VOLUME XIV SLICE VI Inscriptions to Ireland, William Henry (continued 6)

When the net-premium method is employed, it is important that the office premiums be not altogether left out of view, otherwise an imperfect idea will be formed as to the results of the valuation. Suppose two offices, in circumstances as nearly as possible similar, estimate their liabilities by the net-premium method upon the same data, but office A charges premiums which contain a margin of 20% above the net premiums, and office B charges premiums with a margin of 30%. Then, in so far as regards their net liabilities (always supposing the sum set aside in each case to be that required by the valuation), the reserves of those offices will be of equal strength, and if nothing further were taken into account they might be supposed to stand in the same financial position. But it is obvious that office B, which has a margin of income 50% greater than that of office A, is so much better able to bear any unusual strain in addition to the ordinary expenditure, and is likely to realize a larger surplus on its transactions. Hence it appears that in order to obtain an adequate view of the financial position of any office it is necessary to consider, not only the basis upon which its reserves are calculated, but also the proportion of “loading” or “margin” contained in its premiums, and set aside for future expenses and profits.

Valuations may be made on different data as to mortality and interest, and the resulting net liability will be greater or less according to the nature of these. Under any given table of mortality a valuation at a low rate of Effects of different data. interest will produce a larger net liability—will require a higher reserve to be made by the office against its future engagements to the insured—than a valuation at a higher rate. The effect of different assumptions in regard to the rates of mortality cannot be expressed in similar terms. A table of mortality showing a high death-rate, and requiring consequently large assurance premiums, does not necessarily produce large reserve values. The contrary, indeed, may be the case, as with the Northampton Table, which requires larger premiums than the more modern tables, but gives on the whole smaller reserve values. The amount of the net liability depends, not on the absolute magnitude of the rates of mortality indicated by the table, but on the ratio in which these increase from age to age.

If the values deduced by the net-premium method from any two tables be compared, it will be seen that

V′x >, =, or < nVx

according as

1 − 1 + a′x+n >, =, or < 1 − 1 + ax+n

1 + a′x 1 + ax

i.e. as

1 + ax+n >, =, or < 1 + a′x+n

1 + ax 1 + a′x

(1),

or as

1 + a′x >, =, or < 1 + a′x+n

1 + ax 1 + ax+n

(2);

where the accented symbols throughout refer to one table and the unaccented symbols to the other.

We have thus the means of ascertaining whether the policy-values of any table will be greater or less than, or equal to, those of another, either (1) by calculating for each table separately the ratios of the annuity-values at successive ages, and comparing the results, or (2) by calculating at successive ages the ratios of the annuity-values of one table to those of another, and observing whether these ratios decrease or increase with advancing age or remain stationary throughout. The above relations will subsist whatever may be the differences in the data employed, and whether or not the annuity-values by the different tables are calculated at the same rate of interest. When the same rate of interest is employed, any divergence in the ratios of the annuity-values will of necessity be due to differences in the rates of mortality.

A prevailing fallacy in the popular mind, which has grown out of the practice of net valuations, is the inference that the average technical reserve represents the value of the individual policy. Each risk is properly assumed at Fallacy of single-policy reserve. its probable or average value at the time. But from that moment its circumstances are constantly changing in directions then unforeseen, and the expectation that such changes will occur is the motive for insuring. To treat them singly as unchanged in value at any later time is as illogical as it would be after some have matured. The actual value of any one risk borne by a company is indeterminate. It may become a claim to-morrow, or not for a generation to come. In the former case the company must now hold funds to pay in full; in the latter, the future premiums will perhaps more than suffice, so that no present reserve is needed. An entire reserve for the whole body of risks is essential, and its amount is definite, upon the reasonable assumption that the general average remains undisturbed by individual changes. A distinct reserve for a single policy is inconceivable. To recognize it is to deny the first principle of insurance. The average amount by which the reserve of a company must be increased, because of the existence of policies of a given class, is to the actuary an important fact, and is commonly accepted as his best guide in the distribution of surplus. But a popular theory has seized upon the assignment of this average sum to each policy, in the technical shorthand of the actuary, and holds that it is in each case the special property of the owner of that policy. The practical consequences are serious when, as often, many of the insured cease to pay premiums, and each demands the amount of the supposed individual reserve. His right to claim it is countenanced by a widespread public opinion, which has inspired statutes in Massachusetts and some other states, requiring companies to redeem all policies lapsing after the first two or three years of insurance at a price founded on the technical reserve. Yet, in by far the majority of instances, the lapse of policies is of itself a loss to the company. It is deprived of business secured at much expense before it has derived any of the advantage expected from the accession. It is compelled to pay numbers of its profitable contributors for ceasing to contribute. The burden falls in a mutual company upon the insured who fulfil their contracts. Such laws favour those who withdraw after few payments at the cost of those who maintain their insurance to the end, or for many years. The American companies formerly yielded to the pressure of a mistaken public sentiment, and competed for favour by promising excessive values in case of surrender.2 Similar conditions exist in Switzerland, Austria, and other countries in which the business is minutely regulated by government bureaus. But in Great Britain the companies are largely free from such influences, while an open market exists for policies which have a commercial value, with results on the whole more satisfactory to all parties interested than any rule of compulsory purchase which could be enforced on the companies.

A special form of life insurance, which has wonderfully developed, is the family insurance of the labouring people by the so-called industrial companies. Until recently this class of people had no satisfactory share in the benefits Industrial Insurance. of insurance, although the friendly societies in Great Britain, and many forms of beneficial associations in the United States, were attempts, often in part successful, to provide for special wants, mainly for maintenance of the sick and for the costs of burial. Most of them, however, lacked a scientific basis and an efficient and permanent organization, while thousands of them were grossly mismanaged. In Germany an elaborate scheme of compulsory insurance for labourers was established by a law of the empire in 1883, and extended in subsequent years; and similar legislation has been enacted in several other countries, most thoroughly in Switzerland and Austria. The ultimate value of this great social experiment cannot yet be determined. That it relieves much want and does a great service in preventing pauperism is not disputed; but that it also undermines the independent spirit of the people, and that it imposes a burden upon the national industry, which not only hampers it in the world’s competition, but reacts with special injury upon the class it aims to benefit, are criticisms not satisfactorily answered. No scheme of government insurance, certainly, is adapted to a people impatient of paternalism in its rulers and thoroughly habituated to voluntary association for all common interests. The solution of the great problem, how to apply the insurance principle to the most pressing needs for protection of the class supported by the wages of labour, is now sought in Great Britain and America mainly in the universal offer to them of industrial insurance. The Prudential Assurance Company of London was the pioneer in this work, beginning it experimentally in 1848, but gradually adapting its methods to the new field, until a generation later they showed themselves so efficient that an extraordinary growth resulted, and has continued without interruption. This company and others upon a similar plan insure whole households together for burial expenses in case of death, and a small provision for dependants or for old age, charging as premiums small fractions of a day’s wages, which must be collected weekly. The great difficulties encountered were the cost of small and frequent collections, and the high rate of mortality, which is from 40 to 90% more than that in the experience of the older companies. This high death-rate is due not so much to the fact that life is shorter in the labouring class as to the lack of efficient medical selection, which would be too costly. The premiums, at best, must be made higher than in offices insuring for annual payments, but the demand for insurance extended as rapidly as the system could be explained, and the Prudential is said to have now in force some 12,000,000 policies, with an average premium of twopence a week, secured by an accumulated insurance fund of £17,000,000. It has superseded a host of petty assessment societies of various classes without scientific basis or business responsibility, which deluded and disappointed the poor. The British government in 1864 undertook to administer a plan for the insurance of working men, but in thirty years accomplished less than the work of one private company in a year. In addition to the many insurance companies which transact industrial business in the United Kingdom, a large number of friendly societies have adopted similar plans.

The system of industrial insurance was introduced into the United States in 1876. Its growth, though much more rapid than in Great Britain, was at first slow compared with that of later years. The following table, condensed from the Insurance Year-Book for 1900, is an interesting exhibit of the character as well as of the extent of this form of insurance among working men:—

Industrial Insurance in the United States.

Year. No. of Cos. Insurance written. Policies in force 31st December. Insurance in force 31st December. Premiums received. Losses paid.

1876 1 $400,000 2,500 $248,342 $14,495 $1,958

1880 3 34,212,131 228,357 19,590,780 1,155,360 430,631

1884 3 89,150,302 1,076,422 108,451,099 4,486,612 1,499,432

1888 7 161,260,335 2,788,000 302,033,066 11,939,540 4,162,745

1892 11 276,893,923 5,118,897 582,710,309 24,352,900 8,847,322

1896 11 360,852,458 7,375,688 886,484,869 40,058,701 13,420,336

1899 16 519,789,085 10,048,625 1,292,805,402 56,159,889 17,023,485

It is remarkable that the average weekly premium in the United States appears to be about 10 cents, or two and a half times as high as in Great Britain. The average policy is also proportionally larger, and the progressive increase in its amount deserves notice. At the rate at which the practice of insurance is extending among working men, it would require but few years for it to become as universal in these countries as any paternal government has aimed to make it by compulsion.

