BiffiBifli Cornell University Law Library. % THE GIFT OF Jlc:^.^^^.^. Date„;&.<:?r^..J'....^.s5. Insurance, 3 1924 019 288 889 The original of tliis book is in tine Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924019288889 Modern Business A SERIES OF TEXTS PREPARED AS PART OF THE MODERN BUSINESS COURSE AND SERVICE OF THE ALEXANDER HAMILTON INSTITUTE , r "> ALEXANDER HAMILTON mSTTTDTE NEW YORK Modern Business Editor'ittr-Chief JOSEPH FRENCH JOHNSON Dean, New York University School of Commerce, Accounts and Finance Associate Editors: PETER P. WAHLSTAD, ROLAND P. FALKNER Titles Authors Business and the Man Joseph French Johnson EcoNo^Hcs OF Business. {'Y^^lluMfr'' Organization and Control ' Charles W.Gerstenbergf^ Factory and Office Administration . . Lee Galloway Marketing Methods Ralph Starr Butler Advertising Principles Herbert F. De Bower Salesmanship and Sales Management . . John G. Jones Credit and the Credit Man ..... Peter P. Wahlstad Accounting Principles Thomas W. Mitchell Cost Finding Dexter S. Kimball 'Corporation Finance William H. Walker Business Correspondence Harrison McJohnston Advertising Campaigns Mac Martin Railway Traffic Edwin J. Clapp Foreign Trade and Shipping Erich W. Zimmermann Banking Major B. Foster Domestic and Foreign Exchange. . . . E.L. Stewart Patterson Insurance and RkAl Estate -fS?^*"^,^* Hardy (.Walter Lindner Merchandising John B. Swiimey The Exchanges and Speculation .... Albert W. Atwood Accounting Practice and Auditing . . . John T. Madden Financial and Business Statements . . . Leo Greendlihger Investment Edward D. Jones Business and the Government .... Jeremiah W. Jenks INSURANCE BY EDWARD Rf HARDY, Ph.B. Lecturer on Fire Insurance, NeiB York University School of Commerce, Accounts and Finance; Assist- ant Manager, New Tork Fire Insur- ance Exchange WITH THE COLLABORATION OF FRED W. FIELD Editor of the Monetary Times, Canada REAL ESTATE BY WALTER LINDNER, LL.R General Solicitor of the Title Guarantee and Trust Company of New York WITH THE COLLABORATION OF ALFRED BICKNELL Member of the Toronto Bar MODERN BUSINESS VOLUME 18 ALEXANDER HAMILTON INSTITUTE NEW YORK COFYBIOHT, 1918, BT ALEXANDER HAMILTON INSTITUTE COPYRIGHT m OBEAT BBITAIX, 1918, BY ALEXANDER HAMILTON INSTITUTE The title and contents of this volume^ as well as the business firrowins: out of it, aie further protected by laws re- latine to trade marks and unfair trade. All rifirhts reserved, includiner transla- tion into Scandinavian. Registered trade mark, Reg. V. S. Pat. Off., Marca Registrada, M. de F. Made in U.S. A. ', ■' r>\ ;; ■' ■ \ \ ■O i^Si'ii* \ \ I A, 1 \ \ .i-/ A,^/ ':'■}■' ix;- PREFACE This volume should prove of value to all business men, most of whom are, or ^ill be, owners of real property. To pfofession^l dealersst in fire insurance and real estate it should also prove valuable. The authors are specialists who have had experience as university teachers, and have learned how to present the essential principles and details of the businesses they describe, in language that the layman can under- stand. The subjects ot Real Estate and Insurance are so closely related that it has seemed best to com- bine their treatment in one volume. Mr. Lindner desires to acknowledge his indebted- ness to Mr. Philip A. Benson for his valuable help in the revision of the Text on Real Estate. The Editor. TABLE OF CONTENTS PART I CHAPTER I Marine insurance SECTION PAGE 1. Place and Importance S 2. Beginning of Marine Insurance 4 S. Marine Insurance in the United States ... 5 4. Lloyd's 6 5. Policy of Insurance . , 7 6. Definitions of Commercial Terms t 7. Insurable Interest 8 8. Information Secured for the Marine Underwriters 9 9. Captain's Register and Other Functions . . . ' 10 10. Risks Assumed 11 11. War Risks 12 12. Implied Warranties 14 13. What Is Insured 15 14. Valuation of Property Loss 15 15. Risks Insured Against 16 16. Losses , 17 17. General Average 18 18. Particular Average 19 19. Salvage 20 20. How the Conditions in the Policy Are Changed . 20 21. Kinds of Policies 21 22. Rates 22 23. Settlement of Losses 23 24. Rates on the St. Lawrence Route 23 viii INSURANCE CHAPTER II FIRE INSURANCE IN GENERAL SECTION P-*Q2 1. Purpose of Fire Insurance 27 2. Origin of Fire Insurance 27 3. Nicholas Barbon dnd Richard Povey .... 27 4. Stock Companies 28 6. Early American Companies 28 6. Early Characteristics 29 7. Insurable Interest ......... 30 8. Insurable Interest Appears in Many Forms . . 30 9. Insurance Methods . . . . ' 31 10. Extent of Insurance '32 11. Working Organization 33 12. Local Agents Si 13. The Broker 34) 14. How the Business Is Transacted 34 15. Application 36 16. Inspection 37 17. Details of Inspection 38 18. Canadian Inspection System 39 f CHAPTER III FIRE PREMIUM RATE 1. Problem of the Rate . . .' 41 2. Class Rating 42 3. First Tariff or Schedule 43 4. Rating in the United States 43 5. Minimum Rates . . . ' 43 6. Specific Rates 44 7. Schedule Rating . 44 8. Universal Mercantile Schedule 45 ' 9. Rate of a Non-Fireproof Brick Building ... 47 10. Analytical Schedule 49 CONTENTS ix SKCTHMT PAGE 11. Rate-Matdng Ctmtrol in Canada 51 12. Fire Protection 53 IS. Rating Organizations 55 CHAPTER IV FIRE INSURANCE POLICY 1. Insurance Policy 57 2. Restrictions 59 3. Non-Liability 60 4. Non-Insnrable Items 61 5. Specific Items 61 6. Cancellation 62 7. Mortgages 63 8. RemoTal Cover 63 9. Procedure in Loss Settlements 64 10. Forms 65 11. Clauses 68 12. Average Clause 68 IS, Premium 70 14. Loss Settlement 70 15. Underwriters' Associations 71 16. Unlicensed Insurance in Canada 7S CHAPTER V LIFE INSURANCE 1. General Features of Life Insurance .... 77 2. Early Forms of Insurance 77 8. Beginnings in England 79 4. In the United States 80 5. Insurable Interest 82 6. Beneficiary 83 7. The Beneficiary Under Canadian Law .... 84 8. Statistics . '. 88 9. Life Insurance in Canada 89 X INSURANCE SECTIOir PAGE 10/ Procedure 91 11. Application .91 12. Form of Application 93 13. Medical Examination 94 14. Use of Intoxicating Liquors 95 15. Medical Examiner's Report 97 16. Is Medical Examination Necessary.? .... 97 CHAPTER VI MORTALITY AND INVESTMENT EXPERIENCE 1. Factors in the Premium • . 99 2. Mortality Tables 99 3. What Is a Mortality Table.? 100 4. American Experience Table of Mortality . . . 100 5. Illustrations 101 6. How the Table Is Used 102 7. Interest Return 104 8. -Policy Conditions 105 9. Suicide 106 10. Premiums 106 11. Dividend Distribution 107 12. Assignment 107 13. Reinstatement 107 14. Loans 108 15. Policy Loans in Canada 110 16. Manner of Settlement 112 CHAPTER VII BUSINESS, METHODS OF LIFE INSURANCE 1. Loading . 114 2. Settlement of Claims : . . . . . . . H* 3. Life Insurance in Its Coinmercial Aspect . . . 115 4. Group Insurance 117 ( CONTENTS XI ESCnOX PAGE 5. Assessment Insurance 118 6. United Workmen 118 7. Mortality Record . 120 8. Fraternal Insurance 121 9. Industrial Life Insurance 121 10. Industrial Life Insurance in the United States . 122 11. Industrial Premiums 12S CHAPTER Vm CASUALTY INSURANCE 1. Origin of Casualty Insurance 125 2. Extent of Casualty Insurance 126 S. Scope of Casualty Insurance '. 128 4. Personal Accident Insurance 129 5. Accident Insurance in the United States , . 129 6. What Is an Accident? ISO 7. Scope and Development of Personal Accident In- surance ...... 1S2 8. Premium 133 9. Automobile Insurance 135 10. Plate Glass Insurance 136 CHAPTER IX CASUALTY INSURANCE (ContiMiMl) 1. Steam BoOer and Fly-Wheel Insurance . 139 2. Hail Insurance 141 3. Central Organization 142 4. Hail Insurance in Canada 143 5. Burglary Insurance 147 6. Other Forms 148 7. Robbery Insurance 149 8. Title Insurance 150 9. Fidelity Insurance 151 xii INSURANCE SECTION PA.as 10. Three Classes of Fidelity Bonds 152 11. Surety Insurance 154 12. Agreements in the Bond 155 CHAPTER X EMPLOYERS' LIABILITY INSURANCE AND WORKMEN'S COMPENSATION 1. Rise of New Phases of Insurance 157 2. Employers' Liability Insurance 157 3. Employers' Liability Laws in United States . . 158 4. Kinds of ^Liability Insurance 158 5. Premium 160 6. Reserves 161 7. I Workmen's Compensation 162 8. Workmen's Compensation Laws in the United States 163 9. State Laws 163 ip. Main Features of Law 165 11. Compensation Allowed 166 12. Prevention Methods 168 IS. Workmen's Compensation Insurance in Canada . 169 14. Health Insurance 173 PART n REAL ESTATE CHAPTER I THE REAL ESTATE BUSINESS AND ITS INTERESTS 1. Real Estate a Business, Not a Profession . . . 179 2. Ethics of the Business . . 179 8. Divisions of the Business, 18X 4. Investment in Real Estate 181 6. Operation of Real Estate I8I CONTENTS xiii SECTIOK PAQE 6. Real Estate Agency 183 7. Property, Real Property and Real Estate Defined 184) 8. Estates and Chattel Interests Defined .... 186 9. Estates in Fee Simple 186 10. Fee upon Condition and Fee Determinable . . 187 11. Life Estates and Remainders 188 12. Dower ^ 189 13. Estates by Courtesy .189 14. Joint Tenants and Tenants in Common . . .190 15. Chattel Interests 191 16. Limitations upon Ownership of Land .... 191 17. Police Power of the State 191 18. Original aiid Ultimate Ownership of the State . . 192 19. Right of Eminent Domain 192 20. Power of Taxation 193 CHAPTER n LIENS 1. Liens, General and Specific 194 2. Lien of Judgment 194 3. How Lien of Judgment Is Enforced .... 195 4. How Lien of Judgment Is Discharged .... 197 5. Mechanic's Lien 197 6. Enforcement of Mechanic's Lien 198 7. How a Mechanic's Lien Is Discharged .... 200 8. Conditional Bill of Sale 201 9. Lien of Decedent's Debts 202 10. Transfer Tax 203 11. Franchise, Tai of Corporation 203 CrfAPTER III TAXES AND ASSESSMENTS 1. Lien of Taxes on Property 205 2. Various State and County Levies 205 xiv INSURANCE SEOTION PAQB 3. Determination of Tax Rate 206 4. Assessed Valuations 207 6. Reduction of Assessed Valuation 208 6. Taxes in New York City 209 7. Definition of Assessments or Local Improvement Taxes 211 8. Assessments Laid by Authority of the Courts . .211 9. Assessments Levied by a Board of Assessors . . 212 10. When an Assessment Becomes a Lien . . . 213 11. Water Rates ' 213 12. Enforcement of Lien of Taxes 214 CHAPTER IV CONTRACTS Tf. Real Estate Contracts Should Be in Writing . 216 2. Divisions of the Contract 219 3. Date and Statement of Parties 219 4. What the i'urchaser Should Know About the Seller 220 5. What the Seller Should Know About the Purchaser 220 6. Agreement 221 7. Description of the Most Difficult Part of the Con- tract • • • 222 8. Vacant Lot Description 222 9. Description of Improved Property 223 10. Property Subject to Tenancies 226 11. Restrictions on Property " . 226 12. Easements 227 13. Facts Shown by Survey 228 14. Terms of the Financial Settlement . . . . 229 15. Earnest Money . . . . ^ 229 16. Cash Payment on Delivery of Deed .... 230 17. Property Taken Subject to Mortgage .... 230 18. Assuming the Mortgage ; . 232 19. Bond and Mortgage as Part of Purchase Money CONTENTS XV SECTION PAGE 20. Provisions Regarding Purchase-Money Mortgages 234) 21. When the Deed Is to Be Delivered '234! 22. Appointments to Be Made at Closing ... . 235 23. Title to Land in Street 235 24. Water-Meter Charges 236 25. Form of Deed Stipulated in Contract of Sale . . 236 26. Personal Property Included in Sale .... 236 27. Earnest Money a Lien 237 28. Risk of Damage J)y Fire 237 29. Contract Binding on Heirs or Executors . . . 238 30. Signature, Seal, Witness and Acknowledgment . 238 CHAPTER V CONTRACTS— EXCHANGES AND Al/CTION SALES 1. Exchange Contracts 240 2. Description of the Properties 243 3. Financial Statement 243 4. Non-Performance of Contracts , 244 5. Real Estate Auction Sales 246 6. Involuntary Sales '. 246 7. Terms of the Sale .247 8. Voluntary Sales by Auction 250 9. Protected Voluntary Sales 250 10. Terms of Sale in Voluntary Auctions .... 251 11. Successful Auction Sales 251 CHAPTER VI DEEDS 1. Forms of Deeds in General Use 253 2. Indenture, Date and Parties 254 3. Consideration 255 4. Granting Clause 256 5. Description of Property Transferred .... 257 xvi INSURANCE SECTION PAGS 6. Uncertain, Ambiguous and Inconsistent Descrip- tions .' 260 7. Appurtenances . . ., 261 8. Habendum . . . -. 261 9. Conveyance Subject to Incumbrance .... 262 10. Testimony Clause, Signature and Seal .... 262 11. Execution by Corporation 263 12. Acknowledgments 263 13. Bargain and Sale Deed with Covenants . 264 14. Quit-Claim Deed , . . . . . . . .265 15. Full-Covenant-and-Warranty Deed .... 265 16. Explanation of the Five Covenants .... 266 17. Covenants Divided into Two Classes .... 267 18. Breach of Covenants 267 19. Covenants Do not Guarantee Marketability . . 269 CHAPTER VII BONDS AND MORTGAGES 1. Use of the Bond and Mortgage 271 2. Form of Bond 27g 3. Provisions of the Bond 273 4. Default 'in the Payment of Interest and Taxes . . 275 6. Execution and Enforcement of the Bond . . 276 6. Form of Mortgage . 276 7. Parties to the Mortgage 281 8. Recital of the Obligation 281 9. Mortgaged Premises 282 10. Defeasance jClause 282 11. Property to Be 'Sold as a Whole 283 12. Insurance to Be Maintained 284 13. When the Mortgage Becomes Immediately Payable 285 14. Appoiiptment of a Receiver 286 15. Obligation to Pay Taxes . 288 16. Changes in Tax Laws . . . ' 288 CONTENTS xvH SECTION PAOB 17. Notices 18. Warranty 19. Estoppel 289 20. Special Agreements in Mor4:gages 289 21. Special Forms of Mortgage 290 22. Usury Laws 292 23. Methods of Foreclosing Mortgages .... 293 CHAPTER VIII TRANSFERS AND CLOSINGS OF TITLE AND TITLE INSURANCE 1. Growth of Modern Right of Transferring Titles 296 2. Methods of Transferring Titles 296 3.. Instruments Used in Transferring Titles . . . 297 4. When Title Passes 298 5. Necessity and Advantage of Recording Instru- ments ..... 299 6. Transfers of Real Property by Will . . . .301 7. Examination of Title by Inquiry into Public Records . ' 302 8. Title Insurance 304 9. Policy of Title Insurance 304 10. Exceptions and Limitations Upon Subject Matter of Insurance 305 11. Conditions of the Policy 306 12. Use of Title Policy . '. 307 13. Closing the Title 308 14. Report of Title 308 15. Encumbrances Subject to Which the Purchaser Takes Title 309 16. Encumbrances to Be Removed 310 17. Adjustments Made at Closing . . . . .311 18. Other Payments Made at Closing 313 19. Closing Statement . , .314 XVIII— 2 xviii INSURANCE SECTION PAQB 20. Closing Exchanges, Leaseholds and Loans . . 815 21. Methods of Figuring Interest 316 22. Rejection of Title . 316 23. Necessity for Accurate Survey of the Property 316 24. Encroachments Shown by Survey 317 25. Survey for Building Operations, and Land Develop- ments 318 CHAPTER IX ^ LEASES 1. Landlord and Tenant ,. . .320 2. Definition of ftent 320 3. Term of Lease 320 4. Assignment of Lease 321 5. Leases Created Orally and by Writing .... 6. Monthly Tenancies 7. Tenancy-at-Will 324 8. Tenancy for Years 324 9. Ground Lease 325 10. Termination of Leases 326 11. Dispossess Proceedings ^. . 328 12. Obligations of Landlord and Tenant .... CHAPTER X BROKERAGE 1. Broker and His Duties 2. ' Nature of the Broker's Business 3. Employment of the Broker 336 4. Volunteers not Paid 5. Employment, Implied or by Ratification . 6. Employment to Sell Need not Be in Writing . . 339 7. Earning Commission 339 8. Double Employment 34,3 CONTENTS xix SECTION PAGE 9. Secret Profits S4S 10. Broker's Authority 344 11. Disclosing Information 345 12. Statements Made by Broker 345 13. Termination of Agency ' 347 14. When Commissions Are Due 348 15. Purchaser Sometimes Employer of Broker . . 349 16. Rate of Commission 350 PART I INSURANCE INSURANCE CHAPTER I MARINE INSURANCE 1. Place and importance. — The contract of insur- ance is widely used in the modern business world. Under its terms one party, the insured, pays to a sec- ond party, the insurer, a sum of money in consid- eration of which the insurer agrees to indemnify the insured for any loss that may arise from some con- tingency stated in the contract. The contract is the policy, the sum paid as consideration, the premium. The risks which are covered by insurance are at the present time of the most varied character, and the policies written may assume many forms. The chief divisions of insurance are : Marine Fire - Life Casualty Each has its peculiar characteristics which will en- gage our attention. Marine insurance is the oldest form of insurance known. It is therefore natural that it should have had considerable influence in shap- ing the development of other forms of insurance. 4 INSURANCJE I These facts entitle it to the first place in any consid- eration of insurance as a whole. 2. Beginning of marine insurance. — In the form of bottomry, marine insurance was practised among the earliest commercial nations. A loan on bottomry was a favorite form of investment among the ancients. It united an investment with a risk, and because of the element of risk involved in a sea voyage a higher rate of return was allowed on this form of bond, even in countries where ther^ were laws against usury. A bottomry bond is nothing more or less than a loan secured by the body of the vessel. Its equivalent in real estate is a mortgage on the property. In something like its modern form marine insurance is said to have flourished in the Hanseatic League and among the commercial cities on the Mediterranean Sea. It appears to have been introduced into Eng- land by the Lombards, but with the growth of ship- ping passed later into English hands. The name most distinctly associated with marine in- surance in its earliest days is that of Edward Lloyd. His coffee house in London became the meeting place for business men who speciahzed in marine matters. At this coffee house sales of vessels were conducted regularly and the business of insurance was carried on. So strong had the insur3.nce business become that it continued after Lloyd's death, and resulted in the formation of the famous institution now known as Lloyd's of London. In the year 1720 two companies were chartered by MARINE INSURANCE S the government of England for the purpose of con- ducting the business of marine insvirance. In consid- eration of certain pajmients made for the charters, the right to transact such business was denied to other companies. These companies are still in existence, > altho they have of course long since lost any monopo- Ustic privileges which they originally had, and must compete with other companies. When the question of granting charters to these companies was under con- sideration the members of Lloyd's opposed it vigor- ously, feeling that it would jeopardize, the business in which they were engaged. No such result followed. The two companies that were chartered had permis- sion in their charter to do business in other forms of insurance, and they engaged largely in other branches of insurance. In fact, they did only a small part of the marine insurance business. The bulk of it re- mained, as heretofore, in the hands of the members of Lloyd's, and in the century that elapsed befoi^ the abolition ,of monopoly privileges and the subsequent estabhshment of other companies to do a marine busi- ness in England, Lloyd's built up its great institution, which has remained unassailable down to the present time. 3. Marine insurance in the United States. — In the middle of the eighteenth century the Insurance Ex- change was established in New York City. It was an institution similar to Lloyd's, when underwriting was carried on by individuals. By the year 1825, however, this form of underwriting had practically 6 INSURANCE disappeared. In the meantime companies had been formed that rapidly assmned control of the business which remains today in the hands of corporations. The development and purposes of marine insurance can be best understood if we give an account of how business is done at Lloyd's. 4. Lloyd's.— For a long time Lloyd's was an unin- corporated society. In 1871 it was incorporated by an act of Parliament. The act of incorporation de- fines the objects of the organization as follows: (a) The carrying on of the business of marine in- surance by members of the Society. (b) The protection of the interests of members of the Society in respect to shipping, cargoes and freights. (c) The collection, publication and diffusion of intelligence and information with respect to shipping. As a corporation Lloj'^d's does not transact the busi- ness of marine or any othej kind of insurance. It performs for its members the functions which the vari- ous stock and other exchanges do for their members. It affords certain facilities for the transaction of busi- ness between the members, establishes rules for their guidance, and acts as a general source of information. Any person who wishes to become a member of Lloyd's and engage in marine insurance must deposit £5,000 "caution money," as it is termed. These de- posits amount to $17,000,000 at the present time. Marine insurance is the leading business that is trans- acted by the members, and it is the business over MARINE INSURANCE 7 which Lloyd's probably exercises the greatest super- vision; the members, however, are permitted to engage in other forms of insurance. It is stated that almost any kind of a risk may be insured at Lloyd's. 5. Policy of insurance. — The earliest known policy written in the English language dates from 1613; we owe its preservation to a lawsuit. This policy shows that in substance and in form the principles of the contract had been worked out very well at that time. There have been alterations in the policy since, but they are comparatively slight. 6. Definitions of commercial terms. — ^When the owner of a ship wishes to employ it in transporting freight for hire, the contract he makes is called a "contract of affreightment." "Freight" is the money earned by means of this contract. Now the ship- owner may not carry the goods himself — ^that is, take charge of the ship during the voyage — ^but he may hire the ship out to somebody else. The person who hires the ship is called the "charterer," and the con- tract which is entered into between the owner of the ship and the charterer is called the "charter party." The "biU of lading" is the form of contract used when goods which do not require the entire vessel are shipped generally for different persons. It is the re- ceipt of the shipowner and the contract of carriage for the goods placed on his ship. This bill of lading can be indorsed ; the indorsement transfers the ownership of the goods to the indorsee. " Demvurage" is a payment made by the consignee 8 INSURANCE to the transportation company, for delay in unload- ing the vessel. It is customary for a company to permit the person to whom goods are consigned a cer- tain number of days in which to unload after the ves- sel's arrival is reported to him. Should the unload- ing be delayed beyond these days the consignee pays the company for each twenty-foiu: hours' delay, the amount being specified in the contract. A "bottomry bond" is a bond given when money is borrowed upon the vessel. This represents one of the oldest forms of investment known. Correspond- ing to the bottomry bond, which in a sense may be said to represent a mortgage on real estate, is the "re- spondentia bond." This covers a loan on the cargo arjd corresponds to a chattel mortgage on persona;! property. "Salvage" designates everything that is saved. The loss may, of coin-se, be total when a vessel is lost. But such a case is very rare. Even in the famous case of the Titanic, which sank in mid-oce^n there was a slight salvage in the form of lifeboats and some other small bits of property that were picked up. 7. Insurable interest.— The insurer must have some pecuniary interest in the property which will involve him in actual loss in case it is damaged or destroyed^ Otherwise he would merely wager on the outcome. In earlier days an insurable interest was not required. However, the practice was outlawed thru the pas- MARINE INSURANCE 9 sage of an act affecting subjects of Great Britain, as early as 1746. 8. Information secured for the marine under- writers. — In any problem which involves probabilities both parties are interested in eliminating as far as pos- sible all unknown quantities, so as to i-educe the pos- sible loss to the smallest terms. The underwriter seeks to limit his loss, and the insured seeks to lessen his pajnnent. The third function of Lloyd's, which is set forth as "the collection, publication and diffusion of intelli- gence and information with respect to shipping," is therefore of the utmost importance in the develop- ment of marine insurance. Edward Lloyd, in the very beginning of his coffee- house days, apparently appreciated the value of se- curing the earliest and most reliable information about marine events. He established a paper which ran for about one year, and was discontinued in 1696 ow- ing to a disagreement with the government. He re- established it in 1726 — ^thirty years later. With the exception of the London Gazette, it is the oldest newspaper in Europe. The original name was Lloyd's News, but it is now known as Lloyd's List. The information which has been received at Lloyd's up to midnight is published in this paper, which is issued every afternoon. It records not only every disaster or casualty that occurs, but also every movement from port to port of each vessel that is 10 ♦ INSURANCE § * noted at any station or by a, passing ship. Every year many thousands of telegrams are forwarded to Lloyd's from aU parts of the world announcing the movement of vessels. ' This system of intelligence, was organized with the beginning of Lloyd's, and it is needless to point out that it is absolutely invaluable to the underwriter. Lloyd's is quite proud of the fact that as early as 1739 its information service was so complete that they were able to report to the Admiralty the capture of Porto Bello by Admiral Vernon before the government had received the news from any official source. Signal , stations for the perfection of this service have been established all over the world, and from these stations not only the entrance and departure of vessels is reported, but probably one hundred thou- sand movements are recorded during a year. The es- timate is that not one vessel in ten reaches a port with- out having been reported at Lloyd's at some period in her passage. i 9. Captain's register and other functions. — The records of Lloyd's comprise a complete biography of all seamen who attain command of ships. Naturally fliis includes a great number who never attain to a cap- tain's degree, but who have received their certificates for lesser positions, and who may be promoted in time to captains' positions. The record of the captain who commands a vessel is as of much value to the marine underwriter as knowl- edge of the men who propose to borrow money from MARINE INSURANCE 11 a bank is to the banker. The sketch of the captain's life is very complete, and gives the underwriter all the information which he needs for his business. Lloyd's maintains an office of inquiry. Relatives of seamen, friends of seamen, or those interested in the voyage in any way may obtain from Lloyd's any information that they have in regard to the movement of the vessel. The inspection of vessels from, the time their con- struction begins tiU the end of their life was formerly a survey which Lloyd's conducted itself. This haS been taken over by a separate corporation, however, and is conducted by them today. Rating a vessel is a factor of prime importance to the imderwriter. On being asked to insure a specified amount on a certain vessel he may turn to this register, ascertain when the vessel was buUt, the material of which constructed, and what her record has been since that time. The rules for construction are exceedingly rigid, and any vessel attaining the highest rating which is granted by the bureau intrusted with this work has complied with very strict specifications. 10. Risks assumed. — The marine policy describes in quaint phrases as follows the risks against which indemnity is offered: Touching the adventures and perils which the said com- pany is contented to bear, and take upon itself in this voy- age, 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 detainm^ts of all kings, princes or people of what nation, condition or 12 INSURANCE 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. As if the company feared lest otherwise their enu- meration of risks might not be complete, they add, the all inclusive "and all other perils, losses and misfor- tunes." To comprehend the reason for the broad scope of the marine policy one must go back to its origin. Be- fore insurance became a separate business, the mer- chants had been in the habit of insuring one another in a cooperative manner. The risks against which they insured one another had reached the large pro- portions shown in the quotation from the policy. It followed, therefore, that if individuals were to en-' gage in the business of insurance, and so relieve the merchant of that part of the risk of his adventiire, they must furnish the merchant with the same pro- tection against the large number of risks which had formerly been furnished him thru cooperation with his fellow-merchants. It would not have been pos- sible to establish the business of marine insvu-ance so successfully if it had failed to give the very ample pro- tection demanded by the necessities of commerce in the early days. 11. War risks. — Prior to the outbreak of war in 1914 the world had been so long on a peace basis that by means of special agreements added to the policy, the risk of war had been eliminated and insurance MARINE INSURANCE 13 rates much reduced. When the war came there was no experience to guide the marine underwriter in fix- ing a proper charge to cover the war risk. Since the development of the modern navies there had been no war between two great maritime powers, with large merchant interests on the sea as well as large sea forces to protect their own commerce and prey on that of the other nations. There were but two solutions for such a problem. One was to do what one nation did — discontinue its merchant service entirely, calling all vessels in to the nearest ports. The other was f^r the government to come' forward and assimie the war risk. Plans, for doing the latter had been worked out in Great Britain some time previous to the war, and they were put into execution almost immediately after the war broke out. The arrangement involves cooperation between the shipowner and the government. No group of private individuals could afford to run the risk that might be involved in the destruction of ships by the navy of a foreign power. This element or risk must be borne by a larger body than the underwriters represented, and the nation itself was the only body that was large enough to bear it without undue strain. In the United States the government established a war risk bureau which assumed the war risk hazard for American ships. The bureau has been very suc- cessfully conducted, and the experience gained would be useful to the nation in the event of any future war. Canadian marine underwriters have had a large vol- XVIII— 3 14 INSURANCE ume of business, especially during the course of the European war. The congestion in shipping ports has caused vmderwriters considerable anxiety at ports of both shijpment and discharge. This extra hazard would not be likely to disappear in war times and consideration in rate-making will be given to this factor. Owing to the demand for freight in conse- quence of expansion of trade and shortage of ships caused by wastage of, war, shipowners are not able to give their vessels the overhauling they necessarily re- quire ; consequently, underwriters have in war periods to pay claims for damage which under ordinary cir- cumstances they would not have to meet. 12. Implied laarranties. — There is a tacit agree- ment between insurer and insured on four points. They do not appear in the policy, but they are as much a part of it as if they did. These are the fol- lowing: (a) The element of good faith. This was set forth in the insurance laws of Amsterdam in 1598, in the following language: As contracts of insurance are contracts of good faith, wherein no fraud or deceit ought to take place, in case it be found that the insured or insurers, captains, shippers, pilots, or others, use fraud, deceit, or craft, they shall not only forfeit their payments by their deceit and craft, but shall also be liable to the loss and damage occasioned thereby, and be corporally punished, as a terror and example to others; and, if it be found that they have used notorious malversa- tion and great fraud, they shall be punished with death, even as pirates and robbers. MARINE INSURANCE 15 (b) The seaworthiness of the ship. (c) The supposition that the voyage will be prose- cuted without unnecessary delay from port to port. (d) The understanding that the business engaged in shall be a legal business and shall conform to all the requirements of law as respects credentials or docu- ments. 13. What is insured. — The policy may cover the ves- sel itself, sometimes described as "lost or not lost," the cargo, or the freight, the latter meaning ^he sum earned for transporting the cargo from one port to another. The phrase "lost or not lost" may strike one as pe- culiar, since it implies that insurance may be taken out on property which is not in existence when the con- tract is made. This may indeed be the fact. There are many cases in which insurance is desired on prop- erty when it is at sea and, whether it exists or not, is imknown to the iinderwriter or to the parties who seek insurance. This provision, therefore, is as old as the business of marine insurance. In other forms of insurance there is nothing analogous to this peculiar provision of the marine policy. 14. Valuation of property loss.— The policy may be written in the form known as a "valued policy," which fixes the amotmt to be paid in case the property is lost. The amount is not subject to a reconsidera- tion unless it is evident that either there has been a mis- take, or that so outrageous a valuation has been given as to show fraud upon the face of the transaction. 16 INSURANCE If the value is not mentioned, it must be proved. The following information is a guide in this matter: (a) Goods or merchandise — the prime cost (as it is called), to which the shipping expense and the cost of insurance is added, (b) The ship — ^the value at the commencement of the voyage, to which there may be added the outfit, the stores and provisions necessary for the voyage, ad- vances which are made to the crew for wages, and the cost of insurance. (c) The freight — ^the gross amount of freight due the ship on her arrival at the designated port, plus the cost of insurance. (d) Any other objects of insurance not embraced in these three divisions, at their value to the insured at the beginning of the voyage, to which there may be added the cost of insurance. The specific provision for adding the cost of insur- ance is peculiar to marine insurance. 15. Risks insured agcdnst. — The following list classifies the risks insured against : ' , (a) Those embraced in the phrase "perils, of the , sea," and fire. (b) Those which result from th6 actions of those in charge of the voyage, as the master or the crew. (c) Those which arise from enemies from without, as men-of-war. (d) "All other perils." The first group embraces losses due to winds, waves, colUsion and fire. Such misfortunes arise un- MARINE INSURANCE 17 der unusual circumstances, and the policy does not under any circiunstances cover wear and tear due to the ordinary prosecution of the business. The second group includes jettison and barratry. Jettison relates to circumstances under which portions of the cargo, or all of it for that matter, may be thrown overboard on account of a storm; while bar- ratry has been thus defined: Every species of fraud and knavery committed by the mas- ter with the intention of benefiting himself at th^ expense of the owners, and every wilful act on his part of known illegality, gross malversation, or criminal negligence, by whatever motive induced, whereby the owners or the char- terers of the ship are damnified. An illustration of this form of loss is the scuttling of the ship by the master or crew, or some other wil- ful infliction of loss. 16. Losses. — In marine insurance losses fall yito four groups : \ 1. Total loss 2. General average 3. Particular average 4. Salvage Total losses may be actual or constructive. Actual total loss includes cases in which there is a complete destruction of the property. This may be illustrated by the case of a ship's sailing on a voyage and never being heard of again. ■ A constructive total loss occxirs when the ship is actually in existence and her position known, but the 18 INSURANCE cost of floating her may be so large as to absorb and more than absorb the value of the ship. This may happen when a vessel runs ashore during an extremely high tide and it is impossible to float her without an expenditure greater than the value of the vessel. The actual physical injury to the vessel in such a case may be very slight, but from a marine insiu-ance point of view the vessel is as much of a total loss as if she were never heard from again after sailing. When there is a constructive total loss, the insured may give to the underwriter notice of abandonment which turns the vessel over to the underwriters and calls on thein for full payment of the loss. There is a constructive total los's whenever the cost of restoring the vessel, plus the cost of repairing the damages, will exceed her value when she is restored. Practically the same rule holds in regard to the cargo and the freight. If the cost of saving either of these is greater than their value, there is a constructive total loss, and the insured has the same right to indem- nity as if he had an actual total loss. 17. General average. — In marine insurance the damage that may be sustained by the ship, cargo or freight is subject to the application of the principle of average* This principle is not peculiar to marine insurance ; it is a method in vogue for distributing the losses of a venture among the different parties inter- ested, whether there is insurance or not. It is cen- turies older than insurance. If, for example, a portion of the cargo has to be MARINE INSURANCE 19 sacrificed to save the ship, the loss does not fall exclu- sively upon the owTier of that part of the cargo which has been thrown overboard. It is shared in propor- tion to their interest, by aU who have a stake in the success of the voyage — the owners of the remainder of the cargo, the shipowner and, if the ship has been chartered, the charterer. The loss may result from the cutting away of the mast of the vessel or from the sacrifice of some other part. On the Pacific coast of South America, for in- stance, where harbors are scarce, a vessel may put to sea when a gale arises rather than remain near the shore where she is loading or imloading. The storm may arise so suddenly that there is no time to raise the anchor, and the cable may be cut and lost with the anchor. This is a loss under general average, and would be divided among the three interests, just as a more severe loss would be. When marine insurance came into use it took over the principle of average. It assumed that the prop- erty would be insured for its full value, but if it should not be, then the interested party would be liable to contribute toward any loss in addition to the insur- ance. 18. Particular average. — The somewhat contra- dictory terms, particular average, are used to describe a loss which may happen to an individual interfest only when no sacrifice is made for the benefit of all. A vessel may be unfortunate enough to have an anchor and cable washed overboard during a heavy gale. No go INSURANCE sacrifice has been made, and the ship alone is the loser. The accident is a part of the voyage. Again, a shipper may have his cargo stowed in the very bottom part of the vessel, and owing to a leak his portion of the cargo may be damaged, but no dam- age to any other part of the cargo may rqisult. This is a particular and individual loss. In the days be^ fore insurance was known, the individual, in such a case, was obliged to sustain the loss alone ; now, how- ever, he may protect himself by means of insurance. ID. Salvage.— The word "salvage" has two mean- ings. It denotes, on the one hand, a compensation allowed to persons by whose voluntary exertions the vessel, or the cargo or lives on her are protected in case of wreck, capture or other marine adventure. On the other hand, the word also means that which is saved from a wreck or an abandoned vessel. Compensation for saving and the thing which is saved are both called salvage. 20. How the conditions in the policy are changed. — While the body of the policy has not been changed for over a century, the same effect has been reached by means of various clauses that have been added from time to time, or of particular clauses that are intro- duced into a risk. The cost of insurance may be reduced by a clause which states that the property is "free of particular average." In such case the imderwriter is relieved of any liability for damage or partial damage to the property except in the case of total loss and general MARINE INSURANCE 21 average contribution. This condition, ex^pressed by the phrase "free of particular average," is modified in most cases by the words, "unless the vessel be stranded, sunk, burned or in collision." The common rule in regard to all printed policies, that if a written clause or an additional clause is added it shall take precedence, applies in the case of the ma- rine insurance polioy. Thus, the war risk was elim- inated by some such agreement as the following: Warranted by the assured free from claim on account of capture, seizure, detention or destruction by or arising from hostile forces, civil commotions, riots, or by the acts of officers or other persons acting in the name of belligerents, or in pursuing warlike operations whether before or after declaration of war. , Another illustration of the use of a clause for a spe- cific purpose is the following: Warranted by the assured not to be loaded in excess of her registered tonnage with either lead, marble, stone, coal or iron ; and if loading with grain, warranted to be loaded under the inspection of the Surveyor of the Board of Under- writers, and his certificate as to the proper loading and sea- worthiness obtained. 21. Kinds of policies. — ^A time policy is one which insures a vessel for a. specific time, generally for one year. In Great Britain no policy may be issued for a longer period^ but this rule does not apply in the United States, A voyage policy, as its name implies, is one which insures a vessel from one port to another, as from New York to Marseilles. gg INSURANCE A value policy is one which fixes a definite value on the property that is insured, while an open policy is one where the value is to be determined when ascer- tained. ' A floating policy covers vessel or vessels, however propelled, and insures the goods as soon as they are shipped. The details of each shipment, when received by the consignee, are reported to the insurer and the premiums are paid. This last type of policy is espe- cially for the use of importers who order goods a long time in advance of shipment, and who very frequently do not know, before the goods arrive^ that they have been sent forward. 22. Rates. — In every large marine center there is a board of xmderwriters that is charged with the gen- eral oversight of the business. Many of the rates are made by the board in a cooperative manner. In the present disturbed condition of maritime affairs these boards are holding daily sessions because the informa- tion received is frequently of such a nature as to make it advisable to change rates to some part of the world almost daily, if not oftener. Whether or not the rates are followed by all of the companies, they are a valu- able guide to the underwriter. In the summer of 1916 the normal rates from New York City, not including any risk of wa^, were as fol- lows, for a certain day: England and France 15^ Portugal %^ Spam %^o MARINE INSURANCE 23 Italy 3/8% Greece 1 % Norway, Sweden and Denmark — not beyond Malmo y^fo Stockholm %% Archangel from 5 to 10% South Africa via Suez 45^ - China and Japan %% Australia -. %% San Francisco via Panama 45ff West Coast of South America ^^% Buenos Aires 45^ The war schedule, or additional, charges in all- of these cases would be a very substantial addition to these rates, dependent upon the particular conditions that might apply on the day when the policy was taken out. 23. Settlement of losses. — The settlement of losses in marine insurance is a distinct occupation. The per- sons who settle the losses are known as "average ad- justers." The work, which calls for great skill, ranks as a highly developed specialty. 24. Rates on the St. Lawrence route. — Marine in- surance rates on the St. Lawrence route have been the center of controversy for many years. The typical complaint may be judged by that of the president of the Canadian Manufacturers' Association, in 1916, who then alleged unfair treatment by insurance com- panies in the matter of rates. He stated that the fact is capable of ample demonstration that Norwegian shipping, thru the system of mutual marine insur- ance which has been in effect for many years, has cov- 24. INSURANCE ered all risks, including those of British North Amer- ican and St. Lawrence trading, with an average premium rate of slightly less than 5 per cent, and that this has prevailed, not for one year or a few years, but' over a period of more than a decade. This rate is approximately one-half that charged a similar type of shipping when engaged in like traffic, by Lloyd's and British marine underwriters on ves- sels engaged in British North American and St. Law- rence trade. This difference in the cost of marine huU instn-ance is practically a profit in itself, and when there is added to it a very great difference in the cost of cargo insur- ance, as compared with the United States Atlantic ports of Portland, Boston, New York, Philadelphia and Baltimore, these differences run up into large fig- lu-es. A mutual insurance scheme on lines somewhat similar to that of Norway might be l^rought about by a marine insurance board or corporation on which' would be represented the Canadian government, the shipping federation and a representative of the com- bined boards of trade of Halifax, St. John, Montreal, Toronto and Winnipeg. The experience of Norway and other countries that have adopted a mutual sys- tem of insurance and the rates of premivun which ex- perience has shown to be necessary over a period of years, might be taken as a basis for a plan of this character. One essential would be that all steam vessels en- gaged in the coasting or foreign trade, built to Lloyd's MARINE INSURANCE 25 British Corporation or Bureau Veritas classification, be eligible for, and compelled to take out, marine in- surance to the extent of not less than 75 per cent of the vessel's value — the premium being variable, as regards the age, character and equipment of the ship. All Canadian tonnage could be grouped to, say, three or fom* scales of classification for insurance purposes — all government vessels engaged in lighthouse, patrol and such services to be included. On the other h^nd, the marine underwriters say that the business of the Norwegian clubs is done wholly in the Ei^iglish marine insurance market, and that Canadian marine underwriters therefore are not directly interested in the question. The Canadian Manufacturers' Association has had this question be- fore them for a long time ; some years ago a deputa- tion went to England and thrashed the matter out with a committee of iiloyd's, and apparently came back satisfied. Here is the .opinion of Mr. E. W. S. Morren, a marine underwriter interested in the Canadian terri- tory: The majority of Canadian shipping out of the St. Lawrence is made by regular line steamers, on which the rate is low even with the additionals charged for British North American waters. The comparison with rates charged by Norwegian clubs is not a fair one, as they write only Norwegian-owned vessels, and rates are based on the underwriting results of each vessel, and they even charge additional premiums for the use of British North American ports during certain parts of 26 INSURANCE the year. If the Norwegian club rates are so advan- tageous to shipowners, it would be rather interesting to learn why so few Norwegian vessels trade in the St. Law- rence and British North American waters. It would appear that the only Norwegian vessels trading are those in the coastwise coal trade and the West India trade ; only a very few are in the transatlantic trade, and these carry full cargoes of grain. REVIEW Distinguish between particular and general average. Part of a cargo is thrown overboard during a storm to save a ship from foundering. Which rule will apply? A policy of marine insurance is taken out on a s|iip. The vessel is lost thru the negligence of the master and crew. Is the company liable.' A cargo is shipped from Smyrna to New York by an agent of the buyeri The 4ay after sailing, the ship runs aground and the cargo is damaged. The agent knows of this but does not com- municate with the owner. The owner took out insurance. Is the policy good.'' What form of policy is suitahle for an importer ordering goods some time before shipment? A policy of marine insurance is taken out on a fishing vessel on a voyage from Pljmiouth to the Banks and thence back to Plymouth. The vessel runs out of bait and sails to the nearest port, one hundred miles away, for more. On the way a severe storm is encountered and the vessel founders. May or may not the owner recover under his policy? What part of the chapter supports your conclusion? ' In what way may losses which give claim to general average a^se? What is demurrage? Salvage? A charter party? A vessel moored in a harbor' is left aground at ebb tide. She is ah old vessel and receives serious damage. Would the damage be covered by the standard marine policy? CHAPTER II FIRE INSURANCE IN GENERAL 1. Purpose of fire insurance. — Fire insurance in- demnifies one who may sustain a "direct loss" by rea- son of fire. If a claim for a loss is to be sustained under the policy it is necessary that there shall be an actual fire, a "glow," as it has been termed in the court reports. Mere smoke of itself, with no fire, is not suf- ficient. The phrase "direct loss," with reference to a fire, however small, is used to indicate the damage caused by the smoke of the fire, as well as incidental damage that may be done, as by the use of water in putting it out, 2. Origin of fire insurance. — The fire insurance bus- iness was carried on in a crude way on the mutual principle previous to 1667, but there was apparently no well-developed system. Moreover, among the guilds there had been for centuries some allowance made for protection against fire losses. If a member suffered loss from fire, his fellow-members made good a portion tho not all of his loss. But the beginning of fire insurance on a commercial basis dates from the year 1667, after the great fire pf London. 3. Nicholus Barhon and Richard Povey. — Nicholas Barbon of London, a man of considerable education, who had studied medicine, returning from the conti- 27 28 INSURANCE nent shortly after the great fire of London, devoted himself to building houses. In conjunction with this, and probably also to further his building plan (altho the facts are not known) , he set up an office where he might carry on a business of insuring property against loss by fire. Barbon insured buildings only. These he grouped in two classes — the wooden and the brick' or stone. / Richard Povey followed Barbon in the insurance field. His contribution to the business of fire insur- ance was the insurance of personal property. These two men, then, are properly associated as the founders, so far as the English speaking world is concerned, of the business of protecting real and personal property from loss by fire, which has grown now to such enor- mous proportions. 4. Stock companies. — Insurance companies orig- inated in England in 1720. Previous to that time the business of underwriting had been entirely a mat- tei; of individuals or groups of individuals. After 1720 the companies began to branch out into the col- onies, and the English companies stand very distinc- tively for a world-wide business. The business in England is controlled by only a few companies whose capital stock is usually divided into shares of very small amounts, five pounds not being uncommon. 5. Early American companies. — On the American continent insurance was practised in the colonies alon^ much the same lines as in England. Groups of indi- viduals combined and underwrote certain properties. FIRE INSURANCE 29 Owing to the scantiness of the population and of the financial resources, the business was one of small pro- portions until the beginning of the nineteenth century. The first company was a mutual company in Charleston, S. C, which organized in 1735. It did not survive the great fire of 1740. The next, and a very successful one, was the Philadelphia Contribu- tionship in 1752. Among its first members, and the second man to sign the deed of settlement, was Ben- jamin Franklin. The real projector of the enterprise was John Smith, whose descendants have been identi- fied with the company ever since. The third company, also organized in Philadelphia, is mentioned simply because it illustrates a principle. The first company passed a resolution that to facili- tate the control of fires all shade trees in front of mem- bers' houses must be cut down six months from that date. Members who demurred withdrew and estab- hshed a mutual insurance company, which they called the Green Tree Company. This company divided its risks into two classes, charging a higher rate when there were shade trees in front of the house. 6. Early characteristics. — Fire insurance was lo- cal in character from its beginning until about the time of the Civil War. There were many companies, most of them with small capital and limited assets, doing business within a restricted sphere. This feature proved very disastrous to the Illinois, Massachusetts and New York companies when the big conflagrations occurred in Chicago, Boston and New York. The. XVIII — 4 so INSURANCE New York fires, however, occurred in 1835 and 1845, and their effect had passed away when the great fire of Chicago took place in 1871,. and the Boston fire in 1872. 7. Insurable interest. — In the early days of the business a spirit of gambling, which perhaps was born with it, grew strong. This was not checked until a law was passed decreeing that policies could not be taken out except by, those who had an insurable in- terest in the property. If one wonders that anything else ever could have been the case, it must be remem- bered that insurance was looked upon as such a visipn- ary project in those days that it was considered much the same as gambling — that is, the risk, or the hazard, in the business was considered in much the same way. The English statute on the subject, which is the basis of all others was that of 14 Geo. III. C. 48. In its recital of the evils "arising from .gambling contracts it is similar to the statute of 19 Geo. II., applicable to marine insurance, to which reference was made in the preceding chapter (Section 7). The statute of 14 Geo. III. parallels the earlier one, except that it re- quires an insurable interest in the life or events upon which the policy is taken out, and does not refer to marine insurance at all. 8. Insurable interest appears in many forms. — When there is absolute ownership of the property, with no other interest involved, there is no question as to who possesses an insurance interest. The prop- erty may be mortgaged and yet the owner may still FIRE INSURANCE 31 have a complete insurable interest in it. The mort- gage also possesses an insurable interest. It is only necessary that one. have some financial interest in the property. It may be very slight, as a contract for the purchase of the piece of property. Insurable interest also arises from one's legal rela- tion to, or obligation on account of, the property. The^ administrator of an estate is charged with the proper care of the property. One of his duties is to safeguard it from loss by fire. If he should fail to take out insurance^ and the property should bum and the heirs sustain a loss, he could be held in damages for neglect, and since he can be so held he acquires an insurable interest. 9. Insurance methods. — There are four different types of companies that conduct the insurance busi- ness today: (a) The stock companies, which do 95 per cent of the business- (b) The mutuals. These may be divided into two classes : The first, the small local mutuals which may operate to advantage with a limited line of risks and in a limited territory. They have not succeeded where they have branched out to any great extent. Second, the mill mutuals, as they are called, which specialize in large manufacturing plants. They have had a most successful career. They are pritnariry organizations for fire prevention, and deal largely with sprinkler risks. These companies have attained a high standard in the work of fire prevention. 83 INSURANCE (c) Reciprocal underwriters. Insurance business is sometimes carried on by a group of individuals who agree to insure one another. The work is conducted by one person who is appointed as attorney and whq transacts the business for the imderwriters. He is paid a certain percentage, and out of this he pays the expenses. (d) Lloyd's. A somewhat freer form of individ- ual business called "Lloyd's" has almost entirely passed away. It is still possible in some parts of the United States for groups of individuals to undertake the business of fire insurance if they do it within cer- tain limits. Many of these organizations spring up, and take the name of Lloyd's because the name is synonymous with insurance. 10. Extent of insurance. — The capital of the stock companies in the United States amounts now to about eighty million dollars. The foreign companies — whose home offices or places of incorporation are in some other country — ^treat the business done in the United States merely as a part of their total business. In a sense, they have no' actual capital, so far as this country is concerned, altho a,t the present time it is considered that they should have in this country not less than the minimiun capital required of an Ameri- can company. As a matter of fact, they have many times that. But in speaking of capital the foreign companies are not considered. The number of companies engaged in the business is 175. The amount of business written, that is, the FIRE INSURANCE 83 risks for which policies are issued, amounts to forty billions of dollars. The premiums received in the United States represent three hundred and twenty- five paillion dollars ; the losses thru a series of years will average about 55 per cent of the premiums received. Of the remaining 45 per cent the acquisition cost, which covers many services performed by the broker and his commissions, is about 22 per cent. The other expenses of the company will eat up 18 per cent, leaving thru a series of years only about 5 per cent as ap. vmderwriting profit. The average rate of premium is now $1.04. This is slightly over 1 per cent for each $100 of business written. The dividends will average for. all the companies about 10 per cent. There is, of course, the greatest variation in the ^dividends, as in other corporations, but this is a fair average. 11. Working organization. — In its general fea- tures an insurance company does not differ from any other corporation. The chief ofiicer is usually a presi- dent, and a foreign company doing business in this jcountry has a resident manager here. There are vice- presidents, secretaries and treasurers. The ofiicer of primary importance is the one in whom is vested the control of the ynderwriting. The corporation is in the business of selling poUcies. To sell its pohcies it must ass'iime risks. The one who determines the lines along which the risks are to be assumed is the underwrite^. He may or may not be the president. He may or may not be the one who takes the chief care of the investment features — ^but he is the one upon 84 INSURANCE whom the success of the company will ultimately de- pend. In due order, after the executive officers, there will come the adjusters, the inspectors and the special agents. The latter cover a certain territory, which may be a part of a state, a whole state or several states, according to the business done. They keep in touch with the local situation and aid the local agent. 