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INDEX 
 
 c r 
 
 CO-INSURANCE 
 
 By W. N. Bament - 
 
 THE FIRE INSURANCE POLICY AS A CONTRACT 
 
 By W. N. Bament ----- 
 
 WHAT IS A FIRE LOSS? 
 
 DIRECT AND CONSEQUENTIAL LOSS 
 
 By W. N. Bament ----- 
 
 IS A POLICY DIVISIBLE? 
 
 By W. N. Bament ----- 
 
 y —• .. 
 
 FORMS— 
 
 FROM THE COMPANY’S STANDPOINT 
 By W. N. Bament - - - 
 
 USE AND OCCUPANCY INSURANCE 
 
 By W. N. Bament - - - - - - 
 
 THE INTEREST OF A MORTGAGEE 
 
 UNDER A POLICY OF FIRE INSURANCE 
 
 By W. N. Bament ----- 
 
 FIRE LOSS SETTLEMENTS 
 
 FIRST LECTURE 
 
 By J. T. Dargan, Jr. - 
 
 FIRE LOSS SETTLEMENTS 
 
 SECOND LECTURE 
 
 V I ^ ... 
 
 By J. T : Dargan, Jr. - 
 
 FIRE LOSS SETTLEMENTS 
 
 THIRD LECTURE ’ ‘ . 
 
 By J. T. Dargan, Jr. - 9 - 
 
 APPORTIONMENT OF LOSSES * * 
 
 UNDER NONCONCURRENT POLICIES 
 
 By W. N. Bament ----- 
 
 WRITS OF ATTACHMENT AND OTHER LIENS 
 
 By W. N. Bament ----- 
 
CO-INSURANCE 
 
 AN ADDRESS 
 
 DELIVERED BEFORE THE ONE HUNDRED AND 
 FIFTY-FOURTH STATED MEETING 
 
 OF 
 
 The Insurance Society 
 
 of New York 
 
 March 30, 1920 
 
 BY 
 
 W. N. BAMENT 
 
 General Adjuster 
 
 £ia) 
 
 THE HOME INSURANCE COMPANY 
 
 NEW YORK 
 

 $£ 8 ./ 
 
 bfco^x vu 
 
 The Co-insurance Clause 
 
 Of the more important clauses in current use, the one 
 most frequently used, most severely criticized, most mis¬ 
 understood, most legislated against, and withal the most 
 reasonable and most equitable, is that which in general terms 
 is known as the “co-insurance clause.” 
 
 Insurance is one of the great necessities of our business, 
 social and economic life, and the expense of maintaining it 
 should be distributed among the property owners of the 
 country as equitably as it is humanly possible so to do. 
 
 Losses and expenses are paid out of premiums col¬ 
 lected. When a loss is total the penalty for underinsurance 
 falls where it properly belongs, on the insured who has 
 elected to save premium and assume a portion of the risk 
 himself, and the same penalty for underinsurance should by 
 contract be made to apply in case of partial loss as applies 
 automatically in case of total loss. 
 
 If all losses were total, liberality on the part of the 
 insured in the payment of premium would bring its own 
 reward, and parsimony would bring its own penalty; but 
 the records of the leading companies show that of all the 
 losses sustained, about 65%—numerically—are less than $100; 
 about 30% are between $100 and total; and about 5% are 
 total. The natural inclination, therefore, on the part of the 
 public, particularly on the less hazardous risks, is to under¬ 
 insure and take the chance of not having a total loss; and this 
 will generally be done except under special conditions, or when 
 reasonably full insurance must be carried to sustain credit 
 or as collateral security for loans. There were several strik¬ 
 ing illustrations of this in the San Francisco conflagration, 
 where the amount of insurance carried on so-called fireproof 
 buildings was less than 10% of their value, and the insured 
 in such instances, of course, paid a heavy penalty for 
 their neglect to carry adequate insurance. 
 
 Co-insurance operates only in case of partial loss, where 
 both the insurance carried and the loss sustained are less 
 than the prescribed percentage named in the clause, and has 
 the effect of preventing one who has insured for a small 
 percentage of value and paid a correspondingly small pre¬ 
 mium from collecting as much in the event of loss as one 
 who has insured for a large percentage of value and paid 
 a correspondingly large premium. We have high authority 
 for the principle, 
 
 1 
 
 A 
 
 
 % -f 
 
“He which soweth sparingly shall reap also 
 sparingly, and he which soweth bountifully shall 
 reap also bountifully.” 
 
 and it should be applied to contracts of insurance. Rating 
 systems may come, and rating systems may go; but, unless 
 the principle of co-insurance be recognized and universally 
 applied, there can be no equitable division of the insurance 
 burden, and the existing inequalities will go on forever. The 
 principle is so well established in some countries that the 
 general foreign form of policy issued by the London offices 
 for use therein contains the full co-insurance clause in the 
 printed conditions. 
 
 The necessity for co-insurance as an equalizer of rates was 
 quite forcibly illustrated by a prominent underwriter in an ad¬ 
 dress delivered several years ago, in the following example 
 involving two buildings of superior construction: 
 
 “A’S” BUILDING “B’S” BUILDING 
 
 Value $100,000 Value $100,000 
 
 Insurance 80,000 Insurance 10,000 
 
 Rate 1% Rate 1% 
 
 Premium received— Premium received— 
 
 one year, 800 one year, 100 
 
 No Co-insurance Clause No Co-insurance Clause 
 
 Loss 800 Loss 800 
 
 Loss Collectible 800 Loss Collectible 800 
 
 “B” pays only one-eighth as much premium as “A,” 
 yet both collect the same amount of loss, and in the absence 
 of co-insurance conditions both would collect the same amount 
 in all instances where the loss is $10,000 or less. Of course, 
 if the loss should exceed $10,000, “A” would reap his reward, 
 and “B” would pay his penalty. This situation clearly calls either 
 for a difference in rate in favor of “A” or for a difference in 
 loss collection as against “B,” and the latter can be regulated 
 only through the medium of a co-insurance condition in the 
 policy. 
 
 At this point it may not be amiss incidentally to inquire 
 why the owner of a building which is heavily encumbered, 
 whose policies are payable to a mortgagee (particularly a 
 junior encumbrancer) under a mortgagee clause, and where 
 subrogation may be of little or no value, should have the 
 benefit of the same rate as the owner of another building of 
 similar construction with similar occupancy, but unencum¬ 
 bered. 
 
 In some states rates are made with and without co- 
 insurance conditions, quite a material reduction in the basis 
 rate being allowed for the insertion of the 80% clause in the 
 policy, and a further reduction for the use of the 90% and 
 100% clauses. This, however, does not go far enough, and 
 any variation in rate should be graded according to the co- 
 
 2 
 
insurance percentage named in the clause, and this gradation 
 should not be restricted, as it is, to 80%, 90% or 100%, 
 if the principle of equalization is to be maintained. 
 
 Various clauses designed to give practical effect to the 
 co-insurance principle have been in use in this country for 
 nearly forty years in connection with fire and other contracts 
 of insurance. Some of these are well adapted to the purpose 
 intended, while others fail to accomplish said purpose under 
 certain conditions; but, fortunately, incidents of this nature 
 are not of frequent occurrence. 
 
 There are, generally speaking, four forms, which differ 
 quite materially in phraseology, and sometimes differ in prac¬ 
 tical application. These four clauses are: (1) the old co- 
 insurance clause; (2) the percentage co-insurance clause; 
 (3) the average clause; (4) the reduced rate contribution 
 clause. 
 
 Until recently, underwriters were complacently using 
 some of these titles indiscriminately in certain portions of the 
 country, under the assumption that the clauses, although 
 differently phrased, were in effect the same, but they were 
 subjected to quite a rude awakening by a decision which was 
 handed down about a year ago by the Tennessee Court of 
 Civic Appeals. The law in Tennessee permits the use of 
 the three-fourths value clause and the co-insurance clause, 
 but permits no other restrictive provisions. The form in use 
 bore the inscription “Co-insurance Clause,” but the context 
 was the phraseology of the reduced rate contribution clause, 
 and although the result was the same under the operation of 
 either, the court held that the form used was not the co- 
 insurance clause, hence it was void and consequently inop¬ 
 erative. Thompson vs. Concordia Fire Ins. Co. (Tenn. 1919) 
 215 S.W. Rep. 932, 55 Ins. Law Journal 122. 
 
 The law of Georgia provides that all insurance companies 
 shall pay the full amount of loss sustained up to the amount 
 of insurance expressed in the policy, and that all stipulations 
 in such policies to the contrary shall be null and void. The law 
 further provides that when the insured has several policies 
 on the same property, his recovery from any company will 
 be pro rata as to the amount thereof. 
 
 About twenty years ago, the Supreipe Court of Georgia 
 was called upon to decide whether under the law referred 
 to the old co-insurance clause then in use, which provided 
 
 “that the assured shall at all times maintain a total 
 insurance upon the property insured by this policy 
 of not less than 75% of the actual cash value thereof 
 . . . . and that failing to do so, the assured shall 
 
 become a co-insurer to the extent of the deficiency,” 
 
 was valid and enforceable, and it decided that the clause was 
 not violative of the law. Pekor vs. Fireman’s Fund Ins. Co. 
 (1898) (106 Ga. page 1). 
 
 3 
 

 The court evidently construed the clause as a binding 
 agreement on the part of the insured to secure insurance up to 
 a certain percentage of value, and virtually held that if the 
 insured himself desired to take the place of another insurance 
 company he was at liberty to do so as one way of fulfilling 
 his agreement. 
 
 The Georgia courts, however, have not passed upon the 
 validity of the reduced rate contribution clause in connection 
 with the statutory law above referred to; but it is fair to 
 assume that they will view the matter in the same light as the 
 Tennessee court (supra), and hold that it is not a co-insurance 
 clause, even though it generally produces the same result; 
 that it contains no provision whatever requiring the insured 
 to carry or procure a stated amount of insurance, and in event 
 of failure, to become a co-insurer, but that it is simply a clause 
 placing a limitation upon the insurer’s liability, which is 
 expressly prohibited by statute. The fact that the insurers 
 have labeled it “75% Co-insurance Clause” does not make 
 it such. 
 
 It is, therefore, not at all surprising that the question is 
 frequently asked as to the difference between the various 
 forms of so-called co-insurance clauses, and these will be 
 considered in the order in which, chronologically, they came 
 into use. 
 
 Probably in ninety-nine cases out of one hundred there 
 is no difference* between these clauses in the results obtained 
 by their application, but cases occasionally arise where ac¬ 
 cording to the generally accepted interpretation the difference 
 will be quite pronounced. This difference, which will be 
 hereinafter considered, appears in connecton with the old 
 co-insurance clause and the percentage co-insurance clause, 
 and only in cases where the policies are nonconcurrent. 
 
 The first of the four forms is the old co-insurance clause 
 which for many years was the only one used in the West, 
 and which is used there still, to some extent, and now quite 
 generally in the South. Its reintroduction in the South was 
 probably due to the Tennessee decision, to which reference 
 has been made (supra). This clause provides that the insured 
 shall maintain insurance on the property described in the 
 policy to the extent of at least a stated percentage (usually 
 80%) of the actual cash value thereof, and failing so to do, 
 shall to the extent of such deficit bear his, her or their pro¬ 
 portion of any loss. It does not say that he shall maintain 
 insurance on all of the property, and the prevailing opinion 
 is that the co-insurance clause will be complied with if he 
 carries the stipulated percentage of insurance either on all 
 or on any part of the property described, notwithstanding 
 the fact that a portion of said insurance may be of no assist¬ 
 ance whatever to the blanket, or more general policy, as a 
 contributing factor. 
 
 © 
 
 4 
 
'The following example will serve as an illustration : 
 
 Co. “A” covers $10,000 on Bldgs. Nos. 1, 2 and 3, 100% Clause. 
 Co. “B” covers $10,000 on Building No. 2, 100% Clause. 
 
 Co. “C” covers $5,000 on Building No. 3, 100% Clause. 
 
 Sound Value of Building No. 1, $10,000 
 
 Sound Value of Building No. 2, 10,000 
 
 Sound Value of Building No. 3, 10,000 
 
 Loss on Building No. 1, $10,000. 
 
 LTnder the application of the 100% average or reduced 
 rate contribution clause, the liability of Corppany “A” would 
 be 10,000/30,000 of $10,000, or $3,333.33, but under the 100% 
 co-insurance clause its liability would be 10,000/15,000 of 
 $10,000, or $6,666.67, and the insured would be a co-insurer 
 for 5,000/15,000 of $10,000, or $3,333.33. Inasmuch as the 
 $10,000 policy in Company “B” and the $5,000 policy in 
 Company “C” do not cover on the building where the loss 
 occurred, they, of course, can not be brought in for contri¬ 
 bution toward paying the loss, but for the purpose of con¬ 
 structively meeting, or assisting in meeting, the requirements 
 of the co-insurance clause it is contended that it is “insurance 
 on the within-described property.” 
 
 It has even been suggested that in the example above 
 cited the insured would be a -co-insurer only to the extent 
 of 5,000/30,000 of $10,000, or $1,666.66, and that Company 
 “A” would pay the balance of the loss, $8,333.33. To produce 
 this result, however, Company “A’s” policy would have to 
 be transformed from one for $10,000 into one for $25,000, 
 and this would be beyond the realm of either rhyme or 
 reason. If it be conceded that the basis of the insured’s 
 contribution as a co-insurer can be restricted to $5,000, he 
 must co-insure with something, and inasmuch as the only 
 thing for him to co-insure with is the $10,000 policy in 
 Company “A,” it follows that his contribution to the loss 
 as a co-insurer would be, as above stated, 5.000/15,000 of 
 $10,000, or $3,333.33. 
 
 Either of the above constructions is, of course, entirely 
 at variance with the intention of the authors of the clause, and 
 tends to frustrate its purpose, but it appears to be the opinion 
 of lawyers and laymen that the first of these would be upheld 
 by the courts, and that the remedy, if any is to be had, must 
 be sought in an amendment of the clause. A move in this 
 direction has been made in Canada, where it has been amended 
 by making it read: 
 
 “The assured shall maintain insurance on the 
 within-described property concurrent in form with 
 this policy.” 
 
 This ought to correct the defect in the old form, and 
 probably will have that effect in Canada, but the courts of 
 this country have given such a narrow interpretation to the 
 
 5 
 
word “concurrent” that it will not do to place too much 
 reliance upon this amendment. It is suggested that the form 
 might be improved by inserting the word “contributing” 
 before the word “insurance,” thus making it read: 
 
 “The assured shall maintain contributing in¬ 
 surance concurrent in form with this policy.” 
 
 Although insurance companies are apparently content to 
 accept the first of the above constructions of this form of 
 co-insurance clause in the comparatively few cases that arise, 
 yet it certainly requires no prophet to predict that if in a given 
 case the interest of the insured should be adversely affected 
 by said construction, the courts would experience no great 
 difficulty in holding that although plausible and certainly 
 not out of harmony with the phraseology of the clause, this 
 construction could not possibly have been intended by the 
 framers thereof. If, for instance, in the example above cited, 
 the capital stock of the company issuing the blanket policy 
 has become impaired, and the insured had excess insurance 
 broad enough to cover the liability which accrued to him by 
 reason of the operation of the co-insurance clause in the 
 blanket policy, it is self-evident that the smaller the amount 
 due from the insolvent blanket insurer, the greater would 
 be the amount collectible from the solvent excess insurer; 
 hence, it would be against the interest of the insured to have 
 the above construction placed upon the co-insurance clause, 
 and its most ardent advocates would not seriously expect to 
 have it upheld in such circumstances. The clause is defective, 
 and should be amended so as to give the blanket policy the 
 benefit of concurrent contribution from the insured, unaffec¬ 
 ted by the existence of non-contributing specific or less gen¬ 
 eral insurance. The question of amendment has, however, 
 been duly considered by underwriters in the states having 
 restrictive statutes, and inasmuch as the validity of the clause 
 as it reads has been sustained by the courts of said states, it 
 has been deemed advisable to make a change in the wording 
 in that territory. 
 
 The second clause is known as the percentage co-insur¬ 
 ance clause, and provides that: 
 
 “If, at the time of fire, the whole amount of 
 insurance on the property covered by this policy 
 shall be less than —% of the actual cash value 
 thereof, this company shall, in case of loss or dam¬ 
 age, be liable for only such portion of such loss or 
 damage as the amount insured by this policy shall 
 bear to the said —% of the actual cash value of 
 such property.” 
 
 The authors of this clause doubtless supposed that it was 
 an improvement upon, and that it would correct the defect 
 
 6 
 
in, the co-insurance clause; but if so they were mistaken, 
 for as a matter of fact it is not only worse than the old 
 clause, but is positively grotesque in its discriminating effects 
 under certain conditions. It will be noted that the limitation 
 of liability provided for is contingent upon the whole amount 
 of insurance on the property covered by the policy being 
 less than —% of the actual cash value thereof. As in the 
 case of the old co-insurance clause, in all but a comparatively 
 few instances the result will be the same as under the more 
 modern clauses, to wit: the average clause, or the reduced 
 rate contribution clause, and the defect appears only where 
 the insurance is nonconcurrent. 
 
 In the preparation of a form it is, of course, impossible 
 to anticipate all the conditions that are liable to arise, and it 
 cannot be doubted that the framers of this clause intended, 
 to secure to the insurers in all cases the same benefit that 
 would accrue to them if the insured carried full contributing; 
 insurance equal to the stated percentage of the value of the 
 property. The first sentence of the clause, however, is ex¬ 
 ceedingly unfortunate, for as it is generally construed, the 
 entire insurance covering any portion of the property will be 
 included for the purpose of determining whether the co-insur¬ 
 ance condition is properly applicable, although said insurance 
 may not contribute anything whatever toward the payment 
 of the loss. In this respect it is subject to the same criticism 
 as the old co-insurance clause. When the whole insurance, 
 including the blanket and specific, the contributing and non¬ 
 contributing, equals or exceeds the percentage of value speci¬ 
 fied in the clause, both operate exactly alike to relieve the 
 insured from contribution as co-insurer; but if the whole 
 insurance be less than the percentage specified, the percentage 
 co-insurance clause is much less advantageous to the insured 
 than the old co-insurance clause, as will be readily seen from 
 an analysis of the example given above in connection with the 
 latter clause (supra). In said example, by the application of the 
 old co-insurance clause, the insured is a co-insurer for only 
 5,000/15,000 of $10,000, and loses only $3,333.33; but by the 
 application of the percentage co-insurance clause the insured 
 loses $6,666.67, or the difference between $10,000 and the 
 $3,333.33 collectible from Company “A.” 
 
 The fault with the percentage co-insurance clause lies 
 in the opening sentence, “If at the time of the fire the 
 
 whole amount of insurance.shall be less than 
 
 —% of the cash value.” This makes the application of the 
 clause (the latter portion of which is virtually the same as 
 the average clause or the reduced rate contribution clause) 
 absolutely contingent upon the stated percentage of insurance 
 being carried, and in case of nonconcurrence, if the sound 
 value be increased to the extent of only $1.00, it may make 
 a difference of many thousands of dollars to the insured. 
 The following example, suggested by the late W. J. Nichols, 
 
 7 
 
general adjuster of the North British and Mercantile Ins. Co. 
 will illustrate the point: 
 
 Sound Value of Building “A,” 
 Sound Value of Building “B,” 
 Specific Insurance on Building “A,” 
 Blanket Insurance on Buildings “A” 
 and “B,” 
 
 80% of Value of Buildings “A” and 
 
 $200,000 
 
 200,000 
 
 120,000 80% Clause 
 200,000 80% Clause 
 
 “B ” 320,000 
 
 Loss on Building “B,” 200,000 
 
 Blanket Insurance pays 200,000 
 
 Although the $120,000 specific insurance on Building “A” 
 is not involved in the loss, yet it covers on a portion of the 
 property described in the blanket policy, and is a part of 
 “the whole insurance,” therefore, the whole insurance (such 
 as it is) is not less than 80% of the value of the property, 
 and the insured collects his entire loss of $200,000 from the 
 blanket insurer. 
 
 Let us, however, raise the sound value of either Building 
 “A” or “B” by a single dollar, thus making the total sound 
 -value $400,001 instead of $400,000, and what is the effect 
 upon the fortunes of the insured? The whole amount of 
 insurance on the property is less than 80% of the actual cash 
 value thereof, and the insured under the conditions of the 
 ■clause can collect only 200,000/320,000 of $200,000, or $125,000. 
 'Thus, the addition of $1.00 to the sound value results in a 
 reduction of $75,000 in the amount collectible by the insured. 
 This discriminatory absurdity is the direct and logical result 
 of the construction which lawyers, adjusters, and companies 
 feel constrained to place upon the percentage co-insurance 
 clause in circumstances such as those above outlined. 
 
 This clause, under conditions similar to those under con¬ 
 sideration has been before the courts but once, and that was 
 in the case of the Northwestern Fuel Co. vs. Boston Ins. Co. 
 (131 Minn. 19; 154 N. W. 513; 46 Ins. Law Journal 715). 
 The court admitted that the question of construction was not 
 free from difficulty, but said “In view of the rule of con¬ 
 struction favorable to the insured, the uncertainty of the pre¬ 
 cise application of the co-insurance clause and the disfavor 
 with which the law regards provisions for co-insurance, the 
 trial court properly held that the condition as to co-insurance 
 was satisfied.” The loss was confined to one item, and it was 
 held that the clause did not reduce the collectible loss because 
 the total insurance, including the non-contributing specific 
 insurance, was not less than the percentage named in the 
 policy; this being confirmatory of the view generally held 
 with respect to the clause under such conditions. The court, 
 however, strongly intimated that if the co-insurance clause 
 had provided for the maintenance of concurrent insurance, 
 it might have held otherwise. 
 
 8 
 
A clause which is so discriminatory in the effect of its 
 operation, even though in a comparatively few cases, should 
 have been thrown into the discard long ago, and given way 
 to the reduced rate contribution clause which is the latest, 
 best, and fairest that has appeared in the evolutionary process 
 of the co-insurance principle. 
 
 The third clause is that which for many years has been 
 in use in New York City, and is known as the “Average 
 Clause.” It provides that: 
 
 “this company shall not be liable for a greater pro¬ 
 portion of any loss or damage to the property herein 
 described than the sum hereby insured bears to —% 
 of the actual cash value of said property at the time 
 such loss shall happen.” 
 
 This it will be noted is substantially the same as the closing- 
 paragraph of the percentage co-insurance clause which we 
 have just been considering, and its main feature is virtually 
 the same as the reduced rate contribution clause, which is 
 the fourth and last to claim our attention, and they can 
 properly be considered together. The reduced rate con¬ 
 tribution clause reads as follows: 
 
 “In consideration of the rate at (and) or form 
 under which this policy is written, it is expressly 
 stipulated and made a condition of this contract, 
 that this company shall be held liable for no greater 
 proportion of any loss than the amount hereby in¬ 
 sured bears to —% of the actual cash value of the 
 property described herein at the time when such loss 
 shall happen; but if the total insurance upon such 
 property exceeds —% at the time of such loss, then 
 this company shall only be liable for the proportion 
 which the sum hereby insured bears to such total 
 insurance, not exceeding the actual amount of loss 
 to the property insured. 
 
 “If this policy be divided into two or more 
 items the foregoing conditions shall apply to each 
 item separately.” 
 
 It differs from the average clause only in the fact that 
 it is prefaced by a consideration, and also embodies the 
 contribution provision. The average clause was, no doubt, 
 devised for the express purpose of correcting the defects 
 above referred to in the two older clauses, and with the 
 view of precluding all possibility of discrimination and mis¬ 
 understanding as to intention. The thought is as clearly 
 stated as it is possible for language to express it, so that no 
 wayfaring agent, adjuster, broker or attorney need err in 
 the interpretation thereof, and in this respect is an improve¬ 
 ment on the old co-insurance clause, which some people seem 
 to think passeth human understanding. 
 
 9 
 
The name “average clause” is not a particularly appro¬ 
 priate one, and seems to have been copied from the marine 
 contract. (It should not be confused with the average clause 
 used in the West and elsewhere, and which is known in the 
 East as the “average distribution clause.”) Although the 
 title “reduced rate contribution clause” might be applied with 
 equal propriety to the “three-fourths value clause” or the 
 “three-fourths loss clause” it is perhaps as good a name as 
 can be devised to distinguish it from the “co-insurance clause.” 
 In order to apply it or the average clause, all that is neces¬ 
 sary for its application is to ascertain the actual value of the 
 property described in the policy, whether it be blanket or 
 specific, and there is thus obtained a basis for determining 
 the denominator of the fraction, and with the face of the 
 policy as the numerator there is no difficulty in finding the 
 limit of liability under the clause. 
 
 The authors of the average clause apparently did not 
 deem it necessary to insert the contribution provision of the 
 policy in the clause itself, evidently assuming that the words 
 “shall be liable for no greater proportion of any loss” would 
 be sufficient protection; but when the reduced rate contribu¬ 
 tion clause was prepared it was evidently deemed avisable to 
 insert the contribution provision therein, thus emphasizing 
 the fact, if any emphasis were needed, that it was not to be 
 superseded by the reduced rate contribution clause. 
 
 The failure to incorporate the contribution provision in 
 the average clause has not caused the insurers any special 
 embarrassment during the years it has been in use, but it gave 
 the Supreme Court of New York (Erie County) in the case 
 of Buse vs. National Ben Franklin, et al (160 N. Y. Supp. 566) 
 (1916), an excuse for holding that where co-insurance condi¬ 
 tions are present in all policies, and the aggregate co-insur¬ 
 ance limits of liability of all the companies is less than the 
 entire loss, the contribution clause of the policy is not ap¬ 
 plicable. This is at variance with the rule laid down by the 
 New York Court of Appeals in the case of The Farmers Feed 
 Co. vs. Scottish Union & National Ins. Co., 175 N. Y. 241, 
 and that of the Supreme Court of Wisconsin in the case of 
 Stephenson vs. Agricultural Ins. Co., 116 Wis. 277; N. W. 19. 
 In these cases, however, all the policies were concurrent, ex¬ 
 cept that some contained the co-insurance or average clause 
 and others did not. In the Buse case, the policies were non¬ 
 concurrent as to form, and all contained the average clause 
 and it was by reason of these facts that the court apparently 
 felt warranted in distinguishing it from the Farmers Feed 
 Co. case (supra). 
 
 The court quoted lines 98-100 of the old standard policy, 
 which read: 
 
 “and the extent of the application of the insurance 
 under this policy, or of the contribution to be made 
 by this company in case of loss, may be provided for 
 by agreement or condition written hereon or attached 
 or appended hereto,” 
 
 10 
 
and evidently concluded that by reason of this provision the 
 average clause should be construed as superseding the con¬ 
 tribution clause of the policy, especially if the necessities of 
 the insured required such construction. If the contribution 
 clause had been incorporated in the average clause, as it has 
 been in the reduced rate contribution clause, the court could 
 hardly have taken this position in the light of the Farmers 
 Feed Co. decision. This case was not appealed, and is referred 
 to here simply in order to direct attention to a possible weak¬ 
 ness in the average clause in use in the State of New York. 
 Although by a lower court, the decision is no doubt pleasing 
 to the advocates of the so-called limit of liability rule of ap¬ 
 portionment, inasmuch as it affords them an argument in 
 favor of putting the rule into effect in a certain class of cases 
 in localities where the average clause is in use. 
 
 All of these four clauses contain a provision reading as 
 follows: 
 
 “If this policy be divided into two or more items, 
 the foregoing condition shall apply to each item 
 separately.” 
 
 It is said that the first co-insurance clause prepared did not 
 contain this condition, but the underwriters taking counsel 
 of their fears, concluded that its omission might be fatal to 
 the carrying out of the original intention in connection with 
 policies containing more than one item, and it was amended 
 accordingly. 
 
 All the clauses also contain what is known as the “Waiver 
 of Inventory and Appraisement Clause,” which though vary¬ 
 ing somewhat in different sections, reads substantially as 
 follows: 
 
 “In the event that the aggregate claim for loss 
 does not exceed five per cent (5%) of the total 
 amount of the insurance upon the property described 
 herein and in force at the time such loss occurs, no 
 special inventory or appraisement of the undamaged 
 property shall be required.” 
 
 In some sections this percentage is limited to 2%, and in 
 others no special inventory or appraisement of the undam¬ 
 aged property is required if the aggregate claim for loss is 
 less than $10,000 (provided, however, such amount does not 
 exceed 5% of the total amount of insurance upon the prop¬ 
 erty described and in force at the'time of the loss). 
 
 Many people persist in placing a wrong interpretation 
 upon this condition, and among the number are prominent 
 insurance agents, and even special agents and adjusters. They 
 construe it as an absolute waiver of the co-insurance clause, 
 evidently failing to realize that if the framers of the provision 
 had intended it as a waiver they certainly had sufficient words 
 at their command to so state, and would not have deliberately 
 said something else. The clause simply says that under cer- 
 

 tain conditions no special inventory or appraisement of the 
 undamaged property shall be required. The company may 
 resort to any method other than this to ascertain the sound 
 value; it may have ex parte estimates made; it may secure the 
 opinion of experts; examine books of account; examine the 
 insured under oath ; insist upon the sound value being sworn 
 to in the proofs of loss; and, finally, it may let the court 
 decide upon the value on evidence submitted. And, if a 
 claimant should materially understate the value in the exam¬ 
 ination or in the proofs of loss, he might and probably would 
 invalidate his claim by reason of false swearing. This, it will 
 be seen, is far from an absolute waiver of the condition. 
 
 In New York City several years ago, a loss of about 
 $15,000 occurred on a large building owned by a gentleman 
 of wealth. The insurance carried was only $400,000, and the 
 apparent value was many times that amount. The insured 
 evidently assumed that inasmuch as the loss was less than 
 5% of the insurance, the 80% average clause was inoperative, 
 but he was told to file his proofs of loss and make affidavit as 
 to the sound value. He hesitated, but after several months 
 delay, proofs were filed showing a sound value of about 
 $2,500,000, and he was under the necessity of standing about 
 80% of the loss himself on account of under-insurance. 
 
 Years ago, the co-insurance clause contained a provision 
 waiving its application if the loss amounted to less than 5% 
 of the insurance; later it was changed so as not to require a 
 special inventory under those conditions, and still later, within 
 the past few years, it assumed its present form. In some sec¬ 
 tions the clause used to be so phrased as not to require a 
 special inventory or appraisement of the undamaged property 
 if the loss was less than 5% of the actual cash value of the 
 property. Under this form it would be necessary to ascertain 
 the sound value in some way in order to determine whether 
 or not it was necessary to find it. With the advent of the 
 uniform rules and clauses, this form, fortunately, went into 
 harmless disuse. 
 
 In Canada a clause is in use containing the following 
 condition : 
 
 “In case of loss the co-insurance clause shall not 
 be held to apply where the total loss does neither ex¬ 
 ceed $2,500 nor 2% of the sum insured on the in¬ 
 volved item or items of the schedule.” 
 
 There would seem to be no good reason why this same pro¬ 
 vision, with possibly some modification as to amount, might 
 not be adopted in this country. 
 
 A question of no little interest, and one which is asked 
 quite frequently, is whether the mortgagee under the mort¬ 
 gagee clause is bound by the terms and conditions of the co- 
 insurance or reduced rate contribution clause. A prominent 
 attorney has expressed the opinion that the interest of the 
 
 12 
 
mortgagee cannot be affected by the co-insurance clause un¬ 
 less it is made to appear in clear and explicit terms that the 
 mortgagee agrees to be bound by the provisions of the clause 
 as a part of his contract with the company; in other words, 
 unless it be incorporated in the mortgagee clause directly or 
 by reference. Another authority has expressed the opinion 
 that the mortgagee would not be bound by the co-insurance 
 clause as applied to the value of the property, and if applicable 
 at all, it would apply only to the value of the mortgagee’s 
 interest; in short, that the words “value of property” would 
 be construed to mean “value of interest.” According to a 
 third authority, the mortgagee is bound by the co-insurance 
 clause as applied to the sound value of the property. 
 
 We have here three different opinions from high legal 
 and lay authorities, but in July, 1915, the Appellate Division, 
 Second Department, of the Supreme Court of New York, in 
 the case of 
 
 Hartwig vs. American Ins. Co. of Newark (154 N. Y. 
 Supp. 801) (Ins. Law Journal, vol. 46, page 455) 
 rendered a decision in which it was held that the mortgagee 
 is bound by the terms and conditions of the 80% average 
 clause, and on the 14th day of April, 1919, the United States 
 District Court for the Eastern District of Pennsylvania ren¬ 
 dered another decision to the same effect, the latter case being 
 
 Pennsylvania Co. for Insurance on Lives and Grant¬ 
 ing Annuities vs. Aachen & Munich Fire Insur¬ 
 ance Company (257 Fed. Rep. 189, Sept., 1919), 
 
 (Ins. Law Journal, page 291). 
 
 It will be noted that these decisions are in harmony with 
 the third opinion above referred to, and according to the view 
 of the present writer, as expressed in an address delivered by 
 him on “The Mortgagee Clause,” several years ago, they are 
 eminently sound. 
 
 “The average, or co-insurance clause, is a part of the 
 contract with the mortgagee himself, and when he accepts the 
 policy with this provision therein it is his own act; he should 
 be as much bound by it as by the amount of the policy, date 
 of expiration, and description of the property. This imposes 
 no hardship upon him; his interests are not placed at the 
 mercy of third parties, and the arguments advanced against 
 the operation of the contribution clause do not apply. He 
 can insist upon insurance payable to himself being taken out 
 equal to the necessary percentage of the value of the prop¬ 
 erty, and thereby secure absolute protection, and it is the rule 
 with certain large loaning institutions to insist upon this in 
 order to meet the requirements of the clause, unless they 
 regard their security as ample without it. If, however, extra¬ 
 ordinary improvements or repairs are made to the building 
 after a policy is issued, without the knowledge of the mort¬ 
 gagee, thereby materially increasing the value of the prop- 
 
-~ii————■ --- 
 
 erty, this would be an act of the owner, by which the mort¬ 
 gagee would not be bound.” 
 
 The phrase, “for account of whom it may concern,” and 
 its running mate, the “commission or in trust clause,” have 
 probably been in use for a century or more, yet it may well 
 be doubted whether many of the insuring public, or in fact, 
 any considerable proportion of those engaged in the business 
 of fire insurance, are aware of its far-reaching effects. It 
 certainly is not generally known that if the policy of a ware¬ 
 houseman or other bailee contains the commission clause he 
 cannot first reimburse himself for his own loss from the in¬ 
 surance fund, but that if under-insured, whether he be legally 
 liable or not, he must pro-rate the amount collected with such 
 bailors as may adopt his insurance, after the loss has occurred, 
 although he will have a lien against the amounts due the 
 respective bailors for advances or charges, if any, that may 
 have accrued. 
 
 If, in addition to the broad coverage created by the use 
 of the above and kindred phrases, the policies contain the 
 co-insurance or average clause, the insured is liable to still 
 greater embarrassment by reason of his undoubted uninten¬ 
 tional generosity. In the first instance he may sustain a loss 
 by reason of the mere fact that he is under-insured, but if 
 co-insurance conditions be present, he may sustain an addi¬ 
 tional loss by reason of the value of all property in his cus¬ 
 tody being included for co-insurance purposes, thus reducing 
 the amount that would otherwise be collectible. This applies 
 to a railroad company or other common carrier, a warehouse¬ 
 man or other bailee, also to a hotel proprietor or householder 
 who includes in his policies the property of his guests and 
 servants. 
 
 Several very nice questions suggest themselves in this 
 connection. Can the entire value of the property in the pos¬ 
 session of the warehouseman be included for co-insurance 
 purposes under the unrestricted “trust and commission clause” 
 in all circumstances? If claim is made for damage on any 
 portion of the bailor’s goods, or if the bailee has agreed to 
 keep the property insured, or if for any reason he is legally 
 liable for the loss thereon, the value must be taken into con¬ 
 sideration. But if (1) the bailor has specific insurance of his 
 own sufficient to cover his loss, or (2) if his goods are not 
 involved in the loss and there is consequently no necessity 
 of his ratifying the bailee’s insurance, or (3) if the bailee has 
 no lien against the goods for storage or advances, and no 
 personal liability, can this value be included for co-insurance 
 purposes? There is not, to the present writer’s knowledge, 
 any recorded case involving these questions, but some good 
 arguments can be advanced in support of the view that the 
 value of the bailor’s goods, in some of these circumstances 
 at least, should not be included. 
 
 14 
 
The new advisory mercantile form recently adopted, both 
 in the East and in the West, contains the restricted commis¬ 
 sion clause, which only covers goods belonging to others, pro¬ 
 vided the insured is legally liable therefor. Some difficulty 
 may be experienced at times in determining whether or not a. 
 legal liability exists, but this new form which is intended to 
 prevent the indiscriminate adoption or appropriation of the 
 bailee’s insurance by others should be generally acceptable 
 to the mercantile world. Without discussing the reasons, it 
 is suggested, in passing, that this form might be improved 
 by adding the words, “at the time of the fire,” and making 
 it read: 
 
 “provided the insured is legally liable at the time 
 of the fire.” 
 
 There is an admonition on the back of both the old and 
 new standard policies which, if heeded, would save the ad¬ 
 justers, the brokers, the companies and the insured no end 
 of trouble, and enable the Committee of Seventeen, appor¬ 
 tionment experts, who were appointed several years ago to 
 prepare a universal rule of apportionment, to adjourn sine die. 
 It reads as follows: 
 
 “It is important that the written portion of all 
 Policies covering the same property read exactly 
 alike. If they do not they should be made uniform 
 at once.” 
 
 Nonconcurrence is always undesirable, and it is partic¬ 
 ularly so when the policies contain the co-insurance, or av¬ 
 erage, clause. The insured may have insurance in the aggre¬ 
 gate for an amount in excess of the sound value of his 
 property, but may by reason of nonconcurrence be compelled 
 to stand a portion of the loss himself. If the policies cover 
 blanket in two or more buildings, subject to the average or 
 co-insurance clause, and the average distribution clause is 
 also inserted in any of the policies, it should be inserted in 
 all. 
 
 A single illustration will be sufficient to demonstrate the 
 possible adverse effect upon the interests of the insured when 
 co-insurance is present in nonconcurrent policies: 
 
 
 Sound 
 
 
 Specific 
 
 Blanket 
 
 
 V alue. 
 
 Loss* 
 
 Insurance. 
 
 Insurance. 
 
 Stock 
 
 $10,000.00 
 
 $8,000.00 
 
 $6,750.00 
 
 
 Machinery 
 
 12,222.22 
 
 None. 
 
 3,250.00 
 
 $10,000.00 
 
 Total, 
 
 $22,222.22 
 
 $8,000.00 
 
 $10,000.00 
 
 $10,000.00 
 
 90% Co-insurance Clause in all policies. 
 
 90% of $22,222.22 = $20,000.00. 
 
 If there were no co-insurance clause in the policies it is 
 evident that the loss on stock under the rule laid down in the 
 
 15 
 
case of Page Bros. vs. Sun Insurance Office (74 Fed. 203; 
 20 C. C. A. 397), would be apportioned as follows: 
 
 Insures. Pays. 
 
 Specific policy $ 6,750.00 $3,223.88 
 
 Blanket policy 10,000.00 4,776.12 
 
 Total, $16,750.00 $8,000.00 
 
 But the liability of the blanket policy is limited by the opera¬ 
 
 tion of the 90% co-insurance clause to 10,000/20,000 of $8,000, 
 or $4,000, which is $776.12 less than the amount shown in the 
 above apportionment; hence the insured loses $776.12 by rea¬ 
 son of the operation of the co-insurance clause in the blanket 
 policy, notwithstanding the fact that the total insurance car¬ 
 ried equals 90% of the total value. 
 
 If the average clause in use in the State of New York 
 were attached to the policies, the advocates of the limited 
 liability rule would apportion the above loss as follows: 
 Co-insurance limit of stock insurance, 
 
 6,750/9,000 of $8,000, $6,000 
 Co-insurance limit of blanket insurance, 
 
 10,000/20,000 of $8,000, $4,000 
 Apportioning the loss on the basis of these co-insurance limits 
 of liability, the stock insurance would pay 
 
 6,000/10,000 of $8,000, $4,800 
 the blanket insurance would pay 4,000/10,000 of $8,000, $3,200 
 It will be seen that under the rule laid down in the Buse 
 case the insured would collect his entire loss, whereas, under 
 the first apportionment, he would lose $776.12. The decision 
 in the Buse case would have greater weight if it had been 
 rendered by the Court of Appeals instead of by a lower court; 
 in fact, it would then be controlling in the State of New York, 
 under the application of the average clause. 
 
 There is a popular misconception regarding the 80% co- 
 insurance clause. Many persons have the impression that if 
 an 80% clause of whatever form is attached to the policy they 
 can not collect more than 80% of the loss, no matter how 
 much insurance they may have. Nothing is farther from the 
 truth. It is axiomatic that if the loss equals or exceeds the 
 percentage named in the clause the insurer is liable for the 
 entire loss up to, but of course not exceeding, the amount of 
 insurance, and the amount collectible is not affected in the 
 slightest degree by the co-insurance clause. 
 
 There is another thing in connection with the operation 
 of the 80% co-insurance clause that is also axiomatic. If the 
 loss is to be settled on an agreed percentage of the total sound 
 value of the property (but not otherwise) the sound value 
 may be increased or decreased to any extent that the insured 
 may desire, and it will not alter the amount collectible from 
 the insurers, so long- as the co-insurance clause remains op¬ 
 erative. If, however, in his desire to escape the operation of 
 the co-insurance clause the claimant should insist upon the 
 
 16 
 
sound value (and consequently the loss) being reduced to such 
 an extent as to render the clause inoperative, it would result 
 in his undoing, and he would collect less than he otherwise 
 
 might. 
 
 The following will illustrate this point: 
 
 1. Sound value, $20,000 
 
 Insurance, 10,000 
 
 Loss 40% of value, 8,000 
 
 80% Clause. 
 
 Company pays 10,000/16,000 of $8,000, or $5,000 
 
 2. Increase Value and Loss 40% : 
 
 Sound value, $28,000 
 
 Insurance, 10,000 
 
 Loss 40% of value, 11,200 
 
 80% Clause. 
 
 Company pays 10,000/22,400 of $11,200, or $5,000 
 
 3. Decrease Value and Loss 40% : 
 
 Sound value, $12,000 
 
 Insurance, 10.000 
 
 Loss 40% of value, 4,800 
 
 80% Clause inoperative. 
 
 Company pays, $4,800 
 
 Several years ago the question arose as to whether a co- 
 insurance rider attached to the Massachusetts standard form 
 of fire policy violated the statute of that state prescribing 
 such standard form and providing for adding to or modifying 
 the provisions contained therein, and it was held that it did 
 not, and that the co-insurance clause was permissible. 
 
 (Quinn vs. Fire Assn., 180 Mass. 560; 62 N. E. 890; 
 
 31 Ins. Law Journal 460; Mass., St. 1894, C 22, 
 
 Sec. 60.) 
 
 This decision would seem to suggest the permissibility of 
 various other riders to the Massachusetts policy under the 
 standard policy law of that state. 
 
 In Louisiana, in the case of Simon vs. Queen Ins. Co. 
 of America (120 La. 477; 45 So. 396), it was held that the 
 valued policy law of that state did not prohibit the use or 
 application of the old co-insurance clause, but since this 
 decision was rendered the law has been changed so as to limit 
 the application of the clause to policies covering' personal 
 property. 
 
 Is the co-insurance clause a waiver of the “other insur¬ 
 ance” provision in the printed conditions of the policy? It 
 is self-evident that it operates as a permit for other insurance 
 to the amount required to make up the stated percentage of 
 value, but it has been held that it does not supersede a pro¬ 
 vision that the policy shall be void in case of other insurance 
 when that policy itself is for an amount in excess of the stated 
 percentage of the value of the property (Cutler vs. Royal 
 Ins. Co., 70 Conn. 566; 40 Atl. 529; 41 L. R. A. 159). It 
 would, however, appear to be a harsh rule which would require 
 
 17 
 
the insured to maintain insurance to the amount of a stated 
 percentage of the value of the property, and which would 
 render the policy void if in an honest effort to meet the re¬ 
 quirement he should happen to exceed the percentage named, 
 and it may well be doubted whether such a rule would be 
 generally upheld by the courts. 
 
 This question, however, can hardly arise in connection 
 with the average clause or reduced rate contribution clause, 
 inasmuch as these are simply provisions restricting liability 
 and do not specifically require the insured to maintain any 
 stated percentage of insurance. Therefore, if the insured 
 takes out other insurance it is quite important for him to have 
 a permit endorsed on the policy, if it contains the average or 
 reduced rate contribution clause, and it would be advisable 
 for him also to have such endorsement made if the policy 
 contains the old co-insurance clause. 
 
 It would be interesting to give further consideration to 
 the effect which co-insurance conditions may have upon the 
 apportionment of losses in cases of nonconcurrence, but this 
 is a subject in itself, and beyond the purview of this paper. 
 It is sufficient to say that the advent of co-insurance has 
 tended to discredit in a measure all the old rules for the ap¬ 
 portionment of losses under nonconcurrent policies, and that 
 there is open to some inquiring mind or inventive genius of 
 the future the opportunity of discovering what the present 
 generation of adjusters has seemingly been unable to discover, 
 and that is a rule which, although it may not be universally 
 applicable, will generally serve the ends of justice under 
 present underwriting conditions. 
 
 EXAMPLES ILLUSTRATING THE OPERATION OF 
 CO-INSURANCE CLAUSES UNDER VARYING 
 
 CONDITIONS: 
 
 EXAMPLE 1 
 
 80% Co-insurance, Average or Reduced Rate Contribution 
 
 Clause 
 
 Sound value. $5,000 
 
 Insurance that the insured should carry. 4,000 
 
 Insurance carried. 3,000 
 
 Loss . 2,000 
 
 Company pays 3000/4000 of $2000 or. 1,500 
 
 Insured loses 1000/4000 of $2000 or. 500 
 
 example 2 
 
 80% Co-insurance, Average or Reduced Rate Contribution 
 
 Clause 
 
 Sound value. $5,000 
 
 Insurance that the insured should carry. 4,000 
 
 Insurance carried. 4,000 
 
 Loss...:. 2,000 
 
 Company pays 4000/4000 of $2000 or. 2,000 
 
 Insured loses 0000/4000 of $2000 or.Nothing 
 
 18 
 
EXAMPLE 3 
 
 100% Co-insurance, Average or Reduced Rate Contribution 
 
 Clause 
 
 Sound value. $5,000 
 
 Insurance that the insured should carry. 5,000 
 
 Insurance carried. 3,000 
 
 Loss . 2,000 
 
 Company pays 3000/5000 of $2000 or. 1,200 
 
 Insured loses 2000/5000 of $2000 or. 800 
 
 example 4 
 
 100% Co-insurance, Average or Reduced Rate Contribution 
 
 Clause 
 
 Sound value. $5,000' 
 
 Insurance that the insured should carry.:. 5,000 
 
 Insurance carried. 5,000' 
 
 Loss . 2,000 
 
 Company pays 5000/5000 of $2000 or. 2,000 
 
 Insured loses 0000/5000 of $2000 or.Nothing 
 
 example 5 
 
 Blanket policy covering in several buildings. 100% Co-insur¬ 
 ance, Average or Reduced Rate Contribution Clause 
 
 Stock in Building A. $ 5,000 
 
 Stock in Building B. 10,000 
 
 Stock in Building C.’. 8,000 
 
 Stock in Building D. 7,000 
 
 $30,000 
 
 Insurance carried. 30,000 
 
 As insurance is carried for the full value of the property 
 there is no contribution by the insured for any loss either total 
 or partial. 
 
 example 6 
 
 Blanket policy covering in several buildings. 100% Co-insur¬ 
 ance, Average or Reduced Rate Contribution Clause 
 
 Stock in Building A. $ 5,000 
 
 Stock in Building B.,. 10,000 
 
 Stock in Building C.:. 8,000 
 
 Stock in Building D..... 7,000 
 
 $30,000 
 
 Insurance carried. 15,000 
 
 Loss in Building B. 5,000 
 
 Company pays 15000/30000 of $5000 or. 2,500 
 
 Insured loses 15000/30000 of $5000 or. 2,500 
 
 19 
 
2 
 
 The 
 
 Fire Insurance Policy 
 as a Contract 
 
 A LECTURE 
 
 W. N. BAMENT 
 
 General Adjuster 
 
 THE HOME INSURANCE COMPANY 
 
 NEW YORK 
 

The Fire Insurance Policy as a 
 
 Contract 
 
 4 
 
 { 
 
 William N. Bament, General Adjuster 
 The Home Insurance Company, New York 
 
 The seal used by the Insurance Department of the State 
 of New York for many years contained the following in¬ 
 scription: “Alter alterius onera portate ”—“Bear ye one another’s 
 burdens,” and it would be difficult to conceive of a more 
 highly appropriate motto for such a department, or a more 
 felicitous expression with which to symbolize the underlying 
 principle of insurance. 
 
 According to the authorities, insurance was originally 
 held to be in effect nothing but a mere wager, and it was a 
 matter of grave doubt whether as a principle of ethics it 
 should be allowed, but for many years it has been regarded 
 as the handmaid of commerce and an absolute business neces¬ 
 sity, the gambling element being eliminated or reduced to 
 a minimum by the fact that in order to support a valid 
 contract the party insured must have an insurable interest in 
 the subject thereof. 
 
 It is undoubtedly true that in the early part of the 
 eighteenth century, in addition to the regular business of 
 insurance, wagering contracts were issued both in England 
 and on the Continent, covering almost every conceivable 
 subject or event, but about the middle of the same century 
 the issuing of wagering policies was prohibited by statute 
 and Lord Mansfield, who may justly be regarded as the father 
 of insurance law, rendered his famous decision making an 
 insurable interest the basis of the contract. This put an end 
 to the demoralizing practice and paved the way for the 
 marvelous development of legitimate insurances, and placed 
 the business upon the high plane where it now rests and where 
 it is universally regarded as one of the bulwarks of our 
 mercantile, industrial and social life. 
 
 The oldest form of insurance is marine, which was 
 doubtless in vogue among the ancients, but did not assume 
 anything approaching its present form until the twelfth or 
 thirteenth century, when it was taken up by the Lombards 
 who resided in Northern Italy. They had branches in all 
 
 1 
 
the important cities of Europe and some of them settled in 
 London, and Lombard Street, London, which takes its name 
 from them, became in time the great marine underwriting 
 center of the world. 
 
 It was not, however, until the great London conflagra¬ 
 tion of 1666, that people awoke to a realization of the great 
 danger of loss by fire, and it was not until thirty years 
 later that anything except sporadic efforts were made toward 
 placing fire insurance upon a firm basis, but during the past 
 two centuries it has steadily grown in public favor and is 
 now by far the most popular of all the various departments 
 of insurance. 
 
 Contracts of insurance, although they may be by parol, 
 are almost universally reduced to writing in an instrument 
 called the “policy,” which word is most probably of Italian 
 derivation and signifies a promise or a note or memorandum 
 in writing. 
 
 In addition to the necessity of an insurable interest, 
 there are a number of other elements essential to a legitimate 
 contract of insurance; it is primarily a contract of indemnity; 
 it requires the utmost good faith on the part of all parties 
 thereto; there must be a risk which may result in a real loss 
 which neither party has the power to avert or hasten, and 
 it is incumbent upon the insured to communicate to the 
 insurer all facts material to the risk. 
 
 In order to constitute an insurable interest, the insured 
 must be so circumstanced with respect to the property subject 
 to loss or damage by fire, that he may be benefited by its 
 safety or prejudiced by its destruction, and this includes a 
 great variety of relations. 
 
 The following interests may be mentioned as insurable: 
 An owner, in whole or in part, of the property; a vendor 
 and vendee under an executory contract of sale; a mortgagee; 
 a remainderman; a lessee in improvements to the building or 
 land or in his profit on the lease, or one who has obligated 
 himself to restore the property or to pay rent; a landlord 
 in the rents or rental value of the property; a warehouseman 
 or bailee in advances or charges, or on his assumed liability ; 
 a common carrier on its liability; an owner in his profits ; 
 a merchant or manufacturer in the use and occupancy of his 
 store or plant. A right to future possession, or a future 
 interest, no matter how improbable its attainment, will support 
 an insurable interest, whereas a mere expectancy, no matter 
 how probable its realization, will not, although recent decisions 
 by certain courts in this country seem to indicate some de¬ 
 parture from this time-honored priniciple. 
 
 A policy of insurance is an aleatory contract in the sense 
 that it embodies the element of chance and is contingent 
 upon some event which may or may not occur. It is a 
 reciprocal contract in that it involves mutual obligations. 
 
 2 
 
It is a voluntary contract whether it be a form prescribed 
 by the state or not, and when issued by the insurer and 
 accepted by the insured, both are bound by its provisions. 
 It is a personal contract and does not'follow the property 
 nor pass with the title unless assigned with the consent of 
 the insurer. The personal nature of the contract becomes 
 increasingly evident when it is realized that it is not property 
 as such which is insured, but the individual, although the 
 words “property insured” by reason of continuous use, have 
 become an insurance idiom. It is a conditional contract 
 and its validity depends upon its conditions being complied 
 with. This is necessarily so for the reason that for a com¬ 
 paratively small consideration, the insurer may be called upon 
 to pay a large amount, and because the contract is designed 
 to cover every conceivable class of property and protect 
 virtually every interest known to the commercial world. 
 
 The policy must protect the insurer against material 
 misrepresentation, abandonment of property, over-insurance, 
 over-loading of buildings, extravagant claims, increase in risk 
 and moral hazard, both before and after a loss, for inasmuch 
 as many fires are welcomed if not desired, if a moral hazard 
 does not exist before, it not infrequently develops after a 
 loss has occurred. It is on this account and because insurance 
 companies deal with all sorts and conditions of men that the 
 standard policy in current use, contains provisions exempting 
 the insurer from liability for any one of a dozen or more 
 sins of commission on the part of the insured, and for any 
 one of an equal number of sins of omission, and provides 
 that the company shall not be liable for loss caused in a 
 dozen different ways, nor for loss on eight classes of property 
 under any circumstances, nor for loss on about a score of 
 others unless liability is specifically assumed thereon. For¬ 
 tunately for the public, insurance companies do not always 
 stand upon their technical rights, but on the contrary, are 
 disposed to view all meritorious claims in a spirit of the 
 broadest liberality. It is doubtful if one person in a thousand 
 ever reads his policy, especially the printed conditions, but 
 it is not the only well-known piece of literature relating to 
 protection from fire, that people ought to read but do not. 
 
