Insurance defined
Insurance is a provision for the distribution of risks; that is to say, it is a financial provision against loss from unavoidable disasters. The protection which it affords takes the form of a guaranty to indemnify the insured if certain specified losses occur. The principle of insurance, so far as the under-taking of the obligation is concerned, is that for the payment of a certain sum the guaranty will be given to reimburse the insured. The insurer, in accepting risks, so distributes them that the sum total of all the amounts paid for this insurance protection will be sufficient to meet the losses that occur.
Insurance, then, indicates divided responsibility. This principle is introduced in most stores where a division is made between the sales clerk and the cashier's department, the arrangement dividing the risk of loss. The insurance principle is similarly applied in many other cases of divided responsibility. As a business, however, insurance is usually recognized as some form of securing a promise of indemnity by the payment of a premium and the fulfillment of certain other stipulations.
Early instances of insurance.—Forms of insurance were known to the Romans and to some extent were practiced among the Collegia. In certain respects these bodies resembled our benefit societies. For example, they provided for burial and also made some form of provision for promotion among the soldiers in their organizations. In reality, then, they were based on the insurance principle since they accepted from their members a certain stipulated sum and in return agreed to perform certain services. Demosthenes describes marine loans made to the ancient Greeks ; we also have record that insurance existed among the Chinese 2500 years ago. In none of these early instances, however, did insurance reach anything like large proportions. In fact, so far as we know, it entirely disappeared, many centuries passing before there was a revival. It is true that certain laws among the Romans governing annuities necessitated a mortality table, but it was, however, for this sole purpose and apparently not in any sense an insurance matter.
Present forms of insurance.—The business of insurance is divided into four main branches: marine insurance, fire insurance, life insurance and casualty insurance. The first three state the form of disaster against which insurance is provided. The fourth—originally accident insurance—includes all forms not embraced in the other three. An idea of the variety of events against which insurance is offered.
Marine insurance antedates every other form, its history dating back over seven centuries. It appears to have been practiced in the Mediterranean, and at least one old policy has come down from the thirteenth century, proving that marine insurance was an established practice among the commercial countries of that time. A broad gap exists between that period and the continuous history running back now some four hundred years, but since that time insurance has been an established business among those engaged in maritime adventures.
Fire insurance, the second oldest form to become permanently established, dates from the great London fire of 1666.
Life insurance followed a little later, although not until 1760 was a company founded on a modern basis.
Casualty insurance owes its origin to the application of steam to railway travel; its more common name of accident insurance was due to the fact that the first events to be insured against were those of accidents to the person on a railway journey. It originated in England in the first half of the nineteenth century.
The theory of probabilities.—All forms of insurance have a fundamental basis in the theory of probabilities. This theory deals with those events which seemingly do not lend themselves to a fixed law but which in reality occur with such approximate regularity that a definite law may be deduced from a sufficient number of these uncertain events, the law being that these events will occur with sufficient regularity over a period of time so that conclusions may safely be drawn from them.
The possibilities contained in the theory of probabilities were first brought to light by the famous solution of a gaming problem. Two noblemen, engaged in a game of cards called the Game of Points, were obliged to cease play before the game could be finished. Being unwilling to separate with each retaining his own stakes, they asked Pascal, the eminent Frenchman, to suggest how the stakes should be divided. The stakes amounted to $64, each having contributed $32, and it was necessary for one of the players to make three points before he would be entitled to the stakes. At the time they appealed to Pascal, one player had two points to his credit and the other player had one. Pascal submitted the following solution: "Suppose," he said, "that you had played another hand. One of two things would necessarily happen : either the player who has two points would gain one, and, having three points to his credit, would claim the stakes; or the player with one point to his credit would win another so that he would have two points to his credit, the same as his opponent. If this latter should happen, each would have retained his individual stake. The chances of winning I consider equal, and as it is evident that the player with two points cannot, if he plays another hand, lose his original stake of $32, the other 832 should be divided into two parts and the player who has one point to his credit retain $16 and the player with two points receive $16, or the whole stake be divided into proportions of 48 and 16.
Pascal submitted two other suggestive solutions to clinch his theory, but they need not be discussed here. Gambling at that time was prevalent in the courts, and nothing pleased the gamblers more than to be shown ways whereby their games could be decided although not played to a conclusion. Great intellectual interest was aroused in the theory of probabilities, and out of this condition the business of insurance in its modern aspect originated. At this point it should be said that insurance, although often compared with gambling—possibly because of these early' associations—is entirely different from it in principle. Gambling is an attempt to increase, one's means by a venture not based on any known factors; that is, it is purely and simply a chance. Insurance, on the other hand, takes into consideration all the factors that enter into the problem and that may affect the hazard insured against, or the factors that may, if guarded against, prevent the contingency from happening.