12. Local agents. — The business of fire insurance is transacted largely thru agents. There are thousands of agents ; some companies have as many as ten thou- sand. The business, it must be remembered, is a retail business, not wholesale, and so the large nimi- ber of salesmen, as they might be called, are neces- sary. The agent performs, of coiu'se, many services for the insured, but he is the "business-getter" for the company in his locality. He is the one whom the in- sured is most likely to know, since the insured will very seldom come in contact with any of the officers of the company or even with the special agent. 13. TJie broker. — Between the agent and the com- pany has arisen a class of brokers who represent spe- cifically the interest of the insured. They are more numerous in New York City than in any other part of the covmtry, and are found only to a limited ex- tent in the smaller towns. In New York City, for instance, the insured is far more apt to know the broker whom he employs than to know the company. 14. How the husiness is transacted. — ^We shall have little difficulty in understanding how a fire insur- FIRE INSURANCE 36 ance transaction is effected if we consider in their regular order the six steps involved: ( a ) Application for insurance (b) Inspection of the risk (c) Making of the rate (d) Writing of the policy (e) Collection of the premium (f ) Settlement of the loss 15. Application. — ^A contract of insurance may be terminated at any moment after it has gone into ef- fect. Hence an oral acceptance makes a good con- tract of insurance. In many of the smaller towns a large amount of the business is applied for and ac- cepted in this way, and the policy goes on in due course. This method, however, would not do for the large centers ; in such cities a contract called a binder is used. It is necessary only to remark that a contract is limited to fifteen days, but that it is a very sound and simple form of contract. NAME Location on Address of Mortgagee-Payee or of representative thereof. Amount $ Rate * Time Months Eacli of the undersigned companies, for itself only, insures the prop- erty Above described for the amount set opposite name until the issue pf its Standard Policy on the same in f>lace hereof, or until twelve 36 INSURANCE o'clock noon of the next business day after the risk is declined, by notice to the insured or to the representative of the insured placing the riskj provided, however, that if the address of a mortgagee-payee or of a representative thereof is given above, such notice must also be sent to that address in order to terminate the insurance as to such mort- gagee-payee. But in no event shall this insurance be in force over fifteen days from the date of commencement of liability hereunder. If the policy is already in existence and it is neces- sary to change it without writing a new policy, there is issued what is called the indorsement agreement, which reads as follows : Date of Binder Commence- Signed Company Amount ment of Signature Liability Assured Date and Wording of Indorsement: , 19 Address of Mortgagee-Payee or of representative thereof Each of the undersigned companies, for itself only, agrees to make the foregoing indorsement on its policy or policies designated below, provided said policy or policies shall be presented for that purpose within fifteen (IS) days from the date of its signature hereto, otherwise this agreement to be null and void; and this agreement at any time prior to the making of said indorsement will terminate at twelve o'clock noon on the next business day after notice of such termination to the insured or to the representative of the insured requesting the indorsement; pro- videdj however, that if the addtess of a mortgagee-payee or of a repre- sentative thereof is given above, such notice must also be sent to that address in order to terminate this undertaking as to such mortgagee- payee. Policv ^^** ^^*^ Company ^^' Binder Signature Policy Signature Signed Received * Subject to conditions of the J 901% Average Clause. (-801 ■{ 90}-% UooJ FIRE INSURANCE 37 The making compulsory of signed applications by the would-be insured has been frequently recom- mended by those interested in the fire-prevention liiovement. Mr. J. Grove Smith, of the Canadian Commission of Conservation, has suggested legisla- tion invalidating any policy or contract of insurance when issued without the written signed application of the insured or his or'their duly appointed agent. It is generally considered reasonable that there should be an authentic declaration of the values to be insured. The fire insurance contract is one of good faith and as one of the parties to the contract gives a written agree- ment as a matter of course, there is no reason why the other party should not do likewise. The enforce- ment of written apphcation would act as a deterrent to any who are criminally inclined. The onus of hav- ing signed applications, however, r?sts with the com- panies. Whether a general agreement in Canada among the companies in regard to signed applications will be se- cm-ed, time and competition will decide. 16. Inspection. — The insurance company will ex- amine the property that is oifered for insurance. What does this inspection mean? Whatever the de- tails, the following points will always be taken into consideration. The general conditions from a civic point of view, in a town or city in which the risk is located, will be considered. These will include not merely the fire department and those related directly to it, such as water supply, or those related directly 38 INSURANCE to the business of insurance, but many things which perhaps are not ordinarily thought of, such as the kind of streets, police force, high winds and numerous other points. When this foundation has been laid, the individual risk will be considered— its construction, oc- cupancy, hazards, exposure — that is, its relation to the surrounding properties, its fire prevention devices, the general tone of the management, usually called house- keeping. Just as there are no two human beingsi alike, so in all probability there are no two risks that are absolutely identical. 17. Details of inspection. — In the case of the indi- vidual risk, some of the points that are noted are as follows: The kind of building, as frame, ordinary, or fireproof; height; area; roof; thickness of floors, floor openings such as stairways, elevators, dumb- waiters and protection, if any. The business con- ducted, floor by floor, including the nature of the property on each JBloor; any work that is done, the nimiber of hands employed in the work and the kind of machines used. The majority of flres in the United States are due to carelessness. Therefore, the inspector goes very carefully into the question of unsafe heating or light- ing apparatus, untidiness, broken floors, windows, oily floors and other points which denote a somewhat sub- standard conception of housekeeping. Fire-fighting devices will be carefully scanned such as the fire pails, the extinguishers, stand pipes, sprinkler system and anything of that nature on the premises. The care of FIRE INSURANCE 39 packing material and kind of doors which separate one building from another will be taken into considera- tion. When the insurance inspector is thru with the property he probably knows many things about it which the insured himself nevpr suspected and in fact may never have had time to investigate. 18. Canadian inspection system. — The Underwri- ters' Associations in Canada are doing excellent work in regard to inspection. This is described by Mr. A. W. Rpss, formerly secretary of the Mainland Board of Fire Underwriters, in the following words : We maintain a number of experts who have had extensive experience in inspections and applying schedules to various classes of risks. Uniform practices in the manner of con- ducting the business are demanded, concurrent forms of policies upon all important individual risks are maintained. In this connection, all daily reports are examined, and ap- proved, or otherwise, as the cases may warrant. In the congested or mercantile sections of a city, special inspec- tions and rates are made, each risk being rated upon its own merits. The same thing applies with respect to special hazards and all important risks. The inspections or sur- veys of each risk, together with detailed information, are kept on file in our offices, and are open to the inspection of all parties interested. It has been the practice of this association to invite the inspection and criticism of the owners of .the risks, and we are only too pleased upon every occasion to have the interested parties visit our offices and consult upon any real or supposed grievance which may exist. We advise always to undertake improvements which they may suggest. In this way we can ma,terially improve the hazard in the risk, thereby reducing the rate. In a few instances, we experience some difficulty in inducing owners to undertake S|Uggested improvements, but we find the num- 40 INSURANCE ber of such persons is gradually becoming less, and our ex- perience proves that the large property owners and public generally are daily becoming more disposed to consult with us on the question of construction and protection than they ever have been before. Our surveying staff make periodical inspections of the more important risks in so far as it is possible with the assistance employed. Investigations iare constantly being made as to the extent and efficiency of fire departments, water supply, character of streets, conditions and construc- tion of buildings in various cities and other important mat- ters incident to the prevention or suppression of fires and the extent of the conflagration hazard. We also employ, or have made arrangements with other associations for the use of their sprinkling engineers, and we suggest and assist in the drawing up of plans and speci- fications for the sprinkler equipments and when installed finally inspect and pass upon the same. REVIEW How is reciprocal insurance carried on ? How does it differ from a mutual insurance "company ? Name six different risks considered in insuring a property. What is meant by the term "insurable interest?" A is ninety years of age and he has twenty children and grandchildren. He owns a house which will descend to B if A dies without issue. Has B an insurable interest in the house? X is ninety years of age and has one son. X is on his death- bed and incapable of making a will fliru incurable lunacy. Has the son an insurable interest in X's house? ' CHAPTER III FIRE PREMIUM RATE 1. Problem of the rate. — ^When fire insurance was first established rate-making must have been largely guesswork. Barbon, whio was apparently success- ful in his insiu-ance adventure, either by good for- tune or some clue to the problem of which we do not know, evidently made a rate that secured business and at the same time furnished sufficient funds to conduct it. The offices that were founded somewhat later than Barbon's, have handed down to us copies of the tables showing the rates they charged, but no information as to the data on which they were based. In the begin- ning, fire insurance rates were not based on the value of the property; the policies were issued, and the rate charged on the rental value of the property. This plan did not last more than a generation and, from that time on, the value of the property has been the basis on which the insurance policies have been issued and the rate deterinined. ' It is evident that the business could not have been in existence a very long time before some fires oc- cinrisd, and even these may have been few among the insured properties. However, they furnished infor- matibn on which the imderwriter could begin to form a 41 4a ' INSURANCE judgment as to a correct rate. In the United States in 1795, when a mutual company was being organized in Boston, Massachusetts, a very careful search was made into the nimiber of properties that had been de- stroyed or damaged by fire for some thirty-eight years previous to the orgstnization of the company. Pre- vious to 1800, there is no other record of such search being made. ' The experience of the companies showed within about a generation that certain properties or certain kinds of businesses were far more subject to fires than other kinds. A private dwelling, for instance, was not as liable to take fire as a business house, and such facts found expression in different rates for the dif- ferent classes. 2. Class rating. — These classes, which came to be some seven in nimaber, and so continued for a long time, divided properties on the basis of non-hazardous ; hazardous ; extra hazardous and special. Between these, as between non-hazardous and hazardous, they had half classes so that out of this main group of f our they developed the seven classes with varying rates of insurance. The principle of this group-rating sys- tem was very simple. In each case there was the rate for the building with about five cents added for each class from the lowest up to the highest. The contents of the non-hazardous class were written at the same rate of insurance as the building, but beginning with the next group, as the half hazardous, an additional charge for the contents was made over and above the FIRE PREMIUM RATE 43 proper charge for the buUding. This simple system lasted imtil the middle of the 19th ctentury, with the single exception, that before that time some more mmute analyses of certain kinds of properties, such as mills, had been made. 3. First tariff or schedule.-^-This method of more closely analyzing properties offered for insurance originated in England and gave rise to tariffs. The first tariff was adopted in 1843 for the woolen mills. From that time on, various classes of busi- nesses have been taken up and special tariffs adopted for each kind of busi&ess. 4. Rating in the United States. — The entire prac- • tice in the United States strictly followed that devel- oped in England except that the rates were increased as the fires were more nimaerous. There was the same grouping into seven different classes. This was fol- lowed in due course by the adoption of tariffs, or as they became and are now known, schedules. The word tariff never became popular when appKed to the rating of property. Indeed, it is probably true that the use of the word tariff in connection with ra- ting matters was the occasion of some of the hostilities to the rate-making methods of fire insurance com- panies, owing to the fact that the word .was so closely allied with political matters. 5. Minimum rates. — ^Rates are minimum and spe- cific. A minimum rate applies to a large group of properties such as dwelling houses where the hazard, or risk, as it may be better imderstood, is uniform in 44. INSURANCE its character and does not vary much in extent. Min- imum rates apply to groups of properties wiiich the underwriter finds he may safely insure without the expense of a specific inspection and the specific rating. Stores and dwellings, including dwellings above the stores, also come under the minimum rates, provided the stores are occupied by a business of a very mild hazard such as dry-goods, groceries, drugs. 6. Specific rates. — ^A specific rating applies where a business, or some operation in it, deemed to have a risk attached. The underwriter goes to greater ex- pense, exercises more care, and an inspection is made by the rating organization and a rate promulgated. The risk in question may be a property with a dwell- ing above and a store underneath, but the store may be devoted to the sale of furniture, a kind of stock which furnishes the very best of fuel for a fire, with the result that there is usually a heavy damage. In such a store, too, there are' usually oils, paints and varnishes, all highly inflammable. 7. Schedule rating. — ^A property in which there is any risk at all owing either to its business or size, should be subjected to a very close analysis of all its features. This analysis is made by means of a tool called the schedule. What enters into a schedule can be seen from the case of theaters and churches. These properties are erected for certain definite and specific purposes. Both are distinguished by large auditoriums, a condition which greatly facilitates the spread of fire once it has started. Schedules for these FIRE PREMIUM RATE 45 types of properties always take the life-hazard into consideration to some extent, altho primarily the fire underwriter is not charged with responsibility for that feature of a property. Let us take a theater for a closer analysis of this type of risk. The modem theater is divided into three divisions: the stage, in- cluding all that part of the theater which is behind the proscenium wall; the, auditorium where the audience assembles ; the entrance which includes the ticket and general offices, and possibly some other features. After the great Iroquois Theater fire in Chicago, a special study of the design of theaters was made and the effort is now to separate these three parts so that a fire, originating in either the entrance or stage por- tions, may not be communicated to the auditoriima and so endanger the audience. The same would be true in regard to a church property where the activities conducted in connection with parish houses are prominent. Such parish houses are frequently at- tached to the church building without standard sepa- rations. Schedule rating splits the rate into parts in- stead of providing a flat rate, which was a practice for many years. A schedule may make a imiform rate, but one divided into many parts, charging for this defect and crediting for that superior condition. This system of charges and credits shows the property owner where he has fallen below the standard, and where he has reached it. 8. Universal mercantile schedule. — There are two schedules which have been very successful in the at- XVIII— 5 46 INSURANCE tempt to make a uniform method for all properties of a given class. One is the universal mercantile schedule. It was published in complete form in 1893 after it had received the benefit of the criticisms brought forth by some six previous editions. The essential features of the schedule are as follows: ( 1 ) The key rate which is based wholly on the general conditions of the town or city. It considers all that is within the jiirisdiction of the people them- selves, covering everything from the water supply up to the paving of the streets, the police force, etc. This is measured by a certain standard and the key rate is fixed accordingly. (2) The build- ing is then analyzed as to walls, height and area, and these are measured by a standard building. , For example, a standard building is not supposed to be more than four stories high, since the fire department cannot fight a fire to advantage above that height, hence a charge is made for the additional stories. Good features, which differentiate the property from ordinary buildings, such as extra heavy beams and timbers, first floor, fireproof, etc., receive credits. (3) The occupancy of the building is then analyzed. The schedule includes a li^t of occupancies which in the begmning numbered over 1,200. In actual practice it has been expanded by 600 further items. The analy- sis of the occupancy of the building is divided into two parts. The first embraces two features, the risk or hazard and combustibility, while the second part measures the susceptibility to damage. The stock FIRE PREMIUM RATE 47 may not be a very dangerous or combustible stock, but it may be very susceptible to damage. Milli- nery, for instance, represents such a stock. It will not of itself start a fire very quickly; but will burn rapidly and, owing to its very light nature, it is highly susceptible to damage from smoke, fire or water. (4^ The fire-fighting appliances of the risk are then considered. These include water pails, watchman's service, special alarms and perhaps sprinklers. Certain features of location may be con- sidered, as where a building stands on a corner so that a fire may be fought from two sides. All these^points help to constitute a property as a favorable risk. (5) The exposure of a building is the next item taken into consideration. This means the danger of fire from the sm-rounding property. The next classi- fication includes items which are called faults because they need not exist. They mean unsafe stove pipes or heating conditions, imtidinessj improper care of waste cans and all the numerous things which are , called in business properties, bad housekeeping. For these the underwriter wiU make fairly sftifp charges. They are placed last in the rate as they can be easily corrected when c'alled to the attention of the inter- ested parties. They can then be taken off without recomputation of the whole rate. 9. Rate of a non-fireproof brick building. — The rate is based on the Universal Mercantile Schedule; the building has but one tenant, who is a wholesale dealer in drugs. 48 INSURANCE Key rate for city ' 10 rioots, single 05 Wood ceiling finish 07 Wooden side wall finish 08 Floor openings, stairs only 075 Skylight, non-standard ' 15 ^ Electric lighting 01 Stoves for heating purposes 01 Sub-standard chimney 06 Unprotected metal columns 10 Total 706 Charge for hazard 125 Total .83 Deduct for fire escapes 2% or 017 Remainder 813 Add for exposure 05 Total 863 Deduct 15% because insurance equal to 80% of the value is carried 129 Final Rate on Building 734 Key rate for contents .769 Susceptibility charge contents 563 The stock above and below grade floor .07 Total 1.402 Deduct for fire escapes 2% or 028 Remainder 1.374 Add for exposure 06 Total 1.434 FIRE PREMIUM RATE 4-9 Deduct, because insurance equal to 80% of the value is carried, 7^/^% or 108 Final Rate on Contents 1.326 It would be possible to make a substantial reduction in the rate of insurance on this property by correcting the skylights, for which a charge of .15 gross is made. This would not be a difficult or expensive thing to do. It should be noticed that the charges which build up the schedule are specific amounts, while the credits are perdtntages. 10. Analytical schedule. — The universal schedule probably owes its completion to the energy and per- sistence of Mr. F. C. JVloore. The analytical schedule is equally indebted to Mr. A. F. Dean. The base rate in this schedule is founded on the town conditions. Towns are divided into some seven classes. No. 1, the highest, is one which has everything the under- writer could desire in the shape of water supply, fire department and civic conditions which favor a low fire record. No. 7, the last, shows a complete absence of these, especially of water supply and fire-fighting force. The schedule from this point on is diiferent from the universal in that it makes all charges as well as credits percentages of this base rate. The theory on which this is founded is that there is a relation be- tween the defective conditions of buildings and the town in which they are situated. For instance, if there is a town which is in grade 7 and in that town there is a building with a defective chimney, the charge 50 INSURANCE for the deflective chimney will be a certaui percentage, say ten. Now if the town improves so that it grades in class 3, the charge for the defective chimney will still be ten per cent of the base rate. That is, the same relation will exist between the chimney and the base rate of the town then as that which existed be- tween the chimney and the town in the first instance. This shows the schedule as a system of relations be- tween all the forces which make for good or poor con-- ditions in fire matters. The credits are based on a percentage system. The charges for occupancy are divided into three parts, ignitibility, combustibility and susceptibility. It carries the analysis of the occupancy to a finer point than the universal schedule in that it does not lump the two first conditions into one charge. The first and second charges are percentages, but the third charge, susceptibiUty, is a fiat fixed charge and is based on the principle that when fire has started, the contents have a certain susceptibility to damage which is not affected by their environment. The treatment of the exposure is very highly devel- oped, the tables providing for something like eighty different conditions. This schedule has been applied over a great extent of property and probably with more uniformity in its application than any other that has been made. The universal schedule is not copy- righted and so it can be changed. With but few ex- ceptions, it has not been used in its true form, but has been adapted more or less by the local boards. The FIRE PREMIUM RATE 51 anal3rtical schedule, however, is copyrighted and can- not be changed without the consent of the copyright holders. This provision of the copyright is an ex^ cellent feature since it has enabled the business of^ fire insurance to have a fair test of the schedule over a wide extent of territory. It has been used in approx- imately seventeen states. As a general rule, oonditions governing the conduct of the fire insurance business, and the establishment and maintenance of rates, are on parallel lines in Can- ada and the United States, but the attitude of the people to insurance rating associations has been much more demonstratively hostile in the United States than in Canada. As a consequence, legislation of one kind or another has been general thruout the United •States, and while much of it has been wholesome, some of it has been ill-advised. 11. Rate-making control in Canada. — The Ontario legislature early in 1917, had imder consideration the matter of the control of rate-making, and of rating organizations. Mr. E. P. Heaton, the fire marshal of Ontario, submitted the following instructive mem- orandimi to the Attorney-General of the province : 1. The business of fire insurance is of such commercial importanfce that it ranks with banking, railway,^ express and telegraph service, and public interests demand that the insti- tution should be preserved ; that its usefulness should be increased, and that its capacity for efficient public service should be unimpaired. 2. It is in the public interest that stability in rates should be established to the end that unjust and discriminatory 52 INSURANCE conditions should not be allowed to exist, and equally that adequacy of rate should be maintained for the purpose of securing the solvency of the insurance companies. 8. The determination of just and adequate rates must be based upon two fundamental conditions, namely, first, an accurate statistical record of fire losses in classes and terri- tories; and second, upon inspection and written surveys of properties to be insured. 4. It is practically impossible, because of the enormous cost^ for companies, large or small, to prepare their own rates, and rate books, involving, as has been said, statistical information, surveying, inspecting and reporting. Co- operation between them is, therefore, in some degree essential. 5. Legislation should, therefore, assist in the proper regu- lation of the a,gencies used for rate-making purposes, ^nd, like all supervisory and restrictive laws, should go no further than is absolutely necessary for the protection of the people. 6. Oppressive legislation, that is, legislation forbidding the association of companies for rate-making purposes, has always failed, and has resulted in demoralized commercial conditions. 7. In the State of Missouri, two years ago, such a law was passed by the legislature, whereupon all fire insurance companies, except those of domestic origin, retired from business and completely demoralized commercial credit. Conditions became so bad that the state executive called into conference bankers, manufacturers, merchants and insurance representatives, with the result that the oppressive legis- lation was withdraws and a sane law controlling and regu- lating the rate-making body was substituted. The insurance companies thereupon returned to the state for active busi- ness. A condition exactly similar is now operating in the State of South Carolina. Sixty-seven insurance companies have withdrawn, and it is manifest that with demoralized com- mercial credit remedial legislation must be enacted. / FIRE PREMIUM RATE 63 The whole matter of an effective, yet wise control of various insurance ra^e-making bodies is of tremendous im- portance and requires the most thorough and careful con- sideration. The trend of the- Ontario inquiry, at the time of the writing, leads one to believe that the investigating commission will suggest to the provincial government that the superintendent of insurance be given power to declare rates to be discriminatory. This opinion is based upon the conmiission's conmients on similar legislation in the United States. 12. Fire protection. — Closely wrapped up with the business of fire insurance is fire protection. The business of fire insurance may be said to have invented fire protection. It is quite true that there were such things as fire companies before fire insurance was known, but it is equally true that they were on a very small scale and of very primitive development. When the underwriter began to make allowance thru his schedules for certain forms of fire-fighting devices, it at once stimulated the manufacturer to fur- nish these appliances. At present, thru the under- writers'/laboratories of Chicago, nearly all such de- vices are subject to a test and only those which have passed the test and whose manufacture is subject to inspection by the laboratory force, are accepted by the underwriters for a reduction in the rate of insurance. Probably the important position held by the great business of fire protection may be understood better if its financial, asset is considered. In the United 54 INSURANCE States, about $250,000,000 worth of property is annu- ally destroyed by fire. Of this sum of money 60 per cent, or $150,000,000, is subject to a return thru the insurance premiiun. Many fire losses of course are 'not covered by insurance. Forest fire losses are com- plete losses and in many other cases the property is underinsured. While $150i000,000 represent the normal amount paid for fire losses, $100,000,000 is used in various ways for expenses. In other words, we have a sum of not less than $250,000,000 paid for fire insurance premiums. Fire-fighting devices steadily reduce this sum, and if the insured can re- duce his premium payment five per cent by installing fire pails, it wiU be a good investment in most cases. A fire pail is the simplest, the oldest and even today one of the most serviceable fire-fighting tools that we have. One of the most modern is the sprinkler. This is a device which is attached to pipes in the ceil- ing of the building. One sprinkler head is presumed . to protect 100 square feet. In a wet pipe-sprinkler system, there is water in the pipes. The sprinkler is held tight by a special solder which melts at about 160 degrees. This releases the cap and the water flows out of the sprinkler head thus putting the firfe out. In a building equipped with sprinklers, 90 per cent of the fires which originate are extin- guished with not more than three heads opening. If it were not for the fire protection aiForded to prop- erties in the form of sprinklers, large manufactur- ing plants, stores and loft buildings would not be FIRE PREMIUM RATE 55 possible today. We should be confined to very small units as the danger of conflagration would be so great. Again, the siuns paid for fire insurance in the City of New York have not increased in the past ten years, altho the liability which the insurance companies are carrjring has increased in that time nearly $1,000,- 000,000. This increased hability is carried for the same amoimt of mongy because of (1) the increase in properties of fireproof construction, and (2) the in- crease in the properties which are equipped with sprinklers. In 1883, when the sprinklers were first recognized by the insurance companies, the practice was estab- lished and continued, until 1905, of computing the rate of insurance in the usual way and of making a percentage allowance for the sprinkler equipment. At first this was 20 ; then it increased to 30. In 1905, however, especially designed schedules, based on ex- perience, were introduced for risks with sprinkler equipments. The result has been a steady drop in the rate of insiu'ance on sprinkler properties, imtil today it is a fairly safe statement that the difference in rate between sprinkled and vmsprinkled property is, in most cases, 40 per cent. 13. Rating organizations. — The making of the rate of fire insurance is the difficult problem connected with the business. This work is done today almost ■entirely by organizations which are known as rating organizations. These may cover a single city, as Chi- cago, New York, Philadelphia, Baltimore, Boston, 56 INSURANCE Washington. They may cover a state or several states. The area embraced depends largely on the local conditions and the volume of business that is to be handled. The making of this rate in the coopera- tive way is one of the things which the business of fire insurance finds necessary to its existence, and at the same time it is one of the things which the insured is inclined to view with the utmost suspicion. It ex- poses the business to the epithet "trust" and similar names. When the underwriters first organized, the attitude , of the states was antagonistic, and laws prohibiting such organizations went on many of the statute books. The underwriter was thai obliged to conduct the busi- ness of rating as a separate matter thru independent raters and, as they were guided in their work by schedules, the underwriter had at least a clue by which to measiu-e his acceptance. The prohibitive phase has gone. The question and the change in the ofiicial viewpoint have been investigated in many states. REVIEW What do you understand by minimum rate? By specific rate? Of what advantage is the minimum rate? How is the key rate under the Universal Mercantile schedule determined ? How are the charges and credits under the Universal Mercan- tile schedule figured? What elements affect the rate under the analytic schedule? What is made the basic rate? How are devices intended for fire protection tested? CHAPTER IV FIRE INSURANCE POLICY 1. Insurance policy. — In the year 1873, the State of Massachusetts adopted a standard fire insurance policy. If the companies elected to use it, that fact was duly published and thereafter all their policies in that state were issued under the stai^dard form. Some few year;^ later, the standard policy, which had worked so well in its permissive form, was made mandatory and thereafter no policy of fire insurance could be issued in Massachusetts except under the standard form. On May 1, 1887, a standard policy went into force in the State of New York. Previously the companies had been permitted to prepare their own policy forms. Inasmuch as most properties were insured not in one company, but in several, some degree of uniformity in policies soon be- came necessary, and did in fact exist among the com- panies. But there were suflScient variations to pro- duce a somewhat exasperating effect at times. This led to the compulsory standard policy which no one would be willing to depart from today. The impor- tance of the State of New York as a commercial com- monwealth has given a widespread use to its stand- ard policy, altho it is of later date than that, of Mas- sachusetts. 57 58 INSURANCE The standard policy is lettered from A to F for the first six lines and thereafter in numerical order for convenience of reference. The first six lines read as follows : In consideration of the stipulations herein mentioned and of $ premium does insure for the term of from the day of , 19 . . , at noon, to the day of ,......, 19. ., at noon against all direct loss and damage by fire except as herein- after provided to an amount not exceeding $. to the following described property while located and contained as described herein and not else\i^here, namely, etc. A few points in connection with the opening will be noted: (1) The consideration is not merely the premiums paid but the stipulations which are a part of the policy. (2) .The courts have decided that the noon specified is that of local time and not standard time, but in Massachusetts there is a special statute which fixes the time as standard. (3) The insurance is against direct loss and damage by fire. Direct loss and damage means not merely damage from the flame but also from smoke and water. (4) The company desires at all times to have the most definite knowl- edge concerning the property it insures and the lo- cation is of primary importance. Therefore, unless the policy is what is called a floating policy, it will apply only where the property is in a special location. From the point given the policy is numbered liiie by line. It is unnecessary to repe3,t the exact lan- guage, as the general tenor will be gathered from the FIRE INSURANCE POLICY ^ 59 comments made. The first ten lines set forth briefly the limit of the company's liability which cannot, of coiu-se, be more than the face value of the policy, or the actual cash value of the property destroyed by the fire, in case this is less than the face value. Cash means the nearest approximation that can be arrived at, between the company and the insured, as to the amount of cash that wiU make the insured whole at the time the loss has occurred. The value of the goods destroyed may have been more at the time of the fire than when they were purchased. The in- sured is entitled to a settlement at the value at the time of the fife. The value may have been less aiid if that is the case the settlement must be on this lower value. It is not intended that the insurance policy shall do more than indemnify the insured. It aims to make him whole and to put him in as good a posi- tion as he was before the fire occurred, but not in a better one. ^ 2. Restrictions.-^-ln a document as rigid as a stand- ard policy, since it is a part of the state law, some pro- vision must be made for insuring certain classes of property which the company may be willing to in- sure, or for grafting certain privileges which the com- pany may be willing to grant, but about which it wishes to have exact knowledge. Lines 11 to 30 contain provisions making the policy void if certain things are done or exist without the consent of the company. Briefly summarized they are as follows : (1) If there is other insurance; (2) if 60 INSURANCE the plant is a manufacturing establishment and it is continued in operation later than ten at night; (3) if the hazard is increased without notifying the com- pany; (4) if mechanics are employed more than fif- teen days at one time for repairs; (5) if the interest in the property is not sole ownership; (6) if the in- sured property stands on ground not owned in fee simple by the insured; (7) if the property insured is personal and there be a chattel mortgage ; (8) if fore- closure proceedings are commenced and notice of a sale given; (9) if there is a change in the title other than by death of the insured; (10) if the policy is as- signed before a loss without notification to the com- pany; (11) if illuminating gas is generated within the property; (12) if benzine or similar oils are al' lowed on the premises; (13) if the building is vacant or unoccupied for ten daj^. Each of the conditions) above specified renders the^ property more hazardous than is contemplated in the usual run of risks. The company may be quite will- ing to grant -the privilege for any or all of these con- ditions. '^As a matter of fact many are granted as a pure matter of form ; if the insured wii^es any of these privileges, it is necessary that the policy contain the proper indorsement. 3. Nofi-liahility. ^-Times 31 to 35 mention causes such as invasion, insurrection or other circumstances when there is a suspension of the real civic authority from which, if losses occur, the insurance company is not liable. These lines also include the much vexed FIRE INSURANCE POLICY 61 problem of loss from explosion. The policy provides that the company shall not be hable for loss by ex- plosion unless there is a fil-e, and then only for the loss caused by the fire. It is needless to point out the difficulty of separating the two forms of loss. Lines 36 and 37 make provision that the insurance shall immediately cease if the building fall. The com- pany insures a complete construction and not a mass of rubbish ; hence this provision. 4. Non-insurable items. — Line 38i gives a list of items such as accounts, bills and currency, which the company may not insure. The difficulty of proving the loss in the case of money wiU be self-evident. If they could be insured the temptation to have such losses would be possibly too much for himian nature. Many of the other items such as accounts and evi- dences of debt have no real insurable value; they rep- resent a certain legal right to property, a right which exists altho the evidence may be destroyed., 5. Specific items. — Lines 39 to 41 take up a set of items which the company may insure but which must be mentioned specifically^ — awnings, patterns, curios and things of that character. In the case of patterns, there is the susceptibility to damage coupled with the fact that in many cases they may represent a value utterly disproportionate to the rest of the plant, as in the case of an iron foundry. The common practice in connection with patterns is to limit the insurance to not more than ten per cent of the face value of the policy. This is probably not a' necessary procedure XVIII— 6 »> 63 INSURANCE where the property is insured for its full value or eighty per cent of its value. The latter part of lines 41 to 44 provides that no loss shall be paid by the company if the property is ^ damaged or the loss increased thru a city ordinance. In some cases, where a city ordinance forbids the erec- tion of a frame building in a certain section of the city, so that when a frame building is destroyed or damaged by fire it may not be rebuilt in the same tei*- ritory, provision is made for this form of loss, but it is questionable whether it is a loss that is properly in- surable under a fire policy. If the insured is obhged to erect a building of better character than the one he lost, then he has the value in the better building. Ip other words, it is not a loss that he has suffered. 6. Cancellation. — In lines 51 to 55, it is stipulated that the contract may be cancelled by either party — by the insured immediately, and by the company if it gives five days' notice. If the insured cancels the policy the company retains what is called the short rate, which is a higher, percentage of the premium than the pro rata return would be. For instance, a policy written for one year would on a pro rata cancellation call for a return of six months^ premium to the in- sured if the company were to cancel in that time, but if the insvu-ed cancels the policy, the company is al- lowed to retain seventy per cent of the actual pre- mium. The five days' provision means five days from the receipt of the notice, and it is customary for the company, in order to be positive that the cancella- FIRE INSURANCE POLICY 63 tion notice is received, to send it by registered mail. The framers of the policy intended that, after the com- pany has sent the cancellation notice, the insured woiild retvim the policy, and that the unearned pre- mium should then be sent. The New York Court of Appeals has decided that the unearned premium must be tendered to the insured with a notice of cancella- tion, but this has not been the decisioti where the ijues- tion has gone to the United States Courts. It has never been taken up to the Supreme Court, but the Circuit Court has rendered an opinion that the return premium need not be tendered with the cancellation notice. 7. Mortgages. — ^Lines 56 to 59 provide that if there is a mortgagee interest, that interest shall be subject to the provisions of the mortgagee clause. Less re- sponsibiUty is placed on the mortgagee than on the mortgagor. The mortgagee, after all, has only lim- ited rights in connection with the property and so should not be held to the same degree of responsi- bility as the owner or mortgagor. It would be im- possible, of course, to secure loans on property with- out a prohibitive rate of interest if the lender were held to the same degree of responsibility as the borrower. Hence, it has been necessary to make a modified de- gree of responsibility to fit the conditions of the mort- gage interest. 8. Removal cover. — The insured is responsible for the proper care of his property during a fire as much as he is before a fire occurs. If prudence makes it 64. INSURANCE necessary while a fire is burning to remove the prop- erty which is undamaged, the insured may do this and have the benefit of insurance for five days on the prop- erty so removed to a new location. This is a salutary provision which the policy makes for the parties, to encourage the insured to take care of the property/ 9. Procedure in loss settlements. — ^Beginning with line 67, down to and including 107, the procedure, in case a loss occurs, is given. This procedure may be epitomized briefly under fifteen different heads. They are as follows: (1) Immediate notice must be given of any loss. The notice must be in writing and the word "immediate" has been considered by the courts to mean reasonable promptness under the cir- cumstances of the case. As many as fifty-three days after a fire occurred was considered by the court to be proper in one given situation. (2) The property must be protected from further damage. (3), The damaged and imdamaged personal property must be separated. (4) It must be put in the best possible or- der. (5) A complete inventory must be made. (6)" Within 60 days from the date of the fire, a complete statement must be made to the company as to the time and origin of the fire. This statement must be in writing and signed and sworn to by the insured. (7) He must set forth his interest and that of any other parties in the property. (8) He must set forth the cash value of each item and the loss incurred. (9) He must state any incumbrances on the property that exist. (10) He must furnish a complete list of the FIRE-INSURANCE POLICY 65 insurance whether valid or not. Policies may be is- sued whose issuing companies are now insolvent or out of business on the property, but if they have not ex- pired by time limit, they must be set forth just the same as those policies which are in good companies. ( 11 ) The insured must have a copy of the description and schedules in all policies. (12) He must notify the company of any changes of title to the property, or in its use or occupancy. (13) A complete state- ment as to who were the occupants of the building at the time of the fire, must be given. (14) If called upon he must verify the plans and specifications of the building and machinery. (15) A certificate from a magistrate or notary public may be required, setting forth the fact that he has examined into the circum- stances of the fire and it is his belief that the loss sus- tained is an honest one. Thiis is not usually required at the present time. This list of the duties which are placed upon the in- sured may seem somewhat formidable but they are not really so. The insurance companies are in business for the purpose of meeting their obligations and ob- stacles are not placed in the way of a just settlement with the insured. No company could afford to do otherwise because it would soon be obliged to retire from business. 10. Forms. — Between the first six lines and line No. 1 in the average policy, there is quite a blank space. This space is commonly known as the space for the "form." The form is a description of the property 66 INSURANCE , that is to be insured under the policy in question. In the preparation of this form, the language of which is not provided for, the agent and broker must exer- cise skill in order that the insured may be properly protected imder the policy that is issued. If a few principles are borne in mind, the preparation of a form is comparatively simple. General terms should be iised wherever possible; specific terms must be used where the policy demands them, as in the case of awnings; as few words as possible should be used, but enough to describe properly the property and the object of the pohcy. It should be remembered that the person who prepares the form and who uses lan- guage that is ambiguous will be the party to suffer. For instance, if the form is prepared by the company or its representative and the language is not clear, under the stated practice of the courts in interpreting legal documents, the language will be construed in favor of the party who did not prepare the document. This rule of law is based on the common-sense princi- ple that if one has a chance to use clear language and . does not do it, he and not the other party should suffer thereby. It should also be borne in mind that, where the insured employs a broker or prepares the form himself, the use of ambiguous language wiU be construed against him and not against the company. Two examples of forms are given below: (1) On Household Furniture, useful and ornamental, Beds, Bedding, Linen, Wearing Apparel, Plate, Plated Ware, Chandeliers and Gas Fixtures, Printed Books and Music, FIRE INSURANCE POLICY 67 Pictures, Paintings and Engravings, and their Frames (at not exceeding cost price), Bronzes, Statuary, and other works of Art, and objects of Vertu, Pianofortes and other Musical Instruments, Scientific Instruments, Sewing Ma- chines, Mirrors, Watches, Diamonds, and all other Jewelry in use. Fuel and Family Stores, Tools, Bicycles, Guns and other Sporting Implements, and Utensils, the property of the Assured, or any member of the Family. (2) $ On household furniture and other personal property usual to a d^vtlling, but excluding accounts, bills, currency, deeds, evidences of debt, money, notes or securi- ties ; all while contained in the building while occupied as ^ situate Permission is granted to use kerosene oil stoves, to be filled by dayli^t only; also to keep on hand not exceeding one quart of gasoline, benzine or naphtha for household use, but the use of gasoline, benzine or naphtha for cooking,, heating or lighting is prohibited unless special permission is en- dorsed hereon. Permission is given for mechanics to be employed for ordi- nary alterations in the described premises, but this shall not be held to include the constructing or reconstructing of the building or buildings, or additions or the enlargement of the premises. Permission granted for the building to remain unoccupied a portion of each year. The first represents the style where many words are used and the second represents a modern attempt to reduce the language to the least possible limits. It is doubtful, perhaps, whether the language in the latter is qiiite sujficient to meet the conditions of the stand- ard policy, but these two are furnished as illustrations for comparison. 68 INSURANCE 11. Clauses. — There are certain fundamental pro- visions which both parties to the contract may be will- ing to embody in the policy. A good illustration of this is the matter of coinsurance. The state provides that the policy may be written under the terms of coin- surance, but if so, that the clause which expresses this fact must be the one provided by the state. 12. Average clause. — The standard clause in use with the New York Standard Policy, where the policy is issued with the understanding that the insured shall carry insurance for a certain percentage of the prop- erty, usually eighty per cfent, reads as follows : This company shall not be liable for a greater proportion of any loss or damage to the property described herein than the sum hereby insured bears to per- Centum (....%) of the actual cash value of said property at the time such loss shall happen. If the insurance under this policy should be divided into two or more items, this average clause shall apply to each item separately. The important thing in the consideration of this part of the contract of insurance is not the language but the thing itself. A great deal of misapprehen- sion exists as to the true aim and purpose of this part of the insurance contract. The clause makes it ob- ligatory upon the insured to carry insurance equal to a certain percentage of the value of the property.- Ordinarily this is fixed at 80 per qent. Sometimes in sprinkled risks it is fixed at 90 per cent; very rarely at 100 per cent. There is a common error of sup- posing that if the policy has the 80 per cent average FIRE INSURANCE POLICY 69 clause attached it means the insured will collect only 80 per cent of the amount of the loss. If the insvu'- ance equals the amoimt called for, the clause will have no effect in settling the loss. Perhaps an illustration of the effect of a clause in an actual case will be better than any words of explanation. The property is valued at $10,000 and insured with the 80 per cent clause which makes it obhgatory on the insured to carry $8,000 of insurance. The property is damaged to the extent of $4,000 by a fire. When the policies are brought in, it is found that the insured has $8,000 worth of insurance and so will receive the full amount of his loss, $4,000. Let us suppose, however, that when the policies are brought in for checking up, the insurance carried is not $8,000 but $6,000. Now this $6,000 is three-fourths of the amount which the insvu-ed agreed to carry and therefore as he has failed by one-fourth to fulfil the obligation which he as- sumed, he will fail to recover his loss in the same pro- portion at the settlement. Instead of recovering $4,000, the amount of his loss, he will recover $3,000 which is one-fourth less than the amount of the loss. The whole aim of the average coinsurance clause is to make sure that practically the whole body of prop- erty that may be subject to a loss, is covered by a pol- icy of insurance. The fire insurance business has for many decades been working to the point where a fixed percentage of insurance is called for. The time will come when the state will demand that property shall be insured for at least 80 per cent of its value. The 70 INSURANCE provision will be based on the simple equity, that the assessment of the fire insurance premium which in many respects resembles a tax, must be subject to the same law to which other taxes are subject, that is, property to be assessed must be assessed for its full value. Without such a provision it is impossible to distribute the fire cost among different policyholders in an equitable manner. 13. Premium.— The policy implies that the pre- mium is paid as soon as the policy is issued. As a matter of fact, however, custom governs the payment of the premium. On an average thruout the United States there is usually a credit of two months. Like all other commercial transactions some credit prob- ably would be necessary. Insurance may be wanted on any day during the month by the busy merchant, but as in the case of purchases, he would not expect the bill to be rendered imtil at least the first of the month. The policy, therefore, whether the premium be paid or not, may reasonably be expected to be in force when it has passed into the possession of the in- sured. If the premium is impaid the cancellation no- tice must be furnished in the same way as tho the premium had been paid. The fact that the company has waived its right to immediate payment of the premium will not enable it to deny liability if a loss occurs. 14. Loss settlement. — ^We have set forth on previ- ous pages the steps .which the insvu-ed must take in the event of a loss. These need not be recapitulated. FIRE INSURANCE POLICY 71 The person who settles the loss for a company is called the adjuster and for strictly business reasons, even if it had no higher motive, the company has every in- ducement to make its loss settlement promptly, equi- tably, and we might almost say, hberally. Neither agent, broker nor insured would wish to do business with, a company that was a laggard in settling its losses. Hence it foHows that a company cannot af- ford to be behind in any one of these things, if it hopes to continue in the business. The losses under fire in- surance policies are settled in 99 per cent of the cases without the necessity of going to court. The man en- gaged in fire insurance* hke the merchant, knows that to continue in business, he must pay his biUs and he does so. 15. Underwriters' associations. — ^While the label "combine" has, generally speaking, been removed from fire underwriters' associations by legislatures in the United States, the position is somewhat different in Canada. During the sessions of the British Columbia Fii-e Insurance (government) Commission in 1910, some evidence was directed against the Mainland Board of Fire Underwriters, designating the same as a "com- bine." It was then pointed out by the underwriters that the name was wrongly applied for the reason that in no other manner can equitable and just rates be made, and proper credits given for improvements in risks, or charges made for increases of hazard. Every .encouragement is given to each individual property 72 INSURANCE owner to improve his own risk so that he can obtain a lower rate. He is shown just how his building is rated and advised as to what he can do to make it better and safer. Each change for the better thus secvu-ed serves to minimize the fire hazard not only of his, but the surroimding property, and so the whole character of a city or town is gradually improved.. - In this connection tariff associations, with very carefuUy prepared schedules for rating all classes of risks, have done more than all other causes combined to improve the conditions, to secure better buildings, improve old ones, to increase the efficiency of the fire departments, ^ to provide better water supply, larger mains, improve streets and alleys, reduce the possibility of fires, in- crease the facilities for fighting the same and minimize the conflagration hazard, which at the present time exists in every town or city in a greater or less degree. An insurance company may be willing to fix rates upon its own experience or classification record — and this has been done by many companies — but experi- ence and the records prove that such a policy gener- ally results in catastrophe; as evidence, 1,800 com- panies have failed in America since 1867. It unquestionably takes the aggregate experience of a large number of companies to insure absolute protection, for the reason that such enlarged experi- ence offers a better average, and rates based thereon will be more equitable than those based on individual experience. One company may make a profit upon a certain class of risks, while another may lose heavily, FIRE INSURANCE POLICY 73 but the average experience of all the companies affords the best criterion on which to base equitable rates. Many merchants, manufacturers and business men find it necessary to estimate their fixed charges from year to year, and it is therefore of great importance that the insurance rates be not only equitable but stable as well. If individual rates were to take the place of association o» uniform rates, the fluctuations would be great, and general business would become disturbed and vmsettled. If individual rates prevail, those companies which have little or no experience of their own, and having the most meager resources will natm-ally offer the lowest rates, because they cannot otherwise dispose of their policies, and when the day of adversity comes, it will be found that they have not received sufficient income to pay even their normal losses, and the confiding policyholders, as has often been demonstrated, will find that there are no f imds or securities to satisfy their claims. In 1916, an investigation was held by an Ontario government commission into matters relating to fire insurance in that province. Mr. John A. Robertson, secretary of the Canadian Fire Und^writers' Asso- ciation, was asked by the commission to explain the essential difference between an ordinary combination controlling the price and output of commodities and an insurance combination. 