 The adoption of a standard fire policy by the State of 
 New York in 1886, marked a great advance in the insurance 
 contract. The ornate policies in use prior to that time, with 
 no uniformity in conditions, with their classification of haz¬ 
 ards, which few could understand, and their fine print, which 
 no one not possessing unusually acute vision could read, gave 
 way to the plainly printed uniform policy, which materially 
 simplified conditions, which was adopted either verbatim or 
 with slight modifications by other states, so that it is probably 
 safe to say that for the past thirty years, fully seventy-five 
 per cent of all the policies issued, outside of the states having 
 standard policies of their own, have been the New York 
 
 3 
 
Standard. Although this has not resulted in uniformity of 
 decisions, it has had the effect of materially restricting litigation 
 and has been of incalculable benefit both to the insurer and 
 the insured. A new standard policy is to go into effect in 
 New York January 1, 1918. It has already been adopted by 
 several states and will no doubt be by others in the not dis¬ 
 tant future. From time immemorial it has been the uniform 
 practice of the courts to construe the insurance contract most 
 liberally in favor of the insured as against the insurer in 
 accordance with the general rule that the contract should be 
 construed most strictly against the one by whom it is pre¬ 
 pared. The standardizing of the policy by the legislatures 
 of the various states has neutralized this tendency to some 
 extent, but the courts can safely be relied upon to prevent 
 forfeiture if it can be done without undue violence to the 
 plain intent of the contract. 
 
 Insurance companies are not inclined to resist the pay¬ 
 ment of claims, but on the contrary, they sometimes approach 
 the extreme limit of propriety, generosity and good morals, 
 in their efforts to avoid litigation. This is evidenced by the 
 fact that of all the losses which occur, probably not more 
 than one-fifth of one per cent become the subject of litigation, 
 and one-half of these are settled before the cases come to 
 trial. To put it another way, out of all the policies issued, 
 the courts are not called upon to adjudicate claims under 
 more than one out of every thirty thousand, which may be 
 regarded as quite a favorable commentary upon the mutual 
 fainnindedness of the companies and the insuring public. 
 
 Too great emphasis cannot be laid upon the contractual 
 nature of the policy. By accepting it the insured, in the 
 absence of mutual error, which, of course, can be corrected, 
 becomes bound by all the descriptions, representations, war¬ 
 ranties and conditions, written or printed, contained therein. 
 Every property owner should read his policy, the written 
 portion, in order to see that everything he desires covered 
 is mentioned therein, and that the description, location, amount 
 and dates are correct; and the printed portion, in order to 
 obtain information with regard to his duties and obligations. 
 He should comply with all conditions of the contract and 
 be in a position, when a loss occurs, to demand as a right, 
 and not to receive as a matter of grace, payment from the 
 insurer. 
 
 An analysis of the conditions of the contract will be 
 impossible at this time. It will be sufficient to say that the 
 new standard policy before its adoption, received the most 
 careful consideration at the hands of insurance commissioners, 
 legislative committees and the best minds in the fire insurance 
 business, and it is fair to conclude that it contains no pro¬ 
 visions, except those which years of experience have demon¬ 
 strated to be absolutely necessary to the safe conduct of the 
 business and to the support of a wise public policy. 
 
 4 
 
Although all enterprising insurance companies, agents 
 and brokers make a practice of notifying their customers of 
 the expiration of their policies, they are under no obligation 
 so to do; hence, the insured should not only keep careful 
 watch over his expirations, but he should see that his insur¬ 
 ance is renewed several days before the policies expire. The 
 insurance text writers and the courts which have passed on the 
 subject, few in number though they be, have held to the 
 view that the occurrence of a loss is synchronous with the 
 fire actually reaching the property described in the policy. 
 Hence, if a fire or conflagration starts in neighboring prop¬ 
 erty some time 'before noon, the insurance expiring at noon, 
 and the fire, or the smoke, heat or water therefrom, does not 
 reach the premises until after noon, the owner will be com¬ 
 pelled to suffer the consequences of his own neglect if he 
 has failed to renew his policies. (Insurance Co. vs. Peaslee- 
 Gaulbert Co., [Ky.], 34 Ins. Law Journal, 740). 
 
 This question as to when a loss occurs, in circumstances 
 such as those above outlined, arose at Baltimore and San Fran¬ 
 cisco, but fortunately for the parties insured, in both instances 
 the insurance had either been renewed in the same companies 
 or replaced in others so that they sustained no loss. The 
 claims were paid under the new policies. Of course, if a 
 fire breaks out in the described premises, and continues to 
 burn thereafter until the property is totally destroyed, it is 
 deemed one event and the entire loss is one occurring within 
 the terms of the policy. 
 
 A number of years ago, before the days of the telephone, 
 a merchant in a western city, started from his place of busi¬ 
 ness in the suburbs to renew the insurance on his packing 
 house, amounting to $100,000 which was to expire that day 
 at noon. He was unexpectedly delayed and when approach¬ 
 ing the insurance center, the fire bell rang. He supposed it 
 was tolling the hour of noon, but it was sounding the death 
 knell of his business career. It was quarter past twelve, 
 his plant was on fire and burned to the ground. And this 
 is only one of many instances of a similar nature which have 
 occurred in the past and which will occur in the future. The 
 insured cannot transfer to the shoulders of others the respon¬ 
 sibilities which properly belong to his own. 
 
 When it is considered that a very large majority of all 
 the property in this country, of every kind and nature, is 
 protected by insurance, that about thirty million fire insur¬ 
 ance policies are issued annually, upon which the premiums 
 amount to nearly half a billion dollars, that the losses there¬ 
 under are nearly sixty per cent of that amount, that these 
 policies furnish collateral for loans on about sixty per cent 
 of all the real estate in the country, and form the basis of 
 our commercial credit, we can realize that of all the forms 
 of contract in current use, there is none more indispensible 
 to the business world than the contract of fire insurance. 
 
 5 
 

 
 
 
 ■ 
 
 . 
 
 
 
 
 
 
 
What is a Fire Loss? 
 
 Direct and Consequential Loss 
 AN ADDRESS 
 
 DELIVERED BEFORE THE NINETY-EIGHTH 
 
 MEETING 
 
 OF 
 
 The Insurance Society 
 
 of New York 
 
 November 24th, 1914 
 
 BY 
 
 W. N. BAMENT 
 
 General Adjuster 
 
 Jpg) 
 
 THE HOME INSURANCE COMPANY 
 
 NEW YORK 
 
 l 
 
What is a Fire Loss? 
 
 When Prometheus brought to earth as a gift to man the 
 fire he had stolen from the chariot of the sun, he could never, 
 even with his superhuman attributes, have imagined its pos¬ 
 sibilities of destruction as evidenced by wars and conflagra¬ 
 tions, or the magnitude and far reaching effect of its benefits, 
 which have their practical manifestation in the arts and 
 sciences. Nor could he have even dimly pictured as one of 
 the results of his benefaction the great business of fire insur¬ 
 ance, which, after an evolutionary process of over two hundred 
 years, may in The Insurance Society of New York, be said to 
 have reached its apogee. 
 
 It is said that human culture began with the utilization 
 of fire, and that culture increased in the same ratio as its 
 use. The ancients, the barbaric tribes, and even our forefathers 
 were interested in how to produce and preserve it; we are 
 chiefly interested in how to control and prevent it. It was 
 an element in the national and religious ceremonies of the 
 ancient Egyptians, the Greeks, Romans and Persians, and 
 among the aboriginal tribes of America. From the dawn of 
 civilization, and even before, the human race has been more 
 or less familiar with fire and its phenomena, yet the question, 
 “What is a fire?” has claimed the consideration of scientists, 
 lawyers, courts and juries, and possesses enough elements, 
 if not of doubt, yet certainly of interest, to command the 
 studious attention of all those engaged in the business of fire 
 insurance. 
 
 To constitute “fire” within the meaning of a policy of 
 fire insurance, two requisites are necessary. First, there must 
 be actual ignition, evidenced by a flame, glow, or something 
 resembling luminosity. Second, the fire must be, so far as 
 the insured is concerned, accidental in its origin. Hence a 
 fire in a stove, grate or furnace, no matter how intense it may 
 become, or the flame of a lamp, oil stove or gas jet no 
 matter how high it may rise, so long as it is confined to the 
 place where it is intended to be, is not a fire within the mean¬ 
 ing of the contract. A fire of this character is denominated 
 “friendly” as distinguished from “hostile,” and any loss 
 caused bv smoke, heat or soot from such fire, or by the burn¬ 
 ing of property therein, is not covered by the 1 policy. 
 
If, however, such friendly fire extends beyond the place 
 intended and provided for it, and causes ignition outside its 
 proper limits, there is at once an independent fire, fortuitous 
 in its origin, and hostile in its nature, and any loss resulting 
 therefrom, whether by direct burning, smoke or heat, comes 
 within the protection of the policy. 
 
 A contract of fire insurance differs from ordinary con¬ 
 tracts in that it is based upon an event which is possible or 
 liable, but not certain, to occur. Its very essence is embodied 
 in the words “casualty,” “accident,” “chance,” “contingency.” 
 
 The insurer undertakes, for a comparatively small premium, ( 
 
 to guarantee the insured against loss upon the happening of 
 a certain event, and the contract implies the utmost good 
 faith. If, therefore, the insured intentionally sets fire to his 
 property he thereby violates the essential principle of the 
 contract, and even in the absence of a special stipulation, 
 there can be no recovery. And it is not necessary that any 
 indictable offense be shown in order to prevent recovery for 
 the willful burning of the property. (Schmidt vs. New York, 
 etc. Ins. Co., 1 Gray [Mass.] 529). 
 
 Recently a man was tried on the charge of having will¬ 
 fully set fire to his property. The jury disagreed by reason 
 of the fact that the accused on the stand, evidently upon the 
 advice of counsel, made the remarkable statement that he 
 had no motive for burning the property because the premises 
 had been vacant for more than thirty days, and therefore his 
 insurance 1 policy, which was for several thousand dollars, was 
 null and void. 
 
 Where, as in some of the older forms, the policy con¬ 
 tained a stipulation that the company would be discharged 
 from the payment of loss caused by gross negligence, and 
 it having been proved at the trial of the case that the fire did 
 occur from such cause, the insurer was not held. (Camp¬ 
 bell vs. Monmouth Mut. Fire Ins. Co., 59 Me. 430; 5 Ben¬ 
 nett 395). 
 
 The general rule is that carelessness or negligence of the 
 insured, his agents and servants, in the absence of a special 
 stipulation, affords no defense. Aside from the difficulties 
 in the way of determining the degree of negligence which 
 would be sufficient to cause forfeiture, negligence is a well 
 known human characteristic, and a different rule would prac¬ 
 tically defeat the chief purpose of insurance. (Waters vs. 
 Merchants’ Louisville Ins. Co. 11 Pet. [U. S.] 213; 1 Ben¬ 
 nett 615). ( 
 
 On the other hand there is good authority in favor of 
 the doctrine that grave misconduct on the part of the insured 
 or his responsible agent of so pronounced a character as to 
 evince a fraudulent purpose, a corrupt design, or a culpable 
 recklessness and indifference to the rights of others, or the 
 omission to do that which good faith requires that he should 
 do, would warrant a verdict excusing the insurer from liabil- 
 
 2 
 
ity. For instance, if the premises should take fire and the 
 flame begin to kindle' in such a small way that a cup of water 
 would put it out, and the insured having water at hand should 
 neglect to use it; or where the insured, in his own house, sees 
 the burning coals in the fire place roll down on his wooden 
 floor, and does not brush them up; or if the insured not only 
 neglects to save the property himself but attempts to prevent 
 others from saving it, the loss has been held to fall upon 
 the insured and not upon the insurer. (Thornton vs. 
 Security Ins. Co. [C. C.] 117 Fed. 773; Chandler vs. Worcester 
 Mut. Fire Ins. Co., 3 Cush. [Mass.] 328; Ellsworth et al. vs. 
 Aetna Ins. Co. 89 N. Y. 186; Fleisch vs. Ins. Co. of N. Am. 
 Mo. App. 589; Aurora F'ire Ins. Co. vs. Johnson 46 Ind. 
 315—326; Cin. Mut. Ins. Co. vs. May 20 Ohio 211). 
 Ostrander on Ins. 
 
 There is quite a conspicuous absence of consistency in 
 the decisions bearing on this question. For example, the 
 insured, the owner of a steamboat, while racing with another 
 boat placed a barrel of turpentine near the opening in the 
 furnace, intending to use it for fuel, and as a consequence 
 the steamer was destroyed by fire. His conduct was not will¬ 
 ful, yet the Court held that there could be no recovery. 
 (Citizens Ins. Co. vs. Marsh 41 Pa. St. 386). On the other 
 hand, where an ice house was destroyed by the spread of a 
 fire which had been made by the president of the plaintiff 
 corporation, not far from the building, for the purpose of 
 burning some rubbish, and which had been left burning with¬ 
 out any one to watch it during the noon hour, the insurer 
 was held liable. (Des Moines Ice Co. vs. Niagara Fire 
 Ins. Co. 99 Iowa 193; 68 N. W. 600). 
 
 Every insurance company has numerous instances each 
 year where negligence is quite as pronounced as in either of 
 the above cases, and no one in these days ever thinks of 
 contesting them. It is probably no exaggeration to say that 
 a majority of all the fire losses which occur are directly 
 chargeable to negligence of some kind on the part of the 
 insured, his agents or servants. 
 
 The New York standard policy contains a condition 
 making it incumbent upon the insured to use all reasonable 
 means to save and preserve the property at and after a fire, 
 or when the property is endangered by fire in neighboring 
 premises, although it has been held that such a provision does 
 not impose any additional duty upon the insured because it 
 is clearly his duty to do this without any express provision 
 in the policy. Cincinnati Mut. Ins. Co. vs. May 20 Ohio 211, 
 [supra] Gardere vs. Columbian Ins. Co., 7 JohnsR.514 [N. Y.]. 
 It is, however, the almost universal custom for the insured, 
 his man servants, his maid servants, and everybody else, to 
 lose their heads in the presence of fire, and do those things 
 which they should not do, and leave undone those things 
 which they should do, and although there are a few cases 
 
 3 
 
on record of such a flagrant nature that the insurers were 
 excused (supra), it is seldom that a case of misfeasance or 
 nonfeasance occurs sufficiently pronounced to induce a jury 
 to exempt the insurers from liability. 
 
 If the insured burns his property while insane, his 
 irresponsible act is no bar to recovery. (Karow vs. Continen¬ 
 tal Ins. Co. 57 Wis. 56; 15 N. W. 27; 46 Am. Rep. 17). The 
 act of a third party in setting fire to the property whether 
 unintentional, careless or criminal, or that of an agent of the 
 insured while acting outside the scope of his authority, will 
 not relieve the insurer from liability unless the burning was 
 with the privity or consent of the insured. Likewise, the 
 intentional burning of the property of the husband by the 
 wife, or that of the wife by the husband, or that of the father 
 by the son will afford no defense to the insurer. (Walker 
 vs. Phoenix Ins. Co. 62 Mo. App. 209; Mickey vs. Burling¬ 
 ton Ins. Co. 35 la. 174; Grove vs. Ins. Co. 48 N. H. 41; 
 Perry vs. Mechanics Ins. Co. 11 Fed. 485; Plinsky vs. Ger¬ 
 mania Ins. Co. 32 Fed. 47; Feibelman vs. Manchester Assur¬ 
 ance Co. 108 Ala. 180; Henderson vs. Western Ins. Co. 10 
 Rob. [La.] 164; Malin vs. Mercantile Town Mut. Ins. Co. 105 
 Mo. App. 625.) Richards on Ins. 
 
 There is on record a foreign case where a piece of 
 jewelry was accidentally knocked from a mantelpiece into the 
 fire below and it was held to be a direct loss by fire. (Paris 
 Law Courts, 22 Irish Laws and Solicitors, Jl. 169). It is 
 submitted that this ruling is unsound. It is true the fall of 
 the jewelry was accidental, and it dropped into a place where 
 it was not intended to be. The fire, however, was not acci¬ 
 dental, and remained where it was voluntarily placed. It 
 was a friendly fire performing its duty as such, and it did not 
 become any the less friendly or acquire any of the elements 
 of a hostile fire because a piece of more than ordinarily ex¬ 
 pensive and less combustible fuel was added to the flames. 
 No independent hostile fire was created, any more than one 
 would be by the throwing into the grate of another piece of 
 wood or shovelful of coal. The fire itself must be accidental 
 in order to bring the loss within the protection of the policy. 
 
 Some analogy may be drawn between those cases where 
 jewelry and other articles fall or are inadvertently thrown 
 into a grate or furnace, and the familiar and frequent ones 
 where clothing falls upon a red hot stove, or where a lace 
 curtain blows or is pushed against a gas jet. The analogy 
 is slight and ends with the accidental nature of the contact. 
 When the clothing touches the stove, or the curtain the gas 
 jet, another fire is started, entirely independent of that in the 
 stove or the gas burner. The second fire thus created is hos¬ 
 tile, and not being confined to the limits within which fire 
 is intended to be, the loss is one for which the insurer is liable. 
 
 Where the heat from escaping steam is so great as to 
 cause charring, but without ignition, there is no loss within 
 
 4 
 
the meaning of the policy. (Gibbons vs. German Ins. & Sav. 
 Inst. 30 Ill. App. 263). Although certain chemical actions 
 may correspond in their effects to fire, they do not constitute 
 fire unless they result in actual ignition. Mere combustion will 
 not support a claim for loss by fire, unless it is sufficiently 
 rapid to produce ignition. (Western Woolen Mills Co. vs. 
 Northern Assurance Co. 139 Fed. 637; 72 U. S. C. C. A. 1). i 
 Although lightning may be a form of fire, loss caused by 
 lightning, without actual ignition, is not in the ordinary 
 meaning of the words, a loss by fire; but a “lightning clause” 
 may be, and usually is, attached to the policy. 
 
 The ablest and most interesting exposition of the question 
 as to what is meant by “fire” within the meaning of a con¬ 
 tract of fire insurance is that contained in the opinion of the 
 United States Circuit Court of Appeals, 8th Circuit, in the 
 case of Western Woolen Mills Co. vs. Northern Assurance 
 Co. 139 Fed. Rep. 637, 82 U. S. C. C. A. p. 1 which may 
 be briefly stated as follows: A large quantity of wool in 
 fleeces was submerged for eight days during a flood, which 
 caused spontaneous combustion, with smoke, steam and great 
 heat by which the wool was damaged and its fibre destroyed. 
 
 The building did not burn, nor did any part of it. The wool 
 was spread to dry and was stirred with pitchforks day and 
 night, as it was too hot for handling, though not hot enough 
 to blister one’s hands. The wool was at all times wet, but 
 at no time was there any visible evidence of what is popu¬ 
 larly known as fire. 
 
 The Court said, “Spontaneous combustion is usually a 
 rapid oxidation. Fire is oxidation which is so rapid as to 
 either produce flame or a glow. Fire is always caused by 
 combustion, but combustion does not always cause fire. The 
 word “spontaneous” refers to the origin of the combustion. 
 
 It means the internal development of heat without the action 
 of an external agent. Combustion or spontaneous combus¬ 
 tion may be so rapid as to produce fire, but until it does so, 
 combustion cannot be said to be fire.” 
 
 “No definition of fire can be found that does not include 
 the idea of visible heat or light, and this is also the popular 
 meaning of the word. The slow decomposition of animal and 
 vegetable matter in the air is caused by combustion. Com¬ 
 bustion keeps up the animal heat in the body. It causes the 
 wheat to heat in the bin and in the stack. It causes hay in 
 the stack and in the mow of the barn to heat and decompose. 
 
 It causes the sound tree of the forest, when thrown to the 
 ground, in the course of years to decay and molder away 
 until it becomes again a part of Mother Earth. Still we 
 never speak of these processes as fire. And why? Because 
 the process of oxidation is so slow that it does not produce 
 a flame or glow.” Held that the loss was not the result of 
 fire within the meaning of the contract. 
 
 5 
 
The above opinion was rendered by one of the highest 
 courts in the land, after a careful study and consideration 
 of the testimony of a large number of scientific experts, yet 
 a Kansas judge in another case in the State Court growing 
 out of the same fire, had such an exalted opinion of the 
 intelligence of a Kansas jury that he deemed it unnecessary 
 to give any definition of what constitutes “fire,” and the 
 jury, as was to be expected, proceeded to show its entire 
 ignorance of the subject by rendering the customary insur¬ 
 ance verdict, which the divided higher court, in a semi- 
 apologetic opinion, refused to disturb. (Western Woolen 
 Mills Co. vs. Sun Insurance Office, 72 Kan. 48; 82 Pac. Rep. 
 513). 
 
 In a case where the building was heated by steam, which 
 by the breaking of a pipe escaped into a room, damaging 
 books and furniture and causing such intense heat as to result 
 in charring and otherwise severely damaging the contents 
 of the room, the Illinois Appellate Court said: “Fire and heat 
 are not one, but cause and effect. Damage by heat is not 
 insured against in terms, and is covered by the policy only 
 where the misplaced fire causes it. If fire were a moral agent, 
 no blame could be imputed to it. It was doing its duty, and 
 nothing more. The damage was caused by another agent, 
 who, undertaking to transmit the beneficial influence of the 
 fire, broke down in the task. The common understanding of 
 the word “fire” would never include heat, short of the degree 
 of ignition.” (Gibbons vs. German Ins. & Sav. Inst. 30 
 Ill. App. 263). 
 
 Perhaps the most famous and the most frequently quoted 
 decision bearing on this subject is that in the English case 
 of Austin vs. Drewe, decided in 1816 (4 Campbell 360; 6 
 Trant 436). The property covered was the stock and utensils 
 in a sugar house. The building was eight stories in height, 
 and in each story sugar, in a certain stage of preparation, 
 was deposited for the purpose of being refined; this required 
 a certain degree of heat, and this was communicated to each 
 story by a chimney running up through the whole building 
 and forming almost one side thereof. At the top of the chim¬ 
 ney, above the eight stories, was a register, which the plain¬ 
 tiffs used to shut at night in order to retain in the chimney 
 and building all the heat they could. One morning a servant 
 neglected to open the register, and shortly afterward it 
 was discovered that sparks and smoke had gotten into the 
 rooms; that heat had slightly blistered the walls and acci¬ 
 dentally discolored and damaged the sugars. There was no 
 fire in the building that ought not to be there; nothing was 
 on fire that ought not to be on fire; the damage was occa¬ 
 sioned by sparks, heat and smoke. The jury found for the 
 defendant, and the verdict was sustained on appeal, the Court 
 holding that the loss was occasioned by the unskillful manage¬ 
 ment of the machinery and register by the plaintiff’s own 
 
 6 
 
servants; that it was not caused by fire within the meaning of 
 the policy, and the insurer was not liable. 
 
 The smoking lamp figures quite extensively in the exper¬ 
 ience of every fire insurance adjuster, but all the decisions 
 which have been rendered in cases of this nature are in favor 
 of the insurer. Two cases which may be mentioned as directly 
 in point are Fitzgerald vs. German Amer. Ins. Co. (62 N. Y. 
 Supp. 824; 30 N. Y. Misc. 72) and Samuels vs. Continental 
 Ins. Co. (2 Pa. Dist. Ct. 397). The former was an ordinary 
 smoking lamp damage, tliere being no fire outside the lamp 
 itself. In reversing a judgment for the plaintiff the Court 
 said: “The rule seems to be that where the insured employs, 
 fire for economic or scientific purposes, and the fire is con¬ 
 fined to the agencies so employed, and damage ensues, with¬ 
 out any actual ignition to the property insured, the insurance 
 company is not liable.” The latter case was an extraordinary 
 smoking lamp damage, the flame having risen two or three 
 feet above the chimney, but it ignited nothing outside of the 
 lamp. Held, that the insurer was not liable. 
 
 This doctrine is eminently sound, and if it were other¬ 
 wise, there would be no escape from liability on the part 
 of insurance companies, for the expenses of redecorating tens 
 of thousands of ceilings in dwelling houses alone which are 
 blackened or otherwise discolored each year by smoking gas 
 jets, which expenses would almost, if not entirely, absorb the 
 modest premiums collected on that class of property. 
 
 In Massachusetts, claim was made for damage to walls 
 and furnishings by smoke from burning soot in a chimney. 
 There was no fire except in the stove and in the chimney. 
 The Court seems to have had some difficulty in reaching a 
 conclusion, but finally decided, and rightly, that the blaze in 
 the chimney was a hostile fire independent of the friendly fire 
 in the stove, and that the insurer was liable, using the fol¬ 
 lowing language: “A chimney is not intended to be used 
 as a place in which to kindle fires. It is intended to carry 
 off the products of combustion. We, are inclined to the 
 opinion that a distinction should be made between a fire inten¬ 
 tionally lighted and maintained for a useful purpose in con¬ 
 nection with the occupation of a building, and a fire which 
 starts from such a fire without human agency, in a place where 
 fires are never lighted nor maintained, although such ignition 
 may naturally be expected to occur as an incident to the 
 maintenance of necessary fire, and although the place where 
 it occurs is constructed with a view to prevent damage from 
 such ignition.” (Wav vs. Abingdon Mut. Fire Ins. Co. 166 
 Mass. 67; 43 N. E. 1032). 
 
 By parity of reasoning, although the insurer would not 
 be liable for loss caused by smoke and soot from a lamp or 
 an oil stove, so long as the flame is confined to the wick, no 
 matter to what height it may extend, yet if it gets outside of 
 the wick and envelopes the lamp or stove itself, the insurer 
 
 7 
 
would be liable for the ensuing loss, for the reason that the 
 fire then gets outside of the place where it is intentionally 
 lighted, loses its friendly nature and becomes hostile. 
 
 A case bearing directly on this point is that of Collins vs. 
 Delaware Ins. Co. (9 Pa. Super. Ct. 576). The damage was 
 caused by fire in an oil stove, and it was left to the jury to 
 determine from the conflicting testimony whether the fire' was 
 confined to the wick or spread to the oil reservoir. The ver¬ 
 dict was for the plaintiff, the Court having charged the jury 
 that if the loss was due to smoke or heat caused by fire while 
 in its proper place in the stove, the insurer would not be 
 liable, but that if the loss was caused by a fire outside its 
 prope'r place they should find for the plaintiff. 
 
 A case differing in an essential particular from that of 
 Way vs. Abingdon Mut. Fire Ins. Co. (supra), but possessing 
 some points in common, is that of Cannon vs. Phoenix Ins. Co. 
 (110 Ga. 562). The policy covered on a stock of dry goods, 
 hats and clothing. A stovepipe became disconnected at the 
 ceiling, and when a fire was built in the stove, the smoke and 
 soot damaged the goods in the upper story to the extent of 
 several thousand dollars. Water was used quite freely to 
 <cool the ceiling, but there was no evidence that there was any 
 fire except in the stove where it was intended to be. Held, 
 that the insurer was not liable. 
 
 The insurer is not liable for damage caused by an ex¬ 
 ploding steam boiler, where there was no fire except under 
 the boiler; nor for damage to a boiler by overheating from 
 regular furnace fires, owing to the absence of water in the 
 Toiler. (Millandon vs. New Orleans Ins. Co. 4 La. Amn. 15; 
 American Towing Co. vs. German Fire Ins. Co. 74 Md. 25; 
 21 Atl. 553). 
 
 Recently, in Pennsylvania, a large manufacturing con¬ 
 cern after having its furnace cleaned, had kindling placed 
 therein preparatory to getting up steam when the factory 
 opened for business the following morning. The water had 
 been drawn off from the boiler, and the manhole left open. 
 It was claimed that a stranger, or some one who had no 
 right to do so, set fire to the kindling, which resulted in a 
 damage of several hundred dollars to the boiler and setting. 
 The claim, rightly or wrongly, was allowed on the theory 
 that with respect to the insured the fire was hostile, for the 
 reason that although a furnace is ordinarly intended to hold 
 fire, it is not intended that a fire which needs watching should 
 be lighted indiscriminately by strangers at any time, and 
 certainly not irrespective of conditions. If this fire had been 
 lighted by the' insured or any one of his employees while 
 acting within the scope of his authority, the claim would 
 not have been recognized, notwithstanding the fact that the 
 boiler was not in condition to withstand the effects of the fire. 
 
 A decision directly in point (not yet reported) has just 
 been handed down by the Supreme Court of Kansas in the 
 
 8 
 
case of McGraw, Trustee, vs. Home Insurance Company. It 
 was alleged that some unknown person gained entrance to 
 the laundry, drained the boiler, turned on the natural gas, 
 kept the fire going until the boiler was destroyed and then 
 turned off the gas and retired from the building. The court 
 while admitting that under such a state of facts the fire 
 would doubtless be regarded as hostile and the insurer held 
 liable, concluded that the theory advanced presented features 
 of such inherent improbability that it ought not to be adopted 
 except upon evidence tending to exclude any more reasonable 
 hypothesis. As no such evidence was presented the court 
 decided that an inference of malicious injury by an outsider 
 was not fairly deducible, and held that the insurer was not 
 liable. 
 
 Where the insured places anything on a stove for the 
 purpose of cooking*, heating or warming, and the stove be¬ 
 comes overheated, causing the article to become charred and 
 give off an oily or greasy smoke which damages the building 
 and contents, it has been held that the insurer is not liable. 
 
 There is but one discordant note to mar the harmony 
 of these decisions, and that comes from Wisconsin. A servant 
 built a fire in the furnace with paper and cannel coal, not used 
 or intended to be used for such purpose, and in a short time 
 the fire, which was confined to the furnace, became so violent 
 as to fill the house with smoke, soot and intense heat, result¬ 
 ing in a damage of several hundred dollars to the property. 
 The Wisconsin Supreme Court, one justice dissenting, held 
 that the fire was extraordinary and unusual, unsuitable for 
 the purpose intended, and in a measure uncontrollable, besides 
 being inherently dangerous because of the material used. The 
 fire was accordingly declared hostile within the contempla¬ 
 tion of the policy, and the insurer held liable. (O’Connor vs. 
 Queen Ins. Co. 140 Wis. 388). 
 
 This is the only court which has varied from the time- 
 honored principle that the insurer is not liable for loss caused 
 by a so-called friendly fire. There was a strong dissenting 
 opinion, but the fire in the furnace was so unusual and the 
 heat so intense that the majority of the court could not, 
 apparently, refrain from arguing itself into the belief that 
 it had lost its friendly nature and should be regarded as 
 hostile. 
 
 Singularly enough, no claim for loss by heat or smoke 
 from a bonfire has ever been before the courts for adjudication, 
 probably because losses of this nature are usually small. The 
 word “bonfire,” viewed in the light of its possible etymo¬ 
 logical significance, seems friendly, but whether it be derived 
 from the French or not—and this is open to question—a bon¬ 
 fire is anything but a good fire. Inasmuch, however, as the 
 civil authorities, fire departments, property owners and the 
 long suffering community make no objection to these fires 
 being kindled, and put forth no effort to extinguish them, 
 
 9 
 
this may be taken as presumptive evidence that they are 
 looked upon by the public generally as friendly, and it would 
 certainly seem that they should be' so regarded, at least with 
 respect to those who intentionally light them, if not with 
 respect to others. 
 
 Although the insured must show that he has sustained a 
 loss by fire within the meaning of the policy before he can 
 recover against the insurers, it is not necessary for him to 
 show that the property injured has actually been burned by 
 the fire. It is sufficient if he proves that the fire was the 
 proximate, that is, the' dominant, efficient cause of the loss. 
 For example, the insurer is liable for damage by smoke, by 
 water used to extinguish the fire, by the operations of fire¬ 
 men and others, by falling walls, by exposure during the 
 fire, or by reasonable removal; also damage by explosion 
 when explosion is caused by fire; also loss by theft, or injury 
 caused by intentional blowing up of building by the civil 
 authorities to prevent the spread of a conflagration, unless 
 there are express stipulations to the contrary in the policy. 
 
 Damage caused by a fire engine on its way to a fire is 
 not a loss coming under the protection of the policy (Foster 
 vs. Fidelity Ins. Co. 24 Pa. S. Ct. 585) ; nor damage caused 
 by a fire department which breaks into a building under the 
 mistaken assumption that a fire is in progress; but losses 
 of the latter description are usually small and there is a gen¬ 
 eral inclination on the part of the insurers to give them favor¬ 
 able' consideration. 
 
 An explosion caused bv an explosive substance such as 
 gunpowder coming into contact with fire, is strictly speaking, 
 a fire of inconceivable rapidity, though it can hardly be con¬ 
 sidered fire in the popular sense. But many of the older 
 decisions held that the ignition of gunpowder constitutes 
 fire within the meaning of a policy of fire insurance, and 
 doubtless on account of these decisions the insurers inserted 
 the condition exempting themselves from liability for loss 
 caused by the explosion of gunpowder, camphene, or any ex¬ 
 plosive substance, and later the clause as it appears in the 
 standard policy, which expressly declares that the company 
 shall not be liable for explosion of any kind unless fire ensues, 
 and in that event, for the' damage by fire only. 
 
 The most famous among the older cases bearing on this 
 subject is that of Scripture vs. Lowell Mut. Fire Ins. Co. 
 decided in 1852, 10 Cush. (Mass.) 356; 57 Am. Dec. 111. 
 The tenant’s minor son carried a cask of gunpowder into the 
 attic of the building without plaintiff’s consent, and fired it 
 with a match. The gunpowder exploded, set fire to a bed 
 and clothing, charred and stained, some woodwork and blew 
 off the roof of the house. The Court held that the entire 
 damage by combustion and explosion was covered by the 
 policy. 
 
 10 
 
The question as to what is the legal test of the existence 
 of casual relation is one concerning which there is a great 
 diversity of opinion. Philosophers, metaphysicians and 
 logicians for centuries have busied themselves with the sub¬ 
 ject; the philosophers and logicians differ with the jurists, and 
 the jurists differ with each other; and in no branch of busi¬ 
 ness have we more striking or more interesting illustrations 
 than in that of fire insurance. 
 
 From the numerous definitions of proximate cause which 
 have been given, the following is taken from an opinion 
 rendered by our highest court: “The question is not what 
 cause was nearest in time or place to the catastrophe. That 
 is not the meaning of the maxim, causa proxima non remota 
 spectatur. The proximate 1 cause is the efficient cause, the one 
 that necessarily sets the other causes in operation. The 
 causes that are merely incidental or instruments of a superior 
 or controlling agency are not the proximate causes and the 
 responsible one's, though they may be nearer in time to the 
 result. It is only when the causes are independent of each 
 other that the nearest is, of course, to be charged with the 
 disaster.” (The G. R. Booth, 171 U. S. 450). 
 
 One of the most celebrated cases, outside of insurance, 
 involving the question of proximate and remote cause, is 
 one recorded in Blackstone' (2 Wm. Blackstone 893; 3 Wilson 
 403) which is familiar to all law students, that of Scott vs. 
 Shepherd, familiarly known as the “Squib case.” Black¬ 
 stone dissented and the majority of the Court reached their 
 conclusions along different lines of reasoning. The defend¬ 
 ant, a lad, threw a lighted squib or serpent made of gun¬ 
 powder, from the street into the market house, where' a large 
 concourse of people were assembled. The lighted squib fell 
 upon the stand of one Yates, where ginger bread, cakes and 
 pies were sold. To prevent injury to himself and the wares of 
 Yates, one Willis instantly took up the squib from the stand 
 and threw it across the market house, when it fell upon 
 another stand of one' Ryal, who sold the same sort of wares. 
 Ryal instantly took up the squib to save his own goods and 
 threw it into another part of the market house. In its pas¬ 
 sage it struck the plaintiff in the face, and bursting, put out 
 one of his eyes. A recovery of £100 by the plaintiff was sus¬ 
 tained by the English Court of Common Pleas. 
 
 This seemingly far fetched though perhaps logical de¬ 
 cision has a parallel in a well known insurance case, to wit: 
 Lvnn Gas & Electric Co. vs. Meriden Fire Ins. Co. 158 Mass. 
 570, 33 N. E. 690, 29 L. R. A. 297, 35 Am. St. R. 540. A fire 
 occurred in the tower of a building through which electric 
 light wires were carried. The fire was confined to the tower, 
 and the damage there was slight, but it caused a short circuit 
 which resulted in bringing into the dynamo below an increase 
 of electric current. This caused a greater resistance to the 
 machinery, which was transmitted to a pulley through a belt 
 
 11 
 
so that the shock destroyed the pulley. By the destruction 
 of that pulley the main shaft was disturbed and the succeeding 
 pulleys up to the jack pulley were ruptured. By reason of 
 pieces flying from the jack pulley, or from some other cause, 
 the fly wheel of the engine was destroyed, the governor 
 broken, and everything crushed. This general disruption 
 occurred in a part of the building remote from any fire and 
 the Court held that the whole loss was by fire within the 
 meaning of a Massachusetts standard policy. 
 
 Both of the foregoing decisions are in quite striking 
 contrast to that rendered by the New York Court of Appeals 
 in the familiar case of Ryan vs. New York Central & Hudson 
 River R. R. Co., 35 N. Y. 210 (1866), which is very frequently 
 referred to, and in not particularly complimentary terms, in 
 connection with the question of proximate and remote cause. 
 The Court, actuated to a great extent, apparently, by con¬ 
 siderations of public policy, ruled in substance that recovery 
 could be had from the Railroad Company only for the burn¬ 
 ing of the first building ignited, and that it made no differ¬ 
 ence that the burning of the second building was a probable 
 consequence of the burning of the first. This view, which is 
 unsound in principle, and which is opposed to an overwhelm¬ 
 ing weight of authority, has been somewhat modified in later 
 decisions by the Court of Appeals. Hoffman vs. King, 53 
 N. E. 401; Webb vs. R. R. 49 N. Y. 420. 
 
 The same strong inclination on the part of New York’s 
 highest Court to discover some new and wholly independent 
 cause intervening between the original cause and the ultimate 
 effect, as revealed in the above cases, is apparent in the cele¬ 
 brated insurance case of Hustace vs. Phenix Ins. Co., 175 
 N. Y. 292, 67 N. E. 592, where the loss was caused solely by 
 concussion due to an explosion from a hostile fire in the 
 Tarrant Building, fifty-six feet and eleven inches distant, and 
 separated from it by two buildings and an alleyway. The 
 Court of Appeals in this case, one Justice dissenting, reversed 
 the unanimous decision of the court below and held that the 
 loss was not by fire but by explosion, and that the insurer 
 was not liable. 
 
 This decision has been quite severely criticised, but it 
 seems to be in entire harmony with those in other states where 
 similar conditions have been under consideration; in fact there 
 does not appear to be a single case of concussion damage on 
 record where the insurer has been held liable under the stand¬ 
 ard policy or under any policy containing the explosion 
 exemption clause. 
 
 But, in a case decided by the United States Supreme 
 Court (Insurance Co. vs. Tweed, 7 Wall [U. S.] 44), an ex¬ 
 plosion occurred in a certain warehouse. The fire which fol¬ 
 lowed crossed the street and communicated to a mill, and from 
 there to the warehouse containing the property of the plaintiff. 
 The Court held that there was no intervening cause; that the 
 
 12 
 
71 
 
 explosion was the proximate cause of the loss, and as the 
 policy contained the explosion exemption clause the insurer 
 was not liable. It may have been on account of this decision 
 by our highest court that the words “unless fire ensues” were 
 added to the explosion clause in the modern policy. 
 
 There is some conflict in the authorities upon the ques¬ 
 tion whether, under a policy phrased like the New York 
 Standard, an explosion occurring during the progress of a 
 fire, should be treated as a mere incident of the fire, the 
 
 ^ latter being regarded as the efficient cause of the damage, or 
 
 * whether the explosion should be considered proximate in 
 reference to the' loss caused thereby, and the insurer be 
 exempt from liability for such damage by reason of the 
 exemption clause of the policy. The overwhelming weight 
 of authority is to the effect that where the fire occurs in the 
 property described in the policy, and an explosion takes place 
 therein during the progress of the fire, such explosion is with 
 respect to such property a mere incident of the preceding fire, 
 the latter being treated as the efficient cause, and the whole 
 loss is within the risk assumed, although the policy in terms 
 excludes liability for loss by explosion. 
 
 The undoubted intention of the underwriters when insert¬ 
 ing the explosion provision, was not so much for the purpose 
 of exempting themselves from liability for loss by incidental 
 explosions resulting from raging conflagrations occurring in 
 and confined to the buildings in which they originate, where 
 the amount of the explosion damage is practically indeter¬ 
 minate, but rather with the view of eliminating claims for loss 
 by explosions resulting from sparks or small fires, or from 
 causes which are in fact unknown, but which for insurance 
 purposes are attributed to fire, as for instance the Washburn 
 mill loss in Minneapolis in 1877, and the recent Wheeler claim 
 in Buffalo (Washburn vs. Insurance Co., 2 Fed., 304; 29 
 Fed. Cas., 308, 329. 330; Wheeler vs. Phenix Ins. Co., 41 
 Ins. Law Journal, 247; 92 N. E. 452). In fact, the inten¬ 
 tion of the insurers was to exempt themselves from liability 
 for loss by explosions of any kind including those caused by 
 fire, as was correctly stated by the New York Court of Appeals 
 in its dictum in the case of Briggs vs. N. B. & Mercantile 
 Insurance Co., 53 N. Y. 446, and referred to with favor by 
 the same' Court in the Hustace case. This would, of course, 
 naturally include within the exception loss caused by con- 
 
 * Let us see, therefore, what value, if any, remains in the 
 explosion exemption clause in the light of the decisions 
 referred to. If the loss were caused by explosion not preceded 
 by a hostile fire, the exception would be unnecessary, for the 
 insurer would not be liable even if the policy did not contain 
 such a provision. It will not do to say that there is room 
 for the exception because explosions are frequently produced 
 by flame, as by a lighted match, a gas jet, burning lamp, fire 
 
 13 
 
in a furnace, and the like; in short, for loss caused by a 
 friendly fire, because the insurer would not be liable for loss 
 by explosion as an incident of such a fire, any more than it 
 would be for any other incidental damage resulting there¬ 
 from, even in the absence of the exception. Then again, 
 inasmuch as concussion losses in neighboring property are 
 distinguished from those in the premises where the fire and 
 explosion originate, it can be only on the theory that the 
 concussion of the air due to the explosion is, with respect 
 to such outside property, an independent, intervening cause 
 between the hostile fire and the final effect, and if this be 
 true, then the explosion or concussion, and not the fire, would 
 be the proximate and efficient cause, and the insurer would 
 not be liable even if there were no exception. The funda¬ 
 mental principles underlying friendly fires and proximate and 
 remote cause cannot be affected by the presence or absence 
 of the explosion provision. 
 
 There is, however, an intimation in the decision in the 
 Hustace case (supra) which was one involving loss by con¬ 
 cussion, that if it were not for the exception there might 
 have been a recovery as for a loss by fire, but this declaration, 
 if such it be, amounts to an admission that the explosion or 
 concussion is not an intervening cause but an inevitable effect 
 and a mere incident of the fire. Can it be possible that the 
 Court intended to imply that the proximity of the cause can 
 shift according to the presence or absence of a stipulation in 
 the policy exempting the company for the explosion loss? 
 And yet, the suggestion that the absence of the explosion 
 exemption clause might have imposed a liability upon the 
 insurer, seems to make for the contention that what, under 
 a given set of circumstances, will be deemed to be the proxi¬ 
 mate cause, will vary with the introduction or omission of 
 a provision inserted for the purpose of relieving the insurer 
 from liability for a certain species of risk it has concluded 
 not to assume. So much emphasis, however, has been laid 
 upon the exemption provision in the decisions, as a possible 
 controlling factor, that it is perhaps fortunate for the insur¬ 
 ers that they were not under the necessity of relying entirely 
 upon the principle of proximate and remote cause as a 
 defense in this class of cases. 
 
 In Louisiana a fire broke out about 180 or 200 feet dis¬ 
 tant from the property of plaintiff, in a building containing 
 a quantity of gunpowder, and in about thirty minutes the 
 gunpowder exploded. The explosion produced such con¬ 
 cussion of the air as to cause a damage of about $950.00 to 
 plaintiff’s property. The fire continued in the town for forty- 
 eight hours, but did not reach the building in question, it 
 being entirely unharmed except by the concussion. The 
 court which discussed the question at considerable length and 
 apparently based its conclusion upon the supposed intent 
 of the contracting parties, in the course of its remarks said: 
 
 14 
 
“Perhaps after all, it might be' safe here, as in other contracts, 
 to inquire whether the loss was within the reasonable intend¬ 
 ment of the parties when they made the contract. Did they 
 intend by an insurance against fire to cover losses arising 
 from the concussion of the air produced by an explosion of 
 gunpowder upon the premises of other persons than the 
 insured? We think such an extraordinary result could not 
 have been contemplated by the parties. We do not think 
 insurance companies can be considered responsible for the 
 consequences of the combustion of gunpowder, unless that 
 combustion has happened in the premises insured, or the gun¬ 
 powder is itself, with other merchandise, covered by the 
 policy.” (Caballero vs. Home Ins. Co., 15 La. Ann. 517.) 
 
 In Mitchell vs. Potomac Ins. Co. 183 U. S. 42; 22 Sup. 
 Ct. 22; 46 L. Ed. 74, plaintiffs clerk went down into the 
 cellar of the store, which was occupied for the sale of stoves 
 and tinware. He lit a match because it was dark, and the 
 lighted match came in contact with the vapor of gasoline kept 
 in the cellar, and a violent explosion at once followed, causing 
 a collapse of the building. It will be observed that this was 
 a friendly fire, and the Court held that the loss was by ex¬ 
 plosion, and that the insured could not recover. 
 
 Where an explosion was produced by the lighting of a 
 match in a basement filled with illuminating gas, and goods 
 covered by the policy were damaged, but not by burning, 
 and where an inflammable and explosive vapor evolved in the 
 course of the process of extracting oil from shoddy after¬ 
 ward exploded, causing considerable damage, it was held that 
 the insurers were not liable. (Heuer vs. N. W. Nat. Ins. Co. 
 144 Ills. 393; Stanley vs. Western Ins. Co. 3 L. R. Ex. 71). 
 
 In an English case where there was no exception in the 
 policy, it was held that no liability attached where it appeared 
 that the damage which occurred to the premises was occa¬ 
 sioned by a concussion of a large quantitv of gunpowder at 
 a magazine about half a mile distant. (Everett vs. London 
 Assurance Corp. 115 E. C. 19 C. B. [N._ S.] 126). 
 
 In a case where the plaintiff’s premises adjoined a mill 
 which took fire and shortly after exploded, blowing the 
 plaintiff’s house off its foundation and almost ruining it, it 
 was held that insurer was not liable. (Miller vs. London & 
 Lancashire Ins. Co. 41, Ill. App. 395). 
 
 In German Fire Co. vs. Roost, decided by the Supreme 
 Court of Ohio (26 Ins. Law Journal, 699) the plaintiff’s 
 policy contained the usual explosion clause, and also a special 
 clause insuring against any loss or damage caused by light¬ 
 ning. A powder house situated across the street seventy- 
 one feet away, was struck by lightning; an explosion occurred 
 and plaintiff’s house was destroyed by the concussion. It 
 was held that the plaintiff could not recover; and the Court 
 said: “In no case which has come within our observation— 
 and we have examined a great many—has a liability been 
 
 15 
 
 l 
 
found to attach where there was a provision excluding liability 
 for loss by explosion and the loss was caused by fire, or 
 as here, by lightning taking effect in a distant building, and 
 the damage being wrought to the insured property by an ex¬ 
 plosion produced by the fire or the lightning without either 
 of the latter agencies coming in contact with the insured 
 property.” 
 
 In Hall & Hawkins vs. National Fire Ins. Co. Tenn. 
 (35 Ins. Law Journal 507) a fire occurred in a hardware store 
 in Knoxville, Tenn., and ignited powder stored therein. A 
 tremendous explosion followed, shaking the whole city and 
 the country for miles around. The resultant concussion dam¬ 
 aged plaintiff’s stock contained in a building between thirty 
 and forty feet distant, to the extent of several thousand 
 dollars. Held that the insurer was not liable. 
 
 The English decisions are in accord with the American 
 decision in respect of these concussion damages, and although 
 they may seem to be in conflict with the oft quoted first 
 Baconian maxim, it is evident that the line must be drawn 
 somewhere, otherwise, as was said by Ryles, J., in an English 
 case (Everett vs. London Assurance Co., 19 C. B. [N. S.] 
 126) if a ship was in the neighborhood of Etna or Vesu¬ 
 vius and was shaken by an eruption, that would be a damage 
 by fire; or if a gun were fired off, loaded with small shot, 
 among crockery, that would be a damage by fire; or it 
 might be said that if the heat of the sun were too great, that 
 would be a damage by fire. 
 
 Where an adjoining building burned, and as the result 
 of fire a party wall fell and carried with it the partition wall 
 and part of the building covered by the insurance, it was 
 held to be a direct loss by fire. (Ermentrout vs. Girard F. & 
 M. Ins. Co. 63 Minn. 305; 65 N. W. 635). 
 
 Where a building was destroyed by fire, leaving some of 
 the walls standing, and two days thereafter one of the walls 
 fell, damaging the building covered by the insurance, it was 
 held to be a loss within the policy. (Scottish Court of Ses¬ 
 sions 7, Cases in Ct. of Sessions 52, 1 Bennett 259). 
 
 Where, for a week after a fire a high wind prevailed and 
 on the seventh day, while a wind amounting to a gale was 
 blowing, a high wall belonging to the burned building fell 
 over on the adjoining building, crushing its roof and doing 
 considerable damage, the Court sustained the finding of the 
 jury that fire was the proximate cause of the loss, and there¬ 
 fore covered by the policy. (Russell vs. German Fire Ins. 
 Co. [Minn.] 1907; 111 N. W. 400). 
 
 It is suggested, however, that in cases of this character 
 the right of subrogation might be of value to the insurer 
 against the owner of a building who permits the walls to 
 remain standing for an unreasonable time without taking 
 proper precautions to prevent their falling. 
 
 16 
 
But in a Georgia case it was held that damage to office 
 fixtures resulting from the fall of the building twenty-five 
 days after the fire was not covered, the building having in the 
 meantime been repaired, and heavy rains having fallen which 
 tended to weaken the structure. (Cuesta vs. Royal Ins. Co. 
 98 Ga. 72, 27 S. E. 172). 
 
 In the absence of a stipulation in the policy to the con¬ 
 trary, the insurer would be liable for loss caused by the 
 destruction of property by the order of civil authorities to 
 prevent the spread of a conflagration, and the point is well 
 argued in City Fire Ins. Co. vs. Corlies 20 Wend. (N. Y.) 367. 
 The standard policy, however, contains a special provision 
 covering this contingency, which was no doubt prompted by 
 this and kindred decisions. 
 
 The weight of the decisions is in favor of the doctrine 
 that not only loss by removal but also for the expense of 
 removal is a direct loss by fire, whether the building contain¬ 
 ing the goods be actually on fire or in imminent danger of 
 burning, even without any special provision in the policy. 
 Some doubt, however, has been expressed with respect to 
 the item of expense unless liability therefor is specifically 
 assumed. 
 
 In the absence of conditions to the contrary, the insurer 
 under a fire insurance policy is liable for goods stolen during 
 a fire, but the standard policy and others in current use con¬ 
 tain an express provision exempting the insurance company 
 from such liability. 
 
 It has been suggested that the condition making the policy 
 void if the insured neglects to use all reasonable means to 
 preserve the property at and after a fire, or when the prop¬ 
 erty is endangered by fire in neighboring premises, and the 
 condition exempting the insurer from liability for loss by 
 theft, are inconsistent with each other and that the latter 
 should therefore not be enforceable. 
 
 In support of this view the argument is advanced that 
 the effect of these two clauses is to subject the property to 
 a risk against which the insured has no protection; that if 
 the property is negligently lost by theft no clause is neces¬ 
 sary ; and as property is quite likely to be stolen if removed 
 from a building, the more effectually the insured complies 
 with the' conditions of the contract, the more effectually he 
 diminishes his own security. But a Missouri court which held 
 the insurer liable for loss by theft when the policy contained 
 no exemption provision, sustained the validity of the provision 
 in another case, and in a most remarkable decision brushed 
 aside all arguments directed against the alleged inconsist¬ 
 ency in the two conditions. (Webb vs. Protection & Aetna 
 Ins. Co.’s 14 Mo. 3; 3 Bennett 509; Newmark vs. L. & L. & 
 G. Ins. Co. 30 Mo. 160; 4 Bennett 464). 
 
 17 
 
Eminent authorities, however, hold that the insurer is 
 not liable under the New York standard policy either for 
 the expense of putting out a fire or of protecting the prop¬ 
 erty at and after a fire, and there are several decisions sup¬ 
 porting this view. (Hebner vs. Palatine Ins. Co. 157 Ill. 144— 
 152; Wells vs. Boston Ins. Co., 6 Pick. [Mass.] 182; Ralli 
 vs. Troop, 157 U. S. 386-405). 
 
 Except where it is otherwise specifically provided, the 
 insurer will not be liable for consequential damages, such as 
 loss of the use of a store or factory, loss of rents, the inci¬ 
 dental loss of trade and consequent loss of prospective profit, 
 these being regarded as too remote, and not supposed to enter 
 into the calculation of the contracting parties. Thus a policy 
 on a bridge does not cover incidental loss of tolls from the 
 adjacent turnpike belonging to plaintiffs. (Farmers Ins. Co. 
 vs. New Holland Turnpike Co. 122 Pa. 37, 15 Atl. 563. 
 Niagara Fire Ins. Co. vs. Heflin, 22 Ky. L. Rep. 1212, 60 S. W. 
 393. Hayes vs. Ins. Co., 170 Mass. 492, 49 N. E. 754. Niblo vs. 
 Ins. Co., 1 Sandf. [N. Y.] 551.) The standard policy contains 
 a condition expressly disclaiming liability, unless specifically 
 assumed, for loss occasioned “by interruption of business, 
 manufacturing processes or otherwise.” Losses of this 
 nature, however, are taken care of by special contracts in the 
 shape of rent, profit and use and occupancy insurance, which 
 class in recent years has assumed quite large proportions. 
 
 In the absence of an exemption provision in the policy, 
 it has been held that the insurer is liable for any loss which 
 may accrue to the insured by reason of any ordinance or 
 law regulating the construction or repair of buildings ; hence, 
 where a city ordinance will not allow a building that has been 
 damaged by fire to be repaired, the insurer is liable for the 
 entire value of the building, less whatever value remains over 
 the expense of removing it; or, where the building may be 
 repaired, and the ordinance requires changes either of a 
 minor or radical character to be made, the insurer is liable for 
 the additional expense rendered necessary by these changes, 
 unless such liability is expressly disclaimed in the contract. 
 
