CHAPTER IV

THE POLICY: PART I—continued

Common English Policy continued, Valuation

The said ship, etc., goods and merchandises, etc., for as much as concerns the assured, by agreement between the assured and the assurers in this policy, are and shall be valued at £.

English law does not impose any obligation on assured or underwriter to fill up the blank at the end of this clause with any sum. Policies consequently fall into two classes —(1) open, in which no value is given; and (2) valued, in which a value is given.

The earliest Italian and English policies make no statement of the value of the goods or vessel insured; at the most they provide that a certain proportion, usually 10 per cent of the value, shall remain uninsured, stated to be “at the assured's adventure." This provision was embodied in the Guidon de la Mer, and it was stipulated in the Ordinance of Louis XIV. (Tit. vi. Art. 18) that the assured should always bear the risk of the tenth of the goods which they shipped, unless there was an express declaration on the policy that they meant the whole value to be insured. The French Code de Commerce of 1807 did not reproduce this restriction, which had fallen into disuse, express declaration of complete insurance having become usual.

In consideration of the subject of valuations it soon becomes apparent that some regard must be had to the intention of the contract of insurance. The aim of the

contract being to secure indemnity to the assured, indemnity should be the limitation of the obligations of the underwriter. As Lord Mansfield put it in Godin v. London Assurance, 1758: "Before the introduction of wagering policies it was upon principles of convenience, very wisely established, that a man should not recover more than he had lost. Insurance was considered as an indemnity only in case of a loss, and therefore the insurance ought not to exceed the loss. This rule was calculated to prevent fraud, lest the temptation of gain should occasion unfair and wilful losses." But the application of this principle is not easy. What constitutes indemnity in case of loss to a merchant engaged in oversea trade? He conducts certain commercial operations, acting on his knowledge of foreign markets and his skill in estimating the course of trade. If he ships goods and loses them by marine perils, whether is he indemnified by recovery from his marine underwriters of the sum he paid for these goods plus all the shipping expenses or of the sum which, but for the perils of the sea, he would have obtained for them at destination? It is evident that all the impetus would be removed from trade if the merchant had at the commencement of a venture no expectation of obtaining more at the end than he expended at the beginning. Therefore there is considerable reason for asserting that any repayment for lost goods which leaves the assured in a worse plight than he would be if the venture had been completed is an imperfect indemnity. The first person who drew public attention to the ambiguity of the word "indemnity" was Wilhelm Benecke of Hamburg, who published between 1805 and 1821 his great System of Marine Insurance and Bottomry.1 Removing to London about 1814 or 1815, he published in 1824 his Treatise on the Principles of Indemnity in Marine Insurance, Bottomry, and Respondentia. Benecke concluded that to secure perfect indemnity the merchant must word his valuation thus: "Valued at so much as the gross proceeds of the goods specified will be at the port of discharge," 1 2nd edition, edited and rearranged by Vincent Nolte. Hamburg, 1851 and 1852.

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stipulating specially whether the duty-paid price or the price in bond is intended. As a merchant would hardly ever be able to determine exactly what price his goods would fetch at destination, he would need for his own protection to insure an amount in excess of his expectation, and to reduce this at the close of the venture by declaring a short interest and getting a return of premium. Then, from the nature of this method of valuation, it is plain that it will not act fairly between assured and underwriter, unless the goods insured are such that the market to which they are shipped is neither raised by their loss nor depressed by their arrival ; in other words, it is hardly applicable except “in the conveyance of current merchandise to and from important commercial places (Benecke, p. 12). A middle course between the somewhat elaborate and inconvenient system proposed by Benecke, and the stricter ancient system of permitting the merchant to insure nothing beyond the cost of his shipment, is often adopted, namely, the valuing of the goods at invoice cost and an agreed percentage, which may be taken to represent out-of-pocket expenses and anticipated profit. The adoption of such a system simplifies the matter immensely, but it involves the abandonment of the idea of indemnity in either sense, and if the assured covers the whole sum of his valuation he is left either under-insured or over-insured as the market at destination

goes up or down. It has, however, become the almost universal practice in England to use valued policies for goods and ships, while of freight policies a considerable proportion is open.