16. Unlicensed insurance in Canada. — The amount of fire insurance carried on property in Canada by in- surance companies not licensed to transact business in 74 INSURANCE Canada was $235,770,000, in 1915, compared with $197,918,000 in 1912. The following table shows how the amount was divided among the various provinces: Nova Scotia $5,713,674 New Brunswick 10,783,775 Quebec 76,907,525 Ontario , 103,645,877 Manitoba 9,462,290 Saskatchewan 9,030,304 Alberta ' 6,723,638 British Columbia 13,196,664 Prince Edward Island 16,850 Yukon 340,000 $235,770,597 The following table shows the nature of the prop- erty insured by unlicensed concerns in 1915: Ltunber and lumber mills $15,488,299 Other industrial plants and mercantile estabr lishments 154,450,871 Stock and merchandise 40,649 711 Railway property and equipment 24,896,076 Miscellaneous , ggg ^40 $235,770,597 The following table shows the classes of insurers who transacted this business in 1915 : Lloyds' Association $68,188,168 Reciprocal underwriters g2 109 561 Mutual companies Ug ^^4 939 Stock companies gj ggir ggg $285,770,597 FIRE INSURANCE POLICY 75 Section 139 of Canada's insurance act regulates un- licensed insurance. It reads in part as follows : • Notwithstanding anything in this act contained, any person may insure his property, or any property in which he has an insurable interest, situated in Canada, with any British or foreign unlicensed insurance company or under- writers and may also insure with persons who reciprocally insure for protection only and not for profit ; and any prop- erty insured or to be insured under the provisions of this section may be inspected and any loss incurred in respect thereof adjusted; provided such insurance is effected out- side of Canada and without any solicitation whatsoever directly or indirectly on the part of such company, under- writers or j)ersons by which or whom the insurance is made ; and provided further that no such company, or underwriters or persons shall within Canada advertise their business in any newspaper or other publication or by circular mailed in Canada or elsewhere, or maintain an ofBce or agency therein for the receipt of application or the transaction of any act, matter or thing relating in any way to their said business. When the act was being revised in 1910, the licensed insurance companies protested against the practice of unlicensed insurance, but the above legislation was apparently thought to be suflBciently protective. This unhcensed insurance provides some competi- tion but it also allows financially weak companies to write business in Canada. Not infrequently have fires occurred, the losses arising from which have not been paid by unlicensed companies. During an in- vestigation into fire insurance matters in Ontario in 1916, the suggestion was made that the government put a tax on the export of premiums from that prov- ince. This would act as a check upon the volume of 76 INSURANCE » unlicensed insurance and, so far as provincial govern- ments are concerned, afford information as to the amount of such insurance carried in the respective' provinces. The tendency in Canada is for greater control of unlicensed fire insurance. One or two of the Canadian provinces have imposed a 1 per cent tax upon the amouUts of losses recovered from these unhcensed concerns. REVIEW A owns a house in your city. He goes away for six weeks, leaving it unoccupied. The house is insured and no riders are attached to the policy. A fire occurs during his absence. Does his policy cover the 'loss ? In the preceding question, if A had employed workmen to make extensive repairs during the time he was away would your answer be different? Wliy? Outline the steps to be taken by the insured in case of a loss. What Is the application of the average clause ? X and Y are engaged in the manufacturing business. X owns the factory and Y is a secret partner in the business. Insurance is taken out on the factory and stock. X is given as the owner. In case of fire will the company raise any objection to paying the loss on either factory or goods? What is the reason underlying the provision that answers the preceding question ? X takes out a policy on his house. Five months later he sold the house to Y and Y immediately conveyed it to X's wife. JVIrs. X wishes you to take a mortgage on the property. What do you wish to know about the insurance policy? What will you instruct your agent to do with the policy? CHAPTER V LIFE INSURANCE 1. General features of life insurance. — The term life insurance designates a form of insurance based on the contingency of life. Life insurance has one advantage which has given it a solid basis upon which to rest. It has only one contingency to consider. In all of its forms, even if the policy be payable at the end of an endowment period or a death, the contract is based on the possibilities of death during the period the policy must run. In other words, it is a form of insurance in which there is no doubt as to the simi that must be paid at the end of a period, which is deter- mined by death of the insured or by the lapse of a spe- cified number of years as in an endowment policy. There is but one element of doubt in the transaction aiid that is when the contingency insured against will occur. Other forms of insurance involve two ele- ments of doubt; whether the thing itself will happen, and if so when it will happen. In comparing life in- surance with any other form of insurance this impor- tant fact of the solid basis on which it rests must be borne in mind, and if borne in mind much confusion will be avoided. 2. Early forms of insurance. — In a very crude XVIII— 7 77 78 INSURANCE form, there was a real element of life insurance, when centuries ago one departing for the Crusades made provision for a sum of money for his ransom in case he should be captured, If historic records were com- plete, we should probably find that before the 17th century, policies of life ihsurance were issued in indi- vidual cases backed by individuals or a group of un- derwriters. The general conditions of life possibly as latfe as the early 18th century, made life insurance almost impossible as a commercial enterprise. The plagues that followed one another with startling fre- quency were enough to have deterred anyone who thought of insuring the lives of individuals, or of put- ting funds into any project for such a purpose. It would be evident to both parties to such a contract that the great devastations of the plagues which cost so many lives made the duration of life a most un- stable thing. Without a basic knowledge of the dura- tion of life any form of life insurance at once became the merest gambling and continued in that state until the laws of mortality were developed. De Witt, in Holland, probably made one of the earliest uses of the principles of life insurance when, in attempting to raise funds for the state, he used the principles of annuities for securing money. The an- nuity was a form of investment by the individual who turned over his mbney to the state and received thereon a very fair degree of interest, which interest terminated wlien the individual died, the state being then relieved of any further obligation. But anything LIFE INSURANCE 79 of this nature was sporadic and hardly ranks as life insurance as we understand it todays 3. Beginnings in England. — In England a charter was granted in 1706, to "The Amicable Society for the Perpetual Life Assurance Office." Other organi- zations came into existence arid more or less business was done, but it is now recognized that the true his- tory of life insurance in England began in 1756, when there was put forward "The Society for Equitable Assurance of Lives and Survivorships." The initial success of the Equitable and the feature that really enabled it to survive when all the others went under, was the fact that for many years it did not promise to the beneficiary a fixed payment on the death of the assured, but divided the funds for a given year among all those who became beneficiaries by the death of assiu'ed lives in that year. The amount received by the beneficiary naturally varied with the number of deaths, but with the small experience concerning in- surance which at that time existed in the world, any other method would have wrecked the Equitable as it did the previous societies which had attempted life as- surance. In due time the Equitable grew in wealth and was able to promise a fixed sum on the death of the insured and this society, while never doing a large business, as we think of business today, nevertheless has continued successfully down to the present time. After the founding of the Equitable many other companies were organized. Unfortunately there was the same element of gambling connected with many 80 INSURANCE of these enterprises as with other forms of insurance, and it was not until about 1849 when the stiffened laws regarding life insurance companies came into exist- ence that stabiUty was given to the business. These laws were placed on the statute books as a result of a few very prominent failures among the life insurance companies. But of course many companies honestly carried out their obligations from the beginning and were not affected by the disasters which overtook those less prudently and less honestly managed. In 1844, it is estimated that there were in Great Britain over 140 different assurance companies' and societies organized for the purpose of insuring hves. 4. In the United States. — There were probably not one. hundred policies, so it is estimated, of life insur- ance in force in the United States in the beginning of the 18th century. These were purely underwriter's policies. In 1754 in Pennsylvania, the Presbyterian church organized a society for insuring the lives of its ministers. This society was not organized wholly on strict insurance principles because it depended some- what for its income, in the beginning at least, on funds which were given to it in addition to the simas charged the insured. But that phase passed away in due course and this unique experiment in hf e insurance as it has been called, is still in existence and the company is doiag a good work. In 1843, the Mutual Life In- surance Company of New York, issued its first policy and that may be considered as the real beginning of Ufe insurance in the United States. The business LIFE INSURANCE 81 profited by the e;xperiments which had bfeen worked out or tried in Great Britain, tho,many of the new companies did not derive as much benefit as possi- ble from this experience. The business, however, started in this country on a f oimdation that was much more secure than that from which the pioneers in Great Britain had been obliged to work. There was a . fairly quick growth down to the beginning of the Civil War. Contrary to expectations, in the period of the Civil War, the business did not decrease, altho the southern part of the coimtry was not available for life insurance work. But beginning two years prior to the panic of 1873, many of the weaker companies began to retire, and from that time until 1880 a process of weed- ing out occurred which resulted in the disappearance of some ninety companies. The whole condition was improved by this clean-up, and from that time until 1905 the business went on from one degree of success to another. In 1905 the Armstrong Investigation took place and as a result of its disclosures the laws of various states were somewhat stiffened — ^too much so, many think. But every candid historian of the busi- ness would probably admit that the legislation of 1906 placed the business of life insurance on so solid a foun- dation that its subsequent success has been greater than it possibly could have been without these laws. One result of the crisis of 1906 was the formation in the South and West of a large number of new com- panies; something Uke two hundred companies have, been organized, operating mostly in that field. , Very 82 INSURANCE few have come into the middle Atlantic or northeast- ern states. As a matter of fact, less than fifty com- panies operate in the State of New York. These small companies have accompUshed an excellent work. Many of them have made mistakes; many have re- tired but, on the other hand, they have done a very useful work in spreading a knowledge of hfe insur- ance. Many have built up a very successful business and are a distinct accession to life insvu-ance. 5. Insurable interest. — In its early days the same difficulty immediately associated itself with policies of life insurance as with those of marine and fire. Peo- , pie thought it a new scheme for getting rich, and it was possible to take out a policy of life insurance on the life of an individual in whose life one had no in- terest and even with whom the beneficiary had no ac- quaintance. The illness of any noted individual or sovereign served as an excuse for securing policies of insurance which, of course, were nothing more than gambling ventures. So great an evil did this grow to be that the Gambling Act was passed in Great Britain in 1774. This act expressly forbade anyone taking out insurance on another's life, unless they had an insurable interest therein; it also applied to all other forms of insurance except marine, which had been made subject to a similar rule in 1749. To prev.ent any misunderstanding let it be emphp,- sized that it is impossible to take out a policy of life insurance on another without that person knowing it, even tho an insurable interest exists. One may con- ' LIFE INSURANCE 83 duct the early negotiations without his knowledge, but the person insured will, of necessity, have to sign the application and pass the medical examination. Much of the preliminary work, all of it in fact, in the case of children, may be done by one having an insurable in- terest. An insurable interest is precisely the same thing as it is in property insurance, only in this case, it is so related to a life that the loss of that life would mean a loss measurable in money value to the person who seeks to have the life insm*ed. The wife, for instance, has an insurable interest in the husband because he is obliged by law to support her. Parents have an in- surable interest in the lives of the minor children be- cause the parents are entitled to the wages of the child until the age of twenty-one. Where relationship- ex- ists coupled with either an obligation to support or even, if the obligation does not exist, where the fact of support exists, as a brother supporting a sister, there is an insurable interest. 6. Beyiefidary. — Having said so much in setting forth the insurable interest, we must now empha- size that a person insuring his own life may choose as the beneficiary of a policy almost anyone he pleases. It is natural to suppose that one would never choose to carry a policy of life insurance for the benefit of another individual unless there were some good reason for doing so, either to protect the family or to protect an individual from whom one has secured a loan. Such a loan would be paid in due course of aifairs if 84 INSURANCE the individual lives, but might not be paid if he dies, and therefore the borrower may protect the lender by the policy of insurance. So while it may be stated with all frankness that, in the best sense of the word, one may choose as a beneficiary whom he will, it is obvi- ous that if someone should be chosen as beneficiary wlio had no insurable interest, and that those who had an insurable interest were left unprotected, there might be occasion for some suspicion as to the neces- sity of the transaction. As a matter of fact, however, no trouble arises apparently from this cause. Such few cases as have arisen have had some form of crime connected with them and furnish a special chapter in the history of criminal law. Except as showing what the individual may do to secure funds, such cases are not of much moment in life insurance. 7. Beneficiary under Canadian lata. — The Cana- dian laws regarding beneficiaries are based upon the broad principles prevalent in most other countries. They are complicated in Canada, however, by the leg- islation of Quebec province, where there are' a large number of French speaking people. Quebec has a wives' and children's act, as has Ontario, and the other provinces have articles of their acts concerning preferred beneficiaries. Preferences are not so nu- merous in Quebec as in Ontario. These are in the case of a man, his wife, his children and his wife's chil- dren; in the case of a woman, her children. The beneficiaries may be appointed either by the policy itself or by appropriation by a subsequent document LIFE INSURANCE 85 or by will. A wife may insure her life for her chil- dren's benefit, or appropriate a policy to them without the consent of her husband, this constituting a depar- ture from the common law governing consorts. A policy in favor of a preferred beneficiary cannot be changed without his consent, except in favor of an- other preferred beneficiary. It may be assigned or surrendered with the consent of aU the beneficiaries if they are of age. The proceeds of the policy cannot be seized either by the creditors of the assvu"ed or those of the beneficiary. When preferred beneficiaries die before the assured, various circumstances must, be considered in determin- ing who is^ entitled to the money. When such bene- ficiary is a child his descendants take his share whether an apportionment has been made or not. When sev- eral children are beneficiaries and no apportionment is made, if any of such children predecease the assured, without issue, accretion takes place in favor of the surviving children. When the assurance is in favor of a wife and a child or children, also without appor- tionment, if the wife dies before the assured, accretion takes place in favor of the child or children, and if aU the children predecease the assured, accretion takes place in favor of the wife. When the sole beneficiary in whose favor the assurance exists, whether wife or child, or all the beneficiaries, predeceases or prede- cease, the policy reverts to the assured, save in the case of a child leaving issue as before stated. The benefit of any share in an apportionment reverts to the 86 INSURANCE assiired, save in the case of a child to whom the policy was apportioned dying with issue. It is to be noted in all these cases that if the wife is the sole beneficiary, or an apportionment exists in her favor, it does not matter whether she leaves issue or not, for the policy or her share, as the case may be, reverts to her husband. Trustees may be appointed by the assured to receive the poHcy moneys in trust for the beneficiaries, as in the other provinces. If no trustees are appointed, payment is made to the beneficiary or beneficiaries named. The shares of minors, if there is no trustee, are paid to the executors of the wUl of the assured, and if there is none, to their tutors (or guardians) . Another feature of Quebec law is peculiar and that is the right to change the beneficiary. If the benefici- ary is a preferred beneficiary, wife or child, the assured may make whatever changes he likes within the family circle. In that respect Quebec does not differ from the other provinces of Canada, but if the beneficiary is outside this circle — father, brother or stranger — it depends on whether or not the beneficiary has accepted the contract made in his favor. There is nothing in the law of insurance regulating this point, so as insur- ance is a contract we fall back on the common law of contract. Article 1029 of the Canadian Code says : A party may stipulate for the benefit of a third person, when such is the condition of the contract which he makes for himself, or of a gift which he makes to another ; and he who makes the stipulation cannot revoke it if the third person have signified his assent to it. LIFE INSURANCE 87 Quebec has not the vested interest doctrine which prevails in the majority of the United States, but if a beneficiary has accepted the contract made in his favor it is irrevocable, and a new beneficiary cannot be sub- stituted without his consent. It is therefore always necessary to inquire whether or not the beneficiary has accepted. The Canadian courts have decided that acceptance by a beneficiary need not be in writing at aU, but may be made tacitly. That is to say, his con- duct and actions may be sufficient to constitute accept- ance. The only safeguard for the company is to take such precautions as it can. For instance: Require a solemn declaration from the assured, stating that the beneficiary named in the policy did not know that he was made a beneficiary, and that he never had possession of the policy which always re- mained in the hands of the assured; and if the assured cannot say that the beneficiary did not know of his having been so appoiated, to at least ask him for a sol- emn declaration, stating that the beneficiary never ac- cepted nor signified his acceptance of the benefit of the stipulation, either expressly or tacitly. Another arti- cle of the Canadian Code (1145) says that payment made in good faith to the ostensible creditor is valid, altho it is afterward established that he is not the right- ful creditor; so where such a solemn declaration is made it is understood that a new beneficiary, assuming that he siuvive the assured and no further change be made, is, vmder the circimistances, an ostensible cred- itor, and payment to him wiU free the insurance com- pany. 88 INSURANCE These few notes will give a broad idea of the some- what complicated legislation in Quebec province. Its interpretation has exercised the talents of the best legal men in Canada, including Mr. J. Armitage Ewing, K. C, of Montreal, to whom the authors are indebted for the foregoing information on the subject*. 8. Statistics. — The Report of the Insurance De- partment of the State of New York giving the statis- tics of companies doing business in that state as of December 31st, 1915, will, because of its authoritative character, give some information which will enable us to appreciate the stupendous business represented by life insurance. (a) The assets were $4,850,000,000; representing an increase in one year of $213,000,000. (b) The habilities were $4,586,000,000, this not including special funds of $109,000,000, and leaving a surplus of $154,000,000. (c) The income was $925,000,000, an increase of $51,000,000 over the preceding year. (d) The disbursements were $713,000,000, which was an increase of $69,000,000 as compared with the preceding year. The disbursements were roughly subdivided as follows : Claims $288,000,000 ; Lapsed and Surrendered Policies $113,000,000; Divi- dends $106,000,000; Commissions $57,00a,000; Sala- ries and Medical Examiners' Fees $58,000,000. (e) The record of pohcies terminated for the year is of interest as it shows the different causes. The rec- ord was as follows: Deaths 77,000; maturity 32,000; LIFE INSURANCE 89 expired 97,000; surrender 185,000; lapsed 262,000. (f ) The classification of policies for the companies doing business in New York State showed that the whole hfe policies numbered 5,213,000, the endowment policies 2,399,000, all other policies, including term and irregular policies, 675,000. These do not include, of course, policies issued by industrial companies. The number of such pohcies in force were 30,000,000, representing a policy value of insurance of $4,000,- 000,000. 9. Life insurance in Canada. — In Canada, accord- ing to oflScial statistics for 1915, the business of life insurance was transacted by 44 active com- panies, of which 26 are Canadian, 7 British, 1 Colonial, and 10 of United States origin. During that year and the latter part of 1914, the life insurance com- panies were faced with difficvdties such as have never before been experienced in Canada. On the outbreak of war, they were confronted with an immediate de- preciation in all classes of securities, a complete de- moralization of security markets, and a prospective large increase in claims arising out of the war. While these difficulties were recognized during the latter part of 1914, the seriousness of the conflict was perhaps not fully realized imtil 1915, and with the indications which the events of that year gave of a prolonged struggle and of the necessity of further Canadian contingents, the companies were forced to modify their practices in respect of the insurance of enlisted men. 90 INSURANCE Notwithstanding the difficulties arising out of the war, the total amount of policies in Canada taken dur- ing 1915 was $221,119,558, which was greater than the amount taken in 1914 by $4,113,042. The respective amoimts effected in 1915 were : Canadian companies, $121,033,310; British companies, $5,727,313, and United States companies, $94,358,935. Thus the amount taken by Canadian companies exceeded that taken by the British and Colonial and United States companies together by $20,964,562. The total amount of life insurance in force in Can- ada at the end of 1915 was $1,311,616,677, which shows an increase of $69,456,199 over that of the pre- vious year, being distributed as follows: — Amount in Force Canadian companies $829,972,809 British and Colonial companies . 58,087,018 United States companies 423,556,850 Total $1,311,616,677 With its population of about 8,000,000, it is gen- erally conceded that Canada's people are seriously underinsured. There are in that country not less than 3,000,000 insurable men and women, mostly men. If each were insured for $1,000, the simi of $3,000,000,-' 000 would be represented, wherea.s the companies do- ing business in Canada have at present in force a little more than $1,000,000,000, covering only about one- sixth of those who could and should avail themselves LIFE INSURANCE 91 of the service and help of life assurance. In their effort to overcome this national disability, the life in- surance companies have been somewhat hampered by the tendency of the provinces to place unduly heavy imposts upon the premiimis collected within their several jiu-isdictions, but it is hoped that the legisla- tive need may pass and that many of these tax burdens will eventually be removed. The Canadian federal government has recognized that to tax life insurance premiums is a penalty on thrift. In 1916, when fram- ing legislation for the taxation of business profits, the federal government exempted the business of life insurance. The provincial governments of Canada have not yet come to that desirable point. 10. Procedure. — ^As in the case of fire insurance, it wUl be well to consider the successive steps in order, so as to obtain a clear idea of the whole transaction. These steps are (1) the application for insurance; (2) the medical examination; (3) the preparation of the policy; (4) the delivery of the policy and collec- tion of the premium; (5) the continuance of the pol- icy; (6) the payment of the loss. 11. Application. — ^Few persons apply for life in- surance without solicitation. Indeed, some years ago the feeling against one who applied for life insurance was so strong that it was crystallized into the saying: "If a party applies for hfe insurance he should be ex- amined three times by a physician and then rejected." One would never apply for life insurance, it was felt, unless he knew that there was something the matter 92 INSURANCE with him and that he wished very much to protect some interest by means of the insurance poKcy. The view, however, was undoubtedly based on a misunder- standing. Human beings do not indeed, go around expecting to die. Life insurance^ unfortunately, in its begin- ning, associated itself almost entirely with death. The object of taking it was held up to the individual as a provision which he ought to make for the benefit of those whom he might leave behind; in other words, the family. So insistent was this note that the phrase "hfe insurance is one of those things where you must die to win," became common. "This whole attitude is now passing away. We are coming to look upon the insurance of life more as a commercial transaction and, as we do so, we shall probably place it upon more solid foundation. This view is bringing into the subject an element of danger, but that danger can be guarded against, and is small coinpared to the large benefits which will be derived f]fom the increased use of life insurance, because it will be regarded as a commercial transaction. In a very recent instance, a firm was sending abroad a representative to examine into certain matters in Russia and part of the com- pensation oifered was a Iffe insurance policy taken out and paid^ for by the firm. This illustrates the modern view of the matter. The great majority of the persons who insure their lives do so because they are solicited by the representa- tive of the company. Attempts both in England and LIFE INSURANCE 93 in the United States to sell insurance without solicita- tion have not been very successful in^ comparison with the large business of companies which have employed agents to sell their policies. 12. Form of application. — If there ever was a time when the oral application for life insurance was good, it passed away long ago and only written appli- cations are accepted. The essential features of an ap- plication are : Name^ and residence of the applicant, place of business, address, date of birth; this given for the day, the month, the year, and also age at last birth- day; place of birth, including town or city, state or province; coimtry; present occupation; any contem- plated change of occupation; any connection with military, naval organizations; name of beneficiary, residence, relationship or insurable interest in the proposed life of said beneficiary. There are also such questions as: Do you wish the privilege of changing the beneficiary provided policy has not been assigned? Amoimt of insurance applied for, plan, premiums, how to be paid, as, annually, semi-annually or quar- terly? Do you wish the privilege of waiving the pre- mium in case of permanent total disability? Are any negotiations pending for any other insurance? Have you been examined for life insurance and re- jected? There may be a further agreement that, after the policy is issued, one will not engage in certain extra hazardous occupations or employ- ments. This includes a variety of occupations such as retailing intoxicating liquors, submarine labor, the XVIII— 8 94 INSURANCE manufacture of highly explosive substances. These are suflScierit to indicate the character. None of these phases call for any special comment, with the exception of one or two which contain more human interest than the others. Take the ques- tion of age. It has proved, in dealing with himdreds of thousands, impossible to obtain exact statistics in regard to the matter of age. People are apt to report their ages in even numbers, at certain periods of life. There is a tendency to make oneself older and per- haps at a certain period, to make oneself yoimger without any real intention to deceive. An investiga^ tion into mapy thousands of cases, shows that the cases where the age was understated were counter- balanced by those where the age was overstated; in other words, so far as pajmient df premiimis was con- cerned the companies did not seem to be losing any , money. Like all other forms of insurance, the trans- action is based on absolute good faith between the parties, and any misstatement made purposely would at once cause the company, on discovering it, to cease negotiations with the persons in question. 13. Medical examination. — The next step in the transaction after the application has been re- ceived, and the company decides from that evidence to go further, is to have the medical examination. The medical ' examiner stands to the life insur- ance company in the same relation that the inspector does to the marine and fire insurance company. He is the one on whose judgment the great body LIFE INSURANCE 96 of risks are written, and for this reason it is, per- haps, needless to state that his ability must be unques- tioned. It is not merely a knowledge of medicine as it may be taught in the schools or learned in daily practice, but a special knowledge which is acquired in the examination for the passing of the risk for pur- poses of life insurance, and from a knowledge of the death claims which have originated on the lives of those who have been passed by the medical officei's. In most of the companies the medical examiner's reports are divided into two parts, ( 1 ) statements to the medi- cal examiner, and (2) the medical examiner's re- marks. The first are the replies to a series of ques- tions which the examiner asks. Briefly epitomized, they may be set forth as follows: Your full name. Are you married? What illnesses, diseases, etc., have you had since childhood? A statement of the physi- cians who have treated you; or, whom have you con- sulted in the past five years ? Are you in good health ? It is evident that the phrase "good health" has a variety of meanings and one may be much sub-stand- ard as compared with another person and still consider himself in good health. This the examiner will check by the other information brought out during the examination. , 14. Use of intoacicating liquors. — The question of the use of intoxicating liquors forms a very important part of the information which is sought to be obtained. To illustrate, note the following questions which are *sked. (a) Have you ever been engaged in the §g.le 96 INSURANCE or manufacture of liquors? (b) Have yoti used them diu-ing the past year? (c) If you have, what has been your daily average? (d) What was the maxi- mirai amovmt used in any one day? (e) Have you been intoxicated during the past five years? (f) Have you ever taken treatment for alcohohc or drug habit? (g) If you are a total abstainer, how long have you been so? It will be noted from the minute detail of these ques- tions that they are deemed of primary importance by the medical examiner. In the early days of life insure ance, the question was probably comparatively simple and only asked the applicant if he used intoxicating liquors. But this was found to have so many mean- ings with the different applicants that it became neces- sary to develop a series of questions in order to call forth the exact information that was desired. In regard to the use of drugs, it might be pointed out that they occupy a somewhat different moral status from the use of liquors. Anyone will state without question whether he does or does not use intoxicating liquors, but the use of drugs is a habit which one instinctively seeks to conceal, and it is deemed far more difficult to obtain information con- cerning that matter than concerning the use of hqubrs. While heredity is not deemed of so much impor- tance as it was in the early days of hfe insurance and up to a few years ago, it does have a certain bearing, especially in connection with certain diseases, as tuber- culosis. Questions concerning such disease will usu- LIFE INSURANCE 97 ally deal not merely with the individual himself, but with the members of the household who are afliicted with that disease. In regard to the family, information is collected as to the age of the parents at the time of death, if not living, and the same regarding the brother and sister, also in regard to grandparents. 15. Medical examiners report. — The medical ex- aminer is then called upon to fill out a report based largely on the information gathered directly, or by , observation, at the time of the examination. The re- port closes up with the direct question as to the exam- iner's willingness to recommend the applicant for in- surance. The report is then duly certified and passed on for the inspection of the medical officer at the home office. 16. Is medical examination necessary? — In the be- ginning of life insurance there was no medical exami- nation. There was probably httle necessity for an examination, since there was no attempt to do busi- ness over a wide extent of territory and business was locaL It must have been a rare case in those days and indeed for some decades after the business was founded, when any applications for insiu-ance could not be well certified to the trustees by persons with whom they were acquainted and on whose judgment they relied. When the companies began to branch out and the business became larger, it was necessary to protect their interest, and this coincides with the insured's interest, by a medical examination. Such 98 INSURANCE an examination is not indispensable and it is omitted, in certain cases where the number of entrants is suf- ficient to permit of the principle of choice not being exercised against the company. Any company could probably insure safely the first thousand or second thousand or more men who pass its door. The diffi- culty is that without medical examination the choice would be steadily against the company. Those who had some reason to feel that their lives were sub-stand- ard, would seek insurance and not those who were confident of their good health. In the now develop- ing field of group insurance as it is called, where all the employes of a plant may be insured, admittance to the company is permissible without medical exam- ination because the number is so large that the com- pany secures a fairly average selection of lives in the whole group. Our knowledge of the human body has led to the conclusion that the result of a medical examination may be relied upon for about five years. After that period, insured lives tend to approach more nearly to the normal level of the great body of iminsured lives. REVIEW Mention some of the early movements in the life insurance field. Trace the development of life insurance in the United States. Do yon know what the Armstrong investigation was ? What is an insurable interest in life insurance? In group insurance, why may the company dispense with med- ical examination of the risks? CHAPTER VI MORTALITY AND INVESTMENT EXPERIENCE 1. Factors in the premium. — In life insurance, the premium is commonly expressed by the amount charged for one thousand doUars of insurance for or- dinary policies, and by smaller units for industrial in- surance. The two great factors which determine the premium are mortality and the interest received from investments. 2. Mortality tables. — ^Newsholme described the mortality table as the picture of a generation of indi- viduals passing thru time. Mortality tables are based either on statistics of the population as shown by the census retvuns, or on statistics of the life insurance companies, based on their own experience. The first table was compiled by HaUey, the astronomer, in a paper for the Royal Society. He used statistics from Breslau, Silesia, where statistics of birth and death had been kept from a very early period. Hal- ley's table lay buried for many years in the journals of the society and was probably never used by any in- surance company. The first table that was actually used by any insurance society, is known as the North- ampton Table, and was based on the statistics of some parishes in Northampton. This table became justly famous, altho it has been entirely superseded. 99 100 INSURANCE Another table, of far greater accuracy than the Northampton, is the Carlisle, based on the statistics of some parishes in Carlisle, England. The num- ber of lives considered was less than fifteen hundred, but the table has proved 'to be remarkably accu- rate even with the changes that have taken place since the table was compiled more than a century ago. A table based on the statistics of population is not satisfactory to an insurance company which has been in existence for any length of time. It does not represent experience in dealing with picked or chosen ' Uves. The insurance companies have not devoted much time to the sub-standard hf e, as they have found a sufficient number of standard lives to build up their ' enormous business. As soon as the companies se- cured a sufficient amount of experience on which to base accurate statistics^ they dispensed with statistics taken from other less reliable sources. 3. What is a mortality table? — In the somewhat vivid picture which described it as "a generation of individuals passing thru time," we catch a fairly ac- curate idea of what the table aims to present. It traces a group of individuals, taking their lives at an assumed period, until the entire group have passed away. It shows the number at the beginning of the period and also the number that pass away each year, and with these two factors it is easy to show the prob- ability of dying within the year or of surviving within the year. 4. American experience table of mortality. — The MORTALITY EXPERffiNCE 101 table in common use in the United States is tite, Amer- ican experience table of mortality, based on statistics taken from the experience of the Mutual Life Insur- ance Company during a certain period in its history. The table was prepared by the then actuary, Shep- pard Homans, and altho the work was done at a com- paratively early period in the history of American life insurance, the experience was so true and the work so accurate that the table has stood the test of time remarkably well. 5. lUvstrations. — ^Let us illustrate what thp table shows. It assumes that at the age of ten years there are 100,000 lives and year by year it sets forth these four things: (a) the number of living at the begin- ning of each year; (b) the number dying each year; (c) the yearly probability of dying; (d) yearly prob- ability of living or surviving. The last age repre- sented on the table is ninety-five years. There was no experience to show any insured life living beyond ninety-five. There has been, of course, since that time actual experience in regard to insured lives be- yond that age. It is not necessary to reproduce the entire table ; our purpose wiU be served by showing it at ten-year intervals. ^ No. Living at No. Dying ProbabiUty of ProbabiUty of the b^inning during Dyiag thru Living thru of the year. the year. the year. the year. 10 100,000 749 .007490 .992510 20 92,637 728 .007805 .992195 80 85,441 720 .008427 .991578 INSURANCE No. Dying during the year. 76S ProbabUity of Dying thru the year. .009794 ProbabiUty of Living thru the year. .990206 962 .013781 .986219 1,546 .026693 .973307 2,391 .061993 .938007 2,091 .144466 .855534 385 .454545 .546455 3 1.000000 .000000 102 /^ Age No. Living at the beginning of the year. 40 7^,106 50 69,804 60 57,917 70 38,569 80 14,474 90 847 95 B 6. Hoiv the table is used. — ^Let us assume that a person aged forty desires insurance for one year, two years or any number of years. At age 40, the table shows that there are 78,106 persons living. The number that will pass , away in that year is 765; hence it would be -^^^^ for one year. For two years it would be the number 765 plus 774, which is the number pass- ing away in the second year, over the number 78,106 as a denominator, or ^'^ and for five years it would be 765 + 774 + 785 -f 797 + 812 = » 3.953 78,106 No data upon insurance experience were available, up to late in 1916, from which to ascertain the rate of naortality experienced to that date in the European War. The general effect of war claims upon the mor- tality as a whole may, however, be observed by com- paring the actual claims of the year with the expected, by the Standard Valuation table. Figures of nine Canadian companies for the year 1915 show that the total mortality, including war claims, was remarkably favorable in every instance, the ratio of actual to ex- pected ranging from 42.6 per cent to 72.9 per cent. MORTALITY EXPERIENCE 103 while for eight of the companies comhined, it was 58.4 per cent. The net loss under war claims for the nine combined companies was 13.3 per cent of the expected claims. The gross war claims for the nine companies combined were .134 per cent of the mean Canadian business in force. The corresponding figures for the Mutual Life of New York were .107 per cent for Canada and .196 per cent for the combined business in all countries engaged in the war. The gross Cana- dian claims incurred by the nine companies were $5,834,822, of which $900,869, or 15.2 per cent were due to the war. The general consensus of opinion among British and Canadian actuaries, as reflected by the extra pre- miums charged to cover the war risk, is also in accord with the view that a much heavier death rate than five per cent per annum may be anticipated. At the out- break of the war, the extra premium recommended by the British Life Offices' Association in connection with new assurance was 7 per cent for the combatant branches of the service. This rate was shortly after- ward increased to 10, and later on, it was decided to leave the question of extra premium to the indivi- dual judgment of each office. In an instructive address to the Actuarial Society of America in 1916, Mr. Arthur B. Wood, actuary of the Sun Life Assurance Company of Canada, dis- cussed the Evffopean war risk with particular refer- ence to the practice and experience of Canadian com- panies. He said: 104. INSURANCE It is generally conceded that the statistics of previous wars are no indication of the mortality rate likely to be experienced in the present European war. Such informa- tion as is thus far available undoubtedly indicates that the rate of mortality has already beep very high, and no one can predict with any degree of confidence what the future ex- perience will be. Considering the uncertainty attached to the question it is a wise precaution not to fix the extra premium definitely in advance when issuing'a policy, but to retain the right to readjust the rate from time to time according to the judg- ment of the company. 7. Interest return. — A life insurance company, bases its calculations upon the fundamental fact that every policy which it issues must be paid if the policy be carried to a conclusion. The experience of lapsed policies is of no value to the company and indeed its effect on the whole business of life insurance is wholly an uncertain one, so any possible gain from that source the company does not and should not consider. Its calculations are based on the payment of the amount for which the individual is insured, either at the death of the insured or at the end of the insurance period in an endowment policy. Itistands in respect to the endowment in the position of one who knows that in twenty years he must meet a note for $1,000 and must coUect, during that inter- val, such a sum of money as, set aside and permitted to increase at a certain rate of interest, wiU meet that obligation at the end of twenty years. Now the life insurance company, as it insures large numbers of persons, many of whom die before the policy period of MORTALITY EXPERIENCE 105 expiiation, meets its obligations as they fall due, by adjusting its charges on the basis of the mortality table and an assimied rate of interest less than it may reasonably expect to earn, but yet so near as to what it may expect to earn that its premiums wiU not be unduly high. Competition among the different com- panies, it may be added, is quite sufficient to take care of this factor of the premium fixing. In the early history of the United States when the rates of interest ran very high (6 per cent when they were 4 per cent in other countries), an undue increase was assumed from this source and a decade or two was spent by the companies in working to a more sohd foundation. Probably the general assumption now is that the company wiU earn on its invested funds 3% per cent and it so estimates in > making its premium rates. As a matter of fact, the companies earn Inore than this sum and it is not improbable that the time may come, with the enormously increasing demand for capital, when 4 per cent wiU again become a fixed rate of interest for which the companies may assume a re- timi from their invested funds. However, under the system of annual dividends which prevails in the UnitedStates it is almost immaterial what rate of in- terest a company may assimae so long as the amount be within the line of safety. If it assumes a rate more nearly to what it will earn than some other company, the other -company can even up by making its annual dividends somewhat higher. 8. Policy conditions. — The general conditions of 106 INSURANCE policies may be briefly summarized. The beneficiary may, if the right has been reserved, be changed by the insured. For many years this right did not exist but the beneficiary once having been named, a change could not be made by the insured without consent of the beneficiary. If the beneficiary dies before the in- sured, the policy vests in the insured. There are two classes of policies : participating and non-participating. The first shares the dividend, the second does not. It is purely a question of choice with the individual which type of policy he pre- fers to take. The non-participating policy has the advantage of a fixed payment according to the terms of the policy, subject to no reduction diu-ing the period payment of the policy, while, in the case of the participating policy the insured shares in dividends as the company is able to declare them. 9. Suicide. — If committed within one year from the time the policy is issued, suicide voids the policy, but after that time the policy is incontestable. In connection with the question of suicide it may be of interest to note that the attempt to issue policies with- but a restriction as to suicide, say one year, has proved to be unwise, and it is not often done at the present day. 10. Premiums. — ^Advance payment according to the time arranged, as annual, semi-annual or quarterly is the rule for premiums. They are payable at the home office of the company or to any designated agent. A period of grace of thirty-one days subject to an in- MORTALITY EXPERIENCE 107 terest charge is usually granted after the first pre-' mium has been paid. Should the insured die within this period, then the premium due would be deducted from the payment to the beneficiary. The policy im-r mediately ceases if the payment is not made on or before the end of the period of grace. 11. Dividend distribution. — There are several methods of distributing dividends. They may be paid in cash, they may be used toward paying the premium on the policy, or they may purchase more insiu*ance or be left to accumulate. Usually, if the insured has not manifested any expressed wish in regard to the matter, the company wiU apply the dividends in a certain man- ner as set forth in the policy. The average pohcy today is free from any restric- tion as to residence or travel. The same is true in re- gard to occupation unless one were engaged in em- ployments which are admittedly hazardous, including warfare. Naturally if one should enter upon such an employment the proper thing to do would be to notify the company in order that an additional premium may be arranged, should the company care to continue the insurance. 12. Agsignment. — If the policy is assigned due no- tice thereof should be given to the company. 13. Reinstatement. — Provisions are made for rein- statement of the policy within a certain niunber of years. Having insured a hfe, the company desires to continue the policy in force, and that is the reason for the provision of grace and the reinstatement privilege. 108 INSURANCE Usually there are various options which the insured may exercise after the policy has been in force for a certain number of years, generally three. It is con- sidered that that period is necessary before the cost of secvu"ing the insured life has been overcome, and the reserve set aside is of some value to the assured Ufe. In Canada, the clauses used by aU companies after January 1, 1911, with four exceptions, require evi- dence of insurabihty as a condition precedent to rein- statement. The clauses of the four excepted com- panies require merely evidence of good health. The policies of fourteen companies permitted reinstate- ment at any time; the others within two, three or five years from date of lapse. In interpreting the term "evidence of insurability" in cases of reinstatement^ most companies have ap- plied the same test to military /service as in accept- ing applications for new insurance, and this practice in the opinion of the Canadian department of insur- ance conforms with the provisions of the act. Twenty-four companies in 1915 granted reinstate- ment on being satisfied that the applicant did not intend to enhst. The other companies incorporated the war clause in use for new compianies' policies in policies reinstated. 14. Loans. — It was Elizm* Wright of Massachu- setts, probably as able a life insurance man as this country has ever produced, who secured for the in- sured the right to an interest in the reserve. Before MORTALITY EXPERIENCE 109 his time one who allowed his policy to lapse, altho it may have been in force many years, lost all that he had put into it. Wright established the fact that against the assured's policy there was held a certain reserve which grew larger and larger as the time of expiration approached, and that, to deprive the insured of all this when he was in many cases compelled to abandon his insurance was unjust. This, of course, is now an accepted principle in the insurance world. Now, in- stead of abandoning the policy, there has grown up the feature of loaning against this reserve. Loans did not assimie large proportions vmtil the panic of 1907 in the United States, Apparently then the knowledge became quite prevalent that most of those carrying life insurance had a substantial asset in the form of this reserve, and as the company was obliged to loan them on demand they promptly proceeded to borrow from the company. It is evident that as the policy has been taken out for the beneficiary's use, this borrowing privilege defeats the very purpose for which the insurance was taken out, which was to pro- tect the beneficiary. These loans are moreover rarely repaid. This is surely one of the most undesirable practices in the field of insurance as it very of tai leads to a complete surrender of the policy. A great many remedies have been suggested from time to time but no effective method of meeting this evil has been devi^d. It is possible that state law will even- tually require at least, the reduction of the loan by certain annual payments thru a series of years. xvjJi — g 110 INSURANCE The policy usually has a table setting forth its value at the end of periods if it be surrendered or if a loan is desired on the policy. 15. Policy loans in Canada. — The policy loan has been the subject of much discussion in Canada. The following table shows the total assets and the loans, including premium obligations, upon policies of Canadian life companies, at five-year intervals since 1890 and the proportion which these loans bear to the assets : CANADIAN LIFE INSURANCE COMPANIES Loans on Per- Year Total Assets Policies centage 1890 $20,740,444 $1,716,561 8.28 1895 35,323,297 3,582,862 10.14 1900 59,504,066 6,014,022 10.11 1905 102,438,415 9,679,244 9.45 1910 170,804,631 20,409,223 11.95 1915 274,273,018 39,311,402 14.34 This shows that, rapid as has been the growth of the assets, the increase in loans on policies has been nearly twice as great and that the proportion is still rising. The deductions to be drawn from an analysis of the Canadian situation are that policy loans are rapidly increasing and in view of the United States experi- ence, they must be expected to rise higher; that in years of financial stringency, exceptional calls will be made upon the life insurance companies and that dur- ing financial panics, they must be prepared to find cash, at short notice, for large amounts. "^ MORTALITY EXPERIENCE 111 At various times, legislation to restrict the volume of loans on life insurance policies, has been suggested but, as has been pointed out by Mr. R. W. Barton, A. I. A., an English actuary. Life companies see tragedies in families at the death of the breadwinner due to insufScient and neglected assur- ance. Banks witness tragedies in life on the failure of their customers in business. Each, by giving such ad- vice to the public, as their experience suggests, can help those willing to learn, to avoid the dangers that have caused disaster; but to try by legislation to stop bor- rowing, or the use of savings^ is as hopeless as to try to regulate currency by government fiat. History provi^ that neither human nature nor currency has ever been made good by act of parliament. Witii this in mind, oidy if the dangers of the present system are shown to be insurmountable, would the Canadian companies be justified in seeking drastidegislation to restrict pdicy- holders' ri^t. The policy loan situation in Canada may be briefly summarized as follows: For the policy loan. 1. — ^Business men use life insurance companies as custodians of surplus earn- ings, to be available when necessity requires, or as a provision of old age. 2. — ^The policy loan is at least a great convenimce to the policyholder, and has probably come to stay. 3. — ^The loan may be used to keep policy in force, by paying premiimi due. Agmnst the policy loan. 1. — ^A solvent life insur- ance company might fail as a result of policy loan provisions in the insurance act. 112 INSURANCE 2.— -Life companies are called on to make loans when investment opportvmities are best. 3. — Some policyholders, owing to interest rate being stated in policy, can borrow more cheaply than others and a single policyholder may have to pay different rates on different policies, causing much confusion. 4. — Pohcyholders do not always pay back theii- loans but borrow more, creating a dangerous con- dition. 5. — The policy loan is often the first step to the total surrender of the policy. The following suggestions for reducing the volume of policy Ipans have been made in Canada from time to time: (1) Notice of intention to borrow should be givei^ by the policyholder, except when loan is re- quired to pay premium to keep policy in force. ' (2) Goverimient should protect policyholders against themselves by making it more difficult to borrow on policies. (3) No loan whatever should be granted on a hfe policy, 'covering dependents, except to pay pre- mitmds; other loans to be treated as a com- mercial transaction. (4) A partial remedy would be to educate policy- holders to realize the seriousness of mortgaging the protection they have created for their de- pendents. 16. Manner of settlement.'— There are various ways MORTALITY EXPERIENCE US now of paying the beneficiary. The feeling is grow- ing that instead of permitting the policy to be paid all in one sum it is better to have it paid over a series of years, thus providing a fixed annuity. This is espe- cially true if the beneficiary is one who is not accus- tomed to handling even moderately large sums of money at one time. He may on receiving them have quite a false idea as to the amount represented. Un- doubtedly in many cases where the pohcy has been paid in a lump sum, the real purpose of the insured, to protect the beneficiary, has been defeated. REVIEW What mortalitj table is in use in the United States? What argoment in favor of paying a policy by instalments may be advanced? Hov were the varions mortality tables computed? X takes oat a policy of insurance with his wife as beneficiary. His wife dies and later X dies, having named no new beneficiary. He is survived by one daughter. Who receives the benefit of the policy? Why? What are the advantages of the participating policy? On what theory are loans made by insurance companies? CHAPTER VII BUSINESS METHODS OF LIFE INSURANCE 1. Loading. — The expenses of the business of life insurance are provided for by an addition to the net premium, called a loading. The premium itself, as computed by the mortality tables and the assxmied interest earnings, may be called a net or pure pre- mirmi, and does not contain any provision whatever for expenses. In other forms of insurance, as in fire, the cost is not covered by such an addition, but has always been considered as forming a part of the rate computation itself. The loading may vary for different policies and in different companies, but, as competition be- tween the different companies is keen, the cost of in- surance among the old-line companies is kept down. They must maintain a suflBcient reserve at all times to meet their obligations, and competition is a fairly effective hold-back to any undue ambition to put the premium at too high a point by means of loading. 2. Settlement of claims. — In the older method of settling claims adopted by the Equitable of London which has already been described, some claimants were made to wait very nearly if not quite a year before they received the insurance fund. Under the present 114 BUSINESS METHODS 115 method, expedition in the settlement of claims is a marked feature of tiie modem life insurance compa- nies. Probably 95 per cent, if not a s(Hnewhat higher proportion, of claims are paid within forty-eight hours from the time the proofs of death are received at the home office. The life insurance company furnishes cert^un forms which are used in the preparation of claims. One form, filled out by the claimant, sets forth the basis of the claim and gives evidence that the deceased person is the one that was insured under the policy. A statement of a physician, assuming there was one, who attended the insured in his last illness, is usually required. Another statement is made by the under- taker or it may be the clergyman, testifying to the fact that the person buried was the one described in the claim papers. There is often a statement of a friend as to the identity of the deceased and the circum- stances of his death. Not all four of these statements or sets of papers, may be required in all companies, but these cover the usual run of the cases. 