Marine insurance based on indemnity
Marine insurance is, as has already been said, the oldest form which passed into a distinct commercial business. Like fire insurance, it is based on indemnity, the purpose being to make whole a loss which has occurred, but not in any sense to do more than that. Marine insurance was undoubtedly practiced in the Mediterranean. Indeed, in its basic form, so far as adventures at sea were concerned, the principle of insurance was recognized in remote times. Among the Rhodians there were undoubtedly forms of indemnity much like our modern form of insurance. The Hanseatic League also provided for meeting the contingencies of maritime enterprises.
Lloyds of London.—Marine insurance among English speaking peoples had its origin in the famous coffee-house kept by Edward Lloyd in London. Lloyd took such an active and successful interest in marine insurance that his name has become identified with the most important marine insurance association in the world. Lloyds of London is known the world over, primarily for marine insurance and secondarily for other forms of insurance. It was the custom among the merchants who met at Lloyds to assume for each other a portion of the risk of a voyage. Thus, a merchant sending a ship with cargo to the West Indies for purposes of trade and having at stake some 10,000 pounds in the whole adventure, would get his fellow merchants, for a premium, to assume a portion of the risk in the event of the vessel being lost. For a time these amounts assumed were small—possibly 100 pounds, seldom more—and each insurer wrote his name at the bottom of the policy. From the position of the name on the policy arose the term "underwriter," which designates the one who assumes or underwrites part of an insurance risk. As wealth increased, men who had no interest in maritime enterprises beyond that of insurers were induced to insure marine adventures. In other words, a distinct body of insurers arose, and, for the payment of a premium, the merchant was relieved of that part of the burden of his maritime enterprises.
Underwriting.—In the earlier forms of insurance offices a number of persons associated themselves and each person was obliged to sign the policy before it was binding on the offices. Later there arose the practice of empowering the keeper of the office, together with two or three other members of the group, to sign or "under-write" all policies. Signed in this way the policies be-came binding on the whole group, but only to the extent of their individual assumption of liability. Later came the modern practice of having the single agent or attorney sign for the office. Then followed the corporation to undertake the business.
The policy.—The history of marine insurance has been fraught with the romance which naturally pertains to all customs of the sea. Modern inventions and appliances have reduced the dangers of the ocean, although occasional disasters remind us that the ocean's power has not yet been curbed and that there is as much need as ever—probably more need than ever--for insurance against "maritime perils." A unique feature of marine insurance is that the form of the policy has been established practically since 1770, when it was standardized by Lloyds. In the following ancient language it states the things which are insured against:
Touching the adventures and perils which the said Atlantic MutuaI Insurance Company is contented to bear, and takes upon itself in this voyage, they are of the seas, men-of-war, fires, enemies, pirates, rovers, thieves, jettisons, letters of mart and countermart, reprisals, takings at sea, arrests, restraints and detainments of all kings, princes or people of what nation, condition or quality soever, barratry of the master and mariners, and all other perils, losses and misfortunes, that have or shall come to the hurt, detriment or damage of the said vessel, or any part thereof. AND in case of any loss or misfortune, it shall be lawful and necessary to and for the assured, factors, servants and assigns, to sue, labor and travel for, in and about the defence, safeguard and recovery of the said vessel, or any part thereof, without prejudice to this insurance, to the charges whereof, the said Insurance Company will contribute according to the rate and quantity of the sum herein insured, nor shall the acts of the insured or insurers, in recovering, saving and preserving the property insured, in case of disaster, be considered a waiver or an acceptance of an abandonment; having been paid the consideration for this insurance, by the assured or assigns, at and after the rate of
Within recent years the question of putting the policy into modern language has been under serious consideration. It is felt, however, that so much commercial practice is based on court decisions of the policy that to over-turn this great bulk of law would be to the disadvantage of maritime enterprises. Indeed, it is said that every word in the policy has been construed by the courts, and although its construction frequently differs from that which the policy seems to set forth, nevertheless, as all parties to the agreement understand the meaning which the courts have attached to the clauses, it is accepted by all parties and but little trouble results.
Warranties.—Marine insurance always contains certain conditions precedent to the liability of the under-writer and incumbent upon the insured. These conditions are known as warranties which, although not expressed, are of binding force. These are, that the vessel is seaworthy ; that the voyage will be made without deviation; that the voyage or business of the ship is legal, and that she has the necessary legal papers. The violation of any of these warranties would be sufficient to void the policy.
In marine insurance the terms "general average" and "particular average" occur frequently. The word "aver-age" means "damage," its meaning being taken directly from the French word avarie meaning "damage to ship or cargo," and not from the word "average" as we commonly use it.