There are various sources from which a surplus of funds may arise in an insurance company: (1) from the rate of interest actually earned being higher than that anticipated in the calculations; (2) from the death-rate among the insured Division of surplus. being lower than that provided for by the mortality tables; (3) from the expenses and contingent outlay being less than the “loading” provided to meet them; and (4) from miscellaneous sources, such as profitable investments, the cancelment of policies, &c.

Supposing a valuation to have been made on sound data and by a proper method, and to have resulted in showing that the funds in hand exceed the liabilities, the surplus thus ascertained may be regarded as profit, and either its amount may be withdrawn from the assets of the office or the liabilities may be increased in a corresponding degree.

Various methods are employed by insurance companies in distributing their surplus funds among the insured. In some offices the share or “bonus” falling to each policyholder is paid to him in cash; in others it is applied Bonuses. in providing a reversionary sum which is added to the amount assured by the policy; in others it goes to reduce the annual contributions payable by the policyholder. A method of more recent introduction is to apply the earlier bonuses on a policy to limit the term for which premiums may be payable, thus relieving the policyholder of his annual payments after a certain period. Another method is to apply the bonuses towards making the sum insured payable in the lifetime of the policyholder. The plan of reversionary bonus additions is most common, and when it is followed the option is usually given of exchanging the bonuses for their value in cash or of having them applied in the reduction of premiums.

Not only are there different modes of applying surplus, but the basis on which it is divided among the insured also varies in different offices. In some the reversionary bonus is calculated as an equal percentage per annum of the sum insured, reckoning back either to the commencement of the policy in every case, or (more commonly) to the preceding division of profits. In others the rate is calculated, not only on the original sums insured, but also on previous bonus additions. In others the ratio of distribution is applied to the cash surplus, and the share allotted to each policy is dealt with in one or other of the ways above indicated. The following are some of the ratios employed by different offices in the allocation of profits: (1) in proportion to the amount of premiums paid (with or without accumulated interest) since the last preceding valuation; (2) in proportion to the accumulated “loading” of the premiums so paid; (3) in proportion to the reserve values of the policies; (4) in proportion to the difference between the accumulated premiums and the reserve value of the policy in each case.

Some offices have a special system of dealing with surplus, reserving it for those policyholders who survive the ordinary “expectation of life,” or whose premiums paid, with accumulated interest, amount to the sums insured by their policies. This system is usually connected with specially low rates of premium.

In the United States the so-called “contribution plan” has been accepted in theory by many companies, though carried out with many variations in detail by different actuaries. The principle is, that since each of the insured is charged in his premium a safe margin above all probable outlays, when the necessary amount under each head becomes determinate the several excesses should be returned to him. It is therefore sought to calculate what each member would have been charged for net premium and loading had the mortality, rate of interest, and expenses been precisely known beforehand, and to credit him with the balance of his payments. As a corollary of the theory of net valuations, which regards every life insured as an average life until its end, and assumes the rigid accuracy and equity of all the formulas employed to represent business facts, it is consistent and complete. But many minds find it more curious than practical, and prefer to seek equity in faithfulness to contract rights rather than in adjustments which they deem too refined, if not fanciful. The plan has met with little favour in England, where surplus is more commonly distributed on general business principles. Enormous bonuses were saved by the British offices out of the excessive premiums at first collected, and by the American companies during the epoch of high interest rates. But the use of more accurate tables, the decline in interest, and the increased expenses of later years, have vastly reduced the apparent profits. Former methods of distributing surplus, when ascertained, have largely given way in America to novel and more complex plans. The Tontine idea, historically familiar, was for many years imitated by some offices in their insurance contracts. All premiums above outlay, in a company or a class of policies, were accumulated, only stipulated amounts being paid on death claims meanwhile maturing, with no compensation to its members withdrawing, until the end of a fixed term, when the whole fund was apportioned to the survivors. Large returns were sometimes made, but many who could not maintain their policies were dissatisfied. “Semi-tontines” followed, partly meeting the difficulty by pooling only the surplus, and allowing some return in case of withdrawal. But these cruder forms of contract are now largely superseded by various “reserve-dividend,” “accumulation,” “bond,” and “investment” policies, with options at stated periods between cash withdrawals and continued insurance, the simple inducement to provide against death being more or less merged in that of making a profitable investment of capital.

In those branches of insurance where the contract is one of indemnity against loss, the risk remaining the same from year to year—and where the consent of both parties, insurer and insured, is required at each periodical renewal—no Surrender values. question of allowance in respect of past payments can arise when one party or the other determines to drop the contract. It is quite recognized that the premiums are simply an equivalent for the risk undertaken during the period to which they apply, with a certain margin for expenses and for profit to the insurer, and that therefore a favourable issue of the particular contract supplies no argument for a return of any part of the sums paid. In life insurance, however, we have shown that the premiums contain a third element, namely, the portion that is set aside and accumulated to meet the risk of the insurance when the premium payable is no longer sufficient of itself for that purpose.

When a policyholder withdraws from his contract with a life insurance office, the provision made for the future in respect of his particular insurance is no longer required, and out of it a surrender value may be allowed him for giving up his right to the policy. If there were no reasons to the contrary, the office might hand over the whole of this provision, which is in fact the reserve value of the policy. No more could be given without encroaching upon the provision necessary for the remaining policies. But the policyholder in withdrawing is exercising a power which circumstances give to him only and not to the other party in the contract. The office is bound by the policy so long as the premiums are duly paid and the other conditions of insurance are not infringed. It has no opportunity of reviewing its position and withdrawing from the bargain should that appear likely to be a losing one. The policyholder, however, is free to continue or to drop the insurance as he pleases, and it may fairly be presumed that he will take whichever course will best serve his own interest. The tendency obviously is that policies on deteriorated and unhealthy lives are kept in force, while those on lives having good prospects of longevity are more readily given up. Again, the retiring policyholder, by withdrawing his annual contribution, not only diminishes the fund from which expenses are met, but lessens the area over which these are spread, and so increases the burden for those who remain. Considerations like these point to the conclusion that, in fairness to the remaining constituents of the office, the surrender value to be allowed for a policy which is to be given up should be less than the reserve value. The common practice is to allow a proportion only of the reserve value. Some offices have adopted the plan of allowing a specified proportion of the amount of premiums paid. This plan is not defended on any ground of principle, but is followed for its simplicity and as a concession to a popular demand for fixed surrender values.

Another mode of securing to retiring policyholders the benefit of the reserve values of their insurances is that known as the non-forfeiture system. This system was first introduced in America, whence it found its way to the United Non-forfeiture system. Kingdom, where it was gradually adopted by a large proportion of the insurance companies. In its original form it was known as the “ten years non-forfeiture plan.” The policies were effected by premiums payable during ten years only, the rates being of course correspondingly high. If during those ten years the policyholder wished to discontinue his payments, he was entitled to a free “paid-up policy” for as many tenth parts of the original sum insured as he had paid premiums. The system, once introduced, was gradually extended first to insurances effected by premiums payable during longer fixed periods, and ultimately, by some offices, to insurances bearing annual premiums during the whole of life. The methods of fixing the amount of paid-up policy in the last-mentioned class of cases vary in different offices, but the principle underlying them all is that of applying the reserve value to the purchase of a new insurance of reduced amount.

An office, in entering on a contract of life insurance, does so in the faith that all circumstances material to be known in order to a proper estimate of the risk have been disclosed. These circumstances are beyond its own Conditions of insurance. knowledge, and as the office for the most part (except as regards the result of the medical examination, which may reveal features of the case unknown to the proposer himself) is dependent on the information furnished by the party seeking to effect the insurance, it is proper that the latter be made responsible for the correctness of such information. Accordingly it is made a stipulation, preliminary to the issue of every policy, that all the required information bearing upon the risk shall have been truly and fairly stated, and that in case of any misrepresentation, or any concealment of material facts, the insurance shall be forfeited. In practice, however, this forfeiture is rarely insisted on unless there has been an evident intention to deceive. Other systems and conditions of life insurance policies may be shortly noticed.

The usual division of policies is into “non-participating” and “participating.” Non-participating policies are contracts for the payment on death of a certain fixed sum in consideration of a given premium, and these amounts are not affected by the profit made by the company. Participating policies entitle the holders to a share in the profits of the company. These profits are applied in various ways, as described above. A policy may be a whole life one, that is, the policyholder may pay a periodical premium throughout life, or it may be a limited payment one (the holder paying a premium for a limited number of years), or an endowment policy, under which the insurer receives the amount he has insured for at a given age, say fifty-five or sixty; or if death occur previously, the sum is paid to his representatives. There are also endowment policies for children, under which parents or others receive a specified sum on a child attaining a given age, the premiums being returnable if the child dies before the specified age.

