Fidelity and Surety Insurance. 
 
 A PAPER 
 
 BY 
 
 •;v • 
 
 CHAS. A. DEAN, 
 
 PRESIDENT OF THE 
 
 National Surety Company, 
 
 OF NEW YORK. 
 
 READ BEFORE THE THIRTIETH NATIONAL 
 CONVENTION OF INSURANCE COMMISSIONERS. 
 
 DETROIT, SEPTEMBER 7—9, 1899. 
 
Digitized by the Internet Archive 
 in 2017 with funding from 
 
 University of Illinois Urbana-Champaign Alternates 
 
 https://archive.org/details/fidelitysuretyinOOdean 
 

 Fidelity and Surety Insurance. 
 
 HE custom of giving bonds is as old 
 
 J. as civilization, and it is surprising 
 that corporate suretyship was not much 
 earlier introduced. New forms of insur¬ 
 ance are the outgrowth of new conditions, 
 and any fresh departure which embodies 
 an element of risk, usually finds enterprising 
 capital prompt to promote an insurance 
 feature, if that risk can be intelligently un¬ 
 derwritten. Yet for ages after corporations 
 first engaged in other lines of insurance, we 
 find individuals obligating themselves to 
 vouch for their friends’ honesty and business 
 success, and suffering consequent loss. It 
 is only fifteen years since the first company 
 was organized in this country for the prose¬ 
 cution of a general fidelity and surety busi¬ 
 ness. One would think, too, that upon its 
 appearance, the corporate bond would have 
 been greeted with universal approbation ; 
 that the demand for it would have been im- 
 
 3 
 
 3 S 3 
 
mediate; the growth of the business phe¬ 
 nomenal. But such was not the case. De¬ 
 spite the warnings of Holy Writ, the coun¬ 
 sel of philosophers and eminent writers, 
 the dictates of logical reasoning and com¬ 
 mon sense, the public has been slow to 
 comprehend its advantages, and to-day, 
 while considerable progress has been made, 
 a very large percentage of the whole number 
 of bonds given in the United States is signed 
 by individuals. • Yet there is no argument 
 to support the personal bond. The only 
 excuse for its ever having existed, was the 
 absence of its corporate successor. No man 
 has a right to ask his friend for such gratui¬ 
 tous assistance. No man is justified in 
 assuming for another, an obligation which 
 hazards his estate and may impoverish his 
 family. 
 
 Sir Walter Raleigh so well expressed the 
 position of the personal surety, and also 
 the imposition upon friendship which the 
 personal bond entails, that companies have 
 made free use of his words in their educa¬ 
 tional literature, and it is fitting that I 
 here repeat the familiar quotation : 
 
 “ If any desire thee to be his Surety, give him a part 
 of what thou hast to spare ; if he press thee farther, he 
 is not thy friend at all, for friendship rather chooseth 
 
 4 
 
harm to itself, than offereth it. If thou be bound for a 
 stranger, thou art a fool; if for a merchant, thou puttest 
 thy estate to learn to swim ; if for a churchman, he hath 
 no inheritance; if for a lawyer, he will find an evasion 
 by a syllable or word to abuse thee; if for a poor man, 
 thou must pay it thyself; if for a rich man, he needs 
 not; therefore, from Suretyship, as from a manslayer or 
 enchanter, bless thyself; for the best profit and return 
 will be this—that if thou force him for whom thou art 
 bound, to pay it himself, he will become thy enemy ; if 
 thou use to pay it thyself, thou wilt become a beggar.” 
 
 Moreover, the personal bond is, for 
 many reasons, inadequate security. In 
 event of loss, the surety will frequently be 
 found to have become insolvent, or if finan¬ 
 cially able to pay, will seek, as a rule, every 
 avenue of escape. He is a favorite of the 
 law, and he has the sympathy of courts 
 and juries. 
 
 I shall not go into the earlier history of 
 the corporate bond across the Atlantic, 
 where it was first introduced, nor enlarge 
 upon its advantages over the personal bond, 
 but rather confine my remarks to the busi¬ 
 ness as conducted in the United States, 
 outlining, in a general way, the principles 
 applicable to fidelity and surety under¬ 
 writing, and touching upon prevailing con¬ 
 ditions and future prospects. 
 
 The business of corporate suretyship is 
 divided into two distinct branches. One is 
 commonly known as “ Fidelity Insurance,” 
 
 5 
 
i.e., guaranteeing the honesty of officers and 
 employes of corporations, etc. Under the 
 language of the insurance law, fidelity in¬ 
 surance may include bonds of fiduciaries 
 and other special risks, but I shall treat of 
 it as applied only to bonds of officers and 
 employes, classhying all other risks under 
 the second branch, sometimes styled “Surety 
 Insurance,” i.e., becoming surety upon bonds 
 and obligations permitted or required by 
 law, guaranteeing the performance of con¬ 
 tracts, etc. 
 
