject to be insured. Hence, in forming the contract, the insurer, except he undertake to inquire for himself, does not rely on his own resources, but reposes exclusively on the intelligence communicated by the 48 YALE INSURANCE LECTURES. insured. And hence, further, the parties occupying this un- equal position, the law exacts of the party holding the position of advantage — i. e., the insured — the utmost good faith and candor in communicating the facts affecting the risk.” Again, Mr. Hine, in his Book of Instruction, says: “In no contract is one party more completely at the mercy of another than the underwriter, i. e. the company, in insur- ance. He is necessarily ignorant of facts and circumstances that may be vital to the risk and hence open to the fraud of designing men, who may withhold or misrepresent 'material’ facts.” Some mention in the preceding lecture has already been made of the significant features of the earliest insurance con- tracts, or policies, as they began to be called somewhere about 1700, and did space permit, the history of the development of the fire insurance contract and its attendant clauses would well repay investigation and is recommended as an interesting and highly instructive topic for independent work for any who may care to pursue their studies. The present discus- sion, however, must be limited for, the most part to contracts now in general use, and the history of the development which leads up to them cannot even be briefly indicated here beyond the statement that the simple and brief policies used in the early days of insurance history have expanded into the lengthy and complex documents now in general use by gradual pro- cess of development, the numerous changes embodying the results of the experience of the intervening years. Each new clause or provision has a history. Copies of the earliest policies issued in this country are before you. One of them — that issued by the partnership known as the Hartford Fire Insurance Company — is extremely peculiar in its language and is, indeed, nothing more than a marine insurance policy somewhat clumsily adapted to the YALE INSURANCE LECTURES. 49 uses of fire insurance. It is a modification of the policy issued in Holland and is commonly known as the “Amsterdam Policy.” It is a very loosely drawn and imperfect paper. So far as known, it was never used in America save for a few years by the company above mentioned. The other copies of ancient policies before you, i. e. those of the Philadelphia Contributionship, Mutual Assurance Com- pany of Philadelphia, and the Insurance Company of North America, resemble one another closely and are closely modeled after the English policies in use when insurance began to be practiced in this country. These policies contained few pro- visions and were quite simply worded. As a matter of fact, they failed to provide for any of the contingencies likely to arise during the settlement of a loss, nor did they by any means clearly define and limit the rights and the responsi- bilities of the contracting parties. While most of the policies issued during the early years of the nineteenth century were similar, yet divergencies arose at a comparatively early date owing to changes and additions which resulted from the varying experiences and theories of different underwriters. These differences were increased by the efforts of those companies who strove to gain favor by attrac- tive forms of contracts, also by those who endeavored, by cun- ningly worded and over-stringent forms, to prepare pretexts by which the payment of losses claimed might be avoided. This latter practice has even to this day characterized many con- tracts made attractive at first sight by their low prices. The swindler in fire insurance, as in other lines of business, en- deavors to market worthless wares by quoting prices below those at which valuable and reliable articles can be secured. Since it usually happens that more than one company carries insurance on the same property, the difference in forms of con- tracts above referred to often produced dispute and con- 4 5 ° YALE INSURANCE LECTURES. fusion when claims arose under them. Until 1867, however, no great degree of uniformity was attempted. The various insurance centers, such as Boston, Hartford, New *York, Phil- adelphia and New Orleans, each had its characteristic form, some companies doing a widely extended business using vari- ous forms in different parts of the country. In 1867 and 1868 the National Board of Underwriters, an organization comprising most of the leading fire insurance companies of the country, and which has had a very important influence upon the development of the fire insurance business, devised and adopted a form of contract or policy designed to be universally used. However, few companies outside of the city of New York adopted the form in its entirety, and the annoyance to which the public were subjected by the varying kinds of contracts brought about in 1873, in the State of Mas- sachusetts, a law providing for a standard form of policy, and in 1880 the Massachusetts standard policy was made obli- gatory upon all companies operating in that State. In 1886 the State of New York also adopted a standard form of policy which became mandatory January 15, 1887. This policy was devised by the superintendent of insurance in consultation with various eminent insurance officials and organizations. It was carefully prepared and is, on the whole, while not altogether beyond criticism, the most useful and sat- isfactory fire insurance contract yet brought into anything like general use. It has been made mandatory by seven other States, and is commonly used by all insurance companies doing a widely extended business throughout the United States wherever the laws of individual States do not forbid. Other forms of standard policies have been adopted by the States of Maine, Massachusetts, New Hampshire, Michigan, Missouri, Virginia and Wisconsin, but are all inferior to the New York form, which we will accordingly adopt as the YALE INSURANCE LECTURES. 51 basis of our discussion.* The standard policy is a form with the conditions and stipulations printed in a certain size type prescribed by law so that it may be plainly read. Every thing is prescribed by law except the premium, the term, date and amount. A space is left for the proper description of the particular piece of property to be insured. The first part of the contract, below the name of the com- pany, is the statement of the consideration. Policies, like most other contracts, are not valid without a valuable con- sideration. The important thing to notice here is that not only the premium paid, but also the printed stipulations of the policy are a part of this consideration. Next follows the name of the person or corporation to whom the contract is issued. Then the beginning, duration, and ending of the period for which the contract is to run are clearly stated. You will note that the contracts begin and end at noon. For some reasons it would be more convenient to have a later hour than 12 o’clock, so that the policies might end at the close of a complete business day. Whether the language used means the solar noon, i. e., the moment when the sun crosses the meridian, or 12 o’clock according to the stand- ard time at the particular place where the policy covers, is not yet definitely settled by the courts. Next, the policy limits the amount for which the company may be liable. Then comes a clause limiting the application of the policy to the property described while in the location mentioned in the policy only. Needless to say, the contract is made and the rate of premium fixed according to the hazard of the location of the property when insured, hence the policy must be con- fined to that location, unless altered by a new agreement be- tween the parties to it. Next follows a space for the descrip- tion of the property to be insured; also for a description of * A copy of the printed conditions of the New York Standard policy will be found at the back of the book. 5 2 YALE INSURANCE LECTURES. its location and for any additional permits, stipulations or agreements (such as a permit allowing other insurance, or for the use of gasolene, etc.), which may be agreed upon by the company and the policy-holder, which additional agree- ments, however, must not be in conflict with the mandatory legal conditions of the policy. After the description follow six lines which define, briefly and fully, the liability of the company and the method for settlement and payment of losses. The first two lines have already been anticipated and do not need further comment. Lines 3 to 6 refer to the 'floss settle- ment” and will be touched upon in a subsequent lecture. We now come to what are commonly called the condi- tions of the policy. Lines 7 to 10 provide for the forfeiture of the policy by mis- leading or fraudulent acts or by concealment of material facts on the part of the assured. The policy is based upon the representations and statements of the insured and therefore it is but fair that the company should not be bound in a case where its contract has been secured by false statements, or be- cause of the suppression or concealment of some material fact affecting the hazard. Most of the provisions in these lines refer to the negotiations attending the issuance of the policy. Lines 11 to 30 render a policy, which may have been valid during a part of its term, void in case, during its life, some act of the assured or within his knowledge operates to materially alter the conditions of the property insured as to hazard or ownership. Since the contract is a personal one it is obvious that a change in ownership makes it of no effect. Furthermore, the contract was made in view of the hazards existing at the time of its issuance and was determined in several important respects by those circumstances, hence a material increase of hazard cannot be assumed without a re-arrangement of the contract — generally as to price, but also YALE INSURANCE LECTURES. 53 often as to the amount which the company is willing to carry. Some of the hazards mentioned in these lines, such as vacancy, generating of gas, storage of fire works, etc., are so dan- gerous that most companies will not assume or continue lia- bility where they exist. All of the changes mentioned in these lines are considered to affect the hazards involved. It will be noticed that the saving clause ‘'unless otherwise provided by agreement indorsed hereon or added hereto” makes it possible to alter an existing contract so as to permit any or all of the changes mentioned in the lines under consideration, i. e., lines n to 30, and as a matter of fact almost every policy does permit one or more of the hazards or changes prohibited in these lines. Lines 31 to 32 exempt the company from liability on account of fires caused by war, riot, or public authority. Such losses for the most part can be recovered from the municipality, and insurance would be a double compensa- tion. Moreover, such losses are by their nature extraordinary and unavoidable under prevailing conditions. Even the appa- ratus for extinguishing fire, the presence of which may largely have reduced the price, cannot be used. Lines 32^ to 35 in part exempt the company from losses which may be concurrent with a fire loss, but are not losses by fire itself. If the assured remove his goods endangered by fire to a place of safety, it is no more the province of the insurance company to protect them from theft than before. Often companies do pay for stolen articles, but only because it cannot always be determined whether these were burnt or purloined. So, too, when an explosion, as, for instance, of a boiler, is followed by fire, the company can be held for loss caused by fire only, and must be relieved from claims on account of any damage shown to have been caused by the explosion. The clause freeing companies from liability when an assured has failed to use reasonable means to save the 54 YALE INSURANCE LECTURES. property is rarely effective. The burden of proof is upon the company in such case, and it is practically impossible to estab- lish beyond a doubt that the loss or damage was brought about by the assured’s neglect to use reasonable means to pre- serve and save the property. Lines 36 and 37: When a building falls as the result of weakened foundations, or is overthrown by a wind storm, or some other cause, the fire insurance covering it instant!}' ceases for the reason that such a building at once loses its value and becomes a heap of debris. Fires usually start in such cases from some overthrown lamp or stove, but the fire burns only the debris of a building already destroyed, — not the building itself. Line 38 provides that certain articles not as a rule inher- ently valuable, but being the evidence of value, shall not be insured. Money and securities are also included in this list. These articles afford such opportunities for fraud, can be so easily concealed, and the amount of them is so impossible to determine except from the statement of the insured, that to insure them would put the company so absolutely at the mercy of the claimant that companies have never been willing to assume liability on them. Lines 39 to 41 Yz refer to articles concerning which there might be some dispute as to the application of a policy couched in general terms, or concerning the value of which a difference of opinion might readily arise, and, in general, articles of a class which companies will not willingly insure unless under exceptional conditions. Hence it is provided that, in order that these be included within the scope of a policy, they must be specifically mentioned. They are by no means prohibited from insurance; in fact, they are very commonly insured. The last of line 41 and line 4 2 merely express certain truths involved in the caption of the policy by the words “direct loss or damage by fire.” YALE INSURANCE LECTURES. 55 Line 43 is intended simply to put the several companies who may happen to insure the same building under different forms of contracts on an equality as to certain very perishable items. Lines 45 and 46 merely emphasize lines 7 to 9 as to certain written statements made by the assured or assented to by him prior to the issuance of policy. Lines 47 and 48 are inserted for the protection of the companies, because, under the common law, an insurance con- tract may be affected or altered by verbal agreement, and because many of the details between agents and insurers must be handled by clerks. A clerk or a middleman may deliver a policy, collect the premium for the agent of the company, or even take an order for him, but cannot act as authoritative agent of the company unless so empowered by the company in writing. Many times claims for special terms, privileges, etc., are based on alleged verbal promises of clerks or middlemen. Lines 49 and 50 simply enforce the conditions embraced in lines 7 to 30 as to a policy renewed. In other words, they renew the obligation of the assured, as well as that of the company. Lines 51 to 55 permit either party to the contract to termi- nate it. In case the company so elects, the assured is allowed five days in which to secure other insurance. When the as- sured chooses to cancel, the company is permitted to retain more than the proportional fractional part of the original pre- mium; that is, in case of a one year policy canceled at six months by the assured the company is allowed to retain slightly more than one-half of the premium. This is because the company is compelled to expend a considerable part of every premium received in handling the record of the con- tract so as to comply with the law, and in other ways to 56 YALE INSURANCE LECTURES. consume at the outset a part of each premium in fixed charges. If it is terminated prior to maturity by the assured, the law holds the company to be fairly entitled to recover those fixed charges. If the company chooses to cancel, how- ever, these charges are lost and the assured receives full re- turn premium according to the time which the policy has run. Hence, contracts are seldom terminated by companies without good cause. Lines 56 to 59 refer exclusively to mortgage interests, and provide that, as to such interest, companies may alter the policy conditions as they see fit. There is some plausible rea- son for this, since mortgages based upon the value of destructi- ble property must be protected and it is also necessary that such protection shall not be jeopardized by some improper action of the borrower, i. e., the property owner. Lines 60 and 65 simply provide that the efforts of the assured to save his property from destruction by removing it from danger shall not result to his harm. Ordinarily a re- moval without the consent of the company vitiates the policy and lines 60 to 65 simply make an exception to this rule. Lines 67 to 95 refer to the procedure in settlement of losses and will be treated in the future lecture to be given on that subject. Lines 96 to 9 7 J 4 are very important. They provide for the distribution of loss among the various companies insuring identical property according to the amount which each com- pany carries. For instance, if there is $20,000 total insurance actually in force on any piece of property and one company carries $5,000 of this amount, that company must pay and must only pay one-quarter of any loss occurring to the prop- erty up to the amount for which it is liable; and this con- dition is valid even if one or more of the other companies carrying the same risk are unable to satisfy the claims against YALE INSURANCE LECTURES. 57 them, for the amount of insurance legally in force determines the amount of various liabilities and claims. The collection of those claims is a subsequent operation. The last quarter of line 98 up to line 99^2 permits special agreements between assured and companies as to how policies shall apply. There are several of these agreements in common use, which will be described later in this lecture. The last half of line 100 only applies where one insurance company assumes a portion of the liability of another com- pany and permits such contracts between companies to be arranged according to the desires of the two companies. This standard form of policy is intended to secure fair and proper conditions between companies and property owners, and such contracts between companies as re-insurances, so-called, are hardly within its purview. Lines 102 to 104 are intended, first, to prevent double compensation; that is, a profit to the insured, from a fire; second, to compel those through whose act or neglect the loss occurred to make good the loss they have caused. Public policy as well as equity demand this. It is manifest that I should not be made free of financial responsibility for my criminal or careless act simply because the person I have injured is insured. In such cases companies commonly pay the loss and then endeavor to collect from the person or corporation responsible for the occurrence of the loss, the amount so paid. Lines 106 and 107 are a statute of limitation to guard against wilful and vexatious delays in making claims. Lines 108 and 109 are merely explanatory. Lines no to 112 are intended for mutual companies only, and in effect make the articles of association of such com- panies a part of the policy. The remaining lines of the policy recite that no conditions of the policy may be altered except those whose language 58 YALE INSURANCE LECTURES. provides for modification, and that no permissible alteration may be made except by written endorsement on the policy. It will be seen that the whole purpose of the contract is to define the rights of the two parties interested so clearly and fairly that disputes may be avoided and injustice or improper claims prevented. Despite the care exercised by its framers to this end, however, there is hardly a clause in the standard form which has not been referred to some court for authorita- tive interpretation, and a mass of legal decisions have accumu- lated which in reality are collateral to the contract and might even with propriety be deemed a part of it. With these decisions, curious and interesting as many of them are, we shall not concern ourselves here, the broad outlines of the con- tract being sufficient for our purpose. Despite the apparently stringent conditions and technical exceptions contained in this contract, and although these con- ditions and exceptions are sometimes made the basis of im- proper attempts to avoid payment of losses by unscrupulous companies, there can be no doubt that on the whole and in by far the greater number of cases, in fact almost universally, the assured secures absolute justice and more from the opera- tion of this form of contract. A very liberal estimate of the amount of litigation under fire insurance policies indicates that not over one-half of I per cent, of claims result in law suits. When it is remembered that these claims are, in 90 per cent, of the cases occurring, for partial damage to property, con- cerning which there is legitimate opportunity for an honest difference of opinion and in view of the fact that the validity as well as the amount of all claims must be established before payment, the amount of ensuing litigations is seen to be abso- lutely inconsiderable. Not so in effect, however, for such is human nature that one resisted claim overbalances in public estimation a hundred which have been settled not only without friction, but even with liberality. YALE INSURANCE LECTURES. 59 As we have seen, there are various portions of the policy which may be modified by special written agreements with the assured, called endorsements. Any of the numerous pro- hibitive clauses in lines n to 30 may be waived in this way. So also with the excepted articles noted in lines 30 to 44. The most important alterations in the contract, however, and those most generally in use are the ones which refer to interests of mortgagees and those which, as per lines 98 and 99, concern the extent of the application of the policy or its measure of contribution. The policy provides that, as to the creditor interest, the contract shall apply as may be expressed in the written clause referring thereto. The ordinary way of recog- nizing a mortgagee’s or creditor’s interest is to issue the policy to the owner and then endorse upon it “loss, if any, under this policy payable to John Smith, mortgagee, as his interest may appear.” When a loss occurs under a policy with this clause the amount of it is settled with the owner, but payment must be first made to the payee, i. e., the mortgagee, until his interest is satisfied, or unless he consents to allow payment to the owner, as he usually will do when the loss is small. Since, however, many loaners need and demand absolute security, it is a very common practice to attach printed mortgage clauses similar to the sample blank before you, marked Standard Mortgage Clause. This clause practically waives all rights of the insurance company as far as the payee is concerned. He may collect his due, even if it can be proven that the owner, that is, the assured, has fired the property himself or if he has violated every condition of the policy. The only protection for the insurance company in those cases where the policy itself has been made void, but where nevertheless payment must be made to the creditor, is a provision that the claim of the creditor becomes the property of the insurance company and 6 o YALE INSURANCE LECTURES. may be enforced by it against the debtor if collectible. This right of subrogation, as it is called, is frequently taken advan- tage of by companies and in some instances enables them to recover a loss which they have paid under such conditions. The mortgage clause also imposes certain responsibilities upon the mortgagee in case violations of policy conditions occur with his knowledge. The clauses referring to the extent of the application or contribution of policy are more difficult to briefly explain or to be readily comprehended. Before discussing those clauses at all, it may be helpful to make a few preliminary observa- tions. Where there is little or no protection against fire, that is, no local means of extinguishing fires, as in the case of village stores or shops, or where, for any other reason, the property to be insured is thought to be subject to great or total loss should a fire once start, the interest of the insurance companies leads them to limit the amount of insurance (as compared with the value of the property insured) which may be carried or recovered in event of loss. This is done in order that the in- terest of the owner in preserving the property may be so strong that the utmost watchfulness and careful attention will be observed by him. It is evident if, in the event of fire, he is likely to suffer a severe loss over and above his insurance, he will have a much stronger incentive to guard his prop- erty from fire than if it were insured for its full value. For a similar purpose companies find it necessary to limit the percentage of insurance to be carried in certain States or dis- tricts where conspicuous or abnormally heavy burning ratios indicate unusual carelessness, unsatisfactory protection, or dangerous methods of construction. In other words, the greater the danger of total loss the stronger pecuniary inter- est the owner should have in the preservation of his property. YALE INSURANCE LECTURES. 6 I On the other hand, where there is efficient fire protection, as in most large cities, or where a policy covers in several dis- tinct locations, or on property which is not readily suscepti- ble to damage, as for instance, bar-iron, there is a reasonable prospect that fires will be extinguished before a large portion of the property involved is destroyed. In such cases, there- fore, insurance companies naturally desire that a large pro- portion of the value should be covered by insurance in order that a moderate loss of property shall cause only a moderate loss to the insurance company. In the unprotected village any loss is likely to be a total one. In the protected city almost all losses are partial, and insurance companies try to adapt their methods to the varying conditions. Where it is desired to limit the amount of insurance, the New York law permits the use of the clause known as the “percentage value clause/’ a copy of which is before you. This, as may be seen at a glance, prevents the assured from recovering more than a certain, usually 75 per cent, of the value of the property insured. If by mistake he has been carrying insurance exceeding that amount, he is entitled to a return of the premium paid on the excess over the percentage which the clause fixes as a limit to recovery. By far the greater amount of insurable property is located under more or less efficient fire protection and consequently the limitation clauses are not used, but instead, where possible — for in some States the law stands in the way — what is commonly known as the co-insurance clause is used. This clause is also before you. It provides in the words of Mr. F. C. Moore, “that whatever percentage of the property is destroyed — one-quarter, one-half or three-quarters, as the case may be — that percentage of the insurance is payable;” or, as Mr. E. F. Beddall states the case, “it (the clause) leaves the insured free to carry as much or as little insurance as he deems needful, but it 62 YALE INSURANCE LECTURES. fixes the proportion of the loss recoverable from the company in the event of fire, to such as the assured has chosen to pay for. If he insures for one-half of the value he recovers one- half of the loss, be it partial or total; if the whole of the value, the whole of the loss. There is, there can be, no in- equity in this.” Still another statement of its effect may be made as follows : In order that the assured may secure indemnity for the whole of any large or small loss he may sustain, he must carry in- surance equal to the full value of the property involved. Usually a percentage co-insurance clause is used, which makes some given per cent, of the value of the property, ordinarily 80 per cent., the amount which the insured must carry in order to secure in all cases full benefit of his insurance. Fail- ing so to do, he can recover only such proportion of any loss amounting to less than 80 per cent, of the value of the property insured, as the amount of insurance he actually car- ries bears to 80 per cent, of the value. Thus, if the value is $10,000 and the insurance $5,000, he can recover but five- eighths of any loss which amounts to less than $8,000; that is, of any loss which amounts to less than 80 per cent, of the $10,000. When, however, the assured carries insurance equal to 80 per cent, of the value of the property covered, the 80 per cent, co-insurance clause is of no effect. The assured in such cases will receive the entire amount of his loss, be it large or small, not exceeding, of course, the amount of the policy. This should be carefully noted, for many people labor under the impression that where such a clause is used only 80 per cent, of any loss can be collected. The co-insurance clause is even more important as a factor in the problem of making rates or prices, as we shall see when discussing that subject. Where this clause is used in a policy a reduction in price is made as compared with policies cover- YALE INSURANCE LECTURES. 