1. Open policies.

Between 1760 and 1825 various cases went to the courts; we are consequently in possession of a series of decisions by Lord Mansfield and his successors on the valuations attached by English law to different interests. As might be expected, from the date of the earliest of this series of decisions, they are based on practices founded on the theory and jurisprudence of the French system of maritime and commercial law. As French legislators before that period based their work on such maxims of Roman law as Nemo debet aliena jactura

locupletari (no one ought to be profited by another's loss), it is only to be expected that these decisions will leave the merchant indemnified only to the extent of this actual cost and shipping expenses of his goods. The decisions are that in an open policy the valuations attached to different interests are :

(a) Goods or merchandise: the prime cost (say invoice

cost) plus shipping expenses and cost of insurance (Lewis v. Rucker, 1761).1

(b) Ship: the value at the commencement of the voyage, including the outfit, stores and provisions for crew, advances made against crew's wages and cost of insurance (Marshall, p. 633:2 Stevens on Average, 5th ed. p. 190).

(c) Freight the gross freight due to the ship on her arrival abroad plus cost of insurance (Palmer v. Blackburn, 1822).3

(d) Other objects of insurance: the value to the assured at the commencement of the voyage plus cost of insurance.

On examination of these four classes of interests, it is evident that owners of cargo (a) and parties interested in whatever may fall under class (d) get under these decisions the very barest provision that can be termed indemnity. On the other hand, by the provisions of (b) and (c), a shipowner using open policies would be permitted by law to be in a better position through losing his ship at sea than by having her complete her voyage in safety, the difference being the cost of the outfit, stores, provisions, advances, in fact nearly all the expenses of earning the freight, and, in addition, the cost of insurance of ship and freight. The state of the law is thus an inducement both to assured on

1 2 Burr. 1167.

2 "A ship is valued at the sum she is worth at the time she sails on the voyage insured, including the expenses of repairs, the value of the furniture, provisions and stores, the money advanced to the sailors, and, in general, every expense of the outfit, to which is added the premium of insurance."

goods and to underwriters on ship and freight not to use open policies, and indeed they are now but rarely used.

2. Valued policies. The advantages and limitations of the system of valued policies were well set forth by Mr. Justice Willes in Lidgett v. Secretan, 1871:1 “Nobody has been able to improve on the practice as to valued policies, which has been recognised and adopted by shipowners and underwriters, and has, at least among honest men, the advantage of giving the assured the full value of the thing insured and of enabling the underwriter to obtain a larger amount of profit."

The most authoritative document on the English law of valuations is the memorandum on Over-Insurance, Valued Policy, and Constructive Total Loss, written by Mr. Justice Willes in 1867, and printed as Appendix lvii. in volume 2 of Report of the Unseaworthy Ships Commission of 1874. In § 2 of this memorandum we find:

In the absence of proof that the value fixed by the contract is so exaggerated as to be a mere cloak for gambling, in representing more than any possible interest which the assured could have in the ship and outfit, or that the exaggeration was fraudulent with a view to cheat the underwriter, the latter is bound in case of total loss to pay the agreed sum. It is only when the over-valuation is so exaggerated as to show to the satisfaction of a jury that it must have been designed in order to obtain more than a just and complete indemnity that the insurance is void.

That Lord Mansfield would have acted on this principle is clear from his words in Lewis v. Rucker: 2 "If it should come out in proof that a man had insured £2000 and had interest on board to the value of a cable only, there never has been, and I believe there never will be, a determination that by such an evasion the Act of Parliament may be defeated." (The Act referred to is 19 Geo. II. c. 37, prohibiting wager policies.) "There are many conveniences from allowing valued policies, but where they are used merely as a cover to a wager they would be considered as an evasion."

It must be confessed to be impossible to define à priori 2 2 Burr. 1167.

1 L. R. 6 C. P. 616.