 Fidelity Insurance. 
 
 Fidelity Insurance, as limited above, 
 was first introduced in the United States 
 by the Fidelity and Casualty Company, 
 organized in 1876. Under its broad chart¬ 
 er, fidelity insurance is only a feature, and 
 its first business of this character was trans¬ 
 acted in 1879. The Guarantee Company 
 of North America, of Montreal, was the 
 pioneer fidelity compan}^ in North America, 
 and prior to its admission to the United 
 States in 1881, had made some little pro¬ 
 gress in the Dominion. These two com¬ 
 panies had a monopoly of the field until the 
 
 6 
 
organization of the American Surety Com¬ 
 pany in 1884. During the previous year, 
 their aggregate fidelity premium income was 
 only $238,611. Slow indeed had been the 
 progress up to that time! 
 
 Selection of Risks.—We have not reliable 
 experience tables to govern the acceptance 
 of risks, and I doubt if statistical informa¬ 
 tion will ever furnish an absolute guide. 
 Some men will be honest under any and all 
 circumstances; others will misappropriate 
 without excuse ; but the great majority of 
 men intend well and fall only through 
 temptation and weakness. Our decision 
 must be founded upon the applicant’s family 
 connections, his own personal record, the 
 characterizing influences of the position it¬ 
 self, the attendant opportunity for misap¬ 
 propriation of funds and the system of 
 supervision and checking of accounts which 
 will be maintained by his employer. It 
 would be difficult to list the causes of de¬ 
 falcation in order of importance. Certain 
 vices may be classed as equally dangerous, 
 and I would hesitate to say that specula¬ 
 tion does not lead to more disastrous re¬ 
 sults than any of the so-called vices. Pre- 
 
 7 
 
vailing conditions have much to do with 
 the question. I once thought that loca¬ 
 tion was a very important factor in fidelity 
 underwriting, but after A-ears of experience 
 I am prepared to say that men reared in a 
 new country, where the absence of refined 
 social conditions and the prevailing atmos¬ 
 phere, invite an unusual freedom of life, are, 
 perhaps by reason of this very environment, 
 as good fidelity risks as though brought up 
 in touch with more elevating surroundings. 
 If the applicant’s family are worthy per¬ 
 sons, and the applicant himself has arrived 
 at mature age and in his own record shown 
 evidence of a high standard of character, 
 we have a fair starting point. But we also 
 have to deal with the young man just be¬ 
 ginning life, with no business record to 
 guide us. What shall be his future will 
 largely depend upon the temptations which 
 may or may not confront him. And here 
 let me say that I think it morally wrong to 
 advance mere boys to important positions 
 of trust. It frequently occurs that an em¬ 
 ployer, recognizing ability in a young man, 
 places him in a position of responsibility 
 far beyond his years. If he have not ex¬ 
 ceptional control of himself, he will be 
 
 8 
 
spoiled at the outset. First, he will form 
 an exalted opinion of his own importance— 
 a most dangerous step. Next, he will be 
 found living beyond his means, from which 
 it is only another step to his downfall. 
 The employer will do the promising young 
 clerk a kindness if he advance him through 
 positions of trust gradually, affording an 
 opportunity for his character to develop, 
 and prepare him for the ultimate position 
 of greater responsibility. 
 
 Inspection*—Is fidelity under writing, then, 
 a mere speculation upon the outcome, wfith 
 reliance upon the average on the side of hon¬ 
 esty ? Certainly not. Properly conducted, 
 the work upon fidelity risks only begins with 
 their acceptance. There follows an investi¬ 
 gation more or less minute, as circumstances 
 in individual cases may dictate, into the 
 continued personal life of the employe. 
 Occasionally sentiment has prompted ex¬ 
 pressions in opposition to the system of 
 inspection pursued, accusing companies of 
 occupying the sphere of detective agencies, 
 but their authors do not fully comprehend 
 the situation; are usually unfamiliar with 
 the subject; therefore incapable of intelli- 
 
 9 
 
gently criticising the methods emplo 3 "ed, 
 and are ignorant of the mutual advantages 
 to all concerned, of a searching and con¬ 
 tinued investigation. It can be so conducted 
 as not to be in any way offensive, and as for 
 the employe, he many times comes to ap¬ 
 preciate that the fidelity company is his 
 best friend, as when it speaks a word of 
 timely caution at the very threshold of an 
 impending downward career, and turns him 
 “ right about face.” Subsequently he may 
 thank the company and its methods for his 
 ultimate success in life. 
 