6 3 ing similar property similarly located, but without the co-in- surance clause. In fact, this clause is often called the reduced rate clause in States where the law has not given it a name. In some parts of the country, for instance Indian Territory, Texas and Arkansas, where fires have occurred with abnormal frequency, and particularly on certain classes in those sections, such as cotton gins, which are extremely liable to fire on account of the inflammable nature of the cotton and the process to which it is subjected, the percentage value clause is sometimes replaced by what is known as the “three-quar- ters loss clause/’ which provides that the property owner shall suffer one-quarter of any loss, great or small, which may occur to his property. This, of course, is used for the same reasons that prompt the use of the percentage value clause, but is much more radical. And, as a further precaution, there is embraced in policies covering mercantile and manufacturing property in States with a bad fire history, clauses making the policies void unless the assured shall keep an accurate set of books, take an annual inventory, and either keep both books and inventory in a fire-proof safe, or in a place where they will not be endangered by fire in a building where insurance covers. This clause is known as the “iron-safe clause,” and is intended to bar out from the protection of insurance poli- cies the shiftless and careless dealers and manufacturers who abound in many of the smaller towns, especially in the South- west. It also insures a more satisfactory and intelligent loss settlement, should a loss occur, than is possible in those cases where the entire property is destroyed and no record of quantities or of transactions is preserved. Still another clause used to govern the application of the policy is one known as the distribution average clause. This clause provides that the amount of insurance shall attach in each of two or more locations according to the value in each. 6 4 YALE INSURANCE LECTURES. For instance, a merchant may have his merchandise in three locations — in his store where it is to be sold; in his ware- house, where he keeps a surplus stock, and in the freight depot of the railway or steamship line by which he receives it. As business progresses his merchandise is constantly shifted. One day two-thirds will be in his store; on another day one-half in his warehouse; on still other days he may have none at all in the freight depot. If he insures his stock under a policy with the distribution average clause, the policy will auto- matically divide itself as the stock is divided from day to day. If one-third of the value is in the warehouse so will one- third of the policy cover there. If the warehouse is empty the policy will apply only in the store and freight house. And also that part of the policy which covers at each location will be equal to the fraction of the total value of the property at each location. Various other clauses are used by companies to further the convenience of different patrons, or to provide against the contingencies which arise in different parts of the country, but the foregoing are the principal clauses, the others being more seldom used. Policies are said to be specific when they cover on one kind of property or in one definite location; floating when they cover under one division property located at a number of different locations; general when they cover several kinds of property under different items at one location; concurrent when they agree exactly as to their wording and as to the kind of property covered; perpetual when their duration is without limit, except by cancellation. These perpetual policies originated in Philadelphia, where they are chiefly, if not solely, used. It will be remembered that one of the earliest companies issued policies for seven years in consideration of a deposit by Y*ALE INSURANCE LECTURES. 65 the assured, and that the deposit was to be returned to the assured at the expiration of the policy. It was a very natural process to agree with the assured to retain this deposit in- definitely, thus extending the term of the insurance and mak- ing it perpetual. As we have seen heretofore, eight other States have pre- scribed the New York standard policy, and again, seven States have adopted standard policy forms of their own, each differ- ing from the other and all from the New York form. It follows that every company which does a widely extended busi- ness must keep in stock at least eight different kinds of poli- cies. Moreover, since some of the States permit any form of endorsement clause which does not conflict with the policy in use in that State, while others, like New York, permit only clauses which have been specifically authorized by law or passed upon by the insurance official of the State, it will be seen that companies are compelled to have and use a very great number of different clauses. In fact, it requires a very considerable amount of study and a good memory for any one person to be able to keep in touch with the widely dif- fering State requirements as to policy forms and their attend- ant clauses. Such unnecessarily and often injuriously diver- gent laws entail great expense and labor on the companies, and neither they nor the insuring public benefit therefrom. It cannot be doubted that one simple form of policy and one set of appropriate clauses would be better for all concerned. 5 Organization and Methods DIFFERENT KINDS OF MUTUALS— TAXA- TION OF COMPANIES BY RICHARD M. BISSELL In a general way it may be said that fire insurance is trans- acted through three different agencies, the first and most important of which is the stock companies; the second, the various forms of mutual companies, and the comparatively unimportant third, the association of individual insurers known as individual underwriters and Lloyds. Mutual companies again may be divided into three classes — first, the local county or town mutuals ; second, the state or general mutuals, and third, the manufacturers mutuals commonly known as the factory mutuals and their imitators. The local or county mutuals are by far the most numer- ous of any class of companies in the United States. Their number is approximately 1,500. There are 125 in New York State alone. The laws which govern their organization and operation are very dissimilar in the different States. In some States, notably in New York, they are prohibited from operating in large cities. This is, in New York at least, a result of the great fire of 1845, when all existing mutual companies doing busi- ness in New York City were bankrupted. Usually their opera- tions are limited by law to a few non-hazardous classes — such as farm property, dwellings, churches and stores — in a given limited district. Often their operations are confined to a town or county, though in New York State a local mutual company may operate throughout five counties. YALE INSURANCE LECTURES. 6 7 As a rule they must have, before organization is perfected, applications, i. e., promises for a certain amount of insurance, usually somewhere between $50,000 and $200,000, already on file, and a portion of the premiums therefor — commonly 25 per cent. — paid in advance in cash. Having secured the necessary applications, those who are organizing the company — usually a group of farmers, who think the charges of the stock companies are exorbitant — secure from the State authorities the proper papers of incor- poration; then a meeting of the applicants or members is called and officers are elected. Business is then begun by issuing their policies to the original applicants. In most cases all the work of the company is done by the secre- tary, who very likely is the village postmaster, store-keeper or bank cashier, and who receives a fee for each policy issued, or who may be compensated by a salary. Those interested in the company urge their friends and neighbors to join them, appreciating the necessity for a considerable number of policy-holders amongst whom the losses may be divided. The applications thus secured are usually passed upon as to valuations, desirability, etc., by the executive committee or board of directors. If an application is approved a policy is issued by the secretary, and perhaps signed by one or two of the committee. These policies are issued in consideration of a small cash payment, equal to about one-fourth the price com- monly charged by stock companies, and a note given by the applicant for an amount equal to three or four times the cash payment. These notes are subject to call if the needs of the company so require. Each policy-holder is liable for the losses of the company, according to the articles of agreement or incorporation or the by-laws of the particular company in which he is insured, or perhaps according to an agreement assented to when the policy is issued. Sometimes the limit of 68 YALE INSURANCE LECTURES. liability is stated in the policy. In some cases each policy- holder is liable for his fractional share of any or all liabilities which may come to the company. More often, however, this liability is limited to a certain percentage of the amount of insurance the individual carries or to some multiple of the amount for which he has given premium notes. The policies are usually issued for five years. Since the executive committee and all the applicants are neighbors and acquaintances, the personal and financial quali- fications of every applicant, as well as the value and condi- tion of his property, are well known, and thus the danger from dishonest losses or over-valuation is reduced to a minimum. No man with a bad reputation can secure insurance in one of these institutions, if it is properly conducted. Moreover, every policy-holder is constantly, as it were, under the sur- veillance of his neighbors, who are members — many of them — of the same company; consequently the opportunities for the successful perpetration of fraud are not good. Furthermore, while in many rural communities it is considered a very clever business stroke to get the better of one of the large stock companies, who, like the railroads, are looked upon as natural enemies, it is an entirely different matter when a man’s desire to realize on his policy results in an assessment upon his neighbor. An attempt to do so, whether successful or not, usually results in ostracism for the offender. These companies, when wisely and honestly managed, suc- ceed or fail according to the burning record of the districts where they operate. A few heavy losses in the earlier years of their existence usually finish them. Farmers and villagers quickly tire of assessments. On the other hand, in those dis- tricts which have had favorable records as to fires — and there are many such — these little companies live and prosper for years. Often they accumulate assets of considerable value and YALE INSURANCE LECTURES. 69 in such cases furnish indemnity to their members at very low cost. Having no expense of any kind save the fees of the secretary and the cost of their few supplies, they can be very economically operated. Whether their record as a whole has been one of profit or loss to their members cannot be said with any degree of certainty. Large numbers are organized and equally large numbers fail every year, and while many are short-lived, some exist to-day which are fifty years or more old. Their strength and their weakness alike are largely due to the fact that they transact business in a very limited field, where every risk is known and watched, but where a few losses make insurance very costly owing to the limited number of those among whom the losses are distributed. They are usually free from the heavy burden of taxation which rests upon stock companies, being thus favored by that policy of discrimination on the part of the legislator which so often is in evidence where the farmer or laboring man is concerned. Concerning the formation of the mutual companies which do a general business throughout one or more States and which are usually called State Mutuals to distinguish them from County and Town Mutuals, the laws of the different States vary to an extreme degree. In New York and some other States there are no laws whatever governing or controlling such companies.. In others, as for instance Wisconsin, the laws are specific and minute. On the whole, the most marked difference between these laws and those which govern the town mutuals concern the amount of applications for insur- ance which must be secured before a charter can be had. In Wisconsin this amount is $750,000 as compared with $50,000 for a local mutual company. In some States the classes of business which these States Mutuals may write are limited by law ; in others the maximum amount of liability which may be assumed on any one risk is so fixed. The Wisconsin law is 70 YALE INSURANCE LECTURES. remarkable for providing specifically for five kinds of mutual companies which may transact business over an extended territory. Among them are companies formed by retail lumber dealers, hardware dealers, church societies, and finally a class unique in insurance history so far as I know, viz., mutual com- panies formed by the treasurers of county insane asylums and poorhouses. These general or state mutuals have not on the whole been successful, for, having ordinarily no great strength of assets, they cannot command business in districts remote from their place of domicile, except by quoting dangerously low prices. Moreover, they are compelled to delegate to agents or others the power to select risks and do not always get the best service. Those who operate the company lack the incentive of profit, a most important factor. Such companies commonly do not possess and cannot acquire the highly trained staff, the complete organization and concen- tration of authority necessary for the successful prosecution of a general business under competitive conditions through- out a wide territory, and when such powers are given to some official of a mutual company, too often the trust is abused. As long as the business grows rapidly and heavy assessments are avoided — for the loss ratio on a rapidly growing business is always small — the members are not likely to interest themselves in the methods pursued, and when, after a time, the assess- ments become heavy it is usually too late to apply a remedy. The fact that there were seventy-four such mutual companies in New York State alone in 1853, and but two or three to-day, is sufficient commentary on their experience, to which it is perhaps permissible to add the following from the first annual report of the Insurance Department of the State of Pennsyl- vania, issued in 1863 : “Not a few mutual companies have been shipwrecked be- cause of the ambition of officers to accumulate a large business ; YALE INSURANCE LECTURES, 71 going far from home ; trusting to agents, and measuring pros- perity by the amount at risk and gross cash receipts. “Near home, within the limits of half a dozen counties, the officers and members are more or less intimately ac- quainted with the character of those composing the partner- ship and the property at risk; but far from home, in this or other States, they are necessarily, to a great degree, igno- rant. There the agent acts for them. His interest is to do as much business as possible and he is not always so critical as to the risks he assumes as he ought to be. In time, loss after loss is followed by assessment upon assessment, until the home members of the company find that the insurance which ought to have been cheap has turned out very dear. The cause of the disaster is very plain. The laws essential to cheap insurance have been set at defiance. Hazardous and special risks have been written at rates far less than the stock companies could afford, as if the mutual system contained within itself an exemption from the inevitable laws of hazard. The officers of the company attribute their misfortunes to an unprecedented run of ill luck. Mere chance played the smallest part in producing the catastrophe; want of knowl- edge and judgment the largest. Then comes the trouble. The policy-holders rebel against the payment of the large assess- ments. The company resorts to litigation to compel payment. They are pressed to pay losses and are compelled, in turn, to press the payment of assessments. The practical useful- ness of the company is at an end and its career is terminated amid the execrations of all parties interested. ,, It is true that there are throughout the country a number of fortunately prosperous old institutions of this kind which have been conservatively managed, have transacted a selected business only of the non-hazardous classes and have confined their operations almost invariably to limited territory. These 7 2 YALE INSURANCE LECTURES. institutions have had honorable careers, and have furnished cheap indemnity. In life insurance the policy-holder looks to the company for a certain definite payment at some time in the future, and, so far as experience shows, runs little if any risk of personal liability by becoming a member of a mutual company. In fire insurance, however, the policy-holder contracts for indemnity against an extraordinary and even unlikely loss, and yet by joining a mutual company he exposes himself to the possibility of a serious personal liability, in the event of a conflagration, or if the bad selection of risks results in heavy losses. Instances have occurred where former policy- holders have been assessed as late as five years after their own policies had expired, and long after they supposed their con- nection with the mutual company of which they had been members had ceased. We now come to the consideration of the most interesting, and, so far as their influence on the methods of fire insurance companies and on the fire loss of the country is concerned, by far the most important class of mutual companies, viz., those known as the factory mutuals. Edward Atkinson, LL.D., one of their most eminent officials and advocates, is authority for the statement that this class of companies was devised for the prevention of loss by fire, the payment of indemnity for losses sustained being a secondary matter. Theoretically speaking, insurance companies pure and simple have nothing to do with the prevention or extinguishment of fires, or with the reduction of the fire waste. Their province is merely to distribute the losses which fires cause. Despite this truth, it was a short-sighted business policy which pre- vented the stock companies from actively cooperating with factory owners, especially with cotton and woolen manufac- YALE INSURANCE LECTURES. 73 turers, who, when the burning ratio, and hence the cost of indemnity, had risen to an unbearable extent, sought so to improve their property as to reduce the number and amount of losses and so indirectly the cost of insurance.- It seems to be true, however, that the failure or absence of such coop- eration was largely responsible for the origin of this class of factory mutual companies, whose methods as first practiced by themselves, later by the stock companies, have fairly revo- lutionized methods of protection against fire and made possi- ble greatly reduced rates for risks of all classes when prop- erly protected. The first of these companies was organized in 1835 by Zachariah Allen in Providence, Rhode Island, and was called the Providence Manufacturers’ Mutual Company. In 1850 there were three of these companies, and the number had in- creased to seven in i860. There are now in Rhode Island and Massachusetts eighteen such companies in active operation, and others in Pennsylvania and other parts of the country. These companies are carrying insurance amounting to over one billion of dollars on factory property. The activity of these companies was greatly increased and the expansion of their operations greatly aided, by the material advances in rates which were made by the surviving stock companies after the Chicago and Boston conflagrations. These advances, amounting to 56 per cent, or more, compelled fac- tory owners to look about for less costly sources of indemnity, with the result that many of them adopted factory mutual methods of protection and secured the low cost insurance resulting therefrom. From the outset these companies have endeavored, first, to ascertain and eliminate the causes of fires, and, second, to provide such ample protection that any fire which might occur should be extinguished with but slight loss. 74 YALE INSURANCE LECTURES. In these particulars the record of the Associated New Eng- land Factory Mutual Companies has been quite wonderful. Their method is to charge a cash premium based upon the class of work done, construction of the building in question, the extent to which dangerous processes are eliminated, and the extent and efficiency of the apparatus for extinguishing fires. No factory can secure the protection of this system unless in respect to all these matters it comes up to a pre- scribed standard of excellence. In addition to this cash pay- ment, a liability for assessments equal to five times the cash premium is assumed by the policy-holder. As a matter of fact, however, since 1850 no assessment has been found neces- sary by any of the New England companies. On the other hand, the cash premiums have not only paid losses and ex- penses, but have enabled a division of profits to be made at the close of each year. In this way the actual cost of indemnity is reduced to a small amount. Mr. Atkinson ascribes the success of these companies to recognition of the following principle: “The only persons who can prevent loss by fire are the owners or occupants of the insured premises. Upon them rests the responsibility for heavy loss, if any occurs, in nearly every fire. All that the insurance company can do is to pay indemnity for loss which, if large, in nine cases out of ten, is due to the lack of apparatus for preventing loss or to the lack of care and order in the conduct of the work.” In their efforts to ascertain and eliminate the causes of fire, these companies have investigated and endeavored to safe- guard all processes used in manufacture. They have investi- gated methods of illuminating, heating, lubricating; have devised elaborate plans for the safe construction and arrange- ment of factories in order that the spread of fire might be retarded and that especially dangerous processes might be YALE INSURANCE LECTURES. 75 isolated, and, finally, have tested and applied the most mod- ern and approved apparatus for extinguishing fires. More- over, when a factory comes into their membership they not only see to it that in all respects its condition is brought up to their requirements, but by frequent inspection they secure the constant maintenance of such conditions. They are, in- deed, hardly to be called insurance companies at all, but rather associations of manufacturers with experienced in- spectors and engineers, whose work it is to eliminate the pos- sibility of loss or serious damage by fire. The insurance feature only comes into play when, despite their precautions, a damage is incurred. It will be realized that, though the number of fires and the loss resulting therefrom have been very greatly reduced by these methods, a large expenditure is neces- sary to construct, arrange and equip, a factory in such a way as to bring it up to the standard of their requirements. While to these factory mutuals must be given the chief credit for inaugurating such plans for safeguarding property, the stock companies have for a number of years been pursuing methods of cooperation with the owners of factories, and other classes of property as well, similar to those briefly hinted at above, and now are as well equipped as the factory mutual companies to make suggestions to property owners for the proper construction, arrangement, care and protection of their property. The properties thus equipped in accordance with the views of experts are called “protected” or “equipped” risks, and there exists the keenest rivalry between the factory mutual companies and the stock companies to secure the control of this class of business. Thus far the efforts of the mutual companies have been the more successful, especially in New England, though the stock companies are gradually reducing their rates to a point where they approximate the low cost at which the factory mutuals have been able to furnish indemnity. 7 6 YALE INSURANCE LECTURES. There is no reason why this class of mutual companies should not combine to prosper if they continue to confine their field to isolated and thoroughly protected factories, the hazards of which have been properly provided for. Mr. Atkinson, in regard to this matter, says, “the method of granting contracts by the factory mutual companies must of necessity be limited to special establishments, each care- fully guarded from the other and fitted with its own apparatus for the extinction of fire.” “The mutual contract cannot safely be adopted in the crowded districts of large cities for the reason that the owner or occupant of one building may have a very dangerous neighbor in the next, over which he has no control.” There are two factors unfavorable to this class of companies ; first, the possibility that too extensive liability as compared with the income, may be assumed on individual risks, owing to implicit reliance on the experience already gained, in which case dangerously large losses may be incurred ; and, second, the growing competition of the stock companies for the pro- tected risks, which is constantly becoming keener. The stock companies have two important advantages to offer their patrons : first, that their policies are issued at net cost instead of in consideration of a cash payment to be later reduced by dividends; second, that no liability whatever is assumed by the policy-holder. Insurance organizations of another class have flourished in great numbers during the past ten or fifteen years. These are known for the most part as Lloyds of one kind or another. They are voluntary partnerships for the purpose of insuring property. As a rule each partner is liable for a certain por- tion of every loss which occurs. The name Lloyds is, of course, taken from the famous English institution, and is too YALE INSURANCE LECTURES. 77 often used in order to convey the impression that these new American concerns are comparable in point of resources and reliability with that office. As a matter of fact very few in- deed of the so-called Lloyds in this country are in a position to offer reliable contracts of indemnity. They furnish the combined promises of a number of private individuals, and the value of the contract in most cases is entirely dependent upon the financial strength of these individuals, though in a few instances a guarantee fund is paid in, which is liable for claims. Some of these concerns are responsible and have honestly and promptly paid their losses. Most of them, how- ever, are without any of the qualities which a company trans- acting an insurance business should possess, and not a few are operated solely in order to get possession of premiums, which are not by any means designed to be accumulated for the benefit of their foolish patrons. One very frequent feature of their contracts, which makes them without particular value in the congested sections of large cities, is the provision that in case of a general conflagration the liability of each partner under all outstanding contracts shall be limited to a certain fixed amount. These policies are usually issued through some one agent acting for all the partners, who, as a rule, know nothing about the transactions in which their names and credit are involved. While these Lloyds are most of them new institutions — recent phenomena in the insurance world — their operations have been so general and the results so unsatisfactory to the public, that in ten States laws have been passed which re- quire a cash deposit or capital to be paid in by every such part- nership as security for the fulfillment of their contracts. One State — Pennsylvania — prohibits them altogether. In seventeen States there are as yet no laws applicable to them. In the rest of the United States they are, by the wording of the insurance ?8 YALE INSURANCE LECTURES. laws, subject to the same restrictions and requirements as ordi- nary insurance companies. There are from sixty to seventy of these Lloyds now in existence operating in a more or less general way in the United States, of which number perhaps less than half a dozen are responsible and worthy of a limited recognition. There is no way of ascertaining the volume of business which these institutions transact. We now come to the consideration of the methods of in- corporated stock companies, which, as before stated, form alto- gether the most important class of insurance companies, both as to the business transacted and as to solidity of assets and reserve, and which, as stated in a former lecture, transact 90 per cent, of all the business done in the United States. In the case of American companies, at least, it is usual for the directors to concern themselves chiefly with the financial or banking department of the company’s business, largely be- cause insuring property against fire is a business requiring technical training and one which must be conducted by men well versed in its numerous details. Therefore the business of insuring property is commonly left to the officers of the company and their assistants. The whole country is usually divided into districts or depart- ments and an officer, or more than one, placed at the head of each. These departments in some cases are all under the im- mediate supervision of the chief executive and located in the head office of the company. It is believed by some company officers that a more consistent policy, a more uniform method of procedure and greater economy of operation can be secured in this way. The majority of companies, however, establish departments in various large ' cities, each department having jurisdiction over the States naturally tributary to the city where it is located. These departments are usually called general agencies. The companies which maintain them do so YALE INSURANCE LECTURES. 