Collier's New Encyclopedia (1921)/Insurance

INSURANCE, the act of insuring or assuring against damage or loss; a contract by which a company, in consideration of a sum of money paid, technically called a premium, becomes bound to indemnify the insured or his representatives against loss by certain risks, as fire, shipwreck, etc.

While every known form of insurance is carried on in the United States, there is no general law governing the conduct of the business. Till about 1856, the various companies in each branch of the business carried on their operations according to the principles that prevailed in England, with such modifications as American business methods and interests made necessary. Massachusetts was the first State to insist upon an official supervision of all insurance business transacted within its limits by companies chartered there and elsewhere. The establishment of a State insurance department there, in which was vested the entire control of all insurance business in the State, and the enactment of special laws for the management of the companies, placed the business on a firmer footing than it previously had. In 1859 New York followed the example of Massachusetts, and since then nearly every other State has created an insurance department.

Life Insurance.—In the United States the companies are distinguished as stock or proprietary, mutual, and mixed as to organization, and level premium, natural premium, and assessment as to system of operation. A stock company is one organized on the cash capital subscribed by its projectors. The capital is held as a pledge for the payment of policy holders' claims while premiums are accumulating, and as the liability is limited to the aggregate amount of policies in force it is necessary to provide only a sum sufficient to meet these liabilities. No policy holder has any voice in the management of the company, nor any share in the profits of its business. A mutual company is one constituted by persons who are themselves insured, who corporately insure others, and who as policy holders control the management by electing directors from among themselves, and receive in various forms the annual profits. As these companies are organized without any capital, it is necessary that they should accumulate more quickly than stock companies a fund to meet liabilities; hence they charge premium rates in excess of the amount that will really effect the insurance, viz., a reserve element, a mortality element (together constituting the net premium), and the “loading” or expense element, which is an addition to the real cost of insurance to provide for operating expenses and an occasional excess of mortuary loss.

A form of insurance that has attained wide popularity in the United States is known as co-operative. Among the first if not the very first organization to adopt this form was the order of Free-masonry. The rate of admission was graded by age, assessments of $1 or $1.10 were levied whenever a death occurred, and the beneficiary of a member received $1 for each member at the time of his death. The order of Odd Fellows then organized similar associations; and some still follow the above plan, while others classify their members by age periods, vary rates of admission and assessment by classes (according to age), and pay different amounts to members of each class. The expense fund, always comparatively small, is made up from the admission fees, the excess of assessment payments, lapses, and — where sufficient funds have accumulated for investment — interest. There are also a number of accident and casualty companies which insure against both disability and death from accidents, paying a stipulated sum weekly for a disability resulting from an accident, and various sums for a death from such cause.

Returning to what are popularly known as the “old line” companies, a regular whole-life policy, payable at the death of the insured only, may be obtained (1) by the payment of a net single premium, or all the premiums that the mortality tables show that the insured would be likely to pay, in one sum; (2) by equal annual payments through life; (3) by five annual payments (the first); (4) by 10 annual payments; (5) by 15 annual payments; and (6) by 20 annual payments. If issued on the mutual plan, cash dividends will be paid every year during the life of the insured; if on the stock plan, no dividends. The mutual plan carries the highest rate of premium. A term policy is one given for a specified number of years and amount, and is paid only when death occurs within the specified term. It is in some respects similar to an endowment policy, but in others radically different. An endowment policy is paid at death during the term, or to the insured if living at the end of the term. A joint-life policy is payable on the death of one of two or more persons on whose joint lives the insurance was made. A simple annuity policy provides that in consideration of the payment at one time of a specified gross sum, the company will pay to the annuitant a stipulated sum annually, either for a stated term or during life; and a survivorship annuity policy, sometimes taken by one partner for another, by a debtor for a creditor, and otherwise for a business security, guarantees the payment of a stated sum to the person named by the person taking the policy during the period in which the nominee survives the insured. A tontine policy is similar in form to the ordinary life, limited payment life, or endowment policy. No dividend is allowed or paid till the insured has survived the completion of the tontine period, and then only when the policy has been kept alive by premium payments, and the policy is not regarded as possessing a surrender value in a paid-up policy or otherwise previous to the completion of the tontine period. If the insured die before the completion of the tontine period (or term of years specified in the policy), the beneficiary will receive only the sum indicated in the policy; but if the insured survive the period he will share with all other members of his class in the equitable division of the accumulated dividends, and may then surrender his policy for a cash payment by the company, or convert it into any other desired form of insurance. A semi-tontine policy differs from a pure tontine in this respect: It contains the same stipulation on the non-payment of dividends, but is treated as ordinary policies in regard to providing a paid-up policy in case of a lapse, or failure to pay the premiums. The renewable term life and quarterly renewable term life policies have been outlined above in connection with Sheppard Homans's work.

Fire Insurance.—The laws and practices governing this form of insurance approach much nearer to uniformity than those of life insurance. There are very few life insurance companies chartered outside the United States doing business here; but nearly every large fire insurance company in the world has established offices in the principal American cities. The various companies are distinguished as stock and mutual as to organization; and fire exclusively, and fire and marine as to field of operation. The plan of organization of the two forms is practically identical with that of life insurance already explained. In many large cities the various fire insurance companies combine to provide an annual fund with which a “fire insurance patrol,” or a “salvage corps,” is maintained, to co-operate with local fire departments.

Companies are not liable for loss caused directly or indirectly by invasion, insurrection, riot, civil war, or commotion, military or usurped power, or by order of any civil authority; by theft; by neglect of the insured to use all reasonable means to save and preserve the property at and after a fire or when the property is endangered by fire in neighboring premises; or (unless fire ensues, and in that event, for the damage by fire only) by explosion of any kind, or lightning; but liability for direct damage by lightning may be assumed by specific agreement.

Marine insurance proper covers the ship, the cargo, the freight that the ship earns, and the profits that the cargo brings.

Miscellaneous Insurance.—Of the miscellaneous forms of insurance the accident is the oldest. The age of the insured is limited to 16 to 65 years, and women and girls as a rule are insured against death by accident only. The next oldest form is plate-glass insurance, in which companies insure against accidental breakage, somewhat on the abandonment plan of marine companies. Breakage in consequence of fire or heat therefrom is now so frequently insured against by regular fire companies by special contract in the policy, that strictly plate-glass insurance companies usually exclude fire from insurance risks. There are also a few companies making a specialty of insuring farm buildings against loss or damage by fire and lightning; and some in the Western States, organized as associations by farmers, on the mutual plan, that insure certain grades and kinds of cattle and standing crops against loss or damage from specified causes. Among the more recently established forms of insurance is the casualty, based on the legal liability of employers of labor, in which the company insures an employe against accident or death resulting from any cause for which the employer is responsible, and makes settlement with the injured and those who may be killed or die from the results of the injury. A clerk, public officer, or other person required to give bonds for the faithful performance of duty, may have his fidelity insured by another style of company, whose guarantees are received the same as regularly executed bonds; and the clearness of a title to real estate may be insured by a title and guarantee company, which makes all the searches necessary to establish a clear title and guarantee its legality.