value, and diminishing rapidly as the percentage of insurance
increases. Such a scale is, however, impracticable for many
reasons, apart from the endless complications which, even if it
could be constructed, it would introduce into the classification
of risks. Any scientific plan of insurance, therefore, must provide
another method for maintaining the proportion between amounts
of premiums paid and the share in its benefits obtained for them.
This is the purpose of what are generally called average or co-insurance
clauses. The principle is, that when a proper rate
for a class of risks is found, then the insured may protect at that
rate any percentage of such a risk, and in case of fire shall be
indemnified for the same percentage of his loss. When once
clearly grasped, this principle largely simplifies and rectifies
the business. It is in universal use in marine insurance under
the name of “average,” and is there recognized as indispensable.
It is embodied in all fire policies in France, Germany and several
other countries of Europe, and in 1826 was made compulsory
in Great Britain by law in all “floating policies,” those, that is,
which cover stocks of goods distributed in several places and in
fluctuating amounts. But it has not yet become general in
Great Britain or America, although every writer of authority on
the subject, and every practical underwriter of large experience,
approves it. Systematic attempts have been made since about
1892 to extend its application in the United States with much
success, but they have been met by strong opposition, which
shows a widespread misunderstanding of its true bearing.
The co-insurance clause, indeed, which has been generally approved by the American associations of underwriters, and applied in the great commercial cities, is less sweeping than the parallel agreements used in France and Germany. The latter regard the insured owner as self-insurer for the entire value at risk not covered by the policy, and grant indemnity only for that fraction of the loss which the amount insured bears to the whole amount exposed. The American clause is less logical, commonly providing that: “If at the time of fire the whole amount of insurance on the property covered by this policy shall be less than 80% of the actual cash value thereof, this company shall ... be liable only for such portion of such loss or damage as the amount insured by this policy shall bear to the said 80% of the actual cash value of such property.” But this limitation of the basis of co-insurance average to 80% of the total value is in perfect harmony with the conservative policy which seeks in all cases to prevent over-insurance. The most serious danger to which the entire system is open is that a fire may promise profit to the insured. To avoid this, it is a small enough margin to exclude from protection by the policy one-fifth of the estimated value, and to require the owner to assume that proportion of the risk. It is therefore reasonable not to require in any case a larger share than four-fifths to be covered, and not to press the co-insurance principle so far as to offer a differential advantage to those who insure above this limit. Thus, for practical purposes, and in the general mass of business, the 80% clause may be accepted as approximately the best application of the principle. It makes possible substantial equity in distributing the cost, while it does not interfere with proper safeguards against over-insurance. The cordial support of the mercantile community in the great cities, and of the most intelligent state officers, has been given to it.
A popular outcry has, however, arisen against all forms of co-insurance, on the superficial and mistaken assumption that in every case the principal sum named in the policy measures the insurance paid for by the premium; and that any limitation upon it must be a wrong to the insured, for the emolument of the insurance corporation. No less than ten states have passed laws prohibiting the clause within their jurisdiction, though Maine in 1895, after a trial of two years, repealed the prohibition. The law of Tennessee, a typical form, is as follows: “Insurance companies shall pay their policyholders the full amount of loss sustained upon property insured by them, provided said amount of loss does not exceed the amount of insurance expressed in the policy, and all stipulations in such policies to the contrary are and shall be null and void” (except in case of insurance upon cotton in bales). In several states the use of the co-insurance clause is made a penal offence. It is an interesting fact, however, that while this principle, whenever it has been generally applied, has led not only to a fairer equalization of premium rates, but, on the whole, to a marked reduction of them, the laws in question have deprived the people adopting them of the resulting benefit. In the year 1899 the average premium rate upon all fire risks written in the states in which co-insurance was wholly or partly prohibited was something more than $1.20 per $1000, while in the rest of the country, where the clause was permitted and to a large extent used, the rate was but 96 cents per $1000. The marked difference, which tends to increase, is a perpetual object-lesson which must in the end appeal strongly to the popular intelligence.
The varying attitude of several civilized governments towards the institution of insurance has found significant expression in their tax laws. In Great Britain a stamp duty of 6d. was imposed in 1694 upon “every piece of vellum or parchment or sheet of paper upon which any policy Taxation of insurance. of insurance should be engrossed or written,” and was doubled in 1698. It was further increased (reaching 3s. 10d. per policy in 1713) and varied by many subsequent acts, under some of which the percentage duty on fire insurance was also made payable by stamps upon policies. But in 1865 the stamp tax was finally reduced to the nominal sum of 1d. upon each policy. A far heavier burden, however, was imposed upon insurers by the measure of Lord North in 1782, charging all fire insurances in force with an annual duty of 1s. 6d. for every £100 insured. In 1815 the general rate was made 3s. per £100, but was collected once for all upon the policy when issued; and it so remained until reductions began in 1864. The duty was wholly abolished in 1869. The revenue from this source reached its highest point in 1863, when it was £1,714,622, presumably representing insurances effected in that year to the amount of £1,143,081,333. There are no data for determining the amount of premium receipts or of losses realized on the same volume of insurance; but the tax was recognized by economists as well as by all parties to the policy contracts as an excessive burden. In many instances it more than doubled the cost of insurance. Its effect in discouraging the prudent custom of insuring against fire was very serious, and after its abolition this custom extended so rapidly that it soon became, and continues, practically universal in Great Britain. Upon the continent of Europe fire insurance is generally taxed quite heavily; most so in France, where the direct duties on the premiums, together with the registry and stamp taxes paid by the companies, have been estimated to add one-fourth, or perhaps one-third, to the cost of insurance.
In the United States the companies are taxed, each by the state in which it is domiciled, upon their real estate, and often upon their capital, surplus of profits, and are required in other states to pay fees to the insurance departments, and commonly an excise of from 1 to 212% of their premiums. An elaborate table is prepared each year by a committee of the National Board of Fire Underwriters, showing the aggregate amount of taxes paid by the companies operating in New York in comparison with their receipts and profits. The statement received and published by the board in 1900 contained the following:—
| For the Year 1899. | For Twelve Years 1888–1899. | |
| Premiums (fire and marine) | $134,450,639 | $1,425,929,631 |
| Losses paid (fire and marine) | 91,031,677 | 856,978,494 |
| Expenses | 52,849,129 | 517,667,238 |
| Increase of liability (unearned premiums, &c.) | 8,998,526 | 59,104,388 |
| Net loss in the last year | 18,428,693 | .. |
| Net profit in twelve years | .. | 7,820,489 |
| Amount of taxes paid | 4,495,332 | 35,984,081 |
| Taxes were of premiums | 3.34% | 2.52% |
| Taxes were of premiums, less losses | 10.35% | 6.32% |
In qualification of this statement, it may be said that the reported expenses appear to include taxes, and that the additions charged, to liability are to some extent theoretical and flexible. It also appears from the state reports that upon the entire capital and net surplus of $191,000,000 employed in the business in the United States by 316 joint-stock companies, dividends to the amount of $8,000,000, or 4.2%, were paid in 1899 to shareholders. Nevertheless it is true that competition among the companies, together with unfriendly legislation, has reduced the profit upon their aggregate capital near the vanishing point, and that the taxes, the average rate of which increased 50% within the period 1891–1899, are heavier in many states than can be justified by public policy or by the analogy of other corporate interests. The true principle, doubtless, is that while the capital employed