As to Payment of Premiums.—A certain period of grace is allowed, most commonly thirty days, after each premium falls due. If payment is not made within that time, the presumption is that the policyholder intends to drop the contract, and the risk of the office comes to an end. It may, however, be revived on certain conditions, usually the production of evidence of health and payment of a fine in addition to the premium. An impression used to prevail among the public that the offices were interested in encouraging the forfeiture of policies. If any such impression was ever shared by the offices themselves it must have long since passed away, every reasonable effort being now made on their part, not only to secure insurances but to retain them, and to afford all the facilities that can be extended to policyholders with that object.

As to Foreign Travel and Residence, and as to Hazardous Occupations.—When Babbage wrote his Comparative View of Assurance Institutions in 1826, voyaging abroad was scarcely permitted under a British life policy. The Elbe and the Garonne, Texel and Havre, Texel and Brest, the Elbe and Brest were the limits prescribed by most of the English offices. Even at a much later period the extra premiums charged for leave to travel or reside abroad were very heavy. But improved means of conveyance—in some places better sanitary appliances, and habits of living more suited to the climatic conditions—and, more than all perhaps, the knowledge that has been gained by experience as to the extent of the extra risks involved and the relative salubrity of foreign climates—have enabled the offices to modify their terms very considerably. The limits of free residence and travel have been greatly widened, and where extra premiums are still required these are, as a rule, much lower than formerly. The assured are now commonly permitted to reside anywhere within such limits as north of 35° N. lat. (except in Asia) or south of 30° S. lat., and to travel to and from any places within those limits, without extra premium.

Military men (when on active service) and seafaring men are usually charged extra rates, as are also persons following specially dangerous or unhealthy occupations at home.

As to Suicide.—The policies of most companies used to contain a proviso that the insurance shall be void in case the person whose life is insured dies by his own hand, but it is now seldom inserted. Some offices, acting on a sound principle, limit its operation to a fixed period, the extent of which varies in different offices from six months to seven years from the date of issue of the policy.

The practice of rendering policies indisputable and free from restriction as to foreign travel or residence, after a certain period, has tended greatly to simplify the contract between the office and the insured. A declaration of indisputability covers any inaccuracies in the original documents on which a policy was granted, unless these inaccuracies amount to fraud, which the law will not condone under any circumstances.

A remarkable difference in the development of life insurance between Great Britain and the United States is, that among the British companies only one-third of the insurances in force is in purely mutual institutions, while in America the proportion exceeds four-fifths. In both countries there are also “mixed” companies, in which policyholders receive a fixed percentage of the realized surplus, often from three-fourths to nine-tenths of the whole, but the control and management are in the hands of shareholders. These form the great majority of the proprietary offices in the United Kingdom, and the profits of the business have been large. The amount of capital paid in by shareholders of forty-one joint-stock companies was £5,931,000, but the capital authorized and subscribed was much more, and the subscriptions have often been paid, wholly or in part, by credits from surplus. The shares of these companies, at market prices, represent a value of at least £50,000,000, but the dividends upon these shares are drawn largely from other business, many of the largest and most prosperous corporations conducting also fire insurance, and some of them marine or casualty insurance.

No branch of social statistics has been more diligently studied than life insurance, and several governments publish classified accounts of corporations insuring lives within their jurisdiction. But the reports are not uniform in method and in periods covered, and aggregates derived from them must be used with reserve. By the Life Assurance Companies Act 1870, and amendments made in later years, each company issuing policies in the United Kingdom must deposit with the Board of Trade every year its revenue account and balance-sheet for the preceding year, and must at fixed intervals cause an investigation of its financial condition to be made by an actuary, and furnish the public through the Board of Trade with the detailed results, in forms prescribed by the act. Thus these returns are the highest authority for the conditions and operations of the offices, which often supplement or anticipate them by voluntary publications. In the United States the laws exact still more minute and much prompter reports to the insurance departments of the states; and every annual statement is required to show the results of an actuarial investigation. All these facts are collected, classified and compared by statisticians for several standard annuals in both countries, especially the Post Magazine Almanack, Bourne’s Directory and Manual and the Insurance Blue Book in London, and The Insurance Year-Book of the Spectator Company in New York.

The reports of the insurance department of New York cover more companies than those of any other state. The institutions not included in them are about thirty-five in number, mostly small and local. The New York reports represent very nearly 95% of the entire business of the United States. While the amount of life assurance done by British and other foreign offices in the United States is insignificant, fourteen companies of the United States have agencies in Canada (ten for new business), and four transact business in Europe and in other parts of the world. The home business of the American companies is in the aggregate about 87½% of the whole.

In the principal countries of continental Europe life assurance is offered by the chief international institutions of Great Britain and the United States, and their policies are in force probably to the aggregate amount of £140,000,000. The domestic companies have been stimulated to increased activity by the aggressive canvassing of the foreign agencies, and the business in recent years has grown rapidly, until now the total sum insured upon lives on the continent of Europe is little less than a milliard of pounds sterling. Much information about life assurance in the different countries of Europe will be found in Ehrenzweig’s Assekuranzjahrbuch (Vienna).

(C. T. L.; T. A. I.)

V. British Post Office Insurance

In 1864 Mr Gladstone, then chancellor of the exchequer, advocated the extension of life insurance amongst persons of small means, and, encouraged by the remarkable success of the Post Office Savings Bank, then recently established, proposed that the services of the postmaster-general should be enlisted in the promotion of insurance. The result was the passing of the Government Annuities Act 1864. This act authorized the commissioners for the reduction of the national debt, for the first time, to insure a life without granting an annuity upon it, and enabled the postmaster-general to act as the agent of the commissioners in the issue of life policies and the grant of annuities. The limits of insurance were fixed at £20 and £100, and of annuities at £4 and £50; and the purchase of deferred annuities or old-age pay, by monthly, or even more frequent instalments, was sanctioned. The work was eagerly accepted by Lord Stanley of Alderley, the postmaster-general of the day, and the machinery for putting the act in action was elaborated by Frank Ives Scudamore of the Post Office and Sir Alexander Spearman of the National Debt office. The business was commenced on the 17th of April 1865. By the end of the year 560 policies of insurance had been issued, and 94 immediate and 54 deferred annuities granted. In the first twelve months these figures had increased to 809 policies and 230 annuities. The opportunity thus given of insuring through the Post Office with government security was not, however, embraced with the warmth which had been anticipated. In 1882, when Mr Henry Fawcett, then in office, examined the subject, he found that the average number of policies of insurance granted annually during the seventeen years which had elapsed was under 400—less, in fact, than during the first twelve months of the system. The purchase of annuities had increased slightly, but the business was transacted chiefly in immediate annuities, and hardly indicated any progress in provision for old age by means of early savings. Mr Fawcett procured a Select Committee of the House of Commons on the subject. Before this committee Mr James Cardin, then assistant receiver and accountant-general of the Post Office, propounded a scheme for combining the annuity and insurance business of the Post Office with that of the savings bank. The Committee recommended the adoption of this scheme, together with some enlargement of range and some relaxation of conditions. The recommendations of the Committee were embodied in the Government Annuities Act 1882, which came into operation on the 3rd of June 1884, and which forms the basis of the present system.

Any person between 14 and 65 can now insure through the medium of the Post Office Savings Bank for any amount from £5 to £100; and the life of a young person between 8 and 14 can be insured for £5. Through the same channel can be purchased annuities, immediate or deferred, from £1 to £100, on the life of any person from 5 years old upwards. Old-age policies, that is, policies securing payment of a specific sum either at the expiration of a fixed period (varying from 10 to 40 years), or upon the attainment of a certain age, or sooner in case of death, can also be obtained. Policies for a fixed period can only be purchased by a single payment, but in all other cases the purchase can be effected by payment either of a lump sum or of annual instalments. Further, all purchases are effected through the Post Office Savings Bank. As soon as a contract is completed, the purchaser is required to pay the first instalment to his account in the bank, or, if he has no account already, to open an account for the purpose. This and all further instalments are then transferred by the postmaster-general, as they become due, to the credit of the National Debt Commissioners; all the purchaser has to do is to keep his banking account in funds; he can pay his savings into the bank when and as he pleases. So, also, when old-age pay, secured either by a deferred annuity or an endowment policy, becomes due, it is paid to the account of the purchaser; and, if it does not cause the sum standing to his credit to exceed the statutory limits, it can remain there earning interest, and be drawn out in such amounts as may be convenient from time to time. The purchaser has also the advantage of the ubiquity of the Post Office Savings Bank. He can make his deposits, and can draw out his old-age pay when it becomes due, at any one of the 13,000 odd post offices where savings bank business is transacted. He can even, if his savings are made from day to day, use the penny stamp slips introduced by Mr Fawcett, affixing a stamp whenever he has a penny to spare, and paying in the slip when it is worth a shilling. In short, every advantage open to the ordinary depositor in the Savings Bank is placed at the service of the working man or woman who wishes to secure old-age pay, or to have a small sum to aid those who may suffer pecuniarily from his or her death. Even the reluctance of many persons to submit themselves to medical examination is tenderly regarded. A policy for any sum up to £25 may, if the information afforded is satisfactory, be obtained without a doctor’s certificate, on condition that, if death happens during the first year, only the premium paid is returned, and if during the second year, only half the sum insured is paid. As regards old-age pay, a purchaser can, by adopting a slightly higher scale of payment, secure the return of his purchase money if at any time before the annuity falls in he repents of his bargain. Further, employers of labour and friendly societies can, on behalf of their workmen or members, make all the payments necessary to buy an insurance or annuity, and recoup themselves out of wages or members’ contributions.