 As I have above stated, some men are 
 honest from principle, strong in character, 
 and regardless of conditions and surround¬ 
 ings will not be swerved from the path of 
 strict fidelity. Others, possessing the same 
 elevating principles, are weak, subject to the 
 influences of their environments and easily 
 led astray; and there are some wholly 
 devoid of principle, and restrained from 
 wrong-doing only, if at all, through fear of 
 the penalties of the law. The latter must 
 be weeded out and close inspection will 
 soon furnish ample excuse for cancellation. 
 Our chief labors lie with that great middle 
 class. Perhaps they constitute a majority 
 
 10 
 
of the whole. Who shall say what temp¬ 
 tations come into our individual lives ? 
 The constant vigilance of companies which 
 strive to prevent losses, and labor to 
 remove the causes which lead to them, is 
 of as great a benefit to the employer as is 
 the limited guarantee against loss ; and I 
 assert that inspection, open and secret, is 
 the most important factor to the safe and 
 proper conduct of fidelity insurance; and 
 the company which has the most efficient 
 corps of trained inspectors, not only will 
 show the lowest loss ratio, but also will 
 be of the greatest benefit to employer and 
 employe. 
 
 Systems of Accounting.—There are very 
 few men who deliberately and premedi- 
 tatedly set about working out a plan to 
 embezzle and cover up their shortages. Op¬ 
 portunity plays as important a part as 
 disposition. Defalcation usually springs 
 from yielding to impulse, the result of some 
 quite unforeseen condition or circumstance. 
 The weak man may be confronted by a 
 great temptation to use his employer’s 
 funds for a purpose—no matter what. 
 Whether this man will yield or not, de- 
 
 11 
 
pends largely upon his opportunity to evade 
 early discovery. If a bank account be at 
 his disposal, subject to his individual check, 
 the chances are he will fall, hoping to find 
 some means of replacing the amount taken, 
 before his act shall have been discovered. 
 So there enters into the proper conduct of 
 fidelity insurance, the education of employ¬ 
 ers to the adoption of approved systems of 
 accounting and audit, in place of lax 
 methods frequently found to prevail. Much 
 has been accomplished in this direction since 
 the introduction of fidelity insurance, but 
 much more remains to be done. We still 
 find many instances where the large re¬ 
 sources of corporations and business enter¬ 
 prises are in the custody and under the 
 control of one man, and an unwillingness 
 manifested to remedy the evil. Of course 
 there are exceptional cases, where the trust¬ 
 ed official must act alone in the absence of 
 any associate with whom to divide respon¬ 
 sibility, but where the circumstances permit 
 of provision for such joint control of funds 
 and securities as will reduce the possibility 
 of loss to a minimum, fidelity companies 
 will do well to decline to undertake the 
 risk, unless such approved systems have 
 been, or will be, adopted. 
 
 12 
 
Prosecution of Defaulters*—One of the argu¬ 
 ments in favor of fidelity insurance, as 
 widely proclaimed, is the prosecution of the 
 defaulter. The very existence of the corpo¬ 
 rate bond has a deterrent effect upon the 
 employe hesitating under dangerous influ¬ 
 ences. He cannot anticipate the leniency 
 and assistance he might expect from his 
 friends, had they become his surety in the 
 old way. He knows that if he be unfaith¬ 
 ful, he will have a corporation with which 
 to deal, and not a personal friend ; that if 
 he become a fugitive, the company will pur¬ 
 sue him, no matter to what remote clime 
 he may flee, and exhaust every means to 
 cause his apprehension and return. Prose¬ 
 cution and conviction certainly have a 
 salutary effect upon fellow employes, and 
 timely warning is thereby given many on 
 the verge of yielding to temptation. Com¬ 
 panies consider the money well invested , 
 rather than expended , for the apprehension 
 of the fugitive. Losses sustained by large 
 corporations throughout the country on 
 account of embezzlement, have decreased 
 probably 75 per cent, since the adoption of 
 the corporate bond. This for two reasons : 
 First, because of improved methods of 
 
 13 
 
checking and accounting adopted by em¬ 
 ployers, in many instances at the suggestion 
 of the surety company ; and second, because 
 of prosecutions instituted by the companies. 
 A prosecution should never be brought as 
 a matter of revenge, or with a view to 
 forcing reimbursement for the loss sustained ; 
 and, in some instances, where there are 
 extenuating circumstances, it should be 
 waived ; but in all cases where the proof is 
 clear, the law should be permitted to take 
 its course, and the ends of justice are best 
 subserved hy prosecution. 
 
 Confidential Communications*—One other 
 matter I deem of sufficient importance to 
 require brief mention. I refer to confidential 
 communications in the investigation of risks. 
 A few years ago the legislature of Texas 
 enacted a law which, in substance, required 
 that whenever a company should cancel a 
 fidelity bond, or having once become surety 
 for a person, should upon application, re¬ 
 fuse to do so again, the company must 
 furnish to such person, upon demand, “a 
 full statement, in writing, of the facts on 
 which the action of the corporation is based, 
 and if such action be based in whole or in 
 
 14 
 

 Call 
 
 'Number 
 
 Overdue books are subject to a fine 
 of 2 cents a day. 
 