79 because of the belief that in this way they can get in closer touch with their various agents and with the insuring public and therefore can secure the best obtainable results, both as to the amount of business obtained and in the matter of closely supervising it. The cities usually selected for depart- ment offices are New York, Chicago and San Francisco, and, to a smaller extent, Boston, Philadelphia, Atlanta, New Orleans and one or two others. The head office of the company contains the department for the States adjacent thereto. These departments are intended to thoroughly work the territory under their jurisdiction accord- ing to the general scheme of operations adopted by the com- pany. Some companies endeavor to secure business from the larger cities only, but, both for the sake of a larger income and because of the safety and steadiness which can only be secured from a widely distributed business, most companies endeavor to get business from all possible sources where a profit is likely. The business is secured by means of agents residing in the various towns and villages where the company operates. These are called local agents. In large cities, such as Cleve- land, Rochester, Louisville, etc., these local agents usually de- vote their entire time to securing and handling the business and often the same man or firm in such a city will act as agent for anywhere from one to a dozen insurance companies. In the smaller places, however, the amount of business to be done is so small and the number of companies desiring it so large that the business usually demands only a portion of the agent’s time, and is, therefore, combined with banking, the practice of law, store-keeping, or some other occupation. Moreover, the agent in such little places acts for as many companies as he will consent to represent. It will be seen that local agents are the means by which a company comes into direct contact with the insuring public. 8o YALE INSURANCE LECTURES. The local agents are the ones who secure for the company the business on which it feeds. They are, therefore, a factor of supreme importance in the business, and companies en- deavor through their special agents and in other ways to maintain cordial and friendly relations with them. In order to insure success, popularity with local agents is quite as im- portant as popularity with the public in general. In order that there may be an intimate knowledge of the business at each agency, that new agencies may be secured and unsatisfactory ones discontinued, and to the end that all matters concern- ing the transactions between local agents and the depart- ment office may be properly supervised, men called special agents are employed, whose duty it is to travel constantly over the field to which they are assigned, locating agencies at all available points, carefully inspecting and securing accu- rate information concerning all the risks which the company insures, collecting over-due payments, endeavoring to secure from local agents as much desirable business as possible, and in general to further the interests of the company in every legitimate way. To them also is assigned for the most part the duty of arranging with claimants for the settlement and payment of the losses which occur in their particular terri- tory, though some companies doing a very large business have so many losses to settle that expert adjusters, as they are called, are employed for this purpose only. The local agents are equipped by the company with the various forms, books of record, and other supplies necessary for the transaction of business ; also with blank, unsigned policies. When a contract is secured, by an agent, from some prop- erty owner a policy is at once filled out, executed and delivered to him and as soon as possible thereafter an abstract of this contract, containing a full description of the property and all the details of the contract, is made out by the agent on a YALE INSURANCE LECTURES. 81 blank provided for that purpose, called a “Daily Report.” A sample blank of this kind is now before you. This report is thereupon at once mailed to the department office, which has jurisdiction over the territory in which the agent is located, and at the end of each month an account or statement of all the contracts made during the month is sent by the agent to the same department office, accompanied or to be followed by a remittance for the premiums collected. The local agent is compensated by a commission, usually 15 per cent, on the amount of premiums secured or renewed by him. He is presumed and required to protect the interests of the company or companies he represents by carefully select- ing desirable business and by following out their instructions in all matters. Companies endeavor to provide their agents with complete instructions as to their desires and methods concerning the conduct of business, so that agents may prop- erly care for their interests. When the daily reports of policies issued reach the office of the company they are carefully examined and reviewed by trained men called examiners. If the wording of the con- tract (the form, so-called) is found to be faulty, if the price is deemed to be too low, or if any other error is discovered, the agent is promptly requested to amend the contract in the necessary particular. If the property insured is deemed to be an undesirable subject for insurance, he is requested to can- cel or terminate the contract at once. The duties of the examiner are extremely important. They demand an intimate acquaintance with the hazards usually incident to various kinds of property ; also familiarity with the conditions affecting the district or town where each risk is located. Moreover, in judging a risk, the character of the ownership, the nature of the inherent and adjacent or expos- ing hazards due to the various occupants in the vicinity, the 6 82 YALE INSURANCE LECTURES. amount and quality of the protection against fire, the record of the locality as to fires, the rate, i. e., price obtained, and numerous other factors must be considered and investigated with considerable thoroughness by him. To facilitate this work the general offices are equipped with maps showing the construction and size of every building in the business districts of all towns of importance; also with commercial reports indicating the financial standing and business records of all merchants and manufacturers, inspection reports of important risks made by special agents and trained experts as well, and various other tables, books of reference and of rules, which aid the examiner in passing judgment upon the numerous reports which come before him. A successful exam- iner, however, must have a clear head, quick preceptions, cool, careful judgment, and a very considerable knowledge acquired by experience. The examiner has usually two or more assist- ants who help him in matters of detail. The monthly accounts or statements before referred to are also carefully gone over by auditors or bookkeepers. When the work of examining and auditing is done, the daily reports and the accounts pass on into the hands of a large force of clerks, who from them make up the elaborate records and statistics which the insurance companies are required to keep, partly for their own guidance and partly to comply with the laws of the different States. In addition to the daily reports and accounts, canceled poli- cies are also forwarded in large numbers by agents to the general offices; also notice of changes in contracts, called endorsements. Those must all pass through the same intricate and complicated process as the original daily report. In another part of the office the losses are handled. Every loss is at once reported to the general office in whose terri- tory it occurred. It is then assigned to the proper man for YALE INSURANCE LECTURES. 83 settlement — usually a special agent. As soon as possible he visits the scene of loss and arranges a settlement with the property owner. The completed reports of these settlements are forwarded to the general office and are very carefully tabulated, classified and compared with the record of premiums received, the premiums and losses of each class being grouped by themselves in order that the experience of the company, that is, the profit or loss arising from transactions with each class of risks, may be ascertained. A large department office in the course of one year will receive, perhaps, 125,000 daily reports from its agents, who will be located in, say, 2,500 cities, towns and villages. These daily reports will carry premiums averaging about $20 each, or amounting to $2,500,000 in all. Such a department will also have to adjust and pay from 3,000 to 4,000 losses each year. To keep the elaborate records and tables of statistics concerning all these transactions, to watch them throughout the life of the contracts, to collect the moneys due and to carefully and justly pay the losses — all these tasks involve an amount of detailed, arduous and technical labor which is formidable to contemplate. They also render neces- sary the services of well-trained men — high priced, many of them — and a very large expenditure for proper equipment and maintenance. At the head of such a department is a manager, or general agent, as he may happen to be called. He is respon- sible for the results obtained in the territory under his juris- diction. He must see to it that the numerous and troublesome details of the general office work are kept up, exercise general supervision over the examiners and their work, direct the movements of the traveling special agents and inspectors, decide all important questions arising in loss settlements, and last, but not least, utilize all these various factors in such a way that the company may secure its fair proportion of desira- ble business. A large department as indicated above will have 8 4 YALE INSURANCE LECTURES. on its rolls from 2,000 to 3,000 agents and perhaps one hun- dred or more salaried employees. At the head office of the company the president and other officers exercise a general oversight over all the departments. Usually monthly tabulated reports of all transactions are made by the departments to the head office. Any profits are also remitted to the head office for investment. On the other hand, if losses exceed the receipts of any department, advances are made to that department. The officers are also charged with the duty of deciding upon the general policy and methods of the company for the guid- ance of the various departments. The amounts for which liability may be assumed on different kinds of risks are also determined by them. In other words, the plan of campaign is laid out and managed by the officers and executed by the department managers through their special and local agents. In the case of those companies which do not make use of separate departments located in different parts of the coun- try, a large staff of officers is customary at the head office, where the junior officers perform the duties usually devolving upon department managers. In the large cities where values are great and congested and where consequently the amount of business to be done is very large, another class composed of the middlemen or brokers, as they are called, has arisen. These men secure from prop- erty owners orders for insurance which they then place with the local agent and in return receive a portion, usually one- half or more, of the agent’s commission. These brokers usually take entire charge of the insurance affairs of their patrons, acting as their agents in all matters relative thereto. In New York City so universal is this method of transacting business that there are practically no local agents who solicit or secure business direct from property owners, and most com- YALE INSURANCE LECTURES. 85 panies maintain their own offices with salaried managers, with whom the brokers deal. The multifarious labors briefly indi- cated in the foregoing pages are continued without cessation throughout the year and, at its close, the multitudinous details are aggregated and the results of the year’s transactions made up in the different department offices and forwarded to the head office of the company. There all these figures are com- bined into an exhibit called the annual statement, which also includes a detailed list of the assets and liabilities of the com- pany and other particulars affecting its business and its finan- cial condition. Broadly speaking, these annual statements show two general items of income and two of outgo. The income obviously arises from premiums and the interest on investments. The two avenues of outgo are for losses and for expenses. The loss ratio, that is, the percentage of the annual premiums which is required to pay losses, is, of course, beyond the con- trol of companies, except in so far as it depends upon care in selecting and rejecting business and the wise distribution of liabilities. In well-managed companies this percentage ranges from 45 per cent, to 65 per cent, according to the experience of the year. It will almost never happen that a loss ratio of but 45 per cent, is obtained. Such a ratio indicates an abnor- mal profit. Companies frequently, however, experience a loss ratio of 65 per cent, or even more, but that figure is close to the danger line and when reached usually means a net loss on the year’s business. The expense ratio for most companies will average about 35 per cent. This is partly controllable, though the constantly increasing interference of State governments and the steadily growing burden of taxation makes the task of limiting expenses a formidable one. The expense ratio of 35 per cent, may be divided, roughly, into the following items, according to the careful tabulations of Mr. F. C. Moore: 86 YALE INSURANCE LECTURES. Commissions to agents 15 percent. For the salaries and expenses of traveling special agents, adjusters, and expert inspectors 4^2 per cent. For taxes 2^/2 per cent. For maintenance of the department and head offices, including the salaries of all officers, examiners, clerks, etc. ; also for rent, ad- vertising, printing, supplies, etc 13 per cent. Statements of a somewhat similar description are made up by all properly managed business enterprises and corporations for the information of their officers and stockholders and in order that the gain or loss resulting from the year’s operations may be known. Fire insurance companies have an additional reason for mak- ing up these statements, i. e., the legal requirement that they shall do so. As early as 1807 insurance companies were re- quired by the State of Massachusetts to render an account of their affairs to the General Court, but probably the accounts so rendered were more or less informal. In 1837, however, they were compelled to make annual returns to the Secretary of the Commonwealth, by whom a true abstract of the returns was made to the legislature. In 1855 a regular insurance department was established. In New York, insurance companies and other moneyed cor- porations were in 1828 required to render annual statements to the State Comptroller. This law, however, applied only to New York State corporations which should thereafter be created. In 1849 the first general insurance law was passed in New York, and by it all State companies (except those with special charters) and also those of other States were required to render annual reports of their condition and of the year’s YALE INSURANCE LECTURES. 8? transactions ; but not until 1864 were all companies, whether of New York State, other States, or foreign countries, com- pelled to render regular annual statements. Taxation began, however, as early as 1837, when a levy of 2 per cent, was imposed on the premiums of fire and marine insurance companies of other States. It was, no doubt, be- cause the business of insurance was novel and little under- stood, and furthermore one which was, in the early days of its history, a favorite field for swindlers, that it thus early came under the special supervision of State authorities. An addi- tional reason is to be found in the fact that life insurance com- panies are trustees for large amounts, representing the savings of their policy-holders. Finally, the availability of the companies as sources of revenue was an early discovery of the legislatures, and, there- fore, the annual statements have always found their chief use as bases for tax levies, though by means of numerous and con- stantly more numerous inquiries and queries they are also made to serve as tests of solvency and hence as a means of protection to the insuring public. Companies who fail to meet certain established tests of strength are refused authority to transact business. Whatever the reasons may have been that first led the authorities and legislatures of States to thus assume a special supervision over the insurance business far beyond that to which any other business is subjected, the custom is evidently a permanent one, for, at the present time, all States of the Union have more or less stringent laws governing the organization of local companies and the admission of non-State companies for the transaction of business within their borders, and all without exception require the filing of annual statements. The tax on the income of insurance companies is an ab- surdity, for it is the tax on a tax. The insurance company 88 YALE INSURANCE LECTURES. must pay its losses and expenses from its premium income. It is therefore perfectly evident that a tax on this income must infallibly result in an increase of rates. In no other way can the demand be met. According to the present system, the income of companies is taxed even when exceeded by the outgo for losses and expenses. The years 1889, 1891, 1892, 1893 and 1898 were all unprofitable years. The aggregate losses of companies reporting to the New York department were, during those years, over $33,000,000. Yet in those same years, according to Mr. Moore, the companies paid taxes amounting to $14,500,000. The net profit for all companies for the entire period from 1891 to 1902, disregarding the in- crease of outstanding liabilities, was $59,571,933- The taxes paid during the same period amounted to $40,628,927. The premiums, roughly speaking, were $1,500,000,000; therefore, the taxes collected during these years were equal to 2 7 %oo per cent, of the entire amount of premiums collected, and 68 2 /ie per cent, of the entire profit resulting from their insurance transactions. It is doubtful if any other business in the world’s history was ever so severely taxed, or any other institution in so many ways hampered, harassed and annoyed by the opera- tion of State laws and State officials as are the insurance companies. In speaking of this matter Mr. Charlton T. Lewis said : “Government supervision, wasteful taxation and the ignorant prejudices which support these practices are the worst evils of the insurance world.” The only hope is that a more widespread knowledge and appreciation of the real nature of insurance and of its true principles may serve to allay these prejudices and secure some modification of the present system and methods of State supervision and control. The largest organization of companies known to the insur- ance world is called “The National Board of Underwriters,” with headquarters in New York City. This association is com- YALE INSURANCE LECTURES. 89 posed of companies and comprises practically all companies doing a general business throughout the United States. It is advisory only, in capacity, and concerns itself with proper forms of contracts, the investigation of new hazards (such, for instance, as that arising from the use of acetylene gas) and with other problems of general interest. It endeavors to check the practice of incendiarism and arson, tries to secure the passage of proper laws and to defeat the great number of improper ones which are annually attempted to be passed. In a very general way it strives to raise the standard of the business and to promote intelligent and scientific underwriting. Each year elaborate tables showing the results of the opera- tions of all companies are made up by this board. These tables are extremely valuable. Having nothing to do with prices and exercising no authority over its members, it is an organization which does not come in conflict with the law of any State. In the several parts of the country — East, South and West, and on the Pacific Coast — are organizations of company officers or district managers embracing usually from 50 to 75 per cent, of the companies operating in the respective fields, which not only apply the suggestions of the National Board in a more or less authoritative and mandatory way to the business methods of their particular districts, but also devise, where the law permits, schedules and methods for making rates and prices for the various classes of property. These organizations also prepare forms of contracts, rules and re- quirements in accordance with which the different classes of business, especially those peculiar to the district, — such as cotton in the South, grain in the West, etc., — may be wisely handled. In the various States of two of these larger districts, except where prohibited by law, there are minor organizations com- 9 ° YALE INSURANCE LECTURES. posed of the traveling men or special agents of many or most of the companies. These associations are, to a more or less extent, under the control of the larger organizations and carry on the same kind of work, but in a more direct and minute way applying the rating schedules to individual towns and properties. There are still smaller associations composed of the local agents of the several cities, towns and villages. These local organizations are usually called local boards, and supervise the conduct of business in their respective localities. Of late another and entirely different kind of organization has appeared (in the insurance world), namely, “The National Association of Local Agents,” with branches in every State. This body has for its purpose the advancement of the interests of local agents everywhere, their protection from injury arising from the actions of insurance companies, city or state legis- latures, and from any kind of competition which they con- sider unfair or likely to destroy the agency system. It will be readily seen that all these organizations constitute an extremely complex system. The connection between the various portions of it is not to be called close, and their methods and general policies are frequently inharmonious and irreconcilable. Local jealousies, the great number of companies engaged in fierce competition, the spirit of home-rule (nowhere so evident as in the insurance world), and all of these conditions intensified by the facility with which local stock and mutual companies may be organized and operated, prevent anything like a complete or dominant combination among companies or their representatives. In fact, it is probably true that no other business of such wide- spread character is carried on under such continuously aggres- sive competition. It is true that in certain sections and in certain cities and towns uniform conditions as to rates and methods obtain, and YALE INSURANCE LECTURES. 9 1 in times of widespread disaster, or after great conflagrations, the companies do for a time successfully repress their com- petitive warfare; but at the first dawn of prosperity the strife begins afresh and continues until disaster again destroys the foolish and brings temporary wisdom to the survivors. Until these conditions which surround the business are radically changed there need be no fear of an insurance trust. Rates and Hazards BY RICHARD M. BISSELL In the language of fire insurance, the name “risk” is applied to any piece or kind of property which an insurance policy may cover. The hazards of a certain risk (as for instance a building), or of a certain class of risks (such as flour mills), are the peculiar or particular circumstances or characteristics pertaining to or affecting it which favor or make for its destruction by fire. The extent to which these hazards endanger a given risk theoretically governs its rate, i. e., the price, per cent., which must be paid for insurance. A brief examination of the subject of hazards, therefore, will naturally precede and lead up to the subject of rates. Hazards may be divided broadly into two classes, — physical and moral, or personal, as they are sometimes called. The physical hazards are inherent in the risk itself and in its surroundings. Moral hazards arise from personal factors. Physical hazards may be partially measured, appraised, esti- mated, and to a certain extent controlled. Moral hazards are hidden, presumed rather than known, not to be measured or scheduled. The causes of fires are of far greater variety than is com- monly known. They are indeed almost infinite in number, for practically every substance and almost every process of labor, manufacture or commerce is under certain circumstances or in certain relations to other articles or processes productive of danger from fire. Physical hazards may be divided into two classes, as external and internal, which are sufficiently distinguished by their YALE INSURANCE LECTURES. 93 names. The external hazards include lightning, conflagra- tions, sparks, bonfires, forest and prairie fires (which are sometimes very serious hazards), and exposure, the greatest of which by far is exposure, — i. e., the danger to which a risk is subject from the burning of other risks or substances. To this cause is due 28 per cent, of all losses, both as to number and value. Property valued at $50,000,000 was destroyed by exposure fires in 1902. We speak of exposure as a hazard and attribute 28 per cent, of all losses to exposure, meaning thereby that as to 28 per cent, of all risks that are destroyed or damaged, the losses are caused by fires, the origin of which is exterior to the risks embraced in the 28 per cent. It is an obvious truth, however, that the original cause of an exposure loss is usually to be found in some physical hazard and, ordinarily, an internal physical hazard per- taining to an adjacent risk. The following general rule may be laid down: The degree of exposure hazard to which any risk is subject is determined, first, by its own combustibility and ignitibility, i. e., the readiness with which it will ignite and the rapidity and completeness with which it may be destroyed by fire; second, by the distance which separates it from the buildings or substances from which the exposure hazards arise; third, by the inherent hazards of the risks adjacent to it or within burning distance, and fourth, by the extent of protection which it receives from water works, fire department, or private apparatus. Under especially dangerous conditions there is hardly any limit to the burning distance. In the summer of 1894, during a drought accompanied by high winds, there were extensive forest fires in northern Wisconsin and Michigan and risks were burned by exposure arising from fires twenty miles or more distant. Sparks and embers fell on the decks of vessels many miles from land on Lake Superior. The exposure hazard constitutes a factor in the total of a 94 YALE INSURANCE LECTURES. risk’s hazards, which is highly susceptible to reduction by efficient fire protection. In case of frame mercantile buildings, it frequently constitutes the most important factor in determin- ing the rate. The most important of the external hazards are, in their order, — after exposure, sparks, which cause about 4 per cent, of the entire number of fires (locomotive sparks alone caused over six hundred out of fifteen hundred cotton fires during 1902, of which the average loss amounted to over $5,000), and lightning, which is responsible for nearly 3 per cent, of all losses, or three and a half millions in 1902. The internal hazards are much more numerous and, leaving out exposure, much more productive of fires. They may be sub-divided into five classes, which, however, are not abso- lutely distinct. The first class, according to our arbitrary division, is spontaneous combustion. This, while ordinarily not an imminent hazard, becomes one whenever vegetable or animal fibre is handled or stored, as in cotton and woolen mills, cotton warehouses, ice houses, etc. It is a characteristic of these substances when more or less saturated with any oily substance (more especially if it be an animal oil or grease), that rapid oxidation or spontaneous combustion ensues. Two hundred and three out of 1,683 fires in cotton mills, and 151 out of 1,630 fires in woolen mills were due to this cause. The next general division comprises the hazards due to the operation of machinery. These include friction of machinery, heated bearings, accidents and breakages, over-heated boilers and stacks adjacent to inflammable substances, and the presence of foreign substances in fast-running machinery. For example, in the pickers used in cotton and woolen mills and in cotton ginning machines, sparks caused by the presence of stones, buttons, cartridges, etc., cause a great many fires. In cotton mills, 984 out of 1,683 fires were caused by friction and the YALE INSURANCE LECTURES. 