The act of 1882 directed that the tables upon which annuities and policies of insurance are granted should be revised from time to time; and in February 1896 new tables reducing the rates of annual premiums, and giving greater facilities for old-age insurance, were issued. The rates are now but very slightly (less than 3%) higher than the average rates of the larger insurance offices. But the expense of small insurance business must necessarily be above the average, and it is fairer to compare the Post Office rates with those of the office which stands pre-eminent in the insurance of the working classes. Such a comparison shows that up to the age of 40 a life insurance can be effected with the Post Office at a cheaper rate than with the Prudential Insurance Company; between 40 and 60 the advantage is slightly on the side of the company.

In 1885, the first complete year after Mr Fawcett’s improvement took effect, 103 deferred annuities and 457 insurance policies were granted; in 1905, 158 deferred annuities and 741 policies. The increase of business, measured in percentages, is no doubt appreciable, but the figures themselves are so small as to make such a comparison trivial. If we compare the two periods, before and after Mr Fawcett’s reforms, we find that between the 17th of April 1865 and the 2nd of June 1884 (about nineteen years) 7064 policies of insurance, amounting to £557,625, were issued, and between the latter date and the end of 1905, 16,577 policies, amounting to £875,496. For the whole period the figures are 23,641 policies for £1,433,121. During the same time 3144 contracts for old-age pay, amounting in all to £64,378, were made. When we contrast with this sum total the fact that in 1905 alone 1,435,329 new accounts were opened in the Post Office Savings Bank, and more than £42,000,000 deposited in the bank in the course of the year, it becomes apparent that, while the Savings Bank has reached the mass of the population, insurance against old age and death through the Post Office has not.

In 1894 Mr C. D. Lang, the Controller of the Post Office Savings Bank, and Mr Cardin, giving evidence before the Commission on Old-Age Pensions, ascribed the small insurance and annuity business of the Post Office to the want of a personal canvass. They pointed out that there had been some temporary increase in insurance, through an appeal to the Post Office employés themselves, and they suggested that something might be done if the masters of the elementary schools could be induced to interest themselves in recommending to their scholars and the parents of their scholars the advantages offered by the Post Office. It was also pointed out that the friendly societies might, if they were so disposed, act as intermediaries between their members and the Post Office, and thereby, as it were, reinsure their risks with the government; but it was added that all overtures of this nature to the societies had failed, apparently from the fear—quite groundless—of introducing government control of the societies’ affairs. There may, indeed, be another reason for the failure of the deferred annuity system. The insurance of old-age pay is not popular even amongst the members of friendly societies, or even in Germany, where it has been given to the workmen largely at the expense of other people. Insurance against death, sickness and accidents appeals to the young working man; but old age is too far off to be an object of solicitude, especially since the grant of old-age pensions by the state has made the future secure from destitution at least. However, if at any time opinion changes, the Post Office stands ready to make foresight or philanthropy easy. Though no great results have been achieved, a machinery has been established which works with perfect smoothness, and which may some day be of service to the nation.

VI. Marine Insurance

Marine insurance long antedates the kindred businesses of fire and life insurance. Villani, a 14th-century Florentine historian, speaks of marine insurance as having originated in Lombardy in 1182. This proves, at History. least, that in his day it was no novelty. It is mentioned in a Pisan ordinance of 1318, and in Venetian public documents of the early years of the 15th century. The earliest form of policy known is that given in the Florentine statute of 1523. It is uncertain whether insurance was introduced into England directly from Italy or by way of Flanders. The earliest policies issued in England which have yet been discovered are in Italian, but the subscriptions are in English (“Santa Maria di Venetia,” Cadiz to London, 1547, “Santa Maria de Porto Salvo,” Hampton to Messina, 1548).

The earliest known policies in English are one of 1555 on the “Sancta Crux” “from any porte of the Isles of Indea of Calicut unto Lixborne,” and one of 1557 on the “Ele” from Velis Maliga to Antwerp. The authority for this statement is Mr R. G. Marsden, who edited for the Selden Society the records of the Admiralty Court; nothing earlier had been found at the Record Office down to May 1907. In the “Sancta Crux” policy there is no detailed statement of perils insured against, or of risks undertaken by the underwriter; the whole obligation of the underwriter to the assured is embodied in the following words: “We will that this assurans shall be so strong and good as the most ample writinge of assurans, which is used to be maid in the strete of London, or in the burse of Andwerp, or in any other forme that shulde have more force.” This reference to Antwerp usage is 67 years before the date of C. Malynes’ statement that all Antwerp policies contained a clause providing that they should in all things be the same as policies made in Lombard Street of London. The wording of the English policies written in Italian is very much simpler than the Florentine form of 1523, from which it almost seems that the wording used in England followed an earlier Italian form. But even the Italian policies in the two “Santa Marias” mention the uses and customs of “questa strada Lombarda di Londra” as the standard of the assurance they afford. The next most ancient policy we possess is dated 1613; it covers goods on the “Tiger” from London to “Zante, Petrasse and Saphalonia.” The “Tiger” policy is interesting in another connexion. It recalls Shakespeare’s Macbeth I. iii. 7 (written about 1605):—

“Her husband’s to Aleppo gone, master of the ‘Tiger.’”

Clark & Wright’s note (in the “Clarendon Press” series edition) cites Sir Kenelm Digby’s journal of 1628 mentioning “the ‘Tyger’ of London going for Scanderone” (Alexandretta). Hakluyt (Voyages) gives letters and journals of a voyage of the “Tyger of London” to Tripolis in 1583. Shakespeare again mentions a ship called the “Tiger” in Twelfth Night, V. iii. 63:—

“And this is he that did the ‘Tiger’ board.”

The policy by the “Tiger” is much more ample than any of those already mentioned; it details the perils insured against in words closely resembling the Florentine formula of 1523, and differing only slightly from the form adopted by Lloyd’s at a general meeting held in 1779, and afterwards incorporated in the Sea Insurance Stamp Act of 1795, which is the stem form of all modern British and American marine insurance policies.

While the form of the insurance policy was thus developing, there was a singular absence of legislation (and, as far as we can yet trace, of litigation) on the subject. Till 1601 differences seem to have been generally settled by arbitration. This accounts for the poverty of the British Admiralty records in matters of marine insurance. In 1601 a special tribunal was established by statute for summary trial of disputes arising on insurance policies; but, owing mainly to the opposition of the common-law judges, the new court languished, and by 1720 it had fallen into utter disuse. J. A. Park states that not more than sixty insurance cases were reported between 1603 and 1756. Consequently, when Lord Mansfield came to the court of king’s bench in the latter year, he found a clear field. He practically created the insurance law of England. He made use of all the continental ordinances and codes extant in his day, taking his legal principles largely from them; the customs of trade he learnt from mercantile special jurors. Subsequent legislation referred solely to the prohibiting of certain insurances (wager policies, &c.), the naming in the policy of parties interested therein, and the stamp duty levied on marine insurances. In 1894 Lord Herschell introduced his Marine Insurance Bill, which endeavoured “to reproduce as exactly as possible the existing law relating to marine insurance.” After Lord Herschell’s death, Lord Chancellor Halsbury took up the bill, introducing it in the House of Lords in 1899 and again in 1900; he appointed a committee on which underwriters, shipowners and average adjusters were represented, and, presiding himself, went through the bill with them clause by clause. The bill was then passed by the Lords, but was always blocked in the House of Commons till 1906, when it was taken up by Lord Chancellor Loreburn in conjunction with Lord Halsbury. After some amendment and modification it was finally passed by both Houses and became law on the 1st of January 1907 (6 Ed. VII., c. 41).3 In America a less happy fate has attended the insurance code, forming part of the proposed civil code of New York, completed and published in 1865, of which a very slightly altered version was adopted in California and has been in effect there since the 1st of January 1873. On the continent of Europe legislation at first took the form of local ordinances of commercial cities, such as Barcelona (1434-1484), Florence (1523), Burgos (1538), Bilbao (1560), Middelburg (1600), Rotterdam (1604-1655). In the third quarter of the 16th century Rouen produced a handy guide to marine insurance, Le Guidon de la mer; and in 1656 Étienne Cleirac published there his Us et coutumes de la mer. This was followed in 1681 by the Ordonnance de la marine, which, through Lord Mansfield, had a great effect on English case law. In 1807 France produced the Code de commerce, on the model of which nearly every European nation has issued a similar code. Probably the “best considered” (Willes, J.) of these, and the most adequate as regards marine insurance, is that of the German empire; but Hamburg and Bremen still preserve many of their local conditions by special contract in their policies. In fact it is doubtful whether the German Code could have been produced without the previous elaboration of the Conditions of Hamburg and of Bremen. The Hamburg Conditions of 1847, revised 1867, constitute an admirable compendium of marine insurance as practised in that city.

