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Insurance - Clauses And Warranties

( Originally Published 1911 )

Riders.—In the preceding chapter was considered the standard policy itself. The various clauses used in connection therewith must now be considered. When the standard policy was adopted provision was made that certain clauses, called "riders," could be attached to the policy, covering a specific manner of granting the privilege for a certain thing, which privilege the policy permits.

In the State of New York the standard riders are the following:

(a) The average clause.—This clause limits the liability of the company to no greater proportion of any loss or damage to the prescribed property than the sum insured bears to a certain percentage of the actual value of the property at the time of the loss, and also provides that if the insurance be divided into two or more items this clause shall apply to each separately.

No subject in fire insurance is so fundamentally important as the question of co-insurance, or average. There should always be a fixed relation between the value of the property and the amount of insurance carried. By a fixed relation is meant a definitely stated relation. Marine insurance always has this relation, and the contract was based on the fact that the full insurance was carried, that is, insurance to the full value of the property. A failure to carry the full amount makes the insured liable for a proportionate part of the loss.

Now the question arises, as to whether there should be any such provision in insurance. If every loss in insurance were total there would not be the slightest necessity for an average or co-insurance clause. The necessity arises only because losses are not total, being the merest fraction of the value of the property up to a total loss. If the losses were total everyone insured would feel obliged to carry insurance to the full value, but when it is considered that less than 10 per cent of the losses are total it can readily be understood that the insured may often be inclined to take the nine chances and carry less insurance than the total amount or even a fixed percentage. The average or co-insurance, is merely a provision for equaling the rate of insurance on property. A simple illustration will present this more clearly:

Average illustrated. Two owners possess property of the same value. Assume that in one case full insurance is carried and in the other insurance of one-fourth without any provision in either for an average clause. In the event of fire damaging the property to one-fourth of its value in each case the party who carries insurance to the value of one-fourth would receive the full amount of his loss, and the party who carries full insurance would receive the amount of his loss in full also, but one party would have paid four times more than the other, and to just such extent would injustice be done.

From its very inception, therefore, the plan of establishing a fixed relation between the insurance carried and the value of the property has been recognized. The common value fixed is 80 percent.

Co-insurance.-All that the average clause requires the insured to do is to carry insurance equal to a certain percentage of the value of the property. If he fails to do this, then he is a co-insurer, that is, he insures himself to the extent of such deficiency and having done that he loses such a part of the loss.

Assume that the 80 per cent average or co-insurance clause is carried. When the settlement is made it is ascertained that the actual or sound value is $20,000. It is evident that with a value of this amount the insurance carried should have been $16,000, The loss develops the fact that only $8,000 of insurance was carried, or one-half of the amount which the insured stated that he was carrying. . Such being the case, the insured is then co-insurer for that amount. The loss is assumed to be a partial one and may be placed at $8,000. If the insurance carried had complied with the average or co-insurance clause, and had been $16,000 the insured would have recovered the $8,000. loss, but as he failed to comply with this clause by the sum of $8,000-in fact, only carrying one half the amount he was supposed to carry—he is co-insurer to the extent of that one-half. Therefore, the company will pay one-half of the loss, or $4.000, the insured losing the other amount. Expressed as a rule it may be stated that the insured receives that proportion of the loss which the insurance carried is to that which he should have carried. This example may be epitomized as follows :

Sound value $20,000
Insurance carried 8,000
Loss 8,000
Company pays 1/2 loss, or 4,000
Insured loses other 1/2,or 4,000
Amount of insurance which should have been carried 16,000

There are many cases where full insurance is carried. Inasmuch as there is usually a reduction of the rate of insurance when this is done advantage is taken to secure a lower rate. It is evident, however, that it may be somewhat difficult to comply with the amount of full co-insurance, as stocks are apt to vary, and experience would seem to show that the insured may lose in such a case.

Loss settlements in New York City show that a saving of between 4 and 5 per cent has accrued to the companies owing to failure of the insured to comply with the conditions of the average or co-insurance clause; or, to put it differently, the insured has become a co-insurer to that amount. In a manufacturing plant where values are more likely to fluctuate insurance to 90 per cent of the value is generally regarded as the best working rule.

(b) Is also an average clause but makes provision for no appraisal in case the claim for loss on the property does not exceed 5 per cent of the amount named.

(c) Electricity clause.—Is a clause forbidding the use of electricity. This clause is interesting historically because it brings out another feature in the growth of the standard policy. It has been shown that the standard policy may be varied in certain cases only and those cases must be provided for in the policy itself. Now, with the advent of electricity, it becomes necessary to have provision in the policy for this form of lighting or power. In order to accomplish this, in the opinion of the Attorney General it was first necessary to have electricity mentioned in some form in the standard policy. This was done by attaching a clause which forbids the use of electricity, and then having been forbidden on the policy unless permission was given thereon, permission could be given. It was a method perhaps of "Beating the devil around the stump," but it maintained the integrity of the standard policy.

Original clauses.—The three clauses, a, b, and c, mentioned above, were not originally filed when the standard policy was adopted, but were filed in the year 1901 and are known as the riders of that year. The original clauses filed when the policy was first adopted are the following:

(a) The application or survey clause, is that which covers that point in a policy where if there is a written application for insurance and a survey of the property on file, it makes them a part of the policy.

(b) Percentage value clause is that which provides that if at the time of a fire the insurance on the property exceeds a certain percentage of the cash value the company shall not be liable to pay more than its proper pro rata share, and further provides that should the whole insurance at the time of the fire exceed the said percentage the pro rata return of premiums is to be made of such excess.