 Author. 
 
 Title.. 
 
 University of Illinois Library 
 CALL SLIP 
 
part on information, all such information,, 
 together with the name or names of the 
 informants, with their places of residence,” 
 and prescribing a heavy penalty for refusal. 
 In 1897 the law was amended so as to 
 excuse the company from furnishing the 
 names and addresses of informants. In the 
 opinion of eminent counsel, such statutes 
 are unconstitutional. However this may 
 be, they are certainly ill-advised and have 
 proven other than valuable to the parties 
 whom they were intended to benefit. A 
 fidelity business cannot be safely conducted 
 without the most searching investigation 
 and in order to obtain responses to our in¬ 
 quiries, we must assure references that the 
 information given, will be strictly confiden¬ 
 tial, and all such communications ought, 
 under the law, to be privileged. Suppose 
 an applicant for a bond have an unsavory 
 reputation. His neighbor will not disclose 
 the facts if a copy of the communication is 
 to be placed in the applicant’s hands. Tell¬ 
 ing the truth in such cases would often lead 
 to breaches of the peace, and might lead to 
 murder. On the other hand, suppose that 
 some reference maliciously give false testi¬ 
 mony regarding an applicant. This, in and 
 
 15 
 
of itself, would not lead the company to de¬ 
 cline the bond, because, in every case, charges 
 made are fully and carefully investigated, 
 so that when the company finally acts upon 
 an application, it substantially knows what 
 the truth is. Texas, and the one or two 
 other States only, which have adopted such 
 laws, should lose no time in repealing them. 
 Idaho once had a statute of this kind, but 
 her last legislature—be it said to its credit 
 —wiped it from the statute books. Such 
 laws have been introduced into the legis¬ 
 latures of some of the other States, but 
 have been defeated. 
 
 Surety Insurance. 
 
 The second branch’of the business, des¬ 
 ignated “ Surety Insurance ” was undertaken 
 first by the American Surety Company, 
 which, for half a decade, practical^ had the 
 field to itself. The harvest which it reaped 
 during that period was its just reward for 
 the expensive educational work which fell 
 upon it to perform. At the time of its 
 organization in 1884, the corporate bond 
 could be used with individuals and private 
 corporations, but no law recognized it, 
 
 16 
 
and the necessity for legislation came sim¬ 
 ultaneously with the suggestion of applying 
 the corporate idea to bonds given in legal 
 proceedings and for public officers, and along 
 with legislation came also endless work in 
 educating the courts and public officials. 
 
 The surety corporation was doubted. 
 The individual with real estate to qualify— 
 regardless of what he might possess when 
 called upon to pay a loss—was preferred, 
 so deeply rooted was the old system. A 
 court official, in one of the larger cities, 
 required as a condition precedent to ap¬ 
 proval that companies give him a general 
 indemnifying bond, signed by responsible 
 individuals, to guarantee the company’s 
 payment of any claim arising under bonds 
 given in his court! I think am correct 
 in saying that during the early days of the 
 business, the American Surety Company, in 
 order to satisfy the demands made in the 
 City of Chicago, found it necessary to 
 purchase a valuable piece of real estate 
 there, that some tangible evidence of its 
 ability to meet its obligations might be 
 actually in sight. 
 
 We are certainly indebted to the Ameri¬ 
 can Surety Company for removing many of 
 
 17 
 
the obstacles which hindered the early 
 advance of the business. It was not until 
 August, 1894, that Congress recognized the 
 superiority of the corporate bond, and passed 
 the bill authorizing the acceptance of an 
 approved surety company, as sole surety 
 in the Federal Courts and in the various 
 Departments of the United States Govern¬ 
 ment. From that time, the business 
 acquired fresh impetus. The growing 
 preference for the corporate bond had 
 prompted the organization of additional 
 companies; still others have entered the 
 field since, and to-day there are eleven en¬ 
 gaged in the transaction of the business in 
 the various States. In some cities, trust 
 companies are taking local surety risks, 
 with regard to which, f more anon. My 
 remarks now, apply to companies oper¬ 
 ating throughout the United States. Of 
 the eleven, three take no other surety 
 risks than those embraced in the fidelity 
 class, but the remaining eight do a general 
 fidelity and surety business. 
 