3. lAfe insurance in its commercial aspect. — ^Pro- tection to the family, which was the primary idea in the beginning of life insiu"ance, has lost none of its original force, and perhaps is more prominent today than ever. At the same time there is a tendency to look upon life insurance as a commercial undertaking and to disassociate it from the "You must die to win" sentiment. Life insurance is simply an investment for the purpose of prolonging the earning power of 116 INSURANCE the individual when the individuial himself may have lost the power to Continue earning,' This is the com- mon-sense view of the matter that will probably have the greatest influence in the upbuilding of the great business of life insurance. There are, however, cases which perhaps come more closely within the realm of commercial life insurance. Some of these may be suggested: In New England a noted hotel keeper desired to erect another hotel and still continue the one in which he had earned his fame. In fact, at the time of this incident, he was managing successfully two important hotels in the! city, but desired a third, which was to be run on somewhat different lines. His venture in the new \hotel would represent an investment of something over a million dollars. Capitalists were willing to make the invest- ment if there was a reasonable assurance that the hotel would be managed by this person. As part of the investment, they insured the life of the manager and so protected their venture. The hotel was built and successfully managed for many years. This is an incident of commercial insurance. Many corporations find that their success will de- pend on the life of a certain individual if not thru a long period, at least thru the time, perhaps three, fiv6 or ten years, necessary to build up the business. The common-sense thing to do, which is being done ^very day, is to insure the life of that individual, and free both the individual and themselves frran any strain incident to the fear that the whole thing would BUSINESS METHODS 117 come down in ruin thru the loss of this valuable and important life. The extent to which this form of protection may be carried is almost unbelievable, and yet, new uses are being found for it almost daily. Many years ago the large jobbing and manufacturing interest decreed, and have continued so to decree, that those who pm*- chased goods from them on credit must carry fire in- sui-ance. We fancy, the time is not far distant when similar parties will insist on life insurance being car- ried as an additional protection to the business in case the individual dies. In partnerships, in corporations, in a multitude of ways, this great principle of life in- surance, which merely conserves the individual's ef- forts, is coming into play and is doing its great work. 4. Group insurance. — Until recently life insurance has been like the old method of picking berries, in that it has been done one at a time. It is now realized that a greater service to the community can be provided with absolute safety by insuring people in groups, and many policies are being issued, covering all the em- ployes of a given enterprise. These group pohcies usually provide for payment in case of the death of an employe equivalent to one, two or three years' earn- ings, and it is quite needless to point out what that means to a family. The premiums on such policies are usually paid by the employers themselves. It is a business asset; it is a bit of welfare work; it has that about it which tends to make the relations between the employer and employe more satisfactory; all this, in 118 INSURANCE addition to the positive good to the family, should the death of the individual occur. The group policies do not require ftiedical examination for the original group insured. Later additions to the group are usually subject to examination. 5. Assessment insurance. — In the beginning of life insurance, say not further back than 1762, when the old Equitable was foimded, the premiums were the same for everybody who joined the society. The age limitations were quite well established and they were placed rather low, but it was some years after this be- fore an accurate knowledge as to the workings of the law of mortality were not merely imderstood, but acted upon. In connection with matters of insurance, man has, almost from the beginning of life insurance, attempted in one way or another to buck the law of mortality. It is, of course, and always will be, a losing game. He may use the law quite to his advantage and ' adapt his practices in conformity therewith, but he cannot defy it successfully for' any length of time. Assessment insurance is said to have first appeared i^ the United States some sixty years ago, tho at that time it was probably in a somewhat small, tenta- tive aflfair, having a fraternal origin, the benefits be- ing small and confined to the members of certain lodges. 6. United workmen. — -In 1868 there was founded at Meadville, Pa., by Father John Upchurch, the ancient order of United Workmen, a trade imion, as a matter of fact, but as an incidental feature, BUSINESS METHODS 119 there was a requirement that there should be a con- tribution of one dollar, paid into a common fund, on the death of a member, which should go to his widow. The organization grew, not because of this feature, but because of the other elements in the plan; but its growth soon brought it to the point where the indications were that benefits of one thousand and two thousand dollars and even much larger sums would be paid under the one dollar contribution. The amend- ment was then introduced which fixed the maximum death benefit at two thousand dollars. This organiza- tion had a remarkable growth, with a membership at one time of about half a million in the United States and Canada. The success of this organization led to the founding of others having the characteristics of lodges, altho there were many other societies which did not use the lodge system. Up to this time the furnishing of insurance on this plan was associated with organizations whose primary purpose was something else. Some of them became more interested in the death benefit feature than any- thing else and many were turned into what was known as business assessment organizations whose only pur- pose or excuse for living was to assess the members for the death benefit and pay it out to the beneficiary. Probably very few, if any, were founded on sound actuarial principles, and they passed away. Life insurance in the United States up to at least 1870 was more or less experimental. The belief was general that the cost of hfe insurance was actually 120 INSURANCE much less than the life insurance companies charged for it. The question of the proper reserves was little understood, even among many engaged in the busi- ness! 7. Mortality record. — In the first five years of insured lives, there is and may reasonably be expected to be, and ought to be in fact, a niuch lower mortality record than exists among the pop- ulation generally. When an assessment association begins, the assessment may for a while run fairly low but, in due course, there will be an increasing death rate among the members and the assessment must steadily increase if the promised benefits are to be paid. It is impossible to provide hfe insurance with a definite payment to the beneficiary except in two ways. One, to make the provision on the old line principle, which establishes under actuarial tables the proper charge to be made each year for the policy issued. The other way is to increase the payment as the insured life grows older. Unfortunately, of course, that is precisely the timfe of life when fewer persons are able to meet the increased obligations. There has been compiled what is known as the Na- tional Fraternal Congress Table, based on the expe- rience of the fraternal societies. The difiiculty with this table is not a lack of accuracy, but that its intro- duction in any existing society means a higher rate of assessment. This results usually in a loss of the mem-/ bership sufficient to cause the society to pass awav or BUSINESS METHODS 121 8. Fraternal insurance, — Closely allied to the as- sessment form is fraternal insurance, tho greater em- phasis is placed on other benefits to be derived from the association. Some fraternal orders have a mem- bership of over a million and it is estimated that the total membership of the various fraternal societies is not far from eight million persons. Like the busi- ness assessment companies, they have had difficulty in placing their affairs on an actuarial basis because they started with the same fallacious ideas concerning the law of mortality. Yet these two forms of insur- ance have probably done a very large educational work in regard to the value of insurance. The income of these societies at the present tinie is approximately one hundred millions of dollars. The reserves car- ried are comparatively small because the principle of such organizations is that the money should be col- lected when needed and not piled up in the form of vast reserves. This sounds reasonable, but it bears heavily upon the members as they/grow older. With increasing assessments the older members are too frequently obliged to drop out and give up their insurance just at the time of life when they most need it. 9. Industrial life insurance. — ^Insurance for the masses rather than for the classes, or the more care- fully selected lives of the old-line companies is the claim of what is known as industrial life insurance. It is conducted on proper actuarial principles, but the very nature of the problem makes it necessary to de- 122 INSURANCE vise special means for transacting the business. This form of insurance appears to have originated in Eng- land in 1854, when the Prudential Assurance Com- pany of London commenced to issue what is called industrial policies, in connection with the ordinary business of life insurance, which it was then trans- acting. To this company is due the credit for estab- hshing this very important branch of business on the solid foundation which it now enjoys. Its importance in Great Britain can be appreciated when we recall that something like twenty million individuals are in- sured in the policies issued by this company. 10. Industrial life insurance in the United States. — In this country industrial life insurance is due to the late John F. Dryden of New Jersey. The first in- dustrial policies were sold in the year 1875 in Newark, N. J. The company issuing them changed to the present name. The Prudential Insurance Co. of Amer- ica in 1877. The principal companies engaged in the business are the Metropolitan, The John Han- cock, Columbian, which, with the Prudential, transact probably not far from 90 per cent of this form of busi- ness in the United States, altho there are some twen- ty-five companies that issue such policies. Approxi- mately seventy million lives thruout the world are now protected by policies of this kind, over twenty-foilf £ millions of these policies being in the United States. .^ What are the essential features of this form of in- surance? (1) Policies are issued for small amounts, BUSINESS METHODS 123 ward, from that sum, to an infant life of not more than $10. (2) Premiums are multiples of five cents. (3) Premiums are payable weekly and are collected by the agent calling at the house. (4) Insurance is pro- vided for the whole family. Some of the methods of this form of insurance may be briefly noted. (1) If death occurs during the first six months of a policy, only one-half of the amount of insurance is usually paid; (2) there is a period of grace, the same as in the case of other poUcies; (3) the policies are usually incontestable one year after dates; (4) the policies may be converted in due course and at the proper age into ordinary policies; (5) there is the usual clause against naval and mihtary occupa- tion; (6) there is a cash surrender value as in the case of the ordinary policies; and (7) endowment policies as weU as life policies are provided for. 11. Industrial premiums. — The premiums run from three cents, five, ten, fifteen, twenty, twenty-five, and so on. In one company the highest amount that can be insured for is $996 at the age of twenty-eight, the premium" being sixty cents a week. At age ten, a weekly premiimi of five cents is charged, the amoimt payable if the policy has been six months in force, is $150. At age twenty the amount payable is $105. , At age thirty it is $79. The companies now provide that if one attains the age of seventy-five the insur- ance is continued in force but the payment ceases. Regarding the future of industrial insurance Mr. Frederick L. Hoffman says: 124 INSURANCE Industrial insurance is now a thoroly well established method of family protection, intelligently adjusted^ to the needs and conditions of wage earners and their dependents. In the natural evolution of the business constant progress is being made. and every year improved or new features are introduced into the policy contract, or in the relations of the companies to their policy holders, which shows the people that in years to come industrial insurance will serve a still larger social and economic purpose than at the present day. REVIEW Give some instances of the use of life insurance in business. What is the most recent development in this field of insurance? What are four characteristics of industrial insurance? A holder^ of an industrial insurance policy joins the National Guard. What should he do to keep his policy effective? What fact of mortality has often been left unprovided for by assessment companies? What are the results? CHAPTER VIII CASUALTY INSURANCE 1. Origin of casy,edty insurance. — The general name given to the branches of insurance other than marine, fire and life, is Casualty £asurance. In the early part of the nineteenth century when branches other than the three big ones began to be developed, the name Accident Insurance was, altho it applied to a special branch, used for some time to designate these various additional forms of insurance. In due time, however, the phrase Accident Insurance was limited to its special phase, and the broader expression. Cas- ualty Insurance, came into use, and is continued to the present day. One of the most comprehensive lists showing the various forms of insurance of all kinds is put forth by the Brokers' Association of Great Britain. The long- list which would be included under the terms casualty insurance is worthy of note: EiNGiNES, B011.EKS AND EuEC- Peksonax. Accident: TEic Plmtt: Personal Accident. Engines, Boilers and Elec- Sickness and Accident, trie Plant. Do. With Life Ass. Do. (All Risks.) Casuai.tt: Contract Guarantee. Coupon. Dentist's Indemnity, xvm — 10 126 Igg INSURANCE Cycles. Druggist's Indemnity. Hailstorm. Fidelity Guarantee. Lifts and Cranes. Forged Transfers. Live Stoct. Keys. Motor Cars. , Leasehold Redem. Motor Cycles. Licenses. Plate Glass. Mortgage. Third Party and Driving. Patents (Infringement). Transit. Property Owner's Ind. Workmen's Compn. Rail. Wagon Do. Vakious : Registered Post. , , -r ^ .. Solvency Guarantee. ^!^.Ti? li'jtT;*^- sprinkler Leakage. Bad Debt and Credit, Burglary. Trusteeships. 2. Extent of casnialty insurance. — The latest fig- ures of casualty insurance, using the reports of the State of New York, are as follows : (a) The assets were $203,000,000, which showed an in- crease over the preceding year of $17,000,000. (b) The liabilities, not including the capital, were $123,- 000,000, while the total amount of capital was $46,000,000. (c) The total income was $157,000,000. $141,000,000 of this amount was received from premiums. (d) The disbursements were $141,000,000. The divi- dends to stockholders were appro:^imately $5,000,000. (e) As illustrating the somewhat close underwriting con- ditions of the business as a whole, it may be stated that there was a net loss from underwriting for the year of $820,000. ~ The relative income from the different branches in casualty insurance is reported as follows: Personal Accident $25,750,000 Health Insurance 6,750,000 CASUALTY INSURANCE 127 Liability $34,300,000 Workmen's Compensation 31,850,000 Fidelity and Surety 22,000,000 Plate Glass 4,700,000 Steam Boiler 3,000,000 ' Burglary and Theft 4,700,000 Automobile and Teams, Property Damage 5,500,000 Other classes 2,800,000 Insurance business other than fire or Kfe was car- ried on in Canada during 1915 by 28 Canadian, 14 British and 35 United States companies. Thirty- seven of these companies likewise transacted fire insur- surance, and one transacted hfe insurance. In ad- dition to these 77 companies, there were 5 fraterng,! orders or societies which carried on sickness insurance and also life insurance. Of these 28 Canadian companies which carried on business other than fire or life, 21 transacted miscel- laneous classes of business only. Of these, 13 trans- acted sickness insurance; 12 accident insurance; 7 plate glass insurance; 8 guarantee insurance; 9 auto- mobile insurance ; 2 steam boiler insurance; 4 burglary insvu-ance; 1 weather insurance; 1 hail insurance; 1 hve stock insurance; and 1 title insurance. The total amovmt of premiums received in Canada in 1915 for all forms of insurance, excluding fire and life insiu-ance, was $8,133,483. The following sum- mary shows the distribution of the premiums to the various classes: Automobile (including fire risk) $312,427 Automobile (excluding fire risk) 323,658 128 INSURANCE Personal Accident $1,684,010 Combined Accident and Sickness 402,753 Guarantee 730,138 Plate Glass 269,263 Steam Boiler 150,377 Burglary 91^885 Sickness (so far as separate return made) 1,084,798 Inland Transportation 165,450 Employers' Liability 1,952,250 Sprinkler Leakage 38,781 Title 79 Live Stock 79,971 Hail, Weather and Tornado . 841,694. Explosion 5,949 Total $8,133,483 3. Scope of casualty insurance. — The principle of insurance is capable of wide extension. It would be impossible to enumerate all possible cases in which in- surance against a risk might properly be taken. One case in the English courts brought out a contract under which a man interested in a lecture tour of Miss Ellen Terry took out a policy, by the terms of which she was to receive ,£100 for each and every engage- ment, which thru sickness or any other cause Miss Terry was unable to keep. It appeared that this man had made himself responsible for all or a part of Miss Terry'is traveling expenses, for which he was to re- ceive a share in the profits of the tours. Under the terms of the insurance as construed by the court, the insured would have been entitled to an indemnity had he suffered any loss as a result of his contract with Miss Terry. CASUALTY INSURANCE 129 4. Personal accident insurance. — ^Among the very earliest branches of casualty insurance to be devel- oped was personal accident insurance. In 1848 in Great Britain it was proposed to organize a company that should insure those taking railway journeys against injury on the journey. It is perhaps need- less to point out that railway travel was then in its infancy, and that the idea of insuring those who might be injured on such journeys seemed but little short of madness. However, in 1849 the Railway Passen- ' ger Assurance Company was organized by a special act of Parliament. In 1852, finding that the insur- ing of persons traveling on railways wotild appar- ently furnish a limited field, the company obtained a charter amendment which enabled them to engage in accident insurance on more general lines. The ad- venture was successful from the beginning, and many other companies sprang into existence. In connection with this form of insurance, it is ex- ceedingly interesting to note that those who first planned the work were either so skilful or so fortunate as to adopt a series of charges which have furnished a basis for all future work of this kind. Many of the actual charges are still in use altho the benefits under them have been greatly extended. 5. Accident insurance in the United States. — It is to James G. Batterson that accident insurance in the United States owes a great deal of its success. Trav- ehng in England, he purchased a railway accident ticket, and was impressed with the value of the idea.. 130 INSURANCE On returning to the United States he sought, in 1863, and obtained a charter from the legislature of Con- necticut. The Travelers Insurance Company had at first a somewhat limited field, but in 1864 the charter was amended and it was permitted to issue policies against aU forms of accident. From this beginning the business has developed until at the present time some sixty-five companies on the stock plan — ^not to mention mutuals — ^re engaged in this form of in- surance. 6. What is an accident?— In this form of insvu-ance the question arose very early when claims were made as to whether the injury was caused by an "accident." It is evident that the difficulty, like most other ques- tions, comes when the case is on the border-line, and the best way to present it is to give the opinion of the court in two or three cases : In the case of the United States Mutual Accident Association vs. Barry (131 U. S. 100), the assured died from injuries sustained in jumping oflF a plat- form. The Supreme Court approved in its decision the following instructions: We understand from the lestimony, without question, that the deceased jumped from the platform with his eyes open, for his own convenience, in the free exercise of his - choice, and not from any perilous necessity. He encountered no obstacle in jumping, and he alighted on the ground in an erect posture. So far we proceed without difficulty. But you must go further and inquire, and here is the precise point on which the question turns : Was there or was there CASUALTY INSURANCE 181 not any unexpected or unforeseen or involuntary movement of the body, from the time Dr. Barry left the platform until he reached the ground, or in the act of alighting? Did he or did he not alight on the ground just as he intended to do? Did he accomplish just what he intended to do, in the way he intended to? Did he or did he not unexpectedly lose or relax his self-control in his downward movement? Did his feet strike the ground as he intended or expected, or did they not? Did he or did he not miscalculate the distance, and was there or was there not any involuntary turning of the body in the downward movement, or in the act of alighting on the ground? These are points directly pertinent to the question in hand. And I instruct you that if Dr. Barry jumped from the platform and alighted on the groqnd in the way he intended to do, and nothing unforeseen, unexpected, or involuntary occurred changing or affecting the downward movement of his body as he expected or would naturally expect such a movement to be made, or causing him to strike the ground in any different way or position from that which he antici- pated or would naturaUy anticipate, then any resulting in- jury was not effected through any accidental means. But if, in jumping or alighting on the ground, there occurred, from any cause, any unforeseen or involuntary movement, turn, or strain of the body which-brought about the alleged injury, or if there occurred any unforeseen circmnstance which interfered with or changed such a downward move- ment as he expected to make, or as it would be natural to expect to make under such circumstances, and as caused him to alight on the ground in a different position or way from that which he intended or expected, and injtiry thereby resulted, then the injury would be attributable to accidental means. In what are called the poison cases, an injurious substance was taken by mistake. In the case of Riley vs. Interstate Business Men's Accident Associaticm 132 INSURANCE (152 N. W. 617) , the chief justice spoke thus on the matter: , I am entirely clear that John N. Riley came to his death by external, violent and accidental means, and am just as certain that deceased did not voluntarily take poison. The only question in the case to my mind is. Did he take it in- voluntarily, bringing its taking within the meaning of the exception in the policy? The question is a narrow one. What is the meaning of the term "involuntary taking of poison "? I confess J:o some doubt on this proposition, for I hesitate to. apply it so broadly as to cover every case of unintentional poisoning, as where it results from some lethal substance found in ordinary food, or any case where the poison is inadvertently mixed with other apparently innocu- ous substance or substances by accident only. There is some reason for saying that the exception is no stronger than if it had read that the policy should not be held to cover death from the taking of poison, no matter whether the assured was sane or insane at the time of its taking. But on the whole I am disposed to think that it is broad enough to cover death resulting from the voluntary or involuntary taking of poison, provided the poison be of the kind generally regarded as such, that is to say, arsenic, strychnine, carbolic or sulphuric acid, or other drugs com- monly known as a poison as distinguished from a drug, or other concoction which, although poisonous, is not generally recognized as such. I wish to so limit my concurrence so that ptomaine or other like poisoning, the taking of an over- dose of medicine not generally ' regarded as a poison, or any other case except one where death directly results from the voluntary or involuntary taking of what the ordinary mind regards as poison, is covered by the policy. 7. Scope and development of personal accident in- surance. — In personal accident insurance, for a given sum and other considerations the company agrees to CASUALTY INSURANCE 138 pay to the beneficiaries, if the insured be killed by ac- cident, a fixed sum of money; or if the insured be in- jured there will be paid to him either a stipulated indemnity for the loss of an important memjber, as an eye, or a stipulated indenmity per week for the time the injury lasts; but not, of course, in any case would the amount paid exceed the face amount of the policy. The records of accident insurance show very clearly the rise and decline of the popularity of the bicycle. Since the automobile has come into existence an enor- mous increase in the business and in the claim costs has occurred. Statistics show that 25 per cent of all the accidents for which benefits are paid occur at home. Another 20 per cent occurred to pedestrians. Automobiles represent 10 per cent, and ordinary forms of recreation the same. At one time the num- ber of accidents caused by automobiles and horse- drawn vehicles respectively was about the same, but the rapid increase in the number of automobiles is making accidents from this source far more numerous than those caused by the horse-drawn vehicles. 8. Premium. — The basis of accident policies is so much for each thousand dollars of indemnity; ordina- rily it is five dollars. Probably the most popular pol- icy is the one which is twenty-five dollars a year for five thousand dollars, at death, with proportion- ate benefits for injuries which do not residt fatally. These benefits and price have imdergone some change. 134 INSURANCE but the most important changes have increased the benefits rather than modified the charge. One of the features early introduced was a certain percentage of increase in the benefits, usually 10 per cent, for each year up to five after the first time the policy was renewed. Thus, a person who had been insured five years, secured for the same simi of money, benefits of seventy-five hundred dollars under the five thousand dollar policy. Another feature was the doubling of the benefits when death was caused under certain circimistances, as in a bvu-ning building, on a railroad train or in an elevator. That such double benefits ate of more than ordin- ary moment may be illustrated by the case of a noted architect in New York City. Upon leaving a friend's house, where he had been visiting, he called a taxicab, in which he rode from the side street to the avenue. A short distance from his friend's house it collided with a trolley car. The cab was upset and the archi- tect so badly injured that he did not recover. His accident policy was for twenty-five thousand dollars, and subject to double benefit for an injury which happened in this manner, and, as it had been in force for a couple of years, the 10 per cent increase made the payment somewhat larger than twice twenty-five thousand dollars. Accident insurance, like life insurance has been sub- jected to all the schemes and strategems of those who seek to defraud, and much wisdom has been required on the part of physicians and those who settle claims CASUALTY INSURANCE 135 on losses to detect such plans. It seems incredible that one would purposely injure himself even to the extent of parting with an important member of the body for the purpose of obtaining funds from acci- dent insurance, but actual cases show that this has been done. 9. Automobile insurance. — It would appear from the record that the Boston Insurance Company was the first concern to offer policies of instu*ance against a series of hazards to which the automobile and its owner are subject. Naturally, the machine had al- ways been insured against fire by the regular fire pol- icy ; but broader insurance was required by the devel- opment of the machine, and that came into existence. At first its broader coverage was limited to insurance companies devoted to the casualty business; but many of the fire insurance companies have been granted the privilege of engaging in this form of insurance. ' Automobile insurance covers : i. Fire or explosion 2. Transportation, i.e., derailment and collision 3. Theft ' 4. Damage by fire to personal, efi'eets carried upon the car 5. Damage to other property by being in collision with the automobile insured — known as property damage 6. Damage to the automobile insured by being in collision with some other object 7. Loss of life or injury to the occupants of the car and legal liability for expenses in connection therewith 8. Loss of life or injury to others and legal liability for expenses in connection therewith. 136 INSURANCE When one considers this list of hazards, it is evident that the charge must be proportionate to the risk as- sumed. It must be borne in mind, however, that the use of these vehicles is equivalent to permitting steam engines to run on the streets. We should at once recognize that a high rate of insurance would be required to cover such a hazard. An examination of the daily papers shows the steady toll in the loss of lives, machines, and injury in other forms, which must be allowed for in this type of insurance. 10. Plate glass insurance. — The breakable nature of glass might aloiie seem enough to prevent the de- velopment of an insurance company to take care of this risk. Plate glass insurance is now, however, a very substantial business. It originated in this coim- try in 1868, when the New Jersey Plate Glass Insur- ance Company was organized. When only small panes of glass were manufactured there was but little i demand for this type of insurance, but as the demand came for large pieces of plate glass and the value of a single pane increased, some form of protection be- came a necessity. The growth of the business may be ascertained by comparing the premiums in 1874, which were $18,000, with those of today, which amount to $5,000,000. It is estimated that there are at least 400,000 store fronts insured imder plate glass policies. The busi- ness differs from possibly all others in that most of the losses are not settled by cash payments. The com- pany replaces the glass, and for this pvu-pose main- CASUALTY INSURANCE 137 tains warehouses at central points, or makes arrange- ments with jobbers for handling the losses. The causes of breakage nmnber about one hundred- Stones and the small boy are accountable for about 75 per cent of all the losses. There are certain me- chanical featiu-es, such as the settling of a building, which may cause a loss; or the glass- itself may be im- properly set in the sash and the undue strain may cause it to break. The cost of replacement varies. In the metropoli- tan centers the contracts with the jobbers can be made to fair advantage and even large losses can be quickly replaced; but away from the larger centers, espe- cially if the glass is of unusual size, the cost runs up to comparatively large figures. This cost of re- placement naturally is a very important matter to take into consideration in writing the insurance. The risks assimied cover also the show-cases in stores. These are often damaged by objects placed on them for display. Church windows are in a spe- cial class. If the window, as is quite likely, was made in one of the large cities, but placed in a church in a distant part of the country, the cost and expense are duly increased accordingly. The windows above the first floor are seldom insured, since they are con- sidered outside of the zone of danger. This view, however, has changed since the noted explosion and fire in July, 1916, at Black Tom Island in New York Harbor. The loss was the largest from a single disaster in the history of the plate glass insiu-- 138 INSURANCE ance business, and incidentally it gave the business an amount of advertising which it perhaps could not pos- sibly have received in any other way. The fact that so fragile a thing as glass can be suc- cessfully insured reveals the possibilities in the field of insvu-ance for many types of risks which are now considered outside the scope of that business. REVIEW To what risk was casualty insurance first applied? A person^ while asleep, is killed by breathing escaping gas. Would the death be covered by casualty insurance ? Enumerate ten different forms of death by accident that may be covered by casualty insurance. X takes out insurance on his automobile. Subsequently ' he runs over Y, who brings suit against him. By whom is X's case conducted ? Trace the development of accident insurance in the United States. CHAPTER IX CASUALTY INSURANCE iContinued) 1. Steam boiler and fly -wheel insurance. — The de- velopment of steam boiler insurance was the logical thing when the risk had reached the point where sufficient information in regard to it had been gathered so that insurance could be brought to bear upon it. This form of insurance, hke that of per- sonal accident insurance in connection with railroad travel, was among the earliest of the casualty lines to be developed. It has now passed its fiftieth anni- versary, while its younger cousin, fly-wheel insurance, was not taken up until 1901. The distinguishing feature of these two forms of in- surance is conservation. The fimds gathered in the form of premiums are not spent primarily — and are not intended to be — for the payment of losses, altho those are, of course, paid; but a' larger proportion of the funds, perhaps, than in any other branch of insur- ance is expended in the high-grade inspection service which it is necessary to maintain if this business is to be carried to a successful conclusion. No money indemnity can pay for the loss of a life, and that usually results when a boiler explodes. It is found that one boiler in every 170 is mechanically 139 140 INSURANCE defective and physically unsound, so that it is not safe to operate it and, naturally, is not insurable. One boiler in seven has defects that require attention, and sometimes the immediate suspension of work; while one boiler in every two possesses some defect, altho it may be of a minor character. One boiler in three has scale, and one in every seventy is affected by it to a dangerous degree. The insecure stay-bolt is foimd in one of every sixty boilers ; while one in 270 is posi- tively dangerous on accoimt of this defect. A frac- tured plate or head is found in one boiler in forty, and one in every 250 is seriously affected. One man is injured annually, to every 1,000 boilers under steam; and one killed, to every 5,000 boilers in opera- tion. This list of defects and disasters could be expanded, but as it stands it is sufficient to put one in touch with the general conditions which inspection service has shown in this important field of conservation. All too f re4uently the insured does not appreciate the loss that will foUow from the shutting down of his plant. The failure to make allowance for such loss is too often the reason why the insured is indifferent to the kind of insin-ance which brings him inspection service. Fly-wheel insurance, which is now in its seventeenth year, is a very small part of this form of insurance; its total premiums amount to only about $250,000 per year. Undoubtedly the increasing use of elec- tricity as a form of light, heat and power has had a marked eff^ect on the development of steam power. CASUALTY INSURANCE 141 There does not, however, seem to be any reason for supposing that steam power will entirely pass away in the near future. 2. Hail insurance. — Loss from damage inflicted by hail upon growing crops is often provided against by hail insiu-ance. It was developed on the continent of Europe many years before it was introduced into the United States. At first it was very largely a mutual affair. Stock companies did not enter into the business very largely before 1910; the last two years have proved so unfavorable that many of them are already retiring from it. In one of the states this form of insurance is undertaken by the state, which takes charge of the transaction, collects the funds and distributes the payment for losses. The experience in that state has not been satisfactory, since the rates fixed have allowed only a partial return to those insiu-ed for the losses which occurred. Late in April in the southern ter^-itory of the United States the writing of hail insurance begins. It moves northward as the season advances and stopi? in the Canadian provinces of Saskatchewan and Alberta in the month of July. All of the policies expire on Sep- tember 15th, irrespective of the date on which the pbUcies are written; but if the grain is cut earlier than that, liability ceases from the time it is har- vested. Of all growing crops cotton is said to be the most hazardous. Tobacco also ranks as hazardous, be- cause of the broad leaf's susceptibility to damage XVIIX— XI 142 INSURANCE from hailstones. Altitude has a bearing on the mat- ter; the grain fields of Colorado are written at a loss, altho the rate may be four times that in the lower sections. The question of moral hazard is an acute one in this business. This can be readily understood if one realizes how a small rain or hail storm might be con- sidered as causing all the damage to a growing crop, altho the growing crop itself might be quite sub- standard. 3. Central organization. — The settlement of hail losi^es has not been reduced to a scientific basis in any sense of the term. Perhaps the lack of success of the stock companies is due largely to this fact. Be- fore they had formed a central organization, the com- panies were quite at the mercy of the insured. The central bureau, however, has accomplished a vast amount of good work in this field of insurance. It is as important to the insured, as a body, that the losses be equitably settled as it is to the individual. Those who do not suffer a loss may be said, after all, to be those who are paying those who do, and anything that unduly increases the losses unduly in- creases the charge that must be made. This fact, with a foundation in equity, is a paramovmt considerar tion in dealing with the whole question of central organization for handling property insurance. Mr. Walter C. Leach, president of the Western Hail Association, thus set forth the requirements for an adjuster : CASUALTY INSURANCE 143 The adjuster must be a man of strong physique, capable of tramping the field all day, and between times doing 100 miles or so in a Ford every twenty-four hours; be prepared to be bitten by the bull-dog when he lands on the premises, and to drive off under cover of a shotgun if his settlement is not satisfactory. He must speak not less than three lan- guages, swear in none, and have a temperament that is under absolute control at all times — in fact, it is a heart-breaking job requiring a combination of physique, knowledge and diplomacy that is not easy to find. Over 35,000 claims wfere handled by the associa- tion during the past year. It is a form of business which has been quite lucrative to the insurance agent. At first the premiums were paid in cash, but later the note system was introduced. As competition, when too keen, tends to break down sound standards, an undue extension of the note system has probably crept into the business. But this all bids fair to be taken care of by the central organization as soon as it has had a /ew years more of experience on which to base better practices. 4. Hail insurance in Canada. — Hail insurance in western Canada has for some years past been written by (1 ) mimicipalities organized by the provincial gov- ernment; (2) piutual companies; (3) joint stock companies. The importance of carrying hail insur- ance was particularly impressed upon the farmers of the provinces of the Dominion in 1916. In the his- tory of agricultural Canada there had never been so disastrous a season as in that year. Probably over 10 per cent of the entire crop was destroyed by hail. 144 INSURANCE The only protection against hail is furnished by an in- surance policy placed with a reputable underwriting organization. No care or forethought will minimize the possibility of disaster as it may in the case of fire risk. In Saskatchewan;, a municipal hail insurance commission has been created. It has inaugurated' a system of cooperative, or mutual insurance, whereby a farmer whose crop is situated in a rural municipality may procure insurance, under the hail insurance act, to the extent of $5 per acre in addition to the $5 pro- vided for by an assessment of 4 cents per acre made by municipalities that have passed a prescribed hail insurance law. Agents have been appointed to solicit business for the commission in about 150 rural mimicipalities. The commission completed arrangements with several good companies whereby a portion of the risk could be reinsured if the amount of insurance applied for was greater than it was conisidered safe to carry. This arrangement has been carried out in a number of dis- tricts, in fact, wherever it was considered that there was even a slight risk of overloadirig, while in other districts where the lands of farmers taking this addi- tional insurance were more isolated and scattered it was not considered necessary to effect reinsurance. The rate charged for the additional hail insurance is 5 cents per acre for each dollar of insurance, which is 1 per cent per acre less than is usually charge^, but the commission calculated that ^as its administra-r tion expenses were low, the deficiency in revenue CASUALTY INSURANCE 14.5 caused by the reduction of 1 per cent in the rates Would be easily made up. The unfavorable experience of 1916, however, up- set calculations. The Saskatchewan Hail Insurance Commission's losses in that year were approximately $3,500,000. The available assets of the Commission, including the current revenue and surplus frona the previous year, amoimted to $1,500,000, while the losses thruout the system were more than double that amount. So that 50 per cent was the highest amount the Commission could pay on claims. While the hail losses in the year under review had more than taxed the capital, this fact did not, in the opinion of the chairman of the Commission, show any fault in the system. He was inclined to the opinion that it simply went to show the necessity for establish- ing a good security for hail insurance and for building up a large svu-plus. He advocated an all-round in- crease in rates, stating that such action was impera- tive. A 4-cent flat rate should, he suggested, be main- tained, imder the insurance act, on all lands, but this rate should carry $5 per acre on land up to 80 acres only on a quarter section, and a graduating scale of 1 cent per acre should be added on the whole quarter section for each additional 20 acres, or portion thereof, under cultivation. This would mean a flat rate of 8 cents per acre if a fuU quarter section were under cul- tivation. It was proposed that if there are 100 acres under cultivation on a quarter section the rate should be 5 cents; if there are up to 120 acres the rate should 146 INSURANCE be 6 cents; if there are 140 acres the rate should be 7 cents; and if an entire quarter section is under culti- vation the rate should be 8 cents per acre. The experience of the Saskatchewan Commission lends emphasis to the statement on a preceding page that the settlement of hail losses has not been reduced to a scientific basis ; and in Canada it is apparent that rate-making also is in an experimental stage. Continuing with the Saskatchewan province in 1916 as our example, the 22 companies writing business also lost heavily. Their loss ratio averaged 132 per cent of the premium income. When to this percentage is added the underwriting expense, which covers com- missions, adjustments and general office expenditure and which averages 30 per cent, it will be seen at a glance how disastrous for the stock companies was the hail season of 1916. In short, the companies not only paid out the total amount of money received by way of premiums, but they also paid from their reserves an additional amount equal to 62 per cent of the 1916 premium income. At the same time, they paid their losses in full. The mutual and stock companies are required by law to make large deposits by the governments by which they are hcensed or registered. In addition, they have to pay taxes and should they not pay their policyholders 100 cents on the dollar, their licenses are liable to cancellation by the governments con- cerned. Ten per cent would not have been an ade- quate premium in 1916, for the Saskatchewan gov- CASUALTY INSURANCE 147 ernment Commission to charge. The stock com- panies which charged approximately 6 per cent were able to draw on their assets and pay the farmer the full amount of his loss within a few days after the storm. On the other hand, the municipal insurance Commissions were able to pay the farmer only 40 or 50 cents which their funds allowed them to pay, and some difficulty was experienced in doing that. The government must accept every risk offered them, while a well-managed company would not take one-half of the business of ten adjoining townships, even if they could get it. It is obvious, therefore, that important changes must be made in the conduct of the business in western Canada, particularly in re- gard to the operations of the government Commis- sions. 5. Burglary insurance. — Protection thru insurance against loss by burglary originated in the United States in Reading, Pennsylvania, some time prior to 1892, but had no ^eat development. In 1892 one of the larger casualty companies undertook to guarantee banks and bankers, and other users of safes, against loss of money and Securities and other valuable ar- ticles thru attacks by burglars. The business had a very slow growth, and its upbuilding was not a mat- ter of months, but of years. The bankers required much education. Some of this education took the form of advertising, and even demonstrations of how easy it was to break into a safe. In 1895 the business amounted to about $65,000 a 148 INSURANCE year, and included only the banks in the small towns. Other companies entered the field in 1896, and from that period on, due probably to advertising, the busi- ness commenced to grow and has now attained a point where the income is almost $5,000,000. The phrase "burglary insurance" means loss by bm"glars, and in the beginning the policies were some- what restricted and covered what were known as safe burglars and bank burglars ; but today the scope is broadened. In addition to protecting banks and trust companies, the business has been extended to protect the merchants, and also, of course, to protect the pri- vate homes. 6. Other forms. — The broadening of its lines, while it increased the business, brought certain problems; for instance, in the case of resident theft insurance there is difficulty in the adjustment of those losses which are due to disappearance. The articles have disappeared but it is impossible for anyone to state that they have been actually stolen. It is not difficult to prove a burglary because that usually means the entrance into the property, and there will in most cases be some visible mark; but this is wholly lacking in the disappearance cases. The policies now cover the loss from the person of jewelry and other orna- ments. This is merely an illustration of the broad- ening-out process. "Mercantile Open Stock Insurance" provides for stocks which are not protected by safes or vaults. These command a high premium because there is no CASUALTY INSURANCE 149 coinsurance and the experience with it has been rather unsatisfactory. 7. Bobbery insurance. — ^Robbery insurance is anal- ogous. It includes: (a) Interior Robbery, which covers a hold-up in an office or store; (b) Outside Messenger Robbery, which protects bank messengers, delkrery men and collectors while away from their respective places, that is, engaged in some outside delivery ; | (c) Payroll Robbery Insurance. The papers fre- quently annoimce that the employe of an institu- tion returning from the bank with the money for the payroll has been held up and -robbed. Some noted cases have occurred in this form of jobbery, and pro- tection is provided against it under the Burglary policies. In this form of insurance there are six basic safe rates and ten basic vault rates, including many com- binations, as, where the safe may be inside the vault. The rates are different for different territories, and there are albwances which depend on the size of the city or town, and discoimts for burglar alarm and any watchman service. In robbery insurance the base rates are discounted for the nimiber of guards who accompany the messenger, and for any additional safe- guards deemed of value that are placed around the risk. Those engaged in this form of insurance maintain a central organization for the purpose of standardiz- 150 INSURANCE ing many features of the business which are of com- mon value, and probably this cooperative method has done as much as anything else to place a business — which by its very nature is precarious — on a sound and substantial footing. It is a business which in due time will grow, and if the principle of coinsurance can be introduced into the pohcies successfully it probably would mean a very widened scope for the business be- cause the rates would be very much lower. 8. Title insurance. — Another form of insurance which merits attention is title insurance. It had its origin in the city of Philadelphia in the centennial year 1876. Its underlying idea was not so much to pay losses that occurred thru defective titles, but to change the method of passing real estate from one party to another. The plan contemplated was that instead of having the title examined individually, at every trans- fer of property, it would be possible to have it thoroly examined by competent parties, and that policies of insurance could then be issued against any loss that might occur because the opinion that the title was sound proved incorrect. There is no real risk assumed here unless the work of searching the title by the company originally was defective, but the expense of the work is very heavy. It must be done by men of great ability, who com- mand a good price for their services. When first launched the business had to overcome the opposition of those who had done the work in the past, and also the general feeling that the examination CASUALTY INSURANCE 161 of the title was a thing that ought to be done whenever property was transferred. This hostile attitude has passed away, and title insurance has taken its perma- nent place in the world of business. There are no renewal fees required in order that the policy may be kept in force. This is contrary to other forms of insurance, but the initial payment protects the title and covers the expense in connection there- with. 9. Fidelity insurance. — It was apparently about 1879 that bonds which guaranteed the honesty of a person began to be written. Like many names in in- surance the designation is a bit misleading, since one cannot guarantee that a person will be honest; but what they can do is to give a bond which may be called upon for an indemnification should the person fail to be honest. The business falls into three divisions : (a) the pri- vate employer; (b) Organization bonds, as they may be termed, states, counties and municipalities; and (c) those in favor of the United States government. The first class of business — ^that for the private em- ployers — ^is deemed of most value and most desirable. In considering the application for a bond on a specific individual the past history of the individual must be taken into consideration, as well as the opportunity or the temptation, which his present position offers. It does not follow that because the opportunity for taking fimds may be large — as in that of a bank — that it is so. The opportuaiity may be quite counteracted 152 INSURANCE by the care which is exercised over the kind of prop- erty with which the employe is intrusted. This statement is made with full knowledge of the fact that losses resulting from a failure to perform one's duty properly are almost a daily news item. But it should be remembered if it was not so rare it would not be a news item, and would fail to be re- corded, and that there are thousands of banks. Of course a company will lose at times by bonding a person who has secured a bond under an assumed name. His past record, if investigated, would have shown that a loss had already been paid by^ another company. The public official has one element in his favor, the office which he holds — assuming he is a treasurer of public funds — is more or less of a public institution,, and his work may be said to be conducted imder the public eye. We know all too well that this is not always a fact, but nevertheless it is a consideration and is of influence in issuing a fidelity bond. 10. Three classes of fidelity bonds. — ^Fidelity bonds may be classified under three heads : (1) bonds issued for larceny or embezzlement; (2) the culpable negli- gence bond; (3) bonds issued for the faithful per- formance of duty. In the first class, it is essential that the employer of the Donded person prove that his loss is caused by an act of dishonesty on the part of the employe, which comes within the scope of larceny or embezzlement. The second class calls upon the employer to prove CASUALTY INSURANCE 163 [that there has been culpable neghgence on the part of [the bonded person. Should the employe fail to re- turn to the strong box important papers or money which had been taken out for examination, he would be deemed guilty of negligence, but not of any crimi- nal offense such as larceny and embezzlement. It is evident that this phrase is capable of various interpre- tations, and comparaftively speaking many cases go to the courts for the express purpose of settling the question as to whether or not, under the given circiun- stances, there was negligence which amounted to cul- pabihty on the part of the employe. The third class of bonds, which guarantee the faith- ful perfonnance of the duties of an official, has obvi- ously a wider range tiian the other two. The range of duties may be so varied that the burden assumed is exceedingly large. One person may be responsible for the custody of the entire funds, or the responsi- bility may be divided; in many cases one person col- lects, hands over the proceeds to another, and the funds are paid out only on the order of a third party. There has grown up, in connection with this form of insurance, a method of issuing such bonds without the knowledge of the employe. There are many cases where the employer may deem it prudent to bond an employe, altho it has never been done before; and owing to the long service of the em- ploye, and so tax as he knows, faithful service, he may not wish to woimd his feelings by taking out the usual fidelity bond. The fidelity policy, as it has been 164 INSURANCE termed, may be secured in such cases. Naturally it commands a somewhat higher premium because the risk is somewhat greater, since it is in some degree, the insuring of a risk without an inspection of it. 11. Surety insurance. — The practice of becoming surety for another would appear to be, from Biblical references and other ancient works, one of the old- est conmiercial practices that is known. The bonds issued may be roughly classified as those of contract; of court; and of depository. There are also many other types, excise, forgery, customs, internal revenue and others. The first, or contract bond, is one given for the faithful performance of a contract which a party has entered upon. These bonds are subdivided into three classes: (1) those for the proper performance of the work; (2) those for the fvunishing of proper material for work; and (3) those for maintaining the work in proper condition after it is completed. In the performance of most contracts of this kind, the person for whom the work is being done usually re- tains a percentage of the payment to guarantee the faithful performance or the completion of the contract. Ten per cent is not an uncommon amount to hold back, and in some cases it is put at a higher sum. All such forms of surety bonds should be examined with the greatest of care. The questions involve not merely the hMiesty and ability of the person who has the contract, but also the nature of the work to be per- CASUALTY INSURANCE 155 formed, the time limit, if any, and the past record of the contractor. The practice of subletting many contracts must also be carefully considered, since the liability of the surety company runs out to many of these sub-contractors. Provision should, at all times, be made that the sub- contractor shall furnish a bond for his part of the work similar to that ftimished by the contractor him- self. The second tjrpe of bond which guarantees that proper materials will be furnished has less risk since a fairly correct idea can be formed as to the price at which these articles must be purchased and sold in order to yield a- profit. The type of bond known as the maintenance bond has normally a limit of fire years, but in some cases may be written for longer periods. Such bonds are generally issued to cover the up-keep of a road-bed, for the stated number of years. In the case of bonds issued for court purposes there are two classes: (1) the fiduciary, and (2) the bond which is given by one party to a litigation which will enable him to follow out a legal remedy. 12. Agreements in the bond. — ^In the first class of bonds, the person who secures the bond enters into a stipulation for the faithful performance of his duties, and the company signs the bond as a surety, thereby making the guarantee of the conditions of the bond. Such bonds come into use in the case of the settle- ment of estates, in the case of guardians and trustees. 166 INSURANCE Where there is property the company that issues the bond being a party to the trust, has a good deal of control over the situation, since the funds cannot be tampered with without its knowledge; consent or sig- nature. It will be evident, however, that having en- tered upon such a bond, the company must follow it out to the end. This requires steadfast watching which must not relax while the bond is in existence. Depository bonds are those which are given for the purpose of guaranteeing that there shall be a prompt repaying of funds which have been deposited with banks. They are required by states, municipalities, counties, and a great many persons holding pubhc positions. The desirability of such bonds depends on the conditions of the money market and business gen- erally. A bond which guarantees against forgery while quite an old type of bond in Great Britain, is rather new in the United States. Such bonds are used by banks as a protection against loss thru the forgery of checks or drafts. REVIEW In what form of insurance is the technical element of risk not found ? In what form of insurance are premiums devoted primarily to a purpose other than the payment of losses ? In what form of insurance is the moral hazard a vital factor? Name three classes of fidelity bonds. What types of bonds are found in legal proceedings ? What is a maintenance bond? CHAPTER X EMPLOYERS' LIABILITY INSURANCE AND WORKMEN'S COMPENSATION 1. Rise of new pJmses of insurance. — ^Legislation during the past thirty years in Europe has brought about to some extent in the United States, a new form of insurance to which the general title "social insur- ance" is given. In the United States the field of such legislation has been for the most part confined to questions concerning injuries which grow out of the accidents of daily employments. The liability of the employer for the results of acci- dents is an old established principle of law, but under common law, both in Great Britain and the United States, so many exceptions were permitted, that it was difficult to secure redress for the injured employe. Space is lacking to give thejsuccessive steps by which the obstacles confronting the claimant were removed, and by which the responsibility in accident cases was fixed more definitely and irrevocably upon the em- ployer. We are concerned with the development of certain types of insurance. 