 The proposition is fully discussed in a decision rendered 
 by the Supreme Judicial Court of Massachusetts in the case 
 of Hewins et al. vs. Insurance Company. Under a Massachu¬ 
 setts standard policy which contains no exemption stipulation, 
 the insurer was held liable, but under a New York standard 
 policy which was involved in the same litigation and which 
 contains an exemption provision, liability was limited to the 
 amount needed to restore the building to its original condi¬ 
 tion. (Hewins vs. London Assurance Corp., 184 Mass., 178; 
 68 N. E., 62 Cf. Brady vs. Insurance Co., 11 Mich., 425; 
 Monteleone vs. Royal Ins. Co., 47 La. Ann. 1563; Hamburg 
 Bremen Ins. Co. vs. Garlington, 66 Tex., 103; Larkin vs. 
 Glens Falls Ins. Co., 80 Minn., 527; Penn. Co. vs. Phil. Con- 
 tributionship 201 Pa., 497). 
 
 18 
 
The Standard Policy Law of Massachusetts does not, ap¬ 
 parently, preclude the insurer from stipulating against such 
 liability, and during the past year a clause has been adopted 
 in Boston expressly disclaiming liability, unless specifically 
 assumed, beyond the actual value of the property described, 
 at the time the loss occurs, or beyond what it would then 
 cost the insured to repair or restore it to the condition in 
 which it was immediately before the loss occurred. And if 
 the insured desires protection against the demolition and in¬ 
 creased cost of construction, it can be secured by having a rider 
 covering this feature attached to the policy, in consideration 
 of an additional premium. 
 
 The question as to what is a consequential loss is one 
 not entirely free' from difficulty. It arises most frequently 
 in connection with breweries, packing houses and cold stor¬ 
 age plants. Where the cooling apparatus is located in the 
 same building as the stock, there is no question as to liability 
 for the incidental damage to the latter on account of the 
 interruption of the process of refrigeration. It is where the 
 stock is stored in a building which depends for its refrigera¬ 
 tion upon an ice plant located in an adjacent or distant build¬ 
 ing, that the question of liability for so-called consequential 
 damage presents itself. 
 
 Several years ago, in a western city, a large packing 
 house, including the refrigerating plant, was destroyed by 
 fire. About one hundred feet distant from the ice plant, and 
 connected therewith by a cold air conductor, were two stor¬ 
 age warehouses, containing about five million pounds of 
 meat. No fire, smoke or water entered the storage buildings, 
 the only damage to the meats therein being that due to a rise 
 in temperature from the shutting off of cold air from the ice 
 plant. The insured asked the 1 consent of the local representa¬ 
 tives of the insurance companies to “handle the salvage,” and 
 supposing that reference was made to the salvage in the 
 packing house proper, consent was given, whereupon the 
 insured took the entire stock in the two warehouses, shipped 
 some to Boston, some to Buffalo, and some to other places, 
 and presented a claim to the companies for loss and expenses 
 incurred of about $250,000.00. The companies took exception 
 to the amount of the claim, and demanded an appraisement, 
 which resulted in an award of nearly $50,000.00 more than 
 the original claim. The' policies simply covered on stock in 
 the warehouses, and contained no reference to consequential 
 loss. This is probably the largest loss of the kind on record. 
 
 There never has been any court decision bearing directly 
 on this question, and when the above loss occurred, some in¬ 
 surers, although willing to admit that if the whole plant, 
 including the warehouses and contents had been written under 
 blanket policies for single premiums the entire property might 
 possibly have been regarded as one risk, took the position 
 that inasmuch as the contents of the warehouses were written 
 
 19 
 
 
 
 1 | 
 
under specific policies which had no connection with the gen¬ 
 eral insurance covering the packing house plant, no liability 
 existed for damage to the stock caused by the rise in tempera¬ 
 ture. If the case could have been tried unaffected by the 
 element of waiver, the court would no doubt have inquired, 
 as in other contracts, whether the loss was within the reason¬ 
 able intendment of the parties. 
 
 If, as has uniformly been held, damage to adjacent prop¬ 
 erty by explosion caused by fire, is regarded as too remote to 
 come within the protection of the policy, it is not clear why 
 the same reasoning* does not apply, with equal force, to 
 damage by rise in temperature caused by fire in a neighboring 
 building. If the loss is not regarded as the inevitable physical 
 effect of the fire, in one case, it is not easy to perceive why it 
 should be in the' other. And as a matter of principle, it should 
 make no difference whether all the buildings are owned by 
 one man, or whether there are separate ownerships. 
 
 In order to guard against any question arising in case 
 of loss on this class of property, policies are now written 
 expressly disclaiming liability for consequential loss, and if 
 the insured desires insurance of this nature, he can secure it 
 by taking out a separate policy covering such risk, or by 
 having an endorsement made on his policy and paying an 
 additional premium therefor. 
 
 Let us hear the conclusion of the whole matter. Within 
 the meaning of an ordinary policy of insurance the word 
 “fire” must be construed in its ordinary popular sense’, and 
 not be given such technical or restricted meaning as might 
 be applied to it upon scientific analysis. There must be some¬ 
 thing besides mere combustion; the element of flame or glow 
 must be present. The fire must be without intent on the 
 part of the insured or his responsible agent to injure the prop¬ 
 erty ; it must be accidental with respect to the insured. If 
 intentionally kindled for a useful purpose in a place specially 
 designed or provided, the fire does not change its character 
 because the flame extends unusually high, or the heat be¬ 
 comes excessive, or smoke escapes therefrom and causes 
 damage. The fire must be hostile as distinguished from what 
 is universally regarded as friendly, and it must be the proxi¬ 
 mate and not the remote cause of the loss. 
 
 If the hostile fire causes an explosion, the fire is held to 
 be the efficient cause of the whole loss which ensues in the 
 premises where it originates when its effects are produced in 
 direct sequence, though one of the incidents of the sequence 
 may be an explosion, on the theory that it could not have been 
 intended to nullify such predominant cause by the explosion 
 exemption provision. 
 
 If as the result of a hostile fire the concussion of the air 
 causes damage to neighboring property, the explosion or 
 concussion, and not the fire, is held to be the proximate cause 
 
 20 
 
of the loss. If a friendly fire causes an explosion, none of the 
 damage resulting can be regarded as a loss by fire. 
 
 There are probably some phases of this question which 
 have not been touched upon, and new conditions will no 
 doubt arise to tax the ingenuity of the layman, the lawyer, 
 and the jurist, but a careful study of the text writers, and an 
 analysis of the decisions all tend to confirm and emphasize 
 the correctness of the propositions laid down in the beginning 
 of this address, and to demonstrate that they are funda- 
 | mentally sound. 
 
 21 
 
Is a Policy Divisible? 
 
 A LECTURE 
 
 REPRINTED FROM THE INSURANCE MONITOR OF 
 
 FEBRUARY, 1913 
 
 BY 
 
 W. N. BAMENT 
 
 General Adjuster 
 
 THE HOME INSURANCE COMPANY 
 
 NEW YORK 
 

 
 
 
 
 
 
 
 . 
 
 ■ 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 ■ 
 
 
 
 
 
 
 ' 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 . 
 
 
 
 
 
 
 
 
 
 
 ■ 
 
 
 
 
 
 
 
 
 
 
 
 
 
Is a Policy Divisible? 
 
 There is probably no question arising under the fire insur¬ 
 ance contract, concerning which there is such diversity of 
 opinion, as that bearing on the subject of the divisibility or 
 indivisibility of the policy. 
 
 Prior to the adopton of the New York Standard Policy 
 twenty-five years ago, although there was more or less con¬ 
 flict among the authorities, which in point of number were 
 almost equally divided, the better opinion was that the con¬ 
 tract was severable; that is, where it covered several different 
 classes or items of property for separate amounts, either at 
 separate rates or for gross premium, it might be void as to 
 one or more items on account of breach of conditions and 
 valid as to others. 
 
 It was no doubt on account of these varying decisions 
 that the framers of the Standard Policy, actuated by the com¬ 
 mendable desire of making the meaning so clear that a way¬ 
 faring court need not err therein, but by the less commend¬ 
 able desire of making the contract indivisible irrespective of 
 conditions, inserted in line seven (7) the words : “This entire 
 policy shall be void ...” and they evidently thought 
 they had thereby precluded all possibility of its being con¬ 
 strued otherwise than as an entire indivisible contract. 
 
 It is interesting to note, however, that even under the 
 old forms, which did not contain the word “entire,” some 
 courts held firmly to the doctrine of entirety, while others, 
 under the Standard Form, by reason of the insertion of the 
 word “entire,” became converts to the principle of entirety, 
 while still others continued to decide in favor of divisibility 
 despite the phraseology “This entire policy shall be void.” 
 
 The question in one form or another has been before the 
 courts many times, and the decisions which have been ren¬ 
 dered by the highest tribunals of more than three-fourths 
 of the states may, in general, be classified as follows; to wit: 
 
 First: That the policy is divisible, even though the 
 
 risk may be entire. 
 
 1 
 
Second: That the policy is entire, even though the 
 
 risk may be divisible. 
 
 Third: That where the risk is divisible, the policy 
 
 is divisible. 
 
 Although the decisions in some of the states have not 
 been uniformly consistent, the following may be taken as a 
 fairly accurate classification of the attitude of the courts on 
 the question: 
 
 Those in favor of divisibility are New York, Kentucky, 
 Kansas, Nebraska, Illinois, Missouri, Alabama, Colorado, West 
 Virginia, Mississippi, Oklahoma, Delaware, Montana, North 
 Dakota and South Dakota. In the last three states the ques¬ 
 tion is regulated by statute under certain conditions. 
 
 Those in favor of entirety are Georgia,. Massachusetts, 
 Maine, Pennsylvania, Ohio, Tennessee, Louisiana, Connecti¬ 
 cut, Maryland, Minnesota, New Jersey, North Carolina, Rhode 
 Island, Arkansas, District of Columbia and United States 
 Circuit Court of Appeals. 
 
 Those in favor of entirety, only when the risk is entire, 
 are Washington, Michigan, Iowa, Indiana and Virginia. 
 
 New Hampshire and Vermont may be placed in the 
 doubtful column. The earlier Texas cases favored divisi¬ 
 bility, the later ones favor conditional entirety. 
 
 In the above classification, those states favoring divisi¬ 
 bility have decided unqualifiedly in favor of that doctrine 
 under all conditions except fraud. A few of those favoring 
 entirety have declared unqualifiedly in favor of that principle. 
 In many of the cases decided, however, the risks were entire 
 and some of the courts were, doubtless, influenced by that 
 fact in rendering their decisions in favor of entirety. It is 
 highly probable that if called upon to decide cases where the 
 risks are divisible, some of those states, which in the above 
 classification have been placed in the “entirety” column, will 
 be transferred to the list of those favoring conditional divis¬ 
 ibility. 
 
 Many of the courts which have held the policy to be 
 entire, have based their decisions upon the rule appertaining 
 to contracts generally, that entirety of consideration renders 
 the contract entire, and this has been regarded by them as 
 the controlling factor, irrespective of the phrase “This entire 
 policy shall be void,” .... 
 
 Others, on the contrary, do not regard this as controlling, 
 but argue that premiums are not fixed at an arbitrary lump 
 sum, but are ascertained by applying definitely fixed rates 
 to the amounts insured, and adding together the amount re¬ 
 quired for each separate risk; hence, to say that the premium 
 -or consideration is indivisible is a legal fiction, for it is just 
 as easy to divide as it was originally to compute it. The 
 premium might well be stated separately, but for conven¬ 
 ience, the amount thereof is stated in a gross sum. 
 
 2 
 
In these days as many as five hundred separately valued 
 items are sometimes included under the cover of a single 
 policy, and hundreds of policies are written every day cov¬ 
 ering specifically no less than one hundred different items. 
 Yet, if any one of these, no matter how small, or how far 
 removed from the other items described, proves to be a build¬ 
 ing on ground not owned by the insured in fee simple, or 
 be personal property, and be or become encumbered by a chat¬ 
 tel mortgage, without consent thereto being endorsed on the 
 policy, the entire contract, according to the view of the 
 strict constructionists, is void, and the loss on the items not 
 directly involved in the breach, is uncollectible. 
 
 Some courts have apparently felt that it is unreasonable 
 to suppose that the Legislatures which adopted the Standard 
 Policy, or the parties themselves, should intend to avoid the 
 entire contract for some trifling mistake relating perhaps to 
 only one of many items, possibly geographically independent 
 of each other, and have, therefore, practically ignored the 
 word “entire” in their endeavor £o give effect to the main 
 purpose of the policy. Others, however, have adhered to 
 a literal construction and have virtually ruled that the words, 
 “this entire policy” mean one thing only and cannot possibly 
 mean anything else. 
 
 If an insurance company should be small enough to deny 
 all liability under a policy containing fifty different items, 
 simply because a condition had been violated in respect 
 of one item differently located, it would be interesting to 
 observe whether those courts which seem to be committed 
 to the doctrine of unqualified entirety, would be great enough 
 to stand by their principles and grant a forfeiture as to all 
 items; and, if not, what avenue of escape they would find. 
 
 It is true that overinsurance on stock will affect the 
 building containing it as well as the stock itself; that the 
 undesirability of a risk on a building on leased ground, with 
 a short time to run and without the privilege of renewal, 
 will apply with equal force to the stock and fixtures therein, 
 and that a chattel mortgage on stock or fixtures which in¬ 
 creases the risk thereon, also increases the risk on the build¬ 
 ing in which they are contained. And these considerations 
 probably had no little to do with the insertion of the word 
 “entire” in the Standard Policy. 
 
 These are undoubtedly strong points in favor of con¬ 
 ditional entirety; that is, if the breach as to one item or 
 class increases the risk on the rest, the policy should be 
 altogether avoided. But they do not constitute any argument 
 whatever in favor of unconditional entirety of contract and 
 no ethical argument can be advanced in favor of that doc¬ 
 trine. The advocates of the extreme view of entirety under 
 all conditions, have nothing to stand upon except “entirety 
 of consideration,” and the phrase “this entire policy shall be 
 void” . . . But these considerations appear to have been 
 
 3 
 
quite sufficient, according to the view of those courts which 
 have adhered to that doctrine. 
 
 There are a number of points that may be urged against 
 both the principle of unqualified entirety and conditional en¬ 
 tirety and in favor of absolute divisibility. 
 
 In the first place, the insured can, except in rare in¬ 
 stances, for the asking, secure a policy on each item, such as 
 building, machinery and stock, for the same aggregate pre¬ 
 mium that he would have to pay for a single policy embracing 
 all the items with separate amounts on each. The minds of ( 
 
 the insurer and the insured meet upon the rate or rates, and 
 the amounts to apply to each item, and all the insurances 
 contracted for are written on one piece of paper familiarly 
 known as a policy, and is accepted by the insured. If he or 
 his broker requests separate policies for each separately valued 
 item, he can get them, but because he does not subject the 
 underwriter to this trouble and as a matter of convenience 
 principally to the latter, he accepts one document including all 
 the items, it is submitted that this mere circumstance should 
 nuot place the insured in any less advantageous position than 
 he would have occupied if he had asked for separate policies. 
 
 Then again, what has been and what is the daily prac¬ 
 tice of insurance companies with respect to this question of 
 divisibility ? The contribution clause providing for the ap¬ 
 portionment of loss among the various insurance companies 
 interested, has been in general use for nearly a century, and 
 has always read substantially the same as in the New York 
 Standard Policy: 
 
 ‘This Company shall not be liable under this policy 
 for a greater proportion of any loss on the described 
 property,” . . . “than the amount hereby insured 
 
 shall bear to the whole insurance” . . “covering such 
 
 property.” (Lines 96-98.) 
 
 It says “this policy ” and “amount hereby insured.” It does 
 not say “This company shall not be liable for a greater pro¬ 
 portion of any loss on the property described in each item of 
 this policy, than the amount hereby insured on each item shall 
 bear to the whole insurance on each item respectively;” yet, no 
 court decision involving the question of apportionment has 
 ever been rendered, and no loss among the millions that have 
 occurred since the contribution clause came into use, has been 
 apportioned between companies, except on the basis of each * 
 
 separately valued item being treated as a separate policy. 
 
 Thus, in construing the contribution clause, the policy has 
 been and is universally recognized by the courts and the entire 
 insurance fraternity as divisible. 
 
 This is also true in respect of the cancellation clause— 
 
 “This policy shall be cancelled at any time” . . . 
 
 Thousands of policies are cancelled every year, not only 
 as to one or more separate items, but policies covering one 
 
 4 
 
item only are cancelled in part and a ratable portion of the 
 premium is returned to the insured. Thus for many years 
 we have had another recognition of the principle of divisibility 
 on the part of insurance companies in their daily practice, and 
 this recognition has not stopped at items but has even been 
 extended to parts of items. 
 
 It is no doubt true, as indicated by text writers, that the 
 request or notice of cancellation must contemplate an absolute 
 termination of the entire contract, not a reduction of its 
 amount, inasmuch as the terms of the cancellation clause 
 offer no option to either party to cancel in part. If so, 
 legal cancellation in part cannot be effected except by mutual 
 agreement. 
 
 It goes without saying that no insurance company de¬ 
 siring to relieve itself of liability would care to take any 
 chances as to the legality of the cancellation by having the 
 notice relate to one or more items of the policy only, but 
 would have it embrace the entire contract. 
 
 The cancellation clause in respect of the right to cancel, 
 is, of course, alike applicable to the insurer and the insured; 
 but if the insured—who is less conservative than the insu¬ 
 rance companies—should desire to cancel one or more items 
 of a general form, or should insist upon canceling only the 
 stock item of a policy covering specifically on building and 
 stock, it would not be at all surprising if, in those states 
 which have declared unqualifiedly that the policy is divisible, 
 the court would permit partial cancellation, notwithstanding 
 the fact that the cancellation clause refers to ‘‘this policy,” 
 and also provides for surrender upon payment of the unearned 
 premium. In fact, it is difficult to perceive why the words 
 “this policy,” should be given any different interpretation 
 when construing the cancellation clause than it is when in¬ 
 terpreting the contribution clause. 
 
 If the theory as to the indivisibility of the premium be 
 incorrect, and if the principle that two or more separately 
 valued insurances, evidenced by one piece of paper, are sev¬ 
 erable, be sound, the fundamental principle is not affected by 
 the word “entire,” as used in the clause declaring the “entire 
 policy” void, and it applies only to that insurance or to that 
 portion of the policy as to which the breach has occurred. 
 
 The following is a brief summary showing the conflicting 
 views of different tribunals on various phases of the question: 
 
 ALABAMA.—A mortgage on pool tables does not avoid 
 the policy as to other contents of the building. Violation of 
 iron-safe clause voids policy as to stock, but not as to build¬ 
 ing. 
 
 CONNECTICUT.—The risk on contents might be in¬ 
 creased by sale of the building; held, that breach as to build¬ 
 ing avoids as to contents also. 
 
 5 
 
DISTRICT OF COLUMBIA.—A chattel mortgage on 
 part of household effects avoids the entire policy: Decision 
 governed by the word “entire.” 
 
 COLORADO.—Notwithstanding the word “entire,” held, 
 that policy is not avoided as to the whole by breach affecting 
 only a part of the property. 
 
 DELxAWARE.—The statute as to valuation of building 
 held to be a quasi penal statute, and violation thereof by 
 overinsurance voids policy as to building only. 
 
 U. S. CIRCUIT COURT OF APPEALS.—A chattel 
 mortgage on personal property avoids policy both as to 
 building and contents. 
 
 GEORGIA.—The premium being entire, a breach of 
 condition as to stock avoids policy as to building also. 
 
 ILLINOIS.—Vacancy of one house does not avoid the 
 policy as to another, unless the risk on latter is affected. 
 The general trend of Illinois decisions favors divisibility. 
 
 INDIANA.—A policy covering on house and barn, held 
 divisible. Misrepresentation regarding one building will not 
 affect recovery on another building when insured specifically. 
 In general, the Indiana rule is that if the various classes of 
 property are so situated in respect to each other as to con¬ 
 stitute one risk, the contract is entire, otherwise not. 
 
 IOWA.—Vacancy as to house does not avoid as to barn. 
 Chattel mortgage on cattle does not avoid as to house and 
 furniture. Breach as to building avoids as to machinery 
 therein. The Iowa rule’ apparently is that the policy is 
 divisible only when the risk is divisible. 
 
 KANSAS.—Notwithstanding the word “entire,” the in¬ 
 surance on contents is undisturbed by a prohibited mortgage 
 on real estate. Kansas holds that the premium is easily ap- 
 portionable. 
 
 KENTUCKY.—Fraud as to one item avoids policy as 
 to all. Kentucky holds that when different items of property 
 are separately valued, there is, in effect, a separate insurance 
 on each particular class or item of property so valued; and 
 it logically follows that what might affect one policy of in¬ 
 surance, would not necessarily affect the other. 
 
 LOUISIANA.—Breach as to building avoids policy as 
 to contents also. When personal property is contained in 
 two different buildings; held, the policy is entire. 
 
 MAINE.—A policy covering on non-hazardous merchan¬ 
 dise is avoided as to entire item by presence of hazardous 
 articles, not simply as to the hazardous articles—governed 
 by the fact that premium is entire. The general trend of 
 Maine decisions is in favor of entirety. 
 
 MARYLAND.—Prohibited vacancy as to building also 
 avoids policy as to contents. Other insurance without notice 
 on one item avoids entire contract. 
 
MICHIGAN.— Held, a policy covering real and personal 
 property can be regarded as divisible only when the risk 
 on each is different. 
 
 MINNESOTA.—A building on leased ground without 
 notice, avoids policy as to personalty also. Increase of moral 
 hazard as to one item increases it as to both. Fraud as to 
 one item avoids as to all. In one case Minnesota adopted the 
 Texas and Arkansas rule, to which reference will be made 
 later. The policy covered a mining plant consisting of several 
 buildings, one of which was vacant. The court held that, as 
 the consideration was entire, the policy must be regarded as 
 entire, so that a vacancy of one of the buildings constituting 
 the plant, did not affect the validity of the policy as to either 
 building. 
 
 MISSISSIPPI.—Violation of iron-safe clauses does not 
 invalidate policy as to furniture and fixtures. 
 
 MISSOURI.—Misrepresentation as to one item does not 
 affect other separately valued items. The word “entire” 
 applies only to the portion of the policy affected, and does 
 not affect the character of the policy as a divisible contract. 
 
 MONTANA.—Insurance on building held undisturbed 
 by chattel mortgage on contents. The premium might easily 
 be stated separately, and gross sum is stated for convenience. 
 
 NEBRASKA.—Insurance on contents is not disturbed 
 by alienation of real estate. The trend of Nebraska decisions 
 favors divisibility. 
 
 NEW JERSEY.—Breach of condition as to building 
 avoids as to contents also. 
 
 NEW HAMPSHIRE.—Alienation of one parcel avoids 
 policy as to all, unless the court can rule that there has been 
 no increase in risk. 
 
 NEW YORK.—Under an old form of policy reading, “if 
 the property insured or any part thereof he encumbered ” it was 
 held to be indivisible; but the New York decisions generally,’ 
 and particularly those under the Standard Policy, which are 
 numerous, strongly favor divisibility. 
 
 The fact that the Standard Policy makes breaches of war¬ 
 ranty apply to property generally, and not to “any part there¬ 
 of,” as in some of the older issues, has apparently opened the 
 way to the Court of Appeals to adhere to the principle of 
 divisibility, despite the words “this entire policy shall be 
 void.” 
 
 NORTH CAROLINA.—Violation of iron-safe warranty 
 which avoids policy as to stock, avoids as to building also. 
 Breach as to building also avoids as to contents. 
 
 NORTH AND SOUTH DAKOTA.—Statutes in both 
 states provide that change in interest in one or more of 
 several distinct things separately covered, does not avoid 
 policy as to others. 
 
 7 
 
OKLAHOMA.—If different classes of property are sep¬ 
 arately valued, the contract is severable, notwithstanding the 
 word “entire.” 
 
 OHIO.—This state switched from divisibility to entirety 
 by reason of the word “entire” in the Standard Policy, and 
 ruled that if one item of contents was not owned absolutely 
 by the insured, the entire policy was void. 
 
 PENNSYLVANIA.—Breach as to ownership of ma¬ 
 chinery avoids policy as to building and stock. Gunpowder 
 in one of three buildings, which endangers all, renders policy 
 void as to all: Governed by entirety of premium. 
 
 RHODE ISLAND.—Breach as to ownership of part of 
 contents avoids policy as to all. 
 
 TENNESSEE.—This state, like Ohio, shifted its po¬ 
 sition from that of divisibility to entirety, by reason of the 
 word “entire,” and held that fraud as to one item avoided 
 policy as to all. 
 
 VERMONT.—Where the insurance company had a lien 
 on real estate for entire premium, the court held that a pro¬ 
 hibited mortgage on building also avoided insurance as to 
 contents. 
 
 WASHINGTON.—Breach of warranty as to piano avoids 
 entire policy on contents, though separately valued. If entire 
 risk is affected by the breach, separate valuations are of no 
 effect to prevent forfeiture of entire policy. 
 
 In Washington, the policy would probably be held to be 
 divisible, provided breach does not effect the entire risk. 
 
 WEST VIRGINIA.—This state comes out boldly and de¬ 
 clares that the general rule as to whether a contract is entire 
 or divisible, should not be applied to insurance policies, and 
 prefers to be guided by considerations of equity and reason¬ 
 ableness of construction. It has decided in favor of divisibility. 
 
 VIRGINIA.—If the risk is severable, the policy is sev¬ 
 erable. 
 
 The Supreme Court of Arkansas and the Court of Civil 
 Appeals of Texas have turned the tables on the underwriters 
 quite ingeniously if not logically, by holding that the breach 
 of condition must affect the entire subject matter, otherwise 
 no forfeiture at all will result. 
 
 In McQueeny vs. Phoenix Ins. Co., 52 Ark. 257, it was 
 held that where the policy covered two dwellings situated 
 thirty feet apart, separately valued, vacancy of one did not 
 invalidate the policy as to either, and virtually ruled that in 
 order to invalidate the policy, both dwellings must be vacant. 
 
 In case of Bills vs. Hibernia Ins. Co., 87 Tex. 547, the 
 Texas Court of Civil Appeals decided that where a policy con¬ 
 tained the stipulation— 
 
 8 
 
“This entire policy shall be void if the subject of 
 insurance be a building on ground not owned by the 
 insured in fee simple”— 
 
 and the policy covered separate amounts on building and ma¬ 
 chinery, the fact that the building was on leased ground did 
 not invalidate the insurance on either item because “the sub¬ 
 ject of insurance” consisted of the house and machinery. 
 
 The same court also held to the same doctrine in the 
 recent case of Spring Garden Ins. Co. vs. Brown. Vol. 41 
 Ins. L. J., p. 735. The policy contained the clause. 
 
 “This entire policy, unless otherwise provided by 
 agreement indorsed hereon, or added hereto, shall be void, 
 if the subject of insurance be personal property and be 
 or become encumbered by a chattel mortgage.” 
 
 The policy covered a separate amount on stock and a 
 separate amount on fixtures. The stock was encumbered by 
 a chattel mortgage, and the Court, following the decision in 
 the Bills case, held that, as the “subject of insurance” con¬ 
 sisted of stock and fixtures and the mortgage applied to stock 
 only, the policy being entire, it was not invalidated as to either 
 item. 
 
 Conversely, where the policy contained a provision that 
 the policy should be void if the subject of insurance or “any 
 part thereof” was incumbered, the Texas court held that the 
 entire policy was void, although only a portion of the property 
 was incumbered. Curlee vs. Texas Home Fire Ins. Co., 31 
 Tex. Civ. App. 471. 
 
 The construction placed upon the contract in the Bills 
 case and the Brown case, is not only a strained one, but also 
 at variance with the principles established at common law. 
 The court seems to have been influenced by the fact that in 
 the Curlee case the policy contained the words “or any part 
 thereof,” whereas, in the Bills and Brown cases these words 
 were omitted. 
 
 New York seems to have taken the omission of the words 
 “or any part thereof” as an excuse for construing the policy 
 as divisible. Texas, on the other hand, has taken the omission 
 as a basis for construing it as entire in the cases referred to. 
 
 The word “entire” does not appear in the Massachusetts 
 Standard Policy; yet, the Massachusetts court holds that if 
 the premium be an entire amount, the contract is not divisible, 
 and forfeiture as to one item defeats the entire claim. But 
 that staunch adherent to the principle of entirety has held 
 that if a portion of the property is sold without the insurer’s 
 consent, that portion is simply removed from the cover of the 
 policy. Bullman vs. N. B. & Mercantile Ins. Co., 159 Mass. 118; 
 Clark vs. New England M. F. Ins. Co., 6 Cush. (Mass.) 342. 
 
 The supreme Court of Wisconsin, in the case of Schu- 
 mitsch vs. American Ins. Co., 48 Wis. 26, laid down the fol¬ 
 lowing interesting rule; to wit: Where a policy covers sev- 
 
 9 
 
eral classes of personal property, and any property of that 
 description is subsequently mortgaged and placed in the build¬ 
 ing so that the risk will attach to it under the general language 
 used, and the insured claims that such mortgaged property is 
 covered by the policy, the mortgage should be deemed a breach 
 of the conditions of the policy. If, however, the insured 
 should place subsequently mortgaged property in the build¬ 
 ing, not claiming that it was covered by the policy, and other 
 personal property in the building which was covered by the 
 policy should be destroyed, the insurance on the unincum¬ 
 bered property would not be affected by the fact that the 
 mortgaged property was in the building at the same time 
 and destroyed with it. 
 
 In line with the foregoing, it has been suggested that 
 if several classes of personal property be covered under the 
 general language of the policy for one amount, and one or 
 more classes or articles be incumbered by a chattel mortgage 
 at the time the policy is issued, the insured should be given 
 the option of eliminating such mortgaged articles from the 
 cover, in order to avoid forfeiture as to the others. 
 
 For instance, if a printing press encumbered by a chattel 
 mortgage be included in general terms in the machinery 
 item of a policy covering a printing establishment should 
 not the insured, in order to prevent a forfeiture as to the 
 entire item, be permitted to say that it was not intended 
 that the policy should cover that particular press ? This 
 appeals quite strongly to our ideas of equity, as does also the 
 elimination of subsequently acquired mortgaged property, as 
 distinguished from the placing of an incumbrance upon a 
 portion of the property after the issue of the policy, but the 
 New York courts have held that if there be not only a gross 
 premium, but also no separate apportionment of amounts of 
 insurance, a breach affecting part of the subject matter 
 avoids the whole contract; thus, a chattel mortgage on a part 
 of the furniture and fixtures would forfeit the insurance as 
 to the whole property of that class, whether the incumbrance 
 existed at the time the policy was issued, or attached after 
 issue. Fitzgerald vs. Atlanta Home Ins. Co., 175 N. Y. 494; 
 Vucci vs. N. Brit. & Merc. Ins. Co., 88 N. Y. Supp. 986. 
 
 If any significance whatever is to be placed upon the word 
 “entire,” it would surely seem that the principle of divisibility 
 had reached its limit when it permits the division of the policy 
 into its separately valued items. 
 
 The decisions in the United States, England and Canada 
 appear to be uniformly in favor of the primary rule that any 
 fraud on the part of the insured, though relating to a single 
 item of the subject matter, avoids the entire policy. The 
 penalty as to misrepresentation, not amounting to fraud, how¬ 
 ever, is not so severe, and it affects only the item concerning 
 which it is made. A misstatement that the insured has no 
 reason to suspect incendiarism, quite properly voids the entire 
 
 10 
 
contract. Phillips holds to the doctrine that if a fact sup¬ 
 pressed relates only to a part of the goods or subjects of 
 insurance, but yet enhances the risk on the whole, it is a 
 concealment in respect to the whole, and holds conversely, 
 applying the same criterion, that if the suppressed fact does 
 not enhance the risk on the remainder of the property or on 
 the other subjects of insurance, it will remain in force upon 
 these. Vol. 1, p. 381. 
 
 A blanket policy is generally regarded as more advan¬ 
 tageous to the insured than specific policies, but a study of 
 this subject would lead one to conclude that under certain 
 conditions in many states he would be better off with specific 
 policies. 
 
 Cooley, in his concluding remarks on this interesting 
 subject, uses the following language: 
 
 “Though in some jurisdictions the fact that the con¬ 
 sideration for the policy is entire, has led the courts to 
 declare the contract entire, an examination of the cases 
 justifies the statement that the rule established by the 
 weight of authority is that, if the policy covers separate 
 classes or items of property, separately valued and in¬ 
 sured for separate amounts, the contract is divisible, and 
 a breach of warranty or condition which affects only one 
 of the classes or items covered will not avoid the insurance 
 on the other classes or items. The fact that the policy 
 contains a declaration that the entire policy shall be void 
 on a breach of condition, does not change the rule. Reason 
 and justice require, however, that the rule should be 
 modified when various classes of property are so situated 
 in respect to each other that the risk is substantially the 
 same on all, and in such cases a breach of condition or 
 warranty which increases the risk on one class or item 
 of the property insured, should forfeit the whole in¬ 
 surance.” 
 
 Although admitting the seeming reasonableness of the 
 suggested modification, yet, in reaching my own conclusions 
 in favor of unqualified divisibility as to items, I have been 
 largely influenced by the interpretation which the insurance 
 companies themselves, for many years, have placed upon 
 other portions of the contract in their everyday practice, and 
 also by the belief that the insured should not suffer by the 
 mere fact that he failed to insist upon that which would have 
 been freely granted upon request, without additional cost. 
 
 It is easy to understand how a court can declare the 
 policy to be entire under any and all conditions, and I realize 
 that it is somewhat difficult to escape from a strict literal 
 interpretation of the contract; but to hold that a policy con¬ 
 taining several separately valued items, under one state of 
 facts, is entire, and under another state of facts, is divisible, 
 is certainly illogical. There are good reasons, as has been 
 pointed out, for holding that each separately valued item is, 
 
 11 
 
in effect, a separate and distinct contract, and if this con¬ 
 struction is possible or permissible, each item is unqualifiedly 
 distinct, and should be so construed, irrespective of conditions, 
 and treated precisely the same as if a separate policy had 
 been actually issued on each item. A decision which holds 
 that the words “this entire policy” mean a certain thing in 
 one case, and something entirely different in another, is in¬ 
 consistent and arbitrary. I can perceive no logical middle 
 ground between absolute entirety and absolute divisibility 
 of the contract, and as, for the reasons stated, I feel war¬ 
 ranted in rejecting the former, notwithstanding its apparent 
 legal soundness, I am, of course, under the necessity of ac¬ 
 cepting the latter, which I do with very good grace, because 
 I believe it to be ethically sound. 
 
 12 
 
FORMS 
 
 — From the Company’s Standpoint 
 
 AN ADDRESS 
 
 DELIVERED BEFORE 
 
 The Insurance Society 
 
 of New York 
 
 February 20th, 1912 
 
 BY 
 
 W. N. BAMENT 
 
 General Adjuster 
 
 ( 1 § 
 
 THE HOME INSURANCE COMPANY 
 
 NEW YORK 
 
# 
 
 Forms—From the Company’s 
 
 Standpoint 
 
 By W. N. Bament 
 
 The subject of insurance forms is such an exceedingly 
 broad one, that it will be impossible in an address such as 
 this to do more than touch upon it in a general way, and 
 direct attention to some of the more important forms, which, 
 although in general use, may possess features which are not 
 fully understood. 
 
 The best form, whether viewed from the standpoint of 
 the insurance company or the insured, is a fair form, one 
 which expresses in clear, unambiguous language the mutual 
 intention of the parties, and affords no cause for surprise on 
 the part of either, after a loss has occurred. But the prepara¬ 
 tion of such a form is not always an easy task, and it is 
 right at this point that the ability of the broker and the 
 underwriter come into play. 
 
 A distinguished Englishman declared that the English 
 Constitution was the greatest production that had ever been 
 conceived by the brain of man, but it was subjected to the 
 most scathing criticism and violent assaults by Bentham, the 
 great subversive critic of English law. Twenty-five years ago 
 the New York Standard Policy was prepared by the best 
 legal and lay talent in the insurance, world, and the greatest 
 care was taken to present not only a reasonable and fair form 
 of contract between the insurer and the insured, but one 
 which could be easily read and understood. 
 
 While no such extravagant claims have been made for 
 the Standard Policy as were made for the “Matchless Con- 
 
 _, • >> :j i _ ___ ± . -3 ^C 
 
maximum of loss collection with a minimum of co-insurance 
 or other resistance than a present day broker, he has not 
 yet been discovered. 
 
 The ornate policies in use thirty years ago, with no 
 uniformity in conditions, with their classification of hazards 
 which no one could understand and their fine print which 
 few could read, have given way to plainly printed uniform 
 Standard Policies with materially simplified conditions. But 
 the written portion of the insurance contract owing to our 
 commercial and industrial growth, instead of becoming more 
 simple, has taken exactly the opposite direction, and we now 
 have covering under a single policy or set of policies, the 
 entire property of a coal and mining company, the breweries, 
 public service or traction lines of a whole city and the fixed 
 property, rolling stock and common carrier liability of an 
 entire railroad system involving millions of dollars and con¬ 
 taining items numbering into the thousands. This forcibly 
 illustrates the evolution of the policy form since the issue of 
 the first fire insurance contract by an American company one 
 hundred and sixty years ago, in favor of a gentleman bearing 
 the familiar name of John Smith, covering 
 
 “500 £ on his dwelling house on the east side of King 
 Street, between Mulberry and Sassafras, 30 feet front, 40 feet 
 deep, brick, 9-inch party walls, three stories in height, plas¬ 
 tered partitions, open newel bracket stairs, pent houses with 
 board ceilings, garrets finished, three stories, painted brick 
 kitchen, two stories in height, 15 feet 9 inches front, 19 
 feet 6 inches deep, dresser, shelves, wainscot closet fronts, 
 shingling 1-5 worn.” 
 
 It will be observed that in the matter of verbiage this 
 primitive form rivals some of our present day household 
 furniture forms and all will agree that this particular dwelling 
 might have been covered just as effectually and identified 
 quite as easily without such an elaborate description. 
 
 Any one who has an insurable interest in property should 
 be permitted to have any form of contract that he is willing 
 to pay for, provided it is not contrary to law or against 
 public policy, and judging from a contract of insurance issued 
 by a certain office not long ago the insuring public apparently 
 has no difficulty in securing any kind of a policy it may desire 
 at any price it may be willing to pay. The contract in ques¬ 
 tion was one for £20,000, covering stock against loss from 
 any cause, except theft on the part of employes, anywhere in 
 the Western Hemisphere, on land or water, without any con¬ 
 ditions, restrictions or limitations whatsoever, written at less 
 than one-half the Exchange rate in the insured’s place of 
 business. An insurance agent upon being asked whether he 
 thought it was good, said that if the company was anywhere 
 near as good as the form, it was all that could be desired, 
 but vouchsafed the opinion that it looked altogether too good 
 to be good. 
 
In these days we frequently find concentrated within the 
 walls of a single structure one set of fire insurance policies 
 covering on building, another on leasehold interest, another 
 on rents or rental value—and in addition to this, policies for 
 various tenants covering stock, fixtures, improvements, 
 profits and use and occupancy, subject to the 100% average 
 or co-insurance clause, to say nothing of steam boiler, casualty 
 and liability insurance, thereby entirely eliminating the ele¬ 
 ment of personal risk on the part of the owners, and produc¬ 
 ing a situation which will account in some measure for the 
 17,000 annual fire alarms and $15,000,000 fire loss in New 
 York City; $230,000,000 annual fire loss in the country at 
 large, and for the constantly increasing percentage of cases 
 where there are two or more fires in the same building and 
 two or more claims from the same claimant. 
 
 The most common and perhaps least understood phrase 
 found in policies of fire insurance is what is known as the 
 “Commission Clause,” which reads “his own or held by him 
 in trust or on commission or sold but not delivered” or “re¬ 
 moved.” This clause in one form or another has been in use 
 for many years, and it was originally the impression of un¬ 
 derwriters that owing to the personal nature of the insurance 
 contract a policy thus worded would simply cover the prop¬ 
 erty of the insured and his interest in the property of others, 
 such as advances and storage charges, but the courts have 
 disabused their minds of any such narrow interpretation and 
 have placed such a liberal construction upon the words “held 
 in trust” that they may be justly regarded as among the 
 broadest in the insurance language and scarcely less com¬ 
 prehensive than the familiar term “for account of whom it 
 may concern”; in fact, the principles controlling one phrase 
 are similar to those governing the other. 
 
 It has been held that whether a merchant or bailee has 
 assumed responsibility, or agreed to keep the property cov¬ 
 ered or whether he is legally liable or not, if his policies 
 contain the words “held in trust,” the owner may, after a 
 fire, by merely ratifying the insurance of the bailee, appro¬ 
 priate that for which he paid nothing whatever and may file 
 proofs and bring suit in his own name against the bailee’s 
 insurers. Nor is this all, for in some jurisdictions, if the 
 bailee fails to include the loss on property of the bailor in 
 his claim against his insurers, or if he does include it and 
 the amount of insurance collectible is less than the total loss, 
 the bailee may not first reimburse himself for the loss on his 
 own goods and hold the balance in trust for the owners, but 
 must prorate the amount actually collected with those own¬ 
 ers who may have adopted the insurance, although, if he has 
 a lien on any of the goods for charges or advances, this may 
 be deducted from the proportion of insurance money due 
 such owners. 
 
The phrase “for account of whom it may concern” was 
 formerly confined almost entirely to marine insurance, but 
 in recent years there has been an increasing tendency to intro¬ 
 duce it into policies of fire insurance. 
 
 All authorities are agreed that the interests protected 
 by a policy containing these words must have been within 
 the contemplation of him who took out the policy at the time 
 it was issued. It is not necessary that he should have in¬ 
 tended it for the benefit of some then known and particular 
 individuals, but it would include such classes of persons 
 as were intended to be included and who these were may be 
 shown by parol. The owners or others intended to be cov¬ 
 ered may ratify the insurance after a loss and take the bene¬ 
 fit of it, though ignorant of its existence at the time of the 
 issuance of the policy, just the same as under the term “held 
 in trust.” 
 
 The words “for account of whom it may concern” are 
 not limited in their protection to those persons who were 
 concerned at the time the insurance was taken out, but will 
 protect those having an insurable interest and who are con¬ 
 cerned at the time when the loss occurs. They will cover 
 the interest of a subsequent purchaser of a part or the whole 
 of the property and supersede the alienation clause of the 
 policy (U. S. S. C.), Hagan and Martin vs. Scottish Union 
 and National Ins. Co., 32 Ins. Law Journal, p. 47; 186 U. S. 
 423). 
 
 A contract of insurance written in the name of “John 
 Doe & Co. for account of whom it may concern” should 
 contain a clause reading “Loss, if any, to be adjusted with 
 and payable to John Doe & Co.,” not “loss, if any, payable 
 to them” or “loss, if any, payable to the assured,” as forms 
 sometimes read. 
 
 Policies are frequently written in the name of a bailee 
 covering “On merchandise, his own and on the property of 
 others for which he is responsible,” or “for which he may 
 be liable”—and it has been held that'the effect of these words 
 is to limit the liability of the insurer to the loss on the 
 assured’s own goods and to his legal liability for loss on 
 goods belonging to others, but the words “for which they 
 are or may be liable” have been passed upon by the Supreme 
 Court of Illinois, and they have been given an entirely dif¬ 
 ferent interpretation. That tribunal in the case of The Home 
 Insurance Company vs. Peoria & Pekin Union Railway Co. 
 (28 Insurance Law Journal, p. 289; 178 Ills. 64) decided that 
 the words quoted were merely descriptive of the cars to be 
 insured; that the word “liable” as used in the policy did not 
 signify a perfected or fixed legal liability, but rather a con¬ 
 dition out of which a legal liability might arise. 
 
 As illustrative of its position the court said that an 
 assignor of a negotiable note may, with no incorrectness of 
 speech, be said to be liable upon his assignment, but his 
 
 4 
 
obligation is not an absolute fixed legal liability but is con¬ 
 tingent upon the financial condition of the maker; and ac¬ 
 cordingly held that the insurance company was liable for 
 loss on all the cars in the possession of the railroad company, 
 notwithstanding the fact that the latter was not legally liable 
 to the owners. 
 
 In view of the exceedingly broad construction which the 
 courts have placed upon the time honored and familiar phrases 
 to which reference has been made, it is important for the party 
 insured, whether it be a railroad or other transportation 
 company, a warehouseman, a laundryman, a tailor, a com¬ 
 mission merchant or other bailee, to determine before the fire 
 whether he desires the insurance to be so broad in its cover as 
 to embrace not only his own property and interest, but also the 
 property of everybody else which may happen to be in his 
 custody; if so, he should be careful to insure for a sufficiently 
 large amount to meet all possible co-insurance conditions,, 
 and if he wishes to make sure of being fully reimbursed for 
 his own loss, his only safe course is to insure for the full 
 value of all the property in his possession. 
 
 At this point the inquiry which naturally presents itself 
 is, how should a policy be written if a merchant, warehouse¬ 
 man or other bailee desires to protect his own interest but 
 not the interest of any one else? The following form is 
 suggested: “On merchandise his own, and on his interest 
 in and on his legal liability for property held by him in trust 
 or on commission or on joint account with others, or sold 
 but not removed, or on storage or for repairs, while con¬ 
 tained, etc.” This will, it is believed, limit the operation of 
 co-insurance conditions and at the same time prevent the 
 owners from adopting, appropriating or helping themselves 
 to the bailee’s insurance, for which they pay nothing and to 
 which they are not equitably entitled. 
 
 Many of the household furniture forms now in use, in 
 addition to embracing almost every conceivable kind of per¬ 
 sonal property except that specifically prohibited by the pol¬ 
 icy conditions, are also made to cover similar property be¬ 
 longing to any member of the family or household, visitors, 
 guests and servants. 
 
 This form would seem to indicate considerable ingenu¬ 
 ity on the part of the broker, broad liberality on the part of 
 the insurance company and commendable generosity on the 
 part of the insured, and the latter would probably feel more 
 than compensated by being able to reimburse his guest for 
 any fire damage he might sustain while enjoying his hospi¬ 
 tality, but the amount of insurance carried under such a form 
 should anticipate the possibility of his having a number of 
 guests at one time and a corresponding increase in the value 
 at risk. 
 
 It must be borne in mind that in localities where co- 
 insurance conditions prevail the value of property belonging 
 
 5 
 
to all members of the household, guests and servants will 
 be taken into account for co-insurance purposes in event of 
 loss, and as guests frequently have with them wearing ap¬ 
 parel and jewelry of considerable value, a situation might 
 easily arise which would result in quite a large part of the 
 loss being uncollectible. 
 
 But aside from the element of co-insurance, which is not 
 generally applicable to household furniture risks, the fact 
 remains that under such a form the members of the house¬ 
 hold, visitors, guests and servants are insured quite as ef¬ 
 fectually as the party specifically named as the “insured” in 
 the policy, and by merely adopting the insurance which has 
 been generously provided, they will have just as much right 
 to the proceeds, to the extent of their interest, as the nominal 
 insured, for a policy so written is controlled by the same 
 principles as those governing property held in trust or for 
 account of whom it may concern. 
 
 If, therefore, the insured does not desire to carry in¬ 
 surance for an amount sufficiently large to meet these possi¬ 
 ble contingencies, he should content himself with a less am¬ 
 bitious form of policy, otherwise he may under certain con¬ 
 ditions find himself the victim of his own generosity. 
 
 In the absence of co-insurance conditions, this broad, all- 
 inclusive form need not give the average householder any 
 special concern for it is highly improbable that a guest at 
 a private residence would presume, uninvited, to avail himself 
 of his host’s insurance, although servants and members of 
 a household who are not members of the family might not 
 be so considerate. 
 
 It is, however, an exceedingly dangerous form for use 
 in policies covering the contents of quasi public institutions, 
 hotels and boarding houses, for it is hardly conceivable that 
 the managers or proprietors would desire to carry and pay 
 premium on insurance sufficient to cover the uncertain and 
 constantly changing value of the property of their guests, 
 ^especially when they are under no obligation to do so. 
 
 The question is frequently asked whether goods in bond 
 should be insured for the value with or without the inclusion 
 of customs duties or internal revenue tax; also whether the 
 policy form should affirmatively include or exclude the duty 
 or tax or make no mention of it whatever. 
 
 According to the internal revenue laws (Sections 3221 
 and 3223), when any distilled spirits in bond are destroyed 
 by accidental fire or other casualty, without any fraud, collu¬ 
 sion or negligence of the owner thereof, no tax shall be col¬ 
 lected on such spirits so destroyed, or, if collected, it shall 
 be refunded upon the production of satisfactory proof that 
 the spirits were destroyed as specified in the statute. But 
 when the owners may be indemnified against such tax by a 
 valid claim of insurance, for a sum greater than the actual 
 value of the distilled spirits, before and without the tax be- 
 
 6 
 

 ing paid, the tax shall not be remitted to the extent of such 
 insurance. In short, the insurance would be regarded as 
 covering the tax to that extent, and the insurance companies 
 would have no subrogation rights. As virtually all losses 
 on spirits in bond occur without negligence on the part of the 
 owner, and as the statute makes the refund or cancellation 
 of the bond mandatory, there would seem to be no necessity 
 whatever for insuring the tax, and the usual and better prac¬ 
 tice is to affirmatively exclude it in the policy forms.. 
 
 As respects duties on imports, the situation is somewhat 
 different. According to Section 2984 of the United States; 
 Revenue Statutes, the Secretary of the Treasury is “auth¬ 
 orized,” upon production of satisfactory proof of the actual 
 injury or destruction, in whole or in part, of any merchandise 
 while in bond, by accidental fire or other casualty, to abate 
 or refund, as the case may be, the amount of import duties 
 paid or accruing thereupon; and, likewise to cancel any ware¬ 
 house bond or bonds in whole or in part, as the case may be.. 
 
 Although there is no court decision definitely passing; 
 upon the question as to whether the above provision is man¬ 
 datory or whether the matter is left by the statute entirely 
 within the discretion of the Secretary of the Treasury, it 
 has for years been the practice of the Treasury Department 
 to treat it as if it were mandatory, and it is practically 
 certain that the owner of goods in a bonded warehouse 
 would not lose anything on account of duties in event of 
 destruction of the property by fire. 
 
 Some very good authorities entertain the opinion that it 
 is not advisable to affirmatively exclude duties from the cover 
 of the policies, and in the absence of special mention of the 
 duties in the form, the imported value, without duties, will 
 be the basis of settlement for loss and co-insurance purposes. 
 
 All the decisions prior to the enactment of Section 2984, 
 providing for the refund or abatement, were to the effect 
 that as the insured was absolutely liable to pay the duties, 
 even though the goods were destroyed, his only relief was 
 to look to his insurers, but there does not appear to have 
 been any decision since the enactment of said section as to 
 its effect upon the liability of the insurer. 
 
 On the other hand, some good authorities entertain the 
 opinion that if the insurance is sufficient in amount and the 
 duties are not expressly excluded, it would be held to cover 
 them, because they become an obligation immediately upon 
 importation, and the owner is liable for them until he obtains 
 their remission. In this view of the matter, the fact that 
 it is more or less easy to get the duties remitted is imma¬ 
 terial, and it is believed by those who entertain the above 
 opinion, that the courts would not allow the insurance com¬ 
 pany to compel the insured to reduce his claim against it 
 by enforcing his rights against the United States Govern¬ 
 ment. 
 
 7 
 
This might possibly be true if the duties were already 
 paid at the time of the fire or paid subsequently in order to 
 secure the release of the property for salvage purposes, but 
 in this event the insurance company would be subrogated to 
 the rights of the insured against the Government. If, how¬ 
 ever, the property is totally destroyed and the duties remain 
 unpaid, it is difficult to perceive how the insured can collect 
 anything beyond the invoice value, for until he actually pays 
 the duties, he sustains no loss thereon, even temporarily, and 
 if they are remitted, he never will sustain any loss thereon. 
 
 The mere fact, however, that there has been no final 
 court decision, and that there are differences of opinion on 
 the subject, emphasizes the advisability of having it definite¬ 
 ly stated in the policy form whether the duty is to be con¬ 
 sidered a part of the value insured or not, and it is also 
 desirable to have it determined before the fire occurs by 
 whom the duty and warehouse charges shall be paid, in event 
 of its being necessary to remove the stock from the bonded 
 warehouse to protect it from further damage, or for salvage 
 or other purposes. 
 
 The following form, which is used by some companies, 
 would seem to meet the necessities of the situation when it 
 is desired to exclude the duty as a part of the value: 
 
 It is understood and agreed that the Custom House duties 
 payable to the United States Government on property covered by 
 this policy shall not be considered as part of the value insured in 
 event of loss or damage. 
 
 It is also understood and agreed that on demand of this Com¬ 
 pany, in the event of loss, the insured shall, “to protect the property 
 from further damage,” promptly pay all government duties, ware¬ 
 house and other charges necessary for the purpose of removal of 
 said merchandise to such other location as may be designated by 
 this Company. 
 
 In view of the statute providing for remission or abate¬ 
 ment, and the well settled policy of the Treasury Department 
 in interpreting it, there does not appear to be any particular 
 necessity of insuring the duty, and to pay premium on this 
 additional valuation would be an expense without compen¬ 
 sating benefits commensurate with the outlay. 
 
 The question as to the proper form to use when property 
 is sold under contract is one concerning which there is con¬ 
 siderable misapprehension, a great many entertaining the 
 erroneous belief that so long as the legal title remains in the 
 vendor, he is the owner of the property and that it should 
 be insured in his name. 
 
 Where the contract is silent upon the subject, courts 
 differ as to whether the vendee must complete, despite the 
 intermediate destruction of the building by fire. The English 
 rule, followed by some other courts, is, in general, that the 
 vendee, whether possession has been given or not, is to be 
 regarded as the equitable owner, liable meanwhile for all 
 losses and entitled to all benefits, if not in default under the 
 
terms of the executory contract, and that destruction of the 
 building by fire is no bar to an action for specific perform¬ 
 ance of the contract of sale. But the tendency of decisions 
 in this country lends support to the rule that the executory 
 contract falls at the option of the vendee, if the vendor 
 cannot deliver the premises in substantially as good condi¬ 
 tion as when the contract was made. (Browning v. Home 
 Ins. Co., 71 N. Y. 508; Wood v. American Fire Ins. Co., 
 149 N. Y. 372; Tieman v. Citizens Ins. Co., 76 App. Div. 5; 
 O’Neill v. Franklin Fire Ins. Co., 159 App. Div. 313.) 
 