Marine insurance being peculiarly an international business, being a factor in 95% of the operations of oversea trade, it is natural that those engaged in this business or making use of marine insurance in their business should experience the difficulty Conflict of laws. and hardship arising from the differences between the marine insurance law of different states, and should attempt to find a remedy. Such an attempt was made at the Buffalo conference of the International Law Association in 1899 to prepare a body of rules dealing with those parts of marine insurance on which the laws of maritime countries differ. This undertaking was of the same nature as the earlier efforts of the same association which resulted in the formulation of the York-Antwerp rules of general average. There are four important subjects on which great divergence prevails: (a) Constructive total loss; (b) Deductions from costs of repairs, new from old; (c) Effect of unseaworthiness and negligence; (d) Double insurance.

(a) Constructive total loss results, according to the law of France, Italy, Spain, Belgium, Holland, in case of loss or deterioration of the things insured amounting to not less than three-quarters; in German law a ship is considered to be “unworthy of repair” when the cost of the repair, without deductions new for old, would amount to over three-fourths of the ship’s former value (no similar provision seems to exist in Germany for goods); in the law of America a damage over 50% of the value of the vessel when repaired is a constructive total loss of the vessel, in case of the policy containing no express provision to the contrary. None of these varying systems appears to be so equitable to all concerned as the British rule, which was for this reason suggested to the Buffalo conference for international adoption. As regards the time when the test for constructive total loss should be applied, it was suggested to reject the British rule, prescribing that it shall be the time of commencing action against underwriters, and to adopt the continental and American rule referring to the facts as they existed at the time of abandonment. Then, as respects the effect of a valid abandonment on the rights in the property insured, the conference proposed to adopt the British and American rule of making the abandonment refer back to the time of the loss, as against the continental European system of making the transfer operative only from the date of the notice of abandonment. Finally, as to the freight of a properly-abandoned ship, it was proposed to follow for international purposes the American rule of dividing the freight of the voyage between shipowner and underwriter in the proportion of the distances run before the disaster and to be run thereafter, rejecting the British rule of complete transfer to the underwriter and the various continental rules of proportional division between shipowner and underwriter.

(b) It was proposed to adopt the deductions set forth in the York-Antwerp rules as being suitable for international adoption in marine insurance contracts.

(c) As regards unseaworthiness and its effect on insurances on ships and goods, it was proposed in the case of ships to reduce materially the obligations of the insured as required by English and American law; to diminish the requirement from the absolute attainment of seaworthiness to the mere exercise of all reasonable care to make the vessel seaworthy. Even this attenuation did not appear sufficient, as it was proposed to degrade the performance of the already minimized warranty from being a condition of the insurance, and its non-performance from invalidating the policy. As to goods, they were proposed to be exempted from any warranty of seaworthiness of ship. Concerning negligence, it was proposed to hold the underwriter liable (subject to the new seaworthiness warranty) for any loss caused proximately by a peril insured against, although wholly or partly the result of the neglect of the insured, or his servants or agents, or by the wilful act of his servants or agents, or the inherent nature or unsoundness of the article insured.

(d) In case of double or multiple insurance, the conference proposed to adopt the British rule of making all the policies effectual, independently of the order in which they were effected, and of making all the underwriters entitled to contributions inter se. As regards the premium, it was proposed that no premium should be returnable, where the risk has attached.

With the exception of those embodying the two suggestions named in par. (a), all the resolutions proposed were accepted by the conference. But it appears extremely unlikely that British and American underwriters will voluntarily consent to the practical annihilation of the seaworthiness warranty, and no less improbable that American and continental assured will voluntarily accept the stricter rule of constructive total loss embodied in English law, when their national law enforces on the underwriter terms more favourable to the assured. The fewness of the international insurance markets of the world diminishes the need for uniform international regulations in this matter. The matter may be one for adjustment by variation in the rate of premium, but this is not certain.

The Glasgow conference of 1901 adopted the rules, after excepting time policies from the scope of the rule respecting seaworthiness. The rules are known as the Glasgow Marine Insurance Rules. The writer knows of no instance in which they have been adopted in practice.

Returning to marine insurance in the United Kingdom, it is to be observed that the passing of the Marine Insurance Act of 1906 sharply marks an important change in the nature of the law of the subject. Till then it was based almost entirely on common law, only a few disconnected points having been dealt with by statute. The reported cases were thus of great importance, and being about 2000 in number (teste Sir M. D. Chalmers) were not easy to master. No doubt many of them referred to commercial conditions no longer prevalent; still they could not be entirely ignored. But the original introducer of the bill described it as an endeavour “to reproduce as exactly as possible the existing law relating to marine insurance,” and as by being made law the language of the act has become authoritative, insured and insurers have now no call to go behind the wording of the act in any matter with which it deals. It thus appears that the case law of the subject existing before the 1st of January 1907 may be left aside, unless, perhaps, for use as affording examples of the way in which the provisions of the act work.

A contract of marine insurance is a contract of indemnity whereby the insurer undertakes to indemnify the insured, in the manner and to the extent agreed, against marine losses, i.e. the losses incident to marine adventure. Definition. The contract may by its express terms or by usage be extended to cover risks on inland waters or land risks incidental to any sea voyage. There is a “maritime adventure,” where any ship, goods or other movables are exposed to maritime perils, such property being termed “insurable property”; also where the earning of any freight, hire or other pecuniary profit or benefit, or the security for any loan or expenditure, is endangered by the exposure of insurable property to maritime perils; and where any liability to a third party may be incurred by the person interested in or responsible for insurable property by reason of its exposure to maritime perils. By “maritime perils” are meant the perils consequent on or incidental to the navigation of the sea, i.e. perils of the seas, fire, war perils, pirates, rovers, thieves, captures, seizures and restraints, and detainments of princes and peoples, jettisons, barratry, and any other perils, either of the like kind or which may be designated by the policy.

The contract being one of indemnity against maritime perils, it is evident that no one can derive benefit from it who has not some interest exposed to these perils. Consequently while, subject to the provisions of the act, every lawful marine adventure may be insured, all contracts of marine insurance are void when (1) the assured has no insurable interest, and has entered into the contract without expectation of acquiring such interest; (2) when the policy is a “wager” policy, being made “interest or no interest,” “without further proof of interest than the policy itself,” “without benefit of salvage to the insurer,” or subject to any similar terms. But if there is no possibility of salvage a policy “without benefit of salvage to the insurer” is legally valid. Wager policies are illegal only in the sense of being void to all legal purposes. They cannot be sued upon, hence they are known as “honour” policies. They are of frequent use, generally for the protection of interests which, though real, are not easily defined, or are of pecuniary value hard to determine. But they are ignored by the courts. The essential of insurable interest is the pecuniary advantage seen at the time of insurance as arising to the assured from the safety or due arrival of the adventure, or the pecuniary disadvantage similarly arising from its loss or deterioration. But such interest may lapse before arrival or destruction of the venture, and with the interest lapses the right of the assured to recover from the underwriter. Without interest at the time of the loss there is no right to recover from the underwriter. Should the assured simply transfer his interest to another, e.g. by sale, he can assign his policy to the party who acquires his interest—unless, of course, the policy contains terms expressly prohibiting assignment. The customary form of assignment is endorsement of the policy either in blank or to a specified party. Within the limits already named, interests are insurable whether complete or partial, defeasible or contingent; similarly loans on bottomry or respondentia, advance freight not repayable in case of loss, charges of insurance, also shipmaster’s, officers’ and seamen’s wages.

The owner of insurable property may insure its full value even though some third party have agreed or become liable to indemnify him in case of loss: a mortgagor has the same right of insuring to full value; while a mortgagee may insure only up to Value. the sum due or to become due to him under the mortgage, unless the mortgagee is insuring for the benefit of the mortgagor as well as for himself, in which case, even though he insure in his own name only, he may insure up to the full value. A consignee may insure in his own name the total amount of his interest and that of others for whose benefit he insures. Where no special contract is made between insured and underwriter, the insurable value of certain matters of insurance is ascertained as follows:—Ship—Her value at the commencement of the risk, including outfit, provisions, stores, advances of wages, and any other outlays expended to make the ship fit for the voyage or period of navigation covered, plus cost of insurance upon the whole. In the case of a steamship, the word “ship” includes machinery, boilers, coals and engine stores. In the case of a vessel engaged in a special trade, the word “ship” includes the ordinary fittings necessary for that trade. Freight (whether paid in advance or not)—The gross amount of freight at the risk of the assured, plus cost of insurance. Goods—The prime cost, plus expenses of and incidental to shipping and cost of insurance. Other interests—The amount at the insured’s risk when the policy attaches, plus cost of insurance.