General average.—General average embraces all losses which arise when there has been a sacrifice made for the purpose of the safety of the ship or of the cargo. It is a most ancient principle of maritime transactions and in the form of full insurance is brought over into marine insurance. Previous to the invention of insurance it was the established practice that when-ever on a voyage it was necessary to make a sacrifice of a portion of the cargo of the ship in order to complete the voyage in safety, the loss should be divided among all interested in the voyage. The interests usually fell into three groups: (1) the owner of the vessel, (2) the charter party (the one who might have hired the vessel for the voyage and who was interested in the freight to be earned), and (3) those who owned the cargo. These three interests, commonly known as the vessel, the freight and the shipper of the goods, shared in proportion to their respective interests any loss, such as that of an anchor, a mast or sails or any sacrifice of cargo for the safety of the voyage. A simple illustration will present it more clearly than any other method. It can be well imagined that a group of Romans—say ten—may have been journeying across the Mediterranean taking some kind of a. cargo to Rome for sale. This may have been sheep, and each may have owned ten head. A storm arising, it becomes evident to all that if any are to be saved some part of the cargo must be sacrificed. Naturally no one of the ten desires to throw his sheep overboard, but the suggestion is made that if one will throw his sheep over-board the others will share the loss with him; hence ten of the sheep are thrown over, and on arriving at Rome each man has for sale nine sheep, one sheep having been the contribution of each to the loss which was voluntarily accepted that they and as much of their cargo as possible might be saved.
Summing up, then, the principle of general average is this: Each one interested, and according to his interest, must share the loss made for the benefit of all. The owner of the vessel would have to contribute as well as the shippers.
Particular average.—Particular average means an individual loss. It applies only to the person interested and does not represent a sacrifice, as in the case of general average. To refer again to the illustration just used, if the sheep were not voluntarily thrown overboard, but one of the shippers had been unfortunate enough to have all his sheep fall overboard, he alone would have had to stand the loss. The loss is not for the benefit of anybody. It is his misfortune, and is known as particular average.
Average existed, as it has been noted, centuries before insurance was invented. Sometime, somehow and some-where there was a person bright enough to conceive the idea of having each person who was interested in a voyage contribute a small sum to cover any loss which might arise from general or particular average. When that was done, marine insurance was born. If, however, marine insurance should be blotted out to-morrow, the loss of particular and general average would at once come into play, and every person interested in a voyage would be his own insurer to the extent of his interest in the voyage as represented by the value of his goods compared with the value of all.
12. Dangers insured against.—The dangers insured against have been grouped into four classes:
1. Those of the sea.
2. Those concerning the conduct of persons in charge of the vessel.
3. Those arising from the outside; such as pirates.
4. All other perils, is the somewhat broad language which apparently lets nothing happen to the vessel, cargo, or freight that is not covered by the marine policy.
We must not infer from the last of these groups that everything, as a matter of fact, is covered by the marine policy. The so-called ordinary wear and tear which hap-pens to all things is not covered by the policy. That a vessel may need repainting, the paint having worn away with time, is not such a loss as is covered by the policy. Perhaps the. proper interpretation of this last group of causes would be the uncontrolled disasters which may happen to the ship.
Losses.—The losses in marine insurance are divided into four classes:
(a) Total loss.(b) General average.(c) Particular average.(d) Salvage.
Total loss might seem to be capable of a very simple definition. A moment's thought will show us that many cases must arise where, while apparently a vessel is lost, no absolute information exists concerning the fact. The most complete case, of course, would be where a vessel was sunk, or destroyed by fire, and due evidence of that fact was available. It became necessary, however, in marine insurance to establish a certain time when, if a vessel was not heard from, she was considered a total loss. At Lloyd's this is a period of seven years. When this time has elapsed, from a special part of the room a bell is tolled and the announcement made that such and such a ship is a total loss. The insurance is then payable, and even if, as it has happened in one or two cases, the vessel may afterwards return, she is legally lost so far as the insurance transaction is concerned. A vessel may be captured by an enemy in a time of war and, although in existence, may be a total loss to the owner.
A total loss may be constructive or actual. A vessel, for instance, may run ashore, and the cost of getting her off the rocks and repairing her may be more than her value. That is a constructive total loss. While the vessel is in existence in a sense, she is not in existence from an insurance viewpoint. The rule in such cases is, if the cost of saving the vessel, added to the cost of repairs, is greater than the value of the vessel, the loss is total. The same rule is applied in regard to the cargo when the cost of saving and forwarding it to its destination would be greater than its value.
Salvage. Salvage in marine insurance means the reward permitted by law for services in saving life and property at sea. It is required that the service must have been of substantial assistance and have been rendered by non-interested parties. Salvage is divided among the various interests precisely as a loss would be apportioned under general average. Thus in these modern days of course the insurer would have to step for-ward and pay the final amount.