 But where the vendee has, in addition to his executory 
 contract, and pending- its fulfillment, taken actual possession 
 and control of the property and is in a position to enforce 
 specific performance, it has been quite generally held that he 
 is the equitable or real owner of the property. It is vendible 
 as his, chargeable as his, capable of being encumbered as his; 
 it may be devised as his, would descend to his heirs, and 
 while living is insurable as his. The vendor who retains 
 the legal title simply has a lien on the property for the 
 unpaid balance due on the contract; the substance of owner¬ 
 ship has passed—only the shadow remains. As the vendee 
 under these conditions can insure the property for its full 
 value as his own, it logically follows that the vendor cannot 
 insure it as owner, for it can hardly be maintained that there 
 can be two sole and unconditional owners of the same prop¬ 
 erty at the same time. Therefore, a New York Standard 
 Policy which contains a stipulation against change in inter¬ 
 est, title or possession becomes void unless properly endorsed, 
 if the property is sold under contract and the vendee is 
 given possession. (Sewell v’. Underhill, 197 N. Y. 168, 
 affirming s. c. 127, App. Div. 92; Brighton Beach Racing Ass’n 
 v. Home Ins. Co., 113 App. Div. 728, affirmed without opinion, 
 189 N. Y. 526.) 
 
 “When the vendee under an executory contract binds 
 himself absolutely to complete and to take the whole title, 
 whether of real or personal property, he is held to be the 
 sole and unconditional owner. But where the agreement to 
 purchase is conditional or contingent, whether of real or 
 personal property, so that a fire loss will not fall upon the 
 vendee, then his interest is not sufficient to satisfy the war¬ 
 ranty as to sole and unconditional ownership. The beneficial 
 owner of the entire property is the real owner.” (Richards 
 on Insurance, 3rd Edition, 336.) 
 
 If it is desired to protect the interest of the vendor only, 
 it can be done by issuing policy in his name, but it is abso¬ 
 lutely necessary to state therein that the property has been 
 sold under contract or that a bond has been given for a deed. 
 The only interest the vendor has left to protect is that of a 
 vendor’s lien (an interest somewhat similar to that of a mort¬ 
 gagee), and upon payment of the loss, which cannot exceed 
 the unpaid balance due on the contract, the insurance com¬ 
 pany will be subrogated to the extent of the amount paid. 
 
 9 
 
If it is desired to protect the interest of the vendee only, 
 the policy should be issued in his name just as if he also held 
 the legal title. It is customary to state in the policy form 
 that he holds a bond for a deed or a contract of purchase, 
 although under a New York Standard Policy this would 
 hardly seem to be necessary . 
 
 If it is desired to protect the interest of both vendor and 
 vendee it can be done by issuing the policy in the names of 
 both and stating therein that the property has been sold 
 under contract by one to the other, and making loss, if any, 
 payable as their respective interests may appear. 
 
 A policy issued to the vendor setting forth the fact that 
 the property has been sold under contract to the vendee 
 (naming him) and making loss if any payable to each as their 
 respective interests may appear, woukl probably be held to 
 indicate an intention to cover both interests, although this is 
 getting the cart before the horse and would be analogous to 
 issuing a policy in the name of the mortgagee with loss if any 
 payable to the mortgagor. If both interests are intended to 
 l3e covered the policy should so state. 
 
 A policy issued in the name of the vendee in possession, 
 with loss if any payable to the vendor, as his interest may 
 appear, with a mortgagee clause attached, is probably the 
 best protection that the latter can possibly have. 
 
 The law in Maine is a notable exception to the general 
 rule. In that state, even if the vendee be in possession, if 
 the building is destroyed by fire the vendee cannot be com¬ 
 pelled to take a deed of the land alone and pay the purchase 
 money. 
 
 Gould vs. Murch, 79 Me., 288. 
 
 In Georgia, by reason of the “Georgia Loan Deed” stat¬ 
 ute, when the property has been sold under contract, neither 
 the vendor nor vendee is deemed the sole and unconditional 
 owner of the property; hence it is absolutely necessary that 
 the interest to be insured be fully set forth in the form. 
 
 Orient Ins. Co. vs. Williamson, 98 Ga., 464. 
 
 Williamson vs. Orient Ins. Co., 100 Ga., 791. 
 
 Palatine Ins. Co. vs. Dickenson, 116 Ga., 794. 
 
 Athens Mut. Ins. Co. vs. Evans, 132 Ga., 703. 
 
 Some forms contain a stipulation that the policy shall 
 not be invalidated if contracts for sale of the property are 
 executed and delivered. This will save the policy from for¬ 
 feiture, but it will only cover the remaining interest of the 
 vendor. 
 
 Several years ago the Uniform Bill of Lading was 
 adopted by railroads and other transportation companies, 
 with the endorsement of the Interstate Commerce Commis¬ 
 sion acting in an advisory capacity. The only provision 
 therein of special interest to insurance companies reads as 
 follows: “Any carrier or party liable on account of loss of 
 
 10 
 
or damage to any of said property shall have the full benefit 
 of any insurance that may have been effected upon or on ac¬ 
 count of said property, so far as this shall not avoid the 
 policies or contracts of insurance.” The insertion of the 
 closing words of this last paragraph was secured through 
 the efforts of marine underwriters, who lost no time in pre¬ 
 paring suitable clauses to counteract the effect of the insur¬ 
 ance provision. 
 
 From the various warranties prepared by marine com¬ 
 panies to meet the situation, the following have been selected: 
 
 Warranted by the insured free from any liability for merchan¬ 
 dise in the possession of any carrier or other bailee who may be liable 
 for any loss or damage thereto, and any stipulation or agreement 
 that such carrier or bailee shall have the benefit of this insurance, 
 shall void this policy or contract of insurance, 
 also, 
 
 Warranted by the assured free from any liability for merchan¬ 
 dise in the possession of any carrier or other bailee, who may be 
 liable for any loss or damage thereto; and free from any liability for 
 merchandise shipped under a Bill of Lading containing a stipulation 
 that the carrier may have the benefit of any insurance thereon; and 
 that any insurance against fire granted herein shall not cover where 
 the assured or any carrier or other bailee has fire insurance which 
 would attach if this policy had not been issued. 
 
 Fire insurance companies have apparently taken no ac¬ 
 tion toward protecting themselves in this direction, and un¬ 
 less they do so the insurance issued by them will inure to the 
 benefit of the carrier. Although the Supreme Judicial Court 
 of Maine in the case of Dyer v. Maine Central R. R. Co. (99 
 Me. 195) held that an insurance provision in the statute of 
 that State in favor of a railroad company will not deprive an 
 insurance company of its subrogation rights in event of 
 negligence, the Supreme Judicial Court of Massachusetts, in 
 a recent decision under a similar statute, held to a contrary 
 doctrine; New England Box Co. v. N. Y. C. & H. R. R. R. 
 Co. (41 Ins. Law Journal, p. 517; 99 N. E. Rep. 140). And 
 the United States Supreme Court has held that a stipulation 
 in a bill of lading that the carrier shall have the benefit of 
 any insurance on the goods is a valid one, and in such a case, 
 even though the loss be occasioned by the negligence of the 
 carrier, the insurance company cannot be subrogated to the 
 rights of the shipper to recover damages for such negligence; 
 Phoenix Ins. Co. v. Erie & Western Transportation Co. (15 
 Ins. Law Journal, p. 574; 117 U. S. 312). 
 
 The recent action of the New York Insurance Exchange 
 in abrogating the old pattern clause and requiring patterns, 
 models, moulds, matrices, drawings, designs, dies, solutions, 
 photographic negatives or lithographic plates or stones or 
 engravings thereon to be specifically covered, and in preparing 
 a clause precluding the possibility of their being covered by 
 general terms under other items of the policy, was a move 
 in the right direction, and the rule should be universally 
 adopted not only as a matter of sound underwriting practice, 
 
 11 
 
but in the interest of convenience in adjustments and as a 
 matter of simple fairness between the insured and the com¬ 
 pany. All of the articles mentioned are of uncertain value 
 and belong in a class by themselves; and to include them with 
 machinery and fixtures, the value of which is easily ascer¬ 
 tainable, invariably complicates the adjustment, especially 
 when the policies contain the full co-insurance clause with no 
 limit on the articles in question, for the oldest adjuster present 
 never heard of a poor horse (covered by insurance) ever 
 being killed by lightning or a dead pattern ever being de¬ 
 stroyed by fire. 
 
 A case is now pending in a distant city under the follow¬ 
 ing conditions : blanket policies were issued for over $150,000, 
 with full co-insurance clause, and no limit on patterns. A 
 comparatively small fire occurred in the basement of one 
 building belonging to the plant which was used for the 
 storage of patterns and drawings. If the fire had occurred 
 in some other part of the plant, the probabilities are that, in 
 figuring value for purposes of co-insurance, the basement of 
 the burned building would have been regarded as a sort of 
 pattern cemetery, but through the revivifying influence of the 
 fire the patterns and drawings therein instantaneously as¬ 
 sumed a valuation of about $50,000, or about one- third the 
 value of the entire plant and contents. 
 
 In naming a specific amount on patterns and drawings, 
 the company knows just what it is doing and just what to 
 expect; in insuring them blanket without limit, it ought to 
 know from experience what to expect, although it does not 
 know just what it is doing. 
 
 The precaution taken by the framers of the pattern 
 clause to avoid having patterns and other kindred articles 
 covered by general terms in other items of the policy, directs 
 attention to the fact that in preparing any kind of form, 
 special care should be taken to have each item embrace 
 exactly the property intended to be protected by it, and 
 neither by general nor specific terms have the same property 
 covered under more than one item. As there are a number 
 of exceedingly broad general terms such as “supplies,” “ap¬ 
 purtenances,” etc., they should be used exactly where in¬ 
 tended and not elsewhere. 
 
 Among the new elements which have been introduced 
 into policies of fire insurance during the past thirty years, by 
 far the most important is that of co-insurance, which has its 
 practical manifestation in various forms familiarly known as 
 the “eighty percent co-insurance clause,” “the percentage 
 average clause” and “the reduced rate contribution clause.” 
 Co-insurance is fundamentally sound in principle and an ab¬ 
 solutely necessary factor as an equalizer of rates; and al¬ 
 though by some strange providence it almost invariably hap¬ 
 pens that the relative sound value of property saved is much 
 less than that destroyed, yet the co-insurance or average 
 
 12 
 
clause, by maintaining a proper relation between sound value 
 and loss, operates in a large measure as a kind of automatic 
 regulator in loss adjustments. 
 
 Co-insurance, or average conditions, if a proper amount 
 of insurance be carried, are in themselves perfectly harmless, 
 but if used in connection with the average distribution clause, 
 special care should be taken by the insured or his broker to 
 see that all policies are strictly concurrent and that all con¬ 
 tain the average distribution clause, for if some contain the 
 clause and others do not, the insured may be compelled to 
 stand a portion of the loss himself, notwithstanding the fact 
 that the aggregate insurance may exceed the aggregate value. 
 All the policies should contain the average distribution clause 
 or none of them should. 
 
 Policies are sometimes issued to John Doe and/or Rich¬ 
 ard Roe. A policy so issued may cover one, two or three 
 distinct interests in the property described therein, to wit:— 
 It may cover the interest of John Doe individually, the inter¬ 
 est of Richard Roe individually, and the interest of both 
 jointly. But if the policy be subject to co-insurance or re¬ 
 duced rate average conditions, it is only proper that the com¬ 
 bined value of all the interests should be taken as the basis 
 for their application. 
 
 Although the form “John Doe and/or Richard Roe” has 
 come into use quite generally during recent years, it is doubt¬ 
 ful whether it is any broader in its cover than a policy issued 
 to “John Doe and Richard Roe, as interest may appear”; in 
 fact, good argument might be advanced in support of the 
 view that a policy so issued would be more comprehensive 
 and protective to the insured than one issued to “John Doe 
 and/or Richard Roe,” unless the latter should also contain 
 the words “as interest may appear.” 
 
 If one of the parties violates the conditions of the policy 
 it will be void only as to his individual interest, and might be 
 as to the joint interest, but not as to the individual interest 
 of the party not participating in the. violation. A possible 
 exception to this general statement should perhaps be noted, 
 for it may be that the few states which have declared un¬ 
 qualifiedly in favor of the doctrine that the policy is in¬ 
 divisible, and those which have decided in favor of condi¬ 
 tional indivisibility, may hold that if it is void as to one inter¬ 
 est, it is void as to all. It is also possible, however, that they 
 might differentiate a policy covering several different inter¬ 
 ests from one covering several different items. . Most of the 
 states, however, which have passed on the question have held 
 to the view that the policy is divisible, notwithstanding the 
 plain provision, “This entire policy shall be void, etc.” 1 his 
 opinion evidently assumes that sufficient significance is given 
 to the word “entire” if it is construed as applicable to specific 
 items of the policy instead of the entire instrument. 
 
 13 
 
The question is frequently asked as to how a draft in 
 payment of a loss under a policy so issued should be drawn 
 in order to fully protect the company. The opinion is quite 
 general among underwriters and adjusters that when paying 
 a loss the draft should be made out precisely as the policy 
 is written, without any variation or shadow of turning, and 
 as a general rule this is correct. But is this true in respect 
 of a policy issued to “John Doe and/or Richard Roe?” The 
 answer to this question depends on the answer to two others : 
 
 First:—Does a draft so drawn require the endorsement 
 of both parties, or can the insurer be legally compelled to 
 honor it upon the endorsement of either? 
 
 Second:—If a draft so drawn is honored upon the en¬ 
 dorsement of one of the parties only, will the insurer thereby 
 secure a full release, or can it be compelled to respond to a 
 subsequent claim by the party who did not endorse the draft ? 
 
 The opinion seems to be that the endorsement of one of 
 the parties will be sufficient to enable said endorser to collect, 
 and that the insurer will not be relieved of liability in respect 
 of any later claim by the other party to the contract. If 
 these conclusions be correct, it is evident that the insurer 
 cannot safely issue a loss draft in the manner indicated, and 
 that in the absence of a written release or authorization from 
 one of the parties, the draft should be issued in the names of 
 both “John Doe and Richard Roe,” omitting the word “or.” 
 
 If the draft is drawn in the name of “John Doe and/or 
 Richard Roe,” several possibilities present themselves, to wit: 
 
 (1) If the loss is confined to the property belonging to 
 one party only, who files his claim, and the draft falls into 
 the hands of the other party, who collects on his own en¬ 
 dorsement, the company is not released. 
 
 (2) If claim is made by both parties for loss on property 
 belonging to each individually, and the draft is endorsed by 
 one only, who makes collection, the company is not released 
 as to the interest of the other. 
 
 (3) If claim is made by one or both parties for loss on 
 personal property belonging to both jointly, and the draft is 
 endorsed and collected by one only, the Company is released 
 as to the joint property. This, however, is not necessarily 
 so with respect to real property. 
 
 (4) If claim is made by one party only for the full face 
 of the policy, for loss on property belonging to himself in¬ 
 dividually, and the draft is endorsed by him only, and collec¬ 
 tion made, and if a later claim is also made for the full face 
 of the policy by the other party for loss on his individual 
 interest in the property, the insurer would be compelled to 
 pay the second claimant to the extent of his ratable interest 
 in the policy. In other words, in such circumstances the in¬ 
 surer will have the privilege of paying out probably one hun¬ 
 dred and fifty percent of its policy in settlement of the two 
 claims. 
 
 14 
 
(5) If claim is made by one party only for loss on his 
 individual interest in the property, and the other party gives 
 a release or authorizes payment to the first party, the draft 
 could with perfect safety be made payable to said first party 
 only, or it could be made payable to both jointly, in the form 
 “John Doe and Richard Roe,” but it would not be absolutely 
 safe to issue it in the names of both with the conjunctions 
 “and/or” for, as above stated, if it should happen to fall into 
 the hands of the wrong party, who endorses and collects, the 
 company would not be released. 
 
 Is the property-owner absolutely safe in accepting a 
 policy in the form “John Doe and/or Richard Roe?” This 
 depends on circumstances. Assuming that the value of all 
 interests must be the basis for the application of co-insurance 
 conditions in all cases, if both parties to the contract are so 
 situated with respect to the property that they are at all times 
 fully posted as to the total value at risk, so that the amount 
 of joint insurance can be regulated in accordance with their 
 co-insurance necessities, they have nothing to fear on that 
 score, but if either one or the other is not so situated, he runs 
 the risk of being a co-insurer in the event of loss. 
 
 In those states which have held unqualifiedly that the 
 policy is divisible the assured may safely accept policies in 
 the form “John Doe and/or Richard Roe,” but in those states 
 which have held to the contrary, one party may possibly be 
 running the risk of having the entire contract rendered void 
 by some act on the part of the other. 
 
 It is for the parties insured to determine for themselves 
 whether or not the advantages of this form outweigh the dis¬ 
 advantages, but when a policy is so issued the insurers are 
 entitled to a full and complete release in the event of loss, 
 even though the giving of same may at times cause one or 
 both of the parties some inconvenience. 
 
 The safest course, and in fact the only absolutely safe 
 course for the insurer, is to issue the loss draft in all instances 
 in the form “John Doe and Richard Roe,” thereby securing 
 a release as to each individual interest, and the joint interest 
 if any. 
 
 Virtually every insurance company doing business is 
 requested with more or less frequency, when the loss is less 
 than $100, and sometimes when it is more, to eliminate from 
 the loss draft the name of the mortgagee to whom the loss 
 is payable, on account of the difficulty attendant upon secur¬ 
 ing his receipt and endorsement. In most instances this can 
 be done with comparative safety, but inasmuch as the loss 
 payable clause is placed on the policy at the request of the 
 insured, the insurance company should not be asked to ignore 
 the request after it has become a contractual obligation and 
 assume all responsibility therefor. The possible inconvenience 
 connected with securing the mortgagee’s release is well known 
 when the policy is issued, and if the parties do not desire 
 
 15 
 
small losses paid to the mortgagee, it can be very easily ar¬ 
 ranged by making loss if any above a certain fixed amount 
 payable to him as his interest may appear, and in some in¬ 
 stances this is done. 
 
 If a policy covers on building and stock under separate 
 items and it is the desire of the parties that the loss if any 
 on building only shall be payable to a third party, it should 
 so state, otherwise the loss under the entire policy will be 
 payable to him. 
 
 Is the insurer liable for loss when a property owner has 
 released a railroad company from liability? When the insured 
 has, prior to issue of the policy, released a railroad company 
 or wrongdoer from liability for fire due to negligence or 
 other cause, and fails to advise the insurer of such release, 
 has he concealed or misrepresented any material fact or cir¬ 
 cumstance which precludes recovery from his insurer; in 
 other words where the insured has by his own act deprived 
 the insurer of its subrogation rights, is it a good defense to 
 an action on the policy ? 
 
 In England in the case of Tate v. Hyslop (1884, 15 C. 
 B. Q., 3688 Eng.), the Upper Court reversed the finding of the 
 Lower Court and held that when the insured released the 
 common carrier from liability (except negligence) and knew 
 or should have known that the underwriters charged a higher 
 premium on goods carried under such conditions, the in¬ 
 sured’s failure to disclose such release would (and in this 
 case did) defeat recovery from the underwriters. 
 
 There are several American decisions bearing* on the sub¬ 
 ject, among which may be mentioned the following: 
 
 Pelzer v. St. Paul F. & M. Ins. Co., U. S. C. C. 19 Ins. Law 
 Journal, p. 372; 41 Fed. 271; 
 
 Pelzer v. Sun Insurance Office, South Carolina S. C. 21 Ins. Law 
 Journal, p. 952; 
 
 Greenwich Ins. Co. v. L. & N. Ry. Co., Ky., 1902. Vol. 31 Ins. 
 Law Journal, p. 298; 112 Ky. 598; 66 S. W. 411. 
 
 The Courts of this country have not been as generous to 
 the underwriters as the English courts, but from an analysis 
 of the decisions, we feel warranted in drawing the following 
 conclusions, viz: 
 
 Such agreements are valid if there is a proper considera¬ 
 tion therefor; and they are not against public policy. 
 
 When the insured has, previous to the fire, and before 
 the issue of the policy, released the railroad company from 
 liability and neglected to disclose such fact to the insurer 
 when applying for insurance, it is a question for the jury to 
 determine whether the failure to make such disclosure was 
 concealment of a material fact, and where the insurers dis¬ 
 criminate against property subject to such release to the ex¬ 
 tent of charging a higher rate, and this fact is known to the 
 insured, but not to the insurer or his agent, and he fails to 
 pay the higher rate and have notice of release endorsed on 
 the policy, there would be a reasonable chance of defeating 
 
 16 
 
the claim on this ground; but where there is no such dis¬ 
 crimination on the part of the companies, it would seem that 
 the insurer would have no hope of a successful defense. 
 
 All courts which have passed on the question, with the 
 exception of the Supreme Judicial Court of Massachusetts, 
 the Court of Errors and Appeals of New Jersey, the United 
 States Supreme Court and the English Courts (all of very high 
 caliber), have decided that a fact known to an agent at the 
 time the policy is issued cannot be taken advantage of by the 
 insurer as a defense, but most courts have held that a fact 
 coming to the knowledge of an agent after a policy has been 
 issued, must be endorsed in writing on the policy in order to 
 be binding upon the insurer. 
 
 If, therefore, the agent of the insurance company is 
 aware of the fact that a release has been given by the prop¬ 
 erty owner to the railroad company when he issues the policy, 
 the insurance company, in most states, would be estopped 
 from setting up this fact as a defense, but in the states of 
 Massachusetts and New Jersey, or where a case might be 
 transferred to the Federal Court, the insurance company 
 could take advantage of this defense. 
 
 When, after the issue of the policy, the insured enters 
 into a contract with a railroad company, agreeing to hold it 
 harmless from any liability from loss by fire, there can be 
 no recovery against the insurer (Down’s Farmers Warehouse 
 Association v. The Pioneer Mutual Insurance Association, 
 Washington, S. C., 35 Ins. Law Journal, p. 273). 
 
 It is the practice of the insurance companies to make an 
 extra charge of from five to fifteen percent of the annual 
 premium in the Northern States, and as high as twenty-five 
 percent in the Southern States, on account of the existence 
 of such agreements and notwithstanding the well-known in¬ 
 clination of the courts to favor the insured, it would be the 
 part of wisdom for him to pay the additional premium and 
 be fully protected by having the following endorsement made 
 
 on his policies: “In consideration of $., addi¬ 
 
 tional premium, notice is hereby accepted that the assured 
 has waived the right of recovery from.for any damage 
 
 by fire occurring to the property described herein or affected 
 thereby.” 
 
 There are two kinds of insurance which have in recent 
 years become quite popular, to wit: Use and Occupancy In¬ 
 surance and Profit Insurance. 
 
 The term “Use and Occupancy” is somewhat vague and 
 indefinite. It usually involves the idea of earnings and profits, 
 but they are not necessarily synonymous terms. Use and 
 Occupancy Insurance is analogous to Rent Insurance or Profit 
 Insurance, but it is broader than either, as the insurance com¬ 
 panies discovered in the Buffalo Elevating Company case 
 several years ago (Michael v. Prussian National Insurance 
 Company, 171 N. Y. 25), where the Court permitted the in- 
 
 17 
 
sured to collect over $60,000 for an alleged loss of use, a 
 large part of which was not really sustained, for the insured, 
 as members of a pool, composed of many elevator owners, 
 was by agreement to receive, and subsequently did receive, 
 their full share of the pool earnings in spite of fire destroying 
 the elevator in question. 
 
 Use and Occupancy Insurance is adapted more partic¬ 
 ularly to manufacturing risks and Profit Insurance to mer¬ 
 cantile risks, although it is customary for manufacturers to 
 take out Profit Insurance on finished goods, sold or contracted 
 for. There has been a feeling, which still exists ■ in some 
 quarters, that this class of insurance has a tendency to in¬ 
 crease the moral hazard, but probably on account of the dis¬ 
 criminating care on the part of the insurers in selecting their 
 risks, the record thus far has failed to justify these fears. 
 
 This class of insurance should not be written indis¬ 
 criminately. In fact it would seem to be against public policy 
 for it to become universal. It should not be granted to any 
 individuals, firms, or corporations, except those of the highest 
 standing, doing a profitable business, and it calls for the 
 utmost good faith on the part of the contracting parties. 
 
 In a distant city some time ago, a comparatively small 
 fire occurred in the assembling department of a large manu¬ 
 facturing plant which consisted of sixteen buildings. This 
 department was the one which of all others, could be shut 
 down and discommode the insured the least, and on the basis 
 of the payroll, it constituted as a factor in production a little 
 over five percent of the plant. 
 
 The adjusters figured the actual use and occupancy loss 
 at less than $1,000, but claim was presented for $27,000 or 
 $9,000 per day for three days, just as if the entire plant had 
 been thrown out of commission; and in addition to this, 
 
 $9,000 for profit on stock which had been destroyed, making 
 a total claim of $36,000 which modest figure was subsequently 
 raised by the filing of amended proofs for $61,000. 
 
 The form provided that if any of the buildings or the 
 contents thereof should be so damaged, destroyed or disabled 
 as to entirely prevent the insured from producing “finished 
 goods,” the companies should be liable per day for each 
 working day of such prevention, for an amount not exceeding 
 the net average daily yield of the plant for three hundred 
 working days immediately preceding the fire. It also con¬ 
 tained the usual provision in regard to partial prevention. (j 
 
 It did not, however, contain any element of co-insurance and 
 the insurance actually carried amounted to only thirty-five 
 percent of the annual net profits. 
 
 The insured contended, not that they were entirely pre¬ 
 vented from carrying on their business of manufacture, but 
 that they were entirely prevented from producing “finished 
 goods”—as if the production of finished goods did not require 
 the use of the entire plant, but only the finishing department. 
 
 18 
 
 "X 
 
During these three days they were producing finished engines, 
 finished transmissions, finished bodies, and all such parts, but 
 in the opinion of the insured’s counsel, all this counted for 
 naught, because they were in the business of producing fin¬ 
 ished automobiles. 
 
 The claim was finally compromised for $10,000, but if 
 the word “finished” can, in a given case engross the attention 
 of three firms of attorneys, consume several thousand dollars 
 in expenses, and protract the adjustment of a three days’ 1 
 partial loss for fifteen months, it would surely seem as if it 
 were a good one to eliminate from the use and occupancy 
 form. 
 
 There are many use and occupancy forms in current use 
 which it will be impossible even briefly to analyze. In fact, 
 use and occupancy insurance and the kindred subjects of 
 rent, rental value, leasehold and profit insurance if fully con¬ 
 sidered, each possesses in itself sufficient material for a special 
 paper. 
 
 When insuring commissions and/or profits the form 
 should limit the liability of the insurer to not exceeding a 
 certain percent of the sound value of the stock, and it should 
 also contain a stipulation that the loss of commissions and/or 
 profits shall not, in any event, exceed said percent of the 
 amount of damage which the merchandise itself shall be 
 found to have sustained, irrespective of whether said damage 
 be ascertained by agreement, by appraisement, or whether the 
 stock be surrendered to the companies covering same, and the 
 net loss ascertained through sale of the salvage. The policy 
 should also be subject to average or co-insurance conditions. 
 
 The following “market value” clause is now frequently 
 used in connection with lumber risks: 
 
 It is understood and agreed that in event of loss or damage to 
 lumber the basis of settlement and application of the average (co- 
 
 insurance) clause shall be the market value at.the day of the 
 
 fire, less cost of transportation and marketing at the time and place 
 of fire. 
 
 The following is used in polcies covering on stock in 
 tanneries: 
 
 It is understood and agreed that in the event of loss or damage 
 to the property hereby insured the basis of settlement on tanned 
 leather, finished, unfinished or in the rough, shall be the market price 
 of similar leather in Boston, Mass., the day of the fire, less cost of 
 finishing and transportation. 
 
 and somewhat similar clauses are inserted in policies covering 
 on whiskey, sugar and other staple products in the hands of 
 a manufacturer. 
 
 The Supreme Court of Michigan, in 1892 (Mitchell v. 
 St. Paul German Ins. Co., 92 Mich. 594), and the Texas Court 
 of Civic Appeals, in 1898 (Hartford Fire Ins. Co. v. Cannon), 
 decided that the basis of indemnity for lumber is the market 
 value. The Supreme Court of Pennsylvania had decided that 
 the “Actual cash value of sewing machines was the cost to 
 
 19 
 
the insured, who was a manufacturer, to reproduce them.” 
 (Standard Sewing Machine Co. v. Royal Ins. Co., 201 Pa. 
 State, 645.) But when the same Court ran up against whiskey, 
 because of the peculiar nature of that commodity, it staggered 
 and fell into the market value column. (Frick v. United 
 Firemen’s Ins. Co., 218 Pa. State, 409.) 
 
 The United States Circuit Court of Appeals followed 
 with a similar decision (Mechanics Ins. Co. v. C. A. Hoover 
 Distilling Co., vol. 40 Ins. Law Journal, p. 347; 182 Fed. 590), 
 so that unless the parties to the contract agree that the words 
 “actual cash value” and “costs to replace,” as applied to 
 goods in the hands of a manufacturer, shall be construed to 
 mean “cost to reproduce,” there appears to be no good reason 
 why the market value clause should not be used in policies 
 covering on lumber and whiskey at least, for it is more than 
 probable that other jurisdictions will follow the precedents 
 already established and that the companies will be under the 
 necessity of settling future losses thereon on that basis, 
 whether the policies contain such a provision or not. 
 
 To just what extent the judicial inclination may feel im¬ 
 pelled to go in favor of market value as applied to goods in 
 the hands of a manufacturer in construing the New York 
 Standard Policy remains to be seen, but in the meantime the 
 miarket value clause should not be inserted in policies issued 
 to manufacturers except on risks where the companies would, 
 if liability were limited to cost of production, be perfectly 
 willing to write profit insurance. After all, the difference 
 between having cost of production and profit merged in one 
 set of policies and having policies covering each separately 
 is not very great; in fact, in principle, the difference is the 
 same as that between blanket and specific insurance, and in 
 cases where insurance of both cost and profit are not objec¬ 
 tionable, the terrors of the market value clause would be in a 
 large measure neutralized by average or co-insurance condi¬ 
 tions, and no such risk should be written unless subject to 
 such conditions. 
 
 It would be interesting to consider forms covering com¬ 
 mon carrier liability, improvements and betterments, lease¬ 
 hold interest, mortgagee’s interest, rents, rental value, re¬ 
 insurance ; also clear space, iron safe and three-fourths value 
 clauses; policies issued to heirs, administrators, estates, etc. 
 But it was difficult enough to know where to begin this 
 subject, and it is still more difficult to know where to stop. 
 
 In general, policy forms contain many superfluous words. 
 For instance, in that relic of the past commencing: “On 
 household and kitchen furniture, useful and ornamental,” five 
 words out of the eight are unnecessary, and in that other 
 inheritance from our ancestors, reading: “On merchandise, 
 hazardous, non-hazardous and extra hazardous,” six words 
 out of the eight are redundant, and the same criticism will 
 apply to a large majority of the forms in current use. The 
 
 20 
 
longest form may afford the shortest indemnity, and a good 
 form can be very materially weakened by the injudicious 
 addition of words, although it is better to use too many 
 than too few. Vital points should be covered and useless 
 phrases omitted. The three graces of the ideal insurance 
 form are clearness, conciseness and completeness. 
 
 One of the best things in the New York Standard Policy 
 is on the back of it: “It is important that the written portions 
 of all policies covering the same property read exactly alike. 
 If they do not, they should be made uniform at once.” If 
 proper attention were given to this admonition, the vocation 
 of the apportionment expert would be gone and some of the 
 troubles that now vex us would be at an end. 
 
 21 
 
USE and OCCUPANCY 
 INSURANCE 
 
 AN ADDRESS 
 
 DELIVERED BEFORE 
 
 The 
 
 Fire Insurance Society 
 
 of Philadelphia 
 
 November 18th, 1912 
 
 BY 
 
 W. N. BAMENT 
 
 General Adjuster 
 
 THE HOME INSURANCE COMPANY 
 
 NEW YORK 
 
 c 
 
Use and Occupancy Insurance 
 
 William N. Bament, General Adjuster 
 The Home Insurance Company, New York 
 
 An Address Before the Fire Insurance Society of Philadelphia, 
 
 November 18, 1912 
 
 Since the first fire insurance policy issued by an American 
 company was written in the city of Philadelphia one hundred 
 and sixty years ago, insurance, the “handmaid of commerce,” 
 has gone steadily forward, keeping pace with the marvelous 
 development of the country, and we now have the insurance 
 business of today with its hundreds of millions of capital, 
 ready to meet every legitimate requirement of our social, 
 commercial and industrial life. 
 
 During the past thirty years a number of new elements 
 have been introduced into the business of fire insurance, 
 among the more important of which may be mentioned elec¬ 
 tricity for light and power, automatic sprinklers, co-insurance 
 and the subject of this address, “Use and Occupancy Insur¬ 
 ance.” 
 
 Any discussion of this branch of the business would not 
 be complete without a consideration of the kindred subjects 
 of rent, rental value, and profit insurance; in fact, use and 
 occupancy insurance embraces all the others and more, and 
 the former bears about the same relation to the latter as 
 blanket insurance does to specific. Some attention, therefore, 
 will be devoted to these and also to the closely related subject 
 of leasehold insurance. 
 
 The New York form of rent policy reads as follows: 
 
 “The intention of this insurance is to make good the loss 
 of rents, caused by fire or lightning, actually sustained by the 
 assured on occupied or rented portions of the premises which 
 have become untenantable for and during such time as may 
 be necessary to restore the premises to the same tenantable 
 condition as before the fire; * * but this company shall 
 
 not be liable for a greater proportion of any loss than the 
 sum hereby insured bears to the actual annual rental of the 
 entire occupied or rented portions of the premises.” 
 
 1 
 
The framers of this form no doubt thought that it was 
 perfectly clear, but, nevertheless, several questions present 
 themselves in connection therewith. First, what is meant by 
 “loss of rents * * actually sustained by the assured?” 
 
 Does this mean gross rents, as contended by some, and as fre¬ 
 quently though not always construed in practice, or does it 
 mean gross rents less those expenses which may be saved to 
 the insured during the period of reconstruction, such as light¬ 
 ing, heating, elevator service, janitor service, collections, 
 insurance and the like? 
 
 The Courts May Always Be Counted On 
 
 to construe the contract most liberally in favor of the insured, 
 and if they should declare that this class of insurance is 
 valued, the rents being fixed amounts usually set forth in 
 leases, then in the absence of a stipulation in the contract to 
 the contrary, it would be construed like any other valued 
 policy and the insurer would be liable for loss of gross rent 
 without any deductions therefrom. 
 
 Although it is possible that they may so hold, we are 
 hardly warranted, in view of their strong inclination to adhere 
 in their decisions to the fundamental principle of indemnity, 
 in concluding that they would go out of their way to discover 
 a valued feature in a policy form, where there is no evidence 
 -—except remotely inferential—of its existence. In fact, reason 
 and justice would seem to point in exactly the opposite direc¬ 
 tion. 
 
 If the policy is not valued, it should be interpreted like 
 any other contract of indemnity, and there is no more logical 
 reason why one should recover more than his actual loss on 
 rents than he should on any other kind of property. And the 
 fact that the policy limits liability to loss on rents “actually 
 sustained,” lends emphasis to the view that the policy is not 
 valued, and these words, if they have any significance what¬ 
 ever, should be controlling. 
 
 The highest court in England, speaking through some of 
 the brightest minds that ever graced the King’s Bench, is 
 unanimous in standing for the principle that under a contract 
 of fire insurance, the insured in case of loss, shall be fully 
 indemnified, but shall never be more than fully indemnified; 
 that the insured is not entitled to receive anything by way of 
 indemnity, if he has in fact sustained no loss ; that in order 
 to ascertain what a loss is, everything must be taken into 
 account which is received by and comes to the hand of the 
 insured, and which diminishes that loss. And the United 
 States Supreme Court has declared in equally emphatic lan¬ 
 guage, “If a loss happens, anything which reduces or dimin¬ 
 ishes that loss reduces or diminishes the amount which the 
 indemnifier is bound to pay.” (Chicago, etc., R. R. Co. vs. 
 Pullman Car Co., 139 U. S. 79-88.) 
 
Massachusetts, which departed from the principle in con¬ 
 nection with the interest of a mortgagee (King vs. State 
 Mutual F. Ins. Co., 7 Cush., 1), in another case, speaking- 
 through its highest court, said: “The assured is only entitled 
 to be put in the same condition pecuniarily that he would have 
 been if there had been no fire.” Two prominent decisions by 
 the Court of Appeals of New York—Foley vs. Manufacturers’ 
 and Builders’ Ins. Co. (152 N. Y., 131), and Michael vs. Prus¬ 
 sian National Ins. Co. (171 N. Y., 25), have impressed many 
 with the belief that said court has departed from the funda¬ 
 mental principle of indemnity, but a careful analysis of the 
 opinions hardly warrants this conclusion. In the decision in 
 the last named case, which will be referred to later, it was the 
 valued feature that over-indemnified the insured. 
 
 In the light of the authorities referred to, it is clear that 
 unless the policy is a valued one, it is incumbent upon the 
 insured, under a rent policy, to prove what his actual net loss 
 is, after making proper deduction for everything in the way 
 of salvage which may come to him. 
 
 In many cases there would be no diminution in the regular 
 running expenses, but in event of a serious damage to or the 
 total destruction of the building this might be a very im¬ 
 portant factor. 
 
 The Average Condition at the End of the Rent Clause 
 
 is not necessarily inconsistent with the foregoing basis of 
 recovery, but in event of deduction being made from the gross 
 loss for salvage in expense of maintenance during reconstruc¬ 
 tion, equity would suggest a corresponding modification in 
 the value when applying the average condition. 
 
 Nearly if not all rent losses are partial; the present forms, 
 which differ somewhat in various portions of the field, have 
 been in use for many years; the loss record has not been un¬ 
 favorable; very little difficulty has been experienced in ad¬ 
 justments ; settlements are usually made on a compromise 
 basis, and many claimants no doubt take into consideration 
 the salvage in expenses in their adjustment negotiations, so 
 that this question does not arise very frequently as a practical 
 proposition. A form could doubtless be prepared which would 
 eliminate the element of doubt, which in the minds of many 
 surround the present ones, yet the attempt would present its 
 difficulties, and unless we experience more trouble in the future 
 than we have in the past in the adjustment of this class of 
 losses, and unless the necessity for a change becomes more 
 apparent than it has up to the present time it would be ad¬ 
 visable to let it remain as it is. 
 
 Another inquiry which suggests itself is whether, under 
 the above form, if certain portions of the premises are oc¬ 
 cupied by the landlord himself and not rented, the insurer 
 would be liable for the rental value thereof. The term rent is 
 hardly applicable to this condition, and the phrases “loss of 
 
 3 
 
rent actually sustained” and “actual annual rental” tend to 
 confirm this view. This condition should be covered under 
 a rental value policy or as an element of use and occupancy 
 insurance. But the particular form under discussion covers 
 “occupied or rented portions,” and this would in all probability 
 be held to include occupancy by the insured. 
 
 Rental Value Policies 
 
 are written at an advanced rate to cover loss of rents or rental 
 value of the premises whether occupied or vacant at the time 
 of the fire. The theory upon which this class of insurance is 
 based is that the premises have a value as rentable property 
 and may be rented at any time; hence, if destroyed by fire 
 the insured may be deprived of the income which would other¬ 
 wise accrue to him. It will also cover the rental value of 
 that portion of the premises occupied by the owner himself. 
 If not valued the amount of loss under a policy of this nature 
 must necessarily be established by extraneous evidence. 
 
 If it is the intention of underwriters to cover the occu¬ 
 pancy by the owner of the building under the rental value 
 and not under the regular rent form (occupied only) in use 
 in New York city, they can find room for improvement in the 
 latter in respect of the words “occupied or rented,” to which 
 reference has been made. 
 
 Leases Contain All Sorts of Conditions, 
 and forms of policy covering leasehold interests are cor¬ 
 respondingly varied. Under certain conditions a landlord and 
 tenant may both have an insurable interest in the subject 
 matter for its full value, and unless he has otherwise been fully?' 
 indemnified each mav recover from his own insurers the full 
 value thereof. The landlord has an insurable interest as 
 owner and if his tenant is under covenant to repair he is ex¬ 
 posed to the risk of his tenant being unable to fulfill his obli¬ 
 gation. On the other hand, a tenant vfho is under covenant 
 to repair or restore the building in case of fire, has an in¬ 
 surable interest both by reason of his right to use the demised 
 premises and by reason of this assumed liability to restore, 
 and he cannot be fully indemnified in event of the building 
 being destroyed by fire unless he recovers from his insurers 
 the full value thereof. This does not constitute double in¬ 
 surance, and there is no right of contribution, as the interests 
 are separate and distinct. 
 
 This would seem to imply a possible double indemnity, 
 but the equitable doctrine of subrogation has been adopted 
 to prevent this, and the great English decisions give this 
 doctrine the widest scope and application by placing the in¬ 
 surers in the position of the insured upon payment of the loss, 
 and giving them the advantage of every right or remedy 
 whether in contract or in tort, or otherwise, which the insured 
 himself may have.—Castellain vs. Preston (1883), 11 Q. B. D., 
 380; Darrell vs. Tibbitts (1880), 5 Q. B. D., 560. 
 
 4 
 
There is probably nothing stronger in the language of 
 any court than Justice Brett’s elucidation of the doctrine of 
 subrogation as set forth in these decisions, in support of the 
 principle that the insured is entitled to a full indemnity, but 
 nothing more. This reasoning is so sound fundamentally 
 that it is impossible to conceive of any court clothed in its 
 right mind rendering an opinion at variance therewith. 
 
 There is a case in point in New York city, where the 
 owner of a certain building carries insurance thereon (includ¬ 
 ing improvements made by lessee), for its full value, several 
 hundred thousand dollars. The lessee who is liable for rent 
 and for all repairs, unless he avails himself of the statute and 
 surrenders the premises, also carries a large insurance cover¬ 
 ing his interest. Four losses have occurred during the past 
 few years, all of which have been paid by the lessee’s insurers, 
 no claim being made against the insurers of the lessor. 
 
 There are a Number of Other Conditions 
 
 supporting an insurable interest on the part of the lessee. He 
 may have paid the full rental in advance with no right of 
 abatement; he may have obligated himself to pay rent during 
 the entire term of the lease even though the premises should 
 be destroyed by fire. He has the right to the use and enjoy¬ 
 ment of the demised premises. Very frequently the premises 
 are sublet at a profit, and insurance may be taken out by the 
 lessee to cover that interest; or he may occupy the demised 
 premises himself, and owing to an advance in the value of the 
 leasehold interest he may take out insurance to cover this 
 increased value. 
 
 One of the most common forms of leasehold insurance 
 is valued, and provides that if the premises shall be totally 
 destroyed by fire the company shall pay the whole amount in¬ 
 sured, less a deduction of a stated amount per month for the 
 time that shall have elapsed between the date of the policy 
 and the date of the fire. And in case of damage the company 
 shall pay at the rate of a stated amount per month until by 
 the exercise of due diligence the premises can be made tenant- 
 able. As in the case of all valued policies, care should be 
 taken to ascertain whether the facts or conditions warrant the 
 valuation stated in the contract. 
 
 The following comes from a Western city: 
 
 “A, the owner, leases the building to B; he sublets to C, 
 and he in turn sublets to D, for the unexpired term of ten 
 vears; D agrees to pay a stated rental, and in addition to this 
 a bonus of $50,000, in annual instalments of $5,000 each. In 
 event of total destruction of the building by fire the lease 
 may be canceled at the option of either lessor or lessee, but 
 the above bonus is to be paid in any event, and D takes out 
 insurance to cover this liability. A, no doubt, has policies 
 covering the building and rents. B probably has insurance 
 
 5 
 
covering his profit on the lease, and C, who may not care to 
 rely absolutely upon the agreement with D, may also have 
 insurance covering his profit.” 
 
 We have here a chain of insurable interests which may 
 be extended indefinitely, fairly rivaling in its possibilities the 
 famous house that Jack built. 
 
 In Chicago a hotel company took out policies covering 
 on the use and occupancy of a hotel, the loss to be computed 
 from the date of the fire to the time when, by the exercise of 
 due diligence, the building could be rebuilt. After the fire the 
 lessor exercised his right to cancel the lease, there being 164 
 days still to run. The building could have been repaired in 
 eighty-four days, but the insured brought suit claiming in¬ 
 demnity for 164 days. The court very properly held that the 
 insured could collect for only eighty-four days. The hotel 
 company should have taken out insurance on its leasehold 
 interest instead of use and occupancy insurance. 
 
 Insurance Is Frequently Written 
 
 covering buildings standing on leased ground, and under the 
 policy conditions it is absolutely necessary for this fact to be 
 indorsed thereon. It is self-evident that if a company writes 
 ti policy covering a building on leased ground, with the lease 
 •on the verge of expiration, with no privilege of renewal and 
 with no option of sale to the lessor, it is tempting fate and 
 playing with fire. 
 
 The Supreme Judicial Court of Massachusetts (two jus¬ 
 tices dissenting) has held that the lessee of the land who 
 "erects a building thereon, which reverts to the landlord at 
 expiration, has an insurable interest in the building for its full 
 value, although the lease has only two years to run, the policy, 
 of course, stating that it is located on leased ground. (Fowler, 
 et al. vs. Springfield F. & M. Ins. Co., 7 Ins. Law Journal, 
 p. 189.) 
 
 The New York court, however, under a similar state of 
 facts, held that while the lessee had an insurable interest, it 
 was not for the full value of the building but for the value 
 of the tenement for occupation, subject to rent, during the 
 unexpired term. (Niblo vs. North American Fire Ins. Co., 
 3 N. Y., Superior Court, p. 551.) 
 
 The New York Court has also held that when, under the 
 terms of the lease, the lessee had the right, at expiration, to 
 remove the building erected by him, the lessor had no interest 
 therein, and that the lessee was entitled to collect the full 
 value thereof, notwithstanding the fact that the lease had only 
 seventeen days to run when the fire occurred, and if removed, 
 it would net the lessee only about 20 per cent, of its value. 
 (Laurent vs. The Chatham Fire Ins. Co., 1 Hall R., 41.) 
 
 Profits and/or commissions must be insured as such, 
 although in respect of lumber in the hands of a mill owner, 
 and whiskey in the hands of a distiller, the insurer is liable 
 
 6 
 
for market value, which, of course, includes the manufacturer’s 
 profit. “Market value” clauses are now frequently inserted 
 in policies covering on leather, whiskey, lumber, sugar and 
 other staple products in the hands of producers and this is 
 virtually assuming liability for loss on profits in addition to 
 the cost of producing the goods. Just how far this class of 
 decisions or this practice may extend it is impossible to pre¬ 
 dict, but in cases where the insurer would readily write profit 
 insurance and literally run after use and occupancy insurance, 
 the market value clause may be viewed with comparative 
 equanimity, provided it is accompanied by that automatic 
 regulator—a co-insurance or reduced rate average clause. 
 
 When insuring commissions and/or profits, the form 
 should limit the liability of the insurer to not exceeding a 
 certain per cent, of the sound value of the stock, and it should 
 also contain a stipulation that the loss on commission and/or 
 profits shall not, in any event, exceed said per cent, of the 
 amount of damage which the merchandise shall be found to 
 have sustained, irrespective of whether said damage be ascer¬ 
 tained by agreement, by appraisement, or whether the stock 
 be surrendered to the companies covering the same, and the 
 net loss ascertained through sale of the salvage. 
 
 This may not in some instances be entirely fair to the 
 insured, whose actual loss of profits may materially exceed 
 the figure thus ascertained, but it affords an easy method of 
 adjustment and is probably as liberal a contract as the com¬ 
 panies can safely issue. 
 
 The advent of automatic sprinklers, the prompt recogni¬ 
 tion by the New England mutual insurance companies of their 
 value as the greatest of all agencies in the line of fire protec¬ 
 tion, and the failure on the part of stock companies to rec¬ 
 ognize their importance as an underwriting factor, resulted 
 in the transfer of a large portion of the insurance on textile 
 mills in New England from stock to mutual companies. And 
 it was with a view of counteracting this diversion that Mr. 
 Henry R. Dalton, of Boston, and Mr. A. W. Damon, president 
 of the Springfield E. & M. Insurance Company, devised the 
 first use and occupancy form of which we have any record. 
 
 The Phrase “Use and Occupancy” 
 
 is somewhat vague and indefinite, and it is difficult to define 
 with precision. It usually involves the idea of earnings or 
 profits, but they are not necessarily synonymous terms.. The 
 New York Court of Appeals has attempted to define it in one 
 of the few cases bearing on the subject, under a form simply 
 covering “use and occupancy” without any descriptive terms. 
 
 The case referred to is the celebrated one of Michael vs. 
 Prussian National Insurance Company (171 N. Y., p. 25), 
 which in anv discussion of the subject requires special con¬ 
 sideration. The policy was a valued one providing for the 
 
 7 
 
payment of a certain fixed amount for every day required for 
 reinstatement. The insured, the Buffalo Elevating Co., which 
 owned and operated a large elevator in Buffalo, entered into a 
 secret pooling arrangement for the active season with other 
 elevator owners, the agreement providing that after payment 
 of certain operating expenses, the balance, to wit, 80 per cent, 
 of the gross earnings of the Buffalo Elevating Co. should be 
 turned over absolutely to the pool, and that the Elevating 
 Company should continue to receive its full share of the entire 
 pool earnings, even though their elevator should be destroyed 
 by fire. The time required for rebuilding was fixed by arbitra¬ 
 tion at 259 days, and the total claim under 46 policies 
 amounted to $60,328.87. The companies defended on the 
 ground that there had been a change of interest in the subject 
 of insurance and that the insured was not the sole, uncondi¬ 
 tional owner of the same. 
 
 The court held that, notwithstanding the transfer of the 
 total earnings to another, the insured was the sole and un¬ 
 conditional owner under a use and occupancy policy, that 
 there was no change in interest in the subject matter described 
 in the policies, and that the doctrine of equitable subrogation 
 did not apply. The court said: 
 
 “Use and occupancy, as terms of insurance, may assume 
 within their general scope, the expectation of profits and 
 earnings derivable from property, but the terms appear to 
 have a broader significance as to the subject of insurance, 
 and to apply to the status of the property and to its continued 
 availability to the owner for any purpose he may be able to 
 devote it to. * * 
 
 “If the subject of insurance was the earnings and income 
 of the elevator, then it was affected by the agreement in ques¬ 
 tion. There was under that construction a change effected in 
 their ownership, or in the interest of the assured and a con¬ 
 sequent breach of warranty. If the subject of insurance was 
 not the earnings nor the income, as the endeavor has been to 
 point out, but the mere continuance of the elevator plant in a 
 state or condition of availability for use and occupation, then 
 it mattered not what was done with the earnings of the busi¬ 
 ness so conducted.” 
 
 Inasmuch as the insurance was held to be valid, the 
 highest court in the State of New York has virtually held 
 that insurance of use and occupancy is not insurance of earn¬ 
 ings or income. And the unhappy phrase “Use and Occu¬ 
 pancy,” unaccompanied by any explanation in the form as 
 to what it meant, cost the insurers, under valued policies, over 
 $60,000. and the insured were clear gainers by the fire to 
 that extent. 
 
 A lower court in New York, in a later case bearing in¬ 
 directly on the subject of use and occupancy, and referring to 
 the Michael case, used the following language: 
 
 8 
 
“But the profits of the business were quite another risk 
 and not at all covered by the phrase ‘use and occupancy.’ 
 Perhaps the market value of that interest may be as ascer¬ 
 tained by proofs in the absence of agreement, but it clearly 
 does not consist of profits plus fixed charges.” (Tannenbaum 
 vs. Freundlich, 81 N. Y. Supp., 292.) 
 
 Commenting on the Michael Decision, 
 the learned text writer and counsel who handled the case for 
 the defendants, well says that if the earning power and gross 
 earnings of an elevator are no part of its commercial use', it 
 is difficult to see what is. If an absolute transfer of the total 
 earnings is no change of interest whatsoever in the subject 
 matter of “use and occupancy” insurance, it is difficult to con¬ 
 ceive what can be. And the layman, who in his daily practice 
 as an adjuster of losses under use and occupancy policies, not 
 valued, is accustomed, in figuring the value, to allow from 90 
 to 100 per cent, thereof for net profits, may well ask what 
 elements or items capable of being expressed in dollars and 
 cents really go to make up the value of this mysterious some¬ 
 thing known as “Use and Occupancy” if earnings or profits 
 are not at all covered by the phrase? 
 
 The court seems to have looked upon the words as vague 
 and indefinite and in ordei* to avoid a forfeiture apparently 
 chose to regard it as a collective term not subject to analysis 
 or too minute inquiry into the various elements going to make 
 up the value of the entire subject matter. The decision may 
 have been warranted and in the strictest sense, may have been 
 legally sound, but it was inequitable, like many another— 
 based on that convenient apology “ambiguity,”—and if at 
 some future time under different conditions the learned tribu¬ 
 nal which gave expression to the foregoing opinion is called 
 upon to decide just what is to be taken into consideration in 
 arriving at the value of the use and occupancy of a plant, the 
 insurance fraternity will be greatly interested in learning 
 what it has to say on this subject. 
 
 Use and Occupancy Insurance 
 is written covering against loss caused by either fire, light¬ 
 ning, windstorm or sprinkler leakage, the most common being 
 fire and lightning. There has been a feeling, which still exists 
 in some quarters, that this class of insurance tends to increase 
 the moral hazard, but probably on account of the discriminat¬ 
 ing care on the part of companies in selecting their risks, the 
 record thus far has failed to justify these fears. This class 
 of insurance 
 
 Cannot Be Written Indiscriminately; 
 in fact, it would be against public policy for it to become 
 universal. It cannot with safety be granted to any individ¬ 
 uals, firms or corporations except those of the highest stand¬ 
 ing doing a profitable business, and it calls for the utmost 
 good faith on the part of the contracting parties. 
 
 9 
 
In a distant city some time ago, a comparatively small 
 tire occurred in the assembling department of a large manu¬ 
 facturing plant which consisted of sixteen buildings. This 
 department was the one which of all others, could be shut 
 down and discommode the insured the least, and on the basis 
 of the payroll, it constituted as a factor in production a little 
 over five per cent, of the plant. 
 
 The adjusters figured the actual use and occupancy loss 
 at less than $1,000, but claim was presented for $27,000, or 
 $9,000 per day for three days, just as if the entire plant had 
 been thrown out of commission; and in addition to this, $9,000 
 for profit on stock which had been destroyed, making a total 
 claim of $36,000, which modest figure was subsequently raised 
 by the filing of amended proofs for $61,000. 
 