To be admissible in evidence a contract of marine insurance must be embodied in a document called a policy, which must specify the name of the assured (or of his agent in the effecting of the policy), the objects insured, and the risk Policy. insured against, the voyage or time (or both) covered, the sum insured, the name of the assurers. The signature of the assurer is necessary; it is found at the end of the policy, and the assurer is often on this account called the underwriter. The objects insured must be designated with reasonable certainty, regard being had to customary usage. The undertaking to insure is usually expressed by saying that the insured or his agent “doth make assurance and cause himself to be insured.” The risks are either the whole body of maritime perils detailed above, or any one or set of these, or any other named peril against which the assured desires protection. There is no restriction by law of the length of voyage that may be insured, but time policies are, subject to the Finance Act 1901, invalid if made for more than one year; a voyage and a period of time may be covered on one policy. Policies are classed as “time” or “voyage” policies. It is not necessary to state in the policy the value of the objects insured, but generally the value is given; policies are therefore classed as “valued” or “unvalued,” the latter being often called “open” policies. The values of objects insured under open or unvalued policies are the insurable values given above. As it frequently happens that merchants desire to have all their shipments of whatever nature covered, by whatever vessel they may come, they require insurance in general terms; such a policy is termed a “floating” policy. It states the limits of voyage and value covered by the underwriter, and the class of ships to be employed. The particulars of each shipment are declared as the shipments occur, and in the order of despatch or shipment, the declarations being usually endorsed on the policy. All shipments within the terms of the policy must be declared at their honest value, or in accordance with the special provisions of the policy, if any. An omission or erroneous declaration may be corrected even after loss or arrival, provided it was made in good faith.

The consideration paid by the insured to the underwriter in return for the protection granted by the latter is called the premium. Until payment be made or tendered the policy is not ordinarily issuable, i.e. unless otherwise agreed. When the insured effects insurance with an underwriter through a broker, then, unless otherwise agreed, the broker is liable for the premium to the underwriter, who is, however, directly responsible to the assured for losses or liabilities falling on the policy and for returnable premium. But the broker has a lien on the policy for the premium and for his brokerage, and in case he has had dealings as a principal with the insured, he has a lien on the policy for any balance due to himself in insurance transactions, unless he should have known that in these transactions the insured was merely an agent. Some policy forms state definitely that the premium has been paid; when such a form is used and no fraud is proved, this receipt is binding between assured and underwriter, but not between broker and underwriter. If an insurance is effected at a premium “to be arranged,” and no arrangement is made, then a reasonable premium is payable. The same holds where additional premiums have to be charged at a rate to be arranged and no arrangement is made.

It is evident that in nearly all the particulars of any adventure insured by an underwriter he is entirely dependent upon the insured for correct information. It is therefore the law that an insurance contract can be avoided and broken by either of the parties to it if the utmost good faith (uberrima fides) be not observed by the other. The obligation of perfect good faith is thus made reciprocal. Bad faith may show itself either in concealment or in misrepresentation. It is therefore made essential to the stability of any insurance contract that the insured must disclose before conclusion of the contract every material circumstance known by him, failing which the underwriter may avoid the contract. The insured is deemed to know every circumstance which in the ordinary course of business ought to be known by him. Every circumstance is deemed material which would influence the underwriter in his decision as to acceptance of the risk or the fixing of the rate of premium. Consequently the insured is not bound, unless specially asked by the underwriter, to disclose the favourable features of the risk offered, or matters known or presumably known by the underwriter (matters which are of common knowledge, and such as an underwriter ought in his usual business to be aware of), or matters respecting which the underwriter waives or declines information, or which any express or implied warranty renders superfluous. An agent effecting an insurance must, in addition to his principal’s material knowledge, disclose everything material known to himself, or that he should know in the ordinary conduct of his business. Every representation of material fact made to an underwriter before conclusion of a contract by the insured or his agent must be true, or the underwriter may avoid the contract. Every representation is material which would influence the underwriter in his decision as to acceptance of the risk or to fixing the rate of premium. A representation of fact is regarded as true if it be substantially correct; literal correctness is not essential. A representation of expectation or belief is true if it is made in good faith. A representation may be withdrawn or corrected before the contract is concluded. The contract is deemed to be concluded when the underwriter accepts the risk, whether the policy be then issued or not.

It frequently happens that before a vessel has completed the venture on which she is engaged arrangements have already been made for her future employment. Where a vessel is insured on time, this is of no moment as respects her Voyage insured. insurance. It has likewise been decided that where any insurable object is covered by a voyage policy “from” or “at and from” a named place, the policy is not rendered invalid by her not being at that place when the insurance is concluded; but, on the other hand, there is an implied condition that she will begin the venture within a reasonable time, and that if she fails in this the underwriter may avoid the contract. If the delay springs from circumstances known to the underwriter at the time of conclusion of the contract, or if the underwriter then acquiesces in it, the implied condition is nullified. If the insured abandons the venture insured, the contract expires; e.g. if, before the risk commences, the vessel’s destination is changed to one not covered by the policy. Where the policy specifies a place of departure, and the ship does not sail from that place, the risk does not attach. If, however, the vessel actually starts from her intended port of departure, and commences the venture, and thereafter it is decided to change her destination, this decision constitutes a change of voyage. In default of provision to the contrary, the underwriter may elect to avoid his insurance from the time of that decision, although the ship be still in the course she would have followed in her originally intended venture.

Should a ship depart from the proper course of the voyage she starts upon, and for which she is insured, such departure, when made without lawful excuse or justification, is termed deviation. From the moment it occurs, even though she subsequently return to her proper course without loss or injury, the underwriter may avoid his contract; but the mere intention to deviate is immaterial. Deviation occurs (1) when in a policy a course is definitely specified and the vessel departs from it; (2) when, in absence of such definite specification in the policy, the vessel departs from the course usually and customarily followed in the voyage insured. If a policy provides for several named ports of discharge, the vessel may, without committing deviation, omit to proceed to one or more; but whether she goes to all or to some she must (in absence of usage or sufficient cause to the contrary) take them in the order in which they appear in the policy, if not there is a deviation. If the policy provides for “ports of discharge” in a given district, then (in absence of usage or sufficient cause to the contrary) unless the vessel proceeds to them in their geographical order she makes a deviation. Similarly, in the case of a voyage policy, the want of reasonable despatch throughout, unless lawful excuse or justification exists, entitles the underwriter to avoid the contract from the time that the delay becomes unreasonable. As excuses for deviation or delay on the voyage contemplated by the policy, the following are regarded as valid: authorization by licence or other provision in the policy, force majeure, compliance with express or implied conditions of the policy (e.g. warranties, see below), reasonable steps taken for the safety of the ship or other objects insured, saving life, helping a ship in such distress that life may be in danger, or obtaining medical or surgical aid for some person on board. If barratry is insured against, delay arising from barratrous conduct of master or crew does not avoid the policy. A deviation ceases to be excusable unless the ship resumes her proper course and proceeds on her voyage with reasonable promptitude after the cause of the excusable deviation or delay ceases to be effective.

In every contract of insurance there are certain conditions precedent to the liability of the underwriter and incumbent on the insured, which must be fully and literally complied with, whether material to the risk or not. These Warranties. conditions are known in insurance as warranties. The name is unfortunate, as in every other branch of the law of contract it bears another meaning; still it is convenient, and its insurance signification is now firmly established. Failure on the part of the insured to fulfil a warranty literally entitles the underwriter to avoid his contract as from the moment of breach,4 but it does not limit his obligation up to that moment. Breach of warranty is not nullified by subsequent remedy of the breach, consequently loss occurring after breach of warranty is not at the charge of the underwriter, even although before the loss the insured has again complied with the warranty. But breach of warranty may be waived by the insurer. Breach of warranty is excused in two cases only: (a) when by change of circumstances the warranty ceases to be applicable to the contract, (b) when by subsequent legislation the warranty becomes unlawful.

Warranties are of two classes: (1) express (2) implied. Express warranties must be written or printed on the policy, or contained in some document explicitly referred to in the policy, and so regarded as incorporated in the contract. No special form of words is essential to the validity of a warranty if the intention to warrant can be inferred. Express warranties may refer to anything which the parties to the contract choose, e.g. the nationality of the vessel, her sailing on a named day, proceeding under convoy, being excluded from certain voyages or trades or the carriage of certain cargoes, being “well” or “in good safety” on a named day (in which case the warranty is fulfilled if she be safe at any time of that day). As regards nationality, if no express warranty be given there is no undertaking on the part of the insured that the vessel is of any particular nationality or that she will not change it while the risk lasts. The warranty of neutrality in case of insurance of ship or goods means that at the beginning of the risk the property concerned is actually neutral, and that as far as the insured can control the matter it shall so continue during the whole course of the risk. It is also an implied condition of the ship being warranted neutral that to the utmost of the insured’s power she must carry the papers necessary to establish her neutrality, must not falsify or suppress these papers, or use simulated papers; if this condition is broken the insurer can avoid the contract. The words of an express warranty are always to be taken in their commercial sense; within that sense they are to be strictly and literally taken. An “express” warranty does not exclude an “implied” warranty (see below) unless it be inconsistent therewith.