(c) This is a percentage value clause applying to each item in the policy as "b" applies to the whole policy.

(d) This is a co-insurance clause which provides that if at the time of fire the whole amount of insurance on the property shall be less than the actual cash value the company shall be liable for such portion only of the loss or damage as the amount insured by this policy shall bear to the actual cash value of such property.

This is the clause filed for use in case of co-insurance when the policy was adopted. In a large part of New York City it is superseded by the average clause which differs slightly in wording but accomplishes the same purpose.

(e) Is a co-insurance clause for application to specific items of a policy.

(f) Is a co-insurance clause for floating policies.

(g) Is what is known as the percentage co-insurance clause and provides that if at the time of fire the amount of insurance is a certain percentage—usually seventyfive—of the actual cash value, the company in case of loss or damage shall be liable only for such portion as the amount insured by their policy shall bear to the percentage of insurance which was supposed to be carried. These clauses undoubtedly came into existence when the properties grew somewhat large and the companies wished to be sure that a certain amount of insurance was being maintained, otherwise a smaller amount of insurance might have been carried, perhaps a quarter or a third in place of three-fourths. Then in time of fire the company would have met with a whole loss ; but by limiting the payment on their policies to the proportion of the percentage agreed upon to be carried it is immaterial how much insurance was secured as the policies bore a proportionate loss only under any circumstances.

(h) Is a percentage co-insurance clause for applying to specific items of a policy.

(i) Is a percentage co-insurance clause with a certain limitation clause. The principal point in this clause is that if the percentage of insurance carried exceeded the amount called for, the company did not become liable for any greater amount but merely paid their pro rata share of the percentage agreed upon at the time the policy was taken out.

(j) A percentage co-insurance or limitation clause, the same as the preceding, except that it has application to specific items of the policy..

(k) Known as the assessment, instalment, or credit clause and makes provision that if any assessment or instalment of any part of the premium for which credit is given be not paid when due the whole premium is considered earned and the policy is void until the payment has been made.

(1) Provides that if the policy becomes encumbered by a mortgage, trust deed, judgment or otherwise, the entire policy is void unless endorsement is added to the policy noting that fact.

(m) Is the lightning clause. The lightning clause illustrates one of those cases where the company or companies assume a certain liability permitted by the standard policy and agree upon the form in which the liability may be assumed. The standard policy permits the liability for lightning and the companies have agreed upon the form in which that permission may be given, and in granting this privilege of accepting liability for fire or damage caused by lightning this clause must be used.

(n) This is the mortgagee clause. The principal thing in connection with this clause is that it relieves the mortgagee from certain conditions which apply to the owners of the property. It is provided that the loss under the policy shall be payable to the party named as mortgagee or trustee, and that the insurance thereon as to that interest shall not be involved by any act or neglect of mortgagee or owner of the property, nor by foreclosure or other proceeding, or notice of sale relating to the property or change in the title or owner-ship, nor by the occupation of the premises for more hazardous purposes than that assumed by the policy. If, however, the mortgagor neglects to pay the premium it shall be paid upon demand by the mortgagee.

The mortgagee, however, is supposed to notify the company of any change in ownership and, of course, of hazard that may come to his knowledge. It is well to emphasize that the general effect of the mortgagee clause is to make the loaning of money upon real estate comparatively easy. To restate for emphasis, lenders of money would hardly care to loan if they had to assume the duty of watching the property from the insurance standpoint.

(o) Is the mortgagee clause where the owner has no interest in the insurance and is merely provided to cover that condition.

(p) Is the mortgagee clause with full contribution.

(q) Are blank forms for agency certificates and renewals.

Additional clauses.—The above completes a summary of the standard clauses which are filed; they are illustrative of the general character of such clauses in those states where standard policies are in force. There now remains for consideration another group of clauses, warranties, and privileges which do not have quite the legal authority of the preceding, not being filed with the departments but having grown into existence in compliance with a general demand that certain privileges be granted in a certain fixed manner. They also to a limited extent affect the rate of insurance; Among them may be mentioned the following:

I. Automatic alarm clauses, automatic sprinkler clauses and special signal building clauses, and others of like nature. These cover the warranty or guaranty of the insured that, having received a certain consideration in the rate of insurance, he will during the life of the policy maintain the working efficiency of these devices in good condition. They exact of the insured generally that he shall use due diligence in their maintenance, but they do not rise to the exactions usual of a warranty, nor do they possess the same form in all parts of the country, usually being worded by the insurance organizations within the territory covered.

II. Certain warranties dealing with conditions which likewise have an effect upon the rate of insurance, as

(a) A warranty that the building shall be occupied for dwelling purposes only, perhaps by a limited number of families.

(b) A warranty that the building shall be occupied for dwelling purposes only, as an apartment house, but without limitation as to the number of families.

(c) Warranty by the insured that a clear space clause shall be maintained. This usually applies to lumber mills and provides for a certain space between the mill itself and the lumber which is piled.

(d) Private warehouse warranty, which usually calls upon the insured to maintain certain conditions in the building, principally dealing with the manner in which stock shall be handled, the amount which shall be open, etc.

These are sufficiently illustrative of the varied purposes of these clauses and warranties which have come into use.

There may frequently be added to the policies specific forms of warranties dealing with the specific risk in question. A form of this is the amount of steam which may be carried in a boiler, the warranty stating that the insured shall not maintain a pressure of over fifteen pounds, or, again, the warranty may be that benzine shall not be used on the premises. These, however, are matters which arise in connection with individual risks and for which general language is not adapted, but each must be drawn to meet the conditions of the special case.

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