Company's Liability for Loss Limited to the Actual Cash Value of the Property.-A very important provision of the standard policy is that which limits the company's liability to the actual cash value of the property at the time of the loss. This policy provision conforms with the true object of the fire insurance contract, namely, to furnish indemnity for the destruction of actual property values. In other words, even though the face value of the policy is for a larger amount, the insurance company should never, in the absence of a special agreement to the contrary, be held liable for more than the actual cash value of the property at the time of the fire. As explained in the chapter on "The Policy Contract," many causes operate to decrease the value of property during the interval between the time of the issuance of the policy and a loss. Again, it should be borne in mind that, even though values do not fluctuate, it is impossible for companies to make accurate inspections of the property at the time the risk is assumed. Experience shows that relatively few claims represent a total loss. Where partial losses occur, an adjustment must be made in any case. Is it not much more desirable, therefore, from the standpoint of expense, to defer a thorough investigation, as to actual value, to the few cases of total loss when the loss actually occurs, than to make the same at the time all these properties were insured? Despite the fundamental principle of indemnity in fire insurance and the much greater economy in deferring careful examinations to the time of loss, it is most regrettable that nearly half of the states have seen fit to pass laws which, in the case of realty, make the company liable for the face value of the policy in case of a total loss. This type of legislation usually provides that every company insuring any building against loss, shall cause the same to be previously examined and to have its insurable value de termined. The law further provides, as a rule, that in the absence of any increase in the risk without the consent of the insurer, in which the burden of proof shall be upon the company, and in the absence of intentional fraud upon the part of the insured, the company shall be liable for the whole amount mentioned in the policy in case of total loss. Such so-called "valued policy laws" are opposed to the very principles underlying fire insurance, and furnish a motive for fraud, resulting in the payment of dishonest claims out of the premium contributions of the honest. They have proved exceedingly expensive to policyholders of states which have enacted the same, and are sure to increase greatly the moral hazard.* Company's Option to Rebuild or Replace.-Lines 176 to 184 of the standard policy read, "it shall be optional with this company to take all, or any part, of the articles at the agreed or appraised value, and also to repair, rebuild, or replace the property lost or damaged with other of like kind and quality within a reasonable time, on giving notice of its intention so to do within thirty days after the receipt of the proof of loss herein required, but there can be no abandonment to this company of the property described." According to this provision, insurance companies may settle a claim by paying the loss, by taking all or any part of the property damaged or undamaged, or by repairing or replacing the property lost or damaged. When the company has elected one of these alternatives, its decision becomes an absolute agreement, and fixes the rights and duties of the parties. Insurance companies, however, do not desire to exercise the option of repairing or replacing the property unless they deem it absolutely necessary, as, for example, when a satisfactory adjustment of a loss can 'See Dean's discussion of Valued Policy Laws, pp. 103-111 of "The Rational of Fire Rates." not be made. Where the insured claims what the insurance company regards as an excessive demand, the company may determine whether it would not be cheaper to restore the goods or building to their original condition at the time of the fire. Certainly the insured cannot object to this. Since the cost of materials varies considerably at times, the insurance company may profitably exercise this option. In numerous states, however, disputes have arisen as to what constitutes a restoration, especially since the insurance company must replace the property with "other of like kind and quality," and the courts have been severe in their rulings against the companies. Partly for this reason and partly because insurance companies are not in the business of buying materials or constructing buildings, they prefer, whenever possible, not to exercise this option. Abandonment of Property to Company Prohibited. Mention should also be made of the fact that in fire insurance, unlike marine insurance, the insured cannot abandon the property to the company and demand payment for the same. In marine insurance, if the facts warrant the construction of loss or damage into a total loss, the interests of the insured require that he should exercise his privilege of abandoning" the risk to the underwriter. By this is meant that the insured claims payment for a total loss, and is willing to surrender to the underwriter all that remains of the insured property, including all proprietary rights which the insured originally had in the property. Such a practice is expressly forbidden in fire policies. Even where the courts, as in the case of city ordinances prohibiting the reconstruction of certain types of buildings when destroyed by fire to the extent of onethird or one-half, have shown a disposition to construe certain partial losses as equivalent to total losses, fire insurance companies have been prompt in nullifying such decisions through special policy provisions. As already noted, the standard fire policy expressly provides that, in determining the company's. liability, no allowance should be made for any increased cost of repair or reconstruction by reason of any ordinance or law regulating construction or repair." CHAPTER IX TERM OF THE CONTRACT-RENEWAL AND CANCELLATION Term of the Contract.-One of the necessary elements in any complete contract is an agreement as to the duration of the term. In fire insurance most contracts are written. for one year or less, but the term is often made to extend over two, three, and five years, and even longer. The New York standard policy seeks definitely to state the limits of time within which the policy shall be in force.by providing that the insurance shall extend "for the term of . from the ... day of 192., at noon, to the .... 192., at noon." The word "noon" is further defined in the policy as "meaning noon of standard time at the place of loss or damage." Some have argued that a later hour than twelve o'clock would be more convenient, since then. the termination of the policy could be made to coincide Iwith the close of a business day. By invariable custom, however, all fire insurance policies are made to begin and end "at noon. As regards the beginning of the term, it is well settled in law that the policy takes effect on the day when it is applied for and dated. Any act of the company which signifies that it accepts the risk operates to complete the contract, and the actual delivery of the policy to the applicant is relatively unimportant. An excellent illustration of this principle is afforded in the case of the Hartford Steam Boiler Insurance Company vs. Lasher Stocking |