In addition to these expressed conditions, there are also certain essential factors or conditions inherent in each and every contract of marine insurance without exception; these are implied warranties, which are presumed from the very fact of the making of the insurance. They are (a) completion of the prescribed venture without deviation, (b) legality of the venture (viz. that the adventure insured is a lawful one, and that, so far as the insured can control it, it shall be carried out in a lawful manner), (c) seaworthiness of the ship. In a voyage policy it is an implied warranty that at the commencement of the voyage the ship shall be seaworthy for the particular venture insured. If the risk commences when the ship is in port, then she must in addition be reasonably fit to stand the ordinary dangers of the port. If the voyage insured is one in which different degrees of peril are to be encountered, or for which the ship needs different kinds of outfit at different stages, then she must be seaworthy for each stage at its commencement, and the warranty will be fulfilled if she is at the beginning of each stage seaworthy for that stage. The warranty of seaworthiness is held to be fulfilled when the ship is reasonably fit in every respect to meet the ordinary marine dangers of the venture insured; that is to say, the mere loss of a vessel by perils of the sea is not a proof of unseaworthiness in the sense of this warranty. The only ship policies not subject to the warranty of seaworthiness are policies on time (the reason given being that there is nothing to prevent a time policy lapsing and a new one commencing when the vessel is at sea beyond her owner’s control as to seaworthiness); but where the insured knowingly sends a ship to sea in an unfit state and a loss is attributable to that unseaworthiness, the underwriter is not liable for such loss. It is not implied in a policy on goods or movables that these goods, &c., are seaworthy, but it is implied that at the beginning of the voyage the carrying vessel is not only seaworthy as a ship but reasonably fit to carry the goods to the destination named in the policy.

When the main points of the preceding particulars of the contract of insurance are summarized it may be said that the transaction is (1) a contract of indemnity reduced to written or printed words, (2) made in good faith, (3) referring to a defined proportion or amount, (4) of a genuine interest in a named object, (5) being against contingencies definitely expressed, to which that object is actually exposed, and (6) in return for a fixed and determined consideration.

It may happen by accident or by design that an insurance object has been covered twice or more times, and that in consequence the sum of the insurance effected exceeds the value in the policy or the insurable value, if an unvalued Multiple Insurance. policy has been employed. This occurrence involves a new set of relations between the insured and his various underwriters; the underwriters themselves are brought into relation to one another. As regards the insured, he may, in the absence of agreement to the contrary, claim payment from whomsoever of the underwriters he may select, but he is not entitled to receive in all more than his proper indemnity. Each underwriter, whether his policy be valued or unvalued, is entitled to receive credit for his proper proportion of the sum obtained by the insured under any other policy. If the insured does obtain any sum in excess of indemnity, he is regarded as holding it in trust for his whole body of underwriters. It thus appears that in case of multiple insurance each underwriter is bound, as between himself and the other underwriters, to contribute to the loss rateably in proportion to the amount of his liability under the policy; and if any one pays more than his proper share, he is entitled to sue the rest for contribution. Should the insured get any of his premium back? It would not be equitable to enforce a return from any underwriter who has at any time stood alone so as to be liable to the full extent of his policy; but if overlapping policies were accidentally effected all at the same time, the case is rather different. This leads to the general question of return of premium. Such return may be claimed under the terms of the policy, in which case the claim for return is simply the carrying out of the agreement between the parties; it may refer to the whole or to a part of the interest insured. But there are other circumstances in which returns can legally be claimed. For instance, it may turn out that interest insured by a particular vessel and for a particular voyage is never shipped in that vessel for that voyage; the underwriter has in this case run no risk, and therefore the consideration for which he received the premium totally fails, and the premium is properly returnable to the intending insured, unless there has been fraud or illegality on the part of the insured. Similarly, in the case of part of the interest insured on a policy, if that part is distinguishable in the policy or by custom of trade. But the interest might have made the voyage in the vessel, and the intending insured might yet remain without insurable interest. In this case, in absence of fraud or illegality, and if the policy is not merely a gaming or wagering contract, the insured is entitled to return of his premium. Similarly, in the absence of fraud or illegality, if the underwriter legally voids his policy from the beginning of the risk; as he runs no risk, he receives no premium. The only cases, except those of fraud and illegality, in which the underwriter can retain his premium without running risk, are those of risks underwritten “lost or not lost,” and arrived safely without the underwriter’s knowledge, in which the underwriter takes his chance as to the condition and situation of the ship when he assumes the risk. But this is practically a case of agreement that there shall be no return.

When the insured has overinsured on an unvalued policy, a proportionate part of the premium is returnable. But where double insurance has been knowingly effected by the insured or any earlier policy has at any time borne the entire risk or a claim has been paid on a policy in respect of its full value, no premium is returnable.

The policy issued by the underwriter to the insured makes mention of certain perils against which the insurance is granted, and unless the policy otherwise provides, the underwriter is liable for any loss proximately caused by any of these perils, but is not liable for any loss not proximately caused by a peril insured against. He is not responsible for any loss due to the wilful misconduct of the insured but, unless the policy otherwise provides, he is liable for any loss proximately caused by a peril insured against even though it would not have happened but for the misconduct or negligence of master or crew. Nor is he responsible for any loss caused by delay, although the delay be caused by a peril insured against; nor for ordinary wear and tear, ordinary leakage or breakage, inherent vice or character of objects insured, loss from rats or vermin, or injury to machinery not proximately caused by sea-perils.

Losses are divided into “total” and “partial.” A “total” loss may be (1) actual, or (2) constructive; and an insurance against total loss covers the insured against both, unless a different intention appears from the terms of the policy. It is an Total loss. “actual” total loss when the object insured is destroyed or damaged so as to cease to be of the denomination of goods to which it belonged when insured, or when the insured is irretrievably deprived of the property insured. In the case of an actual total loss no notice of abandonment need be given. In the case of a missing ship after the lapse of a reasonable time without news, an “actual” total loss may be presumed. There is a “constructive” total loss when the interest insured has been abandoned on account of what appears inevitable actual total loss, or because the cost of preventing such loss would exceed the value after such expenditure. E.g. if ship or merchandise is in such a position that recovery is unlikely or the cost of recovery would exceed the value recovered, there is constructive total loss; likewise in the case of a damaged ship, if the cost of repair would exceed the repaired value of the ship. (In making the estimate of cost of repairs no deduction is to be made for the share of them payable in general average by other interests, but account is to be taken of the cost of later salvage operations and of the ship’s proportion of any later general averages.) Similarly for damaged goods, there is constructive total loss if the cost of repair and of forwarding to destination exceeds the arrived value. The insured may either treat constructive total loss as a partial loss Abandonment. or as an actual total loss, in which latter case he abandons his insured interest to the underwriter. If he decides to abandon he must give notice of abandonment, else he will recover only for a partial loss. This notice may be wholly or partly written or oral, and in any terms if only they indicate the intention to transfer unconditionally all interest to the underwriter. The refusal of abandonment by the underwriter does not prejudice the assured’s rights. Abandonment may either be expressly accepted by the underwriter or may be implied from his conduct, but his mere silence does not imply acceptance. When notice is accepted, abandonment is irrevocable. Notice may be waived by the underwriter. Notice is unnecessary where, when the news reaches the insured, there would be no benefit to the underwriter if notice were given to him. On valid abandonment the underwriter adopts the interest of the insured in the subject insured, or what remains of it, and all incidental proprietary rights, e.g. in the case of a ship he is entitled to any freight in the course of being earned and which is earned by her subsequent to the accident causing the loss, less the expenses incurred after the accident; and if the cargo is on owner’s account, the underwriter is entitled to reasonable freight from the place of casualty to destination.

Any loss other than a total loss, as defined and described above, is a “partial” loss. As such are classed general average, salvage charges, particular average, particular charges. “General average” is really an outlying branch of the law of Partial loss. General average. affreightment (see Average and Affreightment): its connexion with insurance is merely secondary, arising out of the underwriter’s contract to pay losses generally and this special liability in accordance with definite provisions of the policy. Any extraordinary sacrifice or expenditure voluntarily and reasonably made in a moment of peril in order to preserve all the property in the venture, is a general average act and the loss arising therefrom is a general average loss. The party on whom it falls is entitled to a rateable contribution from the others. These rateable contributions are repayable by the respective underwriters subject to the special provisions of their policies, unless the sacrifice or expenditure was made to avert a peril not covered by the policies, when there is no liability. The party originally incurring a general average sacrifice may recover from his underwriter the whole loss without having enforced his right of contribution from the others concerned in the venture. When ship, freight and cargo, or any two of them, belong to one person, the underwriter’s liability is determined as if these interests were each owned by separate Salvage charges. Particular average. persons. “Salvage charges” are the charges recoverable under maritime law by a salvor independently of contract: if incurred in averting perils insured against, and if not otherwise provided in the policy, they are recovered as a loss from these perils. The cost of similar services of the insured or his agents or hired employees are recovered as a general average loss when the cost fulfils the character of general average expenditure, or in all other cases as “particular charges.” Thus all expenses by or on behalf of the insured to save or preserve the interest insured are either general average, salvage charges or particular charges. Particular charges are not included in “particular average,” which may now be defined as a partial loss of the subject insured, caused by a peril insured against, and not being a general average loss.