95 presence of foreign substances in machinery, and in flour mills, 477 out of 2,616 fires were caused by friction in machinery. The third division comprises the hazards incident to pro- cesses. Among these are hazards arising from dry kilns, roasting furnaces or ovens, use of inflammable mixtures for painting or japanning, the compounding of combustible and explosive chemicals in drug and paint mills, the improper or careless handling of heated substances, such as molten metals or the dried fertilizer just from the dry kilns, the use of fire heat under kettles, etc., and the production of various explo- sive gases or mixtures, as, for instance, dust in flour mills and starch factories or benzine vapor in furniture factories or japanning ovens. The fourth, and so far as the number of losses and value of property are concerned, by far the most important of internal physical hazards, is due to the various processes and kinds of apparatus used for purposes of heating and light- ing. It is quite natural that the process of heating — which usually means the actual use of fire — should make more losses than any other cause ; yet it is a sad commentary on American methods of building and on American laws concerning build- ing, that defective flues should be responsible for twice as many fires as any other one physical or known moral hazard. This cause also is responsible for a greater property loss than any other. Flues may be defective in construction, as when wooden joists or timbers are allowed to pierce their walls, or when unprotected holes are left by careless masons through which sparks or flames may escape. They may become defec- tive by settling or cracking, due to insufficient support, or because the building is moved or shaken in consequence of a tornado or wind storm or if struck by lightning. In 1902, over 14,000 fires, or 13 per cent, of the total number of fires, were attributed to defective flues, and the total property loss 9 6 YALE INSURANCE LECTURES. resulting was over $11,000,000. Other fires due to methods of heating were caused by hot ashes and coals, improperly deposited in dangerous places (barrels for example), or through carelessness or defective apparatus allowed to come in contact with combustible substances. Still other fires were caused by hot stove and furnace pipes and by over-heated stoves and furnaces, and the list includes the fires caused by steampipes passing through or adjoining unprotected wooden surfaces. In all, about 20 per cent, of the total number of fires are directly traceable to the use of fire for heating purposes. The fires due to methods of illumination included in 1902 over 400 caused by candles, over 3,700 from accidents to lamps, resulting in more than $2,000,000 of losses, 970 from gas jets and over 1,000 from electric wires, which are classed with the methods of illumination for convenience, though electric wires are often used to convey power. The losses due to the use of electricity are larger by far in amount than those due to any of the other means of illuminating, chiefly, no doubt, because electricity is now so generally used in buildings and localities where large values are collected, while candles, lamps and even gas are now principally used in dwellings, small stores and small factories; furthermore, fires of electrical origin are often not discovered until they have gained con- siderable headway. The value of property destroyed by fires of electrical origin in 1902 was $12,000,000. Fires due to other methods of illumination were more than four times as numerous as the fires of electrical origin, yet the ensuing loss was slightly below $5,000,000 or less than one-half the amount due to use of electricity. The fifth general division of internal hazards includes every- thing not already classified. The various fires due to accidents and carelessness find a place here. The list includes oil stove YALE INSURANCE LECTURES. 97 accidents, fires from matches, which caused in 1902 four thou- sand fires, with a loss of over one and half million of dollars, children playing with fire, cigars, cigarettes and tobacco pipes, with a record of 1,100 fires in 1902, and the numerous other causes of comparatively smaller importance which have not already found mention. All of these classes and sub-classes of hazards might still be almost indefinitely re-subdivided, for new hazards and new manifestations of old hazards are to be met with daily. If the causes of the 76,000 fires which occurred in 1902 could be ascertained with accuracy, each would be found to differ in some respects from every other. When all ascertainable hazards have been classified and the causes for fire set forth so far as we can ascertain them, there yet remains about 16 per cent, of all fires for which the causes cannot be discovered. It is not strange that the causes of many fires escape detection. In the first place many incendiary fires, if fully successful, destroy all traces of origin. The same is true of fires caused by electric wires, defective flues, spontaneous combustion, sparks, and many other obscure or hidden causes. In fact, whenever fires acquire such proportions before their discovery as to prevent subsequent inspection of the points of origin, or when the amount of destruction is sufficient to obliterate any indication of the cause (in cases when the origin is not witnessed) that cause will usually remain a mystery. It will be readily seen that this very considerable percentage of fires of unknown origin renders anything like an exact estimate of the effect of the various hazards impossible, and one of the difficulties of making a scientific and accurate apportionment of rates is therefore at once obvious. The foregoing must be considered to be merely a rough general index of the numerous heads included in the very important subject of physical hazards. As the profession of 7 9 8 YALE INSURANCE LECTURES. fire underwriting progresses and develops, the investigation and safeguarding of these hazards is more and more passing into the hands of experts, and, indeed, the subject is one sufficiently comprehensive and complex to afford a life work to students of the best technical training. In this discussion we must now pass on to the considera- tion of the other grand division of hazards, usually called moral hazards. Moral hazards arise from the personal (including the financial) circumstances which affect risks. They are indefinite, incapable of analysis, separation or estima- tion, yet they are of the greatest importance in fire insurance. Some authorities believe that more fires are attributable, directly or indirectly, to moral or personal causes than to physical, and, while any such attempt to estimate the results of moral hazards must be largely conjectural, it is quite certain that they are accountable for a very large percentage of the fire waste. Moral hazard is said to exist in regard to a par- ticular risk whenever a benefit, real or supposed, direct or indirect, would ensue to any one, especially the owner, by reason of the destruction of the insured property; also, and nearly as important, whenever for any reason no one has a strong interest in its preservation. In other words, not only the desire to destroy, but also the lack of a strong desire to preserve, creates moral hazard, so called, and it is hard to say which condition is the more dangerous. The prospect of a profit from fire or the absence of a financial incentive to preserve a risk make it impossible for an insurance company to rely upon the exercise of that due care and diligence for its protection which is essential if business is to be transacted at a profit. There are various ways in which moral hazards may arise which can be named and described. The possibility of their occurrence is patent to every one as soon as they are named, YALE INSURANCE LECTURES. 99 but to find out or know in advance that any of them exist in connection with a given risk is often beyond our powers. Hence losses due to such causes cannot be avoided. Any cause which seriously injures the value of a risk or diminishes its productivity is likely to create moral hazard, if the risk be well covered by insurance. Therefore insurance companies avoid risks where for any reason there is doubt as to value or productivity, — summer hotels which have not succeeded, buildings which are likely to be condemned, mines where paying quantities of ore nave not been found, flour mills where the water power has failed, etc., etc. All of these are pertinent examples. Any man would prefer money equal to the cost of such properties to the properties themselves. So, too, experi- mental properties, — temporary branch stores and new ventures of every description which have not demonstrated their earn- ing power, must be handled with greatest caution. The mere fact that capital has been invested does not always indicate that value exists, and the rule of prudence and of indemnity as well, viz., “no profit to the assured from fire,” points the way to the wise rejection of risks where this question of value is involved. Such risks are not only likely to be wilfully fired by a dishonest insured owner, but, even in the hands of honest men, are not likely to receive that assiduous care and watchfulness which men give to their successful enterprises. Indifference and carelessness differ only in degree from the actual desire for the destruction of property so far as the probability of its accomplishment is concerned. In view of the considerations mentioned above, insurance companies look with disfavor upon those risks where the amount of insurance carried exceeds the value of the property and are inclined to fear a moral hazard in connection with them. It goes without saying that such a condition would be dangerous where the owner is dishonest, and where he is IOO YALE INSURANCE LECTURES. honest the fact that no personal loss can come to him from a fire is likely to induce that carelessness and lack of pre- caution which constitute one species of moral hazard. Financial embarrassment and the pressing necessity for ready cash often create the most serious kind of moral hazard. A merchant with notes overdue or who sees failure ahead, or a farmer who cannot pay interest on his mortgage, is often in a position where the ready money obtainable from his insurance policies, even if not equal to the value of his property, would nevertheless help him tide over a pressing emergency. Another situation which frequently involves moral hazard is when property of any kind becomes involved in litigation or where there is dispute as to ownership. In such cases divisible cash is much more available than property which must be liquidated, and everybody interested might well be benefited by a fire which would simplify the settlement of a dispute. More- over, the enmities aroused in the course of litigation are them- selves a source of danger. The foregoing remarks apply to moral hazards which arise in connection with the owners of property, but there . are species of moral hazard which do not involve acts or neglect of the owner, but spring from the acts or desires of others. These chiefly arise from the ill-will of those to whom the property owner or his property is in some way objectionable, or who have been or are likely to be injured by the nature of the property itself or the kind of work carried on therein. Any building, such as a fertilizer factory, contagious hospital, dance hall or saloon, which interferes with the peace and enjoyment of a neighborhood or hurts the value of surround- ing property, offers a constant temptation to those who may be injured by it. Its destruction would be a distinct benefit to them. Similarly, any property owner whose disposition and YALE INSURANCE LECTURES. IOI practices are such as to make numerous and bitter enemies is likely to feel the results of the hostility thus aroused through the burning of his property. It will be seen from the preceding pages that the elements which go to make up hazards to which insured property is subject are numerous, complicated and varied. We will now endeavor, briefly, to survey the methods used by insurance companies to measure these hazards, i. e., to fix rates or prices. Moral hazards may be dismissed at the outset; they cannot be measured or charged, for usually they cannot be ascertained till after a fire. Their existence, however, greatly increases the fire waste and is responsible for the greater part of what are known as basis rates, to be later described, i. e., the irre- ducible foundation, incapable of analysis, upon which all systems and every schedule of rates are based. In the early part of this course the principle was laid down that fire insurance is a tax, — a tax levied for a specific pur- pose, — to repair the fire waste. All agree that taxes are neces- sary evils, but there is anything but unanimity as to methods for imposing and collecting them. No other function of gov- ernment causes such bitter debate, acrimonious dispute, public clamor and individual discontent as this matter of taxes. There is perhaps no other obligation resting upon citizens that is so constantly and ingeniously evaded. Now it is by means of a graduated scale of rates or charges that insurance companies collect the enormous sums required to recoup the provident among the losers by fire, and there is the same diversity of opinion, almost the same intensity of debate, among those who devise these rates as exists between protectionists, free-traders and single tax theorists. Moreover, from the public which is taxed arise the same clamors of discontent, the same charges of inconsistency, the same endeavors to lessen the individual burden which are to be 102 YALE INSURANCE LECTURES. noted in the process of collecting ordinary taxes, and too often, as in the case of such taxes, these complaints have some reasonable foundation. Also, as in the case of ordinary taxes, it frequently happens that the most clamorous objectors and the most enterprising in securing relief are to be found among that number, who, if the truth were known, are taxed at too low a rate rather than too high. From the very nature of things these clamors and this discontent are inevitable, though as the process of making rates becomes more and more scien- tific and therefore equitable, we may hope that both the dis- content and the reason for it may be greatly lessened. That there is some ground for the discontent, all underwriters will agree, for the task of apportioning with absolute correctness and fairness the fire loss among the various classes of risks and to each individual of a class, according to the hazard of each, is an absolutely impossible one. To even approximate fairness is enormously difficult. This is partly because of the absence of reliable data and the impossibility of obtaining them. There are, broadly speaking, no constant factors in the rating problem. In life insurance, rates to-day are frequently based upon a mortality table constructed from the experience of seventeen companies in 1838, and these tables are still found to be substantially reliable, but there are no unchang- ing mortality tables in fire insurance experience. The proper basis for a table of rates, constructed on scien- tific principles, might well be thought to be the combined experience of a number of companies carrying similar classes of hazards during a period sufficiently long, and over a field sufficiently wide, to justify generalization. Such data have been hitherto unobtainable for various reasons, viz. : lack of uniform system of classification, lack of cooperation owing to the furiously competitive conditions under which the business is carried on, and finally and chiefly, the difficulty of properly YALE INSURANCE LECTURES. 103 classifying those most numerous losses which result from fires communicated from one building to another, known as expo- sure losses, and those other numerous losses, the causes of which are unknown. Even were the necessary data obtainable and could they be properly segregated, their value as bases for rate tables might be open to question. In the last analysis the basis for the rate on any risk must be largely determined by the hazards, i. e., possible causes of fire, inherent in risks of the class to which it belongs. For example, the rate on a flour mill must be based upon the known dangers inherent to ajl flour mills, with such additions or subtractions as the peculiarities of the individual mill may make proper; but during the last forty years the process of milling flour has been revolutionized; instead of the old heavy millstones revolving slowly, we now have small steel rollers operated at a very high speed. Formerly, owing to the imperfect apparatus used, flour mills were so filled with dust that the air in them was very like a dry fog, impenetrable to the eye in many parts of the mill. This dust was inflammable to the extent of being explosive. The best modern mills contain machinery which practically eliminates dust. It would be hardly too much to say that all processes, from the time the wheat enters the mill till the flour is packed in bags or barrels, differ from those in vogue forty years ago. Probably it would also be within the bounds of truth to say that each year brings a new change in some part of the machinery or process. What is true of flour milling is true of most other manufacturing indus- tries. One of the causes of the success of American manu- facturers has been their willingness to discard old machines long before they are worn out for new ones better designed for their work, while foreigners cling to their old machines, both from unwillingness to change and from motives of false economy. A flourishing rubbish heap is often a sign of real progress. 104 YALE INSURANCE LECTURES. Again, the various processes and machines which have come into existence in the effort to make valuable the waste products of various industries, have entirely altered the nature of many factories. For instance, in the case of packing houses, — in addition to the work for which such buildings were originally designed, viz. — the slaughtering, cutting, curing and keeping of beef, pork, ham, sausage, etc., there have been added the manufacture of fertilizer, of cooked canned meats and vege- tables, the manufacture of medicinal extracts, and other pro- cesses too numerous to mention, each of which brings a new hazard to be estimated and accounted for in the rate. Furthermore, there are certain changes in methods of heat- ing and lighting and of using power, involving the use of gasoline, electricity, etc., which have greatly altered and are constantly, to a large extent, altering the hazards of the buildings where they are used. Every new machine, every new process, makes a change in the sum total of hazards and therefore the carefully collected data, showing the experience on any particular class of risks, may at any time by the invention of new machinery or by the discovery of a new process, chemical or otherwise, be rendered absolutely value- less, and the underwriter may be compelled to make new rates to cover hazards which have not endured long enough to furnish any experience whatsoever. Difficult as the accumulation of proper data and the ascer- tainment of the fire cost of each class might be, and despite the necessity for frequent revision and reconstruction, owing to the changing nature of the factors involved, insurance companies might well undertake the task and endeavor to more closely ascertain the necessary basis of fire cost for each class of business as a foundation upon which to build a proper system of rates, were it not for the hostility of legis- latures, and of the people as well, to any kind of combined YALE INSURANCE LECTURES. 1 05 or associated endeavor to fix or maintain such rates. Such hostility, we must hold, arises from a failure to comprehend the true nature of insurance and the further failure to appre- hend the principle that a properly constituted rate is chiefly made up of factors which are not in the control of under- writers and which cannot be correctly ascertained and formu- lated by them except through associated effort and combined experience. The attempt to cure inequalities and injustices which occur in the making of rates by legal process, springs from the same mental astigmatism which induces men to at- tempt by law to prevent fluctuations in the purchasing value of silver or of any other commodity. Fair, equitable and adequate rates are a prime necessity, not only for insurance companies, but for the insuring public, for in the long run the premium income must pay the losses. In other words, ^adequate security demands adequate rates. Impairment of security, an undoubted loss to policy-holders, must result from inadequate rates. The foregoing remarks apply to the difficulties which attend the making of proper rates for various classes, but even greater difficulties are met when the attempt is made, as it must be made, to fix an appropriate rate for each individual of a class. In life insurance no such differentiation is attempted. Every man insured at age twenty-nine under the same kind of contract pays the same rate, and it is assumed that every insurable life at age twenty-nine has the same expectation. In fire insurance, however, no two risks are exactly alike and every detail of every risk must be examined and its contribution to the total hazards of the risk estimated. Moreover, in fire insurance many, if not most risks, undergo frequent changes and must therefore be re-examined and re-rated from time to time. It is this necessity for determin- ing the proper charges and allowances for the numerous differ- ences which characterize the construction, occupancy, location io6 YALE INSURANCE LECTURES. and exposure, methods of heating and lighting and extent of fire protection, not only for every class of risks, but also for every individual of each class, which constitutes the greatest practical difficulty to be overcome in making a fair assessment of the fire cost. Without trying to investigate the history of the various methods of classification which have characterized the business or to give any account of the differing processes for making rates which have been attempted from time to time by insur- ance companies, interesting and instructive as those subjects are, we will now proceed to take up a few of the systems and methods by which rates are to-day made. Rates may be said to be made to-day by two processes : First, by what is known as the personal inspection or judgment rate system; and, second, by carefully prepared and more or less scientific schedules. The judgment system of rating is rapidly giving way before the use of highly complex and specialized schedules. It is open to serious and obvious criticism, yet has in times past served a very useful purpose and is not without its good features. A few words will sufficiently describe it. By means of a more or less complete system of classification, companies ascertained in a rough way the average cost of many kinds of risks, and this information was put into the hands of their special agents or gradually absorbed by them in the course of their work. Formerly special agents did practically all of the work of making rates in company with local agents. When a town was to be rated, these average cost figures were used as basis or foundation rates. Usually towns were rated by committees of from two to five special agents who acted for all companies. No rule or regular method of procedure governs the making of rates under this system. The rates so made simply indicate the opinion or judg- YALE INSURANCE LECTURES. 107 ment of the rate makers. Little attempt was made to analyze the factors which determined the judgment of the committee as to each risk. Nevertheless, since that judgment was usually the result of the experience and observation of many years spent in such work, the rates made were in many cases quite satisfactory and equitable to a moderate degree. No attempt was made to take account of minor differences, but all good features or defects of construction and exposure, and also all the hazards of occupancy and processes, were lumped together, and if, as a whole, to the mind of the raters, they were sufficient to appreciably differentiate the particular risk from the average risk of its class, a penalty was added to or an allowance was made from the average rate which experi- ence had shown to be about adequate. Such a system was fairly satisfactory during the years when buildings as a rule were in point of construction very much alike, but with the growth of improved methods of building, and with the increase and improvement of the apparatus for protection against fire, to say nothing of the great changes in business methods, such a system fails to properly discriminate between risks of the same class which may differ widely in many important respects. Moreover, the personality of the raters under the old system was a highly important factor — to such an extent, in fact, that different committees might produce quite different results when rating identical risks. The system of schedule rating which attempts to take into account the various features of construction, exposure, internal hazards and protection against fire, which are peculiar to each risk, obviates these objections, though itself, as will be shortly seen, open to criticism of another nature. As already hinted, no perfect system of apportionment of the fire tax can be devised. On the whole, the system by schedules applicable to each class gives promise of develop- io8 YALE INSURANCE LECTURES. ment into a means of fixing rates which will be much more equitable and satisfactory than any other method which has yet been followed, and there is reason for hope, with more perfect statistics and a better appreciation of the relative potentialities of the different hazards, that the various sched- ules will ultimately develop until they come to be universally recognized by the public as well as insurance officials as satis- factorily solving, so far as it may be solved, the complex problem involved in making rates. In the early days of insurance history two rates only were known, — one for buildings of brick construction, another for frame, and these rates applied regardless of occupancy. Gradually, as the hazards of the different kinds of business came to be appreciated, a system of classification was begun which has been growing and enlarging until to-day, nor has its growth or enlargement by any means reached its limit. At the present time many companies divide their risks into over a hundred classes and further sub-divide each class accord- ing to construction, i. e., whether brick or frame, and according to the class of the town or city, viz., whether protected or unprotected, in which the particular risk may be located. From their experience with these classes approximations are made by companies of the actual average cost of insuring each class, but in order to fix the prices for the individuals of a class there is required a mass of diagrams, statistics and other data, showing the particular features of each risk, which are almost infinite in number. This will be apparent from the statement that these data include more or less complete descriptions of practically all buildings in the central portions of all cities, towns and villages of any size in the United States. Companies as a whole are estimated to expend over a million of dollars per annum for rating purposes. Single companies expend as much as $20,000 per annum for maps alone. YALE INSURANCE LECTURES. 109 The prime requisite for a system of rates is that it shall so far as possible be uniformly equitable; that is, it must compel each class of risk and each individual of the class to pay its proper proportion of the fire tax. To approximate such a result, however, not only are the data before mentioned neces- sary, but the amount of insurance to be carried on each risk must be known. At least nine tenths — Mr. Dean says nineteen twentieths — of all losses are partial. The great majority are small as compared with the value of property insured. It is evident that, in case of a partial loss destroying less than one half the value of an insured property, a man who carries insur- ance to, say, 50 per cent, of the value of his property, secures the same amount of indemnity as the man who carries insur- ance amounting to 80 per cent., though the latter has paid a much heavier tax. It follows that where, as is usually the case, there is a fire department and water-works, the man who carries insurance amounting to 80 per cent, of the value of his property is entitled to a lower rate than the one who carries insurance amounting to but 50 per cent, of that value. For this reason all properly devised schedules or tariffs for making rates are based upon the use of a co-insurance clause, usually the 80 per cent, co-insurance clause, which compels insurance equal to 80 per cent, of the value to be carried, and penalties in the shape of higher rates are imposed where a lower per- centage of insurance is carried. No other means has ever been devised or is likely to be devised which so fairly and automatically apportions the insurance tax according to the value of property, just as ordinary taxes on real estate and personal property are supposed to be apportioned. One way of stating the principle involved is to say that the expectation of salvage is one of the factors involved in making rates. The schedule system, as its name implies, makes rates by applying to classes of risks and to individual risks certain no YALE INSURANCE LECTURES. predetermined charges and credits based upon the various factors of construction, occupancy, exposure and protection against fire. In practice, in the several states or districts of the country, many different schedules for all classes of risks are used, though more than one attempt has been made to evolve a system of rating which might be everywhere applic- able. We shall not be able even to mention many of these numerous systems, nor is it necessary, since for the most part they differ in detail rather than in principle. In the case of such simple classes as dwellings, schools and churches, where the hazards are practically the same for each individual, the class rate is applied to every risk, differ- ences being made only as between brick and frame and those under or beyond the protection of an efficient fire department. The schedules used in rating the different manufacturing classes, such as wood-workers, packing houses, flour mills, etc. (usually called special hazards), are made up substantially according to the following general plan : First. The standard or ideal building of the class in ques- tion is described. This building is standard, not only in arrangement and construction, but often as to its equipment for extinguishing fire. A basis rate is then assumed for a risk equalling the standard. This basis rate, while arbitrarily fixed, is nevertheless the expression of the judgment of expert raters as to irreducable foundation of hazard incapable of analysis and made up of the numerous intangible and incal- culable things (including moral hazard and an allowance for unknown causes), which is thought to be inseparable from any risk of the particular class under consideration, no matter how perfect its structure and arrangement may be. The basis rate having been determined, the various defects in construction, dangerous or improper factors of arrange- ment, and deficiencies in the nature and extent of the appara- YALE INSURANCE LECTURES. Ill tus for fire protection are listed with a table of, usually fixed, charges for each; usually, too, there are some credits men- tioned for extraordinary features of equipment or construction too infrequent to be conveniently included in the description of the standard. Provision is also made in such a schedule for a further credit or charge for the presence or absence of the 80 per cent, co-insurance clause, or some other percentage co-insurance clause, in the contracts. When a flour mill, for example, is to be rated, the assumed basis rate for flour mills is used as a starting point and to it are added the various deficiency charges which may be found on inspection to per- tain to the particular mill to be rated. From the rate thus obtained a deduction is made for any credits to which the mill is entitled. When the rate thus made up is ascertained, the price to be charged is fixed by the allowance or charge for the use of the co-insurance clause above referred to. Many of these schedules are so minute and intricate as to require the services of an expert rater for their application, and therefore, and also for the sake of economy and uni- formity, these schedules are applied to special hazards by men skilled in their use acting for associations of companies in the various districts. The factor of exposure (sometimes of great importance) may be covered by more or less elaborate charges, as shown on some of the sample schedules in your hands; or more frequently in the case of special hazards, together with other additional objectionable features, is left to the judgment of the rater. This is because special hazards, as a rule, are more dangerous to their surroundings than endangered by them. Moreover, they are usually more or less isolated as to location, hence their chief hazards are internal. While, on account of the numerous and often hazardous processes involved and because inflammable material is frequently handled, these risks might be supposed to present unusual I 12 YALE INSURANCE LECTURES. difficulties to the rater, they are on the contrary easier to rate with a reasonable degree of satisfaction, both to the com- panies and the owners, than the apparently more simple mer- cantile risks, which so far exceed them in number and value. The different processes and dangerous materials are, in the case of special hazards, conspicuous, and their hazards com- paratively obvious, hence their appraisal or estimate may be the more easily made. In these schedules many of the more serious defects are often penalized by very severe charges in order to compel property owners to remedy them; indeed, one of the chief merits of the schedule system of rating as a whole is that it encourages safe methods of construction, arrangement and protection, and recognizes them in the rates. Another and the chief argument usually advanced in favor of schedule rating is that, since it lists the various defects of each risk and the charges made for the same, property owners may know why the price which they are compelled to pay for insurance differs from that which may be paid by their neighbors, and hence may realize that they are not suffering from the effects of arbitrary discrimination or of personal judgment of the rater, since it is evident that the rate on their own property is governed entirely by its own faults or merits. In some states or districts as many as thirty different schedules for different classes of risks are in use. The rating of mercantile property, which comprises by far the most important class, both as to the number of risks and value, with which insurance companies have to deal, is the most difficult technical task which confronts the under- writer. There are many schedules in use for this purpose in various parts of the country, most of which, however, have many points of resemblance. The following may be taken as a YALE INSURANCE LECTURES. 