Insurance - Loss Settlements
( Originally Published 1911 )
Losses.—Insurance is written not because people merely 'wish for it but because a loss may or rather will occur. It has been shown that the average rate of insurance is something over $1 and the average rate of loss is between fifty and sixty cents; hence in amount about one-half of the insurance collections is subject to settlement under loss. It has been stated that in 1,000 policies thirty-two on an average are subject to a loss. This, of course, represents all sorts and conditions of policies, simply treating them as policies and basing the average accordingly. If a loss never occurred, insurance would cease, but whether it occurs or not, all that the previous chapter explained is necessary to bring the contract into effect.
Adjusters.—The person who settles losses is called an adjuster. In England the term "assessor" is used. The business of adjusting was originally in the hands of the companies and their representatives. Lately, however, there has grown up the business of public adjusting. These adjusters hold themselves in readiness to take up for the insured the settlement of a loss.
The companies themselves for a great many years handled all their own losses, each company acting for itself. In the course of time, however, as risks grew larger and the companies more numerous, it became customary for all companies represented to appoint from their number a committee of adjusters. Out of this simple method has grown the Loss Bureaus, or Loss Committees, of larger cities, and the committees or bureaus which cover several states. These committees or bureaus handle the adjusting for the companies and are probably able to do so more cheaply and more effectively than where each company was represented directly. The individual company, of course, is not relieved from the necessity of conducting its own loss bureau, but by the co-operative method it is enabled to reduce expenses in the settlement of certain groups of losses.
Losses in standard policy.—Lines 1 to 6 of the standard policy, as well as other lines to be noted later, deal with the question of losses.
Line 1 limits the liability of the company to the actual cash value of the property at the time any loss or damage occurs. It likewise states that loss or dam-age shall be ascertained according to the actual cash value with a proper deduction for depreciation no mat-ter how that depreciation may be caused.
Line 2 states that in no event shall the cash value exceed what it would cost the insured to repair or re-place the property with material of like kind and quality.
The ascertainment or estimate of this actual cash value is made by the insured and the company, but (line 3) if they differ, then by appraisers, who are appointed by a method which will be noted farther on.
The amount of the loss having been determined the sum for which the company is liable shall be payable within sixty days after due notice of the amount of the loss settlement and the satisfactory proof has been received by the company.
Repairs and replacements.—Line 4 states that it is optional with the company to take any or all of the articles at the ascertained or appraised value. It is also provided that it has the privilege of repairing, re-building, or replacing the property loss or damage with other of like kind and quality within a reasonable time, provided that it gives notice of its intention so to do within thirty days after the receipt of proof, but (line 6) the insured is not permitted to abandon the property to the company. In other words, the company can if it chooses take the property and pay the face of the policy, thus reducing the amount of the loss by the amount received from the salvage of the property taken. The insured, however, does not have the option of making a settlement with the company or of stating that he will take the face of the policy and abandon the property to them.
The company prefers at all times to make a settlement wherever possible. It does not care to engage in the business of handling damaged property by means of salvage if it is possible to avoid doing so. It is some-times necessary to do this in order to protect its interests but it is done only as a last resort.
Neither does the company care to handle merchandise for the purposes of salvage, nor to repair, replace, or rebuild the premises if it be a building that has been damaged. It is exceedingly difficult, in the first place, for a company to repair, replace, or rebuild with like kind and condition. The chances of fulfilling those two requirements—kind and quality—are very small. Furthermore, if the insured should be so minded he might possibly convince the court that the company had not carried out its part of the bargain and performed its share of the contract.
There is an historical case which occurred in Tennessee where a building was damaged by fire. Failing to effect .a settlement the company elected to rebuild. The insured, when the work was completed (although the companies thought they were carrying out the exact specifications), objected to accepting the property and was able to convince the jury that the company had failed to carry out its contract with him, and so he received a cash settlement. This might not have been so bad had it not been that the building also became his property as it was erected on his land. With such a possibility confronting it, the company is extremely reluctant to undertake the repairing, replacing, and rebuilding of any property injured by fire.
Provisions for settlement.—Lines 67 to 109, in addition to lines 1 to 6, deal with the settlement of losses and should now be considered in detail. The insured is called upon to act according to the following schedule whenever a loss occurs:
(a) Give to the company immediate notice in writing of any loss.
(b) Protect the property from further damage.
(c) Separate the damaged from the undamaged personal property; put it in the best possible order, making a complete inventory of the same and stating the quantity and cost of each article and the amount claimed thereon.
(d) Within sixty days after the fire, unless the time is further extended in writing by the company, he shall render a statement to the company signed and sworn to by said insured stating his knowledge and belief as to the time and origin of the fire; his interest and of all others in the property; the cash value of each item thereof and the amount of loss thereon; all incumbrances thereon; all other insurance whether valid or not covering any of said property.