 Court Bonds.—The Surety Branch is a 
 much broader subject than Fidelity Insur¬ 
 ance. We will direct our attention for a 
 
 18 
 
moment to bonds required in legal pro¬ 
 ceedings. They may be classified under 
 three distinctly different hazards. One, the 
 monetary obligation, such as the Under¬ 
 taking on Appeal, Supersedeas, Discharge 
 of Attachment, and bonds of like character, 
 which are conditioned for the payment of 
 a definite amount, upon judgment of the 
 court. No such bond should be executed 
 without collateral security, of a character 
 readily convertible into cash, being depos¬ 
 ited with the company. If an appellant 
 have not the means to pay the judgment 
 already found in the lower court, he will 
 not be likely to have, when the judgment 
 shall have been affirmed. If he can pay at 
 the time, he should practically do so, by 
 depositing with the company, as collateral, 
 such securities as will furnish the necessary 
 funds in the event of a decision against him 
 in the higher court. This requirement 
 should invariably be enforced, no matter 
 how favorable the financial condition of 
 the applicant. There is no reason why 
 collateral should not, and every reason 
 why it should, be required, even admitting 
 the applicant’s ability to pay ultimately. 
 To illustrate: Take the case of a man 
 
 19 
 
worth $1,000,000 against whom a judg¬ 
 ment has been entered for $50,000. He 
 desires to appeal and applies for a bond. 
 Suppose it be made, by a company, with¬ 
 out collateral; that the judgment be 
 affirmed and the company so notified by 
 the creditor’s attorney; that the debtor 
 for some reason does not respond; the 
 company must immediately give its check 
 for the amount and charge it to loss, 
 suffering for a time, at least, a correspond¬ 
 ing reduction in assets. The company can 
 then resort to the courts, and in two, three 
 or more years, may recover salvage from 
 the debtor. This, however, at an expense, 
 in attorneys’ fees and other charges, ten 
 times the amount of the premium received 
 for the bond. The risk attached to such 
 an obligation is quite the same as that 
 assumed by the endorsement of a note, and 
 no man or corporation should expect a 
 surety company to undertake it without 
 ample collateral. 
 
 Under the second class we place the 
 bonds of executors, administrators, guard¬ 
 ians, receivers, trustees and others occupying 
 fiduciary positions. The casual observer 
 would say that bonds of this character are 
 
 20 
 
purely fidelity risks ; but not so, since 
 fiduciaries may be liable for loss occasioned 
 by incompetency, mistake, error of judg¬ 
 ment, negligence, or the failure of some bank 
 where funds are deposited. We are living 
 in a wonderful age. Great enterprises, 
 requiring many millions of capital, are 
 promoted with the ease which a few years 
 ago characterized the organization of com¬ 
 paratively insignificant corporations, and 
 along with these legitimate investments, 
 purely speculative tendencies grow and 
 increase. Fortunes are quickly made and 
 as quickljr lost, but notice is taken only of 
 the successful man. The unfortunate who 
 goes down and loses his all, drops quickly 
 out of sight. To the temptations incident 
 to a prosperous and speculative age, are 
 guardians, trustees, executors and the like, 
 exposed. The guardian, with no thought 
 of dishonesty—on the contrary, with the 
 very best of motives, thinking to make a 
 good investment for his ward, and inci¬ 
 dentally a fortune for himself—may ignore 
 the instructions of the court, and invest the 
 funds entrusted to him in some business 
 venture—perhaps a legitimate enterprise— 
 but whether it be so, or some rank specu- 
 
 21 
 
lation, the result is the same if the venture 
 prove a failure: The money is found to 
 have been lost when the court orders an 
 accounting. I can conceive of no position 
 of trust which carries with it a more sacred 
 responsibility than that of the executor, 
 administrator, guardian or trustee. The 
 widow and orphan should be made perfectly 
 sure of the faithful performance of the trust, 
 and a final, full and satisfactory accounting. 
 This the bond should ensure, and in order 
 that it shall do so, surety companies, in 
 all cases, should have joint control of all 
 personal property belonging to such estates; 
 for the bond of a company which disregards 
 this rule, in time may not serve such 
 purpose. Notes, stocks, bonds, mortgages, 
 etc., should be in a safe deposit vault, there 
 to remain except when removed by and 
 with the consent of the company, and cash 
 should be deposited in bank, subject to 
 countersignature of the company. Great 
 care should be taken that proper orders 
 are given by the court regarding the in¬ 
 vestment and handling of the funds, and 
 that such orders are strictly observed. Of 
 course with risks of this kind, the character 
 and financial responsibility of the fiduciary 
 