113 description of the average schedule of this kind used in towns and cities of moderate size — those used in the largest cities are more elaborate. In most states and districts the cities, towns and villages are divided into classes — commonly from four to six in num- ber — according to the amount of protection afforded by the water works and fire department of each. Two basis rates — one each for brick and frame mercantile buildings — are then adopted for each class of towns. The basis rate is usually in the case of brick buildings predicated upon an assumed type of building adopted for that purpose and described in detail in the schedule. In order to determine the rate on any one building or its contents the proper basis rate is taken as a foundation, and to it are added the fixed additional charges made necessary by its structural defects, which are usually listed with more or less minuteness in the schedule, a stated charge being made for each defect. To the rate of the building thus determined additions are made for the expo- sure hazards from adjacent risks according to the table or rule provided in the schedule. From the figure thus obtained a deduction is made on account of credits allowed for those features of construction, or of individual fire protection, which may be permitted by the schedule. The resultant rate is called the unoccupied building rate. It is then further increased by a charge made on account of the nature of the occupancy, such, for instance, as a drug store or a dry goods store, and thus becomes the final building rate. The rate on the contents is then made, frequently by an addition to the building rate, named in the schedule itself as applying to the particular kind of contents under considera- tion ; but more often all kinds of contents are classified roughly into from two to four or five classes, and an additional charge, over and above the building rate, to be applied to 8 1 14 YALE INSURANCE LECTURES. the contents, is provided for each class, and is used in every case where contents which may be embraced in that class are found. The foregoing applies to the rating of brick mercantile buildings and their contents. Rates on frame mercantile build- ings are usually made by a more simple process. In the first place, all frame mercantile buildings are esteemed to be substantially alike for the purpose of insurance, the differences in point of construction which are recognized being confined to metal roofs and brick or iron coverings for side walls. A basis rate is agreed upon for frame buildings in each of the various classes of towns into which a district may be divided, and charges are made for occupancy and exposures. These charges, so far as occupancy is concerned, are usually very few in number. Where frame buildings are concerned the rate on contents is seldom if ever higher than the rate on the building itself, and very often less than the building rate, because a high rate on such a building is usually due to a heavy exposure hazard, which, so far as the contents are concerned, may be overcome by their hasty removal when the danger of fire is imminent. The treatment of exposures in these numerous schedules shows great variety of practice, especially as regards brick buildings. In fact, for the most part this important feature in the rating of mercantile buildings and contents has had very inadequate treatment. When brick buildings are exposed by other risks, one method, very frequently used, is to make a fixed charge for unprotected openings in side walls without regard to the character of the exposure. Another is to add to the rate of the exposed risk, where there are unprotected openings, some percentage of the rate of the exposing risk, according to its distance from the risk to be rated. Many tariffs, however, leave the question of exposure charges to the judgment of the rater, for it is difficult, especi- YALE INSURANCE LECTURES. XI 5 ally in the case of brick buildings, to provide a satisfactory and workable rule for such charges in a schedule designed to be comparatively simple. For frame buildings there are usu- ally definite rules in the shape of a heavy fixed additional charge over and above the basis rate for each frame building within a given distance — usually 20 feet — of the building to be rated. Thus, if a frame building unexposed carries a basis rate of iy 2 per cent., 75 /ioo of 1 per cent, will be added for every frame building exposing it within 20 feet, and also for every frame building which goes to make up a continuous row of wooden buildings up to some arbitrary limit, such as 8 per cent., which is assumed to cover the most dangerous hazard which can be created by a combination of frame mercantile buildings. It will, of course, be understood that the basis rates, as well as the increments of charge made for exposures, vary in the schedules used in different parts of the country. As hinted before, two attempts have been made to evolve systems or schedules for rating mercantile property which might be universally used. The first of these schedules was prepared by a committee of eminent underwriters under the chairmanship of Mr. F. C. Moore, then president of one of the largest American insurance companies, and is called the “Universal Mercantile Schedule/’ It, or some modification of it, is used in many of the large cities of the country to-day, including New York, Cleveland, Denver and many others, and it is, so far as results yet obtained are concerned, the most important of any of the tariffs which have ever been issued. It is also, of all rating schedules, the one which has been most carefully and minutely elaborated and adjusted to meet the almost infinitely varied combinations of the factors of construction, occupancy and protection which are to be found in the mercantile buildings of a large city. This schedule was a great advance beyond anything before known in the history of scientific rating and has exercised a Il6 YALE INSURANCE LECTURES. very important and growing influence upon the framers of other schedules subsequently made, many of which are but imperfect adaptations of the Universal Mercantile Schedule. It is an extremely complicated and intricate schedule and cannot, therefore, be described or discussed in detail in the limits of this paper. A few extracts from the writings of Mr. Moore in regard to it will be given, which, in connection with what has already been stated in regard to schedule rating, will enable some idea of its purpose and scope to be formed: (It is suggested in this connection that the student consult Mr. Moore’s book “Fire Insurance and How to Build.”) “The mere fact that there are more than a hundred features of construction in a single building which should enter into the consideration of its rate, irrespective of nearly forty fea- tures of its city or environment, nearly forty more different features of fire appliances, to say nothing of more than a thousand possible hazards of occupancy; and the further fact that no individual knowledge is equal to the task of putting a price upon so many items, nor any individual memory capable of remembering them, proves, without further demon- stration, the necessity not only of conference to secure com- bined knowledge for fixing prices, but, also, a printed record or schedule, to prevent omissions or mistakes.” “In 1891 a committee of four underwriters was appointed to prepare a schedule for rating mercantile risks which should be universal in its application thoughout the country. Early in their deliberations they reached the conclusion that such a schedule should be formulated upon the following lines, and that it should recognize: First: A key-rate — as to which various cities and towns differ. Second : Charges for variations from standards of construc- tion — which ought to be the same everywhere. YALE INSURANCE LECTURES. 1 17 Third : Charges for hazards of occupancy — which ought to be the same everywhere. Fourth: Charges for insuring contents according to their susceptibility to damage — which ought to be the same every- where. Fifth : The variation of these charges, according to the con- struction of the building. Clearly the same amount should not be added, even for the same stock, to two different buildings where one is an exceptionally good building and the other an exceptionally poor one; there should be more difference between the building and stock rate in the one case than in the other. Sixth : The treatment of fire extinguishing facilities, prox- imity to hydrants, etc., for the particular risk rated, according to circumstances; it being clear that if the risk is within reach of hydrants, steam engines, etc., and on an eight-inch or larger water main, it should rate differently from another of like kind, even in the same town, if the other risk be not so fortunately located.” “So in other items or features of the schedule, the com- mittee found it necessary to go into every detail of hazard, leaving as little as possible to the judgment of a rating expert, so as not only to save his time and thought at every stage of the rating process, but to prevent, also, those inconsistencies of rating in risks of one and the same hazard, resulting from fluctuations of judgment, which so often produce dissatisfac- tion on the part of owners and result in appeals for legislative interference with rating organizations.” “First: A standard city was conceived and described. It involved level and wide streets, gravity water works, adequate pipe service and other features fully explained. “Second : A standard building was described, which may be regarded as a model of ordinary construction, not fire-proof. “Third : A key-rate. 1 18 YALE INSURANCE LECTURES. “The basis rate or starting point for rating a standard building in a standard city was fixed at 25 cents, after careful consideration of the experience tables of the companies.” Since buildings of this class are to be rarely found, this was of course pure assumption. “From this starting point or basis rate of 25 cents, and to obtain the key-rate of any city, or that figure at which a standard building in the city should be rated, additions were made according to the deficiencies of the city as to water works, fire department, building laws, inaccessible or narrow streets, etc., etc. This key-rate, so determined, is thereafter used to obtain the rate of any building in the city to be rated by adding to it charges for its deficiencies from the specifica- tion of a standard building.” For the purpose of rating contents of buildings and in order to make occupancy charges, no fewer than 1,287 varieties of contents are listed, * each with its appropriate fixed charge to be added to the building rate; and also a different charge to apply to the contents themselves, over and above the final building rate. Moreover, a separate application for credits for fire protection is provided for the contents as compared with the building. “No schedule should be framed upon a basis which does not recognize a certain named percentage of insurance to value.” “The universal schedule, however, does not enforce or require any particular amount of insurance, but simply adjusts itself (by reductions from ascertained rate according to stipu- lated account of co-insurance) to whatever amount the prop- erty owner elects to carry.” The chief objection to this, or in fact to any system of schedule rating, is the necessity for the constant use of assump- tions, not only in determining the basis rates, but in making YALE INSURANCE LECTURES. 119 the charges, for each defect of the construction, or for occu- pancy, which go to make up the final rate. A great deal of time and a vast amount of comparative research has been expended in the endeavor to properly appraise the dangers incident to all the various features of construction, protection, occupancy and exposure, yet it is manifestly impossible from any obtainable record of experi- ence to assert that a retail drug store, for instance, will make proper an addition of exactly 10 cents to the building or an addition of exactly 50 cents to the rate on contents over and above the building rate in all cases. A tariff has been devised by Mr. A. F. Dean, of Chicago, called by him a “Mercantile Tariff and Exposure Formula for the Measurement of Fire Hazards,” which differs radically in many respects from the “Universal Mercantile Schedule,” and which has come into very general use in the western states. This tariff is intended to render some of the defects just mentioned less important, and is, moreover, founded on a different conception of the problem of rating. Instead of endeavoring to establish a basis rate for a standard risk in a standard city, Mr. Dean’s tariff divides cities into six classes, beginning with villages which have no protection whatever and which are known as towns of the sixth class. This is a very suitable basis for such a classification since its definition is simple, its existence real and unchanging; while on the contrary our ideas of a standard city are likely to change from time to time. From this as a starting point towns are graded according to their protection up to the first class, which includes all cities having protection in the way of water works and fire department of exceptional complete- ness and efficiency and better than those classified under Sections 2 to 6 inclusive. Moreover, for the purpose of rating, provision is made for the adoption, as a starting point, I 20 YALE INSURANCE LECTURES. of a one story brick building of ordinary construction located in a town of the sixth class. This kind of building is fully described in the tariff. Such buildings are common in towns of that class. However, this tariff does not attempt to name the basis rates. They are supposed to be adopted or selected in each state or district by raters who have had experience therein. This does away with the necessity for making ideal standards and estimating basis rates therefor. Concerning this matter of adopting basis rates Mr. Dean holds that the experience of underwriters enables them to more readily esti- mate a proper rate for an ordinary building, such as may be found in great numbers, than for an ideal standard, which represents a class with which insurance companies have had very little if any experience. Nothing more simple could be thought of as affording a starting point or basis rate than the one story building selected by Mr. Dean; nor could any risk be found for which experienced underwriters could more readily or intelligently name a proper rate. This basis rate having been decided upon, additions or deductions are made for good or bad features of construction, occupancy, protection or exposure, but since the average build- ing is taken as a starting point these charges and credits will be fewer in number than where a standard building is taken as the foundation, and charges made for the numerous defici- encies which every ordinary building has. Moreover, instead of making these charges and credits by means of arbitrarily fixed amounts, the additions and subtractions are made by the percentage method. For example, in the “Universal Mercan- tile Schedules,” ten cents is added to the rate of a building having a retail drug store therein, whereas in Mr. Dean's tariff a percentage of the previously ascertained building rate is added for this occupancy and a similar method is used in making charges and credits for various features of con- YALE INSURANCE LECTURES. I 2 I struction. The system employed for estimating the proper percentage additions to the rate on account of occupancy is especially ingenious and logical — two additions are made for most occupancies, one for the causative hazard of the contents, i. e., the danger which their presence begets, the other for the extent to which the contents are likely to aid the spread or intensity of a fire. Similarly, the percentage plan is followed for establishing basis rates for one story brick buildings in towns of the other classes: that is, the basis rate for a town of the third or fourth class would be ascertained by deducting a certain per- centage from the basis rate selected for a similar risk in a town of the sixth class. The chief object in adopting the percentage system for variations in the factors affecting rates is that it preserves the relativity of charges and credits which are made in rating. It is manifest that where a basis rate, for example, is 40 cents, an additional charge of 10 cents for occupancy on account of a drug store is much more severe than where the basis rate is, say, 80 cents. With the charge for a drug store occupancy of 10 per cent, on the basis rate, however, this inequality would be obviated. Again, the charge of 12 cents for open, unprotected elevators in a building of moderate area and, say, three stories in height, and which in consequence of these features enjoys a low rate, is relatively very much heavier than the same charge in the case of a large six or seven story building of great area which bears a high rate. In the latter case 12 cents would probably be about one-tenth of the total building rate, while in the smaller building it would be at least 20 per cent. Moreover, an open elevator in a building of unusual height or area is a much more serious defect, and is likely to be responsible for much greater destruction of property than a similar elevator located in a small building of 122 YALE INSURANCE LECTURES. moderate height. The same reasoning might be applied to the credits or deductions made for favorable features. In support of his views on this subject Mr. Dean says: “If, under the law of averages, a thousand buildings of given construction, occupancy and protection will show a given ratio of loss to value during a given period, under the same law a thousand flues, hatchways, skylights, well-holes, wooden ceilings, or other parts of the building, of given construction, will each contribute its unvarying quota of this ratio, hence the several parts stand in a position of unchanging relativity, not only to the whole but each to the others. Fire hazard is, by nature, a network of relativity. In constructing a basis schedule we necessarily select certain features of hazard as separable and attach to each of these a charge, while to the residue consisting of unanalyzable parts we attach a lump charge and call it a basis rate. There is no intrinsic difference between the charge we call a basis rate and the other charges excepting that it includes all things too obscure, indefinite or unimportant to schedule. If under the law of averages the relativity between the whole and its parts does not change, and the relativity among the several parts themselves is con- stant, it follows that each charge bears an unvarying relation to the basis rate, or, conversely, the basis rate a constant relation to the other charges. This being the case, it is false logic to treat the basis rate or any of the charges as a dis- sociated element of hazard, for every change in basis rate or charge involves a disturbance of their mutual relativity. The real question in establishing every charge is, What ratio of the total loss will this feature of hazard under the law of average probably contribute? When this ratio has been estab- lished by judgment and experience, it should take its place in every schedule as a fixed ratio bearing a constant relation to the whole and its several parts.” YALE INSURANCE LECTURES. 123 Under this tariff the rates on the contents of brick build- ings are established through a differential added to the occu- pied building rate. This differential is based upon the damageability of the contents by water, smoke, heat, breakage, etc., as the result of fire, and represents the relative value of fire department protection to contents as compared with its value to the building itself. The tariff contains a table of differentials referring to about four hundred different kinds of contents, and further graded to correspond with ten differ- ent sets of basis rates, each set including a basis rate for a town of every class. These differentials are also arrived at by the percentage method, by averaging the differentials con- tained in many previous tariffs made for unprotected towns and then subjecting these differentials to an ingenious scale of percentage comparisons with the building as affected by the various grades of fire protection, according to the theory that the greater the damageability of the contents the less valuable to them — as compared with the building — is the protection against fire afforded by water works and fire departments. A separate schedule based upon similar principles is devised for frame buildings, by which rates for frame buildings and their contents in a city or town of any class may be readily ascertained when once a basis rate has been adopted for an ordinary shingle roof frame building in a sixth class town. One important difference between the brick and frame sched- ules to be noticed is, that the differential for contents in the case of exposed frame buildings depends upon their remov- ability instead of their damageability, and a table of contents graded according to their removability is provided. The matter of exposure charges and hazards is treated in a separate department of the tariff called the exposure formulae. These formulae enable the rater to make additions to the rates of both brick and frame buildings and their contents on 124 YALE INSURANCE LECTURES. account of exposure hazards by means of a highly ingenious exposure table graduated with reference to the construction of buildings, the distances between risks which affect each other, the amount of fire department protection, and the hazards of the exposing risks. This table is also made up on the per- centage system, each risk radiating a percentage of its own rate or absorbing a percentage of the rate of the adjoining risks. The theoretical considerations upon which this table and its applications are based are given below in Mr. Dean's own language : '‘External exposures are classified under three heads : “a. Radiated exposure, consisting of the proportion of its own hazard a risk radiates toward exposed risks. “b. Absorbed exposure, consisting of the proportion of radiated hazard absorbed by an exposed risk. “c. Transmitted exposure, or the proportion of the hazard a risk absorbs from one side, that is transmitted by it to a risk on the other side. “Under the above classification, it is proper to bear in mind : “First : That every exposing risk radiates some ratio of its own hazard towards exposed risks. “Second : That every exposed risk absorbs some ratio of this radiated exposure. “Third : That every risk transmits £ome ratio of the hazard it absorbs. “Fourth : That radiated, absorbed, and transmitted exposure are all modified by structure, clear space, and fire department protection. “In view of the numerous ratios and ratios of ratios found in the problem of measuring exposures, the necessity for some fixed standard of comparison is clear, because a standard is the first essential in all measurement — it is equally clear that as ratios are to be measured the standard must be a ratio and YALE INSURANCE LECTURES. I2 5 not a quantity. Again, if we view exposure from the stand- point of cause and effect, it is evident that radiated exposure is to be taken as cause; hence it is necessary to select some ratio of the hazard of the exposing risk as a standard. “In selecting any standard of measurement, it is proper to choose that which is most generally available and most free from change. These qualities are found in the greatest degree, perhaps, in the exposure of frame buildings by frame build- ings. In existing tariffs, there is substantial agreement in granting that a frame building transmits all the exposure radiated towards it by other contiguous frames, and while there is a considerable diversity in the ratio of radiated expo- sure in the several tariffs, they approach nearer to uniformity in this ratio than in any other feature of exposure. An examination of different state tariffs shows a range of expo- sure charge in unprotected frame rows from about one-third to one-half the hazards of the exposing risk. The average of all tariffs approximates closely to 40 per cent., while under the different grades of protection this ratio decreases in proportion to the protection. “It can hardly be disputed that, under like protection, like buildings radiate like ratios of their own hazard, and if this be true the standard of radiated exposure under any given grade of municipal protection should be the same everywhere ; hence all tariffs should agree in the adoption of a common standard.” Whatever may be thought of the brick and frame sched- ules, and though founded upon scientific principles and worked up according to scientific methods they will, un- doubtedly, be criticised as to details, it is the writer's belief that the exposure formulae, at least, will come to be recog- nized as exhibiting the most satisfactory, logical and adequate treatment known up to this time, of this highly complex and 126 YALE INSURANCE LECTURES. hitherto maltreated department of the science or business of making rates for mercantile risks. A detailed explanation of them is impossible within the limits of this paper, which, indeed, must be considered as an introduction to the study of rating systems rather than an exposition of their methods and practice. Moreover, some little study is required in order to understand the use, or to appreciate the great value of these exposure formulae. Nor would it be possible for any one without large experience to realize the difficulties which must be overcome in any successful attempt to construct a logical and workable scheme for the proper measurement and dis- tribution of exposure hazards. Mr. Dean's tariff formulae as now published are intended for use in towns and cities of ordinary size and would require additional elaboration for use in the largest cities. There is no reason why tariffs or sched- ules based upon the same principles should not be made for all kinds or classes of risks, manufacturing as well as mercantile. Losses and Adjustments MISCELLANEO US BY RICHARD M. BISSELL In a previous lecture some account was given of the various hazards or causes which are responsible for the fire loss, and the relative activities of these causes in producing fires were described. We now come to look at the fire waste from a different point of view and shall consider very briefly the distribution of fires and of the losses ensuing therefrom, not only as to location and time, but as to the different classes of property affected. Speaking in a very general way, we may state that fire hazards in the greatest numbers and in their most active states are to be found in those centers of life where the com- mercial and manufacturing activities of men are most varied and most congested, and where these activities are carried on with the greatest zeal and stress. It is therefore to be expected that in our large cities should occur a great propor- tion of the total number of fires, and the facts justify this expectation. In them also the most serious destruction of values occurs. The multifarious activities above referred to not only create numerous causes for fires but are also respon- sible for the aggregation of enormous quantities of highly valuable and destructible commodities and buildings contain- ing them. Those districts of our large cities which are most advantageously and conveniently located for commercial and manufacturing pursuits, tend to attract to themselves the fac- tories, stores, and warehouses wherein are housed the machin- 128 YALE INSURANCE LECTURES. ery and goods which make up the chief material wealth of such communities. These districts are chiefly determined as to their areas, outlines, and sub-divisions by various circumstances connected with the topography and gradual development of the cities wherein they occur, the most important controlling circum- stances being those which arise in connection with receiving and shipping facilities; as, for example, proximity to the water front in a sea port, or to the railroad terminals in an inland city. In view of these considerations, it is to be expected that we should find such crowded areas — or congested areas, as they have come to be called — arranged without much regard for the danger of sweeping fires. The most important factors of arrangement creating this danger are narrow streets, across which flames may readily leap, and city blocks so large that they encourage either the erection of buildings of great depth, in which fires cannot well be fought, or render necessary alleys or courts for light and ventilation, which greatly aid the rapid spread of fire. Were it not for the various public and private appliances for extinguishing fires, and those devices for hindering the communication of fire, which were described in the lecture on Fire Protection Engineering, not one of the congested areas of our large cities could endure a year. As it is, the frequency of disastrous conflagrations in such centers compels recog- nition of the fact that the danger inherent in the juxtaposition of vast quantities of inflammable material in these centers does not receive anything like necessary or proper attention from the public at large, the legislatures or other governing bodies. It would seem that ordinary prudence should induce individuals and communities to take all possible precaution against a constantly threatening peril of such vastly destruc- YALE INSURANCE LECTURES. 