 The form provided that if any of the buildings or the 
 contents thereof should be so damaged, destroyed or disabled 
 as to entirely prevent the insured from producing “finished 
 goods,” the companies should be liable per day for each 
 working day of such prevention, for an amount not exceeding 
 the net average daily yield of the plant for three hundred 
 working days immediately preceding the fire. It also con¬ 
 tained the usual provision in regard to partial prevention. It 
 did not, however, contain any element of co-insurance and the 
 insurance actually carried amounted to only thirty-five per 
 cent, of the annual net profits. 
 
 The insured contended, not that they were entirely pre¬ 
 vented from carrying on their business of manufacture, but 
 that they were entirely prevented from producing “finished 
 goods”—as if the production of finished goods did not require 
 the use of the entire plant, but only the finishing department. 
 During these three days they were producing finished engines, 
 finished transmissions, finished bodies, and all such parts, but 
 in the opinion of the insured’s counsel, all this counted for 
 naught, because they were in the business of producing fin¬ 
 ished automobiles. 
 
 The claim was finally compromised for $10,000, but if 
 the word “finished” can, in a given case engross the attention 
 of three firms of attorneys, consume several thousand dollars 
 in expenses, and protract the adjustment of a three days’ 
 partial loss for fifteen months, it would surely seem as if it 
 were a good one to eliminate from the use and occupancy 
 form. 
 
 In Order to Determine the Amount 
 
 of insurance to be carried, a conservative manufacturer ought 
 to take the net profits for the preceding year, add a certain 
 percentage for expected increase, if any, during the coming 
 year, and an additional amount to cover fixed charges which 
 cannot be dispensed with, for the period of total or partial 
 prevention. 
 
 10 
 
In probably no branch of the business is there a greater 
 variety of forms than that which deals with Use and Occu¬ 
 pancy insurance. The regular printed forms of no two com¬ 
 panies and no two brokers read exactly alike, and each has 
 special forms to meet the real or imaginary requirements of 
 particular risks. But notwithstanding this lack of uniform¬ 
 ity, virtually all contracts of this nature have some points in 
 common. 
 
 AW policies of this class contain some limitation as to 
 liability. These limitations assume different forms, and 
 among those most frequently used may be mentioned the 
 following: 
 
 One three-hundredth of the amount of the policy 
 for each day of total prevention; 
 
 Such proportion of the actual loss of net earnings 
 that the amount of the policy bears to the net earnings 
 for three hundred working days of twenty-four hours 
 each, immediately preceding the fire; 
 
 A stated amount per day for each day of total pre¬ 
 vention, said limit usually being one three-hundredth of 
 the amount of the policy on the theory that three hun¬ 
 dred working days constitute the average working year; 
 
 A stated amount for each working day of each partic¬ 
 ular month, for instance, $60 per day in the month of 
 December and $40 per day in the month of January,— 
 this form being used in connection with certain classes of 
 risks where the working season is limited to six or seven 
 months, as in cotton seed oil mills. 
 
 Provision Is Also Made for Ratable Liability 
 
 in event of partial prevention, and it is right at this point 
 that the ingenuity of the underwriter comes into play in his 
 effort to construct a form which will be clear and concise, 
 and fair both to the insured and the company. And if anyone 
 thinks it is an easy task to prepare such a form, which will 
 be free from criticism, and at the same time retain the good 
 features of the existing forms, he can soon be disillusioned 
 by making the attempt. 
 
 Many of these forms are, and all of them should be, 
 modified by prefixing the words “not exceeding” to the above 
 limits, the purpose being to prevent over-payment in event 
 of any material falling off in business activity. Some doubt, 
 however, has been expressed as to whether even these words 
 are sufficient to eliminate the valued feature. When the insur¬ 
 ance is valued, special care should be taken to guard against 
 over-insurance. 
 
 In writing this class of insurance the permits and limita¬ 
 tions usual to regular fire insurance policies (vacancy and 
 non-occupancy permits excepted) are ordinarily included in 
 the form. 
 
 11 
 
Use and Occupancy insurance is not ordinarily written 
 with a co-insurance or reduced rate average clause, but in 
 some contracts the element of full insurance, in one form or 
 another, like the traveling salesman’s suit of clothes and the 
 protective tariff, is there all the same. 
 
 The Different Contracts In Use 
 are so numerous that it will be possible to consider only a 
 few selected at random. 
 
 The following is a fair sample of one class of forms 
 quite generally used: 
 
 $.On the use and occupancy of. 
 
 .located at... 
 
 It is agreed that if by reason of fire on the above mentioned 
 premises, the assured shall be wholly prevented from producing fin¬ 
 ished goods, then this company shall be liable for an amount not ex¬ 
 ceeding $. per day for each working day from date of 
 
 said fire to date (whether the same fall within the term of this policy 
 or not) when production of such goods might, with reasonable dil¬ 
 igence, have been recommenced. But if the normal production be 
 diminished only, then shall this company be liable for that proportion 
 of said per diem in which such production is diminished, it being un¬ 
 derstood that under no circumstances shall this company be liable in 
 the aggregate for more than the amount of this policy. 
 
 In case of stoppage of production by fire, as above specified, the 
 average daily production of the twelve months immediately preceding 
 the fire, shall, for the purpose of this policy, be assumed to be the 
 normal daily production. 
 
 In the first place, the words “producing finished goods” 
 should be amended by eliminating the word “finished,” if for 
 no other reason than that set forth in the incident to which 
 reference has been made. 
 
 It will be noticed that for total prevention, the limit of 
 liability is fixed at not exceeding a certain amount per day, 
 but no provision is made for ascertaining the actual loss per 
 day. The reference to the normal daily production has to do 
 only with the basis of settlement for partial prevention. If 
 therefore, for some time previous to the fire, the plant had 
 been producing much less than its normal output, the ques¬ 
 tion which naturally presents itself is, what would be the per 
 diem loss under the policy for total prevention? Would set¬ 
 tlement be based on the output at the time of the fire, the 
 average daily production for the preceding twelve months, or 
 the maximum capacity of the plant irrespective of the actual 
 record previous to or at the time of the fire? I am inclined 
 to think that in the absence of a provision to the contrary, 
 the insured could enforce a claim on the basis of the real 
 capacity, whatever that might be, under the conditions then 
 prevailing up to the per diem limit, the same as he could col¬ 
 lect full rental value, whatever that might be, up to the limit 
 under a rental value policy. 
 
 According to this view the words “not exceeding” would 
 lose much of their force, but conditions might arise where this 
 limiting provision would be very important. It might, more- 
 
 12 
 
over, be possible for the insurer to prove that under the con¬ 
 ditions prevailing, neither the maximum nor the average 
 capacity could have been maintained even if the fire had not 
 occurred and that this might affect the value of the use and 
 occupancy. 
 
 If, at the time of the fire, the plant should be running at 
 a capacity much in excess of normal, it is easily conceivable 
 that a severe fire might reduce the capacity considerable, but 
 not below normal, in which event there could be no claim 
 under such a form. And conversely, if at the time of the fire 
 the output should be much less than normal, the insured 
 might be correspondingly benefited. It follows, of course, 
 that a form which is capable of producing these results, is 
 not free from criticism. 
 
 It has, however, several points in its favor. It has a limit 
 of liability in event of total prevention; it affords an absolute 
 basis for settlement in case of partial prevention, and pro¬ 
 vided the per diem limit is not exceeding 1/300 of the amount 
 of the policy, and not less than the normal average yield for 
 the preceding twelve months, it saves to the company the ele¬ 
 ment of full insurance and the advantages to be derived there¬ 
 from, which is something that both parties to the contract 
 doubtless have in contemplation when the policy is written. 
 This form, notwithstanding its defects, is quite as fair to the 
 insured as it is to the company, for the former knows at all 
 times how the business is running and can regulate his insur¬ 
 ance accordingly, while the latter knows nothing until after 
 a loss has occurred. 
 
 The following form, from which I have eliminated the 
 word “finished,” is in use by a prominent company: 
 
 $.On the use and occupancy of. 
 
 .Manufacturing Buildings situate at. 
 
 and known as. 
 
 The conditions of this contract of insurance are, that if any of 
 the buildings used for manufacturing purposes, or machinery therein, 
 shall be so disabled by fire occurring during the term and under the 
 conditions of this policy, that the assured are entirely prevented from 
 producing goods, then this Company shall be liable for an amount not 
 
 exceeding . dollars per day for each working day of 
 
 such prevention ; and in case said buildings, or machinery therein, are 
 so disabled by fire as to partially prevent the production of goods, this 
 Company shall be liable per day for not exceeding that proportion of 
 
 .dollars which the product so prevented from being 
 
 made bears to the average daily yield previous to the fire, which for 
 the purposes of this insurance is agreed to be the full daily average 
 
 for.working days immediately preceding the fire, 
 
 not exceeding in either case the amount insured. 
 
 It Will Be Noticed 
 
 that there is practically no difference between this form and 
 the one first considered in regard to total prevention, but there 
 is quite a radical difference in respect of partial prevention. 
 The first makes the “normal production” the absolute basis 
 of settlement in event of partial cessation. The second form 
 
 13 
 
docs not make the “normal production” or the “average daily 
 yield” the absolute basis of settlement, but simply utilizes the 
 average daily yield previous to the fire as one element in 
 determining the proportion of the per diem limit in event of 
 partial prevention. 
 
 Under the first form, the- “normal production,” 
 
 i. e., the average daily production of the twelve months im¬ 
 mediately preceding the fire, would be the basis, and if, as has 
 been pointed out, the actual production after the fire equals 
 or exceeds the “normal production,” there would be no diminu¬ 
 tion of the agreed production, even though there may be quite 
 a diminution in the actual production as the result of the fire. 
 
 Under the second form, the actual productive power at 
 time of the lire would be the basis, and the partial prevention 
 percentage would be determined by the relative conditions 
 which prevail at the time of and after the fire, taken in con¬ 
 nection with the average daily yield prior to the fire. This 
 may not be quite so easy of ascertainment, but the settlement 
 will be fair to the insured in each and every instance. It is 
 easily conceivable that under this form, a claimant might 
 under certain conditions be able to collect the full per diem 
 limit in case of partial prevention. This might happen in 
 event of a partial shut down as the result of a very severe 
 fire when the plant was running greatly in excess of its av¬ 
 erage capacity, for the figures might show a partial preven¬ 
 tion equal to or in excess of the previous average daily yield, 
 and this would, of course, call for the payment of the full per 
 diem limit. This, however, is the natural sequence in all cases 
 of under insurance, in the absence of co-insurance or average 
 conditions. 
 
 On the other hand, in event of business depression, re¬ 
 sulting in production falling below the average for the pre¬ 
 ceding year or agreed period, the amount collectible under 
 the second form might be less than that collectible under the 
 first. 
 
 It is quite apparent that in this latter form, the element 
 of full insurance, which is supposed to be embodied in use 
 and occilpancy policies, is lost to the company by reason of 
 the condition relating to partial prevention and the insured 
 in many instances may be correspondingly benefited. 
 
 This form might possibly be improved in thought, if not 
 in diction, by changing the phraseology so as to make it read: 
 
 “This Company shall be liable per day for no greater proportion 
 
 of not exceeding.dollars than the product so prevented 
 
 from being made bears to the average daily yield previous to the fire.” 
 
 As it now reads, the limit for total prevention is “not 
 
 exceeding.dollars per day”—while the basis 
 
 for partial prevention is a certain proportion of an absolute 
 fixed amount. 
 
 
 14 
 
Another Form In Common Use 
 
 provides that the company shall be liable for such proportion 
 of the actual loss of net earnings ensuing from the use and 
 occupancy of the premises as the amount insured bears to the 
 total yearly net earnings based upon the daily average net 
 earnings immediately preceding the fire. It also provides for 
 the ascertainment of net earnings by deducting all manu¬ 
 facturing expenses from the total sales. 
 
 All the forms of this nature which have come to my at¬ 
 tention are ambiguous in expression, but the intent is evident. 
 This is the narrowest form of use and occupancy insurance, 
 in that it embraces only one element, to wit, net profits. It 
 has, however, the merit of including in its provisions the prin¬ 
 ciple of the one hundred per cent, average clause, and if the 
 cover were broadened—as it might easily be—and the phra¬ 
 seology improved, it would make one of the fairest conceivable 
 forms both to the insurer and the insured. 
 
 The name “Use and Occupancy” is not a particularly 
 happy one, and many attempts have been made to find a more 
 satisfactory term to express the idea. The latest suggestion 
 is “Business Interruption Indemnity” and a prominent com¬ 
 pany has evolved a form from which the following paragraphs 
 are taken : 
 
 “It is understood and agreed that the term ‘use and occupancy,' 
 as herein used, shall he construed to mean net profits ; general main¬ 
 tenance, to the extent of taxes, heating and lighting; and legal liability 
 of assured for royalties and salaries and wages of employees under 
 
 contract, as follows:. 
 
 .And if by fire occurring during the period 
 
 of time named herein, the ability to produce the full daily average of 
 goods be impaired, but not destroj^ed, then shall this company be liable 
 per day for said actual loss sustained, in such proportion of a sum 
 
 not exceeding $. as the product so prevented from 
 
 being made bears to the full daily average product, it being under¬ 
 stood and agreed that for the purpose of this insurance the average 
 daily product for the twelve months next preceding date of fire will 
 be considered the full daily average product.” 
 
 The idea of explaining in the form just what is meant 
 by use and occupancy, and taking net profits as a basis and 
 adding thereto various items of continuing expense, is a most 
 excellent one. This may not embrace all the items which cer¬ 
 tain applicants may desire, but any omissions can be easily 
 supplied. 
 
 As under one of the other forms referred to, however, 
 the company might in certain circumstances, be called upon 
 to pay the full per diem limit for partial prevention. 
 
 In Adopting a Name for Use and Occupancy Insurance, 
 
 the originators probably had in mind only the occupancy of 
 the buildings of a manufacturing plant and the use of the 
 machinery and tools therein. Many forms still restrict the 
 insurance to buildings and machinery, while others include 
 stock and still others use the broader term “contents.” It has 
 
 15 
 
been suggested that such a form might include the profit on 
 manufactured stock when it provides for indemnity in case 
 the insured is prevented from “carrying on his business” as 
 distinguished from “producing goods,” the theory being that 
 the only “use” a manufacturer has for finished goods “in 
 carrying on his business,” is to sell them and make a profit 
 thereon. In fact, this is the exact praseology used in connec¬ 
 tion with insurance on department stores and other non-manu¬ 
 facturing property, the main feature of which is profit on 
 sales. These words should not be used in policies covering 
 manufacturing risks, and profits on manufactured goods 
 should be insured as such. 
 
 Raw material and constituent parts which come under 
 the general description of stock are important elements in 
 manufacturing, and the destruction of some ingredient or part 
 might interfere very materially with the entire process, just 
 as effectually as the burning of the picker room of a cotton 
 mill or the power house of any plant; hence, raw stock as a 
 factor in production, is a perfectly legitimate item in connec¬ 
 tion with this class of insurance. 
 
 Although use and occupancy insurance is most frequently 
 written to cover manufacturing risks, yet it is used in con¬ 
 nection with department stores, mercantile risks and other 
 property of a non-manufacturing nature. When written on 
 mercantile risks the forms are varied somewhat, the phrase 
 “producing goods” giving way to “transacting their business” 
 and the expression “production of goods” to “gross sales.” 
 In other respects, the phraseology is very much the same as 
 that used in connection with manufacturing risks. 
 
 The Most Remarkable and Ingenious Form 
 
 which has come to my attention has recently made its ap¬ 
 pearance. It covers the use and occupancy of a department 
 store, mentioning building and contents, and has a tabulated 
 sliding scale agreement fixing the basis of per diem liability 
 for each month in the year, said liability for prevention during 
 each of the respective months (varying as such month may 
 be the first, second, third, etc., up to the twelfth), of total or 
 partial prevention. 
 
 It also provides that the policy shall pay such proportion 
 of the per diem limits named, as the amount of the policy 
 bears to a stated amount, say $50,000.00, this being the max¬ 
 imum amount payable even if the period of prevention should 
 be the full twelve months. This feature on its face looks 
 good, but according to the table, if a fire should occur, say on 
 the first day of the busiest month, causing total prevention 
 for one month, the loss to the companies would be about 
 22%; for two months 37%; for three months 50%, and for 
 six months the insurers might possibly have a loss of 85%. 
 These results are about the same as they would be under an 
 ordinary policy where the insurance carried amounts to from 
 
 16 
 
forty to sixty per cent, of the value; hence, that which at 
 first glance has every appearance of being full insurance, or 
 over insurance, operates practically, under the conditions of 
 the contract, as very pronounced under insurance. 
 
 The Question Is Frequently Asked— 
 
 what period preceding the fire should be taken as the basis 
 of adjustment in case of partial prevention? Some forms 
 provide for settlement on the basis of the average daily yield 
 for three hundred working days immediately preceding the 
 fire; some on the basis of the average daily yield for the 
 previous six months, and some for the previous three months; 
 some from the time the policy is issued until the date of the 
 fire; some for the corresponding season in the twelve months 
 immediately preceding the fire, and some on the basis of a 
 stated amount. 
 
 It might be supposed that the greater the normal or av¬ 
 erage daily yield for the agreed period preceding the fire, the 
 better it would be for the insured, and conversely, the less 
 the normal or average daily yield, the better it would be for 
 the insurer. Under one class of forms which we have been 
 considering, this conclusion is correct, but under another, 
 just the reverse is true. Therefore, a broker or agent who is 
 desirous of adopting a basis which will be most advantageous 
 to his client, would do well to first consider the form in con¬ 
 nection with its relation to partial prevention, for that is 
 where the difference lies. 
 
 Several attempts have been made on the part of com¬ 
 panies to adopt a standard form or set of forms for use and 
 occupancy insurance, but all efforts in this direction have 
 failed, probably for the same reason that this is apparently 
 impossible of accomplishment in respect of other classes of 
 insurance. In the first place, the peculiar conditions con¬ 
 nected with one man’s business differ materially from those 
 surrounding the business of another, and different forms are 
 needed to meet their respective requirements; and further¬ 
 more, standard forms which might meet the needs of a large 
 majority of use and occupancy insurers much better than the 
 miscellaneous aggregation now in use, would interfere with 
 the ingenuity of the broker, for, as one star differeth from 
 another in glory, so does one broker’s form differ from that 
 of his rival in point of desirability, in his own opinion at 
 least, although this opinion is ofttimes subject to revision 
 after a loss has occurred. 
 
 Inasmuch as the only courts which have rendered any 
 decisions bearing on the subject of Use and Occupancy insur¬ 
 ance, have declared that it does not cover profits nor fixed 
 charges, and one has gone so far as to say that profits, which 
 are always an uncertain element and speculative to a certain 
 extent, do not even form any basis for calculating the market 
 
 17 
 
_ 
 
 value of the use and occupancy of a plant (Tannenbaum vs. 
 Simon, 81 N. Y. Supp., 655), it would seem desirable to have 
 the form clearly set forth exactly what is intended to be 
 covered. 
 
 The Court of Appeals, in the Michael case, very properly 
 said that the defendant might have avoided all questions of 
 construction if it had plainly stated that the business of the 
 plaintiff, or its earnings or profits, was the subject of insur¬ 
 ance instead of using such a vague term as Use and Occu¬ 
 pancy. Although the subject has engaged the attention of 
 some of the best minds in the business, 
 
 The Ideal Form Has Not Yet Been Prepared. 
 
 Virtually all of those in current use contain some excellent 
 features, and unless there is some material increase or decrease 
 in the business activity of the insured, adjustments made 
 thereunder ought to be reasonably satisfactory to all parties 
 in interest. 
 
 
 18 
 
The Interest of a Mortgagee under a 
 
 Policy of Fire Insurance 
 
 A LECTURE 
 
 DELIVERED BEFORE 
 
 The 
 
 Fire Insurance Society 
 
 of Philadelphia 
 March 19tli, 1917 
 
 BY 
 
 W. N. BAMENT 
 
 General Adjuster 
 
 (®ej 
 
 THE HOME INSURANCE COMPANY 
 
 NEW YORK 
 
The Interest of a Mortgagee Under 
 a Policy of Fire Insurance 
 
 m _ 
 
 William N. Bament, General Adjuster 
 The Home Insurance Company, New York 
 
 When it is considered that fully sixty per cent, of all 
 the real estate in this country is encumbered to a greater or 
 less extent by mortgage, and that the lenders of money thereon 
 almost invariably insist upon having the improvements cov¬ 
 ered by policies of fire insurance, payable to them as collateral 
 security, it is at once apparent that the subject of this address 
 is one of exceedingly great interest to the vast number of 
 corporations and individuals who loan money on real estate 
 and of scarcely less interest to the underwriters who issue 
 policies thereon. 
 
 It has been the aim of insurance companies to meet the 
 peculiar requirements of these mortgagees in respect of insur¬ 
 ance, by giving them special forms of contract, exceedingly 
 liberal in their terms; and in so doing they have, in some 
 instances, gone to unreasonable lengths and far beyond what 
 was originally contemplated in protecting said interests. And 
 in the light of the interpretations which have been placed upon 
 the provisions in favor of the mortgagees, it will be perfectly 
 safe to say that if there is a more highly favored party to any 
 contract than a mortgagee under a policy of fire insurance, he 
 has not yet been discovered. Whenever he has asked he has 
 received, whenever he has sought he has found and whenever 
 he has knocked it has been opened unto him either by the 
 insurers themselves or by the courts, for what the former 
 have omitted the latter have supplied. 
 
 In Maine, Massachusetts, Mississippi and North Carolina, 
 the mortgagee has, by statute, under certain conditions, a lien: 
 against the insurance money due the mortgagor. In Louisiana 
 a clause is used, making loss, if any, payable to the holder or 
 holders of the mortgage notes. In New York City the loss is 
 made payable to the original mortgagee, or the owner of the 
 mortgage at the time of the fire, the former, however, agree¬ 
 ing upon request to inform the insurer of the name and ad- 
 
 1 
 
dress of the party to whom it may have been assigned. In 
 New England the loss is made payable to the mortgagee as 
 his interest may appear under present and all future mortgages 
 covering the premises. In the West the loss is made payable 
 to the mortgagee or his assigns. In Canada the policy is 
 continued in force for the benefit of the mortgagee after ex¬ 
 piration, and until the mortgagee or the insurer serves notice 
 of cancellation; the mortgagee, however, being liable for the 
 premium for the extended period. In Mississippi the stand¬ 
 ard mortgagee clause is written into the policy by operation 
 ■of law. Sec. 2596 of Code—Bacot vs. Phenix Ins. Co., 96 
 Miss. 223, 50 So. Rep. 729. 
 
 If a mortgage contains an agreement that the mortgagor 
 shall keep the mortgaged property covered by insurance for 
 the benefit of the mortgagee, and for any reason he fails to 
 have the loss made payable to him, the mortgagee has an 
 equitable lien against any insurance that the mortgagor may 
 have, and if the insurer receives notice of such lien before 
 making payment he will ignore it at his peril. Wheeler vs. 
 Insurance Co., 101 U. S. 439; Aetna Ins. Co. vs. Thompson, 
 68 N. H. 20, 40 Atl. 396; Swearingen vs. Hartford Eire Ins. 
 Co., 52 S. C. 309, 29 S. E. 722, 56 S. C. 355, 34 S. E. 449. 
 
 In several states it has been held that the short form 
 “loss payable” clause is nothing more or less than an uncon¬ 
 ditional agreement to pay the mortgagee in event of loss, and 
 if there are any privileges and advantages he does not possess, 
 it is either because he has not yet thought of them or has not 
 ■demanded them. And more remarkable still is the fact that 
 for all this the mortgagee pays nothing whatever. He gets 
 without money and without price a contract which the mort¬ 
 gagor or owner of the best risk in the land cannot buy at any 
 price. 
 
 The mortgagee, however, is entitled to absolute protec¬ 
 tion from acts and conditions outside his knowledge and 
 beyond his control, and if the insurer is willing to grant this 
 protection without extra premium, no criticism can attach to 
 the mortgagee if he gracefully accepts the benefits thus gen¬ 
 erously bestowed. In fact, the writer entertains the hope, 
 perhaps a forlorn one, that some time he himself may emerge 
 from his normal condition of mortgagor and become a mem¬ 
 ber of the mortgagee class with its attendant benefits. 
 
 In the year 1858 the large insurance companies and other 
 loaning institutions received quite a severe shock and rather 
 a rude awakening by two decisions which were handed down 
 4>y the Court of Appeals of New York. Prior to that time, 
 hy reason of decisions rendered in 1832 and 1851, it had been 
 their custom to accept fire insurance policies as collateral 
 security with the short form clause “Loss, if any, payable to 
 
 .. mortgagees as their interest may 
 
 appear,” or to have the policies assigned to them for collateral 
 purposes with the consent of the insurers, in the belief that 
 
 2 
 
their interests could not be adversely affected by any act or 
 neglect on the part of the mortgagor or owner. 
 
 The decisions referred to are Grosvenor vs. Atlantic Fire 
 Insurance Co. (17 N. Y. 391) and Buffalo Steam Engine 
 Works vs. Sun Mutual Insurance Co. (17 N. Y. 401). The 
 former was a case involving the “loss payable” clause and the 
 latter one involving an assignment of the policy to the mort¬ 
 gagee, the Court in both instances holding that the mortgagee 
 was merely the appointee of the party insured, to receive the 
 money which might become due him from the insurers upom 
 the contract; that the “loss payable” provision in the policy 
 in favor of the mortgagee had no more effect upon the con¬ 
 tract than it would if it had provided that the loss for which 
 the insurer should become liable should be deposited in a 
 specified bank to the credit of the party insured. The rule of 
 construction thus adopted by the New York Court was fol¬ 
 lowed in other jurisdictions and naturally spread consterna¬ 
 tion among the large lenders of money on real estate, because 
 the security, which they had hitherto regarded as absolute, 
 was by these sweeping decisions found to depend upon con¬ 
 ditions of which they had no knowledge and over which they 
 had no control. This situation was of course intolerable and 
 it became necessary for mortgagees either to take out special 
 policies of insurance covering their mortgage interests or 
 secure some special form of contract in their favor to attach 
 to the policies of the property owners. The outcome was the 
 adoption of a special mortgagee agreement, substantially the 
 same as the present standard mortgagee clause, which, how¬ 
 ever, did not come into general use until some years later. 
 
 In the year 1886 the New York Standard Fire Insurance 
 Policy was adopted by the legislature of that state, together 
 with a number of permissible riders, among which were three 
 mortgagee agreements, one known as the “New York Stand¬ 
 ard Mortgagee Clause without Contribution,” another the 
 “New York Standard Mortgagee Clause with Full Contribu¬ 
 tion” and a third the “New York Standard Mortgagee Clause 
 when owner has no interest in the insurance.” The first two 
 are exactly the same in phraseology, except that one contains 
 the contribution clause, which reads as follows: 
 
 “In case 6f any other insurance upon the within described prop¬ 
 erty, this Company shall not be liable under this policy for a greater 
 proportion of any loss or damage sustained than the sum hereby in¬ 
 sured bears to the whole amount of insurance on said property, issued 
 to or held by any party or parties having an insurable interest therein, 
 whether as owner, mortgagee or otherwise.” 
 
 This contribution clause has been the subject of two 
 leading cases of absorbing interest in insurance litigation, to 
 which attention will be directed later. 
 
 Two of these mortgagee clauses provide that the interest 
 of the mortgagee shall not be invalidated by any act or neglect 
 of the mortgagor or owner, nor by foreclosure proceedings. 
 
 3 
 
change of title or ownership, or increase of hazard, provided 
 the mortgagee shall notify the company of such changes or 
 increase in hazard as may come to his knowledge, and pay 
 premium therefor and provided also that the mortgagee shall 
 pay the premium in event of default by the owner; also for 
 cancellation and for subrogation in event of non-liability to 
 the mortgagor or owner. 
 
 The third mortgagee clause is intended for use where the 
 policy is issued direct to the mortgagee covering his interest 
 only, and contains a provision for subrogation. This latter 
 clause is seldom used, but if a policy is issued direct to the 
 mortgagee, he is “the insured” and is bound by all the terms 
 and conditions of the policy. 
 
 The New York Standard Policy and its collateral agree¬ 
 ments have been formally adopted by a number of other states 
 either verbatim or with slight modifications, while others 
 have adopted standard forms differing materially therefrom, 
 but it is safe to say that in all the United States, aside from 
 those which have standard policies of their own, fully seventy- 
 five per cent, of the policies issued are the New York Stand- 
 raT.d. It would seem that this approach to uniformity in con¬ 
 tract should be attended with something approaching uniform¬ 
 ity in court decisions, but such is not the case, because the 
 -courts of the various states differ with each other on many 
 points and the federal courts have differed radically with the 
 New York Court of Appeals in the interpretation of several 
 wery important conditions, one of which bears directly upon 
 the interest of the mortgagee. 
 
 The storm center of most of the litigation which has 
 taken place in connection with the interest of the mortgagee 
 is to be found in lines 56 to 59 of the policy, which read as 
 follows: 
 
 “If, with the consent of this company, an interest under this policy 
 shall exist in favor of a mortgagee or of any person or corporation 
 having an interest in the subject of insurance other than the interest 
 of the insured as described herein, the conditions hereinbefore contained 
 shall apply in the manner expressed in such provisions and conditions 
 of insurance relating to such interest as shall be written upon, attached 
 or appended hereto.” 
 
 This paragraph has been to some courts a stumbling 
 block and to others foolishness, and if it were not in the 
 policy, or if the intention of its authors had been more 
 •clearly expressed, much of the litigation which has taken 
 place would have been avoided. 
 
 There are three leading cases involving the question of 
 contribution under the mortgagee clause, two by the New 
 York Court of Appeals and one by the United States Circuit 
 Court of Appeals. 
 
 The first is that of Hastings vs. Westchester (73 N. Y. 
 141) decided by the New York court in 1878. One policy, 
 .the Westchester, was issued to the owner with loss payable 
 
 4 
 
to the mortgagee; the other, the Lycoming, was issued to 
 the insured with loss payable to himself. The mortgagee 
 clause itself did not contain any provision for contribution, 
 and the company relied upon the contribution clause in the 
 printed conditions of the policy. Suit was brought against 
 the Westchester by the mortgagee, who claimed the full 
 amount of loss from that company. The court held that by 
 reason of the mortgagee clause, the policy operated as an 
 independent insurance of the mortgagee’s interest and that 
 the Westchester was liable for the full amount of the loss, 
 but was entitled to subrogation, for what it might be worth, 
 to the extent of the excess which it was compelled to pay 
 over and above its pro rata liability to the insured. Whether 
 the Westchester, by reason of its subrogation rights, could, 
 for its indemnity, have any recourse against the proceeds of 
 the policy in the Lycoming Insurance Company was a ques¬ 
 tion which the court did not feel called upon to decide, and 
 no court has attempted to do so since. The question did not 
 come up again for sixteen years, but in the same month of 
 the same year, to wit: October, 1894, the New York Court 
 of Appeals decided the case of Eddy vs. London Assurance 
 Corporation et al. (143 N. Y. 311) and the United States 
 Circuit Court of Appeals rendered its decision in the case of 
 Williams, Trustee, vs. Hartford Fire Insurance Co. (63 Fed. 
 925), both involving the question of contribution under the 
 mortgagee clause. 
 
 It will be remembered that in the case of Hastings vs. 
 Westchester the mortgagee agreement did not contain the 
 contribution clause. In the Eddy case some policies contained 
 the mortgagee clause with full contribution and some con¬ 
 tained the clause without contribution, while others were 
 payable direct to the insured. In the Williams case the 
 policy contained the mortgagee clause with full contribution 
 so that, with respect to the clause with full contribution, the 
 two cases were on all fours with each other, yet these two 
 courts of last resort reached diametrically opposite con¬ 
 clusions, neither knowing the views of the other. 
 
 The lines of reasoning adopted by these eminent tribunals 
 in reaching their respective decisions will be found interest¬ 
 ing. The New York Court said that the words “the interest 
 of the mortgagee shall not be invalidated” should not be 
 given a narrow, but on the contrary, a broad interpretation, 
 and meant that the interest of the mortgagee should not be 
 injuriously impaired or affected by the act or neglect of the 
 owner; that in order to constitute double insurance, the poli¬ 
 cies must cover the same interest in the same property. or 
 some part thereof; that although the contribution provision 
 was inserted as a part of the mortgagee clause, and called 
 for contribution from the whole insurance on the property 
 held by any party or parties having an insurable, interest 
 therein, whether as owner, mortgagee or otherwise, this 
 
 5 
 
provision was inconsistent with the primary promise that the 
 interest of the mortgagee should not be impaired by the act 
 or neglect of the owner and that the primary promise must 
 prevail. The court admitted that this view might not give 
 full effect to the strict language of the contribution clause, 
 but held that taking the contract as a whole, it was unreason¬ 
 able to suppose that the parties intended to permit the interest 
 of the mortgagee to be adversely affected by the secret act 
 of a third party, and that the contribution clause must be 
 limited in its operations to the insurance held by or con¬ 
 sented to by the mortgagee. 
 
 The Federal Court, in its decision, said that the particular 
 language employed in the mortgagee clause respecting con¬ 
 tribution, seems to have been inserted for the express purpose 
 of making it clear that the mortgagee’s policy was entitled 
 to pro rate with all policies covering the property which at 
 the time of the loss might be held by any person whomsoever 
 had an insurable interest in the property. In the absence 
 of the words “issued to or held by any party or parties having 
 an insurable interest therein,” it might no doubt be fairly 
 argued that it was simply the intention of the parties to 
 reserve the right to pro rate with other policies procured 
 by the mortgagee for the protection of his interest, but the 
 use of the words quoted rendered that construction inad¬ 
 missible. Those words appear to have been added out of 
 abundant caution that there might not be any room for doubt 
 on the subject. The court further said that it would not be 
 justified in ignoring an agreement in one part of the instru¬ 
 ment, which is as clearly expressed as language could well 
 express it, merely because it limits to some extent the scope 
 of general language employed in another part of the instru¬ 
 ment. It further surmised what is undoubtedly true, that 
 the contribution clause was phrased precisely as it is, and 
 inserted as a part of the mortgagee clause itself for the pur¬ 
 pose of remedying the defect brought out in the case of 
 Hastings vs. Westchester, and for the sole purpose of secur¬ 
 ing the contribution which was denied in that case. 
 
 Two courts of such prominence having differed with 
 each other, the question which naturally presents itself is, 
 which is the better law ? Although the mortgagee should 
 have absolute protection in the matter of his insurance, un¬ 
 affected by the acts of omission or commission on the part 
 of third persons, and while it is true that under the inter¬ 
 pretation placed upon the contribution clause by the Federal 
 Court, his interest might in certain circumstances be very 
 materially impaired, yet, to use a favorite expression of the 
 judiciary, it is the province of the courts to construe con¬ 
 tracts, not to make them, but it seems that the New York 
 Court of Appeals in the Eddy case went out of its way to 
 amend the existing contract by virtually eliminating there¬ 
 from the words “issued to any party or parties having an 
 
 6 
 
f 
 
 insurable interest therein/’ There is no ambiguity, no lan¬ 
 guage could be plainer and it is impossible to conceive of any 
 object that the parties could have had in using those words 
 other than to avoid the very construction of the clause which 
 the Court of Appeals adopted. 
 
 The Federal decision was legally sound, but the contri¬ 
 bution provision contained in the standard mortgagee clause 
 is not fair to the mortgagee, and it should be amended so as to 
 permit contribution from those policies only, which are pay¬ 
 able to, held by or consented to by the mortgagee; for other¬ 
 wise he will not, in many instances, have the security to 
 which he is justly entitled. 
 
 A short time after the standard policy went into general 
 use, the insurance companies and the framers thereof received 
 about as great a shock as the mortgagees had received years 
 before, the occasion being a remarkable decision rendered by 
 the Supreme Court of Nebraska in the case of Oakland Home 
 Ins. Co. vs. Bank of Commerce (47 Neb. 717), in which it 
 was held that under the short form “loss payable” clause, 
 the mortgagee is not bound by any of the conditions of the 
 policy whatsoever. According to the interpretation placed 
 by the court upon lines 56 to 59, if the company desired any 
 of the policy conditions to apply to the interest of the mort¬ 
 gagee, it would be necessary for those conditions to be spe¬ 
 cially written upon, attached or appended to the rider, and 
 inasmuch as no conditions were so appended, or included in 
 the “loss payable” clause, the mortgagee virtually possessed 
 an unconditional contract, and in the absence of fraud on his 
 part the company had no alternative but to pay the loss. 
 The court commenting upon lines 56 to 59 used the following 
 language: 
 
 “And even if there be doubt as to the correctness of this con¬ 
 struction, there is some satisfaction in the fact that an insurer who 
 puts such a nondescript provision into, his policy should hardly be 
 heard to object to any kind of construction which any one chooses 
 to give it.” 
 
 Six other states, to wit: Mississippi, Iowa, Washington, 
 Missouri, California and Ohio have rendered similar decisions. 
 Several judges dissented and Mr. Freeman, the learned anno¬ 
 tate^ says that these cases go to the extreme, if not ques¬ 
 tionable, limit, in upholding the rights of the mortgagee, 
 where there is no clause in the policy securing the mortgagee 
 against any act or neglect of the mortgagor—East vs. New 
 Orleans Ins. Assn. 76 Miss. 697, 26 So. Rep. 691; Christenson 
 vs. Fidelity Ins. Co. 117 Iowa 77, 90 N. W. 495, 94 Am. St. 
 Rep. 286; Boyd vs. Thuringia Ins. Co. 25 Wash. 447, 65 Pac. 
 785, 55 L. R. A. 165; Senor et al. vs. Western Millers Mut. F. 
 Ins. Co. 181 Mo. 104, 79 S. W. 685, 33 Ins. Law Journal 455; 
 Welch vs. British America Assur. Co. (Cal.) 82 Pac. 964; 
 Farmers Natl. Bank vs. Delaware Ins. Co. (Ohio) 83 O. S. 
 309, 40 Ins. Law Journal 1248. 
 
 7 
 
According to these decisions it is quite evident that in 
 those particular states the short “loss payable” clause is much 
 more favorable to the mortgagee than the standard mortgagee 
 clause itself, for the latter does reserve some few rights to 
 the insurer, while the former reserves none. 
 
 Various suggestions have been made as to how the “loss 
 payable” clause should be amended so as to meet the condi¬ 
 tions brought about by these decisions, and in this connection 
 it is important to note that in none of the cases referred to 
 did the clause contain any reference to the conditions of the 
 policy. 
 
 The following has been suggested: “Loss, if any, payable 
 to...mortgagee, as interest may appear, sub¬ 
 
 ject, nevertheless, to all the conditions of this policy,” but 
 this has been objected to on the ground that on its very face 
 it creates a distinct contract with the payee, which it is 
 desirable to avoid, and the answer to this criticism is that 
 the several courts, whose opinions we have been considering, 
 have practically decided that lines 56 to 59 of the policy have 
 that effect as soon as a “loss payable clause” is placed on the 
 policy. And, although a mortgagee under the “loss payable” 
 clause is not an “insured,” yet the New York Court of Appeals 
 has ruled that he is bound by all the policy conditions prior 
 to line 56, but is not bound by those after line 60. MacDowell 
 vs. St. Paul F. & M. Ins. Co., 207 N. Y. 472. And all courts 
 without exception which have passed on the question (and 
 they are numerous) have held that the mortgagee, payee, is 
 entitled to notice of cancellation. 
 
 Another objection is that by making the policy subject 
 to all the conditions of the policy, we simply reaffirm lines 
 56 to 59, which brings us back to where we started from. 
 It is possible, however, that under the form suggested the 
 courts might, notwithstanding, render their decisions in ac¬ 
 cordance with the manifest intention of the parties. 
 
 Another suggestion is: 
 
 “Any loss which may be ascertained to be due the assured under 
 
 this policy, shall be held payable to.as interest may 
 
 appear. It being understood and agreed that there is no contract under 
 
 this clause or policy with.except as relating to the 
 
 payment of money due the assured.” 
 
 And still another is: 
 
 “Loss, if any, payable to.as interest may appear. 
 
 This endorsement shall be held to vest in said payee no right or 
 interest in this insurance save as the appointee to receive the amount, 
 if any, which may become due the assured hereunder, in the event of 
 loss, any condition of the policy to the contrary notwithstanding.” 
 
 The latest suggestion is as follows: 
 
 “It is hereby agreed that such loss or damage as shall have been 
 ascertained and proved to be dud under all the conditions of the within 
 
 policy to..(which conditions are hereby by reference 
 
 incorporated into, and made applicable to the payee herein named as a 
 part of this agreement as fully as though written at length herein), 
 shall be held payable unto.” 
 
 8 
 
But no simple “loss payable” clause has as yet been 
 devised which can secure universal endorsement and at the 
 same time meet the requirements of lines 56 to 59 of the 
 standard policy as interpreted by many of the courts. 
 
 The State of California has solved the difficulty in its 
 standard policy by leaving out the paragraph contained in 
 lines 56 to 59 and this is probably the simplest and most 
 effectual way of remedying the defect. It has also been left 
 out of the new standard policies recently adopted by the states 
 of Pennsylvania, North Carolina and South Carolina. This, 
 of course, could not be done except in non-standard policy 
 states. 
 
 In striking contrast to the foregoing decisions may be 
 mentioned the case of the Atlas Reduction Co. vs. New 
 Zealand Insurance Co., decided by the United States Circuit 
 Court of Appeals, Eighth Circuit, April 24, 1905. The policy 
 covered both the realty and personalty and contained the 
 following clause: “Subject to all the conditions of this policy, 
 loss, if any, payable to G. B. Dodge and A. M. Stevenson, 
 as their interest may appear,” two mortgages, one of the 
 realty and the other of the chattels having been executed by 
 the Reduction Company. It was held that the endorsement 
 is a common method of furnishing security to a creditor, 
 but does not make a new contract with the payee, or waive 
 any policy condition; that the payees were the simple ap¬ 
 pointees of insured to receive any payment that might be 
 due to the extent of this interest; that the endorsement 
 did not give consent to a chattel mortgage to D. and S. con¬ 
 trary to a provision in the policy that it should be void in 
 case of such mortgage; that oral testimony was not admis¬ 
 sible to show that the agent intended the endorsement as a 
 consent to such mortgage; that where the entire policy, by 
 its terms, was void in case of such mortgage, there could be 
 no recovery. (Vol. 34, Ins. Law Journal, page 805.) 
 
 It will be noticed that the clause in this case contained 
 the words “subject to all the conditions of the policy,” where¬ 
 as in the other cases referred to they were omitted. The 
 prevailing opinion of justice Van Devanter and the dissenting 
 opinion of Justice Hook, with the authorities cited, are well 
 worth a careful study. 
 
 One of the most interesting questions connected with 
 this subject is whether a mortgagee under the mortgagee 
 clause is bound by the conditions of the average or co- 
 insurance clause. If he is, the adverse result to the insurers 
 on account of their inability to apply the contribution clause 
 to the mortgagee’s interest, would, by reason of the general 
 use of average or co-insurance conditions, be in a large 
 measure neutralized. 
 
 One leading authority has expressed the opinion that the 
 interest of the mortgagee cannot be affected by a co-insurance 
 clause unless it is made to appear in clear and explicit terms 
 
 9 
 
that the mortgagee agrees to be bound by the provisions of 
 the clause as a part of his contract with the' company. While 
 apparently admitting that it is a close question, this authority 
 is led to the above conclusion partly on account of the attitude 
 of the Court of Appeals in the case of Farmers Feed Co. vs. 
 Scottish Union and National Insurance Co. (173 N. Y. 241). 
 It is not contended that the questions are on all fours with 
 each other, but in view of the trend of the judicial mind as set 
 forth in the Farmers Feed Company and other cases it is 
 thought that the court would treat the interest of the mort¬ 
 gagee under the mortgagee clause as free from co-insurance 
 limitations. 
 
 Another eminent authority has expressed the opinion that 
 the mortgagee would not be bound by the co-insurance clause 
 as applied to the value of the property, and if applicable at 
 all it would apply only to the value of the mortgagee’s inter¬ 
 est, just as the co-insurance clause, under an excess floating 
 policy in practice is made to apply only to the excess value 
 and under a rent policy or use and occupancy policy to the 
 value of the inte'rest insured; in short, that the words ‘Value 
 of property” would be construed to mean “value of interest.” 
 
 According to still another authority, we are not warranted 
 in assuming or admitting that the mortgagee is exempt from 
 co-insurance conditions as applied to the value of the prop¬ 
 erty. He says that the short payee clause by itself has been 
 passed upon many times by the courts and for over fifty years 
 it has been universally held in New York, and many other 
 states, that under such a clause, although it may contain the 
 phrase “as interest may appear,” the mortgagee can recover 
 only what the 1 mortgagor would be entitled to “under the pol¬ 
 icy.” This payee clause does not purport to define the amount 
 payable to a mortgagee other than by reference to the policy 
 itself and further to declare that it shall not exceed the amount 
 of the mortgagee’s interest. The mortgagee clause gives the 
 plainest sort of notice that it is only “loss under the policy,” 
 that is to say, loss subject to the' terms and provisions of the 
 policy, that is payable to the mortgagee, with the single ex¬ 
 ception that certain classes of forfeiture are not to be exacted 
 as against the mortgagee. 
 
 Recent decisions by the highest Courts in New York and 
 New Jersey hold that the mortgagee is not bound by those 
 conditions of the policy affecting the situation after a loss 
 (lines 50 to 112), but imply that he is bound by the antecedent 
 conditions (lines 1 to 55) except as modified by the mortgagee 
 clause. The average or co-insurance clause, however, is a part 
 of the contract and when the mortgagee accepts the policy 
 with such a clause therein, it is his own voluntary act. He 
 should be as much bound by it as by the amount of the policy, 
 date of expiration and description of the property. This im¬ 
 poses no hardship upon him; his interests are not placed at 
 the mercy of third parties and the arguments which have 
 
been advanced against the operation of the 1 contribution clause 
 do not apply. He can insist upon insurance payable to him¬ 
 self being taken out equal to the stated percentage of the value 
 of the property and thereby secure absolute protection, and 
 it is the rule with certain large loaning institutions to insist 
 upon this in order to meet the necessities of each case, unless 
 they regard their security as ample without it. One excep¬ 
 tion, however, should be noted. If extraordinary improve¬ 
 ments and repairs are made to the building after a policy is 
 issued, without the knowledge of the mortgagee, thereby 
 materially increasing* the value of the property, this would 
 be an act of the owner by which the mortgagee would not be 
 bound. 
 
 We have here three different views on this subject ex¬ 
 pressed by high legal and lay authorities, but in July, 1915, 
 the Appellate Division, Second Department of the Supreme 
 Court of New York in the case of Hartwig vs. American In¬ 
 surance Co. of Newark, 46 Ins. Law Journal 455 handed down 
 a unanimous decision holding that the average or co-insur¬ 
 ance limit of liability is binding on the mortgagee and used 
 many of the arguments advanced in the view last expressed. 
 The court held that the mortgagee clause does not contain 
 the whole contract made with the mortgagee; that the amount 
 of insurance agreed to be paid by the insurer is not a condi¬ 
 tion, but an integral part, of the policy, limiting its liability, 
 as to any one, to the proportion of the loss it undertakes and 
 agrees to pay. It further held that the 1 legal effect of the 
 standard average clause is to make the liability of the insurer 
 the same as if the words in the policy “to an amount not ex¬ 
 ceeding $1500.00,” together with the 80 per cent, average 
 clause, had been omitted from the policy, and in lieu thereof 
 had been written the words “to an amount not exceeding the 
 sum of $1500.00 if such direct loss or damage equals 80 per 
 cent, of the actual cash value of the property insured at the 
 time such loss shall happen, and, if not, such proportion of any 
 loss or damage to the property described herein as such sum 
 of $1500.00 bears to 80 per cent, of the actual cash value of 
 said property at the time of such loss.” The case has been 
 appealed and the decision of the Court of Appeals is now 
 awaited. 
 
 In the City of New York, probably on account of the 
 decision in the Eddy case, (supra), the use of the mortgagee 
 clause with full contribution see'ms to have fallen into disuse 
 and to have been superseded by the clause without contribu¬ 
 tion. The question, therefore, arises whether in the state of 
 New York, in view of the decision of the Court of Appeals, 
 the contribution clause possesses any virtue whatever and 
 whether, as a practical proposition, it makes any difference 
 which of the two clauses is used. Seventy-five years ago the 
 contribution provision now contained in the printed condi¬ 
 tions of all fire insurance policies, had not come into general 
 
use, and in event of partial loss, a claimant could, if he desired, 
 collect the entire amount of his loss from any one of his in¬ 
 surers, not exceeding, of course, the amount of its policy, and 
 that company would look to the other companies for their 
 pro rata proportion of the claim. We have seen that in the 
 Hastings case the mortgagee is not bound by the* contribution 
 clause in the policy and in the Eddy case that the contribution 
 clause in mortgagee agreement applies only to policies payable 
 to the mortgagee or consented to by him. In the Heilbrunn 
 case, we find that the contract, so far as the mortgagee is 
 concerned, stops at line 59 and that the succeeding conditions, 
 among which the contribution clause appears, is not binding 
 upon him. If, therefore, there is no contribution provision 
 in the mortgagee clause and the mortgagee should desire to 
 collect the entire amount of his loss from any one of his 
 insurers, there would seem to be nothing to prevent his doing 
 so, although he would hardly care to exercise this right unless 
 some of his insurers should, by reason of a severe conflagra¬ 
 tion or otherwise, become insolvent. This is a somewhat 
 remote contingency, although large conflagrations are occur¬ 
 ring with too great frequency and it is simply mentioned as 
 one of the possibilities under the mortgagee clause which 
 does not contain the contribution provision. 
 
 That the interest of the mortgagee is quite a live question 
 is evidenced by the fact that the' September, 1911, issue of the 
 “Insurance Law Journal” reported three cases and the Octo¬ 
 ber issue one case, touching various phases of the subject, 
 but by far the most interesting, most important and most dis¬ 
 appointing was that of Heilbrunn vs. German Alliance In¬ 
 surance Co., decided by the New York Court of Appeals, to 
 which reference has been made, affirming the majority opinion 
 of the Appellate Division, 202 N. Y. 610, 95, N. E. 823. The 
 court decided that the mortgagee’s interest is not affected by 
 any of the policy conditions following line 59, which relate 
 to conditions after a fire, and as most of the conditions pre¬ 
 ceding line 59 are either modified or nullified by the mortgagee 
 clause, he comes pretty close to having a conditionless con¬ 
 tract. It follows from this that in the state of New York a 
 mortgagee is under no obligation to give the company any 
 notice of loss, nor furnish proof of loss, nor submit to appraisal 
 or examination of any kind. He is not bound by the condi¬ 
 tions of the contribution clause and can bring suit at any 
 time within the statutory limit of six years. The' Court ad¬ 
 mitted that insurance companies , ought to have more protec¬ 
 tion in the matter of time within which actions upon their 
 policies must be brought and possibly in other respects, but 
 that relief must come, if at all, from the legislature through 
 modification of the standard policy. The dissenting opinion 
 of Justice McLaughlin in the Appellate Division is a masterly 
 
 12 
 

 effort and presents the most rational construction of the 
 standard policy that has yet appeared. The Supreme Court 
 of Ohio, in the case of Erie Brewing Co. vs. Ohio Farmers 
 Insurance Co. (Ohio, 1909), 89 N. E. 1065, Vol. 39 Ins. Law 
 Journal 200, rendered an opinion similar to that of Justice 
 McLaughlin, and swung the pendulum so far in the other 
 direction as to hold that the mortgagee under the mortgagee 
 clause was bound by an award of appraisers to which he was 
 not a party and of which he had no notice. 
 
 The Court of Appeals in its decision in the Heilbrunn 
 case (supra) said: 
 
 “But the difficulty is that the language of those stipulations or 
 conditions of the policy which relate to the proceedings after the 
 liability of the company has accrued through the fire, does not enable 
 us to apply them to the mortgagee in such part only as may be prac¬ 
 tical or expedient. We must hold (unless our decision be wholly 
 arbitrary) that all those stipulations which in terms relate to the mort¬ 
 gagor only, apply equally to the mortgagor and mortgagee, or we 
 must hold that none of them do. The former dictates that which is 
 impossible and the order of the Appellate Division in this case should 
 therefore be affirmed.” 
 
 After reading this decision in connection with that of the 
 Appellate Division which it affirms, and the strong dissenting 
 opinion of Justice McLaughlin, one cannot help wondering 
 whether, if the interests of the mortgagee rather than those 
 of the insurance company had been adversely affected, the 
 situation might not in some manner have been saved from the 
 realm of the impossible. The Court in the Eddy case experi¬ 
 enced no difficulty whatever in actually striking out of the 
 contribution clause a certain inconvenient phrase which was 
 as plain as language could make it on the ground that the 
 only meaning which could reasonably be given it could not 
 possibly have been intended. That the legislature intended, 
 for obvious reasons to grant to the mortgagee' a somewhat 
 more liberal contract than to the property owner, cannot be 
 doubted, but that it for one moment intended when it adopted 
 a standard statutory form of policy which the title to the act 
 shows was established as a “uniform policy” for all parties, 
 to single out this one class, to wit: mortgagees, and exempt 
 them from all the usual obligations which all other insured 
 citizens must observe, is inconceivable. 
 
 Line 58 indicates very clearly that it is only “the condi¬ 
 tions hereinbefore contained,” that can be modified by the 
 mortgagee clause or rider, and the Supreme Court of Ohio in 
 its well considered opinion (supra) says: 
 
 “It would appear reasonable that in respects not modified or lim¬ 
 ited by the express language of the mortgagee clause, the plain pro¬ 
 visions of the policy must prevail and be observed.” 
 
 This is a reasonable interpretation of the contract even 
 if no consideration be given to the intention of the legislature, 
 but in New York the court of last resort has spoken and the 
 law in that state has therefore been determined. In the Eddy 
 
 13 
 
case the Court found it possible to arbitrarily decide contrary 
 to the manifest intention; in the Heilbrunn case it found it 
 impossible to arbitrarily decide according to the undoubted 
 intention. 
 
 After rendering the sound decision to which reference 
 has been made, the personnel of the Supreme Court of Ohio 
 underwent a change and in a very crude and ill-advised opin¬ 
 ion, held that the mortgagee, could recover, even though the 
 policy might be void as to the mortgagor, and this too under 
 the ordinary “loss payable” clause. Farmers National Bank 
 vs. Delaware Insurance Co. (83 O. S. 309), 40 Ins. Law Jour¬ 
 nal 1248. This is the seventh state which has placed this 
 interpretation upon lines 56 to 59. 
 