 22 
 
are of great importance, but character and 
 honesty alone will not replace money in¬ 
 advertently lost. Some of the States have 
 enacted laws recently, authorizing such 
 supervision and control. I doubt if sufficient 
 protection be given by the discretionary 
 power thus vested in companies. I would 
 advocate that legislation go a step further 
 and instead of merely permitting, make 
 mandatory the joint control of securities 
 and funds under ever} r fiduciary’s bond. 
 Why may it not then be feasible for laws 
 to be enacted, not only authorizing the 
 acceptance of approved surety companies, 
 but requiring that all bonds fgiven by 
 fiduciaries, in fact all bojids which the law 
 can control, be furnished by such companies? 
 It is only a step from preference for new 
 and superior methods to the abolishment 
 of antiquated ideas. In many of the States, 
 individuals are prohibited^from personally 
 undertaking other lines of insurance. In the 
 absence of adequate legislation, judges will 
 do well to inquire as carefully into the 
 methods to be pursued by the surety, as 
 with regard to its financial condition, and 
 decline to approve^any bond unless every 
 possible safeguard be thrown about the 
 
 23 
 
trust. And they will do well to pursue the 
 matter further and subsequently satisfy 
 themselves that the requirements are being' 
 fulfilled. I do not wish to be understood 
 as saying that companies fail to impose 
 these conditions where there is no opposi¬ 
 tion. I do maintain that causes for waiv¬ 
 ing them too frequently intervene, and that 
 some steps should be taken to make 
 impossible any exception to compliance 
 with the safest methods which can be 
 formulated. 
 
 Under the third class of bonds required 
 in legal proceedings, may be placed bonds 
 and undertakings in injunction, for costs, 
 to secure attachment, etc. Usualty the 
 character and financial responsibility of the 
 applicant, determine the surety company’s 
 action, and as a rule, such bonds can be 
 safety executed without collateral. 
 
 Contractors* Bonds*—Bonds for contract¬ 
 ors, as a class, are worthy of special com¬ 
 ment. I refer particularly to bonds given 
 for the completion of public and private 
 improvements. The practical business 
 ability, as well as the financial condition 
 of the applicant, together with the terms 
 
 24 
 
and conditions of the contract, are all mat¬ 
 ters for careful consideration in passing 
 upon risks of this kind. No contract should 
 be drawn so as not to excuse the contractor 
 if, by reason of some unforeseen difficulty 
 for which he is not responsible, it become 
 impossible to complete the work as out¬ 
 lined and agreed upon. Yet this is often 
 done, and plans and specifications frequent¬ 
 ly contain other conditions manifestly 
 unfair to the contractor. Competition may 
 force him to submit and many times suffer 
 a loss, which the surety must pay. 
 
 Another danger to be avoided, if possible, 
 lies with the contractor who has been on the 
 shelf for years, and is aroused to renewed 
 activity by the prospect of closing a 
 contract at a low figure, and inducing 
 some surety company to pin its faith to 
 him on representations of past ability and 
 expressions of friendly references who are 
 loath to advise the company to keep off. 
 If he secure the bond applied for, he will 
 attain his object,—a temporary living for 
 himself and family—and the surety company 
 must foot the bill. A prominent United 
 States Government official has remarked 
 recently that since the advent of the corpor- 
 
 25 
 
ate bond, he has had more trouble in his 
 Department on account of such contractors, 
 than he had seen during his whole previous 
 experience. 
 
 Miscellaneous Bonds.—There are other 
 bonds included under the head of obliga- 
 gations guaranteeing the performance of 
 contracts, growing out of financial under¬ 
 takings, limitless in scope, many of which 
 are very dangerous propositions. Since the 
 public has been getting acquainted with the 
 corporate bond, certain good people are so 
 anxious for a surety company’s guarantee, 
 that if they are interested in the promotion 
 of any doubtful enterprise, they bestir 
 themselves to tack on a provision for a 
 corporate bond, sugar-coated with the most 
 plausible and attractive representations. 
 Companies have ever to be on the alert if 
 they would detect the dangers underlying 
 the attractive surface of much seemingly 
 favorable business. 
 
 And there are many other bonds of which 
 special mention might be made, but the 
 time allotted to a paper of this kind will 
 not permit. Bonds of public officials neces¬ 
 sitate familiarity with the governing laws 
 
 26 
 
and ordinances ; bonds running to the United 
 States Government make necessary a know¬ 
 ledge of the rules and regulations of the 
 several Departments. To sum up: The 
 surety company to-day must keep well in¬ 
 formed with regard to the many laws pre¬ 
 scribing specific duties in various positions, 
 and must be equipped to intelligently ana¬ 
 lyze and consider every conceivable business 
 undertaking and determine the risk involved 
 and the necessity for indemnity. 
 
 Existing Conditions. 
 