2. Employers' liability insurance. — The simple fact that under the common law most of the cases were obliged to be proved in the court by the plaintiff op- erated to limit the right of recovery, especially a,& the >:vni— 12 157 I 158 INSURANCE cases did not usually come to trial for two years. This position of the employer was much improved by the adoption of a series of laws known as Employers' Lia- bility Laws. These were based on two principles: (a) that the person who is guilty of negligence should be held liable for compensation to the injiwed person; and (b) the liabihty might arise not only from the de- liberate act of negligence of the employer himself, but from that of his other employes. 3. Employers' liability laws in United States. — In the United States, employers' habUity acts appear to have been passed in Alabama in 1885, Massachu- setts in 1887, Colorado, 1893, Indiana, 1893, and New York in 1902. There were, as could be expected, some differences in the different states, but these were slight. The basic principles are the same in aU cases. These measures were employers' liability laws with very distinct limitations as to the recompense which the employe might receive. None the less these acts placed greater liability on the employers, who began to take out insurance to. cover such liabihty. 4. Kinds of liability insurance. — Besides employ- ers' liability many other forms of liability policies were soon placed on the market. These may be briefly summarized as follows: (a) The Public Liability policy which provides insurance against the liabihty of an employer to per- sons who are not in his direct employ but who may visit his plant legitimately, that is, are not trespas- sers. WORKMEN'S COMPENSATION 159 (b) The Employers' Liability for Contractors. This protected the contractor against the liability which he assumed in employing labor on work in va- rious parts of the coimtry, that is, not limited to one location. (c) Public Liability for Contractors, taking care for the contractor of persons legitimately on his place of business. (d) Gteneral Liability, which provides protection to the owner of a building for injuries or death caused by defects about the building, or its operation. (e) Elevator Liability. This is for accidents caused by elevators. (f) Team Liability, which provides indenmity to the owner for the liabUity which he may incur by rea- son of accidents caused by his vehicles. (g) Theater Liability, which protects the manage- ment for accidents which may happen to persons in the theater. (h) Vessel Liability, which provides protection for the owners of vessels. (i) Physician's Liability, which protects the physi- cian, surgeon or dentist, for liabiUty for injuries which he may cause by errors in practice. The growth of the business may be indicated by the fact that in 1887, the first year that policies covering liability insurance were written in the United States, the premiums were $131,000; while in the year 1915 they amounted to $22,000,000. In all forms of liabilitv insurance there is a com- 160 INSURANCE mon basis. In employers' liability contracts, it is an agreement to indemnify or make good to the insured any loss arising from the liability imposed by law upon the insured person for damages on account of bodily injuries or death suffered by any employe or employes of the insured, in the factory, shop, yard or other described place. In the case of the other poli- cies, there is the same provision for indemnification for injuries arising to persons who, of course, may not be employes, but who may have been injured by eleva- tors, teams, etc., belonging to the insm-ed. 5. Premium. — The premium is based on the wages of the employes who are protected by the policy. The sums to be paid are usually fixed by the liability acts, and bear some relation to the earnings of the em- ployes. These, therefore, furnish the basis on which the premium is based. It is not unusual to omit the salaries of the higher paid employes, as superintend- ents, foremen, etc., and this is usually acceptable to the insuring office because the large salaries which they receive in many cases would be a heavy liability to as- sume. In a large plant, or a small one for that mat- ter, if the risks vary in different parts, the payroll for each division of course is taken into separate consid- eration, and a higher rate of premium may be charged for certain departments than is charged for others. The following quotation from the Yale Readings in Insurance, illustrates how rates may differ : The rate for woolen mills, Including employes and the public Is .23 for each $100 of payroll. The premium for a WORKMEN'S COMPENSATION 161 mill employing 600 operatives, old and young, skilled and unskilled, at average wages of $450 a year, would be $517.50, and the cost of the insurance per capita is $1,035. The rate for steel bridge construction is $9.00 for each $100 payroll. A structure furnishing employment to 500 men of all grades, at average wages of $700 a year, would require a premium of $3,150 or $6.30 per man. 6. Reserves. — The fact that a liability may develop long after the accident has occurred, and that the liability itself may be of uncertain amount, has made the problem of providing the proper reserves very dif- ficult. It has been necessary to adopt, from time to time, additional safeguards against the reserve becom- ing inadequate. In fire insurance, the losses are very rarely under- estimated, but the liability insurance business is new and no general rules can be stated. The tendency has been perhaps to underestimate the losses. If they were correctly estimated, changes in the laws which increase the benefits, or the attitude of the jury which increases its awards, have been rather discon- certing and additional reserves have had to be pro- vided. This form of insurance does not concern property which can be properly appraised, but injuries to hu- man beings, the appraisal of which must vary in dif- ferent parts of the country, in different tribunals and with different individuals. In general, the reserves are based upon the number of suits or settlements that have been taken care of in a past period, as from three to five years. The aver- age cost of these furnishes a fairly accurate measure, 163 INSURANCE but like everything else it is, for the reason stated above, subject to readjustment at different times. Employers' liability insurance, with the growth of social consciousness, is disappearing and giving place to what is called "workmen's compensation," but the other forms of liabihty and some parts of employer's liability, remain and still furnish considerable casualty premivmi income, and will probably continue to do so. The developnlent of workmen's compensation out of employers' HabUity, is one of the most interesting fea- tures of the growth of civihzation. 7. Workmen's campemation. — The difference be- tween employer's liability and workmen's compensa- tion can perhaps be grasped by the statement, that under employers' liability about one injury in eight which happened to an employe whose . work came within the scope of the act, received compensation, and under workmen's compensation eight such in- jm-ies are taken care of. A fundamental difference is that employer's liabil- ity took a merely legal view of the matter. It said, in effect, under the law the employer is legally bound to do certain things for his employes. Should he fail to do these a fixed responsibility rests upon him, which responsibility means a money payment. Workmen's compensation embodies the view that accidents and injuries which occur in connection with various busi- ness operations are, and should be considered, as a part of the cost of conducting the business. They should be paid for, just as the manufactiu-er would WORKMEN'S COMPENSATION 163 pay for raw material which he might purchase for the purpose of converting it into another product. 8. Workmen's cornpensation laws in the United States. — In the year 1910, the legislature of the State of New York passed what is generally considered the first general workmen's compensation law in this coxm- try. In 1911, in the case of Ives vs. South Buffalo Railway Co., 201 N: Y. 271, the Court of Appeals declared the law unconstitutional. This was the first case to come before a higher court in the United States, in which the modern view of workmen's compensation was passed upon. It became necessary to adopt a constitutional amendment in the State of New York, and it was not vmtil 1913 that the present law went on the statute books. This law has been attacked in two cases, but has been sustained by the Court of Appeals in both. The movement for workmen's compensation had received such impetus when the New York statute was passed in 1910 that, without waiting for a test in any one state, many of the states passed compensa- tion laws. Seldom in the history of such beneficent legislation has the movement been so widespread in so short a period of time. 9. State laws. — The present status of these laws may be simamarized as follows : Thirty-two states and three territories have such laws in force, while Congress has passed a Federal compensation law designed to coVer employes of the United States govermnent and the Panama Railroad. 164. INSURANCE T law is optional, or, as it is often tenned, elect- i n fourteen of the states and two territories as to i classes of employers. This, in other words, means that in these states and territories the law is not com- pulsory upon any employer. In ten of the states it is elective so far as the private employer is concerned, but compulsory f pr public em- ployers, such as towns, cities, counties and states. In eight of the states and one territory the law is compulsory as to both private and public employers. The Federal law, it should be stated, is also a com- pulsory law. In twenty-five of the states and two of the terri- tories the employer who has chosen to pay compensa- tion, or who may be compelled to do so under the law, must make due provision for the payment to his em- ployes; or if he chooses to insure them himself, he must prove to the duly constituted commission that he has the financial ability to do it. Insurance or some other form of security is op- tional in seven of the states and one of the territories. A "state fund," as it has come to be called, which, is a fund administered by the state but without any state guarantee back of it, is a compulsory form of com- pensation in force in four states and one territory. In seven of the states there is a state fund but it is not a monopoly, that is, private companies are per- njiitted to do business also, and they compete with the state fund. In two states where there are state funds, the privi- WORKMEN'S COMPENSATION 165 lege is granted to employers to assume their own risk. The reguIa,tions are very stringent, but if the em- ployer can comply with the regulations and obtain the privilege, he may then secure his insurance in private companies. Insurance is compulsory either in private or in semi- state mutual associations in two states, aild in sixteen states and two territories this form of insurance is written only by companies duly licensed therefor. The act would probably have been made compul- sory in most of the states were it not for some doubt as to the constitutionality of such action. 10. Main features of law. — The essential features of workmen's compensation, omitting various special provisions which are largely for the purpose of giv- ing legal effect to the act, may be briefly set forth, using the New York act for reference, as follows : (a) The employments covered are both public and private, the principal business of which is of a hazard- ous nature conducted for pecuniary gain. Farm labor and domestic servants are not included in the group, but may be voluntarily brought under the scope of the act. It applies where five or more per- sons are regularly employed in these hazardous trades. It covers accidental personal injuries arising from and in the course of employment, and such diseases or infections as may result therefrom. It would not cover those cases where the injury was deliberately inflicted, or where it was due to or arose out of intoxi- cation. 166 INSURANCE The real contentions which have arisen in connec- tion with the administration of the act have come from a difference of opinion as to whether the injury was "due to or arose out of or in the course of employ- ment." It is evident that there is room for difference of opinion in the interpretation of this phrase. For instance, if the factory is closed for the day and the workmen, while standing in line waiting to receive their pay, hegin to fool and one is injured; does this constitute an injury arising in the course of employ- ment? A written notice of all injuries must be sent to the employer and the Commission within ten days of the injury or thirty days after death. 11. Compensation allowed. — The compensation does not apply for the first fourteen days of injury. Medical aid is provided; this includes surgical ap- paratus. If the disability be total the compensation is two- thirds of the average weekly wages with a maximum of $15 a week, and a minimum of $5, not to ex- ceed in the aggregate of $3,500. There are certain injuries which are constituted permanent total dis- ability. If the disability be partial, as the loss of a hand, arm, foot, leg or eye, the maximum compensation is $20 per week and the minimvmi $5. In other cases of partial disability, two-thirds of the loss or re- duced earning capacity of the injured person, with a maximum of $15 per week and a minimum of $5. WORKMEN'S COMPENSATION 167 The total sum cannot exceed in the case of temporary disability $3,500. If the employe be killed, a reasonable amount, usu- ally $100, is allowed for funeral expenses, and 30 per cent of the wages to the wife or dependent hus- band during widowhood or dependency. Should the widow remarry, two years' benefits are allowed. In addition to this there is 10 per cent addition for each child under 18 years of age. Should there be no widow or dependent child, 15 per cent is allowed to each dependent grandchild, brothers and sisters under 18 years of age; while to parents and grandparents 25 per cent is allowed. ' The total may not exceed two-thirds of the wages up to $100 per month, and any excess over that sum is not used in computing the benefits. The companies reporting to New York State for the year 1915 showed receipts of $31,850,000 for work- men's compensation. This would not include all the business of the country because some companies do not operate in New York State, and in some states private companies are not allowed to operate. It would be fairly safe, therefore, to increase this $31,- 000,000 by at least $10,000,000 to secure an adequate idea as to the sums now being paid for workmen's compensation. The first report covering injuries reported and other data for the first seven months of operation (July 1st, 1914, to January 31, 1915), are as follows: 168 INSURANCE Number of notices of injury filed by employers. . . .130,723 Number of claims received from employes ....... 22,221 Number of claims in which initial awards were al- lowed 15,218 Number of claims in which subsequent awards were allowed 3,712 Total number of awards allowed 18,930 Number of claims disallowed 982 Nfimber of claims pending 2,707 Number of completed claims set for hearing 3,314> 12. Prevention methods. — Traveling hand in hand with the compensation which takes care of the injured party we have a movement fostered by the companies and the states that so far as possible improvements shall be made to properties, safety devices installed, and a spirit of cooperation introduced, in order that accidents may be prevented. This is deemed, and justly so, the far better course to pvu'sue than to allow an individual to be injured and then compen- sate him or his dependents. In connection with prevention, it should be pointed out- that so far as the machinery is concerned there are certain hmitations to this kind of work. A large number of the accidents (the greatest percentage) arise not from defective machinery, but from other cases. Hence, if we had perfect machinery and could assimie that all these might be eliminated, it still would leave a great naajority of injiu-ies to be taken care of that arise from other causes. The Industrial Board of Illinois in a compilation of 16,774 non-fatal accidents for the year 1915 showed the causes as follows: WORKMEN'S COMPENSATION 169 Machinery 16.0 per cent Falls 18.5 pet cent Falling objects 22.4 per cent Lifting or handling materials 10.9 per cent Hand tools (hammers, knives, etc.) 5.6 per cent Stepping on nails and other sharp objects. . . . S.O per cent Acids, flames, explosives, hot liquids, glowing metal, etc 7.0 per cent Flying fragments (emery splinters, etc.) . . . 4.4 per cent Animals (kicks, bites, etc.) 1.7 per cent Not stated 10.5 per cent 13. Worhmen's compensation insurance in Cairutda. — ^Eight of the nine provinces have in force in 1918 workmen's compensation acts of various types. In Ontario, Nova Scotia and British Columbia, the State Board administers the act and insurance companies are prohibited from competing with the state. In Manitoba, Quebec, New Brunswick, Alberta and Saskatchewan the companies only transact the busi- ness but the individual employer (with the exception of the province of Manitoba) is permitted, if desired, to carry his own risk. Canadian employers, generally speaking, prefer an opportunity of choosing between workmen's compen- sation insurance provided by the state or by the com- panies. The establishment of a state workmen's compen- sation system in Ontario in 1914, probably set a new standard in this matter. As other Canadian prov- inces have studied its form and one or more propose to adopt it with perhaps some modifications, a few notes on this act will prove instructive. # 170 INSURANCE The Workmen's Compensation Act of Ontario was framed by Sir William Merec^th, chief justice of Ontario, and embodies what may be described as a new code of law respecting compensation for accidents to workmen. ' The part of the act which is to be administered by the State Board is called Part 1. It does not apply to all employments, but it applies to employments in the very large nimiber of industries enumerated in Schedule 1 and Schedule 2, chief among which are manufacturing, building, construction, lumbering, mining, quarrying, transportation, navigation, opera- tion of public utilities, etc. The distinction between the two schedules is that in Schedule 1 the Board levies an assessment and col- lects an accident fund out of which the compensation to workmen is paid, the employers in this schedule not being individually liable to pay the compensation; while in Schedule 2, no accident fund is collected from the employers but they are individually liable to pay the compensation as each accident occurs. The compensation for the injury is payable imder the Ontario act irrespective of any question of negli- gence or absence of negligence, and the old defenses of common employment and volxmtary assumption of risk are no longer applicable. The only cases in which compensation is not payable, provided the accident arises out of and in the course of the employment, are: ( 1 ) Where the disability lasts less than seven days ; (2) Where the accident is attributable solely to the WORKMEN'S COMPENSATION 171 serious and wilful misconduct of the workman and does not result in death or serious disablement. No agreement to forego the benefits of the act is valid ; no part of the amoxmt payable to the accident fund by the employer is to be charged against the workmen; and the compensation cannot be assigned, charged, or attached, except with the approval of the Board. Compensation is to be paid for the industrial dis- eases specified in the act as well as for accidents. The provisions of the act respecting compensation are in Ueu-of the right of action for damages at law. An important feature of the compensation under the act is that it is payable periodically rather than in a lump simi, and as a rule, it continues during dis- ability or during life, as the case may be. Where the impairment of earning capacity does not exceed 10 per cent, the compensation is to be fixed by the Board at a Itmip sum, unless the Board thinks it is not to the advantage of the workman to do so ; and the Board may in other cases fix the compensation at a lump sum if it sees fit, or may in cases of special need make lump-sum advances without entirely com- muting the compensation. All questions, as to right to compensation and the amount of it, are determined by the Board and its of- ficers instead of by the courts. Prior to the establishment of a state system in Ontario, an exhaustive inquiry was made by a special commission of the Ontario government. At, the out- 173 INSURANCE set of the inquiiry, it was contended by those who spoke on behalf of the workingraen: (1) That the law of Ontario was entirely inadequate in the conditions un- der which industries were carried on, to provide just compensation for the employed who meet with in- juries, or suffer from industrial diseases contracted during the course of their employment; and (2) that under a just law the risks arising from these causes should be regarded as risks of the industries and that compensation for them should be paid by the indus- tries. The Ontario commissioner, in his report, stated that most of the compensation laws^ and perhaps all of them, except the German, had not been in force long enough to enable a conclusive opinion to be formed as to their merits or demerits. It was finally decided that a compensation law, framed on the main lines of the German law, but with certain modifications, would be better suited to the circumstances and conditions of Ontario than the British compensation law or that of any other country. The establishment of a state system, in Ontario caused perturbation among the insurance companies which had been writing workmen's compensation in- surance there and which are now prohibited from do- ing that business. Many employers dislike the fact that they are compelled to insure thru the State Board, not having the choice of insuring with the companies. The opponents of the state system take this ground: WORKMEN'S COMPENSATION 173 By eliminating the state as an administrator of the act, workmen's compensation will be qompulsory — that is, if a workman is injured, he will obtain com- pensation. At the same time, the employer of labor automatically assumes liability for accidents to his workmen, but whether or not he takes insurance is optional with him, just as in the case of fire or Kfe in- surance. The state, therefore, would not be bur- dened with the troubles of admmistering a workmen's compensation law, the workmen would be entitled to and would receive compensation, and the employer would have freedom of action in the matter of taking insurance, as he should have. Another serious defect in the proposed Ontario leg- islation is the lack of limitation of compensation. Without limitation, the act is dangerous. i 14. Health insurance. — It would appear that be- tween 1840 and 1850, insurance to cover periods of sickness was written, or an attempt made to write it, in the United States. Companies were organized for this purpose, the first being the Massachusetts Health Insurance Company of Boston. Others were organ- ized in Philadelphia and Jersey City. Apparently not until 1897, did the business commence really to become of much moment. In the following year, 1898, the accident companies began to issue policies making provision for iiidemnity during periods of sickness, and this has been the great f actoy that has developed the business to its present state, ranking as one of the successful minor branches of casualty in- XVIII— 13 " 174 INSURANCE surance. It provides indemnity for temporary disa- bility, permanent disability, hospital charges and surgical benefits. \ The interesting feature in connection with health insurance is not what it has done, but what it pro- poses to do. The income — $6,000,000 — from this form of insurance at the present time shows that it has not been taken up very largely by the commu- nity. But at the present time, owing very largely to the success of workmen's compensation, there is a de- termined effort being made to place it in much the same class as health insurance, that is, to make it com- pulsory so far as that may be possible under the con- stitutions of the several states and the United States. It must be remembered that workmen's compensa- tion dealing with injuries which can be traced quite directly to the business in which the injured person is engaged, furnish a very good starting point from which to assess the damages. But illness, as typhoid fever or any other disease that may be covered by the scope of the law, might be acquired in a whoUy differ- ent place than the place of one's employment. Prob- ably much work that may be called of a pioneer na- ture will have to be done before this form of insurance can be successfully established on anything, like a large scale. The experience of foreign companies is cited as affording just groimds for what; ought to be done in this country, but many things are different; social customs, habits, and policies, which make a plan like WORKMEN'S COMPENSATION 175 this possible in foreign countries, are diflFerent here, and much consideration will have to be given to that difference. It does seem reasonable to expect, how- ever, that out of the discussion that is now going on some workable tentative plan will be developed whereby the value of health insurance to the com- munity at large wiU be demonstrated, and once de- monstrated wiU be adopted. REVIEW A household servant falls while climbmg a defective staircase. In your state is the employer liable ? What is a state fnnd in workmen's compensation insurance? A factory employe attending one machine is directed by the foreman to attend another machine of a different kind. He is injured. Would the policy cover his injury? X comes to I^s work sober but with nerves shaky after an all- day Sunday spree. He loses a finger while running his machine. Would it be your policy to make pa3nnent of his claim without question ? What important movement attends workmen's compensation insurance ? What expenditures are covered by a health insurance policy ? PAHT II REAL ESTATE REAL ESTATE CHAPTER I THE REAL ESTATE BUSINESS AND ITS INTERESTS 1. Real estate a business, not a profession, — Real estate sometimes is inaccurately spoken of as a pro- fession, but it is essentially a business. A profession applies science, art or learning to the use of others, the profit to the professor or person applying it being incidental. On the other hand, business is engaged in primarily for profit, and the profit goes to those who engage in it. A profession implies attainment in special knowl- edge. A person may engage in business with or with- out special knowledge and no one else is concerned with the question whether he has any knowledge bf the business, because no one else is affected by the result. If he is successful, the rewards are his; if he fails, he bears the loss. But let him attempt to prac- tise a profession and others are directly affected, if he is vmskilful. The fact that his reward is diminished by his lack of skill is merely incidental to the fact that others suffer. 2. Ethics of the business. — Whether real estate is a 179 180 REAL ESTATE business or a profession has no connection at all with the ethics governing it. Every business can be conducted on a plane as high ethically as the ideals of any profession, and the men who have been conspicuously successful in the real estate business have attained success because they have applied there the highest ideals of commercial fair dealing. This does not mean that there is any ethical requirement for the seller or the purchaser to give away anything which belongs to him, or for either one to disclose to the other his necessity for selling or his requirements for Imying. It is absolutely necessary tho, that when the bargain has been made, it be lived up to by both parties according to its true intent. If there be any doubt of the intent of the bargain as it- is expressed in writing, thq spirit of the transaction should be carried out rather than the catch words of a written instrument. Men frequently perform the thing which they have promised to do, altho it may be to their own detriment and altho they may not be legally Qbliga the title. Between the making of- the agreement and its consummation at closing title some time may elapse. Because of this and because of possible misunder- standings between buyer and seller, expenses incurred by the pm-chaser, or changes in the legal position of both parties, it is only ordiaary prudence that a writ- ten instrument expressing the full details of the bar- gain be drawn up and signed by both parties. No special form of real estate contract is prescribed by law. If the instrument has the essential elements of a contract, and expresses the entire bargain, it is sufficient. In order that we may note what is usual in contracts of this sort, a copy of a form of sales con- tract used by the leading title companies of New York City is given here by way of illustration. It must of course be recognized that in places outside New York City some of its provisions should be excluded, and others, suitable to the particular case, inserted.. The printed part includes what has been found usual in all such contracts, and the blank spaces are provided to be filled in with such matter as pertains to the par- ticular case. AGREEMENT, made and dated between hereinafter described as the seller and hereinbefore described as the purchaser. 218 REAL ESTATE Witness, that the, seller agrees to sell and convey, and the purchaser agrees to purchase all that lot or parcel of land, with the buildings and improvements thereon The price is Dollars, payable as follows: Dollars on the signing of this contract, the receipt of which is hereby acknowledged Dollars in cash on the delivery of the deed as herein- after provided. The deed shall be delivered upon the receipt of said pay- ment at the office of at 19 Rents and interest on mortages, , if any, are to be apportioned. This sale covers aU right, title and interest of the seller, of, in and to any land lying in the bed of any street, road or avenue, opened or proposed, in front of or adjoining said 'premises, to the center line thereof, or all right, title and interest of the seller in and to any award made or to be made in lieu thereof, and the seller will execute and deliver to the purchaser on closing of title or thereafter on demand, all proper instruments for the conveyance of such title and the assignment and collection of such -award. If there be a water meter on the premises, the seller shall furnish a reading to a date not more than thirty days prior to the time herein set for closing title and the unfixed meter charge for the intervening time shall be apportioned on the basis of such last reading. The deed shall be in proper statutory short form for CONTRACTS 219 record, shall contain the usual full covenants and warranty, and shall be. duly executed and acknowledged by the sellei', at the seller's expense, so as to convey to the purchaser, the fee simple of the said premises, free of all encumbrances ex- cept as herein stated. All personal property appurtenant to or used in the operation of said premises is represented to be owned by the; seller and is included in this sale. All sums paid on account of this contract, and the reason- able expense of the examination of the title to said premises are hereby made liens thereon, but such liens shall not con- tinue after default by the purchaser under this contract. The risk of loss or damage to said premises by fire until the delivery of the deed, is assumed by the seller. The stipulations aforesaid are to apply to and bind the heirs, executors, administrators, successors and assigns of the respective parties. Witness- the signatures and seals of the above parties. In presence of [L.S.J [L.S.] [L. S.] 2. Divisions of the contract. — The form given above has four main divisions. Date and statement of parties. The agreement and the description of the property. The financial terms of the bargain, Miscellaneous stipulations. 3. Date and statement of parties. — The contract is dated merely as a convenient memorandimi of the time it was made. There is no legal necessity for this to be done. The names of the parties are filled in, one be- ing described as seller, the other as purchaser. They might be described as vendor and vendee, or as 220 REAL ESTATE the party of the first part and the party of the second part, but the simpler forms are always desirable when they serve the purpose equally well. 4. What the purchaser should know about the seller. — Under this contract the purchaser deposits his money with the seller as a partial payment on the pur- chase price. His chief concern is to be assured that the seller is the owner of the property, and has a good right to sell it. If the seller has been introduced as the owner of the property by a broker upon whom the purchaser can rely, he takes very little chance in deal- ing with him. If he wishes to be further assured he can ascertain from the records whether the seller ap- pears as the owner. While it is not an easy matter for a layman to find this out from the public records, he can get from any title company, for a small fee, a card which shows the name of the last owner of record. If the seller is an executor, trustee or guardian, it is proper to inquire whether or not he has power to sell the property. It is possible that while he may not have the power to sell when the contract is signed he may obtain the necessary permission from the courts. If the matter is at all doubtful the purchaser should have the advice of counsel before entering into the contract. It is a familiar rule of law that a person under legal age, i.e., 21, or an insane person cannot make a contract. A corporation owning the prop- el-ty, and acting thru its duly authorized officers, may make a valid contract of sale. 5. What the seller should know about the purchaser. CONTRACTS 221 — The personality of the purchaser is rarely of conse- quence to the seller. He merely wants to get a large enough payment when the contract is signed to assure him that the purchaser will carry it out. This pay- ment, or deposit, is often called the earnest money. The property will be withdrawn from the market when the contract is signed, and if the title is not closed, an opportunity to sell to someone else, may be lost. This is especially the case on an active and ris- ing market. When the bargain is made the seller oftentimes becomes liable for a broker's commission. To reimburse the owner for the commission, and to protect him against loss by withdrawing his property from the market, the purchaser should be required to pay a substantial sum when the contract is signed. Purchasers sometimes buy in the name of a dummy. If the broker knows this he should inform the seller, altho he is not obliged to impart the name of a principal especially when he has learned it in confi- dence. The seller, who deals with a dummy, requires the payment of a larger amount of earnest money than when he deals directly with a person of responsibility. Sometimes a sale of land is made with an agreement that the seller will make a building loan. In this case, the personality and reputation of the purchaser, who will also be the builder, is important to the vendor. 6. Agreement. — "The seller agrees to sell and con- vey, and the purchaser agrees to purchase." This promise, in exchange for a promise, is the considera- tion which supports the contract. The earnest money XVIII— 16 REAL ESTATE is merely a payment on account of the purchase price. It is not the consideration. The property is sold when the contract is signed; the title, however, is to be con- veyed by a proper instrument at a later date. 7. Description the most difficult part of the con- tract. — The seller has in mind the property he owns and wishes to sell. The purchaser has in mind the property he expects to get. The contract should be drawn so that the seller is obliged to convey just what he owns and no more, and so that the purchaser will get what it was his true intention to buy. No general rule can be laid down. The description taken from the last deed, or from the seller's pohcy of title insur- ance, if he has one, is the best to follow. How widely the conditions to be described may vary can be seen by means of a few illustrations. 8. Vacant lot description. — -What may be involved in describing a vacant lot can be seen most conven- iently by considering the diagram which follows : 2nd Street Ave. 25' -6—125' Ave. A B l3t Street This shows a vacant lot on Second Street west of Avenue B. A sufficient description would be. "Lot CONTRACTS 223 on the southerly side of Second Street, 125 feet west- erly side of Avenue B, being 25 feet in width front and rear by one hundred feet in depth on both sides; the side lines being parallel with Avenue B." The lot may also be described at length. This is custom- ary in the preparation of a deed. The lot may be shown on a map of a tract of land. If so, It may be described by the lot and block number shown on such maps, as "lot 110, Block 5, Map of lots of D Estate, filed in the office of the Clerk of New York County." If the purchaser desires, the prop- erty can be described both by reference to the map and by dimensions. The seller must be sure in this case that the map descriptions are correct or he should add the words "more or less" to the dimensions. Care- ful pm-chasers, however, may not want to take a de- scription qualified by the words "more or less" unless it is stipulated that the dimensions are not less than a certain quantity. 9. Description of improved property. — When a person buys improved property he expects to get three things: the land, the structures on the land and a good right to maintain such structures permanently. When the building is in the center of the plot, or well away from the side lines as in the case of a detached suburban dwelling, no difficulty of description is pre- sented. The description which fits the lot is all that is necessary. In describing city property, where buildings are contiguous to each other, problems arise from the fact that the lines of the building may not 224. REAL ESTATE coincide exactly with those of the lot. The building on the lot to be sold may encroach on a neighboring lot, or the" lot itself may be encroached upon by ad- joining buildings. Before closing a purchase it is a wise precaution to have a surveyor's sketch to see that the buildings are wholly on the land being conveyed. It is a maxim of the law that, "he who owns the soil owns from the center of the earth to the sky." There are, of course, exceptions to this. (a) When a building and lot exactly coincide, the lot can be described by a street nvmiber as "Being in the Bprough of Manhattan, City of New York, known as 105 Second Street." If the purchaser de- sires, this description may be amplified by a descrip- tion of the lot by dimensions. Both descriptions "mean the same thing, and both can be given, or one or the other can be omitted.s^ ( b ) An ad j oining building may encroach on the lot to be sold, say, for example, two inches. The seller, it is assumed, owns a house known as 105 Second Street and he owns a lot 25 feet wide, but his neighbor by encroaching, prevents him from using two inches of his property. In this case the property would be de- scribed by street number only, and the purchaser would get the house he has. in mind. If he desires to be assured of the dimensions of the lot they can be inserted in the contract in one of three ways. 1. Plot on the southerly side of Second Street, 24 ft. 10 inches wide, 125 ft. 2 inches westerly from tlje westerly side of Avenue B, etc. CONTRACTS 225 2. Plot on the southerly side of Second Street, 25 ft. wide, more or less, about 125 ft. westerly from the westerly side of Avenue B, etc. 3. Plot on the southerly side of Second Street, 25 feet wide, 125 feet westerly from the westerly side of Avenue B, etc., subject, however, to encroachment of two inches on said premises by building adjoining on the east side. The street number and, indeed, any other particulars can, of course, be stated in addition to any of these descriptions. 4. Lot No. according to register. Plan No. in the City of Toronto. (c) The building may encroach on an adjoining lot and it may be assmned again that the encroachment is two inches. In this case there is a building 25 feet 2 inches wide on a lot 25 feet wide. The plot 25 feet wide can be described as you would the vacant lot, letting i^t follow as a matter of inference and of law that you have a right to maintain the build- ing in its present position encroaching on your neigh- bor. It would not be well to describe it by street number, or by street number and dimensions of plot, unless in so doing you added a qualification that your house encroached on your neighbor's lot, but that you conveyed a good right to maintain it there. There are cases where the owner of a building has not a legal right to maintain his building encroaching on his neighbor's lot, and in such cases he must state that his sale is subject to the encroachment. If he does not do this, when the time comes to deliver the deed 226 REAL ESTATE the purchaser may reject the title on the grovind that the title is unmarketable. 10. Property subject to tenancies. — If there is simply a description of the property and no more, the purchaser could expect to get a title in fee simple without any limitations or incimabrances. However, property, and especially income bearing property, is often not free and clear. Frequently it is occupied by tenants who are paying rent to the owner under some kipd of an agi-eement. The agreement may be a lease for a definite term, or it may be a monthly let- ting. If it is a lease, the contract of sale should in- clude-after the description, "subject to lease at (here insert the rfent) expiring (here insert the date the lease ends) ." The lease may affect only part of the prem- ises. If this is so, it is desirable to state what part it affects. If part or all of the premises is occupied by monthly tenants, it is sufficient to state "subject to rights of present monthly tenants." The seller should guard against selling subject to any tenancy different from the lettings subject to which he owns the prop- erty. 11. Restrictions on property. — Many parcfels of land are affected by restrictions as to their use. Such restrictions are imposed on land in order to produce a uniform development or to protect other land of the owner. They may be such as affect the size of the plot on which buildings may be erected, the location of the buildings on the plot, or their size, character and use. ,It is not fair to ask a purchaser to take prop- CONTRACTS 227 erty subject to any restrictions that may exist. What the restrictions are should be specified in the contract, and an opportunity should be given to the purchaser to examine the record of the instruments in which they are contained. When a purchaser is not absolutely certain that the restrictions will not inter- fere with his contemplated use of the property, or in- jvu"iously aflfect its vstlue, he should get expert advice before signing the contract. In no case should he let himself be persuaded by any opinions of the seller as to their meaning. Should there be restrictions and none were mentioned in the contract of sale, the pur- chaser could refuse to take the title. If the seller is imposing the restriction at the time the sale imder consideration is made, and the purchaser assents to it, the proper wording is as follows: "The deed conveying title to said premises shall contain restrictive covenants binding upon the purchaser, his heirs and assigns, as follows:" (the restriction is here set forth at length) . In cases where the sale is made subject to existing restrictions the wording would be "Subject to restrictions contained in deed recorded in the office of the Register (or Clerk) of County, in Liber of Conveyances, Page ." 12. Easements. — An easement is a right thru, over, under or to the use of part of property in favor of an- other adjacent property. If A has the right to cross B's property to get a public highway that right is known as "right of way" and A's property should be sold subject to that easement. 228 REAL ESTATE The most frequent form of easement is the party wall right. A party wall is a wall erected on the di- viding line of two lots, standing partly on each, and one that is common to two adjoining buildings. It is created by express agreement between the two owners, or where one owner erects the two buildings with a common wall between them. The owner of each biiilding has the right to have the wall remain as long as his building stands. He can use it for its entire lengthi but he cannot lengthen it. He may build on it as high as he pleases provided he does not burden it so as to impair its usefulness. The party-wall right should be mentioned in the contract. If a wall stands entirely on one lot, but an adjoining owner has the right to insert beams in it to support his building, the right is known as a "beam right." Rights or easements in favor of the property go with it whether mentioned in the contract and deed or not. 13. Facts shown by survey. — When a survey has been made, it will show any encroachments of build- ings affecting the land covered by the contract, whether buildings on the lot encroaching on adjoining property, or of other people's buildings encroaching on it, or of the buildings on the lot encroaching on the public street. If the encroachment is not specifically mentioned in wording the description, it is well when such encroachment exists to follow the description by a clause somewhat as follows: — "Subject to state of CONTRACTS 229 facts shown by survey dated made by Civil Engineer." 14. Terms of the financial settlement. — Under the contract the seller agrees to part with certain prop- erty, and in exchange the purchaser agrees to pay a definite sum of money in a specified manner. The gross price of the property is first expressed in the contract and the method of payment follows. The payment may be divided into four parts : — The amoimt paid on the contract as deposit or earnest money. The ambimt of cash to be paid when the deed is delivered. The amount of mortgage encumbrance subject to which the property is taken. The purchase-money mortgage to be given back by the purchaser to the seller. 15. Earnest money. — In discussing the parties to the contract we noticed that the seller had reason to require the purchaser to make a pajnment of earnest money when the contract was signed. The purchaser would desire that the payment be as small as possible. He may not know that the seller is of sufficient finan- cial responsibility to insure the return of his payment in case the title to the property proves to be bad or unmarketable. No absolute rule as to the amouni; of this payment can be laid down. It is rarely more than ten per cent of the purchase price, and frequently five per cent or less. Sometimes when the seller is as- ISO REAL ESTATE sured of the pvirctaser's financial reliability, a nominal amount, or nothing at all, is paid on the contract. 16. Cash payment on delivery of deed. — ^When no mortgages are involved, this amount may be the dif- ference between the gross price and the amomit of earnest money paid, or it may be the gross price after . deducting earnest money and the third and fourth di- visions of the price referred to hereinafter, or either of them. The printed form given on page 218 requires payment in cash, i.e., in legal tender money. While it is customary for the seller to accept payment of this amount in a certified check, the contract should pro- vide for cash as this leaves the acceptance of a certi-' fied check optional with the seller. If the words "cer- tified check" were used they would include a check drawn on and certified by any banking institution, even a small one in an obscure town. The seller should reserve the privilege to require cash when the deed is dehvered, or to waive it and take payment in another form if he wishes to do so. 17. Property taken subject to mortgage. — ^As we express the gross price in our contract, the amoimt of the existing mortgage subject to which the property is sold must be stated as a payment of part of the pur- chase price. The price and the first three divisions may read thus: The price is Fifty Thousand Dollars, payable as follows: One Thousand $1,000 DoLXAss on the signing of the contract, receipt of which is hereby acknowledged. CONTRACTS 231 Nineteen Thousand $19,000 Douj^s in cash on delivery of the deed as hereinafter pro- vided. Twenty-five Thousand $25,000 Dollars by taking the property subject to a mortage for that amount now a lien thereon From the seller's point of view the statement of the mortgage as given above is satisfactory. The pur- chaser, however, may want to know something about the terms of the mortgage. Unless the terms are stated in the contract he would have to take title re- gardless of what those terms were. It is therefore often necessary to make the clause read: Twenty-five thousand dollars by taking the property sub- ject to a mortgage for that amount now a lien thereon be- coming due (here insert due date) and bearing interest at the rate of per cent per annum. If the mortgage were to become due at an early date the purchaser might not want to take the propertj'^ and assume the risk of having to replace the mortgage soon after becoming the owner. On the other hand, he might be buying the property for the purpose of con- ducting a building operation. In that case he would not wish to take the property with a long-term mort- gage imless there was a privilege of paying it before maturity. Many purchasers like to have the mort- gages on their property held by one of the well-known mortgage companies or savings banks, and if the prop- erty has been represented as being mortgaged to such an institution he may require that the name of the 232 REAL ESTATE holder of the mortgage be added to the foregoing clause. The interest of an owner in real property which has been mortgaged is called the equity. In the case de- scribed it is really this equity that is being sold. The purchaser under such circumstances does not become liable personally for the payment of the mortgage debt, altho the property he has bought can be held for it unless he has agreed to assume the mortgage. He may lose the property if there is a default in the payment of interest on the mortgage, but he cannot be held personally liable for a deficiency if the prop; erty does not sell for enough on foreclosure to pay the claim of the mortgage. 18. Assuming the mortgage. — The holder of a mortgage has the right not only to hold the property as security for the payment of the money he has Idaned, but also to hold the maker of the bond, given in connection with the mortgage, personally liable for the debt. The seller, who is thus persong,lly hable, may require as part of the bargain for the sale of the property that the purchaser not only take the prop- erty subject to the mortgage, but that he assume pay- ment of it. In order to provide for this in the con- tract, the following is added to the clause describing the mortgage given in the preceding paragraph. ". . . payment of which the purchaser shall assume when the deed is delivered." When this is carried out the purchaser becomes liable as tho he were the original maker of the bond and CONTRACTS 8S3 tnortgage. In the event of a foreclosure, he may not only lose his equity in the property, but he may be held for the payment of ihe deficiency if the sale of the property does not produce enough to pay the claim of the. mortgages. It should be remembered, however, that the original bondsman is not thus relieved from his personal liability. He too can be held for any de- ficiency, but he can sedk reimburisement from the one who assumed payment of the debt. 19. Bond and mortgage as part of purchase money. — When the sum of the cash payments and the mort- gage already on the property do not make up ,the whole purchase price, the remainder is usually repre- sented by a purchase money bond and mortgage. This simply means that the seller is extending credit to the purchaser for part of the price, and that he re- quires security from the purchaser for its payment. A purchase money mortgage may then be described as a mortgage given by a purchaser to a seller to secure payment of that part of the purchase price of land not paid When the deed is delivered. In the case assumed the balance due is $5,000. The additional clause describing the purchase money mort- gage may be worded as follows : Fn'E Thousand Dollaks. $6,000. By the execution and delivery by the purchaser to the seller of his purchase money tond for that amount secured by a purchase money mortgage on said premises to bear interest at the rate of 6% per annum, to run for four years, and to be conditioned for instalments on account of princi- 234 REAL ESTATE pal of $500, every six months. Interest to be paid with said instalments of principal. This clause provides that the purchase money mort- gage be paid in instalments. It may, of course, be worded so that it be payable in one sum at a definite time, if such is the bargain. 20. Provisions regarding purchase-money mort- gages. — In the case which has been assumed for an illustration, the purchase money mortgage would be a second mortgage. That is to say, it would be subject or subordinate in lien to the earlier mortgage of $25,000. In order that it remain a second mortgage, the purchaser may require the following clause: Said mortgage shall contain a clause that if the first mortgage be discharged this mortgage shall remain subordin- ate to any new mortgage placed on the premises in lieu thereof, for like amount and having similar terms. For his protection the seller usually requires that three things be stated in the contract in connection with this mortgage : That the bond and mortgage be prep0,red by hi? attorney, or be drawn on a particular form with which he is familiar, or in a form approved by his attorney. That the expense of preparing and recording the bond and mortgage be paid by the purchaser. That the purchaser pay the mortgage tax, if any. 21. When the deed is to be delivered. — The exact day, hour and place for closing the title and delivering the deed are stated in the contract. No rule can be laid down, but many closing dates are fixed thirty CONTRACTS 235 days after the contract is signed. If a title company examines the title it is often arranged to close at the company's office. 22. Apportionments to he made at closing. — The next clause in the printed form may be completed to read, "Rents, taxes, assessments, or local improvement taxes, interest on mortgages and fire insurance premi- ums, if any, are to be apportioned to date of closing." On closing title, rents for the cturent month are di- vided between the parties as of that date, the seller allowing the purchaser his share of any of the current month's rent that he hasalready collected. Taxes for the current year are apportioned, the vendor being charged his proportion from previous January 1. The seller also shows the purchaser the accrued inter- est on the mortgages on the property to the day of closing, and the purchaser repays to the seller the proportionate part of any premiimis on fire insurance policies not yet expired. 23. Title to land in street. — In some cases the seller owns the fee to the land in the street adjoining the property, and it is often required that he convey what- ever right or title he may have to the purchaser. A proceeding to open the street may be pending, and in order that the man whose land may be charged with an assessment for the proceeding may get any award for the land taken, the contract provides that the seller shall assign to the purchaser, at closing, all his right, title and interest in any such award. This pro- vision can be altered to suit any particular case. 236 REAL ESTATE 24. Water-meter charges. — This provision is made so that the owner of the property shall pay for metered water consumed during his ownership. In many cases no water meter is on the premises, a flat charge for the year being made by the city. ' If so this clause has no application, and no apportionment is made be- tween the parties. 25. Form of deed stipulated in contract of sale. — The contract quoted provides that the seller at his own expense will execute and acknowledge a deed convey- ing a fee simple title to the purchaser in accordance with the terms of the contract. The deed is to be the statutory short form of the full covenant and warranty deed — ^that is to say, the form prescribed by statute, by which the instrument is reduced to a simple form of words. Just what such a form contains we shall see when we come to the chapter on "Deeds." It is suf- ficient to remark here that many sellers, especial^ those acting in a representative capacity, wiU not give a warranty deed and the contract may then provide for a bargain and sale deed, or it may state that vendor being a trustee, he will give no covenants or only the' usual trustee covenants. This, however, needs to be mentioned in the contract or they do not pass. Both forms of deeds convey the same title, but the full covenant and warranty deed in addition contains certain warranties we shall discuss later. 26. Personal property included in sale. — Certain articles of personal property used in connection with the real estate are usually included in the sale. In CONTRACTS 237 the case of an apartment house these are, for example, shades, carpets, gas stoves, janitor's tools, etc. They are part of the property, as a building in actual use, and ought by right to go to a purchaser, altho they are not strictly a part of the realty. \ 27. Earnest money a lien. — In order to protect the purchaser to the extent of the money he pays on the contract, it is provided that such payment and the reasonable expenses of examining the title shall be a lien on the premises. That is, he can look to the prop- erty, or the seller's interest in it for the return of these amounts if the contract is not carried out. It is fur- ther provided, however, that this lien does not con- tinue if the piu-chaser should default in his agreement to buy the property. 28. Risk of damage by fire. — ^When the deed is de- livered, the purchaser is entitled to get a building, or buildings, in practically the same state as when the contract was signed. It may be held that the pur- chaser's interest was such that he could insure, and that he ought to take the title even though the building had been damaged by fire diu-ing the interim. In order to protect the buyer against such a claim, the wording of the contract places the risk of loss on the seller. If the subject of the sale is a piece of land the value of which is large compared to the buildings on it, there may be -a provision that the title shall pass even tho the buildings be damaged by fire, but that the seller shall turn over to the buyer any amounts he may have collected from fire insurance companies to cover the . xvm — 17 238 REAL ESTATE loss. It may also be that the value of the buildings is so comparatively small that the fire risk is not consid- ered at all, or the contract may provide that the vendee shall bp entitled to the benefit of the existing fire insurance on the premises. 