 It has been seen that under the forms of policy in use 
 prior to the adoption of the New York Standard, the plain 
 “loss payable” provision, in the absence of the mortgagee 
 clause, did not import an agreement to pay the mortgagee 
 independent of that to pay the “insured” or the mortgagor; 
 that is, if the policy had been rendered void as to the mort¬ 
 gagor or owner, it became void as to the mortgagee also. The 
 rule is the same in the case of the standard form, Moore vs. 
 Hanover Fire Ins. Co., 141 N. Y. 219, 36 N. E. 191, but, the 
 words “first payable” and “as his interest may appear” import 
 that the interest of the mortgagee is greater than the interest 
 of a mere naked appointee, Pitney vs. Glens Falls Ins. Co., 
 65 N. Y. 6. He would be a necessary party to an action on 
 the policy brought by the mortgagor. Lewis vs. Guardian 
 Fire & Life Assurance Co., 181 N. Y. 392, 74. N. E. 224, 106 
 Am. St. Rep. 557. He is not bound by a settlement of a claim 
 to which he has not assented. Hathaway vs. Orient Ins. Co., 
 134 N. Y. 409, 32 N. E. 40, 17 L. R. A.' 514. 
 
 The rights of the mortgagee under the plain “loss payable” 
 clause are clearly set forth in the unanimous opinion of the 
 Court of Appeals of New York in the case of McDowell vs. 
 St. Paul F. & M. Ins. Co., 207 N. Y. 482, Vol. 42 Ins. Law 
 Journal 796, where the court decided that the mortgagee is 
 not precluded from recovery of loss incurred because the 
 mortgagor refused to make proof of loss as required. The 
 court said that it was reasonable that those conditions which 
 affect the risk, while it is subsisting, should apply alike to 
 mortgagor and mortgagee, unless the parties have stipulated 
 otherwise by attaching a mortgagee clause, but that it was 
 unreasonable after a loss had occurred, that the interest of the 
 mortgagee should be subject to the caprice of the owner, and 
 that was equally true whether there was a mortgagee clause 
 or merely a “loss payable” endorsement. The natural infer¬ 
 ence to be drawn from this decision and that of Hathaway vs. 
 Orient Ins. Co. (supra) is that under the “loss payable” clause, 
 as well as under the mortgagee clause, the mortgagee is not 
 bound by any of the policy conditions after line 60. 
 
 14 
 
In Massachusetts the courts, prior to the adoption of the 
 present standard policy, held that in the absence of a subroga¬ 
 tion provision in the policy, the mortgagee could collect the 
 amount of loss and also retain the mortgage notes; Kings vs. 
 Ins. Co., Mass., 7 Cushing 1. This is the only state which 
 has so held; the opinion has been severely criticised and other 
 jurisdictions have' ruled that even in the absence of an agree¬ 
 ment for subrogation the insurer is entitled to an equitable 
 assignment of the debt from the mortgagee. 
 
 The Supreme Judicial Court of Massachusetts has decided 
 that under the' standard policy of that state, if the title be¬ 
 comes vested in the mortgagee by foreclosure, the policy is 
 void unless the sale is consented to by the insurer. Boston 
 Co-operative Bank vs. American Central Ins. Co., 87 N. E. 
 594, 38 Ins. Law Journal, 599. It has also held that the mort¬ 
 gagee must file notice and proofs of loss if the owner does 
 not, but he is granted a reasonable time and is not held to 
 such a strict accountability as the insured in the matter of 
 time. LTnion Institution for Savings vs. Phoenix Ins. Co., 37 
 Ins. Law Journal, 43. 
 
 In Connecticut it has been held that under the short form 
 “loss payable” clause the mortgagee has no right to a voice 
 in the appraisal, while under the mortgagee cause he has. 
 Collinsville Savings Society vs. Boston Insurance Co., 31 Ins. 
 Law Journal, 1031. 
 
 The words “act or neglect” used in the mortgagee clause 
 have been held to refer to any act or omission on the part of 
 the mortgagor, whether before or after the issue of the rider 
 or policy, but the decisions on this point are conflicting. On 
 the other hand, it has been held that the clause is effective 
 only as to subsequent acts or neglect of the mortgagor; also 
 that if a condition of the policy has already been violated so 
 as to afford a ground for forfeiture, it cannot be revived by 
 attaching thereto the mortgagee clause unless a new considera¬ 
 tion is paid therefor. Misrepresentations of which the mort¬ 
 gagee has knowledge will be attributable to him and he will 
 also be bound by his own misstatements. Generally speak¬ 
 ing, the better opinion seems to be that no act or neglect of 
 the mortgagor unknown to the mortgagee, whether prior or 
 subsequent to the' date of the contract, will avoid it as to his 
 interest. The latest decision on this point is that of Reed, 
 et al, vs. Firemen’s Insurance Co., of New Jersey (Vol. 40 
 Ins. Law Journal, 1711). 
 
 The mortgagee clause give's the mortgagee the right to 
 commence foreclosure proceedings, but makes it incumbent 
 upon him to notify the company of any change in the title or 
 ownership of the property which shall come to his knowl¬ 
 edge. It has been held in at least four states (Kansas, Min¬ 
 nesota, Iowa and Rhode Island) that this has reference to a 
 change or transfer of title to a third person and not to one 
 from the mortgagor to the mortgagee by foreclosure. The 
 
 15 
 
argument is that the insurer must have known when attaching 
 the clause that it might be necessary for the mortgagee, in 
 order to protect his interest under the mortgage, to commence 
 foreclosure proceedings; that this would not have a tendency 
 to diminish the interest of the mortgagee in the property, but 
 rather to increase it, and it has been held that an increase in 
 the interest of the insured is no ground for forfeiture of the 
 policy. Pioneer Savings & Loan Co. vs. St. Paul F. & M. 
 Ins. Co., Minn., S. C. 26 Ins. Law Journal 826; Lancashire 
 Ins. Co. vs. Boardman, Kan., S. C. 27 Ins. Law Journal 1898; 
 Bailey vs. American Central Ins. Co. (Iowa), C. C. 13 Fed. 
 Rep. 250; Continental Ins. Co. vs. Wood, 50 Kan. 346, 31 Pac. 
 1079; Heaton vs. Manhattan Fire Ins. Co., 7 R. I. 502; Esch 
 vs. Home Ins. Co., 78 Iowa 334, 43 N. W. 229, 16 Am. St. 
 Rep. 443; Dodge vs. Hamburg Bremen F. Ins. Co., 4 Kan. 
 App. 415, 46 Pac. 25; Washburn Mill Co. vs. Fire Ass’n, 60 
 Minn. 170, 61 N. W. 828, 51 Am. St. Rep. 500. 
 
 In the case last cited it was held that the subsequent ac¬ 
 quisition of the title to the mortgaged property by the mort¬ 
 gagee will not affect the right of the insurance company to 
 the subrogation as stipulated. 
 
 On the other hand, if, at the time of the issue of the 
 policy or the attaching of the mortgagee clause, the mort¬ 
 gagee has knowledge of facts which render the policy void 
 as to the insured, it is void also as to the mortgagee, as he is 
 bound by every consideration of good faith to disclose to the 
 insurer the information he possesses. Genessee Savings & 
 Loan Ass’n vs. U. S. Fire Ins. Co., 16 App. Div. 587 N. Y. 
 
 If a mortgagee, after a fire, assigns the mortgage, with¬ 
 out transferring any interest in the policy or right of action 
 for the loss caused by fire, there can be no recovery by the 
 assignee of the mortgage. Kupfersmith vs. Delaware Ins. Co. 
 (N.J.). 
 
 If foreclosure proceedings are commenced and before 
 they proceed, so far as a judgment, a fire occurs, the mort¬ 
 gagee has a right to proceed with the foreclosure and to a 
 sale of the premises, and the value of the subrogation rights 
 of the insurance company will depend upon whether or not 
 anything beyond the mortgage debt is realized through the 
 proceedings. Eddy vs. London Assurance Co. (supra). 
 
 An assignment of the mortgage accompanied by an as¬ 
 signment of interest in the policy by the mortgagee would 
 render the mortgagee agreement void and would be without 
 legal support against the insurer unless consented to. Kase 
 vs. Hartford Ins. Co., 58 N. J. 34. 
 
 A mortgagee who has sold his mortgage and has either 
 guaranteed payment of the mortgage debt or endorsed the 
 mortgage notes without taking the precaution to add the 
 words “without recourse” has an insurable interest in the 
 property which he should not lose sight of, for if an insur¬ 
 ance company pays a loss to the assignee of the mortgage, for 
 
 16 
 
which it is not liable to the mortgagor or owner, the com¬ 
 pany in the exercise of its subrogation rights can call upon 
 the original mortgagee as guarantor or endorser for reim¬ 
 bursement. 
 
 It is the prevailing custom in New York City to make 
 the following endorsement on policies no matter by whom 
 presented: 
 
 “The interest of . mortgagee herein having ceased, 
 
 loss, if any, is now payable to . mortgagee.” 
 
 without securing anything whatever in the shape of a release 
 from the original payee'. Considering the number of such 
 endorsements which are made each year, it is really remark¬ 
 able that so little trouble has arisen. There was a decision 
 bearing on this point many years ago, in case of Reid vs. 
 McCrum, 91 N. Y., 412. Policies on the buildings were en¬ 
 dorsed “Loss, if any, payable to John Reid, mortgagee.” Sub- 
 secpiently McCrum induced the insurers to cancel the endorse¬ 
 ment and write on the policies as follows: “The mortgagee’s 
 interest having ceased, the loss, if any, is now payable to 
 Hugh McCrum as owner.” ,The mortgagee’s interest had not 
 ceased and after the buildings were destroyed by fire, the 
 mortgagee brought an action to foreclose his security, making 
 McCrum and the insurers parties defendant. It was quite 
 properly held that the policies could not be legally changed 
 without the assent of the mortgagee and that he was entitled 
 to recover the loss from thejnsurers. 
 
 The question is frequently asked whether any liability 
 accrues to a second mortgagee unless his security has been 
 impaired by the fire, or whether under the mortgagee clause 
 he can collect by reason of the mere fact that a loss or damage 
 by fire has occurred to the property described in the policy; 
 in short, whether it is loss to the second mortgagee’s interest 
 or loss to the property itself that determines the liability of 
 the insurer. 
 
 It has been uniformly held that a first mortgagee under 
 the mortgagee clause can collect the amount of loss to the 
 property not exceeding his interest, notwithstanding the fact 
 that the value remaining may be many times the amount of 
 the mortgage debt, and even though it is self-evident that the 
 first mortgagee has not and will not sustain any loss by reason 
 of the fire. But the fact remains that his security is actually 
 reduced and consequently impaired to the extent of the amount 
 of loss by fire. He can therefore demand payment from his 
 insurer, who will in turn be subrogated to the extent of the 
 amount paid. 
 
 The foregoing reasoning appears to be perfectly logical 
 as respects the interest of a first mortgagee, but a somewhat 
 different situation is presented in connection with the interest 
 of a second mortgagee, for under certain conditions the secur¬ 
 ity of the latter may not be at all impaired by the fire. Can 
 
 17 
 
*1 rirwlf i 
 
 ■Mi 
 
 he in such circumstances collect from his insurer? In answer 
 to this question two diametrically opposite opinions have been 
 expressed. One authority theorizes as follows, to wit: 
 
 “If a second mortg*agee has a separate policy protecting 
 his interest, he has a right to look to it for indemnity. 
 Whether or not he sustains a loss depends upon conditions. 
 There are circumstances under which a second mortgagee’s 
 interest may not be affected by a fire and, if not, he cannot 
 collect anything under a policy made payable to him. For 
 instance, if property should be sold and the new owner should 
 take out a new policy with loss, if any, payable to the first 
 mortgagee under a mortgagee clause, and the second mort¬ 
 gagee should hold a policy in the name' of the former owner, 
 with loss, if any, payable to the second mortgagee, the old 
 policy would be void as respects the new owner. Then if the 
 company which insured the new owner should pay the full 
 amount of the loss to the first mortgagee, the interest of the 
 second mortgagee would not be affected, because the amount 
 of the first mortgage would have been reduced to the same 
 extent that the property had been damaged, leaving the second 
 mortgagee’s interest relatively the same as it was and there¬ 
 fore sustaining no loss by the 1 fire. 
 
 If two policies should be issued to the same owner, one 
 payable to the first and the other payable to the second mort¬ 
 gagee, and a valid claim should arise under both, the first 
 mortgagee' could demand the full amount of the loss from his 
 own insurer, in which event said insurer would be subrogated 
 to the extent of the amount paid in excess of its pro rata 
 liability to the owner. The first mortgage under these circum¬ 
 stances would be' reduced only to the extent of said pro rata 
 liability, and the second mortgagee could collect from the 
 insurer its pro rata proportion of the loss, but no more. 
 
 By such a construction the second mortgagee gets all the 
 benefit from his insurance that he is entitled to, namely, that 
 his interest shall not suffer by any loss or damage by fire to 
 the property.” 
 
 Another authority advances the following argument, to 
 wit: “While it is true that policies taken out in favor of mort¬ 
 gagees are in most of the States to be regarded as contracts 
 of indemnity, they provide very explicitly how that indemnity 
 shall be paid. It must be paid either in cash or by a reinstate¬ 
 ment of the property itself; that is, in the case of a burned 
 building, by a rebuilding. The insurance company in such 
 cases cannot escape payment by showing that in reality the 
 insured has suffered no actual loss. The insurance contract 
 with the mortgagee is not in substance a guarantee of his 
 debt or a guarantee that his collateral security shall continue 
 of a certain value, but on the other hand, is to be construed 
 as an insurance on property against fire loss to that property; 
 and if a fire loss to that property occurs, then the insurer 
 must either rebuild the property itself or pay the full amount 
 
 18 
 

 of the fire loss to the second mortgagee or to any other mort¬ 
 gagee, but not exceeding, of course, the amount of his inter¬ 
 est, that is, the amount of his debt. In principle it matters 
 not at all whether the mortgage is a first or a second mort¬ 
 gage. 
 
 “An insurance company has no authority to guarantee 
 the payment of a debt. Its power is limited to insuring 
 against such loss or damage as happens by fire to property. 
 In insuring a mortgage interest it does not insure the debt, 
 but the interest of the mortgagee in the property, upon the 
 safety of which depends his security.” 
 
 There does not appear to be any American decisions bear¬ 
 ing directly on the interest of a second mortgagee, but there 
 is an English decision which apparently supports the latter 
 view. (Westminster Fire Offices vs. Glasgow Provident In¬ 
 vestment Society [1888], 13 App. Cas,, 699). That case had 
 to do with two series of mortgage bondholders, the suit being 
 brought by the second mortgage bondholders. The insurance 
 companies defended on the ground that the entire amount of 
 loss had been paid by the insurers of the first mortgage bond¬ 
 holders. But the English Court of Appeals decided that this 
 was no ground of defense in whole or in part. But there is 
 a dictum from one of the judge's to the effect that if the money 
 so paid had been actually employed to reinstate the premises 
 then the decision might have been different on the theory that 
 in that event the second mortgage bondholders would have 
 sustained no loss. This dictum seems to lean to some extent 
 at least toward the first of the foregoing opinions. 
 
 If the latter view is the correct one', and if a second mort¬ 
 gagee can collect the amount of his mortgage from the com¬ 
 panies insuring his interest irrespective of whether or not his 
 security has been impaired by the fire, it follows that in many 
 instances, especially in times of real estate depression, a fire 
 would be a veritable godsend, for his hitherto absolutely dead 
 interest would instantaneously assume unexpectedly valuable 
 proportions and the insurers would be compelled to pay a loss 
 which had already accrued from causes other than fire. 
 
 This possibility directs attention very forcibly to the fact 
 that separate policies containing the mortgagee clause should 
 not be issued in favor of a second mortgagee, but when it is 
 desired to protect said interest under a mortgagee clause, the 
 form should read substantially as follows, viz: 
 
 “Loss, if any, under this policy shall be first payable to 
 
 .first mortgagee as his interest may appear ; 
 
 after the debt and interest secured by first mortgage shall be 
 fully satisfied, the remaining loss, if any, shall be payable' to 
 . second mortgagee as his interest may ap¬ 
 pear. subject to mortgagee clause hereto attached:” 
 
 In connection with the “loss payable” or mortgagee' 
 clause, an interesting question arises which has received but 
 little attention at the hands either of text writers or the courts. 
 
 19 
 
and that is whether the words “as interest may appear” or 
 “as interest shall appear” are descriptive of the interest exist¬ 
 ing at the time of the issuance of the policy or at the time of 
 the fire. The Supreme Judicial Court of Massachusetts when 
 called upon to decide the question, held that the words re¬ 
 ferred to the interest of the mortgagee as it existed at the 
 time of the issuance of the policy, thus giving to the words 
 a restricted rather than a comprehensive interpretation. This 
 view has the effect of preserving to the insurance company 
 the subrogation rights which were within its contemplation 
 at the inception of the contract. 
 
 In the case of Attleborough Savings Bank vs. Security 
 Ins. Co., 168 Mass. 147, the plaintiff, subsequent to the issu¬ 
 ance of the policy, had taken a second and third mortgage on 
 the property in addition to the one it already had, and contended 
 that it was entitled to collect the amount due on all three 
 mortgages by reason of the unrestricted nature of the phra¬ 
 seology descriptive of its interest, but the court held that the 
 words used contemplated a possible decrease rather than an 
 increase of the extent of the mortgagee’s interest. It is doubt¬ 
 less on account of this decision that in Massachusetts the 
 mortgagee clause is so phrased as to include the mortgagee’s 
 interest under present and all future mortgages covering the 
 premises. 
 
 It would certainly seem that in the absence of an express 
 agreement, the mortgagee should not be permitted to increase 
 his interest at will and as a result possibly render valueless 
 the insurer’s subrogation right, but notwithstanding the high 
 authority above referred to which has passed on the question, 
 it is by no means certain that its decision will be followed in 
 other jurisdictions, and it is not at all improbable that other 
 tribunals equally distinguished may rule that in the absence 
 of restrictive words in the mortgagee clause, it is the interest 
 of the mortgagee at the time of the fire that is intended to be 
 covered. If so, this would furnish an additional reason for 
 the desire on the part of a junior encumbrancer to safeguard 
 his interest by insurance entirely independent of that existing 
 in favor of the senior mortgagee. 
 
 The belief is quite general among insurance companies 
 that in event of neglect on the part of the mortgagor or owner 
 to pay any premium due under the policy the mortgagee is 
 legally liable therefor, but even as to this the courts are 
 divided in their opinions. The Appellate 1 Division of the Su¬ 
 preme Court of New York, Third Department, at the March. 
 1914, term in the case of Coykendall vs. Blackmer, held that 
 the words “provided that in case the mortgagor or owner 
 shall neglect to pay any premium due under this policy, the 
 mortgagee (or trustee) shall on demand pay the same” is not 
 a covenant, but only a condition, and that the only effect of 
 failure on the part of the mortgagee to pay the premium is 
 to deprive him of the special privileges accorded him in the 
 
 20 
 
mortgagee' agreement, and that he is not liable for the pre¬ 
 mium. One justice dissented from the principle enunciated, 
 but decided against the plaintiff because he had not made the 
 demand on the mortgagee within a reasonable time. This 
 case did not come before the Court of Appeals. On the con¬ 
 trary the highest courts in North Dakota and Kansas have 
 decided that the mortgagee is liable for the premium in case 
 of default on the part of the mortgagor. The North Dakota 
 Court said, “The 1 clause provides that no neglect or act of the 
 mortgagor, nor shall the vacancy of the premises invalidate 
 the policy. If defendant’s contention is sound, this provision 
 would be nugatory if the mortgagor should pay the premium 
 on time; for it is only in case of the mortgagor’s default that 
 the mortgagee can perform this condition of payment, and 
 defendant insists that it is only on performance of such con¬ 
 dition by him that he can have any rights under the mort¬ 
 gagee clause. This construction would destroy its effect in 
 many cases. It would often deprive' the mortgagee of any 
 benefit from the provisions that he should not be prejudiced 
 by any act or neglect of the mortgagor by reason of vacancy, 
 etc. of the premises. The mortgagee clause gave the mort¬ 
 gagee immunity from certain forfeitures resulting under the 
 policy from the mortgagor’s acts or omissions, and the mort¬ 
 gagee in turn agreed to pay for this immunity the premium 
 in case of the mortgagor’s default. This is the clear import 
 of the agreement.” The Kansas Court said, “While the word 
 ‘provided’ ordinarily, indicates that a condition follows, there 
 is no magic in the’ term, but the clause is to be construed from 
 the words employed and from the purpose of the parties 
 gathered from the whole instrument.” St. Paul F. & M. Ins. 
 Co. vs. Upton, 2 N. D. 229, 53 Pac. 472: Boston Safe Deposit 
 & Trust Co. vs. Thomas, 59 Kan. 470, 53 Pac. 472. 
 
 The company reserves the right to cancel the' policy at 
 any time as provided by its terms, but.in such case the policy 
 shall continue in force for the benefit onfy of the mortgagee 
 for ten days after notice' to the mortgagee of such cancella¬ 
 tion and shall then cease, and the company shall have the 
 right on like notice to cancel the mortgagee agreement. It 
 will be noticed that there are' two ways of getting rid of liabil¬ 
 ity to the mortgagee, one by cancelling the policv and the 
 other by cancelling the mortgagee agreement. The policy 
 cannot be legally cancelled in less than five days, unless by 
 waiver on part of the insured: hence “ten days after notice 
 to the mortgagee of such cancellation” may mean fifteen days 
 and perhaps more from date of original notice to the insured. 
 But the mortgagee agreement, the vital principle as regards 
 the mortgagee’s interest, can be cancelled by ten days’ notice, 
 and too much care cannot be taken to see that notices are 
 properly worded. The following is suggested as a legal form 
 of notice to the mortgagee: 
 
 21 
 
“We elect to cancel the mortgagee agreement attached to and 
 
 made a part of our Policy No. issued to . 
 
 through our agency at . on . 19 , cov¬ 
 ering on . at . and made payable to you as 
 
 mortgagee (or trustee), in event of loss, and hereby give you ten days’ 
 notice thereof, as provided by the terms of said mortgagee clause. 
 
 “Take notice that on the . day of ., 
 
 19 , at twelve o’clock noon or, if that date is not ten days from the 
 
 receipt hereof, then at the expiration of ten days from its receipt, the 
 said agreement will terminate and cease to be in force.” 
 
 Although, except in the seven States previously referred 
 to, a mortgagee under the plain ‘Toss payable” clause cannot 
 collect if the policy is void as to the mortgagor or owner, he 
 being bound presumably, by all the policy conditions preced¬ 
 ing line 59, all the courts which have passed directly upon the 
 question have held that a policy cannot be cancelled as to the 
 mortgagee, without notice. But the cancellation provision is 
 in line 51, and notwithstanding the seeming inconsistency in 
 holding that the mortgagee is bound by some of the provisions 
 preceding line 56 and not by others, it is quite evident that 
 under the various “loss payable” clauses in current use, the 
 courts are inclined to distinguish between forfeiture and can¬ 
 cellation and to hold that in order to effect legal cancellation 
 as to the mortgagee’s interest he must receive notice. A 
 clause could no doubt be prepared which would relieve the 
 insurer of this necessity, but a policy containing such a pro¬ 
 vision would lose much, if not all, of its value for collateral 
 purposes and be manifestly unfair to the mortgagee. As a 
 matter of prudence notice should be given both to the insured 
 and the payee regardless of whether the cancellation is by the 
 insured or the company. 
 
 It has been held in many well considered cases (although 
 there are' some views to the contrary) that a covenant by a 
 mortgagor to keep the buildings upon the mortgaged prem¬ 
 ises covered by insurance for the benefit of the mortgagee, 
 and in event of default thereof authorizing the mortgagee to 
 effect such insurance at the expense of the mortgagor, is only 
 a personal covenant of the mortgagor obligatory upon him 
 alone, and is not a covenant that “runs with the land” or 
 which follows the title; and hence does not bind a subse¬ 
 quent grantee of the mortgagor to keep insurance for the 
 benefit of the mortgagee, nor can premiums paid therefor 
 be recovered of such grantee, nor tacked to the mortgage, 
 even though his deed may have been made subject thereto; 
 nor is the record of the mortgage sufficient legal notice to 
 bind either the grantee or subsequent mortgagee. Dunlop 
 vs. Avery, 89 N. Y. 592; Reid vs. McCrum, 91 N. Y. 412; 
 Farmers Loan & Trust Co. vs. Penn. Glass Co., 186 U. S. 
 434. 
 
 The closing paragraph of the mortgagee clause has 
 reference to subrogation when there is no liability to the 
 mortgagor or owner, it being very properly stipulated that 
 no subrogation shall impair the right of the mortgagee (or 
 
 22 
 
trustee) to recover the full amount of his claim. This right 
 of subrogation is about the only consideration for the mort¬ 
 gagee agreement and affords the only excuse for such a 
 contract being entered into. 
 
 When the policy is in favor of a first mortgagee on 
 property where land values are high, subrogation is a val¬ 
 uable right, but when the policy is in favor of a second 
 or third mortgagee its value approaches and frequently 
 reaches the vanishing point, and it is on this account that 
 some companies decline as a matter of general practice to 
 issue a mortgagee clause in favor of a second and third 
 mortgagee. 
 
 The agreement provides that whenever the insurance 
 company shall pay the mortgagee (or trustee) any sum for 
 loss or damage under the policy and shall claim that, 
 as to the mortgagor or owner, no liability therefor existed, 
 the company shall, to the extent of such payment, be there¬ 
 upon legally subrogated to all the rights of the party to whom 
 such payment shall be made, or may at its option, pay to 
 the mortgagee (or trustee) the whole prinicipal due or to 
 grow due on the mortgage and shall thereupon receive a 
 full assignment and transfer of the mortgage and such other 
 securities. This would seem to be about as clear as it is 
 possible for language to make it, and would indicate to the 
 lay mind that the insurer would have a perfect right even 
 arbitrarily to deny liability to the mortgagor and insist upon 
 the mortgagee complying with the conditions of the agree¬ 
 ment, and leave the mortgagor to pursue his remedy under 
 the policy in the courts if he so desired; but the courts 
 say that the clause shall not be construed to vest in the 
 insurance company the right to subrogation upon the mere 
 assertion of claim unfounded in fact; that the claim which 
 it may assert must be valid and well founded. The Supreme 
 Court of Canada has held that the insurance company is 
 not justified in paying the mortgagee and claiming subro¬ 
 gation without first contesting the liability of the mortgagor 
 and establishing its immunity from liability to him, and that 
 is practically the position of those courts in this country 
 which have passed on the question. In short, the mortgagee, 
 if he desires, may decline to accept payment of the loss 
 (although he seldom does) and insist upon a decision from 
 the court of last resort as to whether there is a liability to 
 the mortgagor or owner, before he will be compelled to 
 comply with the subrogation provision. The latest decision 
 is that of O’Neill vs. Franklin Fire Ins. Co. in which the 
 Court of Appeals of New York affirmed without opinion the 
 decision rendered by the Appellate Division, 159 App. Div. 
 
 313, 216 N. Y. P.-43 Ins. Law Journal 388. See also 
 
 Traders Ins. Co. vs. Race, 142 Ill. 338, 31 N. E. 392; Ander¬ 
 son vs. Saugeen Mut. F. Ins. Co., 18 Ont. Rep., 355; Bull 
 vs. North British Canadian Investment Co. & Imperial Fire 
 
 23 
 
Ins. Co., 15 Ont. Rep. 421, affirmed 18 Canadian Supreme 
 Reports, 697 Loewenstein vs. Queen Ins. Co. (Mo. S. C.) 
 39 Ins. Law Journal, 877. 
 
 To the mind of the writer the dissenting views which 
 were expressed in some of these cases are much more reas¬ 
 onable, logical and convincing than the prevailing opinions 
 and the following quotation from the dissenting opinion of 
 Justice Kruse in the O’Neill case (supra) undoubtedly sets 
 forth the intention of the framers of the mortgagee agree¬ 
 ment. 
 
 “I think the insurance company was entitled to an assignment of 
 the mortgage. As between the mortgagee and the insurance company, 
 it was not necessary for the insurance company to show that it was 
 not liable to the mortgagor and owner upon the policy. The insurance 
 company made that claim and offered to pay the mortgagee the whole 
 principal due or to grow due, with the interest, and demanded an 
 assignment of the mortgage. Whether or not the insurance shall be 
 applied as a payment upon the mortgage is a question between the 
 mortgagor and the insurance company, in which the mortgagee has no 
 interest. I think the mortgagee has no standing to contest that ques¬ 
 tion with the insurance company.” 
 
 The Chancery Court in New Jersey in the case of Florence 
 E. Palmer vs. John A. McFadden, Guardian, and Niagara 
 Fire Ins. Co., has recently handed down a decision, which 
 should certainly be reversed on appeal. The Niagara, whose 
 policy was the only one of three which was payable to the 
 mortgagee under a mortgagee clause without contribution, 
 paid the mortgagee $3,416.67 and took an assignment of the 
 bond and mortgage, but its pro rata liability to the insured 
 was only $1,388.16, or $2,028.51 less than the amount paid. 
 The court ruled that because the mortgagee clause did not 
 contain the contribution provision, and because the insurer 
 admitted some liability to the insured, as distinguished from 
 no liability, the insured was entitled to have the bond, mort¬ 
 gagee and decree of foreclosure surrendered for cancellation. 
 In short, the lower court virtually handed the insured $2,028.51, 
 and if the judgment is affirmed, she will have made just that 
 much clear profit by the fire. 
 
 The insurer should, equitably, be subrogated to the extent 
 of the excess payment, even in the absence of an agreement 
 for subrogation, and it is not conceivable that this decision, 
 based as it is upon a strained and distorted view of the sub¬ 
 rogation provision, will be permitted to stand. (Note: This 
 decision was subsequently reversed.) 
 
 A new mortgagee clause is now being considered by 
 various underwriting organizations and no doubt will soon 
 be promulgated for use in states where the present standard 
 form is not required by law. It contains a fair contribution 
 provision and expressly stipulates that the insurer shall be 
 subrogated fo the extent of any excess sum for loss or damage 
 over and above the amount of its liability to the mortgagor 
 or owner, thereby covering the point raised by the New Jersey 
 Court in the Niagara case (supra). 
 
 24 
 
In the absence of an agreement, express or implied, or of 
 a clause in the policy making the loss payable to the mort¬ 
 gagee, or of an assignment to the mortgagee, the mortgagee 
 has no interest in a policy taken out by the mortgagor upon 
 his own interest, and conversely a mortgagor has no interest 
 in the proceeds of a policy taken out in the name of the 
 mortgagee for the purpose of protecting his interest only. 
 
 Where a policy is made payable to a mortgagee “as his 
 interest may appear,” there is a conflict of authority as to 
 J whether the mortgagee is entitled to the proceeds arising from 
 
 the destruction of property included in the policy, but not 
 covered by the mortgage. Cooley’s Briefs, 3699-3700. 
 
 In Massachusetts, Minnesota, Mississippi and North Caro¬ 
 lina, by statute, if by an agreement with the insured or by 
 the terms of a policy taken out by a mortgagor, the whole 
 or any part of the loss is to be paid to mortgagees, the com¬ 
 pany may pay the mortgagees in the order of their priority 
 of claim and such payment shall be, to the extent thereof, 
 payment and satisfaction of the liability of the company. In 
 Maine, by statute, the mortgagee of real estate has a lien 
 upon any policy of insurance against loss by fire procured 
 thereon by the mortgagor, to take effect, if the loss has not 
 been paid, after filing of a written notice with the company. 
 Cooley’s Briefs, 3703-3704. 
 
 A senior mortgagee whose mortgage provides for insur¬ 
 ance has no lien on the proceeds of a policy which by the 
 terms of the policy is made payable to a junior mortgagee, 
 except to the extent of the excess, if any. Dunlop vs. Avery, 
 89, N. Y. 592. 
 
 If a mortgagor complies with the mortgage agreement 
 and takes out insurance for the benefit of the mortgagee and 
 the insurance company becomes insolvent, the mortgagee has 
 no lien against insurance taken out by the mortgagor to pro¬ 
 tect his own interest. Nordyke & Marmon Co. vs. Gery, 112, 
 Ind. 535, 13 N. E. 683, 2 Am. St. Rep. 219. 
 
 The interest of a mortgagee under the mortgagee clause 
 or “loss payable” clause takes precedence over that of an 
 assignee or trustee in bankruptcy, an assignee of claim or an 
 attaching creditor. The equitable interest gained by an as¬ 
 signment of a policy as collateral security will prevail over 
 
 the claim of an unsecured creditor garnisheeing the company. 
 . Wakefield vs. Martin, 3 Mass. 558. The lien of a mortgagee 
 
 J who has been promised insurance, is superior to that of an 
 
 assignee of the policy after loss, who takes with knowledge 
 of the equity of the mortgagee (Nichols vs. Baxter, 5 R. I. 491) 
 or whose assignment is supported only by a precedent debt. 
 An assignee of a mortgage containing a covenant to insure 
 was held entitled to priority as to a policy taken out by the 
 mortgagor, over an assignee in insolvency of the mortgagee. 
 Branch vs. Milford Sav. Bk., 51 Kan. App. 246, 47 Pac. 555. 
 
 25 
 
The right of an attaching creditor has also been held sub¬ 
 ordinate to this lien; Providence County Bank vs. Benson, 24 
 Pick (Mass.) 204. But where the claim under the policy has 
 been assigned after a loss to an innocent purchaser for value, 
 it has been held that his equity was superior to that of the 
 mortgagee. Swearingen vs. Hartford Fire Ins. Co,, 56 S. C. 
 355, 34 S. E. 449. The lien of an assignee of a mortgage, 
 who has been promised insurance by its assignor, is enforce¬ 
 able as to insurance taken out by his assignor after the pur¬ 
 chase by such assignor of the mortgaged property. Hyde 
 vs. Hartford Fire Ins. Co. (Neb) 97 N. W. 629. Cooley’s 
 Briefs, 3706. 
 
 It will be freely conceded that those who loan money on 
 real estate are entitled to fire insurance protection unaffected 
 by the acts or neglect of parties other than themselves. The 
 contracts in their favor must necessarily be less restrictive 
 in their terms than those in favor of the property owners, but 
 the propriety of granting indemnity to a mortgagee under any 
 kind of special contract attached to the policy of the mort¬ 
 gagor without some special consideration is, to say the least, 
 a matter of grave doubt, to say nothing of granting him a 
 contract almost—if not entirely—free from conditions, for 
 no consideration other than the right of subrogation, which 
 in many instances may be of no value whatever. 
 
 Although much has been said and written on this im¬ 
 portant subject and many decisions have been rendered, still 
 the last word has not yet been spoken and we may confidently 
 expect new phases of the question to present themselves for 
 consideration and adjudication. 
 
 26 
 

Fire Loss Settlements 
 
 FIRST LECTURE 
 
 BY 
 
 J. T. DARGAN, Jr. 
 
 Assistant General Adjuster 
 
 (5ia) 
 
 THE HOME INSURANCE COMPANY 
 
 NEW YORK 
 
mb i w 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 t 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fire Loss Settlements 
 
 First Lecture 
 
 The new Standard Fire Insurance Policy of the State' of 
 New York, under the head of “Requirements in Case of Loss,” 
 states in part: 
 
 ‘‘The insured shall give immediate notice, in writing, to this 
 Company, of any loss or damage, .” 
 
 By this is meant that the insured or his legal representatives 
 shall, either personally serve upon the insurance company’s 
 authorized agent, or shall place in the mails a written notifica¬ 
 tion of the loss, addressed to the agent or to the company, 
 and in said notice a mere statement giving the policy number 
 and date of the loss should suffice. We have numerous 
 decisions under the old form of policy where a question has 
 been raised by the insurance company as to the meaning of 
 “immediate notice,” the trend of which would seem to place 
 upon the insured the responsibility of compliance with this 
 very essential condition of the policy within a reasonable 
 number of days, provided no unusual circumstances prevented. 
 For instance, it has been held that from eleven to fourteen 
 days could not be said to have been “immediate notice.” If, 
 on the other hand, the insured, through a chain of circum¬ 
 stances, was unable to notify the company in writing within 
 two or three weeks, I am very much inclined to believe that 
 the average court would place upon the jury the entire respon¬ 
 sibility of determining whether the insured could be said to 
 have acted with due diligence. A verbal notice to an agent 
 could not be said to be an act on the part of the insured in 
 compliance with this condition of the policy. 
 
 The layman would ask, why should an insurance com¬ 
 pany rigidly insist upon strict compliance with the foregoing 
 provision. In answer to this it could be said that in the 
 event of a partial loss, the salvage or what remains would 
 be adversely affected by the insured’s failure to give imme¬ 
 diate notice, and again—in the event of say a total loss, the 
 insurance company would not have an opportunity of viewing 
 
 1 
 
the remains, nor of investigating the cause of the fire until 
 the general public had been given access to the premises, 
 and by either walking upon the debris or carting away 
 portions of the salvage, had so materially changed the appear¬ 
 ance of the premises as to lead an adjuster to view the situa¬ 
 tion from an entirely different aspect. 
 
 Following the above provision, the present New York 
 Standard Fire Policy goes on: 
 
 “Protect the property from further damage, forthwith separating 
 the damaged and undamaged personal property, put it in best possible 
 order, furnish a complete inventory of the destroyed, damaged and 
 undamaged property, stating the quantity and cost of each article and 
 the amount claimed thereon. 
 
 There is probably no vital condition of the policy more univer¬ 
 sally disregarded at the expense of the insurance companies 
 than this very reasonable requirement. The reason, leaving 
 out the question of fraud, is undoubtedly apprehension on 
 the part of the insured that his act may be construed to his 
 eventual disadvantage. He is usually told, particularly 
 by those who furnish free advice, that he should do nothing 
 until the arrival of the adjuster. A perishable stock may be 
 involved, and the company, through failure to receive prompt 
 advices, may not be able to arrange for an inspection by its 
 adjuster for a week or ten days following the fire, and in 
 this period of time if the insured does not attempt to pro¬ 
 tect the property from further damage, a total loss may 
 result. Fortunately insurance companies are blessed with a 
 very high degree of intelligence in the personnel of their local 
 representatives, and it is seldom that salvage is permitted to 
 greatly deteriorate without some effort being made to pro¬ 
 tect or preserve the interests of all concerned. 
 
 Another feature which no doubt acts as a deterrent to 
 the insured is his fear that a separation of the damaged and 
 undamaged property and a general clean-up of the premises 
 will reduce the extent of the true loss in the eyes of the 
 adjuster. This belief is utterly unwarranted, and if through 
 educational means the public could be led to realize that their 
 interests would not be adversely affected by a compliance with 
 this condition of the policy, adjustments would be easier for 
 all concerned, and losses of magnitude would be settled with 
 greater dispatch and less delay and friction. The average 
 insured has, as a rule, no idea of the true loss in the 
 event of a partial loss, whereas if he would comply with the 
 foregoing condition of the policy,—and in doing this he 
 would be forced to inspect each item of merchandise or prop¬ 
 erty,—he would, following a separation of the damaged and 
 undamaged property and the preparation of a complete in¬ 
 ventory, be in a decidedly better position to present his claim 
 in an intelligent manner. 
 
 In scheduling damaged property, the item should be 
 extended on the basis of the cost price, and upon each item 
 
the insured should assess the damage claimed. The manner in 
 which the adjuster arrives at the Sound Value and Loss and 
 Damage will be treated later. 
 
 Following the above quoted provision of the policy, the 
 New York Standard Form continues: 
 
 “The insured shall, within sixty days after the fire, unless such 
 time is extended in writing by this Company, render to this Company 
 a proof of loss, signed and sworn to by the insured, stating the knowl¬ 
 edge and belief of the insured as to the following.” 
 
 This clause as it reads, is, of course, very easy to understand, 
 though unfortunately the various states have either enacted 
 laws or permitted decisions whereby there is great variance 
 in the respective positions. For instance, New York State 
 has rigidly adhered and given full support to this condi¬ 
 tion of the policy, and in consequence if an insured does not 
 within sixty days—unless such time has been extended by the 
 company—file some form of paper which may be said to be 
 in substantial compliance with this provision, all right of 
 recovery under the policy involved is forfeited. However, 
 as compared with this, the state of New Jersey forces an 
 insurance company to make a demand upon the insured for 
 compliance with this provision, and in addition furnish said 
 insured with a blank Proof of Loss. Other states vary in 
 their position, and it is therefore, necessary to consider the 
 subject with reference only to a specific state. In New York 
 State, as stated, Proof of Loss must be served upon the com¬ 
 pany or its duly authorized agent within sixty days, and by this 
 is meant not sixty-one days, but exactly within sixty days. 
 
 The form of policy under consideration following the 
 above condition goes into considerable detail as to what shall 
 constitute a Proof of Loss, and any individual of average 
 intelligence should have no difficulty, even without the assist¬ 
 ance of technical advice, in complying with this provision. 
 The policy requirement following the last quoted provision, 
 states: 
 
 “Render to this Company a proof of loss, signed and sworn to 
 by the insured, stating the knowledge and belief of the insured as to 
 the following: the time and origin of the fire, the interest of the in¬ 
 sured and of all others in the property,” 
 
 Bv interest of the insured and others in the property is meant 
 those individuals or business concerns which may be interested 
 either as sole or part owners or as mortgagees or lienors. 
 
 The policy requirement proceeds: 
 
 “the cash value of each item thereof and the amount of loss or 
 damage thereto,” 
 
 One of the most difficult problems of an adjuster is to secure 
 the insured’s agreement to what may be termed, the “Cash 
 Value” of the property involved at the time of loss. What 
 may have been paid for property prior to the loss does not 
 necessarily govern as to the sound value at the time of the 
 loss. For instance, the market vajue of the commodity 
 
 3 
 
involved may have either noticeably increased or decreased 
 since its purchase by the insured. In considering a fair and 
 reasonable interpretation of what constitutes cash value, it 
 should be borne in mind that the New York Standard Fire 
 Policy covering real or personal property, is a contract of 
 indemnity; it is never a wagering contract, nor is it a gamb¬ 
 ling agreement—barring of course any added provision to 
 the contrary. Its provisions when taken together are drawn 
 in order to indemnify the insured for what may have been lost, 
 less, of course, any proper deduction by reason of the applica¬ 
 tion of such subsequent or added provision as Co-insurance, 
 Average or Three-quarter Value Clauses. If, therefore, in 
 reaching an agreement with an insured as to the meaning of 
 cash value, a figure should be arrived at exceeding either 
 the true value of the’ property involved or the cost to replace 
 at time of fire, an amount will be paid exceeding the true in¬ 
 tent of the policy as well as the legal indemnity or protection 
 afforded thereunder. 
 
 In the beginning or on the face of the policy, you will 
 appreciate the company agrees to insure 
 
 “John Doe, and legal i epresentatives, to the extent of the 
 actual cash value (ascertained with proper deductions for deprecia¬ 
 tion) of the property at the time of loss or damage, but not exceeding 
 the amount which it would cost to repair or replace the same with 
 material of like kind and quality within a reasonable time after such 
 loss or damage, without allowance for any increased cost of repair 
 or reconstruction by reason of any ordinance or law regulating con¬ 
 struction or repair and without compensation for loss resulting from 
 interruption of business or manufacture, etc.” 
 
 This provision gives the company the right to insist upon 
 an adjustment based upon the actual cost to replace the prop¬ 
 erty damaged or destroyed at time of fire, and in the case of 
 several commodities the “market price” has been accepted 
 by the companies as a proper basis of adjustment. The 
 better or more universally known commodities where a market 
 quotation at or nearest the scene of the loss governs, are 
 grain and cotton. The justice of fixing the sound value on 
 basis of market quotation in the case of these two staple prod¬ 
 ucts, is due to the fact that the cost to produce is almost an 
 unascertainable quantity, so far as the average insured is 
 concerned, as due to the existence of “exchanges” in several 
 of our larger cities, both cotton and grain are freely traded 
 in, and in consequence numerous changes occur in owner¬ 
 ship. In the case of commodities where there is no market 
 quotation, the proper basis of adjustment in fixing the sound 
 value is to ascertain the cost to produce in the event that no 
 change has taken place in either cost of labor or the cost of 
 the items which go to make up the finished product, pro¬ 
 vided of course, the property in question cannot be replaced 
 at less than cost to produce. 
 
 In the event that there’ is no provision in the policy 
 concerning the basis of adjustment, other than the foregoing 
 
 4 
 
provision, the market price as well as the cost to produce 
 is the universally accepted and proper basis of adjustment, 
 and never in any instance is the sales price to be used in 
 computing the sound or actual cash value. The sales value 
 may be covered, but this must be' clearly stated in the policy, 
 or the anticipated profits may be covered, but this must also 
 be clearly provided for in the contract. 
 
 After the insured has prepared a statement setting forth 
 the cash value at time of loss, the loss or damage should be 
 extended under each item and the total, of course, may be 
 said to be the most vital feature of the entire insurance con¬ 
 tract. A proper, reasonable and just manner of fixing the loss 
 or damage on each item involved is reached in the case of say a 
 retail merchant, by taking into consideration the basis upon 
 which the damaged merchandise may be sold at the same 
 percentage of profit as would have been obtained from the 
 undamaged merchandise, had there been no loss. That is, the 
 insurance company cannot expect to force a merchant to con¬ 
 tinue in business selling damaged merchandise without ob¬ 
 taining a reasonable profit for his efforts. In other words if 
 a stock of merchandise could be said to have an actual cash 
 value at time of loss of $10,000 and it could also be said that 
 ■the merchandise in question had been damaged to the extent 
 of 50%, then the ordinary interpretation would be that the 
 insurance company should pay $5,000. This would be a fair 
 and reasonable settlement, provided the merchant could dis¬ 
 pose of the damaged goods for $5,000 plus a reasonable profit. 
 The insurance company could not expect to force the mer¬ 
 chant to continue business for several months and merely 
 obtain the net sum of $5,000 but must in addition, be willing, 
 as stated, to afford the insured the opportunity of making 
 a reasonable profit from the continued sale of the damaged 
 goods, unless by agreement all salvage should be sold as 
 a unit. 
 
 Quoting further from the policy provision with reference 
 to the insured’s duty in connection with filing a proof of 
 loss, it is stated the insured shall 
 
 “render to this Company a Proof of Loss.stating. 
 
 all encumbrances thereon, all other contracts of insurance, whether 
 valid or not, covering any of said property,” 
 
 By encumbrances is meant a mortgage or lien granted by the 
 insured to another, usually as a result of money obtained as 
 a loan by the owner of the property involved. All insurance, 
 whether valid or not, must be fully set forth in the proof of 
 loss. For instance, several policies involved may be said to 
 be invalid and the insured may be utterly unable to recover 
 anything as a result of the loss, but notwithstanding this 
 the invalid policies in question must, at least in the statement 
 or apportionment of the total insurance, bear their propor¬ 
 tionate part of the loss. 
 
 
f 
 
 The insured is further required to note: 
 
 “any changes in the title, use, occupancy, location, possession or 
 exposures of said property since the issuing of this policy.” 
 
 By this is meant that the insured must incorporate or state in 
 the proof any information concerning a sale of any or all of 
 the property covered, and also any change in the use to which 
 the property may have been put, such as changing an ordi¬ 
 nary dwelling to a hotel. If any property has been moved 
 from the location as stated in the policy, this must be clearly 
 shown in the proof, or if a change in possession has occurred, 
 this must be incorporated. The insured is further required to 
 note in the proof any exposures, such as new buildings or 
 property placed or erected near the subject of insurance since 
 the issuance of the policy. 
 
 Continuing the policy requirement: 
 
 “By whom and for what purpose any building herein described 
 and the several parts thereof were occupied at the time of fire.” 
 
 The insured is required to insert in the proof a statement 
 giving the names of occupants and the nature of their business 
 at the time of the loss. 
 
 The policy requirement further continues: 
 
 “and shall furnish a copy of all the descriptions and schedules 
 in all policies and if required, verified plans and specifications of any 
 building, fixtures or machinery destroyed or damaged.” 
 
 The latter part of this requirement, you will note, is not a 
 mandatory one, unless the insured shall be notified by the 
 company that such information must be furnished. In those 
 cases, however, where the insurance company makes specific 
 demand upon the insured for the production of the data spe¬ 
 cified, proper or reasonable compliance on the part of the 
 insured must be shown. 
 
 Continuing the policy requirement: 
 
 “The insured, as often as may be reasonably required, shall 
 exhibit to any person designated by this Company all that remains of 
 any property herein described, and submit to examinations under 
 oath by any person named by this Company, and subscribe the same.” 
 
 The effect of this condition is that the insured must 
 exhibit or show to the company representative all that remains 
 of any property involved, and the insured must also submit 
 to an oral examination under oath, either at the scene of the 
 loss or a location agreeable to both parties at interest. The 
 company cannot require the insured to make a specific trip to 
 its office to answer under oath questions and interrogatories, 
 but must designate a reasonable place. The insured’s failure 
 to appear for examination under oath at a designated reason¬ 
 able time and place is a bar to recovery under the policy. 
 On the other hand, the insurance company must not make an 
 unreasonable or improper demand either as to time or place. 
 That is, the insurance company should not wait until approxi¬ 
 mately the expiration of sixty days from the date of proof 
 and then demand an examination under oath, but if it desires 
 
 6 
 
to avail itself of this privilege or condition of the policy, the 
 examination under oath must be demanded within a reason¬ 
 able time after the proof of loss has been hied by the insured, 
 and by reasonable time could probably be said to be, at any 
 time within the sixty days following- the serving of the proof, 
 provided the date set for the examination is previous to the 
 expiration of the sixty days. After the insured has submitted 
 to an examination under oath, he is required to subscribe the 
 same as the foregoing condition recites, though his failure 
 to do so will not result to the insurer’s disadvantage in the 
 event the oath has been administered to the insured at the 
 beginning of the examination. 
 
 “Requirements in case of loss” as embodied in the policy 
 concludes: 
 
 “and as often as may be reasonably required, shall produce for 
 examination all books of account, bills, invoices, and other vouchers, 
 or certified copies thereof, if originals be lost, at such reasonable 
 time and place as may be designated by this Company or its repre¬ 
 sentative, and shall permit extracts and copies thereof to be made.” 
 
 Under this condition the insured if requested is required to 
 obtain duplicate bills ‘showing the cost of the property in¬ 
 volved, in the event he cannot produce the originals, and 
 again, all books of account must be presented for the com¬ 
 pany’s examination at such reasonable time and place as may 
 be designated. The insured’s failure to show a reasonable 
 compliance with this condition would undoubtedly result in 
 his failure to make a recovery under the policy. 
 
 In the entire foregoing, stress or emphasis has been laid 
 on the duty of the insured in the event of a loss. In the 
 following an attempt will be made to briefly set forth the 
 duty of the insurer. 
 
 After the insured has given immediate notice of the loss, 
 and has to the best of his ability protected the property from 
 further loss or damage, the insurer must arrange to have a 
 representative act with the insured in an attempt to deter¬ 
 mine the value of the salvage as well as the amount of the 
 loss, and failing so to do, must bear the consequences of any 
 further loss or deterioration of the salvage by reason of 
 its inaction. For instance, in the case of loss on a perish¬ 
 able stock of merchandise, the insurer could not, several 
 weeks after the date of the loss, and after having received 
 due notice, maintain its position in alleging that the insured 
 had used poor judgment in handling the 1 salvage where it 
 had given the insurer no advice nor made any attempt to 
 arrange for an inspection of the damaged property by an 
 agent or adjuster. If the insured could demonstrate that he 
 had used due diligence in protecting the property, the insurer 
 could not after its failure to act penalize the insured for 
 merely improper judgment. 
 
 The appraisal condition of the new New York Standard 
 policy is radically different as compared with the old. For in- 
 
 7 
 
stance, the new form provides that following the selection of 
 competent and disinterested appraisers by the insured and the 
 insurer, an umpire shall be selected by the appraisers so 
 chosen, though failing for fifteen days to agree upon such 
 umpire, then upon request of the insured or the company 
 such umpire shall be selected by a judge of a Court of Record 
 in the city in which the property insured is located. The old 
 form policy still in use in some other states contained no 
 provision concerning the selection of an umpire other than 
 to state that it was the duty of the two appraisers to select 
 such umpire. This of course resulted in numerous deadlocks. 
 That is, the two appraisers could not agree upon an umpire and 
 so reported to the insured and insurer, and in consequence 
 either a new appraisal was resorted to or the insured, upon 
 failure of the appraisal, thereupon filed suit. Theoretically 
 the new appraisal condition is fair and reasonable. Prior 
 to entering into an appraisal there must be a failure to agree 
 as to the amount of loss or damage and the appraisal con¬ 
 dition of the policy may as stated be resorted to by the insurer 
 or the insured upon written demand of either. Failure to com¬ 
 ply with a demand for an appraisal would constitute a bar 
 to recovery by the insured, and likewise if the company failed 
 to comply with the insured’s demand it could not then 
 allege failure to complete an appraisal, as a defense in 
 event of suit, but must allow the jury to fix the loss or 
 damage in the' event it should be held liable for the loss. 
 
 In the absence of fraud, the award of any two of the two 
 appraisers and umpire so chosen, will be definitely binding 
 upon the insurer as well as the insured as to the sound value 
 and loss or damage. An appraisal award may be set aside by 
 presentation of evidence by either party showing collusion or 
 bad faith on the part of the appraisers and again, it is 
 probable that an award would be ignored or set aside by 
 the court in the event definite proof could be submitted that 
 a glaring error of magnitude had been made, provided it 
 could be clearly shown that the error had been committed by 
 the appraisers making the award. 
 
 The average layman views the nomination of appraisers 
 as the selection of representatives of either side, though such 
 is entirely contrary to the meaning as well as the wording of 
 the policy, which states that the insured as well as the com¬ 
 pany shall select “a competent and disinterested appraiser.” 
 
 Following the insured’s compliance with all conditions 
 of the policy including those demanded by the company in 
 addition to those as incorporated in the policy, the company 
 under the New York Standard form of fire policy is re¬ 
 quired to pay the amount ascertained to be due within sixty 
 days following the receipt of proof of loss or the filing with 
 the company of an appraisal award as provided. Upon fail¬ 
 ure of the company to pay the loss within the required time, 
 the right of an action at law instantly accrues to the insured. 
 