(e) A copy of all descriptions or schedules in all policies.
(f) Any changes in the title, use, occupation, location, possession, or exposure of said property since the issuance of the policy.
(g) By whom and for what purposes any buildings herein described and the several parts thereof were occupied at the time of fire.
(h) He shall furnish if required verified plans and specifications of any building, fixtures, or machinery destroyed or damaged; and furthermore,
(i) If required shall furnish a certificate of a magistrate or notary public not interested in the claim as a creditor or otherwise, nor related to the insured, living nearest the place of fire, stating that he has examined the circumstances and believes the insured has honestly ascertained loss to the amount of such magistrate's or notary's certificate.
(j) The insured must as often as required exhibit to the person appointed by the company all that remains of any property described.
(k) He shall submit to examination under oath and subscribe to the same.
(l) He shall produce for examination all books of accounts, bills, invoices and other vouchers, or certified copies thereof, if the originals be lost.
(m) He shall permit extracts and copies to be made of these documents.
These lines—from 67 to 85 inclusive—practically cover the duty of the insured and his attitude toward the question of loss settlement. Needless to say, each line has been subject to a legal decision, and probably will continue to be so subject so long as man endures and fire policies are written.
Appraisal.-Lines 86 to 91 provide for the appraisal in event of an absolute disagreement between the insured and the company. The lines state that the loss shall then be ascertained by two competent and disinterested appraisers, the insured selecting one and the company the other. These two shall select a third. The two appraisers then take the estimate and appraise the loss, stating separate sound values and damage. Should they fail to agree then the third appraiser, or umpire, has the deciding vote. The award in writing of any two of the three determines the amount of such loss, and the parties thereto are obliged to pay the appraisers respectively selected by. them, and they shall bear equally—the insured and the company—the expenses of the appraisal and umpire.
Lines 92 to 95 provide that the company shall not be held to have waived any condition or forfeiture of any requirement, act, or proceeding as shown in its attitude to the appraisal, neither shall the loss under an appraisal become payable until sixty days after due notice and separate proof shall have been received by the company. This, of course, includes an award by appraisers when an appraisal has been required. This provision for the loss being payable sixty days after the settlement is reached is an exceedingly old provision in fire insurance contracts, dating back to the very be-ginning and is for the purpose of preventing cheating.
Payment of loss.—It is generally held to be poor policy to pay a loss too soon, especially when the old question of moral hazard is involved as closely in a business as it is in the business of fire insurance. The provision of sixty days has in many instances proved sufficient to enable not only a proper checking of the claim but at the same time to unearth many fraudulent claims.
It is not customary, however, in minor losses to wait, but to pay the claim immediately and always to pay the larger losses whenever the discount duly provided for is accepted by the insured.
The strongest asset that an insurance company can possess is the reputation of paying its losses promptly. It is too great a business asset to be lightly trifled with.
The personal connection always enters into the dealings of any business, and the personal equation of the adjuster and the insured are not unimportant factors in reaching a settlement; but it should be noted that where both parties honestly desire to secure a fair settlement there is very slight chance of friction occurring. If one party or the other does not desire such a result then the chances of friction are many and can be utilized by either.
Difficulties of settlement. Whenever a calamity' like the San Francisco fire occurs, and the insurance companies play a somewhat leading part in straightening out conditions, one is likely to hear much of the difficulties of settling losses. As a matter of fact, those in position to speak with authority of the San Francisco situation know that the volume of money which passed from the companies to the insured at that time was enormous, comparatively speaking, and the friction exceedingly slight. The few cases were made much of, but they were few in comparison to the entire number of risks to be settled and the volume of money which changed hands.
The element of competition in liberal methods used in conducting the business of fire insurance is not an unimportant item, and while a company may often wish to do differently, it may by the competition of its neighbors be obliged to do as they do.
It must not be gathered from what has been stated that the settlement of losses is a difficult matter or one attended with any serious complications. In pro-portion to the volume transacted it is probable that the business of fire insurance is conducted with as little friction and with as few cases reaching the courts as any other business of like magnitude. In fact, it is probably conducted with less friction than most businesses of an equal importance.
Standing of companies.—The great essential fact in the settlement of losses is that no company de-sires to be known as not settling promptly and equitably. To obtain such a reputation would be to put itself practically out of business. No agent would care to represent such company; no broker would care to do business with it, and the insured would not care for its policies. There are too many companies in fire insurance for any company to stand too strictly upon technicalities.
Most of the laws in force relating to insurance companies and to the adoption of standard policies have been occasioned not by the doings of the many but by those of the few. Our penal laws are not made because everybody needs them, but because of that small portion of humanity which apparently needs such restrictions.