29. Contract binding on heirs or executors. — The seller or purchaser may die between the time of mak- ing the contract and of closing the title. If the seller dies, his heirs or executors are obliged to carry out the contract. If the purchaser dies, his executors or ad- ministrators should pay the purchase price. Either party may assign his interest in the contract. If the seller conveys the land to a third person who knows of the contract, that person would have to carry it out. If the purchaser assigns his contract another prin- ciple applies, i.e., a person can assign his rights but not^ his liabilities. The assignee could pay the purchase price and get the title, but he could not be compelled to do so unless he had expressly assmned the obliga- tion. 30. Signature, seal, witness and acknowledgment, — The contract should be signed, sealed and witnessed, but it need not he acknowledged. The signatures of both parties are necessary in order that each may hold the other, for the contract cannot be enforced against one who has not signed it. The parties need not sign the same copy, but may sign coimterparts. Seals are important for three reasons: (1) a seal imports consideration, and the burden of proof is on the one who attacks the instrument alleging lack of CONTRACTS 239 consideration; (2) an undisclosed principal cannot be held, since only the one signing a sealed instrument is liable under it; (3) the statute of limitations in New York State is twenty years on a sealed instru- ment, but only six years on one unsealed and a similar proportion exists in most states. The contract should be witnessed merely in order to prove the signatures Of those whose names are sub- scribed. Acknowledgments are added to instruments in order that they may be recorded, but as contracts are not usually recorded, they are not usually acknowl- edged. REVIEW A contract for the sale of land by A and B is executed and recorded. Who is the legal owner of the land? What rights has the other party to the contract? X buys a mill. The owner of the mill property has always enjoyed the privilege of overflowing his pond on the adjacent property. X floods some 6f his neighbor's land. The neighbor objects. What rights, if any, has X? In selling a property subject to a mortgage how may the pur- chaser be required to assume personal liability for the debt? In a transfer of real property when purchase money mortgage is to be given, who pays for drawing the deed? Who for the bond and mortgagp? Who for the search? X and Y enter into a contract whereby X agrees to purchase Y's house. X assigns his contract to Z. Z refuses to carry out the contract. What may Y do? Must a contract for the sale of land be in writing? CHAPTER V CONTRACTS— EXCHANGES AND AUCTION SALES 1. Exchange contracts. — A special form of contract is used for transactions involving an exchange of properties. Land may be exchanged for land, or a parcel of land may be taken in part payment for other land. Owners may wish to get rid of their equities in large holdings and will take free and clear property in exchange, or a man owning a small parcel may offer it as part payment for something more valuable. There are brokers and operator;^ who make a specialty of exchange transactions. A standard form of ex- change contract follows : . AGREEMENT, made and dated between hereinafter described as party of the first part, and hereinafter described as party of the second part, for the exchange of real property. Witness, as follows : The party of the fiyst part, in consideration of one dollar, the receipt of which is hereby acknowledged, and of the con- veyance by the party of the second part hereinafter agreed to be made, hereby agrees to sell, grant and convey to the party of the second part, at a valuation, for the purpose of this contract of Dollars, 240 CONTRACTS 241 All that land with the buildings and improvements thereon in the , The premises which are to be conveyed by the party of the first part shall be conveyed subject to the following en- cumbrances : The party of the second part, in consideration of one dollar, the receipt of which is hereby acknowledged, and of the conveyance by the party of the first part hereinbefore agreed to be made, hereby agrees to sell, grant and convey to the party of the first part, for the purpose of this contract, at a valuation of , Dollars, All that land with the buildings and improvements thereon in the The premises which are to be conveyed by the party of the second part shall be conveyed subject to the following encumbrances : ' The difference between the values of the respective prem- ises, over and above encumbrances, for the purpose of this contract, shall be deemed to be Dollars, and that sum shall ^e due and payable as follows, by the party of the The deeds shall be delivered and exchanged at the office of at o'clock on ' 19 . It is agreed by the respective parties hereto that brought about this exchange and that the brokerage shall be paid as follows: Rents and interest on mortgages, if any, are to be ap- 242 REAL ESTATE portioned, and the risk of loss or damage to the premises by fire, until the delivery of the deeds, is to be borne by the re- spective sellers. If there be water meters on the premises, the respective sellers shall furnish readings to dates not more than thirty days prior to the time herein set for closing title and the unfixed meter charges for the intervening time shall be aji- portioned on the basis of such last readings. ' ' All personal property appurtenant to or used in the operation of said premises is represented to be owned by the respective sellers and is included in this exchange. This contract covers all right, title and interest of the respective sellers, of, in and to any lands lying in the bed of any street, road or avenue, opened or proposed, in front of or adjoining the premises to be conveyed to the centre line thereof, or all right, title and interest of the respective sellers in and to any awards made or to be made in lieu thereof, and the sellers wiU execute and deliver to the pur- chasers, on closing of title, or thereafter, on demand, all proper instruments for the conveyance of such title and the assignment and collection of such aT^ards. Each of the parties agrees to convey the property herein- before described as sold by such party respectively, free from all encumbrances, except as above specified, and to execute, acknowledge and deliver to the other party, or to the assigns of the other party, a deed in proper statutory short form for record, containing the usual fuU covenants and warranty, so as to convey to the grantee the fee simple of said premises free from all encumbrances except as herein stated. The deed, in each case, shall be drawn at the cost of the party of the first part thereto. The stipulations aforesaid are to apply to and bind the heirs, executors, administrators, successor^ and assigns of the respective parties. WITNESS the signatures and seals of the above parties. f , [L. S.] IN PRESENCE OF ] [L. S.] L [L.S.] CONTRACTS 243 Each party to the contract is at the same time a buyer and a seller. The consideration is the agree- ment of each party to sell and convey his property in exchange for that of the other party. 2. Description of the properties. — There are of course two descriptions. They should be Mn-itten out in accordance with the principles governing sales con- tracts. The limitations and encvmibrances on each parcel follow the description. Here should be set forth tenancies, restrictions, easements and encroach- ments as in the sales contract, and in addition the mortgage encumbrances, subject to which the land is to be conveyed. 3. Financial statement. — In connection with each parcel, there is a statement that it will be sold and conveyed "'at a valuation for the purpose of this con- tract of Dollars." This amount is stated as the valuation, not the price. Following the description of the property to be conveyed by the \party of the second part and encumbrances against it, is the further statement, "The difference between the values of the respective premises over and above encimibrances, for the purpose of this contract shall be deemed to be Dollars." That is to say, taking each property at its given valuation, and de- ducting encimibrances, there is a difference to be set- tled by some kind of a payment from one to the other. This figure can be considered as the difference in the agreed values of the equities. The contract then 244 REAL ESTATE states which party pays the difference and the manner in which it shall he paid. The values stated in a contract of this kind are fre- quently inflated values. As both sides know what land is being transferred the difference is the only important figure and no one is. deceived. Sometimes merely nominal valuations for each parcel are given, the differences being stated in the same manner as when full or inflated values are given. 4. N on- performance of contracts. — The pvu-chaser has the choice of three remedies in case the seller fails to carry out the contract. He may ( 1 ) require the return of the earnest money he has paid together with the expenses which he has actually incurred in the ex- amination of the title; (2) sue for specific perform- ance of the contract; or ,(3) sue for the return of his earnest money and any damages which he can prove that he has sustained by the seller's refusal to complete the transaction. The suit for specific performance is brought when the purchaser caij show that he requires the particular property cov- ered by the contract. Here money damages will not compensate him. The property itself is necessary. If the court grant a judgment for specific perform- ance, the seller must comply or he will be guilty of contempt of court. A suit for damages, in which a money judgment is asked, must show that the pur- chaser has sustained an actual loss by not obtaining the property. If he can prove by expert testimony that the property has a market value in excess of the CONTRACTS " 245 price he was to pay for it, this difference would be the measure of his damages. He might also show that he had an opportimity to resell at a profit. Merely prospective or speculative profits, however, would not be a measvu*e of damage. The seller also has the choice of three remedies if the purchaser fails to complete the contract. He may (1) keep the earnest money and disaffirm ihe con- tract; (2) sue for specific performance; or (3) sue for damages. In asking for a judgment of specific performances, he would allege that the buyer was able to pay the purchase price but would not. In suing for damages the seller would try to prove that the purchaser had agreed to pay a certain price, and that the market value of the property was now less than that amount, the difference representing his dam- ages. The remedies of. the parties for non-performance apply both to sales and exchange contracts. In Canada the courts have wide powers to relieve against penalties and forfeitures. The Judicial Com- nlittee of the Privy Council went to considerable length in relieving against a penalty in the case o^ Kilmer vs. British Columbia Orchard Lands Ltd., L. R. 1913, Appeal Cases 319. There it was stated to be an extremely clear case of a mere penalty for non-payment of the purchase money, from which pen- alty the company was entitled to be reheved on pay^ ment of the balance of the purchase money. Since August, 1915, several provinces have enacted 246 REAL ESTATE what is commonly known as Moratorium Acts, They provide usually that without leave of the court, ven- dors or mortgagees cannot enforce payment of prin- cipal during the war if interest, taxes and insurance are kept paid. 5. Real estate auction sales.— Sales of real estate are frequently accomplished by means of public auc- tions. The sale is advertised and at the appointed time and place the property is offered for sale to the highest bidder. These sales are sometimes voluntary sales held with the consent of the owner, or they may take^lace against the owner's will. As an agreement is signed when the sale'takes place. We may consider them under the headiQg of contracts. "6. Involuntary sales. — ^While involuntary auction sales are held again,st the will of the owner of the prop- erty, they are the result of some past act on his part, which resulted in creating a debt or obligation. In default of the payment of this debt, the sale of the debtor's property can be required. Preceding such involuntary sales the relation of debtor and cred- itor, leading to a lien on the real estate, must have existed. Sales under this heading include sales imder the powers of sale contained in the mortgage, mortgage foreclbsur^s, sheriffs' sales under execution of judg- ments, i^ales by trustees in bankruptcy, etc. Except the first, they are held under the direction of an officer of the courts, as a referee in a foreclosure action, the sheriff or the trustee in bankruptcy. Frequently a CONTRACTS 247 professional auctioneer is employed to conduct the sale and secure bids on the property offered. The courts require that such sales be free and un- restricted. An opportunity to buy must be given to everyone present. The interests of an unfortunate owner are being sold out, and those who conduct the sale under authority of the courts, should seek to ob- tain as much as possible for the property. 7. Terms of the sale. — The auctioneer reads a copy of the advertisement of the sale which includes the description of the property. Then he reads the terms of sale, a form of which is given below: ■ TERMS OF SALE The premises described in the annexed advertisement of sale, will be sold under the direction of Referee, upon the following terms : Dated, '. 191 1st. — ^Ten per cent of the purchase money of said premises wiU be required to be paid to the said Referee, at the time and place of sale, and for which the Referee's re- ceipt will be given. ^nd. — ^The residue of said purchase money will be required to be paid to the said Referee at his office, No in the Borough of • City of New York, on or before the r • • -day of , 191 at o'clock M., when the said Referee's deed will be ready for de- livery. Srd. — ^The Referee is not required to send any notice to the purchaser; and, if he neglects to call at the time and place above specified to receive his deed, he will be 248 REAL ESTATE charged with interest thereafter on the whole amount of his purchase, unless the referee shall deem it proper to extend the time for the completion of said purchase. 4th. — All taxes, assessments and water rates duly con&rfaied and payable which, at this date, are liens or encum- brances upon said premises, will be allowed by the Referee out of the purchase money, provided the pur- chaser shall, previous to the delivery of ,the deed, pro^ duce to the Referee proof of such liens, and duplicate receipts for the payment thereof. 6th. — ^The purchaser of said premises or any portion thereof, will, at the time and place of sale sign a memo- randum of his purchase and an agreement to corajdy with the terms and conditions of sale herein contained, and pay, in addition to the purchase money, the auc- tioneer's fee of fifteen dollars for each parcel sold and the salesroom fee of two dollars for each knock, down. 6th. — The biddings will be kept open after the property is struck down; and in case any purchaser shall fail to comply with any of the above conditions of sale, the premises so struck down to him will be again put up for sale, under the direction of said Referee, under these same terms of sale, without application to the Court, unless the Plaintiff's Attorney shall elect to make such application; and such purchaser will be held liable for any deficiency there may be between the sums for which said premises shall be struck down upon the sale and that for which they may be purchased on the re-sale, and also for any costs or expenses occurring on such re-sale. 7th.— . Referee. CONTRACTS 849 MEMORANDUM OF SALE have this day of 191 purchased the premises described in the above annexed .printed advertisement of sale, for the sum of I dollars and hereby promise and agree to comply with the terms and conditions of the sale of said premises, as above mentioned and set forth. ' Address 191 Received from the sum of dollars, being ten per cent on the amount bid by for property sold by me under the order in the cause. $ ^ The terms stated require the payment of ten per cent earnest money. The third and sixth clause state what happens when default is made by the purchaser. The fourth clause states that any existing liens at the time of sale, such as taxes, assessments and water rates, shall be allowed by the referee out of the pur- chase money. Following- the sixth clause is a space to be used for particulars of any limitations on the title. If the sale is subject to the lien of a prior mortgage, or subject to existing covenants and re- strictions, this should be stated. When the sale is of the entire fee of the premises, as in the case of named (usually twenty days later) , when the referee purchase price be paid to the referee at the time and place of sale, and that the balance of the purchase price shall be paid at the referee's office on a date iThis Receipt is to be returned on the delivery of the deed. 250 REAL ESTATE a mortgage foreclosure, any limitations or encum- brances that reiiiain should be stated with as much care as in a contract of sale. The property is struck down to the highest bidder, who signs the memorandxmi at the bottom of the terms of sale. He receives a copy containing a receipt by the referee for the payment of 10 per cent of the amount bid.. 8. Voluntary sales by auction. — The voluntary auc- tion sale has, more of the elements of, a contract than an involuntary sale. Some voluntary sales are held by trustees, executors, or others acting in a fiduciary capacity; sometimes at their own discretion, and sometimes carrying out the terms of a trust or a will. They may conduct such a sale in order to raise money to pay debts, or to raise money for division among the distributees. Such sales are frequently conducted by owners as a convenient and expediti^s means of disposing of real estate. Many large tracts of land are retailed in this manner. 9. Protected voluntary sales. ■^— When, the sale is held by a trustee, or other fiduciary, it is understood that those who have interests in the proceeds may be present and make bids on the property to protect their interests. When the seller represents his own inter- ests, and reaps 'all the benefits of the sale, he must either announce and advertise that the salq will be pro- tected, otherwise it must be open, unrestricted and un- protected. It is not fair to bidders to protect a sale which has been advertised as imrestricted, and if one CONTRACTS 251 finds that he has been led to raise his bid thru the ef- forts of by-bidders or "boosters" he will be reheved of his contract, and can demand the return of his deJ)osit. The seller must keep faith with those whom he has attracted to his sale, and cannot resort to fraudulent practices to gain higher prices. If the seller intends to protect the sale, he must announce it in advance. If he does not, and the*prices bid do not suit him, he should withdraw the sale. 10. Terms of sale in voluntary auctions. — The terms of voluntary sale are similar to those used for an involuntary sale except that 10 per cent of the ac- cepted bid is paid to the owner, the owner's attorney or the auctioneer. If the auctioneer receives it, he is con- stituted the agent of the owner for that purpose. The auctioneer's receipt for this 10 per cent is usually required to be surrendered when the deed is dehvered*. Rents, interest on mortgages and fire insurance pre- mimns are adjusted on a voluntary sale, while they are not at an involuntary one. 11. Successful auction sales. — ^Usually no effort is made to interest the public in an involuntary sale. It is a perfunctory affair, the rights of the parties inter- ested being adjusted by the sale. With a voluntary sale, the principal thing is to attract bidders. This is done by extensive advertising. Suceessful auction- eers are persistent advertisers. The property and its advantages are brought before the people with reminders bf the opportimities presented. Having attracted a crowd to the sale, the auctioneer's skill 252 REAL ESTATE and personality are shown in the manner in which he draws out the bids. REVIEW If a man 'wishes to give one parcel of land for another, into what kind of contract will he enter? In this contract is the given valuation the real value? How is the amount paid by one of the parties decided? What three remedies has the purchaser if the seller breaks the contract? What three remedies has the seller if the purchaser fails ? Do these remedies apply to exchange contracts ? Why are auction sales considered as contracts ? What kinds of sales are included in involuntary auction sales? How are they held, and what are their terms ? Who may hold a voluntary auction sale? Distinguish between protected and unrestricted sales. What difference is there in the terms of sale of voluntary and involuntary auctions? Of what value is advertising in auction sales? CHAI*TER VI DEEDS 1. Forms of deeds in general use. — The instru- ment by which immediate title to land is transferred is called a deed. There are three forms of deeds in general use, known respectively as bargain and sale deed, full covenant and warrant}'- deed, and quit claim deed. The law does not require that a deed be worded in any particular manner, but a statute has been enacted in New York giving a short form of deed containing aU necessary elements clearly ex- pressed. The statutory short form of bargain and sale deed follows: THIS INDENTURE, made the day of in the year nineteen hundred and Between party of the first part and ^party of the second part: WITNESSETH, that the said party of the first part, in con- sideration of the sum of dollar lawful money of the United States, paid by the said party of the second part do hereby grant and release unto the said party of the second part, heirs and assigns forever, all ToGETHEK with the appurtenances and all the estate and xvin — 18 253 254 REAL ESTATE rights of the party of the first part in and to said premises. To Have and to Hold the above granted premises unto the said party of the second part, heirs and assigns forever. In Witness Whereof, the said party of the first part has hereunto set hand and seal the day and year first above written. In the presence of STATE OF NEW YORK, COUNTY OF ss.: On this day of , in the year nineteen hundred and , before me, came to me known to be the' individual described in, who executed the foregoing instrument, and acknowledged that he executed the same. This deed contains the substance of bargain and sale deeds in use in most jurisdictions and the com- ments made apply equally to them. 2. Indenture, date and parties. — The expression "this indentm-e" is a relic of the ancient custom of preparing instriunents in duplicate on the same sheet, and then tearing them apart. The ragged edges or indentations when brought together helped to prove that the instrument was authentic. Formal instru- ments are now frequently called indentures. The date is not essential to a deed but is merely a convenient memorandum. If nothing can be found DEEDS 255 to the ccmtraay it is assumed that the deed was exe- cuted and delivered on the day of its date. The parties in the deed reproduced are designated as party of the first part and party of the second part. The parties are usually known as "grantor" and "grantee." The grantor should, of course, be a person considered as fully competent of entering into a formal ccaitract. • 3. Consideration.-rThere is no legal necessity for making reference irf^ the deed to the consideration given for the conveyance, hut it is advisable to, do so, as the biu-den of proving that no consideration was given then passes to anyone attacking the instru- ment. While the full purchase price may be stated if the parties wish it, frequently the consideration stated is merely nominal; that is, it may be men- tioned as "one dollar" or "one dollar and other val- uable considerations" or "one hundred dollars and other valuable considerations." In dealing with fiduciaries, it is important that the full consideration be stated in the deed, since fidu- ciaries are generally without authority to convey" property committed to their charge, except for a val- uable consideration, usually money. If, for some rea- son, it is not desired to make public the amount of consideration paid, an agreement regarding it, or a receipt for its payment, executed by the fiduciary in recordable form, should be obtained. If at any time the title is questioned because the deed does not set forth the consideration, the separate instrument 256 REAL ESTATE showing the payment may be recorded in support of it. The consideration for a transfer of real property may be either a good or a valuable consideration. A consideration is termed good when the transfer is made because of blood relationship or because of nat- ural affection. Such relationship or affection is recognized by law as sufficient consideration to sup- port the transfer of property to another without the passing of anything of value. Such a conveyance is not good against creditors whose claims are in exist- ence and valid at the time of the transfer. A valuable consideration may be a transfer of money or of anything of value. It may consist either in some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other. Marriage is a valuable consideration imder English law. It may also be a change either actual or potential in the financial position of one in favor of another. Any deed made without valuable con- sideration (even tho the one were inserted fictitiously) may be set aside by creditors as a fraud upon their rights. Creditors, whose claims arise after the con- veyance, have no ground for attacking the transfer. A deed may be void when the consideration is illegal or against public policy or when induced by fraud or duress. 4. Grranting clause. — "Does hereby grant and re- lease unto the said party of the second part, his heirs DEEDS 257 and assigns forever" — ^these words, known as the granting clause are important. By this clause the title is transferred from one party to the other. The language used is similar to that employed for the conveyance of an estate in fee simple. If any less estate than a fee is to be transferred by the deed, the language of the clause should be changed appropri- ately. For example,* if a life estate were to be granted, the wording would be "does hereby, grant and release unto the said party of the second part for and during the term of his natural life." 5. Description of property transferred. — ^The de- scription of property to be included in a deed should be more detailed than in a contract. It should be quite definite and easily traced because it is perma- noit. The contract lasts for only a short time, but the deed is usually recorded and becomes part of the permanent history of the title to the land. The deed affects not only the present parties, but also their successors in ownership. Two methods of description are employed in deeds: one by metes and bounds, the other by references to maps or monuments. The following is a specimen of a description by metes and bounds: AH that certain plot, piece, or parcel of land situate, lying and being in the Borough of Manhattan, City and State of New York, bounded and described as follows: — Beginning at a point on the nortJierly side of Thirty- fourth street, distant ei^ty-five feet westerly from the comer formed by the intersection of the northerly side of Thirty-fourth Street with the westerly side of Fifth 258 \ REAL ESTATE Avenue; running thence northerly parallel with Fifth Avenue one hundred feet; thence westerly parallel with Thirty-fourth Street fifty feet; thence southerly again parallel with Fifth Avenue, one hundred feet to the northerly side of Thirty-fourth Street and then easterly along said side of Thirty-fourth Street fifty feet to the point or place of beginning. From this description the location of the property- can be ascertained with exactness. A definite point of beginning is determined, i.e., a point on the northerly side of TlHrty-fourth Street, eighty-five feet "westerly from the northwesterly corner of Thirty-fourth Street and Fifth Avenue. From that point the description proceeds by metes (measures) and bounds (directitms) around the entire plot. The measures are exact and the directions are abso- lutely fixed. A description like this is of course the most satisfactory. The example given is a very sim- ple one ; in some cases a metes and bounds descripticm may be used for a farm or a tract of land of many acres. The directions and distances may then be stated with reference to the point of the e<»npass as, "north five degrees six minutes west, 857 feet." A description by reference to a map may be used when the property is part of a tract that has been mapped, as — Lots one to ten inclusive in Block 76 on map of Jones Estate, made by €reorjge Edwards, Civil Engineer and Surveyor, filed in the Office of the Clerk of Albany County, on Felwoary 11, 1893. Such a description conveys the land as it is shown DEEDS 259 on the map to which reference is made. The map is usually, but not always, filed as part of the public records. A description by monuments is one which not only depends oti metes and bounds, but is controlled by natural monuments and cannot be ascertained except by a knowledge of matters of geography or topog- raphy outside the recorded description. A descrip- tion which reads: Bediming on the side of the road running from West- chester to Yonkers, at the northwest corner of the farm of John Smith, and thence southerly along John Smith's farm to a rock at the comer of Jones's farm, and thence westerly along Jones's farm to a blazed tree at Robin- son's barn, etc., is a description which depends for its identity en- tirely upon matters outside the record title to the property. It is controlled not by the distances stated, but by the natural monuments. Descriptions of this sort are frequent, and if the property can be identified and the natural monimients on the groimd can be found, it is sufficient. One hundred years from now it may be troublesome to construe such a description and in order to identify a tract it may be necessary to examine the title to all the surrounding property, and make surveys and topographical maps of all the surroimdings. However, if it can be ascer- tained in any dependable way in accordance with all known methods which an engineer may suggest, what was the subject of that conveyance, it is valid, and will convey the property described. 260 REAL ESTATE A description which is absolute in its metes and bounds is the one extreme; a description which de- pends entirely upon monuments, natural or artificial, is the other extreme. Between these there are many descriptions which partake of the character of ^both. Reference to other conveyances or to some map helps to identify the property to be conveyed; after a description by metes and bounds, the deed may state that it is the property which was convej'ed to the seller by a certain deed, citing it by its parties, its date and place of record. Then if a mistake has been made in copying the description from the other deed, the mistake will correct itself by the reference to the deed mentioned. 6. Uncertain, ambiguous and inconsistent descrip- tions. — Any description by which the property may be identified is good, but an uncertain description which renders the property incapable of identifica- tion makes the instrument void. If a description is merely ambiguous, it does not follow that it is so un- certain as to be void. In the attempt to support the transaction it is only fair that reference should be made to matters outside the instrument itself which will result in the identification of the subject matter. Again, there may be several elements in the descrip- tion in the deed which are inconsistent in themselves. In such a case it would be pertinent to inquire into the real intent of the parties. An example of an uncertain description is "one of several houses owned by the party of the first part in DEEDS 261 the Borough of Brooklyn" ; of an ambiguous descrip- tion, "the most easterly of five lots fronting on Grand Street owned by the party of the first part"; of an inconsistent description, "lot 5 in Block 68 on Map B, described as" (metes and bounds description here inserted being of a lot in an entirely different block) . A deed that is not ambiguous on its face must be construed by itself. Regardless of the intentions of the parties, or any misunderstandings between them, outside parties can rely on the record and be secure against any claims the parties to the deed may make regarding it. There is a distinct line between latent ambiguity and patent ambiguity. 7. Appurtenances. — The clause "with the appur- tenances, etc." follows the description. Appur- tenances are rights which gowith the land, altho not mentioned in the description. They include such things as the right to maintain a wall on another man's land, or the right to cross other property to reach a highway. As a matter of legal construction appurtenances go with the land whether specifically conveyed or not. 8. Habendum. — "To have and to hold the above granted premises imto the said party of the second part his heirs and assigns forever." This part of the deed is known as the habendimti. It should contain a clear expression of what is intended to be conveyed by the instrument. The^ language quoted is that used for the transfer of an estate in fee simple. If any other estate is to be granted, it should be stated 262 REAL ESTATE clearly, not only in the gi-anting clause but also in the habendum clause. A conveyance upon trust, for ex- ample, would be worded: "To have and to hold the above panted premises imto the party of the second part, his successors and assigns forever, upon trust however to and for the following uses," after which the conditions of the trust are set forth. 9. Conveyance subject to incumbrance. — Prop- erty is often conveyed subject to a mortgage which is a lien upon it. This may be covered by inserting after the habendum a clause such as, "Subject how- ever to the lien of a certain indenture of mortgage made for $5,000 and interest." Rights of tenants, easements, restrictions, etc., affecting the property should also be stated in the deed in a similar manner. If restrictions are being imposed upon the property at the time of the conveyance, they are usually in- serted in the deed by a clause such as the following: "The said party of the second part does hereby cov- enant and agree to and with the said party of the first part as follows": (here follows the exact wording of the restriction agreed upon.) 10. Testimony clause, signature and seal. — The testimony clause just before the place for the signa- ture is purely formal. The deed would be just as good without it. The sij^ature of the party of the first part is usually the only one which appears on the deed. It may be the ordinary writing of the name or it may be just a mark. Any tiling made by DEEDS 263 the grantor and intended for, his signature is suf- ficient. In many states it is necessary that the deed he sealed. In the State of New York deeds by indi- viduals need not have a seal. It is to the advantage of the grantee, however, that for two of the reasons noted in om* chapter on contracts a seal be affixed; first, consideration is imported by the seal, second, the time of the statute of limitations is longer on a sealed instrument. In Canada deeds require seals, but transfers under Land Titles Acts do not. 11. Execution by corporation.— A deed made by a corporation is' executed by the signature of one or more officers acting on its behalf, and by affixing the corporate seal. Frequently, the name of the corpora- tion is written above the signature of the officers, but this is not necessary tho it is preferable. The seal, however, is a necessary part of the execution. It usually consists of an impression made upon the paper, and frequently takes the form of two concen- tric circles, with the name of the corporation between them. There are a few corporations which have not adopted a corporate seal. When such a corporation executes a deed, the individual seals of the persons attesting the instnmaent are attached. 12. Acknowledgments. — ^Practically every deed whether by an individual or a corporation is acknowl- edged or proved before officers authorized to take ac- knowledgments. When this has been done the deed REAL ESTATE is entitled to be spread upon the public records. A corporate deed is usually proved by the officer who signed it. The form of individual acknowledgment appears at the bottom of the deed reproduced in this chapter. The form of certificate for a corporate ac- kiiowledgnient is as follows: STATE OF NEW YORK, COUNTY OF NEW YORK, ««.; On this eighth day of January one thousand nine hun- dred and seventeen before me personally came John Smith to me known, who being by me duly sworn, did depose and say that he resides in the Borough of Manhattan, City of New York; that he is the President of SMITH REALTY COMPANY, the corporation described in and which executed the foregoing instrument; that he knows the seal of said corporation ; that the seal afBxed to said instrument is such corporate seal ; that it was so affixed by order of the Board of Directors of said corporation, and that he signed his name thereto by like order. 13. Bargain and sale deed 'with covenants. — The bargain and sale deed already described conveys just as good a title as any deed can convey. It is ap- propriate under certain circumstances for the grantor, in addition to conveying the title, to make certain covenants with regard to it. The bargain and sale deed therefore often has added to it cov- enants known as "covenants against grantor's acts." These covenants have to do only with what has hap- pened to the title during the time the grantor has owned it. The grantor represents that "he has done DEBODS 265 or suffered nothing whereby the premises have been encumbered in any manner whatsoever," This covenant is made usually by persons acting in a fiduciary capacity, sometimes by other individuals, and by some corporations. Fiduciaries cannot be ex- pected to know what happened to the property in the past nor to make warranties as to the future, but tliey can covenant as to their own doings in relation to it. 14. Quit-claim deed. — A quit-claim deed is exactly similar in form to a bargain and sale deed, except that in place of the words "grant and release" the terms used are "remise, release and quit claim." A quit claim deed will convey the entire estate of the grantor in the same manner as a bargain and sale deed, but it is usually employed to release some claim, real or supposed, upon the property. 15. Full-covenant-and-warranty deed. — The full covenant and warranty deed is like the bargain and sale deed in form except that five covenants made by the grantor are added to it. These covenants do not help the transfer of the title in any way, but are as- surances respecting the title conveyed. The form of the covenants in New York deeds is as follows : And the said do . . covenant with said part . . of the second part as follows : First. — ^That said seized of the said premises in fee simple, and ha . . good right right to convey the same. . Second. — That the part . . of the second part shall quietly enjoy the said premises. 266 REAL ESTATE Third. — That the said premises are free from encum- brances. Fourth. — That the part . . of the first part will execute or procure any further necessary, assurance of the title to said premises. Fifth.— That the said will forever warrant the title to said premises. 16. Explanation of the five covenants. — The five covenants contained in the full covenant and war- ranty deed may be considered in the order in which they appear. The covenant of seizen. This covenant signifies that the grantor owns the property, possesses it and has a good right to convey it to the grantee. Covenant of quiet enjoyment, "that the party of the second part shall quietly enjoy the said premises." This meahs that the grantee shall not be disturbed in his possession of the property by reason of any right or cause of action which existed at the time of delivery of the deed. Covenant against encumbrances. The grantor covenants that the title to the premises is free from all encumbrances. If any encumbrances exist and it has been agreed that the grantee takes subject to them, they should be set forth in the deed, either after the description or after the habendum. Then the clause will read, "That the said premises are free from encumbrances, concept as aforesaid." Covenant for further assurance. This covenant provides that whenever necessary the grantor will give other instruments to perfect the title of the DEEDS 267 grantee. This may be useful in case the deed should prove to he defective in any respect. If the graiitor under this deed can remove the defect — ^whatever it may be— by executing or proeuring a further assur- ance of title, he must do so. Covenant of warranty. This is the most impor- tant of the five covenants. It means an absolute guarantee of the title on the part of the grantor. 17. Covenants divided into two classes. — Two of the covenants relate to the past and three relate to the future. Those which relate to the future are said to "run with the land." The two which relate to the past, and which do not run with the land are the cov- enant of seizen and the covenant against encum- brances. If these two covenants are broken, the breach occurs when the deed is delivered. Subse- quent conveyances may operate to assign the cause of action on the breach, but the right of action ac- cruesj and the time of limitation begins to run, at the tiine of delivery of the deed. The other three covenants run with the land. They are binding covenants passing with the title to the land until broken, and enforceable by the owner at the time any breach occurs. The time of limitation begins to run, not from the delivery of the deed, but from the date the covenant is broken. After being broken, the covenani; no longer rims with the land; the right of action, however, may pass by assignment. 18. Breach of covenants. — The covenant of seizen is broken at the time of delivery of the deed if aijy of 268 REAL ESTATE t the elements of ownership, possession and right to convey do not exist. The covenant against encum- brances is also broken at that time if encimibrances not mentioned in the deed are in existence against the property. The covenant of quiet Enjoyment might not be broken even tho the grantor did, not have a title in fee simple absolute. If the fee could be de- feated by any contingency, the breach of this cov- enant would not occvu* until the grantee or those claiming under him were ousted from the enjoyment of the property. The covenant for further assurance is not broken until the grantor fails to give some other instrument when such action becomes necessary. ' He can then be sued for specific performance, or for dam- ages after performance has been demanded and re- fused. ^ ^ The covenant of warranty cannot be invoked un- til the owner claiming under it has been actually- ousted of his ownership, i.e., deprived of all the land or some essential portion. He can then claim dam- ages under the covenant. The measure of damage is not the value of the land at the time of the breach, but the consideration paid for the conveyance con- taining the covenant. There is no obligation on the part of the grantor to make good under any covenant until there is loss or liability thru loss. In some states the rule regard- ing the covenant against encumbrances is that the mere existence of an encumbrance shall be sufficient to call upon the maker of a covenant to respond. In DEEDS 269 New York the rule is more limited — the holder of the covenant must actually buy his way out before he can recover against the covenantor. 19. Covenants do not guarantee marketability. — The covenant of warranty is in no manner an assur- ance that the title to the property conveyed is market- able. There are many ways in which a title may prove unmarketable for which there; is no redress upon any covenant in the deed. A house may en- croach upon a neighbor's land, and the owner may have no right to maintain it there. If he tries to sell the house, the purchaser may decline to take tlje title. He will be in possession of an unmarketable litle, but he has not been ousted of anything which is within the bounds of the land described in the deed and has not been deprived of any valuable thing which was conveyed to him. Therefore, he has no re- dress under the covenant of warranty. A building may have an important projection upon a public street, so that the title is unmarketable, and a pur- chaser would not take it, neither would a lender lend on it, and yet there may be no redress under any cov- enant. The title may also be unmarketable because of some defect in the chain of title, or because of the possibility of some lien (such as a lien of decedents' debts) being asserted against it. A purchaser might not be compelled to take the title under the circum- stances, and yet there would not be a breach of any of the covenants contained in the warranty deed we have analyzed. XVIII— 19 270 REAL ESTATE REVIEW What is a deed? 'Name three forms. How are the parties to a deed designated? State the distinction between a good and a valuable considera- tion. Under what circumstances may a deed be invalid even if it recites a proper consideration? What is meant by the granting clause; habendum clause? How are they modified by circumstance? Explain what methods of description of the property may be employed in a deed and the merits of each. What is the danger in the description by monuments? How may an ambiguous de- scription be overcome? Should a deed be sealed? What are the requirements in the execution of a deed by a corporation? How are deeds acknowl- edged ? State the difference between a bargain and sale deed and a quitclaim deed? In a warranty deed which covenants are said to "run with the land" and why? What are the covenants of seizen, and against encumbrances ? What redress has the grantee for a breach of the covenants? Does a covenant of warranty assure marketability ? CHAPTER VII BONDS AND MORTGAGES 1. Use of the bond and mortgage. — ^When real property is given as security for the payment of a debt or obligation, the instrument used for the pur- pose of transferring the title to such property as se- curity is called a mortgage. The debt itself is usu- ally evidenced by a bond or note. In New York, the principal instrument used in connection with a mort- gage is the bond. In some other states it is a note, or a series of notes. Imimediate title to land is not transferred by a mortgage. The transfer is merely potential. Possession of the property is usually re- , tained by the mortgagor or his successors. Before modern method was adopted, the lender got actual owhership together with the right of pos- session. The borrower retained only a right in equity to redeem his land upon paymeht of the debt and this interest in the property was known as the equity of redemption.^ Under modern conditions, that term continues to designate the interest of an owner in his land, over and above the interest of the 1 In England, Canada, and in Massachusetts, New Hampshire, Maine, Illinois, and probably in some other states, the legal title to the land is transferred by the mortgage to the first mortgagee, and the mortgagor retains only on equitable interest or estate in the property— 'his equity of redemption. A. G. Reeves, "Real Property." Vol. II, page 1,050. ^ . 271 272 REAL ESTATE mortgagee. Under the various Land Title Apts in Canada the legal title to the lands is not transferred, hut the land is charged with the payment of the mort- gage money. A mortgage is personal property and if taxed, is taxed as personal property. It passes from one holder to another by assignment and delivery and not by deed. Because it is a chattel interest and a lien upon the land and not an immediate transfer of the title, there may be not only a first mortgage but also a second, a third, as many, indeed, as the owner may be able to obtain. Each mortgage takes its rights in the order of precedence, the subordinate or junior being subject to the rights of the senior or prior mortgages. 2. Form of bond. — A form of bond in use in New York is as follows : KNOW ALL MEN BY THESE PRESENTS, That hereinafter designated as the obligor do hereby acknowl- edge , to be indebted to hereinafter designated ag the obligee , in the sum of dollars, lawful money of the United States, which sum said obligor do hereby covenant to pay said obligee or assigns, on the day of Nineteen Hundred and BONDS AND MORTGAGES 273 with interest thereon, to be computed from the day 1 , at the rate of per centum per annum, and to be paid on the day of next ensuing the date hereof, and semi-annually thereafter. And It Is Hereby Expressly Agreed That the whole of said principal sum shall become due at the option of said obligee after default in the.payment of any interest for thirty days, or after default in the payment of any tax or assess- ment for thirty days after. All the covenants and agree- ments made by the said obligor in the mortgage covering premises therein described and collateral hereto, are hereby made part of this instrument. Signed and sealed this day of , 19 . In the presence of (Note. — On opposite page of this Bond space is provided for the entry of interest payments, and for payments on account of principal.) 3. Provisions of the bond. — The bond contains the names of the parties to it, one person or several per- sons described as obligor, or obligors, acknowledging 'himself or themselves to be indebted to some other person, or persons, described as obligee, or obhgees, for a definite sum in money. The obligor covenants to repay the simi on a definite date as well as interest computed from a given date at an agreed rate and payable at certain fixed times, The last part of the bond contains a reference to the mortgage collateral to it, makes the agreements and covenants in the mortgage part of the bond, and provides that the whole debt may become due at the option of the obli- gee, upon default in' the payment of interest for 274 REAL ESTATE thirty days, or upon default in the payment of taxes or assessments upon the mortgaged premises for thirty days. The instrument is dated, signed, sealed and witnessed, and often acknowledged. If there is more than one obligor, the words "jointly and severally" are inserted in the blank space following the words "to be." The holder of the obligation can then enforce payment of the entire amount against all or any one of the obligors. Each person signing the bond, incurs a personal liability for the payment of the whole debt. , Bonds are frequently written for twice the amoun,t of the principal. The amount so fixed is known as the penalty or "penal sum" of the bond. It creates no obligation to pay more than the true amount of thjB debt. In fact, such a bond will contain a pro- vision that if the real debt and interest is paid, the bond is void. The principal sum in the bond repro-- duced above is mentioned as being "lawful money of the United States." In some cases, especially when the mortgage secures an issue of bonds to be sold to investors, payment is required to be made in "gold coin." The principal sum is payable on a definite date. The obligor has no option of prepayment unless the bond specifically provides for payment "on or be- fore" the specified date or contains a s|)ecial clause to the effect that the obligor has the privilege of pay- ing the sum before maturity. It should be noted, however, that in the usual fifst mortgage made for BONDS AND MORTGAGES 275 investment of funds the privilege of prepayment is not customary. The lender dictates the terms, and he may wish his money to be placed and drawing in- terest, so that the investment may not be disturbed. When the privilege of prepayment is granted, provi- sion is often made that interest shall be paid on a date subsequent to the date of payment of the principal. This is not usury, but a. price paid for the privilege of paying off the debt before the due date. The interest should of course be fixed at not more than the legal rate. It is computed from the day stated in the bond (usually the day the bond is dated) and is payable on a fixed date thereafter, and then in regular instalments, usually semi-annually, some- times quarterly or even monthly. It is not paid in advance. The lender often specifies the interest days desired by him. Some savings banks have a rule that interest on all mortgages held by them be paid on the same interest days. 4. Default in the payment of interest and taxes. — The holder of a properly prepared bond has the op- tion of considering the entire principal due if there is any default in the payment of interest for thirty days, or if taxes or assessments on the mortgaged premises remain unpaid for thirty days. This pro- vision protects the lender who has advanced money on the security of the bond and mortgage. Without this provision, in case of default, suit would have to be brought separately on each instalment of interest and the lender would be without power to require the 276 REAL ESTATE owner to pay the taxes and assessments on the land. Hence the power contained in this provision adds to the security of the loan. The holder of the bond has, of course, the right to waive any default, and can re- instate the credit even after he has exercised his op- tion. Mere forbearance to take action does not mean a waiver of the default, but if interest or taxes be .paid before the option is exercised, the option is con- sidered waived. 5. Execution and enforcement of the bond. — Each obligor must execute the bond. It is usually sealed because there are longer legal limitations on a sealed instrument. The statute of limitations begins to run from the due date, or the last time there was an ac- knowledgment of the obligation — as by payment of interest upon it. A bond need not be witnessed or acknowledged to be enforceable, but it is often both witnessed and acknowledged. The holder of the bond can enforce it by f oreclosr ing the mortgage which accompanies it„ or he may bring suit on the bond. If he sues on the bond, he must exhaust his remedies under that instrument be- fore he can enforce the mortgage, but he may fore-- close the mortgage in the first instance, and ask for a judgment against the bondsman for any deficiency that may arise on a sale of the property. 6. Form of mortgage. — The bond we have analyzed is an evidence of the debt; the mortgage is given as security for the debt. While there are a nimiber of mortgage forms in general use, the fol- BONDS AND MORTGAGES 277 lowing may be taken as a specimen of what the com- plete instrmnent should contain. THIS INDENTURE, made the day of in the year nineteen hundred and , between hereinafter described as party of the first part, and hereinafter described as party of the second part. Wheeeas, the said by virtue of a certain bond or obligation bearing even the date herewith, justly indebted to the said party of the second part in the sum of dollars, lawful money of the United States, secured to be paid on the day of in the year nineteen hundred and , together with the interest thereon from the day of 191 , at the rate of per centum per annum, and to be paid on the day of , next ensuing the date hereof and semi-annually thereafter. It Being Thereby Expressly Agreed that the whole of the said principal sum shall become due after default in the payment of interest, taxes, assessments or water rents as hereinafter provided. Now This Indenture Witnesseth, that the said party of the first part, for the better securing the payment of the said sum of money mentioned in the said bond or obligation, with interest thereon, and also for and in consideration of one dollar paid by the said party of the second part, the receipt whereof is hereby acknowledged, doth hereby grant and release unto the said party of the second part, and to and assigns, forever, all (Description of property follows.) 278 REAL ESTATE ToGETHEE with all fixtures and articles of personal property used in connection with said premises, all of which are dc- Cjlared to be covered by this mortgage. ToGETHEE with the appurtenances and all the estate and rights of the party of the first part, in and to said premises. To Have to Hold the above granted premises unto the said party of the second part, and assigns forever. Provided Always, that if the said party of the first part, or the heirs, executors or administrators of the party of the first part, shall pay unto the said party of the second part, or assigns, the said sum of money mentioned in the said bond or obligation, and the interest thereon, at the time and in the manner mentioned in the said bond or obligation, that then these presents and the estate hereby granted, shall cease, determine and be void. And said party of the first part covenants with the party of the second part as follows : First. That said party of the^first part will pay the in- debtedness as hereinbefore provided, and if default be made in the payment of any part thereof, the party of the second part shall have power to sell the premises herein described, according to law. Said premises may be sold in one parcel, any provision of law to the contrary notwithstanding. Second. That the party of the first part will keep the buildings on the said premises insured against loss by fire for the benefit of the party of the second part. Should the party of the second part by reason of such insurance against loss by fire, as aforesaid, receive any sum or sums of money, such amount may be retained and applied by said party of the second part toward payment of the sum hereby secured, or the same may be paid over either wholly or in part to the said party of the first part, or assigns, to enable said party BONDS AND MORTGAGES 879 of the first part to repair said buildings or to erect new buildings in their place, or for any other purpjsse or bbject satisfactory to the said party of the second part, without aflFecting the lien of this mortgage for the full amount secured thereby before such damage by fire, or such payment over, took place. Thied. And it is hereby expressly agreed that the whole ' of said principal sum shall become due at the option of the holder of this mortgage after default in payment of interest for thirty days, or after default in the payment of any tax or assessment or water rent for thirty days, or upon the failure to exhibit to the holder of this mortgage, on demand, the receipt therefor, or after default for thirty days after notice and demand in the payment of any instalment of any assessments for local improvement heretofore or hereafter laid which is or may become payable in annual instalments, and which h^as affected, now afi'ects, or hereafter may affect the said premises, notwithstanding that such instalment be not due and payable at the time of such notice and demand, or immediately upon the actual or threatened demolition or removal of any building erected upon said premises, or if for any reason it shall be impossible to obtain fire insflrance on the premises covered by this mortgage from fire insurance companies lawfully doing business in the State of New York. FoTJKTH. That the holder of this mortgage, in any action to foreclose it, shall be entitled, without notice and without regard to the adequacy of any security for the debt, to the appointment of a receiver of the rents and profits of said premises ; and said rents and profits are hereby, in the event of any default or defaults in paying said principal or inter- est or taxes and assessments, or water rents, assigned to the holder of this mortgage as further security for the payment of said indebtedness. Fifth. That until the amount hereby secured is paid, the party of the first part will pay all taxes, assessments and water rfents which may be assessed or become a lien on said premises, and, in default thereof, the holder of this mortgage may pay the same, and the party of the first part will repay 280 REAL ESTATE the same with interest, and the- same shall be a lien on said premises and secured by this mortgage. Sixth. In the event of the passage after the date of this mortgage of any law of the State of New York, deducting from the value of land for the purposes of taxation any lien thereon, or chan^ng in any way the laws for the taxation of mortgages or debts secured by mortgage, for State or local purposes, or the manner of the collection of any such , taxes, so as to affect this mortgage, the holder of this mort- gage, and of the debt which it secures, shall have the right to give thirty days' written notice to the owner of said land requiring the payment of the mortgage debt, and it is hereby agreed that if such notice be given, the said debt shall become due, payable and collectible at the expiration of said thirty days. Seventh. That the mailing and demand of a written nptice by depositing it in any post-office, station, or letter box, inclosed in a post-paid envelope addressed to the owner of record of said mortgaged premises and directed to said owner at the last address actually furnished to the holder of this mortgage, or, if no such address has been furnished, then to such record owner at said mortgaged premises, shall be sufficient notice and demand in any case arising under this instrument. Eighth. That the party of the first part will execute any further necessary assurance of the title to said premises, and will forever warrant said title. Ninth. The party of the first part, or aiiy subsequent owner of the premises described herein, shall, upon request, made either personally or by mail, certify, by a writing duly acknowledged, to the party of the second part or to any proposed assignee of this mortgage, the amount of principal and interest then owing on this mortgage; upon failure to furnish such certificate after the expiration of six days in case the request is made personally, or after the expiration > of thirty days after the mailing of such request in case the request is made by mail, this mortgage shall become due at the option of the holder thereof. i BONDS AND MORTGAGES 281 In Witness Whereof, said party of the first part has signed the day and year first above written. 