 C 
 
 8 
 
Lines 182, 183 and 184 of the New Standard Fire Policy 
 of New York states: 
 
 “but there can be no abandonment to this Company of any prop¬ 
 erty.” 
 
 While this should be a very easily understood condition of 
 the policy, it can be safely said that there is as much mis¬ 
 conception as to the company’s or the insured’s option in this 
 respect as to any other feature of the policy contract. The 
 average layman seems to feel that once a loss has occurred 
 the remaining property belongs to the insurer. Such, how¬ 
 ever, is not the case under the fire policy, and no court has, as 
 yet, rendered a decision which would be in the slightest 
 contrary to this statement, unless of course, some adverse 
 act of the insurer should have created an unusually peculiar 
 situation constituting a waiver. Any remaining property, 
 regardless of its value or its condition, is the property of 
 the insured, and as stated, there can be no abandonment to 
 the insurer in the absence of an agreement to the contrary. 
 
 The company has the option, however, to take all or any 
 part of the articles involved in a loss at the agreed or ap¬ 
 praised value, and in addition has the added option of repair¬ 
 ing, rebuilding or replacing the property lost or damaged 
 with other of like kind and quality within a reasonable time, 
 though the company must give notice of its intention so to 
 do within thirty days after the receipt of the proof of loss. 
 
 It is seldom indeed that the insurer takes advantage of 
 the option to repair or replace' the property lost or damaged, 
 though it frequently happens that the company accepts 
 abandonment of the salvage; the latter being usually the 
 result of failure to agree upon the value of the salvage and 
 the adjuster’s idea that more may be obtained by taking 
 possession of and selling same for the benefit of the company 
 rather than by paying the loss demanded by the insured and 
 in consequence leaving all damaged property in his possession. 
 
 In probably ninety-nine cases out of one hundred, the 
 insured gives verbal notice to the agent, and the agent in 
 turn gives written notice to the company. An adjuster is 
 promptly named and immediately visits the scene of the 
 loss, and in a great majority of the cases an amicable adjust¬ 
 ment is arrived at with great dispatch ; proofs of loss sub¬ 
 mitted, and the loss instantly paid. It is seldom indeed that 
 the company takes advantage of its privilege to refrain from 
 payment until the expiration of sixty days from the date 
 proof is filed. The adjuster, as a rule, assists the insured in 
 every possible manner, with reference to the conservation, 
 handling and disposition of the damaged property as well as 
 in the preparation of the proof of loss. In the larger busi¬ 
 ness centers numerous individuals are engaged in the busi¬ 
 ness of representing the insured in the adjustment, and in 
 some states the position of adjuster for the insured is legally 
 recognized, and such individuals are licensed by the state. 
 
 9 
 
It can be safely stated in comparing procedure in fire 
 loss settlements with procedure in connection with the pay¬ 
 ment of obligations arising under contracts, that there is 
 probably less red tape or technical evasion resorted to than in 
 any other business. For instance’, under the policy contract 
 there is no obligation upon the company, except in certain 
 circumstances, to present the insured with a blank proof of 
 loss or assist in the preparation of said proof, though unless 
 the insured is represented by a licensed public adjuster, a 
 great majority of insurance adjusters relieve the insured 
 of all detail in connection with the completion of a proof of 
 loss. 
 
 The average insured seldom, if ever, reads the policy con¬ 
 tract until a loss occurs, but, notwithstanding the fact that 
 a certain percentage of policies can be said to be void due 
 to acts or omissions of the insured, few companies endeavor, 
 in the absence of fraud, to take advantage of the situation 
 which exists. Instead, as a general rule, an amiable adjust¬ 
 ment is reached with the insured, based upon the merits of 
 the case, and prompt payment is made without delay, undue 
 formalities and unreasonable or technical requirements. 
 
 10 
 
Fire Loss Settlements 
 
 SECOND LECTURE 
 
 BY 
 
 J. T. DARGAN, Jr. 
 
 Assistant General Adjuster 
 
 [psq] 
 
 (®SJ 
 
 THE HOME INSURANCE COMPANY 
 
 NEW YORK 
 
Fire Loss Settlements 
 
 # 
 
 Second Lecture 
 
 In our discussion of the subject of “Fire Loss Settle¬ 
 ments” up to this juncture we have given special considera¬ 
 tion to “requirements in case of loss” on the part of the in¬ 
 sured, and perhaps it will not be amiss at this time, with¬ 
 out attempting to lay down any definite rules, to outline the 
 usual or customary procedure on the part of the company’s 
 adjuster or representative. 
 
 As already explained, the usual procedure following the 
 actual occurrence of a fire is a verbal notification by the 
 insured to the agent who in turn either writes or telegraphs 
 the company interested. An adjuster is promptly dispatched 
 to the scene of the loss in the event the claim exceeds $100, 
 and if under this figure the agent usually acts as the adjuster. 
 Immediately upon arrival at or near the scene of the loss 
 the adjuster, in accordance with custom and courtesy, first 
 calls upon the company’s local agent who in turn introduces 
 him to the insured. 
 
 Naturally the first impression formed upon the mind 
 of the adjuster, as well as of the insured, as to the personal 
 characteristics or make-up of either is quite important. If 
 the adjuster creates an unfavorable impression upon the 
 insured, it is needless to say that he will enter into the 
 adjustment under a considerable handicap, though by his 
 later attitude he may be able to entirely overcome this feeling. 
 On the other hand the insured may adopt such thoroughly im¬ 
 proper or unreasonable tactics that the adjuster may form a 
 premature opinion which could not be said to be altogether 
 favorable. 
 
 As previously explained, many insured seem to be under 
 the impression that once a loss has occurred all salvage be¬ 
 comes the property of the company and probably one of the 
 first duties of an adjuster is to explain in as diplomatic a 
 manner as possible that such is not the case. 
 
 1 
 
Many misunderstandings which occur during an adjust¬ 
 ment are frequently overcome by reference to the company’s 
 local agent as intermediary. The local agent, of course, 
 legally represents the company, though at the same time he 
 has a distinct moral obligation to the insured up to the extent 
 of straightening out, if possible, all difficulties which may 
 arise with justice and full consideration for the rights of all 
 concerned. 
 
 An agent well versed in loss procedure, and in addition 
 with a knowledge of the insurance contract, is an asset to an 
 adjuster which should not be overlooked. 
 
 No set rule can be laid down as to procedure in a fire 
 loss settlement, as each case is so distinctly different that a 
 rule which might properly apply to one loss would be entirely 
 out of order in another instance. 
 
 After the agent has discussed the loss with the company’s 
 adjuster and the latter has gotten in touch with the insured, 
 the customary procedure is to ascertain, if possible, the cause 
 of the fire, and naturally if no criticism is to be directed 
 toward the insured, it is the next duty of the adjuster to take 
 up for consideration the policy contract. That is, he should 
 first endeavor to ascertain what interest the insured has in 
 the property involved and, without putting his questions in 
 the form of a legal examination, should endeavor to ascertain 
 whether all requirements in the policy have been substantially 
 complied with. 
 
 Where an adjuster ascertains that a vital condition of 
 the policy has been ignored by the insured, or becomes aware 
 of the fact that the insured by some act has voided an essential 
 condition thereof, it is the duty of the company representative 
 at once to bring to the attention of the insured the fact that, 
 inasmuch as the contract has been violated, it will be necessary 
 for both parties to agree that all further discussion or con¬ 
 sideration of the loss is to be without prejudice. In order to do 
 this it is necessary for the insured as well as the adjuster to 
 jointly execute what is known as a “non-waiver” agreement. 
 This agreement is simply a statement to the effect that the act 
 of the adjuster in further investigating and attempting to de¬ 
 termine the amount of the loss shall be done without any com¬ 
 mitment on the part of the company or without infringement 
 upon the rights of either. In other words, it is an endeavor 
 on the part of the company to preserve the rights, which 
 properly have already accrued to the company, and in addition 
 with as little trouble as possible to ascertain by definite agree¬ 
 ment, if this can be done, the true amount of the loss sustained. 
 
 Practically no company at this time is in the habit of 
 making a flat denial of liability immediately upon becoming 
 aware of a serious violation of the policy contract, but 
 instead they, as a rule, wish to proceed further in order to 
 determine the amount of the loss. 
 
 (# 
 
 2 
 
The average insured, when being confronted with this 
 situation, as a rule seeks legal advice unless perchance he 
 has every confidence in the company’s local agent, in which 
 event there is seldom any delay in agreeing to the adjuster’s 
 proposal that he sign a “non-waiver” agreement. 
 
 For some unknown as well as some unascertainable rea¬ 
 son an occasional public adjuster, i. e., the adjuster who repre¬ 
 sents the insured and not the company, advises his client not 
 to sign a “non-waiver” agreement, evidently proceeding upon 
 the presumption that by so doing he would acknowledge the 
 existence of a policy violation. As an offset to this I would 
 say that I do not recall one single instance in my, it is true, 
 short career as an insurance adjuster,, where the insured’s 
 act in signing a “non-waiver” agreement has reacted to his 
 disadvantage; on the contrary I think the average court would 
 look upon this as a clear evidence of the insured’s good faith 
 as well as his desire to do anything within reason as sug¬ 
 gested by the company. 
 
 Analyzing the procedure in connection with adjustments 
 under various classes of losses it might be said that there are 
 two separate and distinct methods; one being the careful and 
 very proper procedure of the conscientious adjuster who en¬ 
 deavors in a detailed and proper manner to> ascertain the true 
 loss. If such an adjuster is unfamiliar with the class of prop¬ 
 erty damaged or destroyed, he invariably seeks technical ad¬ 
 vice and before making the insured an actual offer of settle¬ 
 ment is, as a rule, quite positive.as to the true facts in the 
 case. 
 
 The other class of adjusters, who are decidedly in the 
 minority, are those individuals who make what may be termed 
 “jump” settlements, i. e., following a superficial examination 
 of the loss, make the insured an offer in round figures of so 
 much money. Probably in a great percentage of these cases, 
 the insured himself does not know the true extent of the loss, 
 and where a loss is settled on basis of a “jump” estimate and 
 it later develops that it has been considerably underpaid, the 
 company will secure unfavorable though properly earned 
 notoriety, and in the reverse case the insured will reap a 
 decided profit as a result of a settlement in this manner. 
 
 The act of any adjuster who adopts the “jump” estimate 
 basis of settlement is to be greatly regretted, as it is, I believe, 
 almost a physical impossibility for any one individual to tell 
 at a glance just what a loss may or may not be. 
 
 It is quite true that a “jump” settlement greatly reduces 
 the necessity of detailed work or trouble as well as annoyance 
 on the part of all concerned, but inasmuch as a settlement 
 on this basis has such serious disadvantages as well as come¬ 
 backs, it is hoped by, I believe, a great majority of the com¬ 
 panies that no insured will accept settlements on this basis. 
 
 Of course where grave doubt exists as to the extent of a 
 loss and no amount of careful analysis or detailed work, as 
 
 3 
 
well as technical advice, will avail as to fixing - by agreement 
 the true amount of the loss, then it very frequently happens 
 that a round figure is agreed upon in compromise, though it 
 is clearly understood that such figure is a compromise settle¬ 
 ment and there can, therefore, be no comeback on the part 
 of either. 
 
 It is my impression that competent insurance brokers, 
 who have the interest of their clients at heart, would much 
 prefer to deal with a careful, thoroughly reasonable adjuster 
 than with an individual who preferred to settle all losses 
 by simply naming a round figure without going fully and 
 carefully into the details of the case. The broker would 
 realize in the first instance, that he would receive the same 
 form of consideration and treatment on all losses, whereas 
 in dealing with the other type of adjuster, he would be 
 apprehensive as to the eventual outcome of every case. 
 
 Perhaps the' most important element that enters into a 
 satisfactory adjustment is with reference to the make-up as 
 well as the characteristics of an adjuster. 
 
 It has been frequently stated that “an adjuster is born 
 and not made” and I can heartily endorse this statement. I 
 have known individuals well posted from every standpoint 
 who were utterly unable to accomplish anything as fire loss 
 adjusters. 
 
 Such individuals might be able to readily ascertain the 
 amount of any loss probably with a greater degree of accuracy 
 than their successful associates, though they were unable to 
 so convince the insured. It is one thing, of course, to be able 
 to ascertain a loss as well as to construe a policy contract, 
 but it is an entirely different thing to be able to convince 
 others of the properness of one’s line of reasoning. 
 
 From time immemorial the general public has looked 
 upon the adjuster as the “bull dog” type of individual, though 
 from my observation the most successful men in the profes¬ 
 sion are those who have a thoroughly pleasing and inoffensive 
 demeanor as well as diplomacy. 
 
 x\s a rule the average individual suffers not more than 
 one loss during a lifetime, and naturally when this crisis 
 arises, diplomacy as well as consideration on the part of the 
 company adjuster accomplishes more to straighten out mis¬ 
 understandings than any other form of treatment. 
 
 The policy contract becomes a thoroughly personal one 
 at this time. The insured when purchasing the policy does 
 so purely from the standpoint of protection in the event of a 
 casualty and in probably not one out of ten thousand cases 
 is the contract carefullv read and considered. Naturallv after 
 a loss the insured reads the policy from beginning to end and 
 no doubt notices that there are several things which should 
 have been done which he has failed to do. He is, as a rule, 
 somewhat excited or over-wrought upon the arrival of the 
 adjuster, and unless the latter’s attitude is considerate and 
 
 4 
 
reasonable a serious and thorough misunderstanding may 
 arise. 
 
 As a general rule no insurance adjuster is delegated with 
 the authority to waive a policy violation, his duty being to 
 ascertain the facts and, if possible, agree upon the amount 
 of the loss. If one or more essential condition of the policy 
 has been violated, the adjuster usually submits a written 
 report to the company, and upon receipt of definite instruc¬ 
 tions either denies liability, attempts a compromise settlement, 
 if same would seem to be in order, or submits a blank proof 
 
 of loss to the insured for signature on basis of the agreed 
 
 loss. 
 
 As previously stated, few companies endeavor to take 
 advantage of minor technicalities which frequently arise, and 
 particularly where there has been no wrong intent. 
 
 It is only natural that the adjusting or loss department 
 
 of any insurance company can be no more human than its 
 
 executive heads, though from my observation it is my candid 
 opinion that more considerate treatment is accorded by fire 
 insurance companies in the adjustment of losses than in any 
 other similar branch of commercial enterprise. 
 
 Perhaps an item of general interest would be the con¬ 
 sideration of those claims properly coming within the cate¬ 
 gory of fraudulent losses. 
 
 Insurance companies while most considerate of an honest 
 and deserving claimant, are as a rule the reverse when con¬ 
 fronted with a fraudulent claim, though unfortunately, due in 
 g*reat part to our form of judicial procedure, fraudulent claims - 
 are either collected direct from the company by reason of 
 ignorance of the latter as to the existence of fraud, or through 
 the channel of the' courts. 
 
 It is seldom indeed that an insurance company will with¬ 
 stand suit unless a positive as well as a g*ood defense exists. 
 
 It has always been the writer’s theory that a fraudulent 
 claim will at some stage of the adjustment or investigation 
 be easily detected. It is very seldom that the individual who 
 has deliberately burned his property will not leave* uncovered 
 some vital fact or feature which will, when discovered, place 
 the loss within the proper category. For instance, I recall 
 one distinct case where a very beautiful set of books had 
 been presented to the adjuster bv the insured to substantiate 
 his claim for loss of a stock of merchandise, and the ad¬ 
 juster when casually examining the last detailed inventory 
 suddenly detected the fact that one page of the inventory was 
 dated a year ahead of the date of loss. This of course' is con¬ 
 trary to all rules of human nature. One will frequently in 
 the first part of a year insert a date through error or from 
 habit, as the past year, yet I do not know of any individual 
 who has ever through error or habit inserted a coming year 
 as the date upon which an instrument or document was 
 drawn up. 
 
Perhaps one of the greatest assets or qualities for an 
 adjuster to have is a thorough knowledge of human nature. 
 Those company representatives who proceed upon the theory 
 that all losses are questionable, seldom, if ever, are elevated 
 to important positions by the company. On the other hand 
 the adjuster who considers every one honest is not only a 
 costly investment for his company, but he is in addition 
 a menace to society by reason of the fact that “loose” adjust¬ 
 ments are unquestionably responsible for additional or further 
 losses. 
 
 Perhaps if our laws were a little more stringent with 
 respect to responsibility in connection with the cause of a fire, 
 insurance companies would be able to afford the necessary 
 protection for a much more reasonable rate of premium than 
 at present. In France, I believe, as well as in some other 
 foreign countries, every fire is properly chargeable to the 
 negligence of some individual. For instance, where a loss 
 occurs the proprietor or occupant is usually placed under ar¬ 
 rest until he establishes his innocence both with respect to 
 fraud as well as undue carelessness. If the loss is due' say 
 to a structural defect of the building, the contractor or builder 
 is next interrogated by the authorities, and he in turn may be 
 able to demonstrate that the building was erected in strict 
 accordance with the plans and specifications. The next in¬ 
 dividual questioned is the architect who may be adjudged 
 guilty of carelessness or improper judgment in connection 
 with the origin of the fire. 
 
 The courts of this country, due to our system of legal 
 procedure, have given the insurance companies as well as the 
 public little assistance in connection with the segregation of 
 fraudulent and accidental losses; apparently confining their 
 verdicts wholly to the contract and not to the apparently true 
 facts in the case. 
 
 Without going into a technical, or attempting a far reach¬ 
 ing legal discussion of the conditions of the present New York 
 Standard Policy, it will probably not be' amiss to take up for 
 consideration and briefly consider each essential condition. 
 
 In the foregoing the first provision of the policy— 
 
 “does insure John Doe and legal representative, to the extent 
 of the actual cash value, etc.” 
 
 was quoted in full, and following this appears 
 
 “against all DIRECT LOSS AND DAMAGE BY FIRE and 
 by removal from premises endangered by fire, except as herein 
 
 provided, to an amount not exceeding .!. Dollars 
 
 to the following described property while located and con¬ 
 tained as described herein, or pro rata for five days at each 
 proper place to which any of the property shall necessarily be 
 removed for preservation from fire, but not elsewhere, to wit: 
 as per printed form attached, duplicate of which is filed in 
 this office.” 
 
 6 
 
* 
 
 Following this provision a printed form is usually at¬ 
 tached to the policy briefly describing the character of the 
 property insured, that is, whether it consists of a building, 
 household furniture, stock of merchandise or any other real 
 or personal property. The location or locations at which the 
 property is situate are then inserted in the form and afterward 
 all clauses or permits, such as co-insurance, lightning, elec¬ 
 tricity, etc., are inserted. 
 
 Any permit or clause attached to the form necessarily 
 takes precedence over any contrary provision in the policy— 
 see lines 72 to 77 reading: 
 
 “The extent of the application of insurance under this policy 
 and of contribution to be made by this Company in case of 
 loss or damage, and any other agreement not inconsistent with 
 or a waiver of any of the conditions or provisions of this 
 policy, may be provided for by agreement in writing added 
 hereto.” 
 
 Though particular attention is called to the fact that the 
 foregoing is only true provided the permits or added agree¬ 
 ments are not inconsistent with or a waiver of any conditions 
 or provisions of this policy. 
 
 The body of the policy, lines 1 to 200, begins: 
 
 “This entire policy shall be void if the insured has concealed 
 or misrepresented any material fact or circumstance concern¬ 
 ing this insurance or the subject thereof; or in case of any 
 fraud or false swearing by the insured touching any matter 
 relating to this insurance or the subject thereof, whether be¬ 
 fore or after a loss.” 
 
 The meaning of the foregoing is that the policy shall be 
 void in the event the insured has deliberately concealed or 
 misrepresented any material fact or circumstance. For in¬ 
 stance, in securing* insurance the insured may make a direct 
 statement as to the cost of the property to him, as well as 
 the age and condition of the property, whereas upon investiga¬ 
 tion it develops that an entirely different situation exists. As 
 I have’ already said, what an individual pays for an article 
 or piece of real property is not necessarily a guide as to its 
 value at the time of any loss, though where a deliberate mis¬ 
 statement is made of anv material fact or circumstance, it 
 will unquestionably be held to void the policy. For instance, 
 the insured may, in securing a certain policy, maintain that 
 he has no other insurance and the company’s agent in granting 
 insurance may do so with the distinct understanding that 
 there is no additional insurance. The policy, it is true, would 
 be void by reason of other insurance without notice, though 
 misrepresentation on the part of the insured would be as vital 
 a defense as this added condition. 
 
 In addition to the feature of misrepresentation, the act 
 of the insured in giving false testimony following a loss will 
 be equally effective in voiding the policy. 
 
 7 
 
Under the head of “Requirements in Case of Loss,” the 
 company’s right to examine the insured under oath was 
 touched upon, and it may therefore be said that when during 
 such examination the insured gives false testimony, he may 
 by such act create a voidance of the policy, whereas the in¬ 
 strument may at the time of the fire exist as a valid contract. 
 
 Lines 7 to 11 inclusive state: 
 
 “This policy shall not cover accounts, bills, currency, deeds, 
 evidences of debt, money, notes or securities; nor, unless 
 specifically named hereon in writing, bullion, manuscripts, 
 mechanical drawings, dies or patterns.” 
 
 The foregoing condition hardly needs a detailed explanation 
 other than to state that while bullion, manuscripts, mechanical 
 drawings, dies or patterns may be and are frequently covered 
 under the policy by specific endorsement, yet never in any 
 instance are accounts, bills, currency, deeds, evidences of debt, 
 monev, notes or securities covered other than for their cost 
 to replace. In other words the amount of ‘a debt cannot be 
 covered except under a very peculiar form of agreement, not 
 however, attached to the standard policy, though probably by 
 some such institution as London Lloyds, even though the bill 
 or document intended to be covered under the policy may be 
 the only true evidence of the debt. Deeds are frequently cov¬ 
 ered though only for the cost to replace, that is, the actual 
 clerical work incidental to duplication. No doubt fire insur¬ 
 ance is frequently carried on money, notes and securities, 
 though not, I am quite sure, under the standard policy. 
 
 The policy proceeds—see lines 12 to 19 inclusive: 
 
 “This Company shall not be liable for loss or damage caused 
 directly or indirectly by invasion, insurrection, riot, civil war 
 or commotion, or military or usurped power, or by order of 
 any civil authority; or by theft; or by neglect of the insured 
 to use all reasonable means to save and preserve the prop¬ 
 erty at and after a fire or when the property is endangered 
 by fire in neighboring premises.” 
 
 We have had during the present world war a very clear 
 example of the application of the foregoing, and particularly 
 with reference to what has been defined as a riot by the 
 statutes of various states. The Statute of New York declares 
 that the act of three or more persons may constitute a riot, 
 and therefore the destruction of property by fire as a result 
 may be said not to be covered under the policy. 
 
 During the progress of a big fire it may happen that the 
 civil authorities will cause the destruction of property by 
 dynamite or fire in order to stop the spread of the fire, and 
 naturally the property owners so affected make claim under 
 a fire policy. This, however, is not a legal claim under the 
 contract, and where it can be demonstrated that property in¬ 
 volved was damaged or destroyed by dynamite or fire by 
 order of the civil authorities, there can be no collectible loss 
 under the policy. 
 
 8 
 
The theft of any portion of property involved during a 
 fire is not a loss coming under the terms or conditions of the 
 policy. 
 
 The last portion of the above quoted provision is seldom 
 enforced by the company due to the fact that it is, as a rule, 
 very difficult to demonstrate to the satisfaction of a jury that 
 all reasonable means to save and preserve the property have 
 not been used. For instance, I know of several cases where 
 a storekeeper has deliberately prevented the removal of a 
 stock, due to his idea that the fire would not reach his prem¬ 
 ises, as he no doubt felt, and possibly very properly so, that 
 a removal of the property by the general public would cause 
 greater damage than the risk involved would warrant in 
 allowing the property to remain at its present location. Of 
 course, where it could be demonstrated that an insured had 
 every opportunity of removing the property and deliberately 
 failed to do so, the company could unquestionably avoid pay¬ 
 ment of the loss. 
 
 Lines 20 to 31 inclusive state: 
 
 “This entire policy shall be void, unless otherwise provided 
 by agreement in writing added hereto, 
 
 (a) if the interest of the insured be other than uncondi¬ 
 tional and sole ownership; or (b) if the subject of insur¬ 
 ance be a building on ground not owned by the insured 
 in fee simple; or (c) if, with the knowledge of the in¬ 
 sured, foreclosure proceedings be commenced or notice 
 given of sale of any property insured hereunder by reason 
 of any mortgage or trust deed; or (d) if any change, other 
 than by the death of an insured, take place in the interest, 
 title or possession of the subject of insurance (except 
 change of occupants without increase of hazard) ; or (e) > 
 
 if this policy be assigned before a loss.” 
 
 As you will recall, in the foregoing stress was laid upon 
 the fact that fire insurance under the standard policy covers 
 an interest and not simply a physical piece of property, as in 
 the marine contract, and therefore the interest of the insured 
 in the property described must be clearly set forth in the 
 policy or same may be said to be null and void. For instance, 
 if insurance should be granted to an individual who had say 
 a half interest in either a piece of real or personal property 
 and this fact was not noted in the policy, the contract would 
 be null and void as to any loss which might be sustained. 
 
 A building situate on leased ground, where this fact is not 
 noted in the policy, could not be said to be covered, nor would 
 the insured be able to collect any loss under the standard 
 policy. 
 
 If the insured permitted foreclosure proceedings without 
 notifying the company, or permitted a notice to be given of 
 sale of any property covered under the policy by reason of 
 any mortgage' or trust deed, the policy would be void from 
 date of such occurrence. 
 
 9 
 
If, following the issuance of a policy, the insured should 
 die, it is unnecessary to secure an endorsement as the policy is 
 valid as to the estate or heirs until expiration, though when 
 renewed should be in name of the estate or the heirs. 
 
 Where a building as described is occupied as a store or 
 blacksmith shop, any change of occupancy may occur unless 
 the entire nature of the business is changed, that is, if a 
 dry goods store were converted into a powder factory without 
 notice to the company, the policy would be void from date 
 of change of the occupancy. The owner and occupant of a 
 blacksmith shop may in turn rent the premises to another 
 individual who will likewise operate a blacksmith shop, but 
 this would not be contrary to the policy provisions. 
 
 10 
 
Fire Loss Settlements 
 
 THIRD LECTURE 
 
 BY 
 
 J. T. D ARC AN, Jr. 
 
 Assistant General Adjuster 
 
 (mE) 
 
 («®J 
 
 THE HOME INSURANCE COMPANY 
 
 NEW YORK 
 
Fire Loss Settlements 
 
 Third Lecture 
 
 The subrogation provision of the present New York 
 standard policy, lines 197 to 200 inclusive, reading: 
 
 “This Company may require from the insured an assign¬ 
 ment of all right of recovery against any party for loss or 
 damage to the extent that payment therefor is made by this 
 company.” 
 
 is quite different from this provision in the old policy. The 
 request has been made that the rights of the company under 
 this provision of the policy be defined. The main difference 
 between the subrogation provision in the old New York 
 standard policy and the new is that in the latter it is stated 
 that: 
 
 “This company may require...” 
 
 whereas in the former it is stated that: 
 
 “This Company shall on payment of a loss be subrogated.” 
 
 In the old form there was no provision whereby the 
 company could upon request obtain a mere assignment to the 
 extent of its payment, unless it was alleged that the fire was 
 caused by the act or neglect of a person or corporation. It 
 is quite true that the right of subrogation accrues as a result 
 of common law, provided, of course, the company is clearly 
 legally entitled to succeed to the rights of the insured against 
 the third person. 
 
 I believe that there is a decision in one state which 
 forces the company upon payment of a loss to make specific 
 demand for the execution of a subrogation receipt or assign¬ 
 ment, though in the absence of any such decision, the right 
 
 1 
 
of subrogation would, I believe, exist regardless of whether 
 the company did or did not at the time of loss obtain a sub¬ 
 rogation receipt. There would seem to be a distinction be¬ 
 tween a subrogation receipt and a mere assignment; the 
 first being the legal operation by which the company in pay¬ 
 ing the insured succeeds to the rights of the insured against 
 the person or corporation whose negligence caused the fire, 
 whereas in the case of an assignment, the company would 
 have the privilege of insisting upon the execution of an as¬ 
 signment in its favor upon making payment of loss to the 
 insured, and it would not be necessary in obtaining such 
 assignment to make any allegation as to the cause of the fire. 
 
 The company, when making payment of a loss which has 
 been caused by the negligence of a third person, invariably 
 requires the execution on the part of the insured of a sub¬ 
 rogation receipt or assignment. 
 
 The company in filing suit against the person or corpora¬ 
 tion, whose negligence caused the fire, may sue in its own 
 name as assignee, or suit may be entered in the name of the 
 insured, though, if the latter procedure be adopted, the 
 insured’s consent and acquiescence must of course be secured. 
 
 Where the loss sustained exceeds the amount of insur¬ 
 ance collected, the insured would seem to have an equitable 
 right to participate in the proceeds of the amount recovered, 
 if any, and in a large percentage of cases suit is brought in 
 name of the insured with a side agreement whereby it is 
 stipulated that the company and the insured shall participate 
 in the net recovery in accordance with the amounts of their 
 respective interests. 
 
 I do not believe the company has the legal right to act 
 without reasonable regard for the interest of the insured. In 
 other words, if the insured sustained a loss far in excess of 
 the insurance, the company could not, even though it had 
 obtained the necessary subrogation receipt or assignment, 
 enter into a compromise settlement of the claim with the third 
 person ignoring the unsatisfied interest of the insured in the 
 settlement, unless perchance the subrogation receipt or assign¬ 
 ment, by its terms and conditions, gave the company the legal 
 right to do this. 
 
 No company, however, will as a rule attempt to proceed 
 under a subrogation receipt or assignment without first 
 reaching some agreement with the insured concerning the 
 participation of his interest in either a compromise settlement 
 or recovery by suit. 
 
 The subrogation provision in the old policy necessitated 
 the company alleging that the fire was caused by the act or 
 neglect of some person or corporation, whereas the provision 
 in the new policy does not mention this feature. 
 
 Unquestionably the benefits, therefore, of the subroga¬ 
 tion provision in the new policy are far superior to those 
 afforded in the old. 
 
Embodied in the New York and New Jersey standard 
 mortgage clause is the following subrogation provision: 
 
 ‘‘Whenever this Company shall pay the mortgagee (or 
 trustee) any sum for loss or damage under this Policy and 
 shall claim that, as to the Mortgagor or owner, no liability 
 therefor existed, this Company shall, to the extent of such 
 payment, be thereupon legally subrogated to all the rights 
 of the party to whom such payment shall be made, under all 
 securities held as collateral to the mortgage debt, or may at 
 its option, pay to the mortgagee (or trustee) the whole prin¬ 
 cipal due or to grow due on the mortgage with interest, and 
 shall thereupon receive a full assignment and transfer of the 
 mortgage and all such other securities; but no subrogation 
 shall impair the right of the mortgagee (or trustee) to recover 
 the full amount of his claim.” 
 
 By the foregoing is meant that the company merely steps 
 into the shoes of the mortgagee, or in other words either buys 
 the mortgage outright, if the amount paid equals the face of 
 the mortgage, or if less than the mortgage, then the company 
 simply acquires an interest in the mortgage' to the extent of 
 the amount paid. 
 
 As the mortgagee under the standard mortgage clause 
 frequently has distinct advantages over the insured, it occa¬ 
 sionally becomes necessary or advantageous for the company 
 to pay off the mortgage in full, even though it is often neces¬ 
 sary to pay or advance more than the amount of the policy. 
 
 The company may be liable to the mortgagee but not 
 to the insured, and by paying the full amount of the mort¬ 
 gage and obtaining an assignment thereof, the company may 
 then proceed to insist upon the payment to it by the insured 
 of the full amount of the mortgage, and upon the insured’s 
 failing to comply the company has the right, when the mort¬ 
 gage becomes due, to foreclose upon the property and obtain 
 exactly the same' benefits as would have been obtained by the 
 mortgagee in the event that no insurance had been collected. 
 It is true that if no fire had occurred, the mortgagee would 
 have had the added value of the improvements as security for 
 the payment of the debt, and therefore the company, when 
 acting as the assignee, as a rule only obtains the benefit derived 
 from the sale of the vacant land. 
 
 In those instances where the company pays the mortgagee 
 an amount less than the' mortgage and acquires an interest 
 in the mortgage to the extent of its payment, it—the company 
 —cannot take any action that would adversely affect the in¬ 
 terest of the mortgagee; in fact the remaining amount due 
 the mortgagee must first be paid before the company has the 
 right to participate in the proceeds derived from the sale of 
 the property. 
 
 In the adjustment of losses on property situate on the 
 railroad right of way, the adjuster is frequently confronted 
 with the situation where a waiver of the property owner’s 
 rights with respect to the liability of the railroad has been 
 
 3 
 
made in consideration of the act of the railroad company 
 in laying a spur track up to and frequently upon the insured’s 
 premises. Where the insured has previous to the date of the 
 policy signed an agreement relieving the railroad company of 
 all responsibility for loss caused by negligence or otherwise 
 the question arises whether the policy has ever existed as a 
 valid contract. Where no change has taken place during the 
 life of the policy, it is seldom indeed that the company 
 attempts to take advantage of the situation with respect to 
 the adjustment of the loss with the insured. Where, how¬ 
 ever, the insured has during the life of the policy signed an 
 agreement relieving the railroad of all responsibility, thereby 
 incidentally waiving any and all rights which the company 
 may have, it would seem that a valid defense exists as to the 
 payment of any loss. 
 
 The insured, however, as a rule, never considers the 
 effect of waiving his rights against the railroad company as 
 concerning the fire insurance contract. 
 
 Where the common carrier or railroad company happens 
 to be the cause of fire which damaged property in cars on a 
 railroad siding on the insured’s premises, where the shippers 
 had not waived any of their rights, the latter would unques- 
 tionablv be able to collect the full amount of their loss from 
 the railroad company, or if the insurance company had paid 
 the insured the full amount of the loss, then the doctrine of 
 •subrogation would apply and the company could in turn collect 
 the full amount of the loss, which it had paid to the insured, 
 from the railroad company. 
 
 Where it could be proven that the fire was due to 
 negligence on the part of the property owner, the railroad 
 company could unquestionably succeed in collecting the loss 
 or damage to its property on the siding, provided no agree¬ 
 ment to the contrary existed. And again the railroad com¬ 
 pany could collect for the loss or damage to property on its 
 main line, provided negligence on the part of the property 
 owner could be proven. 
 
 A great many recent forms presented to the underwriter, 
 under which some losses have been sustained, are we notice 
 designed to cover the liability of the property owner to the 
 railroad company for cars of the latter in the former’s pos¬ 
 session or on the former’s premises. 
 
 The consequential loss and damage clause, when con¬ 
 tained in the policy, is simply an added condition which places 
 the necessity upon the company of recognizing liability and 
 paying for loss or damage sustained by the insured on prop¬ 
 erty which may not in the slightest degree from a physical 
 standpoint actually be damaged by fire or water. To illustrate, 
 the refrigerating machinery of a cold storage plant may be 
 situate in a building some distance from the storage ware¬ 
 house. A fire in the machinery building may put the refrig¬ 
 erating apparatus or plant entirely out of business and it may 
 
 4 
 
be physically impossible to make necessary repairs within 
 sufficient time to save and preserve stock in the warehouse, 
 such as meats. It could not be said, of course, that the stock 
 of meats had in the slightest degree been damaged by fire or 
 water, and therefore the consequential loss and damage clause 
 was designed to cover this situation, and the insured holding 
 a policy in which the consequential damage clause is con¬ 
 tained would, in the case just cited, be able to collect the en¬ 
 tire loss or damage sustained on meats, whereas had there 
 been no consequential loss or damage clause in the policy, 
 no loss could have been collected by the insured on meats 
 notwithstanding the fact that the stock in question had proven 
 to be a total loss. 
 
 Most of the consequential loss and damage clauses con¬ 
 tain a provision that the insured shall use due diligence to 
 repair, or restore, the damaged or destroyed building, or 
 buildings or plant, and therefore when it could be proven 
 that the insured had not acted with due diligence in an en¬ 
 deavor to save and preserve the property affected, the com¬ 
 pany could naturally sustain a denial of liability. 
 
 In a large percentage of the consequential damage clauses 
 a further provision is embodied, that the insured shall give 
 the company immediate notice, and the importance of com¬ 
 pliance with this provision can be very readily understood. 
 
 Bearing in mind that a fire policy is intended to cover 
 only ALL direct loss and damage by fire, the question fre¬ 
 quently presents itself as to what may constitute a direct 
 loss and damage by fire. 
 
 One of the simplest illustrations is with reference to loss 
 or damage by explosion, preceded of course by a fire. The 
 overwhelming trend of court decisions with reference to this 
 feature is that the company is liable under the regular fire 
 policy for ALL loss or damage where it can be proven to 
 the satisfaction of the jury that the proximate cause was a 
 “hostile” fire. On the other hand, where the company can 
 produce evidence that a “friendly” fire preceded the explosion, 
 the only liability which may accrue 1 under the policy is the 
 damage which may be sustained by the ensuing fire, that is 
 the fire which may follow the explosion. It is, of course, fre¬ 
 quently quite difficult to separate the fire and explosion 
 damage, though this is a matter of agreement as to amount 
 and is not a question of contract. 
 
 By “proximate” cause is meant the nearest cause. That 
 is, the cause to which the loss is most nearly related. 
 
 Of all forms of insurance at present accepted or written 
 probably no form is so little understood as Use and Occu¬ 
 pancy, and it is the adjustment of this type of loss that gives 
 the present day adjuster the greatest amount of thought as 
 well as hard work. Unfortunately forms designed to cover 
 use and occupancy are by no means uniform, and it is there¬ 
 fore impossible to lay down a set rule as to the proper pro- 
 
 5 
 
cedure in event of a loss other than to say that the adjuster 
 frequently has to secure’ the real intent of the parties at in¬ 
 terest over and above the actual contract. 
 
 Many features enter into the adjustment of a use and 
 occupancy loss upon which even no two competent adjusters 
 agree. 
 
 It is true that the ascertainment of the actual loss sus¬ 
 tained on net profits of the business does not appear to be a 
 difficult problem, though where the plant or concern sustain¬ 
 ing the loss is a large or complex one', I believe I am safe in 
 saying that I do not think any two competent adjusters could 
 achieve exactly the same result in independently figuring on 
 the actual loss sustained of net profits, from exactly the same 
 records. 
 
 In addition to the actual loss sustained of net profits on 
 the business which may be prevented by the fire, the item of 
 fixed charges and expenses as must necessarily continue 
 during a total or partial suspension of business is frequently 
 covered, though the determination of just what may be said 
 to constitute tixed charges and expenses is another problem 
 for the adjuster. 
 
 The entire use and occupancy cover is naturally predicated 
 upon the item of time required to rebuild, repair or replace 
 the property damaged or destroyed, and the item of time in 
 this instance is, of course, figured from the date of the fire 
 and not from the date of the arrival of the adjuster nor of the 
 completion of the adjustment nor of the payment of the loss. 
 
 A great majority of use and occupancy forms embody a 
 provision limiting the liability of the company to not ex¬ 
 ceeding $. for each business day of such suspen¬ 
 
 sion, though this is not intended for, nor does it have the effect 
 of a valued policy as many brokers seem to feel. 
 
 The most essential fact for an adjuster to consider in the 
 adjustment of a use and occupancy loss is that the contract 
 is intended to indemnify the insured against actual loss sus¬ 
 tained plus the item of fixed charges and expenses, if cov¬ 
 ered, and bearing in mind the intent of the cover, the only 
 proper method to pursue is, as stated, first to ascertain the 
 true intent of the parties at interest as concerning the item 
 of fixed charges and expenses and then by a keen analysis 
 of the insured’s books and records to ascertain the percentage 
 of profit. 
 
 I personally know of one loss coming under this head 
 where the insured, upon being able to realize the same, or 
 in fact in that instance a greater profit, first reported a loss 
 under his use and occupancy policy, but subsequently of 
 his own volition withdrew same as he reached the conclusion 
 that he had sustained no loss coming under the terms and 
 conditions of the contract, though of course in that instance 
 the form did not contain the provision covering fixed charges 
 and expenses. 
 
 6 
 
Many use and occupancy forms contain a provision that 
 a certain previous stated period, varying- from six to twelve 
 months, shall be utilized in ascertaining the average profit 
 earned, and others are entirely silent on this feature. 
 
 The adjustment of use' and occupancy losses presents 
 most difficult problems while business conditions are unset¬ 
 tled as at the present time. To illustrate, a merchant or 
 manufacturer may be able to show an unusual profit for the 
 last preceding six or twelve months, whereas the same con¬ 
 cern may now be doing business at a loss. The use and oc¬ 
 cupancy form, therefore, must first be analyzed before an 
 expression of opinion can be given as to the company’s liabil¬ 
 ity. In those instances where the merchant is now doing 
 business at a loss, the only collectible item under the policy 
 is with reference to fixed charges and expenses, provided of 
 course the cover could not be said to be a valued one. 
 
 A question several times presenting itself to us is with 
 reference to the inclusion or the properness of excluding the 
 cost of removing debris in the event of both a building as 
 well as a personal property loss. In the event of a partial 
 loss on the building, the item of removing the burned or 
 damaged portion of the building together with the debris is 
 invariably admitted as a part of the loss. Where, however, 
 a total loss to the building structure has been sustained and 
 by chance the amount of insurance slightly exceeds the 
 agreed sound value of the building, then the question arises: 
 Is the added cost of removing the debris a collectible item 
 under the policy? There are no court decisions on this point 
 so far as I know, and it is hard for me to believe, even taking 
 into consideration the trend of court decisions, which lean 
 toward the interest of the insured rather than the company, 
 that the latter would be called upon to pay any sum in excess 
 of the entire sound value of the building. The item of cost 
 of removing the debris may be covered under the policy, but 
 it should be clearly stated. 
 
 In the event of loss of personal property, such as a stock 
 of merchandise or any property other than a building struc¬ 
 ture, the cost of removing the debris does not so frequently 
 arise, though in one recent instance the question was pro¬ 
 pounded to us whether in the event of the company’s admit¬ 
 ting a total loss to sound value, could the insured insist upon 
 the payment of the additional amount necessary to remove the 
 debris—the amount of insurance being in excess of the 
 agreed sound value. I believe, as stated, that the company’s 
 liability is limited by the sound value, and I cannot conceive 
 of any situation which might arise where the insurer could be 
 called upon to pay exceeding the value at the time of the loss, 
 provided, of course, the policy contained no contrary or added 
 provision. I have heard some doubt expressed on the part 
 of some adjusters as to the legal right of the company to 
 exclude the item of the cost of removing the debris in the 
 
 7 
 
event of a total loss on a building structure, but, as stated, 
 there are no decisions on this point of which I have any knowl¬ 
 edge, and I am quite sure that no company would be willing 
 to admit this item other than on a strictly compromise basis. 
 
 The question frequently arises as to the proper course 
 to pursue in making a denial of liability on behalf of the 
 company. The writer’s custom, or belief, in this respect is 
 that it is not necessary to insert in a letter denying liability 
 any cause or reason, but a mere statement, setting forth that 
 the insurance company hereby informs you that it denies any 
 and all liability as a result of claim made on account of fire 
 on such and such a date', should suffice. 
 
 Where the premium has been paid in advance and the 
 policy is void from issue, I believe the safest policy to pursue 
 is to tender the full return premium together with the legal 
 rate of interest from the date premium was received. 
 A majority of attorneys seem to feel that this is unneces¬ 
 sary, though certainly no harm is done and opposing counsel 
 are prevented from dwelling upon the acceptance of and fail¬ 
 ure to return premium. 
 
 In those cases where the insured has through some act 
 voided the policy since the date of issuance, I do not believe 
 it is necessary to tender any return premium, for the policy 
 did at time of issuance exist as a valid contract, and it so 
 existed for a period thereafter, and naturally had a loss oc¬ 
 curred during such time the company would have been called 
 upon to fulfill its contract by paying the proper amount due. 
 
 The co-insurance, or reduced rate contribution or average 
 clause, is a provision added to the policy, designed to force 
 the insured to carry insurance up to a certain stated value, 
 and failing so to do, the insured must bear his proportion 
 of the loss. 
 
 The simplest manner in which the co-insurance clause 
 can be applied is by considering that the insured will in every 
 given case be entitled to collect a certain fractional portion 
 of the loss; the amount of insurance actually carried being 
 the numerator of the fraction and the amount of insurance 
 which should have been carried being the denominator. To 
 illustrate, if a building should be valued at $10,000, the insured 
 would, under the 80% co-insurance clause, be required to 
 carry $8,000. If, however, in the event of a loss the insured 
 had only provided for $6,000 insurance, then he would be 
 able to collect only 6000/8000 or 24 of any loss. Upon 
 applying this very simple formula it will readily be seen that 
 when a loss amounts to or exceeds the percentage named in 
 the co-insurance clause, the insured will succeed in collecting 
 all insurance, though of course there will be a deficit in that 
 he will be forced to stand the loss sustained over and above 
 the amount of insurance up to, of course, the true extent of 
 the loss. 
 
« 
 
 k 
 
 Many adjusters, and particularly beginners, are confused 
 as to the proper method of applying the distribution average 
 clause together with the co-insurance clause. As stated, the 
 co-insurance clause is designed to force the insured to carry a 
 certain percentage of insurance to value, whereas the distribu¬ 
 tion average clause is a condition of the policy, which, when 
 added, distributes the insurance at the several locations named 
 in the proportion that the value of the property covered at 
 each location bears to the value of all the property. To illus¬ 
 trate, let us consider a $100,000 policy, covering three retail 
 lumber yards designated as numbers 1, 2 and 3, with the 80% 
 co-insurance clause applying. The fixed value of the lumber 
 stored at yard No. 1 is $50,000, the value upon yard No. 2, 
 $50,000, and the value upon yard No. 3, $100,000. Under the 
 distribution average clause the $100,000 insurance will be 
 apportioned 50000/200000 or i* e - $25,000, covering yard 
 No. 1 ; 50000/200000 or %, i. e. $25,000, on yard No. 2, and 
 100000/200000 or J4, i. e. $50,000, on yard No. 3. 
 
 It can be readily seen that the insured is short insurance 
 at all locations, and therefore in the event of loss must bear 
 his ratable proportion by application of the co-insurance 
 clause as above explained. A rule which all adjusters should 
 remember is that the distribution average clause must first 
 be applied prior to operation of the co-insurance clause. 
 
 The three-quarter value clause is a condition of the policy 
 which, when added, is designed to prevent over insurance and 
 is, therefore, in direct contrast to the co-insurance clause. 
 
 Under the three-quarter value clause the insured cannot 
 under any condition, regardless of the amount of insurance 
 carried, succeed in collecting more than three-fourths of the 
 value of the property covered at time of any loss. This state¬ 
 ment, however, must be made with the reservation that in cer¬ 
 tain states the three-quarter value clause has by law been made 
 inoperative, and even though it may be inserted in the policy 
 by the company without penalty, yet if the insured objects 
 it cannot be applied, and must, therefore, be ignored by a 
 company representative in the adjustment. 
 
 In several states insurance companies are’ forced to con¬ 
 tend with what is known as a valued policy law; said law 
 having reference only to insurance on building structures. 
 The law as a rule requires the insurance company to state 
 in the policy the agreed value of the building, and by this 
 provision the company is estopped from raising any question 
 as to the stated value in the event of a loss, barring, of course, 
 the question of fraud which may be utilized as a defense un¬ 
 der any contract and under any condition. 
 
 Unfortunately the valued policy law permits numerous 
 abuses, one of which being the impossibility of properly 
 applying the co-insurance clause where the building has in the 
 policy been valued at a ridiculously low figure. While this 
 law is not in any respect favorable to the interests of the 
 
 11 
 
 9 
 
company, and it was never designed to be, yet it has in many 
 cases acted as a boomerang. For instance, the insured may 
 have deliberately valued his property at a very low figure in 
 one policy, which policy carries provision for other insur¬ 
 ance and contains a co-insurance clause, whereas it is ascer¬ 
 tained at the time of the loss that the insured has procured 
 insurance greatly in excess of the fixed stated value. The 
 valued policy laws in force at present in several states do not 
 permit the collection of an amount exceeding the stated value, 
 and it is, therefore, useless for an insured to carry insurance 
 in excess of the value as set forth in the policy or policies. 
 
 A very troublesome situation which frequently arises is 
 with reference to what may be construed as double insurance 
 on improvements or betterments to a building structure. In 
 a large percentage of the cases, barring an agreement to the 
 contrary, all improvements and betterments made upon or in 
 a building structure by a tenant instantly become the property 
 of the owner, and the tenant cannot remove the improvements 
 or betterments upon expiration of the lease, nor can he deface 
 the building in an endeavor to place it in the same condition 
 it was in upon commencement of the lease. 
 
 The value of improvements and betterments is predicated 
 to a large extent upon the life of a lease, and therefore the 
 insurable interest of the tenant investing money in improving 
 or bettering the 1 building is a very clear and well-defined one. 
 On the other hand the landlord or owner invariably carries 
 building insurance, and it is seldom, when a loss occurs in 
 such a building, that the question does not arise as to which 
 class of insurance shall pay the loss and, if both, upon what 
 basis. The tenant carrying insurance on his improvements 
 and betterments is certainly entitled to a full measure of pro¬ 
 tection and the company covering the building structure 
 cannot sustain a denial of liability for loss on improvements 
 and betterments in the event the owner persists in making a 
 claim for same. 
 
 Most losses of this type are settled upon a compromise 
 basis, that is by an agreement between all interests. If. how¬ 
 ever. it is impossible to secure' concurrent action, the only 
 method by which duplication of payment of either all or anv 
 part of the loss can be avoided is by actual repairs being 
 undertaken by the companies interested, both on the building 
 as well as the improvement and betterment line, under a side 
 agreement, the eventual basis of settlement between them¬ 
 selves having previously been agreed upon. 
 
 Probably one of the most frequent situations which arises 
 in the adjustment of losses on household furniture is with 
 reference to the existence of a chattel mortgage covering the 
 property described either in whole or in part. A large per¬ 
 centage of those individuals who purchase pianos or victrolas, 
 do so on the partial payment plan, and upon making the first 
 payment a contract of sale is invariably required by the 
 
 10 
 
seller, which contract the purchaser usually signs without 
 reading. Most of these contracts are designed to retain the 
 title in the name of the seller until the final payment is made, 
 though I am very much inclined to believe that the legal 
 title would, in the event of litigation, be proven to be vested 
 in the purchaser; the interest of the seller being that of a 
 mortgagee or lienor. Regardless of whether the title could 
 be said to be vested in the purchaser or seller, a voidance of 
 the policy with respect to the item involved could be said to 
 exist. The policy, as you know, requires sole and uncon¬ 
 ditional ownership and further provides that personal prop¬ 
 erty covered shall not be encumbered by a mortgage. 
 
 If, therefore, in presenting a claim upon the company, the 
 insured should incorporate in the schedule the item which is 
 being purchased under contract, and has not been paid for, 
 the entire claim could be rejected by the company and the 
 insured could not succeed in collecting anything by a suit. 
 If on the other hand the insured made no claim upon the item 
 in controversy, the company could not disclaim liability on the 
 remaining property which was not covered under a chattel 
 mortgage. 
 
 In several states there are very peculiar laws with respect 
 to the sale of real property under contract. In Florida, for 
 instance, the execution of a contract of sale, where the pay¬ 
 ment say of only $1 had been made, vests the legal title in the 
 purchaser under contract; the seller occupying merely the 
 position of a mortgagee, and a mortgage on real property 
 in but very few states affects the validity of the policy. 
 
 * 
 
 11 
 
■■■■ 
 
Apportionment of Losses 
 
 Under 
 
 Nonconcurrent Policies 
 
 A LECTURE 
 
 BY 
 
 W. N. BAMENT 
 
 General Adjuster 
 
 [pSj 
 
 THE HOME INSURANCE COMPANY 
 
 NEW YORK 
 

 
 
 
 
 
 
 
 
 
 
 ' 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 I 
 
 - ’*$8 I ii 1*1 
 
 I 
 
 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 . 
 
 
 
 
 
 
 
 
 
Apportionment of Losses 
 Under Nonconcurrent Policies 
 
 By W. N. Bament, General Adjuster 
 The Home Insurance Company 
 
 This subject has been one' of absorbing - and ever increas¬ 
 ing interest ever since the contribution clause came into general 
 use as a policy condition and even before. It has commanded 
 the attention of the courts as well as that of the best legal 
 and lay minds in the fire insurance business for nearly a 
 century, and although many rules have been devised for the 
 apportionment of losses where policies are nonconcurrent, no 
 rule of universal or even general application has been found 
 and the' prospect of discovering the philosopher’s stone is as 
 remote as ever. 
 
 What is the “whole insurance” upon the property covered, 
 or on the items damaged, when both specific and general 
 policies are involved? Shall the blanket policy contribute 
 with one specific policy and in remainder with another and 
 so on all down the line, or shall it be distributed on the 
 various classes in the ratio of value, the ratio of loss, or 
 in some other manner? What effect should the presence of 
 a co-insurance or average clause in one or more nonconcur¬ 
 rent policies have upon the apportionment? No satisfactory 
 answer to these questions has ever been given. 
 
 All the courts which have passed upon the question have 
 held that the first requisite of any method of apportionment 
 must be the insured’s protection to the full extent of his 
 rights under his policies and any method, which in a given 
 case fails to afford him this just measure of indemnity, must 
 give place to another that will. 
 
 This is eminently proper, because other insurance is taken 
 out by the insured for his own benefit and not for the benefit 
 of co-insuring companies. He pays the premium and con¬ 
 sequently it is his interest which should be the prime con¬ 
 sideration. The benefit accruing to co-insuring companies is 
 and should be regarded as a piece of good fortune and merely 
 incidental; but as each policy is an independent contract, it 
 should be construed in the light of reason without doing vio¬ 
 lence to any of its provisions. 
 
 Almost all of the well known rules of apportionment 
 were devised long before that evolutionary product of the 
 insurance business—co-insurance—made its appearance, and 
 although some of them served reasonably well in many 
 
 1 
 
instances as means to an end, the question has been so affected 
 by co-insurance conditions that all the olde'r rules have in a 
 large measure lost what merit they possessed as practical 
 working propositions. 
 
 As it has seemingly been impossible to find any rule of 
 apportionment of general application, it follows that it would 
 be equally impossible to prepare a contribution clause which 
 would satisfactorily meet all conditions, hence the present 
 brief form, in view of the general inclination of the courts 
 to construe it along reasonable and equitable lines, is prob¬ 
 ably as good as can be devised, except that possibly some 
 amendment might be made in order to meet situations grow¬ 
 ing out of co-insurance or reduced rate average clause con¬ 
 ditions. 
 