129 tive possibilities; and yet a careful inspection of the crowded portions of all of our large cities will reveal countless defects in construction, negligences in precaution, and inadequacies in protection which, when realized, give cause — not for wonder at the number and extent of the conflagrations which do occur — but rather for surprise that they do not occur in greater numbers. The recent conflagration at Baltimore gives a very good example of how the crowded arrangement of a business district, poor methods of construction, and the non-observance of avail- able means for preventing the spread of fire from one building to another, make ready for widespread disaster. Baltimore was, in some important respects, better equipped for fighting fire than most cities of its size. Its water supply was ample and did not once fail throughout the fire, although the demands made upon it were enormous and were augmented by the waste from hundreds of broken service pipes in the destroyed build- ings. Yet, though the fire started in a building of more than ordinarily good construction, located so as to be accessible from three sides, the fire was communicated to other buildings by an explosion due to unknown causes, almost immediately passed beyond control of the fire department and thereafter spread from block to block with a rapidity almost incredible. The tremendous extent of this fire and the enormous destruction of property were primarily due to the following causes : Many of the streets were narrow and many of the build- ings were built with inflammable roofs and cornices. For the sake of convenience, openings had been made, in hundreds of cases, in the walls between buildings; and finally and chiefly, the great majority of the buildings in the burned district had numerous wholly unprotected door and window openings on to the narrow streets and alleys, or into the courts which were 9 130 YALE INSURANCE LECTURES. used for purposes of light and ventilation. These features of construction are commonly known to be dangerous, but ordi- narily the fire department is relied upon to offset them. When, however, a fire gets beyond the control of the depart- ment, all of these dangerous factors come at once into play and are largely, if not altogether, responsible for the great loss %hich ensues. Inflammable material separated from a blazing structure by glass windows only, will take fire almost as quickly as though it were piled in the street. Wooden cor- nices will ignite when exposed to a hot fire at a considerable distance from it, say, one hundred feet or more. The probabilities are that, had the buildings in the vicinity . of the origin of the Baltimore conflagration been provided with fireproof roofs and cornices, and had all exterior wall openings been protected by approved fire shutters or doors, there would have been no conflagration. In other words, conflagrations are preventable and unnecessary. Just at pres- ent, when the recollections of Baltimore are still fresh, and are kept so by the subsequent disastrous fires at Rochester and Toronto, the cities of the country are more or less active in their efforts to create safe conditions. Similarly, after the Iroquois Theater disaster in Chicago much was done in the theaters throughout the country to make theaters less dangerous. However, many if not most theaters are still capable of duplicating the Chicago horror, and most of our cities are still in a condition which invites conflagration. Nor, it is to be feared, can the cities be relied upon to take any action which will largely eliminate this danger. Rather must we expect that the fear of conflagration will cause insur- ance companies to impose such heavy penalties in the way of increased rate charges, where there are dangerous features of construction, lack of adequate protection, and other factors which invite sweeping fires, as to compel the adoption of proper safeguards. YALE INSURANCE LECTURES. 13 1 The best obtainable reports indicate that since 1820 property amounting in value to about five hundred million of dollars has been destroyed in conflagrations in the United States. In a former lecture the relative activity of the principal hazards was touched upon, and it may be interesting now to note the extent to which, relatively, some of the different classes of risks suffer from fire. The available data upon which we must rely for information as to the distribution of losses, and as to the potency of the different hazards as well, is by no means exact, and due allowance must be made for the errors arising from imperfect reports and the absence of reports in many cases. Yet, for our purposes of comparison, we may accept the obtainable figures as relatively correct and as approximately indicating actual results. If we divide the buildings of any town or city into three general classes, namely: (a) dwellings and barns; (b) mer- cantile buildings, and (c) factories, including in the latter all risks where power is used to any considerable extent, we shall find that the dwellings greatly exceed in number the buildings of the other two classes, and that again the stores far exceed the factories. It is to be expected, therefore, that the greatest number of fires will occur in dwellings, especially since defec- tive flues and dangerous heating apparatus — the most fre- quently operating causes for fires — are more often to be found in dwellings than elsewhere. The facts justify this expecta- tion. In a natural and logical order, the fires in mercantile risks again largely exceed in number those which occur in factories. The same order does not prevail, however, when the value of the property destroyed in the several classes is tabulated. It is obviously true that, as a rule, far greater values are exposed to fire in a mercantile or manufacturing risk than in a dwelling. Moreover, such risks are more inflammable and are apt to lack the constant supervision which i3 2 YALE INSURANCE LECTURES. prevails in a dwelling-house where fires are usually quickly discovered and in a majority of cases as quickly extinguished. The experience of eighteen years throughout the United States gives approximately the following results : Class. Number of Fires. Value Destroyed. Dwellings and barns 550,000 $470,000,000 Mercantile risks 200,000 700,000,000 Manufacturing risks 80,000 550,000,000 from which it will be seen that the destruction of value in the average loss of the dwelling class is about one-fourth that which is caused by the average mercantile loss ; and this again is about one-half that caused by the average fire in a manu- facturing risk. Of the total number of fires nearly 50 per cent, occur in dwellings; something over 25 per cent, in mercantile risks ; and about 8 per cent, in manufacturing risks. The progress of the fire wave throughout the year is not without interesting features and can be best shown by a diagram or plat indicating the record of a long series of years. Such a diagram, showing both the property loss and the number of fires by months, is here presented. It is based upon the record of twenty-eight years prior to 1903, and since no great conflagration occurred during that period, it may be fairly held to exhibit the normal relative experience of the different months. The course of the heavy line shows the total property destruction by months for twenty-eight years. The light line shows the aggregate number of fires for twenty-eight years by months. This plat indicates that the shape of the fire curve through- out the year is governed in large measure by the seasons. The maximum destruction occurs during the cold winter tto. P+e ft i*> w 000 ‘ID ‘ ^ Losses BY MotvtKs YALE INSURANCE LECTURES. *33 months and the minimum during the summer months, when there is less use of fire for heating purposes, and when, therefore, the hazards which of all hazards are most fruitful of destruction, namely — defective flues and heating apparatus — have their smallest opportunity. As might be expected, the curve reaches its lowest point in the early summer, when the millions of shingle roofs, the for- ests, the prairies, the lumber yards, and other inflammable substances are still somewhat moist from the spring rains and are less likely to ignite from sparks and other causes than later in the summer, when they have been subjected to the dry parching winds of July and August and to the drouth which so often prevails in midsummer in many sections of the country and acts as a predisposing cause for the ready incep- tion and rapid spread of fire. The curve as presented shows one noticeable irregularity. This occurs in the month of July. A fainter line indicates the course which the curve might reasonably have been expected to follow. Instead of this course, however, an abrupt rise is seen. The average loss for July has been $9,831,000, whereas the normal curve would indicate an average loss of about $8,725,000. This variation can, with little chance of error, be attributed to the celebration of the Fourth of July, which would seem to be responsible, therefore, for the loss by fire each year of property whose value exceeds one million of dollars. The average number of fires in July also, no doubt for the same reason, is abnormal, exceeding the average of June and August by about four hundred and fifty. In fact, the record for ten years shows a larger average number of fires in July than in any other month of the year. The slight depression in the curve shown during September may well be due to the fact that in September the fall rains begin, thus lessening the susceptibility of buildings to fire, J 34 YALE INSURANCE LECTURES. while at the same time, in most parts of the country, the use of heating apparatus — the chief apparent cause for the augmented losses of the winter months — has not yet begun. The geographical distribution of loss seems to closely approximate that of the population and material wealth. The largest number of fires occur and the greatest values are destroyed in the four most populous and wealthy states; namely — New York, Pennsylvania, Illinois, and Ohio, in which states the total property loss for twenty-eight years is as follows : New York $450,000,000 Pennsylvania 270,000,000 Illinois 196,000,000 Ohio 181,000,000 It does not follow from this, however, that the fire cost — that is, the percentage of loss to insured property as compared with the amount of insurance carried thereon — varies in the same way. On the contrary, New York State has the lowest burn- ing ratio of any of the United States, and Pennsylvania, Illinois, and Ohio are all much below the average in this respect. In other words, while the actual loss in these states is greater than elsewhere, the relative loss as compared with the population and wealth is less than is usually found in other states, from which we may properly conclude, perhaps, that better fire protection, better care, and better methods of building are to be found in those sections where the popula- tion and wealth are most centered. This conclusion is strengthened by the fact that the highest burning ratios are to be found in Arizona, Florida, Indian Territory, and North Dakota, communities where the population is sparse and the material wealth, comparatively speaking, small. The burning ratio of Arizona is over five times that of New York, and “The figures exhibiting the burning ratio represent decimal fractional parts of ifi of the total amount at risk — not the fractional parts of the entire amount at risk (see table, page 152).“ YALE INSURANCE LECTURES. I 35 accordingly the average rate paid for insurance in Arizona is over four times that paid in New York, which state enjoys a lower rate of insurance taxation than any other state in the Union, and properly so in view of its low burning ratio. These brief and condensed statements naturally lead up to the consideration of the general subject of the relation exist- ing between the fire cost, the loss ratio, and the rate of insur- ance taxation. The accompanying plat will be helpful in this matter. On this plat the unbroken line indicates the history of the burning ratio — the true measure of cost — from 1891 to 1903, inclusive. The dotted line represents the varying percentage charges or rates, i. e., the rate of taxation levied by the insur- ance companies; while the broken line shows the loss ratio incurred by the companies under these conditions. To insure clear understanding, please keep in mind that by burning ratio, or fire cost, is meant that percentage of the amount of liability assumed by companies which is made pay- able by fire; and that by loss ratio is meant that percentage of the premium income which is required to pay incurred losses. Suppose, for example, an insurance company writes insurance policies amounting to $30,000,000 and receives an income in premiums therefor of $3,000,000. Suppose, also, that it suffers losses under these policies amounting to $2,000,000. Then it will have lost a / 3 o of the total amount of its liability and 2 /z of its premium income. 2 / 3 o, therefore, or .066, will express its burning ratio or fire cost, and 2 /z or .66, will express its loss ratio. It is manifest that the loss ratio is gov- erned by the combined influence of the burning ratio and the rate of taxation. In the last analysis, however, the rate of taxation also is governed by the burning ratio. A low loss ratio means a large percentage of profit. At a time when a low ratio prevails, competition for business becomes very keen and many companies begin to offer more 1 36 YALE INSURANCE LECTURES. favorable terms. In order to retain their customers, other companies are forced to also reduce prices and thus the average rate is gradually cut down. So utterly impossible is it to long maintain prices at a level which will afford large profits, that conservative and far-seeing underwriters are quite as often opposed to attempted advances in rates as favorable to them. Referring now to the chart: In 1891 the burning ratio was above the average, but owing to preceding favorable years — especially 1890 — the average rate had fallen to a very low point. Consequently, the loss ratio was fairly high. More- over, the burning ratio increased in 1892, and in 1893 reached the highest point recorded for many years, or perhaps in any year during which no great conflagration occurred. Accord- ingly, during 1892 and 1893 rates were advanced repeatedly, the average rate increasing about 10 per cent. In view of the enormous amount of risks carried, this increase in rate meant a very large increase in the insurance tax. In fact, the premiums collected in 1893 exceeded those of 1891 by over seventeen millions of dollars, about double the amount of increase which would have ensued from the increased amount of liability assumed. When the books of companies were balanced, as required by law, at the end of 1893, that year was found to have been the most disastrous year in the history of the business, barring conflagration years. Companies therefore entered upon 1894 with the belief that rates were still too low, and accordingly rates were made even higher, by five points, in 1894. During that year, however, and for the three succeeding years, the fire cost decreased each year and reached in 1897 the lowest point recorded in the entire period of thirteen years. At the same time and in consequence of this decrease the average rate receded. As may be seen, the course of the burning ratio and of the YALE INSURANCE LECTURES. *37 average rate is shown on the chart by lines almost parallel from 1893 to 1897. However, changes in the average rate, being caused by the burning ratio, follow the latter in point of time and are usually about one year later than the experi- ence which determines them. (Note the dip in the burning ratio in 1893 and the dip in the average rate in 1894.) Accordingly, the years from 1894 to 1897 were highly profit- able. In 1898, however, the burning ratio began to ascend once more, while rates, still under the influence of the extremely favorable record of 1897, continued to decline. Nevertheless, the year 1898 as a whole was a good one, especially during the later months, and underwriters entered 1899 without any strong incentive to advance prices. In fact, the average rate advanced but little in that year, though the burning ratio was excessive. The result of this combination of a low and stationary aver- age rate with a rapidly increasing burning ratio was that the loss ratio jumped to a point that meant a serious loss on the year’s business and rates began to advance once more, while the burning ratio receded slightly — not enough, however, to create a profit for 1900 or to check the accelerating advance in rates. This advance continued throughout 1901, during which year there was a further very slight recession in the burning ratio, so that companies ended that year with books nearly balanced as to income and outgo, though, when the added reserves necessary to care for an increasing business were taken into account, the year was a losing one. Nevertheless, there can be little doubt that under normal conditions the year 1902, barring an increase in the burning ratio, which did not occur, would have yielded a profit, because of the natural tendency of rates to continue to advance in the absence of that condition of things which, and which only, seems to bring about a reduction, namely — abnormal profits. But the year 138 YALE INSURANCE LECTURES. 1902 was full of abnormal experiences. Hardly had the results of the work of the year 1901 been ascertained when, in Febru- ary, two conflagrations followed one another in rapid succes- sion. These disasters occurred at Waterbury, Connecticut, and Paterson, New Jersey, and together destroyed property valued at about seven million of dollars. These fires, coming after a period of three years during which there had been no profit in the business, caused consternation in fire insurance circles. The officers of most companies believed that another unprofit- able year was in store and that the loss-paying ability of many of the companies would be seriously jeopardized unless some radical action was taken. So widespread was this belief and so urgent appeared the necessity for immediate action, that almost without exception companies — some by formal agree- ment, others by individual action — took steps in April, which resulted in advancing the average annual rate for 1902 by twelve points and carried it to a figure not before reached in the recorded history of the business. This was accomplished by arbitrarily advancing the existing prices for many kinds of property — the most hazardous — 25 per cent. It was an abnormal and radical method of pro- cedure, yet such was the temper and such the apprehensions of underwriters that few could be found who seriously opposed the step or doubted its wisdom. No sooner had this action been taken, however, than the fire record began suddenly to improve and continued to be highly favorable throughout the balance of the year, so that as events proved and despite its untoward commencement, the burning ratio for the whole year 1902 showed a perceptible decrease as compared with 1901, and was over 4 V 2 points below that of 1899. This fact, coupled with the radical advance in prices, reduced the loss ratio to 52J/2 and caused 1902 to rank as one of the best years in the history of the business. YALE INSURANCE LECTURES. I 39 The arbitrary advance above mentioned continued until 1903, with the result that the average rate advanced in that year somewhat above the high mark of 1902, while the burning ratio again receded. It resulted that 1903 closed with an average loss ratio of 48.6 per cent., the lowest ever recorded, and which caused an abnormal profit, so large as to make reduc- tions in the average rate an absolute necessity. In fact, the closing months of 1903 saw this reduction well under way and it was in full progress when the great Baltimore conflagration came to stay it. As to the wisdom or necessity for the great advance in rates in 1902 there is much room for argument. Some of those who favored it then afterwards came to consider it a mistake, and the facts expressed in our chart would not seem to demon- strate a valid reason for it. On the other hand, it must, in fairness, be said that the high rates which it produced made possible the accumulation, in the treasuries of companies, of funds which in many cases materially assisted them to survive the shock of the conflagrations in Baltimore, Rochester, and Toronto during the past four months, and the same high rates are even now effective in lessening to some extent the demands of those who believe that a further radical advance in prices has been made necessary by these conflagrations. We have already discussed most of the printed conditions of the Standard Policy in one of the earlier lectures. Those paragraphs which had particular reference to loss settlements, however, were then passed over and will be briefly consid- ered now. Referring to the Standard Policy, the first six lines state in a general and preliminary way — First (lines 1-2), the extent of the liability assumed by the company. This was discussed in the earlier lecture. Second (lines 2-3), the manner in which the loss or damage shall be ascertained. 140 YALE INSURANCE LECTURES. Third (lines 3-4), the date when proved claims shall become due. And, Fourth (lines 4-5-6), the options to which the company is entitled; (a) to pay to the assured the duly ascertained value of the property damaged, thereby acquiring ownership of it; or, ( b ) to repair, rebuild, or replace the property destroyed or damaged with other of like kind and quality after the loss or damage has been duly proved. But the assured is not permitted to abandon his property to the com- pany except at their option. The second and third provisions just mentioned are more fully elaborated in later paragraphs and will be touched upon when those paragraphs are discussed. The fourth provision is intended for the protection of com- panies. It enables them sometimes to defeat attempts to collect exorbitant claims for damages or to replace at actual cost a building or other property where an excessive amount is claimed. The first option is often useful in cases where an excessive damage is claimed on articles whose value has been fixed dur- ing the settlement. For instance : if the assured and the company have agreed that the original or sound value of a damaged stock was $10,000, but cannot agree as to the amount of damage done by fire, water or smoke, it is of course perfectly fair for the company to pay to the assured the agreed value, namely $10,000, and then to dispose of the stock as best it can. Very often by this means controversy is avoided and the claimant satisfied beyond cavil, while the company escapes with the loss of a much smaller sum than the claimant would have been satisfied to accept without dis- pute. Where this course is followed the damaged articles are usually cleaned, repaired, and put into the best possible con- dition and then sold. This process is called wrecking and YALE INSURANCE LECTURES. 