 And now as to existing conditions : I 
 feel warranted in the statement that not 
 10 per cent, of the bonds required in the 
 United States during the last twelve months, 
 has been made by surety companies. Rail¬ 
 road companies uniformly—there may be a 
 rare exception—have abolished the use of 
 the personal bond. Perhaps 50 per cent, 
 of the larger, but only a few of the smaller 
 banks, use corporate bonds. Compara¬ 
 tively few of the bonds required in legal 
 proceedings, are yet made by surety com¬ 
 panies. I have previously remarked that 
 it is possible to-day to purchase any kind 
 
 27 
 
of bond. I mean that an applicant can 
 secure, at a reasonable rate, (less than 
 reasonable to-day r ) any bond to which he 
 is justly entitled. Then why are individuals 
 signing most of the bonds ? There is some 
 remedy, and companies ought to be con¬ 
 ferring in an attempt to ascertain and 
 apply it. The total premium income of the 
 eleven companies for the year 1898, was 
 less than $3,500,000. The fact is, we are 
 devoting our time rather to poaching upon 
 one another’s preserves than to seeking the 
 many uncultivated fields. I desire to be 
 understood as criticising no particular com¬ 
 pany or companies. There is, I regret to 
 say, some glass in my own house. My 
 thought is directed towards the methods 
 pursued by all, and which cannot be remedied 
 by any one company alone. Active compe¬ 
 tition is but the natural result of the rapid 
 growth of business during the past two or 
 three years, and rate cutting, to a certain 
 extent, was to have been expected. But 
 rate cutting went from bad to worse, and 
 companies have been for some time, and now 
 are, engaged in a most ill-advised warfare. 
 Companies have all been conspicuous by 
 their silence on the subject, and perhaps 
 
 28 
 
this may be a fitting occasion for public 
 utterance. Your object, in inviting here 
 representatives of the various insurance 
 interests, would not be attained unless we 
 speak plainly. Let us not deceive ourselves. 
 The public has to some extent, become 
 aware of the situation. Insurance critics 
 have commented upon it, and predict the 
 inevitable. No surety company has been 
 in existence long enough to determine what 
 are adequate premium rates for the respec¬ 
 tive risks assumed. We have some little 
 information regarding the loss ratio under 
 fidelity bonds, but in other lines, nothing 
 of value to guide us. What company has 
 had sufficient experience with bonds required 
 in the Probate Courts to have yet 
 encountered the complications and losses 
 growing out of suits brought by heirs years 
 after the settlement of estates ? Such suits 
 have been instituted under personal bonds. 
 Do companies hope to escape them ? Rather 
 let us look to have those suits multiply. 
 Instead of cutting rates so low as to be 
 laughed at by the public, we ought to be 
 conferring in an effort to ascertain what 
 are adequate rates. I am not, however, 
 more disturbed over the question of rates 
 
 29 
 
than over many other things of equal im¬ 
 portance to our welfare. In the eagerness 
 to secure patronage, sound business princi¬ 
 ples are being subordinated, and risks 
 undertaken, not only at ridiculously low 
 premium rates, but without regard to con¬ 
 ditions. Waiver of joint control of estates 
 is frequently offered in competition as an 
 inducement to secure the bond of the fidu¬ 
 ciary. Waiver of collateral security in con¬ 
 nection with undertakings on appeal, etc., 
 is advanced as an argument. Frequently 
 demand is made that applicants not posses¬ 
 sing requisite collateral, furnish indemnity 
 bonds of individuals to save the company 
 harmless from any loss. It is manifestly 
 inconsistent that a counter bond of this 
 character should be exacted, except that 
 officers and stockholders of corporations 
 should be willing to back their own enter¬ 
 prises. Are we not contradicting ourselves 
 when we argue that a man should not ask 
 his friends to sign his bond, and in the same 
 breath demand that he give us an indem¬ 
 nity bond with personal surety ? 
 
 Companies have themselves created the 
 only real difficulties which beset them, and 
 being of their own creation, the conditions 
 
 30 
 
can be readily changed. Many reforms 
 may be accomplished, but no one company 
 alone can bring them about. Underwriters’ 
 associations are too well known to be an 
 essential factor in the successful operation 
 of any insurance business for me to comment 
 upon their advantages. Yet surety com¬ 
 panies have never had any mutual organiza¬ 
 tion whatever. They should come together 
 in friendly association, and agree never to 
 waive joint control of estates ; invariably 
 to require collateral security under mone¬ 
 tary obligations; never to demand an 
 indemnhying bond signed by individuals, 
 except as I have already stated; to establish 
 a S3 r stem of interchange of information re¬ 
 garding rejected applications, which would 
 prove a most important adjunct to the 
 conduct of fidelity business with safety to 
 companies and satisfaction to employers. 
 
 If such a compact could possibly be 
 construed as a violation of the anti-trust 
 law of any State, then such law should be 
 so amended as not only to permit, but 
 expressly authorize, surety companies to 
 enter into such agreements and adopt safe 
 methods for the preservation of estates. 
 