7. Parties to the mortgage. — The party of the first part is the owner of the property, and is often re- ferred to as the mortgagor. The party of the second part is the person to whom the debt is payable, the lender or the representative of the lender, usually called the mortgagee. It is customary that the wife of the owner join in the mortgage in order that it may be a lien superior to her dower rights. The se- curity is defective unless she does bar her dower, where by law she would be entitled to dower. In the Province of Ontario, Nova Scotia, New Brunswick, Prince Edward Island, a wife is entitled to dower and in British Columbia to a limited extent. It is not necessary that the wife join in the bond. 8. Recital of the obligation. — Immediately after the names of the parties there is a reference to the debt which the mortgage is made to secure. A blank space is left in which to insert the name of the maker of the bond. As a general rule, he is the same person as the maker of the mortgage, but in some cases a mortgage is made to secure the debt of a third party, as, for example where a wife mortgages her property^ to secure her husband's indebtedness. The bond is described as "bearing even date herewith." It is usual and customary that both bond and mortgage be dated alike, yet there is no reason why a mortgage should not be given to secure an antecedent debt. 282 REAL ESTATE The due date of the principal sum, the rate of inter- est and the times when the interest is payable are stated. In the next paragraph provision is made that upon default in the payment of interest, taxes or assessments, the whole principal sum may become due. 9. Mortgaged premises. — The premises in ques- tion should be described in the mortgage as carefully as they would be in a deed. The granting clause and the habendum follow the language of the deed. It is stipulated, however, that the conveyance is made to furnish better security for the payment of the principal sum and interest. Immediately following the description of the pyop- ^rty is a clause whereby the mortgage is made to cover all fixtures and articles of personal property attached to, or used in connection with the premises described. This clause is intended to bring imder the lien of the mortgage such articles upon the premises as may not be real property, or which may be claimed to be per- sonalty, such as gas ranges or lighting fixtures. This clause does not of course bring household furni- ture under the mortgage but makes it cover all that is essentially a part of the property and necessary for its use. 10. Defeasance clause. — If the instrument ended here, it would be very similar to a deed. What is known as the defeasance clause, however, makes it a mortgage. This provides that if the amount of the bond and interest is paid "at the time and in the man- BONDS AND MORTGAGES 283 ner mentioned in the said bond or obligation, that then these presents and the estate hereby granted shall cease, determine and be void." In some states it is necessary that the defeasance clause be recorded at the same time as the instrument which creates the lien. If it is not so recorded, the mortgagee can take no advantage from recording the conveyance. The law seeks to prevent,- as far as pos- sible, any hidden conditions of this sort. The mortgage being personal property, the de- feasance clause provides that payment shall be made to the party of the second part, his personal repre- sentatives or assigns. The conveyance of the land, however, which follows the language of the deed, is to the party of the second part, his heirs and assigns. With the defeasance clause included, nothing more is needed to ma;ke the instrtiment a complete and legal mortgage. It is a conveyance of land upon security, the transfer being defeated by the payment of the obligation. The lender, however, requires further and additional safeguards, and for his benefit a num- ber of covenants and agreements are inserted. 11. Property to he sold as a whole. — The first cov- enant is a repetition of the obligation in the bond, a promise by the party of the first part to pay the in- debtedness. It also contains a stipulation that if any default occurs, the party of the second part shall have power to sell the property according to law. To pro- tect the borrower the law requires that in order to execute the power of sale conferred on the mortgagee REAL ESTATE by this covenant, the mortgage be foreclosed. In some jurisdictions the mortgage gives a power of sale without the necessity of resorting to the courts. The last sentence of this covenant provides that the premises may be sold in one parcel, regardless of any provision of law to the contrary. The lender may consider the property more valuable since it is held in single ownership, and consequently better security for the loan if it can be sold as one parcel under foreclosure. The general rule of law requires that when the property can be divided into separate lots forming natiiral divisions, such lots must be of- fered for sale separately and only so much of the property sold as will satisfy the claim of the mort- gagee. If an owner is being foreclosed by legal ac- tion, and he can show the court that it would be a hardship upon him to have the property sold as one tract, the court may grant relief from this stipulation and order the property to be sold in separate parcels. This is usually done with the provision that if this method of sale does not raise enough money to pay off the mortgage, the property may then be offered for sale in one parcel. 12. Insurance to be maintained. — The second cov- enant provides that the owner will keep the buildings on the premises insured for the benefit of the mort- gagee against loss by fire. Often the buildings are a more important part of the security for the loan than the land. Loans on improved property are usually made for a larger proportion of the value of BONDS AND MORTGAGES 285 the property and at a lower interest rate than loans on unimproved property. It is therefore extremely im- portant that the mortgagee have insurance policies in his possession, protecting him against loss arising thru damage to the buildings by fire. Such policies are made out in the name of the owner, but with a rider attached making any possible loss payable to the mortgagee, as his, interest may appear. The original policy is retained by the mortgagee and the owner is furnished with a copy by the insurance com- pany. The latter part of the second covenant provides' what shall be done with the insurance money collected by reason of any fire loss. The proceeds may be ap- plied by the mortgagee toward the payment of the debt. The money may be paid over to the owner in whole or in part, to enable him to repair the buildings or erect new ones in their place, or it may be used for any other purpose satisfactory to the mortgagee. Payments by insiu-ance companies do not affect the lien of the mortgage for the full amotmt. 13. When the mortgage becomes immediately pay- able. — The third covenant states the circumstances under which the whole of the principal sum of the mortgage and interest becomes due and payable prior to the agreed date. This may be on account of non- payment of interest, taxes or assessments, or by rea- son of actual or threatened demolition or removal of the buildinffs on the premises. The covenant does not say that thirty days grace shall be allowed for the XVIII— 20 286 REAL ESTATE payment of interest, but it does say that if the in- terest remains unpaid for thirty days the mortgagee can not only enforce payment of the interest in ar- rears, but can require payment of the principal as well. Were it not for this agreement, suit could be brought for the impaid interest only. The mort-,. gagee is also given the option of calling for payment of the mortgage if taxes or assessments remain un- paid for thirty days. As taxes and assessments cre- ate a lien which takes precedence of the mortgage, the security of the mortgage lien is impaired when they are not paid. The mortgagee need not extend fur- ther credit under such unfavorable circumstances. The buildings on the premises are under the con- trol of the owner. They are very often an important part of the security. Under this clause the mortgagee can require payment of his mortgage if the owner threatens to destroy or remove the buildings, or if he actually has accomplished their destruction or re- moval. If he knows such action is threatened he can obtain an injunction, restraining the owner from com- ,mitting waste. Any new building placed upon the land becomes realty and comes imder the lien of the mortgage. The mortgage at};aches to all that is realty as long as the lien continues. 14. Appointment, of a receiver. — The fourth cov- enant provides that if an action of foreclosure is brought, the mortgagee shall be entitled to the ap- pointment of a receiver for the rents and profits of BONDS AND MORTGAGES 28T the property. Under this clause no notice need be given of the application for the appointment of the receiver, and the right is given regardless of whether the property is sufficient security for the debt or not. It happens frequently that when it is necessary to foreclose, the land and buildings are not adequate se- curity for the amount owing. This is so especially if the amount of unpaid 'taxes and interest is large. The appointment of a receiver gives added security to the mortgagee, as in the event of a deficiency at the foreclosure sale, the surplus in the receiver's hands, less commissions, wiU be applied to the payment of the mortgage. The coiirt may decline to appoint a receiver, even when the mortgage contains a receivership clause, if the court deems it unnecessary to do so. Similarly, they may appoint a receiver during foreclosure upon proper application and due notice, even tho the mort- gage contained no such privilege. This covenant also proceeds to pledge the rents and profits as further security for the debt in the event of default. The intent of this is to give the mortgagee the right to exercise the assignment;, and to go in and collect the rents. It is often difficult to put the assignment into operation, however, as the tenants are not inchned to recognize it. Usu- ally it is necessary to resort to the receivership. There is no reason why the owner should not give up possession of the property if he wishes to do so, and instruct the tenants to pay rent to the mort- 288 REAL ESTATE gagee. The owner is, however, entitled to an account- ing and any surplus must be applied to the amount due to the mortgagee. 15-. Obligation to pay tawes.—The third cove- nant made the principal sum due by reason of non- payment of taxes or asiiessments. The fifth cov- enant contains an agreement on the part of the owner to pay such taxes (and also to pay water rates). If they are not paid, this clause gives the holder of the' mortgage the right to pay them. The owner then be- comes liable for their repayment, and they are added to the lien of mortgage. 16. Changes in tacc laws. — The sixth covenant has to do with taxation upon mortgages. The loan is made relying upon mortgage tax laws in force at the time, and if any change which affects the mortgage is made in the law the holder has the right to give thirty days' notice requiring the payment of the mort- gage. The responsibility for any hardship occa- sioned to the owner by such procedure rests with the legislative body making the change in the law. 17. Notices. — The seventh covenant provides for giving to the owner such notice as the holder of the mortgage may desire to give him. There is no ne- cessity under the instrument for any notice except those the holder may desire to giver Notices are fre- quently sent, however, notifying the owner of in- terest becoming due, or fire insurance policies expir- ing, or taxes and assessments due. 18. Warranty. — The eighth covenant includes the BONDS AND MORTGAGES 289 covenant of fxirther assurance and the covenant of warranty, similar to two of the covenants found in the warranty deed. By reason of this covenant any interest in the land acquired by the borrower subse- quent to the date of the mortgage, would come im- mediately under the lien of the mortgage. > 19. Estoppel. — Under the, ninth covenant the owner of the mortgaged premises agrees to sign an estoppel certificate, that is to say, a written instru- ment which certifies to the amoimt due on the mort- gage. A mortgage is not always a lien for the amount of principal and interest mentioned in it. A payment may have been made by the owner of the property or it may have been modified by agreement. The estoppel certificate's of value to the mortgagee and any assignee relying on it, as it confirms the amovmt claimed by the mortgagee and estops the owner from claiming any less amount to be due. Failure to furnish the certificate when requested, within the time specified, may result in the entire mortgage becoming due. 20. Special agreements in mortgages. — Besides the covenants described, special provisions, either for the benefit of the owner of the land or the holder of the mortgage may be included in the mortgage. One of these is known as the release clause which states that the holder of the mortgage agrees to release por- tions of the premises upon payment of a certain sum of money on account of the principal. This provision is of value when the mortgage covers a number of 290 REAL ESTATE lots which the owner may sell separately. As he sells one or more lots he pays the mortgagee a specified amount agreed upon, and obtains an instrimient re- leasing the plots sold from the lien of the mortgage. Another important clause is frequently inserted in mortgages which are jimior liens on the property, that is, subject to prior mortgages. This is known as the "lifting clause" and provides that thq mort- gage is subject and subordinate to the prior mort- gage, and shall continue to be subject and subordi-. nate to any new mortgage of like amount and srmilai" terms, made to replace the existing prior mortgage, and that the holder agrees to execute any instrument necessary to effect such subordination. The subordinate mortgage may further provide that if there is any default in the payment of interest on the prior mortgage, the holder of the jimior hen may pay such interest and add it to the amoimt se- cured by his mortgage ; also, that if any action is com- menced to foreclose the prior mortgage, the holder of this mortgage may elect to consider his mortgage im- mediately due and payable. This provision is valu- able to the holder of a mortgage, the lien of which may be jeopardized by default occurring in a prior mortgage, as it helps him to preserve his hen on the property. 21. Sj^edcH forms of mortgage. — There are a num- ber of forms of mortgages which are used as occasion requires. Three of such forms are the following: (a) Instalment mortgage. The principal feature BONDS AND MORTGAGES 291 of the instalment mortgage is its provision that the principal svmi shall be paid in instalments. Some- times it is provided that certain instalments of prin- cipal shall be paid in addition to interest. In other cases it is provided that specified amomits shall be paid, out of which interest on the mortgage shall be taken and the balance of the payment be applied to- ward the payment of the principal. In the latter case the interest charge becomes smaller as the prin- cipal is reduced; hence, as the payment remains the same, the portion applied to principal becomes greater with each succeeding payment. (b) Building loan mortgages are used to secure advances on a loan made to finance the construction of some improvement on the land. The principal is advanced to the owner from time to time during the progress of the work. The mortgage is made out for the total amoimt to be loaned, but it is only a lien on the property for the amoimt actually ad- vanced. As advances are made they are receipted on the bond. In New York, it is necessary to file a building loan agreement in connection with such a mortgage, setting forth among other things, how the advances are to be made. (c) Trust mortgages are made to a trustee, usu- ally to seciu-e an issue of bonds. Instead of one bond, held by one person, there may be many bonds held by a number of persons, all secured by one mortgage. The mortgage is then made to the trustee who acts for all the bondholders. This form of mortgage con- 292 REAL ESTATE tains all the covenants and agreements found in the usual form and, in addition, a number of provisions regarding the rights and duties of the trustee and the individual bondholders. In Canada the form of mortgage or charge depends on whether the Torrens System or Land Titles Act is in force or not. If the jproperty is under the Land Titles Act, the docu- ment is usually called a charge, otherwise a mortgage. 22. Usury laws. — In many states there is a legal rate of interest and any interest charge above such rate is usury. Economically all usury laws are fal- lacious, and what is more they fail to protect the bor- rower. A needy borrower will obtain money on a mortgage and wiU pay extra interest for the loan in the way of fees and commissions in spite of the usury laws. Extra compensation is paid by borrowers not only to pay for the lender's financial risk, but also on account of the risk the lender takes in breaking the law. , If there were no usury laws more money would be attracted to the mortgage market for investment, and the added supply of funds would naturally tend- to reduce the rate of interest. Of course, there is usually an ample supply of money for conservative first mortgages, and such loans, as a rule, can be ob- tained at the legal rate of interest or less. The State of New York charges a recording tax of one-half of one per cent on mortgages. This tax is usujally paid by the borrower, and such payment does not make the mortgage usurious, even tho the mortgage itself bears interest at six per cent, the BONDS AND MORTGAGES 293 legal rate in New York. Payment of the recording' tax makes the mortgage exempt from other taxation in the state. 23. Methods of foreclosing mortgages. — There are two methods of foreclosure. One is known as a foreclosure by advertisement. It is the more simple but the less used method. It is not an action at law, but merely the execution of the power of sale granted in the mortgage instrvmient. The law regulates the power to sell by requiring that notice be given to the owner, if he can be f otmd, the posting of notices in public places, and a sale by public auction at a public place. The disadvantage of the method is that it may be diflBcult to get possession of the property kfter the sale. Since the rights of the parties have not been passed on by a court, it may be necessary to resort to a long and expensive ejectment proceeding in order to get possession. The second method of f oreclosvire is by an action at law. It is an action whereby the rights of the par- ties are adjudicated by the court, a judgment entered and a sale held under the court's direction. The pur- chaser at such a sale is entitled to the assistance of the sheriff in obtaining possession, if this is necessary. The first steps in a legal foreclosure are an inspec- tion of the premises and a search of the records to get the names of all who have or claim to have in- terests in the property inferior to the mortgage. Such persons are made defendants to the action. A summons and complaint is drawn. A notice of the 294 REAL ESTATE impending action (lis pendens) and a copy of the summons and complaint is filed in the County Clerk's office. A copy of the summons and complaint is served on each defendant, and opportunity is given to them to answer. If no answer is put in, a judgment of foreclosure and sale is obtained as a matter of course. If there is an answer, the issue is tried out. The court appoints a referee to compute the amount due and also to sell the property at public auction. The sale is advertised twice a week for three weeks. The referee employs an auctioneer ^.nd sells the prop- erty to the highest bidder on the day specified. The purchaser usually pays ten per cent of the amovmt bid at the sale and twenty days later he pays the bal- ance, at which time he gets a deed from the referee and is entitled to possession of the property. The proceeds of the sale are used to pay (1) taxes, as- sessments and water rates, liens on the property sold; (2) costs of the action, referee's fees and ad- vertising; (3) amount due mortgagee. The balance, if any, is paid into court and is then paid over to those claiming it according to legal priority as if their claims were against the land. , When the property falls into natural divisions, the court may order the parcels to be sold separately and only so much sold as will satisfy the claim of the mort- gagee, plus expenses. REVIEW What is, a bond; a mortgage; a note? State the two legal theories of mortgage. What is the New York law? What is "equity of redemption"? BONDS AND MORTGAGES a95 What are the parties to a bond called, and what covenants do tiiey make? What is the "penal sum"? How njay repayment of the principal sum be made? When and how is interest usually payable? In case of default in payment, what are the rights of sale? Is the property to be sold as a whole or in separate parcels ? When and why may a mortgage debt become due before the agreed date ? Does the mortgage call for the maintenance of the fire insur- ance? What is the receivership clause? What effect does the mortgage tax law have on the holder? What are the covenants of further assurance and of war- ranty; an estoppel certificate; the release clause; the "lifting clause" ? N What rights' have the holders of subordinate mortgages ? Describe the instalment, a building loan and a trust mort- gage. How do usury laws affect borrowers? How may a mortgage be foreclosed without a suit at law? What are the proceedings in a suit? CHAPTER VIII TRANSFERS AND CLOSINGS OF TITLE AND TITLE INSURANCE 1. Growth of modern right of transferring titles. — Under the feudal system of the Middle Ages, land tenure was a personal relation between the tenant and his overlord, founded upon the necessity of material defense, and carrying with it the obligation on the part of the lord of protecting his tenant and on the part of the tenant of fealty and aid to his lord. The tenant was unable to sever this relationship imless he put in his place some other person selected by and acceptable to his overlord. When he relinquished his holdings he had no voice as to who should take his place. Under such a system commercial transactions with the land were practically impossible. A method of sub-infeudation arose, however, whereby the ten-' ant put in another under him and the under tenant put in tenants under him and so on indefinitely. The evils of this system and the necessity for the freedom of the land led to the enactment of a statute allowing a tenant to sell his holdings and substitute another tenant in his place. 2. Methods of transferring titles. — ^Formerly the transfer of the title to land was effected by trans- 296 TRANSFERS 297 ferring actual possession of the land. Sometimes there was a symbolic act performed, such as breakiag, a tin-f from the land and handing it over with words of delivery, such as "I put you in possession of this land." Such a method was crude, often resting upon memory for the vaUdity of the title since no per- manent record of the transfer was made. If a man was in possession and Jie and his ancestors had been in possession as long as anyone could remember, it was necessary to assimie that his title was good. This is the foundation of our present title by adverse pos- session. The system, however, led to "many disputes. Men took possession wrongfully, and held possession by force. As the nimaber of transfers increased it was fovmd necessary to enact a statute requiring a written record to be made of every transfer. This was known as the Statute of Frauds. The result of this enactment was that aU transactions had to be in writing and later by a deed, the instrimient we now use in transferring titles to land. 3. Instruments used in transferring titles. — Trans- fers of land may be absolute, or they may be made as security for an obligation. The instrument usually used to transfer the absolute title to land (or any estate therein) is called a deed or transfer; the instru- ment used to make the transfer upon security is called a mortgage, or in some cases a deed of trust. Both the deed and mortgage have been considered under separate chapters in this volume of the Text, Transfers of title may occur by conveyance and 298 REAL ESTATE also by operation of law. Transfer by operation of law takes place when a decedent leaves no will. The law then steps in and says who shall get the title. Commercially, we shall consider that all transfers by death, whether they are made by will or not, are trans- fers by operation of law, while aU others are transfers by conveyance. In the ordinaiy language of the real estate busi- ness, the word "deed" means an instrument used to effect a transfer of the title of real property. Legally, the term includes any formal instrument given imder seal. While in ^PiTew York, and iri some other states, it is not necessary that a conveyance of land be under seal, the instrument is nevertheless called a deed. In some jurisdictions under Land Titles Acts it is called a transfer and is not under seal. The law requires that a dded of land shall be in writing and subscribed. In some states it must be sealed and witnessed. If it is imderstandablp and the subject matter capable of identification, and if it be properly executed, it will transfer the title. 4. When title passes.— Title passes only upon delivery of the instrument. Surrender of, the in- strument to the trafisferee must be a voluntary act on the part of the vendor. Possession of the instru- ment obtained by fraud or theft, does not give the transferee the title. From the moment of the dehv- ery all rights of the transferer cease and all rights carried by the instrument to the transferee begin. Delivery of the instrument must be made by a TRANSFERS 299 person competent in law to make a contract. The grantor must be competent when the instrimient is signed, and also when it is delivered. If a man should make a deed to another, retain possession of it and afterward become insane, the deed may be set aside as not having been delivered during the com- petency of the grantor. In a similar manner, a deed recorded after the death of the grantor may be ques- tioned on the ground tKat it may not have been deliv- ered before the grantor's death. 5. Necessity and advantage of recording instru- ments. — The execution and delivery of an instrument does not of itself give notice 1;o outsiders that a trans- fer has taken place. If the transferee takes posses- sion of the property, effectual notice is given, how- ever, as all the world is required, when dealing with the property, to take notice of the rights of the occu- pant. In cases where the property is vacant, or where the transferee does not become the occupant, some other form of notice must be given. A man might sell his land to one purchaser, deliver a deed and then seU it again to a second person, leaving the two claimants to fight it out. To avoid such contin- gencies, a system of public records has been devised under which a place for recording conveyances is pro- vided by public authority. The law further provides that the recording of the conveyance on the pubhc rec- ords serves as "constructive notice" and sometimes "actual notice" to the world that the transfer has taken place. To be protected, persons dealing with the 89^ REAL ESTATE property must resort to the records to ascertain the condition of the title, since they are charged by law with a knowledge of everything the records show. Constructive notice is just as good as actual notice. If A conveys a piece of land to B, and a third party, C, had actual notice of the transfer, a subsequent con- veyance by A to C would not be good as against B, and this would hold true whether B recorded his deed or not. But if C had no knowledge of the transfer to B, and if B failed to record his deed, C who pur- chased the property and recorded his deed before B offered his for record, could hold the title against B. In the second instance, B should have protected him- self by promptly recording his deed, as then C would have been charged with constructive notice of the prior transfer, whether he actually looked up the record or not. To be entitled to a place on the pubhc records, in- strimients must be acknowledged or proved by a prop- erly qualified officer. The acknowledgment of an in- strument is the admission by the grantor to the proper public official that he did execute the instrimient for the purposes the instrument is intended to serve. The method of proving the execution of instruments by corporations is described in the chapter on Deeds. Proof of the execution of an instrument by an indi- vidual is sometimes made by a subscribing witness.. The stibscribing witness goes before the official quali- fied to take acknowledgments, and swears that he is acquainted with the one who executed the instrument, TRANSFERS 301 that he knows him to be the person described in and who executed the instrument, that he was himself present and saw him execute it, and that thereupon, he signed his name as subscribing witness. Such proof is equivalent to a personal acknowledgment and it is used only when a personal acknowledgment cannot be taken. Officials who are authorized to take acknowledg- ments are: notaries public, commissioners of deeds, justices of the peace, judges of courts of record, may- ors of cities, ambassadors and ministers residing abroad, consuls, vice-consuls, consular agents and commissioners of deeds appointed by the governors of states to take acknowledgments in other states. Mas- ters in Chancery and, in a number of states. Attorneys and Covmselors at law or Commissioners for taking affidavits. In order that an instrument which was acknowledged before an official of one state may be recorded in another state, it is usually necessary to add to the acknowledgment, a certificate to the effect that the acknowledging official is authorized to take acknowledgment of instruments intended to be re- corded in the state in which he resides, that the certified officer knows his signature, and that the signature is genuine. The certifying officer is the clerk of a court of the county or city in which the acknowledging officer resides or acts. 6. Transfers of real property by will. — The per- son who receives the title to real property by virtue of a will, is known as a devisee. The will is a volun- XVIII— 21 REAL ESTATE tary act of the testator, but the title to the property- is carried forward to the devisee at the testator's death by operation of law. A will (except in the case of a soldier on active miUtary service, or a sailor at sea) must be in writing and signed with certain formalities as provided by the statutes of the state or province. Those who take title under wiUs are not considered pin-chasers for value, and a deed of the property to a third party executed and delivered during the life- time of the testator would bar the rights of the devisee in the property. The principle of constructive notice can be invoked only in favor of innocent purchasers or encumbrances for value. If a person owning real property dies intestate, the property passes to his heirs by operation of law. 7. Examination of title by inquiry into public rec- ! ords. — Inquiry into public records should be di- rected first toward ascertaining the history of the property under consideration, and second toward as- . certaining whether any defects in or encumbrances upon the chain of title is disclosed in the history or abstract of title. Such inquiry.is necessary since, ac- cording to the principle of constructive nptice, any- one dea%g with the property is charged with a knowl- edge of the entire contents of the record. A layman would find so inany difiiculties in mak- ing an examination of title even where public records are kept systematically, that it is usually found nec- essary to employ an expert for the purpose. Every- thing affecting the property under examination found TRANSFERS SOB on the record must be noted and an abstract or his- tory of the title made up. With the facts before him, the examiner gives his. opinion upon the result. He should be able to state the names of the person or per- sons in whom the title is vested, and existing defects and encumbrances, if any. The law of real property is a technical and com- plicated set of rules. To examine a title one must be to some extent familiar with the principles of law applicable to the subject, must have some degree of experience with the effect of the records and must have the ability to handle and read the indexes to ^he rec- ords. An attorney who examines a title undertakes to apply his ordinary professional skill in the work, but he cannot guarantee the result. From each link in the chain of title, he niust draw conclusions of fact and also of law. For instance, he may trace the title to A, and then find a deed on record from A to B. He is justified in assuming that the record is a copy of an authentic deed, and not of a forgery. Again he may find that B mortgaged the property to C, that C foreclosed the mortgage and that X, as ref- eree in the foreclosure action, deeded the property to D. He must examine the record of the foreclosure and see that it was conducted according to the rules of law. The examiner is justified in his belief in the authenticity of all of the facts shown on record, and if he draws an erroneous conclusion, believing these facts, and using ordinary professional skill, he incurs so* , REAL ESTATE no liability to his employer. If a deed turns out to be forged or if some matter which affects the title but . which is not apparent from the record, develops later, the employer must bear the loss. 8. Title insurance. — ^Defects in titles often de- velop years after the examination is made. One may think he has the title and a good right to convey it, when upon a new examination something in the past history is disclosed which shows the title to be de- fective. Because of the fallibility of title examiners and of the dangers of defects in titles which are not dis- closed or cannot be detected from the public records, the system of title insurance has been devised. Cor- porations organized for the purpose and authorized by law, undertake to examine and guarantee titles. They use the best professional skiU obtainable in do- ing the work, and they issue a policy of title insurance, to the owner or mortgagee, guaranteeing him against loss. 9. Policy of title insurance. — The policy issued by a title insurance company usually consists of four parts. The first is the agreement of insurance; the second is a schedule setting forth the details of the subject matter; the third is a schedule of the excep- tions or limitations affecting the subject matter; the fourth is a statement of the conditions governing the relations between the company and the policyholder. Under the agreement of insurance, the company, in consideration of the premium, guarantees to the in- TRANSFERS 305 sxired and to his heirs and devisees (not his assigns) that it will instu-e them against all loss or damage. Their payment for loss, however, shall not exceed the amount which the insured shall actually sustain hy reason of any possible defect in the title. The prem- ises are described in the schedule which is annexed to the policy, and any encumbrances or objections are listed. The amount of insurance is usually the amount the insiu-ed paid for the property and this Is the maximxim that may be recovered. It is often appropriate that the insurance be for more than this amount, espec- ially when the insured intends to add to the cost by ex- penditures for improvements. The premium paid for the policy is a single premiimi paid once for all. It is based upon the amount of insurance, and is the same regardless of whether the title was a difficult or an easy one to examine. 10. Exceptions and limitations upon subject mat- ter of insurance. — Every exception, encumbrance and limitation affecting the title insured should be clearly set forth in the schedule annexed for the pur- pose. It is somet^nes required, in closing the title, that the insvu-ed assent in writing to the items to be included under this schedule. When the policy is issued these items should be carefully examined by the insured, to make sure that they are the ones agreed upon. Encroachments and other matters shown by a sur- vey will be stated in this section of the policy, and if 806 REAL ESTATE no survey has been furnished the policy will state that the company does not insure against such facts that an accvu:g,te survey would show. 11. Conditions of the policy. — An important clause of the policy provides that the company will defend at its own expense, all actions or proceedings on mat- ters insured against founded on a claim of title or encumbrance prior in date to the policy. Another important condition is that the title is not only good but that it is marketable. All proceedings are con- ducted and defended by a title insurance company vmder its direction and at its expense, both as to coun- sel fees and risk of costs. The insured is indenmified not only against actual loss but is saved from the an- noyance incidental to litigation. A policy of title insurance, unless it is issued to a mortgagee is not transferable. The agreement stip- ulates that the insured shall be indemnified against loss. If he parts with his property and receives sat- isfactory compensation for it, the company's guar- antee of marketability has been performed. If the insured conveys the property by a warranty deed, and is afterward called upon to make good his warranty for a defect in the title, he can then obtain indemnity from the title company. The policy always protects the insured, but it is unreasonable to expect that it should be transferable. When a mortgage is assigned, all securities and col- lateral go with it, and for that reason a mortgage title policy is transferable upon the assent of the company. TRANSFERS 307 In the event of loss, the title company has the op- tion of either paying the loss or taking over the prop- erty. ■ If the loss is total and cannot be salvaged (as in the case of a forged deed) the company wiU pay the loss to the amount of its insm-ance. Very often time and skill will clear up a defective title. If the company sees a chance of recovery by clearing up the title, it will take over the property, paying the insured its full market value which may be much more than the amount of thie insurance. Whenever a company settles a claim, it acquires every right which the policyholder has against per- sons who are liable to him by reason of the loss. If a company is held beicause a mortgage or tax has not been paid, and the insured has a full convenant and warranty deed, the company after paying the policy- holder his loss, is entitled to sue the man who made the full convenant and warranty deed so that it may recoup the loss. The policy of title insurance expressly provides that the insurance does not cover "defects and en- cumbrances arising after the date of the policy." Everything that happens after that date is in the control of the policyholder. 12. Use of title policy. — ^A title policy should be produced whenever the insured property is being sold or any agreement about it is being made. Care should be taken to make the contract or agreement with respect to the title exactly as it is insured, so that if there is any defect in title or marketability, the 808 REAL ESTATE insured can fall back on the insurer. In order to be certain that this detail is observed, it is advisable to have the title insurance company prepare the con- tract or agreement. The policy of title insurance necessarily stipulates that any untrue statement made by the applicant or policyholder leading the insurer to issue a pohcy will vitiate it. 13. Closing the title. — The ordinary contract of sale or exchange provides for payment of the pur- chase price and delivery of the deed at a date shortly following. We will assvime that in the interim the title has been searched for the purchaser. Two things are necessary to close a title intelli- gently: first, a copy of the agreement covering the transaction, and second, accurate information con- cerning the present status of the title. A study of the first will give an understanding of the bargain and will show what each party is entitled, to receive at the closing. The information on the present status of the title is furnished by the attorney or the title company that has examined the title, and will show whether or not it is possible to adapt the title to the proposed transaction. 14. Report of title. — ^When a titlp is examined by a title insurance company it is advisable to obtain a written report of the title. This is usually fur- nished in the form of a letter, sometimes in the form of a certificate, and sets forth in whom title is found vested and also all liens, defects, encumbrances and exceptions affecting the title. Sometimes the pur- TRANSFERS 309 chaser's attorneys will have the title examined and reported by a title company, and he wiU then proceed to close the title himself. It is usual, however, to have the title closed hy the attorney in the employ of the title company. The search of the title should be brought down to the very day of closing. If the title to be conveyed under the contract is one in fee simple, a proper deed conveying such an estate should be obtained at the closing from the owner of the property and all necessary parties should join in the deed. The person to whom the title is conveyed should see also that the title is subject only to those encimabrances which are set forth in the con- tract, apd that if there are other encumbrances, they are disposed of in such a manner that they can be cleared from the record. The same principles apply when a life estate or any other estate is to be conveyed. If it is a mortgage transaction the mortgagee should See that the proper parties join in the mortgage and that on advancing his money, he obtains such a lien on the property as he may desire. 15. Encumbrances subject to 'which the purchaser takes title. — ^Encumbrances found by an examination of title are of two classes, those subject to which the purchaser is to take the title, and those which must be removed. Contracts of sale frequently provide that title shall be dehvered subject to the lien of one or more mortgages, to restrictive convenants and to tenancies of various kinds. Anyone taking title subject to a mortgage, should SIO REAL ESTATE see that the amount, expiration, date, rate of interest and any special clauses are as stated in the contract. If the record differs from the facts claimed hy the seller, the purchaser is entitled to have evidence of the changie in such form as can he recorded. If the record does not disclose certain facts concerning the mortgage, the purchaiSer is entitled to a reasonable opportunity to ascertain whether the mortgage is as represented in the contract. All leasings or lettings affecting the property should be examined to see if they conform to the con- tract. The purchaser or his representative should not be satisfied with the lease presented to him by the seller at the closing. If possible he should go to the property and find out the claims of each occupant as to his rights in the property. It is advisable also to be on the lookout for agreements for the renewal of leases, rebates of rent, etc. Restrictive convenants should be read carefully to see that they are the ones mentioned in the contract. Other restrictions frequently are disclosed by the ex- amination, and if they are considered not to affect the value of the property injuriously or to interfere with its intisnded use, they may be waived by the pur- chaser. The pm-chaser's representative should not waive a^ay such restrictions unless the matter has beenv submitted to' his principal. 16. Encumbrances io he removed. — ^After being satisfied as to the encumbrances which are to remain, attention may be given to those which are to be re- TRANSFERS 311 moved. It is the seller's business to have the title clear and to have all instruments necessary to clear it present at the time of closing. It is customary, however, for the purchaser to waive his rights in this respect if it can be ascertained definitely that the encumbrances can be easily removed. For example, if the property appears to be subject to unpaid taxes, it is the duty of the seller to present receipted bills showing payment. It is a very wise precaution to have a certificate from a proper tax authority showing what if any taxes are in arrears. If they are actually unpaid at the time of closing, the seller can leave with the purchaser or his attorney (frequently the title company's representative) sufficient funds to cover the amount of the taxes with accrued interest. Again, the property may be subject to the lien of a mort- gage or judgment. In many cases the purchaser can satisfy himself that a satisfaction-piece is at a known place ready to be delivered upon payment of a certain amoimt of money. The title is closed, the required amount held out, and the purchaser 6r his attorney obtains the satisfaction piece with the money held for the purpose. It is always desirable in closing a title to exercise every reasonable precaution to pro- tect one's own interests or the interests of the client represented. 17. Adjustrnents made at closing. — The adjust- ments at closing are made in the form of a debit and credit account. The first debit is the gross amount of the purchase price, which we shall assume to be 312 REAL ESTATE 5,000. The next debit relates to the unexpired .portion of the fire insurance policies covering the buildings on the premises. This adjustment is made on the basis of the premiums on the policies, pro- rated over the term for which they were written. If, for example, the closing is on June 15 and the policies were dated October 15 of the previous year, and the premiums totaled $36 for three years, we would figure that eight months had expired and that two years and f otir months were unexpired. The pro- portion of the premiums to be charged to the pur- chaser would therefore be $28. If there is an ad- journment of the closing the purchaser sometimes is charged with interest on the balance of the pur- chase price for the adjourned period. This is done when the closing is made as of the original plate, and, unless otherw'ise stipulated, the interest is at the legal rate. The purchaser's first credit is the amount paid when the contract was made. Assume in this case the amount so paid to be $1,000. The next credit is the amormt of the mortgage subject to which the pur-, chaser takes the property. This mortgage we will assume to be $15,000 with interest at five per cent payable January 1 and July 1. The purchajser is entitled to receive as a credit the interest accrued on the mortgage from the last interest day, January 1. Since the closing is on June 15, interest for five months and fourteen days amounting to $341.6T has accrued. TRANSFERS 313 If the contract provides for a purchase money mortgage in addition to a mortgage abeady on the property, the amount of that mortgage, which we will consider to be $3,000, would be the next credit. The purchaser is also to be credited with a pro- portionate part of the rents collected for the current month. Rents paid in advance on the first of the month would be equally^ divided, the seller retaining one-half and allowing the purchaser one-half. Rents paid from dates other than the first would be appor- tioned so that the purchaser wiU receive the part covering the period subsequent to the closing date. In order to complete our figures, we wiU assume that the amount agreed as due to the purchaser to cover the adjustment of rent, is $125. Rents due and unpaid are not adjusted at the closing. Either the pvu*chaser or the seller must coUect them (as agreed upon at the closing) , one making the collections and sending the other party his share. 18. Other payments made at closing.— The report of title may show other impaid obligations — rtaxes, assessments or water rates. It is not usual to ap- portion these items unless the contract provides spe- cifically for such apportionment. The total amount of these items, with interest, is often deducted from the money due the seller and turned over to the closing attorney for payment. In the following statement a deduction of $385 is made from the amoimt due the seller to cover the amounts we wiU assume he must pay. 314 REAL ESTATE In addition to the amount due to the seller, the pur- chaser must pay the expenses incidental to preparing the purchase money bond and mortgage, recording the mortgage and the mortgage tax. These expenses as shown by our statement total $23. 19. Closing statement. — From the foregoing fig- ures, the following statement can be made ; Dr. Gr. Purchase price $25,000.00 Paid on contract $ 1,000.00 Insurance premiums .... 28.00 Subj. to mtge. 15,000.00 Int. 5 Mo. 14 days. 341.67 Purchase money mtge. . . 3,000.00 Adjustment of rents 195.00 Total $35,038.00 Total $19,466.67 Amount on Cr. side 19,466.67 Gross balance due seller $ 5,561.33 ' Payments^ to be made by Seller Taxes $350.00 Assessments 35.00 Water r&tes 10.00 385.00 Net balance due seller $ 6,176.33 Payments to be made by Purchaser Drawing bond and mort- gage $5.00 Recording mortgage 3.00 Mortgage tax 15.00 23.00 In order to carry thru the transaction, the purchaser must provide $5,561.33, and must pay in addition the seller's attorney expenses amounting to $23. Out of the $5,461.33 the seller must pay $385, leaving a net balance of $5,176.33 to be taken away by him* TRANSFERS 315 20. Closing excJianges, leaseholds and loans. — The closing statement for exchange transactions contains a double set of debit and credit items. One party is charged with the purchai^e price of the property to be transferred to him, and credited with the price of the property he conveys to the other party. Mortgages and adjustments are set up in a similar manner. Each party is charged wjth items he must allow to the other party and credited with those he is entitled to receive. Sometimes the difference in the respective values as stated in the contract, is charged to the proper party instead of showing the values of each parcel and the mortgages affecting each. If there is no difference in the values to be paid by one to the other, the adjustment pro and con are the only items to be considered. Leaseholds are closed by adjustments of rents be- tween the parties, including the ground rent paid or to be paid to the owner of the land, and the rents paid by the sub-tenants to the lessee. In closing mortgage loans, aU items of expense are paid by the borrower, the lender simply advancing the amount of the loan. The closing attorney must see that the mortgage in- stnmaent is in proper form and that the report of title shows that the mortgage creates a lien on the premises of the kind contemplated. 21. Methods of figuring interest. — In rear estate transactions, it is customary to figure interest on the basis of a 360-day year. Each month is considered to be one-twelfth of a year and for the purpose of 816 REAL ESTATE short figuring it is customary to take each day as the thirtieth of a month, so as to use the ordinary six per cent method of calculating interest. As a mat- ter of law, in calculations of interest for a period consisting of months and days, each month is con- sidered to be one-twelfth of a year, and only the odd days are figured on the basis of a 365-day year. When figuring interest, it is customary to exclude the first and include the last day. 22. Rejection of title. — If a purchaser has good reason for rejecting the title, he is entitled to have returned to him any sum which he has paid on the contract, together with interest at the legal rate from the time when he made the payment up to the time when it was returned to him. He is entitled also to have returned to him his reasonable expenses for examination of title, which means that a person can merely charge the actual cost of examining title in accordance with the customary rate. He cannot obtain consequential damage or compensation for loss of prospective profit, or brokerage paid for bringing about the contract, or loss incurred upon a prospective resale of the property, unless the seller is convicted of fraud in making the contract. Only in case of fraud can the purchaser get secondary damage. 23. Necessity for accurate survey of the property. — ^When a parcel of land is the subject of any com- mercial transaction, it is important that an accurate survey of it be obtained. The surveyor employed for the- purpose makes his return in the form of a dia- TRANSFERS 317 gram, showing the outline and dimensions of the property, the location of every structure upon it, and the extent of any encroachments upon it by adjoin- ing structures. Occasions have arisen where no sur- vey was obtained before closing, which showed that the buildings said to be on the land conveyed were on other land. Only a survey can usually show this. 24. Encroachments shown hy survey. — Having in mind the extent of the ovsTiership of the person whose land has been surveyed, the survey is examined to see if the structures upon it are entirely within the bounds of the land. If not, there may be a question as to the marketability of the title. If the buildings en- croach upon adjoining land, the owner of that land ,may be able to compel their removal, or may require damages for the encroachment. The buildings may encroach upon the street and the pubhc authorities may compel their removal. The question of market- ability can be solved only by a person familiar with the principles of law applicable to the situation. In considering the eflPect of encroachments upon the land by buildings erected on adjoining property, the question to be decided is more one of business than of \aiWi The encroachment does not affect the title to the remainder of the land. The question is, has the encroachment diminished the size of the plot so that it is materially different in value from the plot which was the subject of the negotiation? The courts will not compel the purchaser to take a plot materially different from the one contracted for. XVIII— 22 . 318 REAL ESTATE Under some circumstances an allowance for the dif- ference in value may be given if the purchaser takes the plot. A survey should be examined in connection with any restrictions kifecting the property. The build- ing may violate some restriction such as one requiring it to be set back from the building line of the street. Party walls, beam rights, etc., should be indicated by the survey. It is often necessary to show old roads and changes in the lines of streets upon the survey. 25. Survey for building operations and land de- . velopments. — ^Whenever a building is to be erected upon a lot, a surveyor should be employed to mark the lot lines and to indicate, where Ihe structure is to be placed. The surveyor should also be called in from time to time to test the work of the builder in order to guard against encroachments. In connection with a building operation^ the survey is also useful in show- ing grade of curb, sewer levels, etc. The surveyor is employed when a tract of land is to be laid out in streets and divided into separate lots. The streets are definitely located, blocks are cut into subdivisions and maps are made showing such contemplated changes, REVIEW A executes a deed to B and leaves it on his desk. Later B comes in, picks up the deed and goes away with it. Has title passed ? Why ? X makes a mortgage to Y, who does not record it. Subse- quently he makes a second mortgage to Z and this is plaCed on TRANSFERS 319 record. Jones, knowing of Y's mortgage, buys the property from X. What are Y's rights? X makes a will, leaving his homestead to Y. Z, knowing of the will, buys the property during the lifetime of X. What are the positions of Y and Z upon the death o^ X ? When title to a property where the title has been insured, proves defective, what courses may the title company pursue? In your state, if a person dies intestate, to whom does the real property descend? A sells a farm to B, who enters into possession but does not record his deed. Later A, jxfho is dishonest, bfFers the property to C. C knows B is on the farm but, supposes him to be a ten- ant of A. C buys the farm. What are the rights of B and C? If you were purchasing a tract of land and the seller executed the deed in another state, what facts would you wish to know? How would you show them? CHAPTER IX LEASES 1. Landlord and tenant. — A landlord is an owner of an estate in real property, or of an interest therein, when considered with relation to another hiring the property and agreeing to pay rent, who is known as the "tenant." \ 2. Definition of rent. — Rent is a definite periodi- cal return for the use of land. The expression "definite" does not mean necessarily that which is ascertained by the agreement itself, but that which can be made definite. If the return from a farm is to be a share of the produce, while neither party knows in advance what that share Will be worth, the fact that the share can be ascertained when the return is to be made, make it a definite return. Hence "leas- ing on shares" establishes the relation of landlord and tenant. The return must be periodical as well as definite. A period must be specified when the return is payable. Sometimes it is all payable at one time, as at the beginning or the end of the term. Very often the rent is paid in instalments, either monthly, quarterly, or yearly. 3. Term of lease. — The time during which occu- 320 LEASES 321 pancy is to last is known as the tenn of the lease, or technically as "the term." There is no limit as to what the term may be. It may be one day, one month, one year, or 999 years. lii New York Slate long-term leases usually are made for twenty-one years with the privilege of one or more renewals for similar terms. The reason for this is that the rent on leases for more than twenty- one years is taxable as personal property to the per- son entitled to receive it. If the person is not within the state, it may be taxed against the tenant. This tax is an added burden, since it is imposed in addition to the ordinary tax upon the land, and to avoid it the expedient of the shorter term with renewal privilege has been adopted. 4. Assignment of lease. — The landlord's interest in the rent, his right to receive rent, and his expecta- tion of being restored to possession of the property at the expiration of the term, remains real property. A deed to the property carries with it the right to receive the rent. The tenant's interest, regardless of the length of the lease is personal property, is assign- able as personal property and goes to the personal representative rather than to the heirs. Unless the lease expressly provides against it the tenant's rights may be assigned or tnortgaged. Any such mortgage would be a lien on the tenant's term or right of occupancy. If a lease provides that it shall not be assigned by the tenant, as leases usually do, and if notwithstanding the covenant, the tenant 822 REAL ESTATE assigns the lease, and the landlord knowing of the assignment accepts rent from the assignee, that pro- vision of the lease will be deemed to have been waived. Thereafter the lease is freely assignable. To guard against this possibihty, the lease should provide not only that the tenant shall not assign but al&o that no subsequent assignee shaU assign. An assignment of a lease does not relieve the tenant of liability to pay the rent he has agreed to pay. He is bound on his covenant to pay rent, but as entitled to be credited with any amount collected by the land- lord from the assignee. Any occupant other than the original tenant can be held liable for the payment of a fair rental and can be sued for thie value of the occupancy during his actual use. He cannot be held for the rent called for by the lease unless an agree- ment to pay that rent can be shown. 5. Leases created oraRy and by •writing.