141 has grown to be a business by itself. A number of insurance companies have organized a company to do such work and there are also private concerns who conduct renovating estab- lishments, where damaged goods and wares of every descrip- tion may be cleansed, laundered, polished, repaired, dyed, or put through any other process that will make them salable, and the salvages thus made are frequently surprisingly large. The second option — that which gives the company the privilege of replacing — is availed of by companies in extreme cases only. Insurance companies are not traders or con- tractors. They have no special machinery or opportunities for advantageous buying; in fact, are likely to be unable to purchase at as favorable terms as the assured. Nor if a building is to be repaired or rebuilt can the work be economically supervised and watched by an insurance com- pany, especially if, as is likely to be the case, the location is at a distance from the head office of the company. Moreover, the requirement that the company shall furnish articles of like kind and quality involves certain risks, for it may be necessary to prove that this condition has been satis- fied. A noteworthy case of this kind occurred not many years since in Tennessee, where the owner of a hotel which had been destroyed succeeded in establishing what seemed to the com- panies interested an excessively high valuation, — so high, in fact, that it was thought a new building like the old one could be erected for much less than the amount claimed. Accord- ingly, the companies elected to rebuild instead of paying the loss, and having called upon the assured for plans and speci- fications, proceeded to make contracts for the restoration of the building exactly as it was before the fire. It was practi- cally impossible for the companies to watch every detail of the construction, but an easy matter for the assured, who lived 142 YALE INSURANCE LECTURES. where the building was located. When the building was finished the companies tendered it to the assured in lieu of payment, but he was able to prove — or at least did prove to the satisfaction of a jury — that the building was not of exactly the same kind and quality as the old one which had been destroyed. Therefore he claimed the full cash payment and the court decided that the companies were liable. As a result, the assured received the full amount of his claim, with interest, and since the new building was on his land, he also acquired that. This was a very costly experience for the companies and will suffice to explain why the option to replace is seldom used. Passing now to the more detailed conditions of the policy, which refers to loss settlements, we begin at line No. 67. The paragraph embraced in lines Nos. 67-80 inclusive, states very clearly the duties of the assured if fire occurs and pro- vides first, — that he shall give the company due notice of its occurrence. Second, — that he shall protect the property saved, whether damaged or undamaged, — at the same time making an inven- tory of the same, with complete statement of quantities, values, and amount of claimed damages. And, Third, — that he shall, within sixty days, render a complete statement, under oath, giving in detail a full account of the fire and a description of the property involved, and of the facts concerning its ownership, in accordance with the list to be found in the paragraph under discussion. The next five lines, Nos. 81-85 inclusive, give to the com- pany the opportunity to inspect all that remains of the property, to cross-examine the assured as to claims and state- ments made and to verify same by an examination of the books and records of the assured. It will be seen that these provisions and requirements (embraced in lines Nos. 67-85 just mentioned) contemplate YALE INSURANCE LECTURES. M3 the making of a complete proof or statement by the claimant, which the company may thereupon verify, test, and pass upon, and, if the proofs set forth a claim which is satisfactory and correct under the terms and scope of the contract, it is to be presumed the company will, at the proper time, pay it. In common practice, loss claims are settled in a somewhat different fashion. As soon as practicable after a notice of loss has been received and without waiting for detailed state- ments, a representative of the insurance company — called an adjuster — goes to the scene of the fire for the purpose of investigating and settling, or adjusting, the claim. The adjuster's work is difficult and often technical. Since he is called upon to settle claims arising from loss or damage to buildings, an expert adjuster must be competent to super- vise and criticise plans and estimates. In order to adjust claims for mercantile losses he must be informed, or be able to acquire information, as to the value of commodities of all kinds, and should be well versed in the methods and customs of the various branches of commerce and manufacture. Furthermore, he must be a good accountant, so that he may be able to test the accuracy of the amounts of goods on hand, profits, etc., etc. Finally, and perhaps most important, he should possess the ability and personal qualifications necessary to carry on with as little friction as may be, negotiations concerning all these matters with claimants to the end that claims may be amicably and justly settled without dispute or litigation, which the better class of companies dread and will concede much to avoid. Since claimants usually have an exaggerated idea as to the amount of loss they have suffered, and are ignorant for the most part of the nature of the contract under which their claim has arisen, this is no easy task. In addition to these requirements, a good adjuster often has need of that alertness of perception and ingenuity which will 144 YALE INSURANCE LECTURES. enable him to detect and defeat the well laid plans of those too frequent claimants who endeavor, by one means and another, to fraudulently collect claims to which they are not entitled or which are dishonestly excessive. The first duty of the adjuster, after requiring the assured to take proper care of any insured property not totally destroyed, is to determine whether the company is actually liable for the loss or damage, or not. That is, he must find, through investigations of various sorts, whether the contract has been made void by any of the circumstances, acts, or con- ditions named in lines Nos. 7-30 inclusive. This will include an attempt to discover the cause which originated the fire. In those few cases where there is reason to suspect that the policy has been rendered void by fraud or some other cause, the adjuster must exercise a wise discretion as to his subse- quent actions. If there be clear evidence of deliberate fraud, he will secure proofs of it and take no further action. If, later, the assured attempts to present proofs or to collect his claim, the company will deny liability and contest the claim, if need be, in court; or, the claimant, knowing his case to be well-nigh hopeless, will consent to withdraw his claim for some nominal sum. Where there are strong indications of fraud, but not sufficient evidence to enable a flat denial of liability to be made, a temporizing policy is often pursued. The claim is investigated, the assured cross-examined and questioned, his statements are verified or disproved by careful investigation, and if, during the protracted negotiations, he is discovered to be making false statements, he will very likely put himself in a position where he must accept a partial pay- ment or compromise settlement, or he will perhaps defeat himself altogether. As stated above, however, the vast majority of claims are found to be honest and the sole duty of the adjuster in such cases is to ascertain the extent to which the company is liable. YALE INSURANCE LECTURES. x 45 Trifling losses demand little time or attention. The cost of petty repairs or the value of an insignificant amount of merchandise or other property, which has been destroyed, can almost invariably be quickly agreed upon. The small amount involved will not warrant either party in delaying a settle- ment. In the case of larger losses, the first step towards deter- mining the extent to which the company is liable is to endeavor to agree with the assured as to the fair cash value of the insured property immediately preceding the fire. In determining this value — usually called the sound value — the question of depreciation, — referred to at some length in a previous lecture — must be gone into. To determine the fair cash value of a building which has been destroyed or very badly damaged, it is usually necessary to have plans or descriptions furnished by the owner. By means of these it is not difficult to determine, by estimates obtained from builders or otherwise, what it would cost to replace the building. This amount, when subjected to a proper depreci- ation, represents, in ordinary cases, the value in question. There are, however, in every community, buildings which, on account of unfortunate location, bad design, or some other reason, have practically no real cash value. Insurance com- panies do not knowingly insure such buildings; but where, by reason of the carelessness of examiners or inspectors, or through the ignorance, or worse, of a local agent, such build- ings are insured, they are very apt to burn, and the loss settlements necessary in such cases almost invariably lead to controversy and must be settled — not by any well-defined rule but by some compromise, probably unsatisfactory to both parties. To fix the value of personal property, as, for instance, a stock of merchandise, is a more difficult matter. The basis io 146 YALE INSURANCE LECTURES. or starting point in the process of adjusting every loss on merchandise where a large portion of the value has been destroyed should be an inventory, which should furnish a clear and accurate statement of the quantities and values, with proper allowance for depreciation, of the insured property on hand at some date within a year previous to the fire. Since most merchants and manufacturers take annual inventories, this basis can usually be had, though often a careful verifica- tion of it is necessary. To find the value at the time of the fire there is added to the amount shown by the inventory the subsequent purchases as shown by the books and vouchers of the assured, and from the sum thus found are deducted the sales, less profits on goods sold. The question of profit is often difficult to determine, as many factors affect it and few merchants and manufacturers keep their records in such a way as to accurately measure this item. The rate of profit plays a very important part in the settle- ment of losses on merchandise, for the larger the profit the greater the loss, as will appear from the above statement. Where a policy covers staples in large quantities (usually in warehouses or elevators), such as cotton, tobacco, grain, flour, etc., instead of determining value by means of an inventory, it is determined by quantities and the market price, which fluctuates from day to day and which may be very different at the time of the fire from the original cost to the owner. When the value has been fixed, an attempt is made to agree upon the amount of loss or damage. If the property has been totally destroyed, this is, of course, not necessary. Where the property insured is a building and is but partially destroyed, the amount of damage is ascertained by determining the cost YALE INSURANCE LECTURES. 147 of the repairs necessary to fully restore the building to its former condition. Where merchandise or other personal property is merely damaged or partially destroyed, various methods of ascertaining the amount of damage are used. If no articles are totally obliterated, the damaged are separated from the undamaged and the amount of loss on each damaged article or package of goods is agreed upon. Then the sum of these agreed damages makes up the total loss which has been sustained by the assured. Where any considerable portion of a stock of merchandise has been completely obliterated, how- ever, the amount of loss sustained is determined by sub- tracting from the already ascertained sound value immediately preceding the fire, the value of that portion of the stock which is saved, making due allowance for any damages incurred. It sometimes happens that there is no inventory, either because none has been taken or because it has been destroyed in the fire. Such cases often test the ingenuity of the adjuster. He must secure from the assured some fairly accurate esti- mate of the value of the merchandise on hand before the fire. If any books of sales or of cash receipts are at hand, these are searched and the volume of his business and sales thus estab- lished. He is also usually required to secure duplicate invoices and bills from the manufacturers and jobbers from whom his stock was purchased. Sometimes his daily deposits and withdrawals from his banker are tabulated, and, finally, his own memory is searched, as well as those of his employees. By combining all these methods, some approximation of the value can be made, even if the entire stock on hand has been destroyed, but such cases are very unsatisfactory — so much so that most companies will not insure merchants who do not keep regular books of account and take annual inventories. Having now determined the sound value and the actual loss or damage, the claim is adjusted by applying the con- ditions and amount of the policy to these ascertained item,s. 148 YALE INSURANCE LECTURES. The assured may not recover more than the sound value. He cannot collect more than his actual loss, nor more than its proper proportion under any one policy. Moreover, if the co-insurance clause forms a part of the contract and he has failed to carry enough insurance to comply with it, that fact may affect the amount of his claim against the company. (See second lecture.) Nevertheless, when once the value and the actual loss are ascertained, the amount of the claim against the company can in almost every case be determined by a very simple mathematical calculation. This being done, the adjuster in ordinary cases helps the assured to prepare his proofs and forwards them to the company for approval and payment, or he may pay the loss on the spot. It was stated above that when once the value and amount of loss were ascertained, the proper amount of claim could be readily ascertained in almost every case. In some cases where more than one policy is affected and the policies differ in scope or conditions, it is very difficult to determine how great a claim should be made under each policy. For instance : Suppose three policies to be in existence at the time of fire and that all have been issued to the same merchant, who carries a general miscellaneous stock of merchandise, including dry goods, groceries, hardware, boots and shoes, etc., etc. Suppose further that these three policies cover as follows : The first — on his stock of general merchandise (which would include everything kept for sale) ; the second — on his stock of groceries and provisions only ; while the third covers his stock of groceries and dry goods. In such cases, of which this is a very simple example, even if the values and the amount of loss are quickly determined, it requires some skill and often protracted negotiation to determine just how YALE INSURANCE LECTURES. 149 much each policy shall pay, unless, indeed, the destruction of the property is so great as to involve beyond a doubt a total loss to all policies. This situation would be considerably complicated if one of the policies contained a co-insurance clause and the other did not. In any event, the company with the broadest or most inclusive form would be at a serious dis- advantage as compared with the other two. Such policies are called non-concurrent and are not knowingly written or permitted by insurance companies; but they are sometimes found to exist where several different agents have been inter- ested in a risk and have not been careful to examine all the policies in force upon it, for it is a fixed principle that policies intended to cover the same property shall be identical in language. Thus far we have assumed that the adjuster and the assured have agreed without much difficulty, though it must be admitted that the problems involved in fixing values, damages, and profits, and in defining the application or scope of the policy, afford many opportunities for honest differ- ences of opinion. It argues well, therefore, for the ability, tact, and fairness of adjusters as a class, that the number of claims which are not settled by agreement with the claimant is, comparatively speaking, very small. When, however, an agreement as to value and amount of loss cannot be reached, lines Nos. 86-91 of the policy provide that these questions shall be determined by arbitration. The case is then put into the hands of two arbitrators, — one chosen by the company and the other by the claimant, and the arbitrators themselves choose an umpire. A decision by any two of the three so selected is final. This is, theoretically and practically, an eminently fair way of settling such dis- putes if truly disinterested and competent arbitrators are selected. It sometimes happens that improper selections are 150 YALE INSURANCE LECTURES. made and the case is then likely to lead to much bitterness and feeling and, not infrequently, to litigation. It is to be noted that the arbitrators may fix the value and ascertain the amount of loss. They are not permitted, how- ever, to make any decision as to the liability of the company or as to the extent to which the policy shall apply. Where the assured and the adjuster cannot agree upon those points, a recourse to litigation is the only method of reaching a settle- ment. Either the company or the claimant may demand an arbitration at any time. Accordingly, when the case bids fair to be complicated or involves unusual problems, as, for instance, the determination of the value of or damage to large quantities of expensive machinery or the ascertainment of the damage of partially wrecked fire-proof office buildings, as recently in Baltimore, it is usual, at the outset, to adopt the method of arbitration. Usually in such cases neither side is competent to fix the loss and expert builders or machinists are employed as arbitrators. Lines Nos. 92-93 provide that the attempt to fix the amount of loss by appraisal and the other steps taken by the company to investigate the loss shall not be held to prevent it from denying liability later if circumstances warrant such action, or in any way bar it from the rights which the policy conditions confer. Lines Nos. 94-95 make the loss payable sixty days after it has been adjusted or the arbitration decided, and proper proofs have been filed with the company. This interval gives the company time to verify the proofs and to make any further investigation necessary to confirm the honesty of the claim. It also, in the case of conflagrations, allows time for the accumulation of funds with which to make payments.' Companies usually elect to pay small losses as soon as they are settled; and usually, too, they are glad to YALE INSURANCE LECTURES. 151 promptly pay large ones if the claimant will consent to the regular rate of discount for prepayment. In the second lecture it was stated that probably not over one-half of one per cent, of the total number of claims result in litigation. This is an extremely remarkable fact when the opportunities for conflict which present themselves in loss settlements are considered. The truth is, however, that adjustments are not often difficult to accomplish when there exists an honest desire on both sides to fairly and equitably measure the extent of the actual loss or damage according to the conditions of the policy. This is the usual condition, though sometimes men ordinarily honest cannot resist the temptation offered by the opportunity to make a profit out of a fire; and sometimes, too, though by no means often, it must be admitted, adjusters, impelled by a desire to make a repu- tation for successful settlements or because they desire to cut down the loss payments of their company as much as possible, are loth to deal out to the assured the full measure of com- pensation to which he is entitled. Companies of good standing do not encourage or knowingly permit injustice to claimants. The good-will of customers is a valuable asset and no company can afford to acquire a reputation for unfair settlements. On the other hand, all losses should be settled so that the assured may receive as near as may be the amount to which he is entitled and no more. Lax methods and a reputation for indiscriminate liberality are likely to make a company a target for numerous fraudulent claims and bring to it a class of patrons whose deliberate purpose when securing insurance is fraud. Furthermore, such methods violate that cardinal principle of insurance — “No profit to the assured from a fire,” and by so doing encourage carelessness, the increase of the fire waste, and the growth of incendiarism. *52 YALE INSURANCE LECTURES. Table given below shows the Burning Ratios, Loss Ratios, and Average Rates of the different States of the Union for a period of twenty-three years, ending December 31, 1902: State. Burning Ratio. Loss Ratio. Avg. Rate. Alabama 008l 52.9 .0153 Arizona 0194 79-9 .0243 Arkansas 61.6 .0193 California 43-8 .0155 Colorado 44.2 .0162 Connecticut 48.7 .OO94 Delaware 59-7 .0080 District of Columbia 0023 39-6 .0059 Florida 90.1 .0195 Georgia 0074 57-6 .0128 Idaho 57-9 .0244 Illinois 0057 49.6 .0115 Indiana 56.9 .0120 Indian Territory Ol66 75-8 .0220 Iowa 45-2 .0151 Kansas 0067 50.6 '01 33 Kentucky 61.6 .0131 Louisiana 0059 Si-7 .0113 Maine 0083 60.3 .0137 Maryland 56.2 .0076 Massachusetts 0057 56.5 .0100 Michigan 54-9 .0139 Minnesota 008l 57-4 .0141 Mississippi 52.1 .0188 Missouri 0077 64-3 .0119 Montana 34-8 .0240 Nebraska 43-5 .0151 Nevada 37-3 .0247 New Hampshire 0065 52.0 .0124 New Jersey 0045 56.3 .0081 New Mexico 54-3 .0196 New York 58-7 .0062 North Carolina 54-9 .0148 North Dakota 0154 77-4 .0200 YALE INSURANCE LECTURES. 1 53 State. Burning Ratio. Loss Ratio. Avg. Rate. Ohio 59-8 .0110 Oklahoma OO54 30.8 .0174 Oregon 43-2 .0201 Pennsylvania 006l 57-2 .0107 Rhode Island OO48 50.5 .0095 South Carolina . . . 0072 54-3 .0132 South Dakota .... 0090 48.5 .0185 Tennessee 66.4 .0150 Texas 62.4 .0163 Utah 0075 43 -i .0173 Vermont 65-9 .0138 Virginia 59-8 •0135 Washington OI33 60.5 .0220 West Virginia . . . . , 56-5 .0126 Wisconsin 55-6 .0142 Wyoming 35-8 .OI89 Below is given a simple example of statement such as is ordinarily made up, to show the method by which a loss is settled, and should be studied in connection with the remarks upon Adjustments in the last lecture. STATEMENT OF LOSS. Value. Last inventory $11,000 Deduct agreed depreciation 1,000 Net value date of inventory $10,000 Add purchases since inventory, including freight 4,000 $14,000 Deduct sales since inventory $5, 000 Less agreed profits 1,000 4,000 Sound value $10,000 I 54 YALE INSURANCE LECTURES. Loss. Property saved undamaged $3,000 Add property saved damaged $3,ooo Less agreed damage to same as per itemized schedule 1,000 2,000 Total salvage $5, 000 Total loss to assured 5,000 $10,000 Insurance carried $6,000, with 80% co-insurance clause, which, with a sound value of $10,000, requires $8,000 insurance to be carried. Therefore each $1,000 of insurance will have to pay % of $5,000 (the total loss), or $625. $6,000 insurance pays $3,750 Assured contributes $2,000 insurance, which pays 1,250 Total $5,ooo Fire Insurance Engineering METHODS OF BUILDING CONSTRUCTION FOR THE PREVENTION OF FIRE LOSSES BY H. C. HENLEY Much of the enormous fire loss in these United States can be traced directly to faulty construction of buildings; open elevator shafts, stairways, light shafts, well holes and other communicating openings through floors, creating natural flues, through which fire, once started, travels with lightning rapidity throughout the building. The arrangement of wooden sheath- ing on walls, metal and wood ceilings, the construction of attics, creating concealed spaces wherein fire, obtaining head- way, is inaccessible to streams of water. Mercantile build- ings with stone or iron fronts, backed with wood lath and plaster, leaving continuous open space through full height of wall from cellar to attic, defective construction of flues, defec- tive wood framing around flues — all tend to increase the fire loss. Within the past few years, insurance inspection bureaus have given the matter of the construction of buildings, towards making them more fire-retardent, much attention, and in attempting the correction of the above defects, the slow- burning building was designed, and most of the buildings which are erected at the present time, especially those intended to contain large and valuable stocks or to be used as large manufacturing plants, are either of slow-burning construc- tion or of the so-called fireproof type. 156 YALE INSURANCE LECTURES. I have been requested to describe the Standard Slow-Burn- ing Building. The Standard Slow-Burning Building differs from the building of joist construction in the following par- ticulars : The elevators, stairs, belts, etc., are enclosed in brick shafts — walls of shaft extending three feet above roof and shaft com- municating with each floor through openings provided with standard automatic fire doors. Floors are solid, without open- ings, constructed of heavy tongue and grooved plank with top floor of matched boards, with two thicknesses of asbestos paper between the two. The floors are laid directly upon the beams and girders and the bottom of the beams and girders are left open, preventing any concealed spaces in which dirt can accumulate. In this construction, there is less surface exposed to flame, and, the beams being heavier than joist in joist construction, the floor is kept intact a longer period of time, and there is a chance to hold fires that occur upon the floor in which they originate. Walls should preferably be built of hard-burned brick laid in cement mortar. Stone disintegrates quickly and granite is particularly bad under heat and will not stand fire and water. Steel or iron framework of walls, unless protected by brick or terra cotta, loses its strength rapidly under heat. Ornamental fronts and fronts having a large amount of glass are subject to severe loss from exposing fires. Good brick clay does not contain more than 6 per cent, of fluxing impurities and when hard burned affords the best material for the construction of walls. The small difference in the cost between brick made of good clay, hard burned, and brick made of inferior material is sometimes the cause of the cheaper brick being used. In a seven-story fireproof hotel structure, being erected at the present time, I noticed the quality of brick which was being used in the construction of the walls, and an analysis of the brick showed : YALE INSURANCE LECTURES. *57 Loss by ignition Silica (t Alumina 1441 tt Oxide of iron 5-82 tt Lime, CaO tt Magnesia, MgO 5-88 ft Alkalies 543 tt 100.00 Total fluxing impurities 27.29 per cent. The brick had weak bond, crushing at 2,610 lbs. per sq. in. It was poorly burned, as it was evident from its composition that it would not stand much over a low kiln heat without melting and its use as building material would be dangerous, since it would be destroyed at a temperature far below that common in burning buildings. The strength of the wall depends upon the mortar used and the best mortar is composed of Portland cement and clean, sharp sand, mixed while dry in the proportion of not less than one of cerr^ent to, three of sand, thoroughly mixed to a uniform color and sufficient water added to make a smooth mortar. The mortar should not be allowed to set or become hard before used. Mortar made and used as stated above will bond well and is very adhesive. Poor mor- tar is as bad as poor bricks and a wall made with poor mortar will be merely a pile of bricks with no bond after a few months weathering. Brick should be thoroughly wet be- fore being laid, preventing the absorption of the moisture from the mortar and causing it to cling to the brick. The thickness of walls should not be less than the following: The top story 13 inches ; the next two below 18 inches ; the next two below 22 inches; the next two below 26 inches; the next two below 30 inches. 158 YALE INSURANCE LECTURES. To prevent the weakening of the walls by inserting the ends of beams into walls they should be corbeled out on each floor to form a four-inch ledge for the floor planks to rest upon, unless a four-inch ledge is made by the walls receding to smaller dimensions. Changes in the thickness of walls should be made on a line with top floor beams. No wood planking, wood plates or wood lintels should be built in walls. In some instances, builders prefer to build wood plates in wall extending the full length at each floor level, for the pur- pose of supporting the floors. The wood plates enable them to lay the floor quickly and the floor requires no leveling. Introduction of these wood plates in the wall weaken it by reducing the thickness at that point and the shrinkage of the wood plates renders the floor at that point leaky. Party or Division Walls. As these walls, in the event of fire, are apt to be subjected to severe heat and shock from portions of buildings which they separate falling, it is neces- sary that they be built heavier and stronger than called for in exterior wall construction, and all party or division walls and bearing walls over 100 feet in length should be four inches thicker than the thickness called for in exterior walls, and the walls should be carried three feet above the roof and be coped with stone, cast iron or tile and corbeled sufficiently to extend past the cornice line. Flues. Flues for heating stoves should not be less than eight inches thick or, if lined with cast iron flue lining, the thickness may be reduced to four inches. Base of flue should not be supported upon any floor, but should be built from the earth. Flues for boilers, furnaces, etc., which heat the flue to a high temperature should be provided with double walls of a combined thickness of thirteen inches, leaving an air space of two inches in thickness for a distance of at least twenty-five feet above the smoke inlet. This inner wall should YALE INSURANCE LECTURES. T 59 be constructed of fire brick, laid in fire clay mortar. The area of the flue should be adequate for the service required. All woodwork should be trimmed away at least two inches from outside wall of flue and the space thus formed between trimmers and wall left open for ventilation, and no beam, girders or other woodwork should enter a wall within twelve inches of the interior of any flue. Columns , Beams and Girders. In buildings of this type it is preferable that all columns, beams and girders be of solid timber. Unprotected iron and steel supports are very unrelia- ble and will bend and twist quickly under heat. No metal supports should be used unless properly fireproofed. Stone or granite must not be used for any of the interior supports. The columns, beams and girders should be of such dimensions as to easily bear their respective strains after allowing an inch for charring on all sides. No timber, however, should be less than eight-inch dimension. They should be planed smooth on all sides which may be exposed to action of fire. Special precaution should be taken to secure ventilation around ends of timbers where entering walls, to prevent dry rot. Beams and girders should rest upon cast iron wall boxes built in the wall. All beams and girders should be beveled at top, prop- erly anchored to wall, but in such a manner as to be self-releas- ing, so that, in the event of a serious fire, their falling will not pry down the wall. The most simple arrangement is notching the under side of beams near the end and fitting the notch over a lug arranged upon the wall box. Columns should be continuous throughout all stories and ends connected with cast iron caps, pintels and base plates and also be arranged in such a manner as to be self-releasing. Where iron columns, girders and beams are used they should be protected by fire- proof covering of Portland cement concrete, not less than two and one-half inches thick at any point, or well burnt terra i6o YALE INSURANCE LECTURES. cotta, fire clay hollow tile of not less than three inches thick, and all joints thoroughly filled with Portland cement mortar. Timbers entering party walls from opposite sides should have the ends separated by at least eight inches of brickwork. A compromise construction, consisting of built-up timbers of small dimension, bolted together with washers placed between the timbers to prevent dry rot occurring in the timber, has not proven satisfactory, as there is more surface exposed to the flames, and fire in these crevices cannot be reached by streams. Floors. In the construction of floors, we have one of the most important features of the slow-burning building, and, if properly built, the floors will retard fire for a considerable length of time. They should be solid, without any openings, and, as the ceilings are open and smooth, effective service from hose streams may be obtained, providing the building is not of excessive area and height. Floors should be double, the under floor of plank, the upper floor of hardwood at least seven-eighths of an inch thick, tongue and grooved. Floors should be laid directly upon the beams or girders. The under or heavy floor plank should be planed on the exposed sur- face, splined or tongue and grooved, and at least two and three-fourths inches thick. For bays exceeding eight feet, the thickness of the plank should be