The nature of the liability for loss of the underwriter having been determined, it remains to fix its extent, or in other words the “measure of indemnity”; each underwriter bears that proportion of the loss which his subscription bears in the Measure of indemnity. case of a valued policy to the insured value, and in the case of an unvalued policy to the insurable value. In the case of a total loss, the measure of indemnity is the sum fixed by the policy if valued, or the insurable value of the object insured if the policy be unvalued. When the insured fails in an action for total loss, he is not precluded from recovering a partial loss if the policy insures him against partial loss. In the case of damage to a ship not amounting to a total loss the insured is, subject to the terms of his policy, entitled to recover the reasonable cost of repairs less customary deductions, but not exceeding for any one casualty the sum insured. If the repairs are only partial he is in addition entitled to an allowance for unrepaired damage, but the aggregate must not exceed the cost of complete repairs, less customary deductions. If the damaged ship has neither been repaired nor sold during the risk, the insured is entitled to reasonable depreciation but not exceeding the reasonable cost of repairs, less customary deductions. As regards freight, the underwriter’s liability for partial loss is, subject to the terms of the policy, the proportion of the policy value, or (in case of an unvalued policy) of the insurable value, which the freight lost bears to the whole freight at risk of the insured under the policy. When there is liability under a policy for total loss of part of the goods insured its amount is determined as follows: on an unvalued policy, it is the insurable value of the portion lost, ascertained as in case of total loss; on a valued policy, it is the proportion of the sum insured which the insurable value of the portion lost bears to that of the whole. Subject to any express provision of the policy, when goods are delivered at destination damaged throughout or in part, the liability is for the same proportion of the sum insured (or, in an unvalued policy, of the insurable value) that the difference between gross sound and gross damaged values at destination bears to the gross sound value there. Gross sound value means the wholesale price including freight, landing charges and duty; gross damaged value means the actual price obtained at a sale when all charges on sale are paid by the sellers. In case of goods customarily sold in bond, the bonded price is taken to be the gross value. When different kinds of property are insured under a single valuation, that valuation is apportioned over them in proportion to the respective insurable values they would have on an unvalued policy, but when the prime cost cannot be ascertained the division is made over the net arrived sound values of the different kinds of property. The liability for general average contribution and salvage charges is, for anything insured for its full contributing value, the full amount of the contribution; but in case of insurance not attaining the full contributing value there is a reduction in proportion to the under insurance; and where a particular average is payable on the contributing goods, its amount must be deducted from the insured value when the underwriter’s liability is being ascertained. On policies covering liabilities to third parties, the measure of indemnity, subject to the condition of the policy, is the amount paid or payable to the third party. When property is insured “free of particular average” (f.p.a.), then unless the policy is apportionable, as above, there is no liability for loss of part with exception of loss of part occasioned by a general average sacrifice, but there is liability for total loss of an apportionable part. The underwriter on f.p.a. F.P.A. liabilities. terms is liable for salvage charges, particular charges and charges incurred under the “sue and labour” clause of the policy to avert a loss insured against. Unless otherwise provided in the policy when goods are insured f.p.a. under a certain named percentage, a general average loss cannot be added to a particular average loss to make up the specified percentage; nor may particular charges nor the expenses of ascertaining and proving the loss; in fact only the actual loss suffered by the object insured may be taken into account. The engagement evidenced by the “sue and labour” clause of a policy is regarded as supplementary to the contract of insurance, and the expenses incurred under it are recoverable from the underwriter, even if he has paid a total loss or has insured the goods f.p.a. with or without any franchise being specified. General average losses and contributions are not “sue and labour” expenses, nor are salvage charges, as defined above. The expenses of averting a loss not covered by the policy cannot be recovered under the “sue and labour” clause. The Marine Insurance Act specially declares that “It is the duty of the insured and his agents, in all cases, to take such measures as may be reasonable for the purpose of averting or minimizing a loss.”

Unless otherwise provided, and subject to the provisions of the law, the underwriter is liable for successive losses, even though their aggregate amount exceeds the sum insured. But where, under one policy, an unrepaired or uncompensated partial loss is followed by a total loss, the insured can only recover the total loss. These provisions do not affect the underwriter’s liability under the “sue and labour” clause, for, as explained above, the “sue and labour” clause is a contract supplementary to the insurance contract contained in the policy.

The payment of a total loss of the whole or of an apportionable portion of the object insured entitles the underwriter to take over the insured’s interest in all that remains of the Subrogation. same, the underwriter becoming subrogated to all the rights and remedies of the insured in and regarding the interest insured as from the time of the accident occasioning the loss. The payment of a partial loss gives the underwriter a similar subrogation but only in so far as the insured has been indemnified in accordance with law by such payment for the loss.

In case of double (or multiple) insurance each underwriter is bound to contribute, as between himself and the other underwriters, rateably to loss in proportion to the amount for which Coinsurance. his policy makes him liable; for any excess of this amount he may maintain action against the coinsurers and may obtain the same remedy as a surety who has paid more than his proportion of a debt.

Where the object is insured for less than the insurable value, as defined above, the insured is deemed to be his own underwriter for the balance.

Recent extensions of marine insurance in England have mostly been in the direction of giving to shipowners protection against liabilities to third parties. The first addition was the running down clause (r.d.c.) by which underwriters take Liabilities. burden of a proportion, usually three-quarters, of the damage inflicted on other vessels by collision for which the insured vessel is held to blame. The rapid increase in the use and size of steamships was accompanied by an equally rapid increase in the frequency of collisions at sea, tending to make the shipowner desirous of insuring himself against the balance of his collision liability, and against whatever other liabilities to third parties might be imposed upon him. There was a hesitation on the part of underwriters to meet these wants and the result is that in Great Britain most liability insurances are effected in mutual insurance societies. The insurance of such liabilities is perhaps simpler in Great Britain than in other countries, as the amount for which a shipowner can be liable is limited by law, although, of course, none but English tribunals are bound by that law. A new and extensive set of liabilities has been thrown on shipowners by the Workmen’s Compensation Act of 1906; the liabilities in this case vary with the wages of the workmen concerned. Another interesting class of insurances has received much attention, namely, those against the risks of capture, seizure and detention by a hostile power, generally described briefly as war risks. But the difficulties connected with such risks probably lie more in determining the legal position of the owners of the property, and the obligations under which they lie, than in settling those of their underwriters. Such questions concern blockade, contraband, domicile, nationality, neutrality, &c.

The usual procedure in the offer and acceptance of a risk is as follows: The intending insured (principal or broker) offers the risk by showing to the underwriter a brief description of the venture in question, called in Great Britain a slip, in Course of business. America an application. The underwriter signifies his acceptance of the whole or of a part of the value exposed to perils by signing or initialling the slip, putting down the amount for which he accepts liability. Or he may sign and issue to the insured (principal or broker) a similar document made out in his own office, called a covering note or insurance note. These documents are simply first sketches of the contract, mémoires pour servir, so imperfect that they can be explained only in conjunction with the contract in its completed form (the policy). In America it is not at all rare for insurances to be effected through applications alone without any policy existing. In Great Britain the existence of a policy is essential, slips and covering notes being merely provisional agreements, binding in honour only, to issue policies on certain terms and conditions on receipt of the necessary information. One reason for insisting on a policy being issued for every risk is that a means of raising revenue by stamp taxes is thus created. In Great Britain the stamp duties under the Stamp Act 1891 are as follows:—

Where the premium does not exceed 1⁄8% of the amount insured 1d.

Where the premium exceeds 1⁄8% of amount insured:—

(a) On any voyage, per £100 or per any fractional part of £100 1d.

(b) For any time not exceeding six months, per £100, &c., as above 3d.

(c) For any time exceeding six months, and not exceeding twelve months, per £100, &c., as above 6d.

In consequence of this regulation, no time policy can be issued for a period exceeding twelve months. Policies or certificates of insurance coming from abroad are subject to the same duties, which should be paid within ten days after receipt in the United Kingdom. The shortness of the time allowed for stamping often prevents payment of the tax. These stamp regulations are very troublesome, and produce only a comparatively insignificant revenue. On small premium insurances the tax is so excessive that it drives business out of the country. A uniform tax per policy has been several times suggested, but these proposals have not yet been accepted by the Treasury.