-^ A lease for the term of one year or less may be created oraUy. A lease for a term exceeding one year must be in writing and must be signed by the person to be charged. These terms may vary in different states. In New Jersey, for instance, a lease must be for a ten-year-term period, in order to be recorded, and leases may be made orally for any term up to five years. The statute law of the individual states should be consulted when exact information is re- quired. The element of' signing and the necessity for expressing clearly the entire contradt in the in- strument are the same as in the other instruments we LEASES 323 have considered. Some leases may be recorded (in New York those for three years or longer) but they usually are binding upon the parties even tho not recorded. It should be noted that actual notice by occupancy applies to leaseholds as well as to other interests in the land. Possession of the property gives to those dealing with the property actual notice of the tenant's rights. It is not safe to conclude that if a tenant has not recorded his lease the term of it is only a short one. 6. Monthly tenancies. — The shortest lease known commercially and to the law is the tenancy from month to month. This is an agreement, oral or written, whereby the tenant hires and the landlord lets the premises for a period of one month only. A term of leasing fron^ week to week comes under this same classification. While the tenancy apparently terminates at the end of the month, it is actually a self-renewing month-to-month arrangement. The tenant usually remains in possession and the landlord receives the rent month after month. It is a uniform rule, except in New York State, that a notice to quit shall be coincident with the length of the tenancy period. So a tenant fjom month to month must be given one month's notice; a tenant from week to week, one week's notice ending with the tenant's week, and so on. In New York City, by statute, only five days' notice is requu-ed. The requirement of notice to end leases of this kind is reciprocal. This is the common law rule, but an 324 REAL ESTATE apparent exception exists in New York State, where a dictum of the court implies that the tenant need not give notice. If the tenant stays over his monthly term for even one day he is liable for another month's rent. 7. Tenancy-at-will. — The tenancy-at-will is the longest term of letting in the eyes of the law. The term is indefinite — ^there ik no limit to its duration. The usual arrangement is that a letting is agreed upon, with rent payable monthly, but no term is stated. The tenancy-at-will is apt to be confused with a monthly tenancy. If the parties desire a monthly tenancy it should be so provided in the written agree- ment if there be one, or the rent receipt should read to that effect, A tenancy-at-will can be terminated by either party at will. In New York City, by statute, all tenancies- at-will end on May 1 of each year and the tenant can' remove or the landlord require possession without notice. 8. Tenancy for years. — A tenancy other than that from month to month, or at will, is usually for a year or more. The term is fixed definitely by agreement. Such a tenancy ends of its own force, without notice, on the last day of the term. If the tenant continues in possession at the end of the term, the landlord may exercise one of three options. He may dispossess the tenant and obtain possession; he may consider the tenant a hold-over from month to month, or he may consider the tenant a hold-over for a further LEASES 325 period of one year. If nothing be said on either side, the presumption is that of the hold-over on an annual basis and upon the same terms as the former lease. 9. Ground lease. — There is a form of lease for years which is sometimes called a ground lease. The feature of this form of lease is that it is a lease of the ground only, the tenant erecting the structure on the land. The term of the lease must, of necessity, be long, in order to induce the tenant to erect a suit- able building. There may be one long term, or there may be a term of say twenty-one years with a privi- lege of one or more renewals for hke terms. The rent fixed by a groimd lease is often based on a percentage of the value of the land. In case of renewal privileges, it may be provided that the rent for the renewed term be made a certain percentage of the value of the land at the time the new term commences. The new value is arrived at frequently by arbitration. Usually all taxes, assessments and water rates must be paid by the tenant* so that the return to the landlord is net. The problem of the tenant is to put a building on the plot and obtain such rents from sub-tenants oc- cupying it as will pay the following charges: (a) The ground rent. (b) Taxes and water rates (and assessments if any). (c) Fire insurance, labor, heat, light and power, repairs, and aU expenses incidental to the upkeep and maintenance of the building. REAL ESTATE (d) Interest on the amount invested in erecting the building. (e). An amount sufficient to amortize the cost of the buiMing by the end of the term of the lease, or , the end of the last renewal of the lease. (f ) A sum over and above all the foregoing charges ' to compensate him for his own services and the risk he assumes in undertaking the enterprise. In some cases it is provided in the lease that at its expiration the landlord shall pay the tenant a fixed sum f or^ the buildings erected. In this case the ten- ant would only have to amortize the difference between the cost of the building and the sum to be received from the landlord on the surrender of the premises. It should be remembered that the buildings are real estate and belong 'to the landlord as owner of the fee as soon as erected, but nevertheless the landlord can agree to pay the tenant for them on the expiration of the lease. The maxim is "He who owns the soil owns from the center of the earth to the sky," but but there are many qualifications of this. 10. Termination of leases. — ^Every lease ends at the expiration of its term. Prior to the end of the term leases may be terminated by a voluntary offer of sur- render on the pajrt of the tenant and an acceptance of the offer by the landlord. The tenant is liable for rent up to the time of surrender, and thereafter all obligations of the parties cease. Surrender and acceptance may be implied by the acts of the parties. For example, the tenant may vacate the premises and LEASES 327 the landlord may enter and take possession. The re-entry by the landlord may be for the purpose of protecting the property, and yet it may be construed as an acceptance of a svu^render. For the protection of the landlord the lease should provide that if the premises become vacant he may resume possession for the account of the tenant, and that the tenant shall remain liable for the rent until the end of the term. The lease may be terminated and the relation of landlord and tenant severed by a breach in the cov- enants or conditions of the lease. The conditions may be divided ipto two classes, those for which the landlord can dispossess the tenant by a summary pro- ceeding, and those for which he cannot dispossess. A tenant can be dispossessed for any one of three causes. First: — Holding over after expiration of term. Second: — ^Non-payment of rent, or for non-pay- ment of taxes and other charges, if the tenant has agreed to pay such charges. Third: — ^Unlawful use of the premises. For the breach of any other covenants of the lease, the landlord is not entitled to dispossess a tenant sum- marily but to obtain possession he must sue the tenant in a lengthy and expensive ejectment action. Leases can be drawn in a manner that will avoid this, how- ever. For example, the tenant may covenant to make certain repairs. A provision can be made that if he fails to do so the landlord may make and charge the 828 REAL ESTATE cost to the tenant as additional rent, payable with the next instalment. Failure to pay the charge then gives the landlord the right to dispossess the tenant. It may be provided also that if there is a breach by the tenant in other covenants, the landlord may elect to terminate the lease. After such a breach and no- tice-io-quit the landlord may proceed against the tenant as against the hold-over. All conditions that can be settled by the pajmient of money may be put in such form that the amoimt is made as a charge of additional rent,- and all other conditions can be made conditional limitations in the term of the lease. The ordinary short-term, lease is drawn in simple language, however, and complicated clauses of the kind mentioned are used only in long-term leases of valuable property. _ 11. Dispossess proceedings. — ^Dispossess proceed- ings are. brought in courts of minor jurisdiction. They are usually commenced by a petition to the court by the landlord setting forth the tenancy and the fail- ure of the tenant to pay the rent and asking for a dis- possess warrant. The tenant is served and given an opportunity to appear in court and answer. Judg- ment is nearly always in favor of the landlord and the warrant is issued. If the tenant faUs to move, a pub- lic oflBcial physically removes the' tenant and his be- longings from the premises. The warrant is some- times stayed by the court for a short time, as a matter of compassion. In some states there is a law allowing the tenant to LEASES 329 pay up the back rent after dispossession and to redeem the premises, providing the lease has a certain number of years to run. Long-term leases usually contain a clause whereby the tenant expressly waives the right of redemption. The dispossess then terminates the lease absolutely. In certain provinces of Canada somewhat similar proceedings are taken. A demand of possession is first served on the tenant, and if he refuses to comply, an application is then made to a judge who appoints a time to determine whether the person complained of was tenant for a term or period which has expired, or been determined, and whether the tenant holds against the right of the landlord and wrongfully refuses to go out of possession, having no right to continue. Evidence is then taken and the matter decided summarily. 12. ObUgations of landlord and tenant. — The ob- ligation of a landlord is to secure the tenant in pos- session of the property he has leased, and to protect him in that possession. The obhgation of the ten- ant is reciprocal. He must protect his landlord's in- terests and give him prompt notice of all matters of which he learns by reason of his occupancy which aflFeCt that interest. He may not recognize any per- son as landlord or pay rent to any person who claims hostility to the maker of his lease. The tenant must be loyal to his landlord and is liable for damages if he breaks that obligation. Unless there is an express covenant in the lease, there is no obligation on the part of the landloM to 3S0 REAL ESTATE make repairs. Repairs frequently are made by land- lords as a matter of expediency and in order to retain their tenants, but usually landlords cannot be com- pelled to make them. Unless otherwise agreed the tenant does not bave to make any permanent repairs, but he must commit no waste upon the premises. He can let the premises go along in ordinary wear-and- tear vmtil they arie worn out so long as. he does not commit actual waste. If by reason of some act or omission of the landlord, the tenant is not accorded the occupancy of the prem- ises, or if the premises are not kept so that they can be used for the purpose for which they were hired, there may be a constructive eviction of the tenant which would release him from his obligation to the landlord. Such woidd be the case where the tenant hired a steam-heated apartment and no heat was sup- plied. The apartment could not be used for living purposes and the tenant could move. He must take advantage of the landlord's failure at the actual time it occiu-s, however. In the instance given, if heat were supplied later, the tenant could not then move and allege the former unsatisfactory condition as an excuse. In some states a lease terminates if there is a fire on the premises which renders it untenantable. If there is no such law, or if there is a provision to the con- trary in the lease, the tenant remains liable notwith- standmg the fire. If he has the option to remove, he LEASES 3S1 must do so promptly, or his liability on the lease re- mains. REVIEW A leases a house from B. During the year repairs become nec- essary. B refuses to make them and A prepares to move. Dis- cuss the rights of the parties. In the instance given above, suppose A, who is wealthy, as- signed his lease to C, who has no property. C refuses to pay rent. What are the rights and liabilities as between A and B? In your state, what leases must be in writing? What ones must be recorded? A tenant leases a store for one year. At the expiration of the term he continues in possession, paying rent monthly as nsual. After six months he gives notice of intent to terminate his tenancy. What sort of a tenancy has he? What is the land- lord's positicm? In your state, what are the ways in which a tenant may be dispossessed? What is the procedure? Who owns a house erected by the tenant under a ground-lease? What are the tenant's problems under this form of lease? CHAPTER X BROKERAGE 1. Broker and Ms duties. — "Real estate brokers are those who negotiate between the buyer and seller of real property, either finding a purchaser for one desirous to sell, or vice versa; they also manage estates, lease or let property, collect rents, and nego- tiate loans on bonds and mortgages." ^ A broker has also heea described as "one who makes a bargain for another and receives a commission for so doing." * The broker is-an agent or middleman; those he rep- resents are called the principals and they include buyer and seller, lender and borrower, lessor and lessee. The compensation paid a broker for his services is called commission. It is a certain, rate per cent com- puted on the gross amount involved in the transaction. On sales it is based on the sales price, on exchanges on the values in exchange, on loans on the amoimt of the loan and on rentals on the rent called for by the lease. Brokers reaUy make their living by doing piece work, as they are paid for each transaction separately. They do not receive a salary. If they did they would not be brokers but salesmen. A successful broker possesses the qualities of a good 1 4 Am. & Eng. Encjr. of Law (Snd Ed.), 963. 2 Potts vs. Turner, 6 Bing. 702, 706. 332 BROKERAGE 338 salesman. He has a thoro knowledge of the thing he is selling and is ahle to bring it before the right cus- tomer in the right way. He has also certain rights and duties of a legal nature. In this chapter we shall consider him briefly as a business man and ^Iso out- line the most important of the legal principles in- volved in his activities. 2. Nature of the btoker's business. — The ordinary real estate broker does a general real estate business. He will earn a commission li^henever he can whether by securing a tenant for a cheap flat or by bringing about a sale of property involving thousands of dol- lars. Many brokers are specialists and will devote their energies only to some particular part of the busi- ness. Some brokers work entirely on sales of real estate, others make a specialty of securing mortgage loans while others seek to effect commercial leases. Whether the broker's business is a general one or whether he specializes in some particular part of it, the requirements for success are the same. The confidence and good-will of his customers are the broker's chief stock in trade. If he obtains the confidence of a customer, that customer will be glad to do business with him again and will recommend him to his friends. In that way the circle of the broker's acquaintance will gradually widen— he will slowly but steadily build up a clientele, and if the uniform experience of these business friends with him is satis- factory, and they find him dependable and truthful, XVIII— 23 384 REAL ESTATE his business is bound to grow. The undertying prin- ciples of success, whether ethical or practical, are the same in this business as in any other business or in any of the professions. The real estate man should possess a thoro and ac- ciu-ate knowledge of the property he wishes to sell or rent. He should have a diagram showing the exact lo- C£^ion, dimensions and shape of the land. He should know aU about the buildings on the land — ^the size, number of floors and nvmiber of rooms and the ma- terial of which it is built. He should know the age of the building, the improvements it contains, whether it is in good or poor repair, the tenures under which it is held, the rent paid by each tenant, the length of the term of rental and the number of vacant apartments or stores. The foregoing has to do with the physie^d condition of the building and its present rents and tenants. In addition, information about the mort- gages on the property should be obtained — ^their amount, rate of interest, when due, privileges of pre- payment, and the name of the mortgagee. A convenient way of keeping a record of the prop- erties listed with the broker is by means of a card in- dex or loose-leaf book. The card or sheet should have a printed or typewritten outline to be filled in with the information noted about each piece of property. Of course, the broker must note in his records the price an owner is asking for property he wishes to selL The broker's knowledge should tell bim whether this price is fair and reasonable or not. Such knowl- BROKERAGE 335 edge is acquired only by experience in making sales himself and by keeping careful notes of sales made by other people whenever this information is obtainable. The broker ought to know if sales of similar property in the same neighborhood have been made and the prices obtained at such sales. He should be able to form an opinion as to the present market value of the property, its value as indicated by the rents it produces and also the possibility of its increasing its value, due to changes in the neighborhood, sidewalks, sewers, water, gas, projected transit lines, increased rents, etc. Many owners list their property with the broker with the idea of having him find them a purchaser. If a person seeking to buy property comes to the broker, tlie broker goes over his list with the prospec- tive purchaser, makes a note of what probably will suit the person best and shows these propai;ies to him and then tries to close him on one of them. Some- times the broker has nothing in his books to suit the buyer. Then he looks around and tries to find some- thing. He may try for months before he finds the property the buyer wants. Again, a salable piece of property may come to the attention of the broker and he will endeavor to find a buyer for it. Often he is successful and makes a good commission. Fre- quently he does a great deal of work from which noth- ing comes. While an important transaction brought about pays the broker well, the business is' full of disappointments. Impressions may be made, trans- REAL ESTATE actions almost consummated and then the whole thing may fall thru. The experienced broker has learned to take these disappointments as part o'f the business, and at once starts in again to work on some other prop- osition. A broker should find out that the one offering property is in reahty the owner or his authorized rep- resentative and also that the owner js able to sell. If he owns the property in a fiduciary capacity, he may not be able to seU it or he may have to obtain an order of the coiKt in order to do so. Sometimes property is affected by restrictions that destroy its usefulness for certain purposes. If the broker knows about such things in advance he may avoid wasting time and energy working up a deal only to find that it cannot be carried out. 3. Employment of the broker. — It is. a clearly es- tablished principle of law that a broker must have been employed by the principal in order to be able to recover a commission for bringing .about a trans- action. This employment must be either expressed or implied. In order to found a legal claim for com- mission on a sale, there must be not only a causal but also a contractual relation between the introduction of a purchaser and the ultimate transaction of sale. The usual thing is for the owner to come to the broker and place his property in the broker's hands for sale. At that time the broker should make sure that the owner will pay him the usual commission if he procures a buyer. If the owner agrees to BROKERAGE 337 this, we have a definite and express emplojrment. It would make it even a little better for the broker if the price and terms of sale of the property, together with an agreement to pay commission, were written out and signedby the owner. But the mere fact that the owner ,voluntarily lists the property with the broker, either by word of mouth or in writing, even tho payment of com- mission is not mentioned, will be construed in most jurisdictions as an employment of the broker by the owner and will subject the owner to the payment of a xommission if the broker sells the property for him. 4. Volunteers not paid. — ^If one approaches the owner inquiring the price of a piece of property, and the terms upon which the owner will sell, and after- ward brings a customer to buy the property on the owner's terms, the owner has not become liable for a commission. - The inquirer will be considered a mere volunteer and as such not entitled to compensation. Probably in most cases of this kind if the owner were asked in advance if he would pay a conmiission if a sale were, made he would have agreed to do so. Brok- ers have frequently carried negotiations up to a suc- cessful termination, only to wake up to the fact, after the deal was made, that the owner had never em- ployed them. See 70 App. Div. 45 (N. Y. ) ; 4 E. D. Smith 354 (N. Y.). 5. Employments implied or by ratification. — Em- ployment of the broker niay be implied from past re- lations of the parties or from special circumstances. If the broker has been accustomed to sell property REAL ESTATE for an owner and has received commissions for doing so, tihe owner could not refuse to pay him a commis- sion for selling another parcel on the plea that he had not been employed. The past custom of the owner would justify the agent in expecting a commission for the service rendered unless the owner had deUberately said in advance that he wovdd not pay one. Also, if an owner negotiated with one he knew to be a profes- sional broker and whom he knew expected pay for his services he could be held for a commission if the sale were made. The employment of the broker would be implied. Any act of an owner recognizing a claim for commission, such as offering a less amount, raises the presumption of an imphed agreement to pay. Employment may be by ratification but only where there is a plain intent to ratify. Thus, if one not pre- viously employed brings the owner a purchaser, and the owner avails himself of the broker's services and continues negotiations thru him, the circumstances in- dicating in some way that the broker expected to be paid for his services, an implied promise to pay the broker would be presumed. Questions of fact in these cases may be very difficult to determine. It has been well said, however, that an owner cannot be enticed into paying a commission against his will, so the intent to ratify must be very clearly shown. The Supreme Court of Canada field that the agent who was the effluent cause of the sale was entitled to his commission altho the purchase was on altered terms and by associates of the person to whom the agent in- BROKERAGE 339 troduced the subject. Stratton vs. Vachon 44 S.C.R. 395 (1911). 6. Employment to sell need not he in ivriting. — Written authority of the owner to sell his property is not required now in the State of New York. Chap- ter 128 of the Laws of 1901 which provides that the broker's authority must be in writing was subse- quently declared unconstitutional, and furthermore was repealed by Chapter 516, Laws of 1906, and again repealed byiJie Penal Law of 1909. In New Jersey and a few other states the written authority is re- quired. 7. Earning commission. — The question as to what efforts of the broker entitle him to a commission nat- iu"ally arises. The answer to this has been made clear by nimierous judicial decisions. He must produce a purchaser ready, willing and able to buy the property upon the terms specified by the owner or terms ac- ceptable to him, or he must be the procuring or effi- cient cause of the sale being made. When the broker is employed to sell the property, he should, as we have already pointed out, obtain fuU particulars of the property including the price asked by the owner, and the terms on which he will sell. If the owner has stated no terms the broker's customer must offer terms which the owner will accept. In either event if the broker brings a customer who wiU buy on the owner's terms, the broker has fulfilled his agency and is en- titled to compensation. Furthermore, if the broker brings a customer who altho not willing to purchase REAL ESTATE on the owner's terms, yet offers other terms which the owner accepts, the broker is entitled to the com- mission. The broker is not paid for interesting a prospective purchaser in the property, for making impressions, or for any efforts that are unsuccessful (Sibbald vs. Bethlehem Iron Co., 83 N. Y., 383) . He is not en- titled to a commission if he abandons negotiations after commencing them, or if the purchaser refuses to deal thru him. This is true in some jurisdictions even tho the sale is made afterward by the owner direct or thru the efforts of another broker. If the owner, or purchaser, in bad faith, get together behind the broker's back and make the deal, the broker would be considered the procuring or efficient cause and would' be entitled Ito commission. It is not neces- sary that the broker guarantee the solvency of his customer. If the customer were of nbtorious finan- cial irresponsibility the oAvner could refuse to treat with him, biit if he accepts him he cannot claim this as sufficient ground for refusing to pay the broker's commission. If no contract were made the broker suing for commission would have to prove that his customer was able financially to carry out the con- tract, had one been made. In some cases the pur- chaser would have to be one who was personally acceptable to the owner, as, for instance, where there are large terms of credit involved, or where a loan is to be made in connection with the sale to a builder improving the land. It is not necessary that the contract of sale be re- duced to writing and signed, altho the signing of a contract is the best evidence a broker has that his customer is ready and willing to pvu"chase. The customer must be one, however, who could execute a binding contract at the time if reg^uired to do so. The owner cannot conscientiously refuse to deal with the proposed purchaser, and if he should do so, and the broker could prove that the purchaser was one ready, willing and able to buy on the owner's terms, the owner would be liable to the broker for his commis- sion. The owner would also be hable for cpmmission, if he could not carry out the transaction after a regu- larly employed broker produced such a purchaser. A case of this kind was one where the seller's wife re- fused to consent to the arrangements. 33 Misc. 793 (N.Y.). When the broker advertises a piece of property and a purchaser is attracted to the property and opens negotiations thru the broker, the broker is the pro- curing cause and is entitled to commission if a sale is made directly between owner and purchaser. The parties must agree about all of the terms of the proposed transaction. There must be a meeting of the minds, Where the owner has not expressed him- self already, all the terms offered must be satis- factory to him. A case is on record where the brok- er's purchaser required a warranty deed and the owner refused to give one. In this case the form of deed had not been agreed upon. A similar case came to 342 REAL ESTATE the writer's attention in which negotiations for the sale of property were practically completed, the price and amount of cash payment having heen agreed upon, when the question was raised as to which side should pay the expense of procuring certain mort- gages to be placed on the property. Both the pur- chaser and the seller refused to pay these expenses and the deal fell thru. The minds of the parties never met, and the broker did not earn a commission. 8. Double employment. — The broker's duty to his principal is that of any employe to his employer — loyalty, faithfulness and honesty. He is an agent, and as such must do aU in his power to serve his em- ployer's best interests. He cannot represent both buyer and seller faithfully and therefore must not ac- cept pay from both, unless each knew that the other was paying a commission. By accepting, or agreeing to accept pay from the opposite side in a transaction, he forfeits the right to receive a commission from his employer. It is a breach of his contract of agency, and a fraud on his principal. Of coiu'se, a double em- ployment might be known and consented to by one or both of the principals, in which event it could not be offered by one to whom it was known as an excuse for refusing to pay the broker. The rule against double emplojrment is in accordance with both legal and moral principles — "No man can serve two masters." It applies whenever the agent has been intrusted with the slightest discretion. Where the broker merely acts as a middleman to hring the principals together. BROKERAGE 843 the price and terms being arranged entirely between them, he can be the agent for both sides. In such cases the broker has no discretion whatever, and if em- ployed by both principals he can receive commission from both. 9. Secret profits. — ^A broker employed by an owner to sell property cannot become the pm-chaser unless the owner clearly and unmistakably assents to it. In the NewYork case of Clark agaiast Bird, reported in 66 Appellate Division 284, a broker was intrusted with property to sell for the owner. He received offers, but advised that they be declined. Finally he told the owner that one Jones would purchase the property for $10,000 and advised acceptance of the of- fer. A contract was drawn and signed between the owner and Jones at $10,000 but at the closing of the title the deed was taken in the broker's name. The owner claimed that she was cheated as shfe supposed Jones to be the real purchaser. . Her action to rescind the sale resulted in the deed being set aside. The court in this case, quotuig from Story on Agency said, "An agent employed to sell cannot himself be- come the purchaser; and an agent employed to buy cannot himself be the seller. So an agent employed to purchase cannot purchase for himself." A broker cannot get the owner to fix a net price for his prop- erty and then effect a sale at a greater price and keep the difference. He would be liable to the owner for the secret profit so reaUzed. In Bain vs. Brown, 56 N. Y., 285, a broker brought about a sale for an owner 344 REAL ESTATE at $17,000. Before title closed he made a contract in his own name with another party for the same property at $26,000. He took an assignment of the first contract and then directed the owner to deed direct to the second purchaser, not disclosing to the owner the price imder the second contract. The Court of Appeals held that the owner wa's entitled to the benefits of the advance upon the second sale. The foregoing does not mean of course that one not acting as agent for the owner could not get a net price from the owner and then sell at a larger price and make the profit, nor does it mean that the terms of employment m^y not allow the broker to make as a commission all he can realize over and above a cer- tain price. This must be expressly stated in the con- tract of agency, however. The agent cannot take a secret profit. 10. Broker's authority. — The broker may not sign a contract of sale for an owner unless authorized to do so. The ordinary employment of the broker does not include his authority to execute a binding- contract of sale in the owner's behalf. In the states of New York and New Jersey and some others, if authority to sign a contract has been given to the broker, such authority need not be in writing. If a broker employs another broker to sell property the latter must look to the first broker for commission. No privity of contract exists between the second broker and the owner. The owner can expressly au- thorize the broker to employ sub-agents and in such BROKERAGE 345 cases he would be directly liable to the sub-agents for their commission. The owner might also ratify the employinent of the sub-agent and thus become liable to him for commissions. 11. Disclosing information. — The broker is bound to reveal to his employer all information he may have affecting his employer's interests in the property. Withholding information which naturally could be expected to influence the conduct of the employer in dealing with the property is a fraud on the part of the broker. He forfeits his right to recover commission by such an action. The broker, however, does not have to violate confidences. If a purchaser negotiate confidentially with a broker for some property and wishes the transaction made in the name of a dummy, the broker does not have to reveal to the owner the real purchaser. He should tell the owner, however, that the purchaser is a dummy acting for an undisclosed principal. 12. Statements made by broJcer. — A broker can make statements regarding the property.based upon information furnished by the owner which he believes to be true. If a purchaser rehes upon* these state- ments and contracts to purchase the property, but later rescinds upon learning that the statements were untrue, he will be relieved of his contract and is en- titled to receive his money back. The broker, how- ever, in such a case is entitled to his commission. He was not at fault. If the broker makes unauthorized misrepresenta- S46 REAL ESTATE tions, a purchaser who had heen induced to contract by reason of such misrepresentations would be entitled to receive his money back and be relieved of his con- tract, ynder such circvraistances the broker would not be entitled to conmiission, because of his fraud. If the owner accepts the fruit of the broker's work and enters into a contract with the purchaser knowing of the misstatements of the broker, he wiU be hable to the broker for a commission, even tho the purchaser be subsequently relieved of his contract. In a case of this kind the owner is deemed to have ratified the broker's acts. It is an established rule of law that a principal is bound by the acts of his agent when the agent acts within the scope of his apparent authority. By rea- son of this an innocent purchaser is relieved of his contract not only when it has been induced by mis- representationp made by the owner directly, but also when made by the broker employed by the owner. The broker can recover commission on the sale, how- ever, whenever the misrepresentations were made by authority of his employer or were ratified by the em- ployer. When the misstatements were unauthorized and the employer innocent, the broker loses his right to compensation. - Misrepresentations sufficient to relieve one from a contract must be about some material fact such as the amount of the rents, the size of the plot or the price actually paid for the property by a former buyer. Mere opinions as to present or future value will not be BROKERAGE 34-7 considered as misrepreseiitations even tho exagger- ated. The New York courts have also decided that an unintentional misrepresentation on the part of the owner did not amount to a warranty to the broker and did not authorize a recovery of commission when the purchaser refused to enter into a contract. The mis- representation concerned the size of the plot. It was held that the broker was employed to sell the plot, with which he was familiar, and not a certain number of feet of land. (Hausman vs. Herdtf elder, 81 App. Div. 46.) If the broker makes misstatements to his employer to induce him to enter into a contract of sale, it is a breach of the broker's duty of good faith and a fraud upon his employer, and will cause a forfeiture of the broker's right for commission. This is so even tho the employer carry out the contract. 13. Termination of agency. — ^Where no time for the continuance of the contract is fixed by its terms, either party is at liberty to terminate it at will, sub- ject oiJy to the ordinary requirements of good faith. , Usually the broker is entitled to a fair and reasonable opportunity to perform his obhgation, subject of course to the right of the seller to sell independently. But that having been granted -him, the right of the principal to terminate his authority is absolute and unrestricted, except only that he may not do it in bad faith and as a mere device to escape the payment of the broker's commission. The right of the parties to terminate the agency is clearly established by judicial 348 REAL ESTATE decisions. The agency is also terminated by the death of either principal or agent; by the destruction of the subject matter; by the bankruptcy of the principal; by mutual consent and by the sale of the subject mat- ter by other means than thru the agent. It is of course terminated when the object of the emplojrment is performed, and it can generally be considered ter- minated after the lapse of a reasonable length of time, except that the'principal must act in good faith in con- sidering it terminated for this cause. 14. When commissions are due. — It can be laid down as a rule that commissions are due and payable as soon as the broker has done the work for which he was employed; that is, as soon as he has brought to the owner a purchaser ready, willing and able to biiy on the owner's terms. The broker does not have to wait until title closes or even imtil the contract is signed. This may be modified, however, by express^ agreement made prior to the time the commission is earned. If, after he has earned his commission, an agreement is made by the broker to wait until title closes, or to make his commission dependent upon the happening of any event or to take less than the usual commission, or to waive commission entirely, it is not binding upon the broker and can be disafiirmed by him. It cannot be enforced against the broker be- cause no consideration was given for his promise. There are cases, however, where the owner in closing negotiations with a purchaser either agrees to accept a lower price for his property, or modifies the terms of • BROKERAGE 349 the financial settlement upon the express condition that the broker waive his right to commission until a later date, or accept a smaller amount. Such an agreement is for a consideration and is binding. The broker is not responsible for failure of the cus- tomer to complete the contract. If the broker brings a customer answering the description we have already noticed, and the owner enters into a contract with him, it is the owner's responsibility to get a sufficient sum paid on the contract as earnest money at least to cover the broker's commission. ' If the owner does not do so, that is his aflPair. He may accept a fifty dollar deposit upon the sale of a piece of property and be- come liable to the broker for a one himdred dollar commission. The broker does not lose his commission because the owner fails to require a large enough de- posit on the contract. When the payment of commission is deferred imtil passing of title by valid agreement, and title never passes because it is defective, or for any other reason for which the seller is responsible, the broker is en- titled to commission notwithstanding such agreement. 15. Purchaser sometimes employer of broker. — The broker is usually employed by the owner to sell the owners' property. As the agent of the owner his duty is toward his employer. In the final analysis, however, the pvu-chaser pays the commission, for it can be assumed that the owner includes the commission in determining the price of his real estate. In a few cases the purchaser employes the broker to buy prop- Xnil— 24 350 REAL ESTATE erty for him, and then the broker's duty is toward the purchaser. All that has been said about the agent's diSty to his employer applies with the same force when the purchaser is the employer. Furthermca-e, it is considered perfectly proper for a broker employed by a purchaser to go, to an owner and get his lowest price and obtain an agreement from the owner that out of the price the broker shall get a commission. The owner in such cases knoWs he is dealing with an agent for the purchaser, and the purchaser knows the owner pays the broker a commission. Brokers as- sembling large plots for buyers frequently have made this arrangement. The site for the terminal of the Pennsylvania Railroad in New York is an example. In some cases the owner is asked to quote his lowest net price, the commission being paid by the purchaser. 16. Rate of commission. — ^Rates of commission are fixed by custom and agreement. There is no legal fixed rate of commissions, but the customary rate in the community will be understood to be the rate un- less there is an express agreement for a different one. It is poor business for brokers to accept less than the customary rate. A short, interesting and instructive article, and collection of authorities applicable to the laws in Canada relating to commissions to real estate agents may be foimd in Volume 48, Canada Law Journal, page 549. / REVIEW What is necessary to entitle a broker to compensation for his services ? BROKERAGE 351 In your state is it necessary for an agreement for the sale of land to be in writing? When is the broker's commission dne? A broker brings purchaser and seller together. They then pass title between them' and the broker's claim for commission is refused. What are the broker's rights ? Make a list of the things you wonid wish to know about a property someone brou^t for yon to offer for sale. How would you set about finding a market for the property? What are the recipropal rights and duties of principal , and broker? If either party fails to complete a transaction, is the broker responsible? INDEX Accident Inanrance^ Personal, 129; Success in United States, 129-30; Supreme Court decision, 130—31; Poison case, 131-32; Scope of, 132-33; Policy benefits, 133-34; Schemes to de- fraud, 134-35 Agency, Beal estate, 183; Brokerage, 184; Property management, 184 Agents, Fire insurance, 34; Hail insurance, 144 See also Brokerage Analytical Schedule, Insurance rating, 49—53; Completed by A. F. Dean, 49; Legislation in Ontario, 51—53 Applications, Oral acceptance, 35; Indorsement agreement, 35-36; Signed, 37 Assessment, Property values, 207—9; Land and buildings, 207—8 ; Reductions 208-9; New York City taxes, 209—10; Apportionment of taxes, 211; Special, 211; By court au thority, 211-12; By board of as , sessors, 212—13; Becomes a lien, 213 Assessment Insurance, In United States, 118; United Workmen plan, 118-19; Decline of, 119; Mortality records, 120 Auction Sales, Beal estate contracts, 246; Invol- untary, 246; Terms of sale, form of, 247-50; Voluntary, 250-51; Advertising, 251 Automobile Insurance, First company for, . 135 ; List of hazards, 135-36 Average Adjusters, Marine losses, 23 Barratry, Definition, 17 Barton, B. W., on Policy loans. 111 Batterson, JTames O., Promotes accident insurance, 129 3S3 Beneficiaries, Canadian laws, 84-88; Wife or child, 85 ; Trustees, 86 ; Bight to change, 86; Payments, 87; Changes, 106; Policy payments, 113 Bill of Lading, Marine insurance contract, 7 Bond and Mortgage, 271-94 State practice, 271—72; Bond provi- sions, 273-75; Default, 275-76; Mortgage form, 276-81; Defeas- ance, 282-83; Covenants, 283- 89; Special mortgages, 290-92; Usury laws, 292; Foreclosure, 293-94 Bonds, Fidelity insurance, 151—53; Classes of, 152-53; Surety bonds, 154- 55; Court issuance, 155; Agree- ment, 155-56; Depository, 1S6; Forgery, 156 See also Bond and Mortgage Bottomry Bond, Form of insurance loan, 4, 8 Brokerage, 332-50 Broker's services, 332-36; Quali- fications, 334-35 ; Commission, 337—50; Employment of broker, 338-39, 342; Broker's contract, 344-48; Bate laws, 350 Brokers, Numerous in N. Y. City, 34; Brok- ers' Association of Great Brit- ain, 125 See also Brokerage Borglaiy Insurance, Origin of, 147; Mercantile open ^stock insurance, 148-49; Forms of robery, 149-50 Business Methods of Life Insurance, Loading, 114; Claims, how certi- fied, 114-15; Commercial phases of insurance, 115—17; Group poli- cies, 117—18; Assessment bene- fits, 118; United Workmen, 118- . 19; Payment plans, 120; Frater- nities, 121; Industrial -insur- ance, 121—24; Prudential Insur- ance Co., 122; Premium pay- ments, 123 854 INDEX Casualty Insurance, Origin, 125; Items under, 125-26; N. Y. State reports, 126-27; Companies in Canada, 127; Scope of, 128; Personal accident, 129, 132-33; Success in United States, I If 129-30; Court opinions on claims, 130-32; Accident records, 133 ; Premium and double bene- fits, 133-35; Schemes to defraud, 134-3&; Automobile hazards, 135—36; Plate glass, risks cov- ered, 136—38; Steam boiler risks, 139—40; Fly-wheel insurance, 140; Hail adjustments difficult, 141-47 ; Saskatchewan Commis- sion, 144—47; Burglary, forms of, 147-50 ; . What robbery in- cludes, 149-50; Title insurance, 150-51; Classes of fidelity bonds, 151—54; Employers and em- ployes, 152-54; Fidelity policies, 153-54; Surety, 154-56; Con- tract bond, 154-55; Maintenance. 154, 155; Court cases, 155; Bond agreements, 155—56 Caution Money, Marine deposits, 6—7 Clauses, Fire policies, 68-70; Average, 68- 70; Application illustrated, 69; Aim of, 69; Defeasance, 282- 83; Mortgage, 283-89 Consideration, Real estate transfer, 255-56; In deed, 255-56 Contracts, , I Implied warranties for ships, 14— 15; Amsterdam law, 14; Fire in- surance applications, 35—37; Me- chanic's lien, 199; Real estate transaction^ made binding, 216- 19; Statute of frauds, 216; Sales contract form, 217—19; Purchaser and seller, 220-21; Earnest money, 221, 229, 237; Agreement, 221-22; Descriptions difficult, 222-25; Improved property, 223- 25; Leasing to tenants. 226; Specifying restrictions, 226—27; Easements, 227-28; Surveys show encroachments, 228; Pay- ments, 229—30; Mortgage terms, 230—34; Purchase money mort- gage, 233-34; Delivery of deed, 234—35; Apportionments, 235; Street title, 235; Water rates. 236; Deed, form stipulated, 236; Articles included in sale, 236— , „ 37; Fire risk, 237-38; Heirs or Contracts — continued executors, 238; Essentials, 233- 39 ; Exchange, standard forms of, 240-43 ; Property description, 243; Valnations, 243-44; JiTon performance^ and remedies, 244— 46; Auction sales, 246-52; Form for terms of sale, 247-49; Vol- untary sales, 250—51; Successful auctioneers, 251 Covenants, Real property deeds, 264-69; IJx- planation of, 266-67; Two classes, 267; When broken, 267- 68; Of warranty, 267, 268, 269; Marketability, 269; Mortgage, 283-90; Warranty, 289; Estop- pel, 289 Deeds, 253-269 Statutory form, 253-54; Indenture, 254; Consideration, 255-56; Granting clause, 256—57; De- scribing property, methods of, 257—61 ; Appurtenances, 261 ; Habendum, 261-62; Testimony clause, 262; Corporate acknowl- edgment, 263—64; Bargain and sale, 264-65; Quit-claim, 265; Full covenant and warranty, 265— 69 Demurrage, Delayed vessels, 7-8 DlTidends, Distribution, 107 Divisions of Insurance, 3 Types of companies, 31 Dower Eights, New York law for, 189; Mortgage - bonds, 281 Earnest Money, Payment on contract, 229; a lien, 237 Easements, Property rights, 227; Party wall right. 228 Employers' Li&bility and Workmen's Compensation, Social insurance, 157; Employers* liability laws, 158; Liability pol- icies, summary of, 158—60; Pre- mium rates, 160—61; Reserves. 161—62; Compensation versus liability, 162; Workmen's com- pe,nsation in U. S., 163; State laws, 163— 65; Features of law, 165-66 ; Fixing compensatios. INDEX S55 Employers' UablUt; — continued 166—67; Accident prevention, 168; Workmen's compensation in Canada, 169-73; Act of Ontario, 170; Hesltli insurance, 173-75 Sstates and Chattel Interests, Definitions, 186; Fee simple, 186: Fee determinable, 187; Fee upon condition, 187; Lite estates, 188; Remainders, 188—89; Estates by courtesy, 189-90; Tenants, 190; Leasebolds, 191; Liens, 191 Excbange Contracts, Standard form of, 240-42 Tidelity Insurance, Tliree divisions, 151; Bond classes, 152-53; Fidelity policy for em- ployee, 153—54 Tire Insnrance, Indemnity, 27; Origin, 27-28; Founders of, 27—28 ; Fnglish com- panies, 28; Organization in U. S., 28-29; Early character of, 29; Insurable interest, 30—31; Types of companies, 31—32; Scope of business, 32—33 ; Organization, 33-34; Agents, 34; Brokers. 34; Steps in transaction, 34—35; Ap- plications, agreement forms, 35— 37; Inspection, 37-40; Canadian underwriters, 39—40 lire Insnrance Folicy, Standard form, 57—58; Cash value, 59; Summary of restrictions, 59— 60; Non-liability, 60-61; Items not insurable, 61; Specific items, 61-62; Notice to cancel, 62-63 Mortgages, 63; Property re moved, 63—64; Settling for losses, 64-65, 71; Examples of forms, 65—67; Clauses, average coinsur ance, 68—70; Premium, 70; Un derwriter associations, 71—73 Fixing rates, 71-73; Failures, 72; Ontario commission, 73; Ca nadian companies unlicensed, 73— 76; Regulation in Canada, 75-76 Tire Premium Bate, Problem of, 41—42; Class systems of, 42-43; First tariff, in Eng- land, 43; V. S. practice, 43; Minimum, 43—44; Specific, 44; Schedule analysis, universal, 44— 47; Non-fireproof brick building, 47-49; Analytical schedule, 49- 53; Heaton on rate-making, 51— 53; Fire protection, 53-55; Or- Fire Premium Bate — continued ganization of underwriters, 55— 56; State laws, 56 Fly- Wheel Insurance, Total premiums, 139, 140 Foreclosure, Methods of, 293-94; Proceeds of sale, 294 Franchise Tax, Corporation liens, 203 Fraternal Insurance, Success of, 121 Gambling Act, Insurance regulations, 82 Group Policies, Welfare insurance, 117-18 Hail Insurance, Development of, 141, 142; Crop losses, 141—42; Adjuster for, 143; Canada, 143-47; Rates, 144-46 Hazards, Class rating for fire insurance, 42— 43; Industrial reports, 168-69 Health Insurance, Development of, 173; Need for planning, 174—75 Heaton, E. F,^ Fire insurance rates in Canada, 51— 53 Hoffman, F, L,, on Industrial insurance, 124 Indorsement Agreement, For fire insurance, 35—36 ' Industrial Life Insurance, Problems of, 121-22; In United States, 122; Companies engaged in, 122; Essentials of, 122-23; Methods, 123; Premiums, 123; Hoffman on, 124 Inspection, Lloyd's survey of vessels, 11; Fire risks, 37-40; Points noted, 38- 39; Canadian system, 39-40 Insurable Interest, Marine application of, 8; Fire in- surance gambling, 30; English statutes, 30; Sources, 30-31; Administrator, 31; Life insur- ance, 82-83 Insnrance, 3-175 ' Marine, 3-26; Fire, 27-56; Stand- ard _fire policy, 57-76; Life, 77- S56 INDEX Insntanee — eokitiiuied 98, 114-24; Uortalitr tables. 99-104, 130; Policy lous, IDS- 13; CUim setttements, 114-13; Onmp policies, 117-18; Assess- ment, 118-19; Fntemal. 131; IndnstriiO, 181-34; Gasoaltr, 125- 56; Aeeident, 129-35; Aatomo- bfle, 135-36; Plate-gUss. 136- 38; Steam boiler, 139-40; Fly- wheel. 140; Hail. 141-47; Bur- Slary, 147-49; TiUe, 130-51; FideUty bonds. 151-54; Surety bonds, 154-56; Employers' lia- bility. 157-62; Workmen's com- pensation, 163-73; Health, 173- 75 iBVaBtmant, Real estate foims ot, 181; Specu- lation and development. 183; Building, 183; Mortgage loans, 182 Jettison, And marine cargoes, 17 Loasas, Rent payment, 320, 325; Term, 321; Assignment, 331-22; Terbal and written, 322; Tenancy, 323-25; Ground, 325-36 r Termination of, 336-28; Dispossession, 328- 29; Repairs by tenant, 329-30; Termination, 330 Lniss, State and county taxes, 205-6 UabllltT Insurance, Kinds of, 158-59; Indemnity basis, 160; Premium, 160-61; Reserves, 161-62 Uens, General and specific, 194; Judg- ments, how enforced, 194—97; Judgment discharged, 197; Me- chanic's lien, 197—201; Mechan- ic's Iiien Law, 199-300; Condi- tional bill of sale, 201-8; Debts of decedent, 303; Transfer tax, 203; Corporation franchise tax, 203-4; Iiien of taxes, 205, 214; Foreclosure, 214 Iiifo Insniancs, Basis of, 77; Early history, 77- 78; Principle in Holland, 78; Be- ginnings in England, 79-80; In United States, 80-82; Armstrong investigation. 81; Companies in United States, 82; Insurable in- Ufe Insomiee— continued terest, 82-88; Gambling Act, S3; Beneficiariea, 83-87; Canadian laws, 84-88; Sutistics for N. T. State, 88-89; Business in Can- ada, 89-91: Procedure, 91; Ap- plicants, solicitation of, 91-94; Essentiala of an application, 93— 94; Medical examination, and re- ports. 94-95, 97-98; Drugs and intoxicants, 95-98 Se* also Business Methods of Life Insurance Iroaas, On insurance policies, 108—12; Real estate investments, 181- 83; Building, 183, 891; Thru brokers. 338 Set also Bonds and Mortgages Marine groups, 17-18; Actual total loss, 17; Constructive, 17-18: General average, 18-19; Particu- lar average, 19-80; Salvage, SO; Marine settlements, 83; Records in 1795, 42; By fire in United States. 54; Procedure in settle- ments. 64. 70-71; MortaUty, 103 Uoyd's of London, History, 4r-5; Marine insurance transactions, 5, 6-7; Information service, 6. 9-10; Ueyd'a LM, 9; Signal stations, 10; Captains' register, 10-11; Rating vessels, 11; Fire insurance, 38 Marine Insannc«,~ Early history, 3-6; Bottomry bonds, 4, 8; Lloyd's of London, 4-6, 10-13; English companies, 4-5; Insurance Exchange of Kevr York City, 5; Oldest policy, T: Terms defined, 7-8; Insurable interest act, 8; Newspaper serv- ice, 9-10: Signal stations, 10: Register bureau, 10-11; Rislcs assumed, 11.-12; War risk bu- reau, 13; Canadian business and the war, 13-14; Warranty points, 14r-15; Peculiar provision, 15: Loss valuations, 15-16; Risks classified, 16-17: Losses, groups of, 17-18; Averaging losses, 18-30; Salvage, 80; Policy clauses, 20-31; Kinds of poli- cies, 21-32; Rates. 22-83; Ad- justments, 23; St. Lawrence route, 83-26; Norwegian club rates, 35-36 INDEX S57 Mechanic's Lien, - Definition, 197; Kotiee of. 198; Enforcement, 198-09 ; Heelinn- ie's Lien Law. 199; Bow di«- eliarged, 200-1 Medical Ki a m li ut lon, Life inmranee, 94—95; Nature of reports. 95. 97; Intoxicating liq- uors. 95-06; Drngs. 96; Neces- sity for, qnestioned. 97-08 MMmn. E. W. 8^ on Harine rates, 25 Mortality and Imrestanent Expsrlanee, Preminm. fsctors that detCTmine, 99; Mortality tebles, 99-100; American experience table. 101— 4; War claims, 102-4; Interest rates, 104-6; Classes ot policies. 106; Suicide, 106; Bnle for pre- miums. 106—7; Dividends, method of distributing, 107; Assignment, 107; Beinstetement, 107-8; Loan- ing against reserve, 108-9; Cana- dian policy loans, 110-12; Pay- ments to beneficiary, 113 Moitalttr Tables. First, by HaUey, 99; Method. 100; American experience table, 101; Illustration, 101-3 ; Canada, 103; Association records, 120 llMtgagev Building, 183; Permanent, 183; Property subject to, 230-32; Purchase money, 233-34 See also Bond ai^d Mortgage Mutual Ufa Insoranee Ooiiq^i>iV> First policy in 1843. 80; Mortality experience table, 101 Classes of companies. 31 Plate Glass Insurance, Origin of. 136; Policies, 136; Be- plaeing losses, 137 Police Power, Regulations over property, 191-02 Policies. Earliest known. 7; Clause rule. 21; Types of, 21-22; Application. 35-37; Examples of forms, 65- 67; Life insurance statistics, 88- 89; Classes of, 106; Policy loans, 108-12; Industrial insurance, 122; Title insurance. 306-8 See also Pire Insurance Policy Policy Loans, Origin of, 108-12; Seldom repaid, 109; In Canada, 110-12; Barton on. 111; For and against. 111— 12; Suggestions for reducing, 112 Preniuns, Fire insurance in V, 8,, 33; Pay- ments, and fire insurance. 70; Determining factors. 99; Pay- ments, 106; Industrial insur- ance, 123 ; Distribution to classes, 127-28; Accident policies, 133- 34; Liability insurance. 160-61 Property and Beol Property, Definitions, 184-85; State limita- tions on ownership. 191, 192; Bight of eminent domain, 192; Estates. 186; Fees 187; Life es- tates and remainders. 188; Im- proved, 223-25; Tenancy con- tracts, 226; Bestrietions. 226- 27; Easements, 227—28; Surveys and encroachments, 228-29; Exr change contracts. 240-43; De- scription in deeds, 257-60; Un- certain description. 260-61; Cov- enants, 264—69; Bond and mort- gage, 271-94; Transfer of title. 296-304 Proteetlan, Fire fitting devices. 53-55; Al- lowance for sprinkler systems, 54-55; Losses in United States, 54; Accident prevention, 168 Bates, Marine boards, 22—23; From New Tork City, 22-23; St. Lawrence route, 23-24; Differences, 24; Norwegian clubs, 25-26; Morren on Canadian. 25-26; Fire insur- ance premiums. 33; Basis of fix- ing. 71-73; War risk, 103; In- terest return, 104-5; HaH insur- ance, 144-46; Usury laws, 292; Brokers, 350 See also Fire Premium Bate Beal Estate, 179-351 Not a profession, 179, 185; Ethics governing, 180; Divisions of, 181; Forms of investaient, 181; What operation includes, 181— 83; Land deals. 182; Bnflding operations. 182. 183; Mortgage loans. 182; Agency divisions, 183-84; Brokersge, 184, 332-50; Property management, 184; Beal property, methods simple, 185; Estates and chattel interests, 186; Fee simple, 186; Difference between fee upon condition and fee determinable, 187-88; Life estates, 188-89 ; Bemainders, 188; Dower. 189; Estates by 358 INDEX Seal Estate — continaed courtesy, 189—90; Joint tenants and tenants in common, 190—91; Leaseholds and liens, 191, 194— 204; Ownership limitations, 191; Police power of state, 191—92; State ownership of land, 192; Right of eminent domain, il92; Power of ' taxation, 193 ; Taxes and assessments, 205—15; Con- tracts, 216^2; Exchanges, 240- 45; Auction sales, 246-52; Deeds, 253—69; Bonds and mort- gages, 271-95; Title transfer and closing, 296-304; Title in- surance, 304-18; Leases, 330— 31; Brokers, 332-50 Beinstatement, Provisions for, 107—8; In Canada, 108 Bisks, Marine policy described, 11-14; Co- operative insurance, 12; War problems, 12—13; Government as- sumes,' 13; Canadian business, 13—14; Classes of marine, 16— 17; Jettison and barratry, 17; War agreement eliminates, 21; Mortality rate and war, 103-4; Contract to purchase, 237-38 Boss, Ai W,, Fire inspection in Canada, 39-40 Salvage, Marine, 8; Two meanings, 20 Schedules, Origin of insurance tariffs, 43 ; Minimum rates, 43—44; Specific rates, 44;, Schedule ratii^g, 44r- 45; Universal mercantile, 45— 47; Application of, 47—49; Ana- lytical, 49—53; Workmen's com- pensation, 170 Sheriff's Sale, Lien of judgment enforced, 195 Sprinklers, Pire protection device, 54-55; Minimize loss.e8, 54; Affect rates, 55 Standard Policy, See Fire Insurance Policy Statute of Frauds, 216,207 Steam Boiler Insurance, Defects cause accidents, 139-40 Suicide, Restrictions for, 106 Surety Insurance, Bonds for, 154—55; Bond agree- ments, 156—56 Surrey, Accuracy essential, 316—17; En- croachments, 317; Builder's, 318; Street surveyors, 318 Tax Budget for New York City, Preparation of, 210 Taxes and Assessments, Property tax liens, 205; Levies, state and connty, 205-6 ; Tax - rate determination, 206—7; As- sessed valuations, 207-9; In New York City, 209-10; Making the budget, 210; Assessments, how levied, 211-13; When assessment becomes a lien, 213; Water rates, 213-14; Tax liens en- forced, 214 Tenants, Joint, 190; In common, 190; Real estate contracts, 226; Term of lease, 320-23; Monthly, 323; Tenancy-at-will, 324 ; Possession over term, 324; Lease termina- tion, 326-28; Dispossess, 328- 29 ; Obligations, 329-30 Title Insorance, Origin of, 150; Expensive, 150; No renewal fees, 151; Methods and procedure, 304-18 Titles, Modern right of transferring, 296; Former methods. 296-97; Deed transference, 297-99 ; Recording conveyances, 299—301; Under wills, 301-2; Public record in- quiry, 302—4; Title insurance, 304-8; Policy provisions, 304-8; Closing, 308—15 ; Examination, 308-10; Encumbrances, 309-11; Adjustments, 311—13 ; Closing sttatement, 313—15; Figuring in- terest, 315-16; Rejection, 316; Survey, 316-18; Encroachments, 317-18 Transfer Tax, State liens for, 203 Underwriters' Associations, "Combine" removed, 71—73; Im- proved conditions, 73; Basis of rates, 73; Ontario commission, 73 Universal MercantUe Schedule, Fire premium rating, 46-49; Ap- plication of, 47—49; Completed by F. C. Moore, 49 INDEX 359 Unllcansed InsnzuMi War Blska, Canadian business, 73—76; Act Marine insurance problems, 11—14; regulating, 75; Tax to check, 75— GoTemment bureau, 13; Canadian 76 underwriters, 13-14; Elimination nsnx7 Laws, in policy, 21 Mortgage taxes, 292-93 Water Bates, How fixed, 213-14; 236 Wood, A. B., TatnaUon, Mortality, and war risk, 103-4 Marine losses, 15-16; Property as- Workmen's Compensation, sessment, 207; Overvaluation, See Employers' Liability 208 Date Due LNirary Bureau Cat. fito. 1137 .nPiSmsViV KF 1164 .3 H26 Author Vol. Hardy, Edward Rochie Title Insurance, By Edward R. c^ Hardy . . . with the collaboration. . Date Jiff:;,