increased. Between two floors two thicknesses of asbestos paper should be laid, care being taken to break joints, and paper should be turned up at least three inches at walls and secured in place by two inch moulding, nailed to floor. Ordinary roofing paper has been used to some extent, with an attempt to make the floor water-tight. Roofing paper is of little service, as it becomes torn through the shrinkage of the planks. It is neither water- tight, nor does it act as a fire retardent. The floors may be arranged to drain, by sloping them toward scuppers arranged YALE INSURANCE LECTURES. l6l in walls. The scupper should be placed about two inches below the level of the floor. Openings in the floors for steam and all other pipes, to prevent water from passing through openings made for pipe, should be provided with wrought or cast iron thimbles made water-tight at the floor, and extending three inches above it. No openings should be made through floors for elevator ropes or belts, but they should be enclosed within the brick walls of elevator shaft. Woodwork should not be painted or varnished. Fireproof paint for the under side of the floors may be used, but it is preferable not to paint the heavy woodwork until it has been up for some time and becomes dry. Roof. The roof should be constructed of plank and beam; plank to be tongue and grooved or splined and not less than two and three-fourths inches thick and planed upon the under side and covered externally with metal, composition or tile. A very acceptable roof is constructed of two thicknesses of asbestos paper laid directly upon the top of roof planks, one thickness of roofing felt upon the asbestos paper and the roofing felt covered with tar and gravel. A roof constructed in this manner will hold a fire from within the building until the upper part of the building is nearly destroyed, lessening the chances of ignition of exposed buildings. In all structures constructed upon roof, adjoining outside or division walls, the walls should be carried up as fire walls at least thirty inches above the roof of such structures, and, if the other enclosing walls are not wholly of incombustible material, the walls should be extended at least thirty inches beyond such intersecting wall. All other roof structures should be constructed of three-inch plank covered on the outside with metal or tile. Sash, if required, should be of approved sheet metal and wire glass. Cornice. Cornice should be of brick, terra cotta or metal on metal brackets. No roof timbers should enter the cor- II 1 62 YALE INSURANCE LECTURES. nice, or be used for the support of cornice. The parapet wall should be built out, to cut off cornice from any adjoining building. Stairways and Elevators. Stairways and elevators should be enclosed with walls of brick or Portland cement concrete and, where used as bearing walls, they should be of standard thickness for their height; non-bearing walls may be four inches less in thickness, but no wall should be less than thir- teen inches. Portland cement concrete walls, when reinforced with steel, or iron columns and beams, of sufficient strength to carry floors and their loads, should be not less than twelve inches thick. All steel and iron should be protected with, at least, two and one-half inches of concrete. Walls should extend at least three feet above the roof. All doors opening into the shaft should be protected by standard, automatic metal clad fire doors. Rolling steel shutters have been used to some extent for the protection of these openings, but this class of shutter is not reliable, cannot be closed quickly, is difficult to repair and is not to be recommended. Doorways into shaft should have iron or concrete sills, and the sills should be sufficient in width to cover bottom of door and full thickness of wall. Stairs in shaft should be of incombustible material. The bottom of stair shafts is used at times for gen- eral storage, and, if the stairs in shafts are constructed of wood, a fire at the base of shaft would extend to the top and, possibly, communicate with the various floors of building. The elevator shaft should extend three feet below basement floor level, and should be provided with adequate drainage con- nected with the sewer. Roof for shaft should be provided with skylights with one-fourth inch rib glass protected with wire netting placed directly over elevator. The elevator shaft should not be obstructed at the top by solid floors or platforms for the support of elevator motors or machinery; if extend- YALE INSURANCE LECTURES. 163 ing over shaft, floor should be of open lattice work, permitting the free discharge of smoke through skylight in case of fire. Dumb waiters should be enclosed within fireproof shafts, con- structed of Portland cement concrete and steel not less than four inches thick. All openings into shaft should be protected with automatic fire doors. Interior Finish . All partitions dividing a floor into com- partments should be of brick, tile, terra cotta, or iron studding, with iron lath and plaster; no wood studding, lath or furring, or enclosed raceways enclosing wires or pipes should be per- mitted, and wainscoting, if used, should be attached directly upon the wall and should have no hollow space behind it. Exterior Openings. Openings in exterior walls should be as few and small as possible and be protected with standard coverings. The openings for windows on street side should not exceed 60 per cent, of the wall area and the openings for windows on sides exposed should not exceed 30 per cent, of the wall area. Windows and door sills should be stone, iron or other incombustible material, and the sills should be of an equal thickness with the wall and project sufficiently to cover bottom of fire shutters. This is of importance as, in many cases, shutters do not fit sufficiently close to the walls to exclude flame from an exposing building. The exposure of openings overlooking alleys and roofs of adjoining build- ings is very severe and these openings should be protected in a substantial manner with standard metal clad fire shutters, fitting closely to wall, or by standard metal frames and sash with wire glass. Sheet metal shutters warp easily under heat, convey fire to interior or building through radiation and have not given satisfaction. Openings in Party or Division Walls. Openings through party or division walls into adjoining building should be pro- vided with double, metal clad, automatic fire doors, and all 164 YALE INSURANCE LECTURES. shaft and belt holes should be made as small as possible by- being bricked up or by being provided with double, metal clad fire shutters or metal hoods. It is impossible to thor- oughly cut off spouts and conveyers, and their passage through division walls should be prevented, if possible. Boiler Rooms. Boilers should be located in fireproof com- partments, walls constructed of brick of at least thirteen inches in thickness. Ceiling should be constructed of cinder concrete, tile, or be of brick arch construction. All openings into build- ings should be protected with standard automatic fire doors. A nine-inch brick wall is of insufficient strength to perma- nently support the weight of fire doors. Breeching of boiler should connect to a brick stack, and not to metal smoke stack, arranged outside of external wall. The boiler room should be of sufficient area, preventing the crowding of contents. Area. The height of buildings, unless of fireproof construc- tion and intended to be occupied for office or hotel purposes, should not exceed the height available by the local fire depart- ment. The highest apparatus used by fire departments for elevating hose nozzles are extension trucks, and these trucks are made to a height of seventy-five feet, and so arranged that hose nozzles may be operated at the top of ladder. Only very large cities have sufficient of these trucks to place a number of streams in operation. Hose streams operated from the ground level to the upper stories of a building are not effec- tive, as the water is thrown but a short distance within the building to the ceiling, falling upon the floor, leaving the center of the building unprotected. In large cities having first-class fire departments, buildings should not exceed five stories in height. Unless the building is protected with auto- matic sprinklers, the area of the building should not exceed 5,000 square feet. Buildings of larger area should be sub- divided by division walls, communicating through openings YALE INSURANCE LECTURES. 165 provided with automatic fire doors. Buildings of very large area filled with combustible stock, stock at times piled to ceilings and in a manner that prevents sending streams to center of floors, are not safe when of any known construc- tion, as fires occurring can not be extinguished and the heat will be sufficient possibly to destroy the building. “Fireproof” Construction. Buildings of this type differ from the slow-burning building in the construction of the floors and roofs, the floors and roof being constructed wholly of non-combustible material such as cinder concrete, tile or brick, supported by protected steel work. In the skeleton type of fireproof construction the entire load is carried by a framing of steel, all exterior columns being protected by fireproofing of sufficient thickness to protect the steel work. While the building may be constructed wholly of non-combustible ma- terial, the interior, if filled with inflammable material, thor- oughly afire, would be likely to cause a total or a partial destruction. Buildings of this type are superior to slow-burn- ing buildings on account of there being no combustible material used in their construction, but it is necessary that all steel framing for floors and all columns supporting the floors, be properly protected with tile, terra cotta, brick or concrete of sufficient thickness to thoroughly protect them from excessive heat. Vertical openings through floors of buildings of this type are just as objectionable as in buildings of slow-burning construction, and all elevators, stairs, etc., should be enclosed with brick shafts with openings communicating with each floor protected by automatic fire doors. The cost of buildings of this type is about 20 per cent, more than the cost of buildings of slow-burning construction, and the difference in rate of insurance is such that it is a very excellent investment for prospective builders to erect buildings of this type, and they are coming into more general use. 1 66 YALE INSURANCE LECTURES. Fire Doors. The best fire door is the wood, tin-clad door, hung upon a rail which is fastened to the wall on an incline and so arranged with fusible link that upon the melting of the fuse the door will automatically close. This automatic arrangement should not be such as to prevent the doors from being closed by hand when the openings are not in use, and the doors should be operated daily. If allowed to stand open the doors become blocked with stock, and cleated open at the floor, and pulleys supporting door are apt to stick on rail. Wood tin-clad doors not exceeding forty-eight square feet should be made of two thicknesses of well-seasoned white pine of at least seven-eighths inch thickness each; one layer to be vertical, and the other layer to be at right angles ; layers securely fastened together by wrought iron clinch nails. The doors should be thoroughly covered upon all sides and edges with heavy tin plates not exceeding 14 x 20 inches in size, and all joints locked and nailed under seams. The door should be of sufficient area to cover the opening, which it is intended to protect, two inches upon all sides and top. Doors exceeding forty-eight square feet of area should be con- structed of three thicknesses of seven-eighth inch white pine placed together and covered as described above. The value of the door will depend upon the quality of the tin and the manner in which the joints have been made, as the covering must be sufficiently tight to exclude oxygen, preventing com- bustion of the woodwork. Hardware for fire doors should be of wrought iron, as cast iron fractures upon application of water when heated. Fire doors constructed wholly of iron or steel warp under heat, carry fire through the openings they are intended to protect by radiation, are not easily repaired, and have given very poor satisfaction. Electric Wiring for Light and Power. Electric lights, both incandescent and arc, are in general use and afford the YALE INSURANCE LECTURES. 167 safest and most convenient means of furnishing light and power at the present time, when the wiring is properly installed and maintained in good condition. There being no concealed spaces in buildings of slow-burning construction, the wires are supported upon the ceilings and walls in plain view, where any existing defects may be discovered and remedied. Where the circuits are supported upon the ceilings they should follow the contour of the beams and be securely fastened thereto, by sufficient porcelain cleats to securely hold them in place. Wires supported in this manner will remain in position and do not disfigure the ceiling. Wires supported from beam to beam sag and loosen at supports, and, within a short time after installation, hang in loops and easily become crossed. Insecure fastenings, loose connections in joints, switches and cutouts, are responsible for most of the fires caused by electricity. The wires, switches and cutouts should be of ample capacity ; the switches and cutouts constructed of non-combustible material; all connections well and securely made and circuits protected by proper sized fuses. Fuse metal, if properly pro- portioned, melts at a less temperature than the copper of the circuit, interrupting the flow of current upon a short circuit or excessive flow of current, when occurring from imperfect insulation, causing leaks to occur or overloading of the circuit above the capacity of the wire. The over-fusing of a cutout is similar to the over-weighting of a safety valve upon a steam boiler. The' probable result would not be as disastrous in the electrical installations as in the boiler installation, but the over-fusing of the cutout would as surely cause fire to occur in the event of a short circuit. All fuse metal should be properly enclosed, preventing the ignition of combustible material nearby from the blowing of the fuse. Protection. Results have shown that very excellent pro- tection may be expected from automatic sprinkler service in i68 YALE INSURANCE LECTURES. buildings of slow-burning and fireproof construction, and, where buildings of these classes are protected with sprinkler equipments, the area of the buildings is not of so much con- sequence. An automatic sprinkler equipment consists of an arrangement of pipes regularly spaced under all ceilings and extending to all closets, rooms, under benches and all con- cealed spaces with automatic sprinkler heads or valves attached; the system of piping being supplied automatically with water from elevated tanks, pressure tanks, city connec- tions or pumps. Two of any of the above sources of supplies being necessary for standard equipments and in cities having fire departments, steamer connections are attached to the equipment in such manner that the fire department may pump directly into the system, reinforcing the supplies. There are two kinds of equipments — wet pipe systems in which the pipes are continuously filled with water, and dry pipe systems, the pipes of which are filled with air as far as the automatic valve, which is held closed by the pressure of the air. In buildings where the temperature is such that the water in the pipes would be apt to freeze, dry systems are installed. Wet systems are preferable as their operation is more prompt, and there is less opportunity for this class of equipment to become disarranged, as there is no obstruction to the flow of water, when the main valve is open, but the sprinkler heads. The sprinkler heads, or valves, are sealed close with fusible solder melting at temperatures ranging from 165 to 360 degrees, the desired sprinkler being determined by the temperature of the place in which the sprinkler is to be located; dry rooms, ceilings directly above furnaces, etc., requiring sprink- lers which open at a higher temperature than would be required in ordinary mercantile risks. On account of smooth ceilings and absence of vertical openings through floors and concealed spaces at walls, sprinkler protection in buildings of YALE INSURANCE LECTURES. 169 slow-burning and fireproof construction is more effective than in buildings of joist construction. In joist construction, the space between the joists is, to some extent, out of reach of the distribution from the sprinkler heads, and fire obtaining headway in these spaces must be extinguished by hand. Sprinkler heads should be so located as to protect all parts of the premises. The number and spacing of sprinkler heads is determined by the construction of the ceiling and class of stock contained in building. Under open joisted construc- tion the pipes should be run at right angle to joists, not more than ten feet apart, and sprinkler heads placed not to exceed eight feet apart on pipes and the sprinkler heads staggered — that is, the sprinkler heads be so located as to distribute water into alternate joist channel ways. In sprinkler pro- tection the most important question is that of supplies. An equipment, if installed in the most approved manner, unless with adequate supplies cannot possibly render as good service as an inferior equipment with good supplies. Two sources of supply are necessary, to lessen the chances of a water shortage in time of fire. One of the supplies should furnish water under a heavy pressure, that the first sprinklers opened may be as effective as possible. Public water works, having adequate sized mains and providing a continuous heavy pressure, are most desirable. Next in value are pressure tanks which furnish an excellent primary supply, especially in connection with wet pipe sprink- ler service. Pressure tanks are not so effective for dry pipe sprinkler service, as much of the initial discharge is consumed, in filling of the empty pipes. The tanks should not be placed below the top floor, and better service is obtained if located upon the roof, as less air pressure would be necessary to expel all of the water under good pressure, the tank being above* all of the sprinkler heads. Pressure tanks are cylindrical in 170 YALE INSURANCE LECTURES. shape, constructed of steel, air-tight, and the size of the tank generally used is sixty-six inches in diameter and twenty-five inches in length ; total capacity, 4,500 gallons ; water capacity, 3,000 gallons ; two-thirds of the tank containing water and the remainder filled with air under pressure. The number of tanks necessary depends upon the number of sprinkler heads per floor, and, if the tank supply is of a capacity to supply 20 per cent, of the sprinkler heads upon the floor having the greatest number, allowing 200 gallons of water per head, the supply will be considered sufficient. No tank, however, should be of less than 4,500 gallon capacity. Gravity Tanks. Greater quantities of water may be stored in gravity tanks, as no air space is required. The tanks should be of a capacity sufficient to provide 5,000 gallons for each 100 sprinkler heads upon the floor having the greatest number. The pressure of the water delivered from gravity tanks is wholly dependent upon the height of the tank above the highest sprinkler heads, and the tank should be elevated as high as possible. The bottom of the tank should not be less than fifteen feet above the highest sprinkler heads. Gravity tank supply should not be used as a primary source, as the pressure, dependent upon the length and size of pipe, fittings and deposits, is often insufficient to discharge the water into ceilings, but will answer very well to wet all material below the sprinkler heads. Pumps. Pumps as a source of supply for sprinkler service are less desirable than any of the supplies referred to above, due to their liability of being out of order through disuse, lack of care, and on account of their limited supply while in operation. When installed, Standard Underwriter pumps should be used. They differ from the ordinary trade pump in being constructed of greater strength to withstand excessive strain; YALE INSURANCE LECTURES. 171 the steam and water passages are of greater area; and the plungers, piston and valve rods and lining of stuffing boxes are constructed of non-corrosive metal, preventing as far as possible the disability of the pump from rust. The pump should be provided with automatic steam valve, adjusted to maintain a continuous high pressure. Where pump is intended for primary service, recording steam gauge should be provided. Automatic Sprinkler Alarm. Sprinkler equipments are provided with an automatic alarm arrangement, which sounds a warning when the water within the“pipe is set in motion, caused by the opening of a sprinkler head, or pipe, by accident or fire. When kept in proper order, too much importance can not be placed upon the alarm, as serious water loss may result from a small fire, which the sprinklers extinguish, if the flow of water is not checked. Several severe losses have occurred in this manner. Outside Sprinklers. For the protection of cornices, struc- tures on roofs, and openings in exposed walls, a well designed system of outside sprinklers affords the best protection. The supply should never be taken from the supplies pro- vided for an automatic sprinkler system, but from independent connections from stand pipes or city water works. Where the local fire department can be induced to attach to the equip- ment, steamer connections should be added. Open automatic sprinklers are not acceptable for this use. Specially arranged sprinkler heads discharging the water against the building have been designed. The piping should be adequate, as all of the sprinklers are to be operated at one time, discharging a considerable amount of water. The equipment should be provided with a separate riser for each two floors, all risers connecting with a main on the 172 YALE INSURANCE LECTURES. lower floor, through cut off valves. The risers should pass through the floors, and short extensions from the cross mains project through lintel of each window frame, to the exterior part of frame. One sprinkler head at each opening is suffi- cient to protect windows not exceeding four inches in width. For the protection of cornices, the sprinkler heads should be spaced six feet apart. High Pressure Service. For the protection of congested districts in large cities, exposed to sweeping conflagration, a system of high pressure service supplied by a sufficient number of stationary pumps, i$ far in advance of the present method of reinforcing the pressure from water works with steam fire engines. The great height to which buildings are now erected, narrow alleys and streets, unprotected openings of buildings, increase the conflagration hazard to a considerable extent, and the present method of supplying hose streams from steam fire engines is slow and inadequate. A very excellent high pressure system, such as has been referred to above, has been installed for the protection of the buildings of the Louisiana Purchase Exposition, and, while a number of fire engines will be kept upon the grounds, it is not intended to use them, except for pumping into some of the sprinkler systems which will be installed. Hose connections will be made directly to fire plugs and continuous pressure maintained in system by stationary steam pumps provided with automatic valves. The mains are of extra strength of wrought iron pipe and ends connected together with threaded couplings. All exterior mains are laid in the earth below the frost line and tested to 300 pounds per square inch after installation. The trunk lines consist of three twelve-inch pipes, extend- ing the full length of the grounds, and these lines are cross YALE INSURANCE LECTURES. *73 connected with eight-inch, ten-inch, and twelve-inch pipes between each two buildings, each connection being provided with a cut-off valve enabling any section to be disconnected, in the event of a break, without disabling the service. Two six-inch feed pipes connect with four-inch circulating mains in each building, supplying the interior fire hydrants. Extensions are taken from the four-inch circulating mains to roofs of buildings and supply numerous hose connections. A sufficient number of three-inch deck turret nozzles, con- nected with the underground mains by six-inch connections, are located upon platforms in the main buildings, to discharge water over the interior of the building in the event of serious fire. For exterior protection three way, self-draining hydrants are placed one hundred and fifty feet apart, and about one hundred feet distant from buildings. The hydrants are suffi- ciently close to avoid the necessity of running long lines of hose, thereby reducing the pressure through resistance. First class two and five-eighths inch fire hose is expensive. A fifty-foot section of the best hose costs more than a hydrant. The deterioration of hose is greater than that of a hydrant, and it is economy to install hydrants in sufficient number that less hose be required. The water supplies will consist of fourteen Worthington “Underwriter” pumps, of one thousand gallons capacity each, taking water, through a twenty-four inch suction pipe, from a reservoir of six million gallons capacity, and discharging into the system of pipes through a twenty-inch main. The elevation of the reservoir is above that of the pumps, and the water is delivered to the pumps under about five pounds pressure. The system is also connected to the city water works service, through several connections to twelve and thirty-six inch pipe, i74 YALE INSURANCE LECTURES. furnishing a supply from this source under pressure from ninety to ninety-five pounds. These connections are provided with check valves, pre- venting the pump pressure, which is the greatest, from passing into the city pipes; if the demand exceeds the capacity of the pumping plant, the check valves will open automatically. A separate system for domestic service has been provided, and the high service system will be used for fire protection exclusively. The pumps are located in a fireproof building, which is also to be occupied as a boiler house. The building is exposed by the machinery building, one hundred feet distant. The exposed wall is to be protected with outside sprinklers. Sufficient boiler capacity will be furnished and each pump is provided with independent supply and exhaust pipes, the supply pipes connecting with a steam main connected to inde- pendent batteries of boilers. Fire Hose. At present 29,000 feet of two and five-eighths inches cotton, double jacket, rubber lined hose, for outside hydrant use, has been provided, three feet samples of this hose, before purchase, passing the test for strength required by the National Board of Underwriters. This test requires, in three feet lengths, bursting pressure to average not less than: When straight 500 lbs. When curved, radius two and quarter feet 500 “ Ends tied together, sharp kink in center 300 " Most samples leaked or burst when subjected to the curve test. The above requirements are more severe than needed for private fire protection service, but, as the hose tested was of the kind sold and generally used by public fire departments where wear and tear is considerable and heavy pressure fre- YALE INSURANCE LECTURES. I 75 quently carried upon the hose, due to long lines kinks and curves, the test for strength should necessarily be severe. Some of the samples of hose tested showed an excessive twist under pressure, sufficient, in a length of fifty feet, to loosen the couplings and cause leaks. Hose should show little tendency to twist, and the twist should be in the direction to tighten and not to loosen the coupling. Cheap hose is a disappointment, and the most expensive in the end. Many fires have gotten beyond control on account of the bursting of hose just at the time when most needed, and the hose provided for use in the public fire departments should be of the very best. For the protection of the interior of the buildings, hydrants are placed one hundred and fifty feet apart. One and one-half inch hose is provided for these hydrants and hose connections on roof, as it is believed that hose of this size can be more quickly handled and placed in service. The hose connections of the interior hydrants are bushed down for connection with the one and a half inch hose and the heavy hose can be attached to any of the hydrants by removing the bushing. Fire Alarm System. The fire alarm system is to consist of two hundred and twenty-five fire alarm boxes distributed about the various buildings and grounds. One hundred and twenty of these boxes are now in place. There are two box circuits for each building, and the boxes will alternate on circuits so that all of the boxes in any one building will not be dependent upon one circuit. The circuits are placed in a subway and protected from * lighting and power wires and extend to a central station located in engine house No. i. 176 YALE INSURANCE LECTURES. Operators, serving eight hours watch each, are in attend- ance day and night, and all alarms are received and sent out from this office. The central station is connected with the city fire alarm office by box circuits and telephones. Construction of Buildings. The buildings, except the Fine Art Buildings, are constructed of frame, composition and gravel roofs, exterior walls covered with staff and interior walls coated with whitewash. Where hollow walls occur, the hollow space is broken by vertical and horizontal fire stops, preventing any fire which may occur from spreading in walls. All burlap, bunting and other inflammable material used for decoration will be chemically treated, preventing its rapid combustion. 1 / 9 & 1 I m -r£_ vye UNIVERSITY OF ILLINOIS-URBANA HG9658.Y34X C001 YALE INSURANCE LECTURES NEW HAVEN 3 0112 020944184