 Simple Nonconcurrence 
 
 In cases of simple nonconcurrence, the law is apparently 
 settled. Where there is a loss on one item only, the full 
 amount of the blanket or general policy must contribute with 
 the specific toward the payment of the loss. Page Bros. vs. 
 Sun Ins. Office, 74 Fed. 203, 20 C. C. A. 397. In that case 
 the court used this somewhat striking sentence, “This con¬ 
 tract is too plain to permit construction, too positive to allow 
 evasion, and too clear to admit of doubt.” 
 
 When there is a loss on two items, one of which is 
 covered by a specific policy, and there is also a blanket policy 
 covering both, the latter must first pay the loss on the 
 extraneous item and then contribute in remainder with the 
 specific. Cromie vs. Kentucky and Louisville Ins. Co., 15 B. 
 Mon. 432 (Ky. 1854). 
 
 To the minds of some, both these rules place too great 
 a burden upon the blanket policy, but the argument of the 
 court in the Page Bros, case (supra) in support of the first, 
 emphasized as it is by the decision of the Court of Appeals 
 of New York in the case of Farmers’ Feed Company vs. 
 Scottish Union & National Insurance Company, 173 N. Y. 241, 
 and the Supreme Court of Wisconsin in the case of Stephen¬ 
 son vs. Agricultural Insurance Company. 116 Wis. 277, 93 
 N. W. 19, both of which decisions, singularly enough, were 
 rendered the same day, seems to be unanswerable. 
 
 The second rule has not received universal endorsement. 
 If, say its critics, it be admitted that there must be some 
 division of the blanket policy, the question might easily arise 
 whether that division should be made by setting aside as 
 covering on the extraneous item an amount just sufficient to 
 pay the loss thereon, and apply the remainder to contribute 
 with the specific policy as in the Cromie case (supra), or 
 whether some other division might not or should not be made. 
 This thought seems to have been in the mind of Chief Justice 
 Marshall, when in the' Cromie case, he expressed grave doubt 
 
 2 
 
m 
 
 whether, on account of the continuing liability of the blanket 
 policy on the undestroyed property, and the possibility of 
 a later loss thereon, the Court had not made that policy 
 contribute with the specific for too great an amount. If 
 he could have anticipated present-day co-insurance conditions, 
 he would, through his seeming solicitude for the interest of 
 the insured, doubtless have discovered another reason for 
 a different subdivision of the blanket policy, for while the 
 Cromie rule points an absolutely sure way of giving the 
 insured the maximum indemnity to which he is entitled in 
 every instance in the absence of co-insurance, yet it has 
 exactly the opposite effect in many cases when co-insurance 
 conditions prevail. 
 
 Although it is conceivable that the co-insurance' neces¬ 
 sities of the insured may have some influence upon future 
 decisions in cases of compound nonconcurrence, good argu¬ 
 ments can be advanced against their doing so in cases of. 
 simple nonconcurrence. 
 
 According to the plain reading of the contribution clause, 
 the specific insurer is entitled to contribution from the full 
 face of the general policy. The courts, however, declare 
 that full contribution will not be accorded if there be' a loss 
 on an extraneous item, but hold that the loss thereon must 
 first be cared for by the general policy. If, therefore, the 
 specific insurer consents to a modification of the clear, 
 unambiguous phraseology of the clause to the extent of per¬ 
 mitting the general policy to first pay this extraneous loss, 
 it meets the situation fairly, and cannot be deprived of con¬ 
 tribution from the remainder, without doing unreasonable 
 and inexcusable violence to the contribution provision. 
 
 When there is no loss on any other item, there is nothing 
 to deduct from the blanket policy, and the specific is conse¬ 
 quently entitled to contribution from its full face. 
 
 The Page Bros, decision (supra) is so fundamentally 
 sound as to preclude discussion. The Cromie decision has 
 stood the test for over sixty years and its underlying prin¬ 
 ciple has never been successfully assailed or seriously ques¬ 
 tioned ; hence, it is entitled to be regarded as a fixed rule, 
 universally applicable in cases of simple nonconcurrence 1 . 
 
 If these two decisions are fundamentally sound when 
 the policies do not contain co-insurance or reduced rate 
 average conditions, they are equally sound when such con¬ 
 ditions are present. These conditions neither increase nor 
 diminish the amount of the policies containing them, or in 
 any way affect the “whole insurance” on the property; hence 
 they should not be permitted to have any influence whatever 
 upon the contribution clause, so long as it retains its present 
 phraseology. Apportionments under them must, however, 
 always be subject to the limit of liability of all policies under 
 their conditions of co-insurance or average. 
 
 3 
 
Such extraordinary liberties, however, have been taken 
 with the contribution provision from the time of its birth, 
 and it has been disfigured by the experts and the courts in 
 such a variety of ways, as to leave one 1 in doubt whether there 
 is any limit to which they will not go in that direction, in 
 order to meet the necessities of the insured. But when all 
 is said, it would seem that the argument advanced by the 
 court in the Farmers’ Feed Co. case—that the insured should 
 stand a portion of the loss himself in a certain contingency, 
 because he virtually agrees to do so—should apply to cases of 
 simple nonconcurrence as well as to those where the policies 
 are concurrent. 
 
 Compound Nonconcurrence 
 
 It is in cases of compound or interlocking nonconcurrence 
 where two or more subjects which are covered by specific 
 policies are also embraced within the cover of blanket 
 ^policies, or where they interlock, that the principal trouble 
 arises. 
 
 Some adjusters entertain the view that in cases of non- 
 'Concurrence, simple or compound, when it is found that the 
 sum of the co-insurance or average clause limits of the various 
 insurers is less than the total loss, each company should pay 
 the amount of its limit, and that no attempt at an apportion¬ 
 ment should be made. And if the sum of the co-insurance or 
 •.average clause limits exceeds the total loss, as they frequently 
 do, there should be deducted from each maximum limit its 
 pro rata proportion of the excess loss in order to arrive at the 
 net liability of each group of policies. 
 
 This view is evidently based on the following line of 
 reasoning: Rates at the present time are quite generally 
 predicated upon the use of the 80, 90 or 100 percent average 
 or co-insurance clause. The insurers, in effect if not in fact, 
 say to the insured: “If you will carry insurance to the extent 
 of 80, 90 or 100 percent of the value of the property, as the 
 case may be, and thus give us the benefit of that contribu¬ 
 tion in the event of loss, we will be satisfied, provided, of 
 course, you are not overpaid.” In cases of compound non¬ 
 concurrence where all policies contain the average or co- 
 insurance clause, and the same is operative in all, where the 
 aggregate insurance equals or exceeds the required percentage 
 of the aggregate value, the insured should be entitled to collect 
 his loss up to, but not exceeding, the co-insurance limit of 
 each. If average or co-insurance conditions are complied 
 with, the insured will have done all that was contemplated 
 either by himself or the insurers when the policies were 
 issued, and each company should be content if the amount 
 apportioned to it does not exceed its average or co-insurance 
 limit. 
 
 4 
 
It will be observed, however, that the theory or rule 
 above outlined is virtually the same as apportioning the total 
 loss on all items on the basis of the average or co-insurance 
 limits, instead of the face of the policies, and is in direct con¬ 
 flict with the principle laid down in Farmers’ Feed Company 
 and Stephenson cases (supra). In considering this ques¬ 
 tion, we must take the insurance contract, not as it might, 
 could, or should be, but as it is; and the contribution clause 
 therein, although it has been distorted almost beyond recog¬ 
 nition, is entitled to at least a rational construction. 
 
 In the case of Buse vs. National Ben Franklin Insurance' 
 Company et ah, 161 N. Y. Supp. 566 (1916), the Supreme 
 Court of New York, Erie County, applied the above principle 
 in the apportionment of the loss. The old New York Stand¬ 
 ard Policy under which this loss occurred, lines 98 to 100, 
 contains the following stipulation: 
 
 “and the extent of the application of the insurance under this policy 
 or of the contribution to be made by this company in case of loss, may 
 be provided for by agreement or condition written hereon or attached 
 or appended hereto,” 
 
 and the court evidently concluded that by reason of this pro¬ 
 vision the average clause superseded the contribution clause 
 of the policy, the latter clause being omitted from the average 
 clause. The court also seems to have ignored the decision in 
 the Farmers’ Feed Company case (supra), evidently dis¬ 
 tinguishing the two cases by reason of the fact that in the 
 former the policies were nonconcurrent, while in the latter 
 they we're concurrent. The case was not appealed probably 
 on account of the smallness of the amount involved, hence we 
 do not know what views the Court of Appeals may entertain 
 on the subject. 
 
 It should be stated that the Farmers’ Feed Company case 
 is also distinguishable from the Buse case from the fact that 
 in the former a part of the insurance did not contain the 
 average or co-insurance clause, whereas in the latter case all 
 the insurance was subject to co-insurance conditions. 
 
 Many ingenious methods of apportionment have been 
 suggested, among which may be mentioned the Finn- 
 Griswold-Kinne rule, the Connecticut or Gradual Reduction 
 rule, the Reading, the Albany, and the Rice rules, and the 
 later inventions, the Morristown and Giesse rules (so named 
 on account of the modesty of their authors), all of which 
 have been weighed in the balances and found wanting. 
 
 Each of these rules has had its strong advocates and also 
 its hostile critics. The number of court decisions bearing on 
 the subject are comparatively few, and there is quite as great 
 a diversity of opinion among the experts as there is among 
 the courts ; in fact, there has probably been no court decision 
 rendered which did not have its inception in the mind of some 
 insurance adjuster. 
 
 5 
 
Probably the best and most exhaustive discussion of the 
 subject which has ever appeared is that contained in a paper 
 read by the late E. F. Rice, adjuster of the Aetna Insurance 
 Company, before the Underwriters’ Association of the North¬ 
 west, and published in the proceedings of that organization in 
 1880. Pie reviewed and carefully analyzed all the decisions 
 and views of text writers and experts up to that time, and 
 clearly demonstrated that none of the methods which had 
 been devised were theoretically sound or universally applic¬ 
 able. He showed by concrete examples that under the then 
 known rules of apportionment, which made a division of the 
 blanket policy, if the amount of gross loss were increased, 
 the liability of the blanket policy might be diminished, and he 
 rightly argued that any rule which would admit of a really 
 bright adjuster increasing his company’s salvage by magnify¬ 
 ing the loss must be fallacious in principle. Mr. Rice invented 
 an ingenious rule of his own, to which reference will be 
 made later, and evidently thought he had at last found some¬ 
 thing which would withstand the criticism which he had 
 directed against the older theories, but alas, Mr. Rice’s own 
 rule succumbed to the same test. The Kinne rule had not at 
 that time made its appearance, but being an offspring of the 
 Finn rule, it cannot withstand the test applied by Mr. Rice any 
 better than the others. 
 
 The Reading Rule 
 
 This, briefly stated, provides for a division of the blanket 
 policy among the various items of property in the ratio of 
 values, for purposes of contribution. 
 
 This rule was used by the Supreme Judicial Court of 
 Massachusetts in 1858 in the case of Blake vs. Exchange 
 Mutual Insurance' Company, 12 Gray 265, and again by the 
 same court in 1913 in the case of Taber vs. Continental Insur¬ 
 ance Co. et ah, Vol. 42, Insurance Law Journal, page 516, 
 213 Mass. 487. The same principle was also applied by the 
 courts in New York and Vermont, Ogden vs. East Rivet 
 Insurance Company, 2 Insurance Law Journal 135, 50 N. Y. 
 388; Chandler vs. Insurance Company of North America, 
 70 Vt. 562, 41 Atl. 502. This rule will often fully reimburse 
 the insured and do no real violence to the interest of any 
 insurer, yet it will in many instances fail to give full indem¬ 
 nity, and unless modified by making the division only among 
 the items involved in the loss, will work quite an injustice 
 to the specific insurers. 
 
 The point most frequently urged against it, is that it 
 imports into the blanket policy the average distribution clause, 
 a condition which is foreign to it, thereby giving it a more 
 favorable construction than it deserves, but a similar objec¬ 
 tion can be urged with equal propriety against all of the other 
 rules which call for a division of the blanket policy, and if 
 the division be made only among the items involved in the 
 
 6 
 

 loss, in the ratio of value', there would seem to be no logical 
 reason why this method should be subjected to any greater 
 criticism than the others. 
 
 This rule has had the endorsement of the courts of last 
 resort, to which reference has been made (supra), but in the 
 cases decided the interests of the insured were not adversely 
 affected by its application. If conditions had been otherwise 
 we can easily believe that the principle of the rule would 
 have been rejected by these courts just as it has been by others. 
 
 The Modified Reading Rule 
 
 This rule divides the blanket policies among all classes of 
 property, whether involved in the loss or not, so that when 
 possible, and as nearly as possible the percentage of available 
 insurance to value will be the same on each class as the 
 percentage of total insurance to total value of all classes. 
 
 This differs from the original Reading rule in that it 
 takes into consideration both value and insurance, and the 
 relation of one to the other. Although it is not universally 
 applicable, it will work reasonably well in a large number 
 of cases when co-insurance conditions prevail. 
 
 The Albany Rule 
 
 This much criticized and many times rejected rule, which 
 was inserted as a condition in some policies fifty years ago, 
 provides that if the insured shall have other insurance which 
 includes the premises or property described, and such policy 
 or policies shall at any time or under any circumstances or 
 contingency be liable to the insured for any amount what¬ 
 ever, such policy or policies, as between the insured and the 
 company, shall be considered as contributing insurance. 
 
 This condition was adopted because of the decision of 
 the Court of Appeals of New York in the case of Howard 
 vs. Scribner, in 1843, 5 Hill 298, wherein it was held that 
 where there is both specific and blanket insurance the latter /n 
 does not constitute “other insurance” and that the specific I L 
 policy must pay in full without regard to the blanket policy. 
 
 But this decision was overruled in 1872 in the case of Ogden 
 vs. East River Insurance Company (supra). Strange as it 
 may seem this antiquated doctrine still obtains in Pennsyl¬ 
 vania, Meigs vs. Insurance Company of North America, 205 
 Pa. St. 378, 54 Atl. 1053. The Federal Court held to a 
 contrary doctrine in another case (the Hill school case) 
 growing out of the same fire, Meigs vs. London Assurance 
 Company, 126 Fed. 781. 
 
 The Pennsylvania Court has certainly turned the tables 
 on those who are imbued with the idea that no rule of 
 apportionment is too good for the insured and the specific 
 insurers, and none too harsh for the blanket policy. It 
 swings the pendulum too far in the opposite direction, carries 
 the doctrine of the conservation of the blanket policy beyond 
 
 7 
 
all reason, and entirely ignores the contribution clause in 
 the specific policies. The Pennsylvania Court had rendered a 
 similar decision in the case of Sloat vs. Royal Insurance 
 Company, 49 Pa. St. 14, in 1865, and its adherence to the 
 same doctrine fifty years later indicates that the Court is 
 still joined to its idols. The position of the Pennsylvania 
 Court is unsound, and it is not at all surprising that its 
 opinion is never followed by other states and is ignored 
 in practice within its own borders. 
 
 The Albany rule very frequently entails a loss upon the 
 insured and does a flagrant injustice to the blanket policy. 
 It has been in harmless disuse for many years, and no one 
 in these days gives it serious consideration. 
 
 The courts, however, in the Farmers’ Feed Company 
 and Stephenson cases (supra) when construing the words 
 “whole insurance” held that the amount of insurance is the 
 largest sum that the company in any circumstances, accord¬ 
 ing to the terms of the policy, can be required to pay and 
 not the smaller sum which can be collected under special 
 conditions, and according to these decisions the loss which 
 accrues to the insured by reason of the co-insurance or re¬ 
 duced rate average clause in certain policies must be borne 
 by him and cannot be transferred to the companies whose 
 policies are otherwise concurrent but have no such clause. 
 
 Although the language used in these decisions is ex¬ 
 ceedingly broad, and notwithstanding the fact that both 
 courts permitted the insured to suffer a loss under special 
 conditions in the face of the fact that they carried full in¬ 
 surance, it is hardly to be supposed that they would stand 
 for the principle of the Albany rule in a case of either simple 
 or compound nonconcurrence, but would on the contrary 
 follow precedents and permit some equitable division of 
 the blanket policy, for purposes of apportionment. 
 
 Gradual Reduction Rule 
 
 This rule is one of the most popular among adjusters, 
 particularly in the Middle West where it has been in use for 
 many years, and it has less to commend it than any other 
 with the possible exception of the Albany rule. It is un¬ 
 sound in principle, is always inequitable in its results, and 
 possesses but one virtue and that is, in the absence of co- 
 insurance conditions, it will more frequently indemnify the 
 insured, unless reapportionment is resorted to, than any other. 
 But this virtue is largely neutralized by the injustice it al¬ 
 ways does to the blanket insurers, and by its inevitable dis¬ 
 crimination against certain specific insurers when their poli¬ 
 cies cover on different items. And if the blanket policy 
 contains the reduced rate average clause, as it usually does, 
 the rule will in many instances have just the opposite effect 
 from that intended, for the liability of: the blanket policy 
 
will be limited by the operation of the average clause, and 
 the extra burden imposed upon it by the rule will be trans¬ 
 ferred to the insured. 
 
 The Gradual Reduction rule was adopted by the Su¬ 
 preme Court of Errors of Connecticut in the case of Schmaelzle 
 vs. London and Lancashire Fire Insurance Company et al., 
 75 Conn. 397, 53 Atl. 863, 60 L. R. A. 536, 96 Am. St. Rep. 233, 
 and more recently by the New Jersey Court of Errors and 
 Appeals in Grollimund vs. Germania Insurance Company, 
 83 Atl. 1108. It was urged by the company having the 
 specific policy in the recent Massachusetts case previously 
 referred to, but was rejected by the court. Taber vs. Con¬ 
 tinental Insurance Company, 213 Mass. 487, 42 Insurance 
 Law Journal 516 (supra). 
 
 It makes the blanket policy contribute first for its full 
 amount on the item where the loss is greatest, then in remain¬ 
 der where next greatest, etc., thereby, in all instances mag¬ 
 nifying the contributing power of said policy, and in many 
 instances transforming it as a factor in contribution into a 
 policy several times its original amount. Why the impo¬ 
 sition should start with the greatest loss instead of the next 
 greatest or smallest is not manifest; in fact the Connecticut 
 Court in the Schmaelzle case frankly admitted that the start¬ 
 ing point was purely arbitrary and intimated that the order 
 of reduction might be determined by the highly intellectual 
 and logical process of drawing lots. The ends of justice 
 would probably have been served quite as well if the entire ap¬ 
 portionment had been made in that way. 
 
 The Schmaelzle case has its ludicrous side. So absorbed 
 were all the parties in the question of apportionment, that 
 the fact that the blanket policy contained a co-insurance 
 clause and that its maximum liability was absolutely fixed 
 thereby was entirely overlooked. If this had been discovered, 
 we would doubtless have had from the Court, instead of an 
 argument in favor of the continuing gradual reduction of the 
 blanket policy, a learned dissertation in favor of its con¬ 
 servation. 
 
 In the Schmaelzle case all the blanket policies were con¬ 
 current and all specific policies were concurrent. In the 
 Grollimund case the specific insurances were in the same 
 company, so that these are not ideal cases with which to 
 illustrate the' absurdity of the “gradual reduction” principle 
 as a practical working proposition. Let us take for example: 
 $10,000 specific insurance in Company “A” on building, 
 $10,000 specific insurance in Company “B” on machinery, 
 and $10,000 blanket insurance in Company “C” on building 
 and machinery. Sound value of building $15,000 and loss 
 $10,000. Sound value of machinery $15,000 and loss $9,999. 
 No co-insurance conditions. Applying the Gradual Reduc¬ 
 tion rule commencing with the larger loss, Company “A” 
 
 9 
 
pays 10,000/20,000 of $10,000 on building, or $5,000; Com¬ 
 pany “B” pays 10,000/15,000 of $9,999 on machinery, or 
 $6,666, and Company “C” pays $8,333. 
 
 Conceding, of course, that the insured should be fully 
 indemnified, and even conceding for the moment that the 
 blanket policy should be penalized, what possible excuse 
 can be given for making Company “B” with a policy cov¬ 
 ering for the same amount on an item with the same sound 
 value and a smaller loss, pay $1,666 more than Company “A”? 
 Why this extraordinary discrimination in favor of Company 
 “A” ? 
 
 This apportionment, which is self-evidently arbitrary, 
 does a three-fold injustice: First, to Company “B” which 
 is made to pay a sum unconscionably out of proportion to 
 that paid by Company “A”; second, to Company “C” in that 
 it is treated as if it were a policy for $15,000 instead of what 
 it really is, one for $10,000; third, to the insured by reason 
 of the fact that his best insurance (the blanket) is unwar¬ 
 rantably depleted, and solely in the interest of one of the 
 specific insurers. 
 
 If the 100 percent reduced rate average clause be in¬ 
 serted in the blanket policy and the Gradual Reduction rule 
 be applied, Company “A” pays $5,000, Company “B,” $6,666, 
 Company “C,” $6,666.33 and the insured loses $1,6 66.67. 
 
 This apportionment, if possible, is even worse than the 
 other, for the discrimination against Company “B” still re¬ 
 mains and the burden which, in the absence of the average 
 clause is saddled on to the blanket policy, is transferred to 
 the insured who loses $1,666.67 in the face of the fact that he 
 is fully insured. 
 
 It is argued by the advocates of the rule that if two or 
 more independent fires occur, no matter how short the in¬ 
 tervening time, the blanket policy will be gradually reduced 
 by the first and by each succeeding fire, and in the payment 
 of this series of losses its basis of contribution will in the 
 aggregate exceed its face just as it does through the opera¬ 
 tion of the Gradual Reduction rule. That is quite true, but 
 one loss is' not two or more losses, and the amount of the 
 blanket policy at the time of “any loss” is no more than its 
 face. And there is no more warrant for magnifying it beyond 
 that amount for purposes of contribution, than for loss pay¬ 
 ing purposes, and the latter is of course impossible. 
 
 The blanket insurer might easily be reconciled to having 
 its policy gradually reduced and its contribution regulated 
 by the course of events in the shape of a second or third 
 fire which may never occur, but that is vastly different from 
 having it gradually reduced and thereby greatly magnified as 
 a contributing factor, by an arbitrary act in every single 
 loss. The specific insurers might also cheerfully accept the 
 
 10 
 
results accruing from the order of events, whereas they might 
 justly resent the discrimination which inevitably attends the 
 operation of the Gradual Reduction rule. 
 
 If three items are involved in a loss, six different com¬ 
 binations or orders of reduction are possible; if four items 
 are involved twenty-four combinations are possible, and if 
 five items, one hundred and twenty combinations, etc. Each 
 one of these orders of reduction will produce a different re¬ 
 sult and neither is entitled to precedence over any other. 
 
 The rule always works an injustice to one interest, gen¬ 
 erally to two interests, sometimes to three interests; and 
 any scheme of apportionment against which these indictments 
 can be proven is indefensible. 
 
 The Finn-Griswold-Kinne Rule 
 
 The Finn rule which was first applied by its author in 
 1842 is substantially as follows : The contributive liability 
 of the compound policy shall be based upon the loss (in¬ 
 stead of the value as in the Reading rule) in the proportion 
 that the loss upon the specific property shall bear to the loss 
 upon all of the property covered by the general insurance. 
 
 This rule which failed to fully indemnify the insured in 
 many instances, was modified by Griswold and still further 
 modified by Col. Kinne in the rule which bears his name, 
 which is the latest and probably the final development of the 
 loss to loss principle. It possesses the merit of being con¬ 
 sistent with itself in that it is made applicable to cases of 
 simple as well as compound nonconcurrence. Its first ap¬ 
 plication sometimes fails to give the insured full indemnity, 
 which necessitates a reapportionment, and sometimes, though 
 seldom, a second reapportionment. The idea of reapportion¬ 
 ment is repugnant to many, and to the minds of some there 
 is a serious fracture of the loss to loss principle the moment 
 this becomes necessary. The rule, in the absence of co- 
 insurance conditions, through its provisions for reapportion¬ 
 ment, will always give the insured the fullest indemnity to 
 which he is entitled, but the Reading rule or any other rule 
 will do the same if unlimited reapportionment is resorted to. 
 
 In point of popularity among adjusters the Kinne rule 
 will take rank with the Gradual Reduction rule. It has 
 been in use on the Pacific Coast for over thirty years and in 
 1910 the Fire Underwriters’ Association of the Pacific adopted 
 it for general use among the companies in that territory, and 
 by some members of the fraternity there and elsewhere it 
 is regarded as the last word on the subject of nonconcurrent 
 apportionments, as is evidenced by the following quotation 
 from a recent address delivered by a prominent adjuster, 
 “There is only one equitable rule, that is the Kinne rule, 
 loss to loss, with reapportionment from excess to pay short¬ 
 ages.” 
 
 11 
 
The basis for this somewhat extravagant eulogy is not 
 apparent. As a matter of fact the rule is simply one of 
 several convenient makeshifts, none of which can lay claim 
 to theoretical soundness any more than they can to general 
 applicability. In addition to the criticism directed against 
 its underlying principle by Mr. Rice, the Kinne rule will not 
 only fail to fully indemnify the insured in many instances 
 when co-insurance is present, but will come about as far 
 from doing so as almost any other known rule, hence under 
 present day underwriting conditions, it fails in the one point 
 which of all others is chiefly instrumental in bringing it into 
 being. 
 
 Some who favor the Kinne rule in preference to the Read¬ 
 ing rule do so on the ground that the latter is too favorable 
 to the blanket policy, evidently overlooking the fact that 
 sometimes the reverse is true, and not infrequently the Kinne 
 rule penalizes it less than the Reading rule. 
 
 The Modified Finn Rule 
 
 As the modified Reading rule is sometimes used when 
 co-insurance conditions are present, so the modified Finn 
 rule is occasionally used when those conditions are absent. 
 It divides the blanket policy among the various classes of 
 property so that when possible, and as nearly as possible, 
 the ratio of available insurance to loss will be the same on 
 each class as the total insurance is to the total loss on all 
 classes. 
 
 The difference between the modified and the original 
 Finn rules is similar to the difference between the modified 
 and the original Reading rules; it takes into consideration 
 both loss and insurance, and the relation of one to the other. 
 
 There is of course no authority in the policy for such 
 arbitrary divisions and they could not stand if they resulted 
 in reducing payment to insured. 
 
 The Rice Rule 
 
 According to Mr. Rice’s rule, if the aggregate loss is less 
 than the aggregate insurance, and the loss upon each subject 
 covered by the specific insurance is less than the specific in¬ 
 surance plus the whole insurance available to pay the loss, 
 there is contribution, as between the specific and collective 
 policies, and every policy should enjoy a proportional abate¬ 
 ment of liability. And the loss, if any, for which the general 
 policy alone is liable, having been provided for, the insur¬ 
 ance remaining under that policy should be apportioned for 
 contributive purposes among the various subjects in the pro¬ 
 portion that the maximum overinsurance on each bears to 
 the aggregate overinsurance on all collectively. 
 
 12 
 
By maximum overinsurance on each item is meant the 
 excess of insurance over and above the loss on each item 
 ascertained by adding the full face of the blanket policy to 
 each of the specific policies. The Rice rule virtually makes 
 an apportionment of the salvage in the ratio of the over¬ 
 insurance. It is ingenious but, as has been pointed out, it 
 is open to the same objection that Mr. Rice directed against 
 the older well-known rules, that is, if the total loss be in¬ 
 creased, the payment of some insurer may be diminished. 
 
 The Giesse Rule 
 
 This rule takes its name from the case in which it was 
 first applied and is quoted verbatim: 
 
 “First find the limit of liability of each class of insurance under 
 the average or co-insurance clause, and find the total of those limits 
 (which will usually be somewhat greater than the aggregate loss) by 
 adding them together; then find what each class would pay if it got 
 the full benefit of its contribution clause, i. e., contribution from the 
 face or full amount of all other insurance covering the whole or any 
 part of the property which itself covers, and find the total of these 
 amounts (which of course will be less than the aggregate loss) by 
 adding them together. We thus find the most each class can be 
 made to pay, and also the least it can possibly get off for. Add the 
 several differences between these pairs of limits, find what proportion 
 of that total the aggregate excess of the upper limits over the aggre¬ 
 gate loss constitutes, and deduct that proportion of each of the dif¬ 
 ferences from the respective upper limits, to find what each class of 
 insurance shall pay to make up the loss.” 
 
 This rule was devised for use under reduced rate aver¬ 
 age or co-insurance conditions, and is of course not univer¬ 
 sally applicable. A great deal of ingenuity was displayed 
 in its preparation, but as the basis upon which the lower 
 limits are fixed is unsatisfactory, it follows that the result 
 must be equally so in many instances. 
 
 The Morristown Rule 
 
 This rule is so named because of the fact that it was 
 while adjusting a loss at Morristown, New Jersey, that the 
 author received his inspiration. 
 
 The basis of this rule is the same as the lower limits, 
 as fixed by the Giesse rule, the aggregate of which will be 
 less than the loss. The deficiency is distributed among the 
 various policies pro rata until each reaches its co-insurance 
 or other limit of liability. Inasmuch as the basis is the same, 
 it is subject to the same criticism as the Giesse rule. Fur¬ 
 thermore, if in attempting to take care' of the deficiency in 
 the manner prescribed, the co-insurance limits of certain 
 policies are reached, and a portion of the loss still remains 
 unpaid, no arrangement is made for taking care of the deficit, 
 and hence the rule frequently fails to fully indemnify the 
 insured. 
 
Conclusion 
 
 That the foregoing observations are mainly critical rather 
 than constructive is due to the fact that virtually every con¬ 
 ceivable phase of the question has been considered by the 
 brightest minds that the business has produced, and although 
 they have not led us out of the wilderness into the promised 
 land, the methods suggested by them have been utilized in 
 solving all the intricate questions in apportionment that have 
 arisen up to the present time, and too much credit cannot be 
 accorded to them for the study they have given, and for the 
 efforts they have put forth in the attempt to perform the 
 seemingly impossible task of finding a rule of universal ap¬ 
 plication. 
 
 The question still confronts us; most of the rules possess 
 some merit as means to an end, but the experts and the courts 
 have never agreed upon a uniform and clearly defined method 
 of apportionment—and probably never will—and as all of 
 those in use are arbitrary, that rule should be applied to 
 each specific case which will come nearest to' doing sub¬ 
 stantial justice to the respective insurers, and at the same 
 time give the insured the fullest indemnity to which he is 
 entitled under the most generous interpretation, within reason, 
 of the various contracts. 
 
 Judge Ostrander, in his well-known work on insurance, 
 says: “Cases are sometimes presented where the complica¬ 
 tions defy human understanding. When this occurs—when 
 reason is baffled and mathematics fail—arbitrary action be¬ 
 comes a necessity. The knot we cannot untie must be cut.” 
 
 14 
 
Writs of Attachment 
 and Other Liens 
 
 BY 
 
 W . N. BAMENT 
 
 General Adjuster 
 
 THE HOME INSURANCE COMPANY 
 
 NEW YORK 
 
Writs of Attachment and 
 Other Liens 
 
 * 
 
 Of all the matters connected with claims arising under 
 policies of insurance, perhaps the most vexatious are liens 
 and restraining orders which are known by various names 
 such as warrants of attachment, writs of garnishment and 
 trustee writs, the practical effect of which is to tie up the 
 insurance fund and virtually make the garnishee a stake¬ 
 holder or custodian of the defendant’s property in his hands. 
 And if there is any more highly favored party under the 
 laws of this country (with the possible exception of a mort¬ 
 gagee under the mortgagee clause of a fire insurance policy) 
 than an attaching creditor, he has not yet been discovered. 
 
 Insurance companies are not infrequently served with 
 notices from attorneys stating that their clients have liens 
 against any insurance money which may be due parties to 
 whom they have sold goods and requesting, and sometimes 
 demanding, that no payment be made without recognizing the 
 interest of their clients. These so-called liens have no legal 
 significance, but insurance companies are exceedingly con¬ 
 servative in the matter of loss payments and usually insist 
 upon all liens, whether valid or not, being dismissed before 
 making payment. 
 
 If a notice is received from a bailor who happens to 
 have goods in the possession of a bailee, whose insurance 
 policies cover “for account of whom it may concern,” or 
 contain the unrestricted “trust and commission clause,” 
 stating that he claims an interest in the insurance taken out 
 by the bailee, it will be necessary for such notice to be 
 respected, because, under policies so phrased the bailor 
 might, under circumstances similar to those in the cases 
 hereinafter cited, have a direct right of action against the 
 bailee’s insurers. Utica Canning Co. vs. Home Ins. Co., 132 
 App. Div. 420, 38 Ins. Law Journal 813; Johnson vs. Abresch, 
 123 Wis. 130, 101 N. W. *395. Czerweny vs. Ins. Co., 139 
 N. Y. Supp. 345. 
 
 Liens are sometimes filed by public adjusters and if the 
 copy of the contract, which usually accompanies such notices, 
 is so phrased as to constitute an assignment of a certain per¬ 
 centage of the adjusted loss, these liens cannot safely be 
 ignored, but if the contract is not tantamount to an assign¬ 
 ment, it is of no binding effect. Several years ago a prom- 
 
 1 
 
inent company served notice upon public adjusters, great 
 and small, that they must cease serving them with such liens, 
 and that if persisted in they need not expect to collect any 
 of their losses until the expiration of sixty days from filing- 
 proofs. The practical effect of this action was to put a stop 
 to the persistent filing of liens by public adjusters. This rule, 
 however, is not as inflexible as the laws of the Medes and 
 Persians and has been waived in exceptional cases where 
 unscrupulous claimants have deliberately attempted to evade 
 liability to a public adjuster under a meritorious lien, when { 
 
 the latter has been instrumental in securing a fair adjust¬ 
 ment. 
 
 There is no uniformity in the laws of the various states 
 with respect to the matter of garnishment, either statutory 
 or judicial, but the attitude of the State of New York on this 
 question is very forcibly set forth in the case of Douglas vs. 
 
 Phenix Ins. Co. of Brooklyn, 138 N. Y. 209, from which 
 the following extracts in abbreviated form are taken: 
 
 “The right of a creditor of a corporation to prosecute an action 
 to recover the debt in the courts of his own state cannot be defeated 
 by the pendency of attachment proceedings against him in another 
 state by a creditor there, when the only claim of jurisdiction by the 
 foreign courts rests upon authority given by the statutes of its state 
 to seize the debt by and through process proceedings against an agent 
 of the corporation in that state. 
 
 In attachment proceedings the res must be within the jurisdic¬ 
 tion of the court issuing the process, in order to confer jurisdiction. 
 
 A domestic corporation has at all times its exclusive residence 
 and domicile in the jurisdiction of origin, and it cannot be garnished 
 in another jurisdiction for debts owing by it to home creditors, so 
 as to make the attachment effectual against such a creditor in the 
 absence of jurisdiction acquired over his person. 
 
 The law of a state cannot make a debtor, who is actually a 
 non-resident, a resident, by so declaring, at least so as to bind 
 another jurisdiction by the declaration. 
 
 The legal proceedings or judgments of another state are rec¬ 
 ognized here only where jurisdiction has been acquired according 
 to the course of the common law in the foreign forum; and this 
 although the statutes of that state purport to give its courts jurisdic¬ 
 tion, in disregard of the principles and rules of general jurisprudence, 
 which this state is bound to recognize. 
 
 In an action upon a policy of insurance issued by defendant, a 
 domestic corporation, it pleaded in abatement, in substance, that it 
 was carrying on business, and maintained an agency in the state of 
 Massachusetts; that pursuant to the laws of that state, it has ap¬ 
 pointed an attorney therein, upon whom process can be served; that 
 prior to the commencement of this action, an action was brought by V 
 
 creditors of the plaintiff, residing in that state, against him, in which 
 action defendant was made a party defendant as trustee of the plain¬ 
 tiff therein; * * * and by virtue of the attachment the sheriff 
 levied on the debt due plaintiff from defendant upon said policy, 
 
 that said action is still pending, and that by virtue of the laws of 
 
 said state, its courts acquired full jurisdiction of the parties and 
 control over the fund; that defendant had notice of all the proceed¬ 
 ings in said action, ‘and was duly served with process therein.’ Held 
 
 that a demurrer to this plea was properly sustained; that defendant 
 
 was in no just or legal sense a resident of Massachusetts, had no 
 
 2 
 
domicile there and was not the agent of plaintiff; and that, in con¬ 
 templation of law the company and the debtor were, at the time of 
 the issuing of the attachment, in this state, and not in Massachu¬ 
 setts.” 
 
 1'he court further held : 
 
 “We deem it unnecessary to consider the position of the defend¬ 
 ant. If it may be subjected to embarrassment or even to a double 
 judgment, it will be in consequence of its own act in voluntarily 
 subjecting itself to the laws of Massachusetts.” 
 
 Whatever view may be entertained as to the soundness 
 of ruling - of the New York Court of Appeals, that a statutory 
 assumption of jurisdiction by another state is subject to col¬ 
 lateral attack whenever *my deviation from the common law 
 shall have occurred, especially if not in consonance with its 
 own statutory laws, yet if the Supreme Judicial Court of 
 Massachusetts were to compel payment to an attaching cred¬ 
 itor in that state, in keeping with the statutory laws of that 
 Commonwealth, and the courts of New York were to decide 
 that the loss must be paid a second time to a claimant in 
 that state, it would certainly seem directly in conflict with 
 the full faith and credit clause of the Constitution of the 
 United States as indicated in the cases hereinafter cited. 
 
 Article 4, Section I. of the Constitution of the United 
 States, reads as follows: 
 
 “Full faith and credit shall he given in each State of the public 
 acts, records, and judicial proceedings of every other State. And the 
 Congress may by general laws prescribe the manner in which such 
 acts, records and proceedings shall be proved, and the effect thereof.” 
 
 Two decisions of absorbing interest have been rendered 
 by our highest tribunal by reason of this provision of the 
 Constitution, which bear directly on the subject of the juris¬ 
 diction of states in garnishment proceedings. The first of 
 these, which is reported in 198 U. S. 205, that of Harris 
 vs. Balk, is familiar to all law students. The caption of the 
 decision, which was rendered by Mr. Justice Peekham in 1905 
 reads as follows: 
 
 “(1) The judgment of a state court, if that court has jurisdiction to 
 render it, is entitled to the same faith and credit in the courts 
 of another state that it is in the state where rendered as a 
 valid domestic judgment. 
 
 (2) The temporary presence of the garnishee within the state gives 
 a court of that state jurisdiction to render judgment against 
 him in garnishment proceedings upon personal service within 
 the state, if during such temporary presence in the state, the 
 principal debtor could have sued him there to recover the debt, 
 and the laws of the state permit the garnishment of a principal 
 debtor. 
 
 (3) The consent of a garnishee to a judgment impounding his debt 
 to the principal debtor does not make the payment under the 
 judgment voluntary, where he was absolutely without defense, 
 so as to prevent him from pleading such payment in bar to 
 an action on the debt. 
 
 3 
 
(4) The duty of the garnishee to give notice of the garnishment 
 to the principal debtor is discharged by pleading the judgment 
 therein in bar to an action on the debt while there remained 
 nearly a year in which the principal debtor might litigate the 
 question of his liability in the court which rendered the judg¬ 
 ment.” 
 
 Harris, a resident of North Carolina, was indebted to 
 Balk, also a resident of North Carolina, in the sum of $180 
 for money borrowed under a verbal promise to pay, but there 
 was no written evidence of the obligation. Jacob Epstein, y 
 
 of Baltimore, asserted that Balk was indebted to him in the 
 sum of $300. Harris visited Baltimore for the purpose of 
 purchasing merchandise and while there was served with a 
 foreign or non-resident writ of attachment against Balk, at¬ 
 taching the debt due Balk from Harris. Before the return 
 day of the attachment writ, Harris left Baltimore and returned 
 to his home in North Carolina. He did not contest the garn¬ 
 ishment, and August 11th, 1896 made affidavit that the 
 amount had been attached by Epstein of Baltimore, and by 
 his counsel in the Maryland proceedings, Harris consented 
 therein to an order of condemnation against him as garnishee 
 for $180, the amount of his debt to Balk. Afterward Harris 
 paid the amount of judgment to one Warren, attorney for 
 Epstein, residing in North Carolina. 
 
 On the 11th day of August, 1896 Balk commenced suit 
 against Harris before a justice of the peace in North Carolina, 
 to recover the $180. Harris pleaded in bar the recovery of 
 the Maryland judgment and his payment thereof and con¬ 
 tended that it was conclusive because the judgment was valid 
 in Maryland and entitled to full faith and credit in the courts 
 of North Carolina. Judgment was rendered against Harris, 
 which judgment was affirmed by the Supreme Court of North 
 Carolina. The ground of such judgment was that the Mary¬ 
 land court obtained no jurisdiction to attach or garnishee the 
 debt due from Harris to Balk, because Harris was but tem¬ 
 porarily in the state and the situs of the debt was in North 
 Carolina. The United States Supreme Court in commenting 
 on this case used the following language: 
 
 “It ought to be and it is the object of the courts to prevent the 
 payment of any debt twice over. Thus—Harris, owing a debt to Balk 
 paid it under a valid judgment against him to Epstein. He certainly 
 ought not to be compelled to pay it a second time, but should have 
 the right to plead his payment under the Maryland judgment. It is 4 
 
 objected, however, that payment by Harris to Epstein was not a legal 
 compulsion. Harris in truth owed the debt to Balk which was at¬ 
 tached by Epstein. He had, therefore, as we have seen, no defense 
 to set up against the attachment of the debt. Jurisdiction over him 
 personally had been obtained by the Maryland court. As he was 
 absolutely without defense there was no reason why he should not 
 consent to a judgment impounding the debt, which judgment the 
 plaintiff was legally entitled to and which he could not prevent. There 
 was no merely voluntary payment within the meaning of that phrase 
 as applicable here. 
 
 4 
 
But most rights may be lost by negligence and if the garnishee 
 were guilty of negligence in the attachment proceedings, to the damage 
 of Balk, he ought not to be permitted to set up the judgment as a 
 defense. Thus it is recognized as the duty of the garnishee to give 
 notice to his own creditor, if he would protect himself, so that the 
 creditor may have an opportunity to defend himself against the claim 
 of the person suing out the attachment. While the want of notification 
 by the garnishee to his own creditor may have no effect upon the 
 validity of the judgment against the garnishee (the proper publication 
 being made by the plaintiff) we think it has and ought to have an 
 effect upon the right of the garnishee to avail himself of the prior 
 judgment and his pajunent thereunder. The notification by the garn¬ 
 ishee is for the purpose of making sure that his creditor shall have 
 an opportunity to defend the claim made against him in the attach¬ 
 ment suit. Fair dealing requires this at the hands of the garnishee. 
 Balk had notice of the proceedings in Maryland, but took no action. 
 
 Generally though, the failure on the part of the garnishee to 
 give proper notice to his creditor of the levying of the attachment 
 would be such a neglect of duty on the part of the garnishee, which 
 he owed to his creditor, as would prevent his availing himself of 
 the judgment in the attachment suit, as a bar to his creditor against 
 him, which might therefore, result in his being called upon to pay 
 the debt twice.” 
 
 This litigation over a $180 debt came before the Supreme 
 Court of North Carolina on several occasions. It lasted from 
 1896 to 1905 and after nine years was reversed and remanded 
 by the Supreme Court of the United States. 
 
 This decision has been quite severely criticized by a 
 prominent professor of law who declares it to be unjust and 
 unsound. He thinks that Epstein should not have been per¬ 
 mitted to attach the debt due from Harris to Balk until he 
 had first secured a judgment against Balk, and this certainly 
 seems reasonable at least to a layman. Let us analyze the 
 situation. A, a citizen of California, is indebted to B, also a 
 citizen of California, in the sum of $500. A happens to be in 
 the state of Maine and is served with a writ of attachment by 
 C, who claims that B is indebted to him in the sum of $500. 
 A notifies B that such writ has been served upon him. C has 
 secured no judgment against B and C’s claim is unjust, but B 
 must go to the trouble of defending this action in Maine, 
 3000 miles distant, and in order to properly protect his interest 
 he might be under the necessity of traveling all this distance 
 and appearing at the trial, and it is self evident that it might 
 be better for him to lose the $500 than to incur the expense 
 which would be incurred in an attempt to save it. 
 
 There is another United States Supreme Court decision 
 somewhat analogous to that of Harris vs. Balk (supra) re¬ 
 corded in 240 U. ,S. 620, which is entitled “Baltimore and 
 Ohio Railroad Company against Hostetter.” Hostetter, the 
 defendant, a resident of West Virginia, sued in a Justice’s 
 Court in that state for wages due him by the railroad com¬ 
 pany. The defense was that the wages had been paid by 
 the railroad company as the result of a garnishment pro¬ 
 ceeding taken against it in Virginia where it was suable to 
 
 5 
 
enforce a judgment rendered in Virginia against Hostetter 
 when he resided in that state and after a domiciliary service 
 on him. 
 
 The West Virginia court held that the garnishment pro¬ 
 ceeding was not entitled to be enforced against Hostetter 
 under the full faith and credit clause of the Constitution of 
 the United States because he was not served with process in 
 such proceedings, he then residing in West Virginia, although 
 extra judicial notice was given him by the railroad company. 
 
 The plaintiff in July, 1911 resided in Clifton Forge, 
 Virginia, and was indebted to one Wagner in the sum of $35, 
 for which debt Wagner obtained a judgment against him in 
 a Justice’s Court in Virginia based on a summons served 
 “on said plaintiff ----- by delivering a copy thereof 
 to the wife of the plaintiff at his usual place of abode.” Said 
 record further shows that on the 17th day of September, 1912, 
 a garnishee summons was directed against the Baltimore & 
 Ohio Railroad Company; that on the third day of October, 
 1912, judgment was rendered against Hostetter and the Bal¬ 
 timore & Ohio Railroad in favor of Wagner for $38.40 and 
 interest. In these garnishment proceedings no notice or pro¬ 
 cess of any kind was served on Hostetter who then resided 
 in West Virginia. But on February 14th, 1913, after an appeal 
 had been taken by the Railroad Company in the garnishment 
 proceedings, it notified Hostetter in writing of the pendency 
 of the garnishment proceedings on appeal. It was not con¬ 
 tended that any formal notice was given to Hostetter of the 
 garnishment proceedings for the reason that the statute of 
 Virginia does not require notice to be given to a non-resident 
 of that state of pending garnishment proceedings. 
 
 The United States Supreme Court overruled the courts 
 of West Virginia and held that the Baltimore & Ohio Rail¬ 
 road Company could not be compelled to pay the second time 
 the sum it had discharged under the Virginia judgment, citing 
 the following cases: 
 
 C. R. I. & P. R. R. Co. vs. Sturm, 174 U. S. 710. 
 
 Harris vs. Balk, 198 U. S. 215. 
 
 L. & N. R. R. Co. vs. Deer, 200 U. S. 176. 
 
 It will be observed that in this case a judgment had 
 been rendered against Hostetter in favor of Wagner, thereby 
 distinguishing it from the case of Harris vs. Balk (supra) 
 and this would seem to meet the point raised by the law 
 professor above referred to against the former decision, al¬ 
 though even if no judgment had been rendered, the Supreme 
 Court would no doubt have stood by its decision in the Harris 
 vs. Balk case. And thus a case great in principle, but involv¬ 
 ing only $35.00 in amount, engrossed the attention of the 
 greatest tribunal in the world. 
 
 There is a case pending at the present time where the 
 loss occurred in Oklahoma and the claim was garnished by 
 a large packing company in Chicago, whose claim amounted 
 
 6 
 
to more than the total loss. Later, garnishment proceedings 
 were brought by a resident creditor in Oklahoma. The rep¬ 
 resentative of the company in Chicago inadvisedly admitted 
 that it was justly indebted to the insured for the amount of 
 the loss as adjusted, whereupon judgment was rendered in 
 favor of the attaching creditor in that state. This fact was 
 set up in the Oklahoma proceedings, but the attaching cred¬ 
 itor in that state is persistent in his efforts to secure the 
 insurance fund. The matter has been in litigation for a year 
 or more and is still pending. 
 
 The practice of attorneys with respect to the matter of 
 making answer in garnishment proceedings seems to differ, 
 but it is submitted that the custom which prevails in the 
 East, of making* non-committal answers irrespective of 
 whether or not the loss has been adjusted, is the better 
 practice; in fact, it can truthfully be said that the Company 
 has no money belonging to the insured until the claim has 
 matured, that is, sixty days after the receipt of satisfactory 
 proofs of loss, and the New York Court of Appeals has so 
 held (Douglas vs. Phenix Insurance Company, supra). 
 
 There would seem to be no reason why the garnishee 
 cannot with perfect propriety make answer in garnishment 
 proceedings, by saying that it has not yet determined whether 
 or not it has any liability even though the loss may have 
 been adjusted and the claim may have matured, for until 
 payment has actually been made there is a possibility of 
 some development which will afford a valid defense under 
 the policy. 
 
 If this position were taken, or liability denied in the 
 garnishment proceedings, it would be incumbent upon the 
 attaching creditor to affirmatively prove that the company 
 had a liability to the insured, and in many instances the 
 expense of proving this would be in excess of the creditor’s 
 claim. If, on the other hand, as has not infrequently been 
 done in some sections, the Company passively admits liability, 
 judgment can be taken and the pathway to the Company’s 
 exchequer made exceedingly easy to the attaching creditor. 
 
 In some jurisdictions, under certain circumstances, the 
 court makes the garnishee a small allowance for expenses in 
 filing answer to the garnishment proceedings, especially when 
 the attachment does not lie, but as a rule insurance companies, 
 under the laws as they exist, are under the necessity of in¬ 
 curring all the expense incidental to making answer, and if 
 there are a number of garnishments against the claim, this 
 expense amounts to no inconsiderable sum, and this is par¬ 
 ticularly true when garnishments are fded against the com¬ 
 pany in two or more jurisdictions. 
 
 Writs of attachment are positively a source of trouble 
 and expense to insurance companies at all times; they are 
 comparatively so when the loss is in one state and the 
 
 7 
 
garnishment in another, and they are superlatively so when 
 two or more garnishments are pending in different states. 
 It is said that companies have been compelled to pay losses 
 twice under these latter conditions, but it would seem that 
 if properly handled, this could have been avoided by invoking 
 the full faith and credit clause of the Federal Constitution, 
 which was certainly intended to prevent such a result. 
 
 In New York it is made the duty of a person or cor¬ 
 poration upon whom or which a notice is served, to furnish 
 a certificate to the sheriff showing the nature, amount, and 
 description of the interest of the defendent in any property 
 or debt in the hands of such person or corporation. Any one 
 under this duty, who refuses to perform it may be ordered 
 before a court or judge for examination. 
 
 The certificate furnished is evidence against the person 
 or corporation making it, but it is open to explanation in 
 case of mistake. It is customary, therefore, to be quite 
 non-committal in making answer to these proceedings, simply 
 saying that a policy has been issued to the defendant cover¬ 
 ing certain property; that a loss has been reported, but that 
 the company has not determined its liability, if any, in the 
 premises. When this is done the insured should be notified 
 of the fact that the claim has been attached and then await 
 developments. This mode of procedure usually results in 
 the settlement of the claim and a dismissal of the proceedings. 
 
 When making answer to a writ of attachment, if any 
 writs have been previously served, or if the claim has been 
 assigned, or if the loss under the policy is made payable to 
 a third party, these facts should be fully set forth. An 
 ' assignment may be subject to attack on the ground of fraud, 
 and it will not be safe to pay the assignee of a claim unless 
 the attachment proceedings are dismissed. The claim of a 
 named payee under the policy, however, takes precedence 
 over that of an attaching creditor, or of a trustee or assignee 
 in bankruptcy, and he will have no difficulty in enforcing 
 payment. Ordinarily when the attention of an attaching cred¬ 
 itor is called to the fact that the loss is payable to a third 
 party, whose interest exceeds the amount of the loss, he 
 will dismiss the proceedings. When, however, there are 
 numerous claimants to the fund it frequently becomes ad¬ 
 visable to pay the money into court, provided all claims are 
 within the same jurisdiction. 
 
 A circumstance frequently affecting the validity of legal 
 liens such as garnishments, is the bankruptcy of the insured. 
 Section 67 of the Federal Bankruptcy Act provides that such 
 liens, except under circumstances which are not material in 
 this discussion, will be dissolved by the adjudication in bank¬ 
 ruptcy provided (a) that the lien was obtained within four 
 months prior to the filing of the petition in bankruptcy and 
 (b) that the bankrupt was in fact insolvent at the time when 
 
 8 
 
the lien was obtained. If the lien was procured more than 
 four months prior to the filing of the petition in bankruptcy 
 or if the bankrupt was still solvent at the time when it was 
 obtained, the lien continues in effect. 
 
 In normal times every large fire insurance company is 
 liable to be served with several writs of attachment each 
 month, but during the period of deflation which has been in 
 process for the past year there has been a veritable avalanche 
 of garnishments and liens filed against insurance companies, 
 and it is not at all unusual for a company to receive a single 
 telegram containing notice of three or four garnishments, and 
 in a case recently settled in Kentucky twelve writs of attach¬ 
 ment had been filed against the claim. 
 
 It will be seen from the foregoing analysis that the laws 
 are highly favorable to the attaching creditor; that they are 
 correspondingly unfavorable to the debtor and still more un¬ 
 favorable to the garnishee, who is invariably subjected to 
 more or less trouble, and not infrequently to considerable 
 expense, wholly in the interest of the attaching creditor. There 
 should be some provision made for reimbursing the garnishee, 
 at least for actual expenses incurred in connection with the 
 garnishment proceedings. 
 
 Years ago it was the practice of virtually all insurance 
 companies to issue, or have their field representatives issue, 
 sight drafts in payment of losses reading “Pay to the order 
 
 of.”. But largely on account of the difficulties 
 
 connected with garnishments and the element of doubt as 
 to what constituted payment under this form of draft many 
 companies now issue only “Acceptance Drafts” reading 
 
 “Upon acceptance pay to the order of.” 
 
 If, therefore, the company receives notice before the draft 
 is accepted that the claim has been garnished, acceptance, or 
 payment can very properly be refused. 
 
 When a garnishee summons or a similar document is 
 served upon a local agent he should promptly telegraph the 
 company, giving sufficient details to enable it to identify the 
 loss, and should forward the summons by first mail. He 
 should also notify the general or state agent having juris¬ 
 diction in order that the matter may receive prompt attention. 
 
 9