 31 
 
Local Trust Companies.—I have already 
 referred to the fact that in a few places, 
 trust companies are doing a surety business 
 locally. Time will demonstrate that this 
 should not be permitted for many reasons. 
 Their operations are confined to so small a 
 territory, that the amount of business done 
 will not give a general average. They take 
 surety risks merely as an incident, with a 
 view to encouraging patronage in their 
 other principal departments. The limited 
 premium income will not justify the employ¬ 
 ment of trained men to handle the surety 
 business properly. They cannot afford a 
 force of inspectors. The loaning of money 
 on collateral and personal security will ac¬ 
 cumulate, in the course of time, assets of a 
 questionable character, not up to the stand¬ 
 ard required of surety companies under the 
 insurance law. Not only that, but they 
 are liable to close their doors and go into 
 receivers’ hands as the result of a run by 
 depositors. If they be permitted to con¬ 
 tinue, ultimately every community will have 
 its little local company dabbling in the 
 surety business, and most disastrous results 
 will follow. My first experience in the 
 business was as manager of the surety de- 
 
 32 
 
partment of a trust company, and I speak 
 knowingly on the subject. 
 
 Surety companies operating all over tlie 
 country have local officers in the large cities, 
 and are fully equipped to take care of all 
 business, so that remote location of the 
 Home Office and consequent delay in execu¬ 
 tion of bonds cannot be urged as an 
 argument in favor of permitting the local 
 trust companies to transact surety business. 
 
 Nor should the fact of a local trust 
 company having a large capital, weigh in 
 its favor in this connection. Losses are 
 paid out of premiums, not out of capital; 
 and while 50 per cent, as required by law, 
 is ample reserve to provide for losses which 
 a regular surety company may sustain, hav¬ 
 ing the benefit of the general average of a 
 large field, the entire premium income of a 
 local company would not pay one excessive 
 loss possible to be incurred under a single 
 bond. 
 
 The tendency of the day is to a specialty; 
 not only in the professions, but in business. 
 The banker should be a banker. In my 
 opinion, all laws now authorizing a bank¬ 
 ing, trust, and surety business under one 
 charter, should be amended. Such charters 
 
 33 
 
are usually broad enough to authorize the 
 company to buy and sell exchange, buy and 
 sell real estate for ‘itself and others, act as 
 agent for collection of rents and placing of 
 • insurance, act as trustee, executor, admini¬ 
 strator, guardian, etc., without bond, and 
 as well perform all the functions of a com¬ 
 pany especially organized for fidelity and 
 surety business. 
 
 Future Prospects. 
 
 In conclusion what shall I say with re¬ 
 gard to future prospects ? The corporate 
 bond is a recognized necessity and it will 
 grow in favor and sooner or later become 
 the universal form of suretyship. The busi¬ 
 ness is in its infancy; whether it shall 
 rapidly develop or continue for a time to 
 shuffle along in an uncertain manner will 
 depend entirely upon the companies them¬ 
 selves. If a halt be not called in the present 
 course it is quite possible that we shall see 
 the corporate bond discredited by conserva¬ 
 tive officials. It has been remarked that 
 the failure of some company must be the 
 solution of the problem. Such will prove 
 true if nothing else serve to bring com- 
 
 34 
 
panies to a proper appreciation of their 
 responsibilities as bondsmen, but I want 
 to say parenthetically that that company 
 will not be the National. Why not guard 
 against such a catastrophe ? 
 
 If companies would succeed, fidelity 
 rates must be high enough to provide for 
 ample inspection of risks, and justify the 
 payment of losses without hope of salvaga 
 (they are far below that to-day.) Other¬ 
 wise salvage will be sought at the expense 
 of waiving prosecution, and once let this 
 fact become known to employes, crime 
 will increase and losses be heavier. This, 
 employers should well consider when offered 
 bonds at cut rates. Rates for fiduciaries’ 
 bonds must be high enough to cover the 
 expense of joint control; for contractors’ 
 and miscellaneous bonds enough to justify 
 the company in assuming the risk without 
 indemnity if collateral cannot be furnished, 
 wholly discountenancing the personal in¬ 
 demnity bond. I say if companies would 
 succeed they must cease violating the im¬ 
 portant principles of surety underwriting ; 
 put a stop to ill-advised methods ; organize 
 in friendly association, and through inter¬ 
 change of ideas, comparisons and discus- 
 
 v 
 
 35 
 
sions, and the resultant adoption of uni¬ 
 form methods for the protection of all, 
 upbuild, dignify and perfect the business, 
 and as well direct their united strength to 
 accomplish many necessary reforms in 
 existing laws, ordinances and governing 
 regulations, making it safe to undertake 
 risks which are now dangerous, and gene¬ 
 rally devise ways and means of cultivating 
 and occupying the great fields yet untouched. 
 
 36