paying only that portion of the loss represented by their pro rata share of all the insurance on the property, even though taken out subsequently to the issuance of the mortgagee clause and for the sole benefit of the owner.

The court argued that in this particular case the "full contribution clause" in the mortgagee clause was inconsistent with the other section in the same clause which protects the mortgagee against the acts of the owner, and that this last agreement must take precedence over the provision for contribution. Since the last policies were taken out by the owner for his own benefit and without the knowledge of the mortgagee, the court argued that “the act of obtaining this additional insurance was the act of the owner, and it was unknown to the mortgagee, and, of course, not consented to by him. The additional insurance could by no possibility benefit him, as it was not upon any interest of his in the property. He could not, therefore, resort to any of these additional policies for his indemnity. It is not a case of contribution in any sense, but simply one on the insurer's theory of the diminution of their liability, caused by the act of the owner, and unknown, and with no possible corresponding benefits, to the mortgagee." While legal textbook writers recognize the force of this reasoning, it should be stated that in other cases the courts have sought to enforce this important provision of the policy as regards subsequent insurance, by declaring that the section of the mortgagee clause protecting the mortgagee against the acts of the owner, is qualified by the agreement relating to contribution. The decisions mentioned under this section make it clear that the insurer's interest is better protected by the full contribution clause; likewise, that the non-contribution clause is better designed to afford full protection to the mortgagee.

CHAPTER V

TYPES OF UNDERWRITERS

Classification of Insurers.-The fire and marine insurance business of the United States is transacted by four main types of insurers. Named in the order of their importance they are stock companies, mutual companies or associations, self-insurers, and Lloyd's organizations. Concerning mutual companies and associations a further classification may be made, viz., local assessment mutuals, deposit premium companies, ordinary premium mutuals, non-assessable mutuals, and ship owner's mutuals or "clubs." Lloyd's organizations may also be classified into Lloyd's of London and Lloyd's Associations.

Stock Companies. By far the largest share of American fire and marine insurance is transacted by this type of company. As a rule, these companies operate over a widely extended territory, and of necessity require a large and intricate agency and home office organization. They insure all types of properties, along either the fire or marine line, as the case may be. A widely distributed business is desirable to make the loss ratio from year to year as uniform as possible, and for this reason most stock companies extend their efforts into any territory which offers a profitable business.

The distinguishing feature of stock companies is that they are owned and controlled by stockholders and are operated to yield profit to the owners. Liability is assumed by the company in its corporate capacity; a definite premium is charged and the consequences must be borne by the company alone, should losses exceed the

premium income. Owing to the hazardous nature of fire and marine insurance, it is only natural that there should have been an overwhelming tendency on the part of the insuring public to place reliance in corporate underwriting. Through the accumulation of large assets, stock companies can offer to the public a condition of financial strength far in excess of that which can be attained by individual underwriters. Just as is the case with banks and trust companies, the great stock in trade of stock insurance companies is a large surplus over and above all liabilities. The assets of the company must, of course, equal the unearned premium liability. But over and above this item are the "capital stock" and the "surplus," the two together constituting a fund available to policyholders in case of extraordinary losses, and commonly called the "surplus to policyholders." The capital and surplus items will at times be made extraordinarily large by stock companies in order to inspire confidence in their unquestioned safety. Other things being equal, there is a natural disposition for the insured to select a company which is financially the strongest. Funds comprising capital stock and surplus are not idle, of course, but are invested in interest or divided bearing securities, and the income account of many of the companies thus shows a large investment return in addition to their underwriting profit."

Competition has caused stock companies to exert every effort to improve their financial standing. Policyholders have the further advantage that such companies are regulated very strictly by the various states. They also have easy access to the annual financial statements which all companies must file for publication with the insurance

1 See chapter on "The Reserve."

For a general outline of the main headings of an insurance company's financial report, see page 221.

departments of the states in which they transact business, and are thus enabled to judge for themselves. It is also asserted that the self-interest of the stockholders, since their own investment is at stake, is a guarantee that the company will be wisely and successfully managed. Moreover, it is urged that a good stock company leaves nothing uncertain, the policyholders knowing exactly what their insurance will cost, since everything is guaranteed.

Local Assessment Mutuals.-Under this plan insurance is furnished on the payment of a cash premium, with the understanding that in case losses and expenses exceed the income the balance may be collected through assessments levied upon the members. The best examples of this type are the so-called "local mutuals"-"county," "town," or "farmers' mutuals"-of which there are fully 2,000 in the United States, with total insurance in force of between five and six billion dollars. Companies of this kind are found in all except about six states. As reported by the United States Department of Agriculture, "in some states of the middle West fully three-fourths of all insurable farm property is now insured in the farmers own companies." "

Assessment mutuals operate principally upon two plans. Some charge only a small cash premium intended to meet expenses and small losses and require policyholders to give their premium notes on which payment is demanded should losses and expenses exceed the cash premiums. Others follow a plan of not requiring premium notes, but of merely charging a cash premium and levying assessments if necessary. In both groups the liability of the members is usually fixed by the laws of the state or by the charter and by-laws of the company.

'V. N. Valgren: "Organization and Management of a Farmers' Mutual Fire Insurance Company," United States Department of Agriculture. Bulletin, No. 530. Washington, 1917.

In most instances, local mutuals are organized by a group of farmers or by property owners in villages and small cities to secure the lowest possible rates. The business is begun by issuing policies to the original members. After the officers have been elected, and the organization perfected, the business is usually entrusted to the care of a secretary, who in many instances, if the company is small, may also pursue some other vocation, such as law, banking, or storekeeping. In this way the expense item is reduced to a minimum. The valuation of the property to be insured, and the desirability of the applications is usually left to the decision of the board of directors or an executive committee.

Both the merits and demerits of local mutuals are found in the fact that they operate in restricted districts. Because of their local nature they are able to eliminate much of the moral hazard so frequently found in fire insurance. If the company is small, most of the members are acquainted with each other. It is easier therefore to avoid overvaluation, and it becomes exceedingly difficult for a dishonest man to obtain insurance. Moreover, the insured usually does not bring the same loose moral code to bear on his actions when dealing with his neighbors and friends, as he does when dealing with an unknown corporation having headquarters in a distant locality.

But the writing of insurance in a restricted territory also constitutes an element of danger in that it loses sight of the inevitable law of average in insurance. So long as the fire loss record of the locality is sufficiently low or uniform, the mutuals may prosper, but upon the advent of several fires at about the same time they may break down. The number of mutuals that have gone insolvent is an exceedingly large one, and the cause in probably a majority of cases has been an unexpected series of large fires. The system of assessments provided