Cyclopedia of Commerce, Accountancy, Business Administration, v. 03 (of 10)

by American School of Correspondence

INSURANCE

167. Insurance Defined. Insurance is the name applied to a contract, by the terms of which one party, in consideration of a certain sum of money, agrees to protect another to a certain specified degree against injuries or losses arising from certain perils. The kinds of insurance are almost as numerous as the kinds of perils to which persons or property may be subjected. The nature of insurance contracts are such that legislatures of the states have the power to define what classes of persons may engage in the insurance business. Some states provide by statute that only incorporated companies shall transact the business of writing insurance policies, and that these companies shall be subject to stringent state supervision and inspection. States have the right to stipulate upon what terms foreign insurance companies shall have the right to transact business within their borders, and may exclude them from transacting business if they refuse to comply with such provisions. The United States Constitution provides that interstate commerce shall be under the control of United States Congress. The Supreme Court of the United States has decided that insurance business is not interstate commerce. Therefore the states may determine upon what terms insurance companies may transact business within their territory. Unincorporated companies as well as individuals may engage in the business of writing insurance, if it is not provided otherwise by statute.

168. Nature of Insurance Contract. An insurance policy is a contract requiring competent parties, mutuality, consideration and all the elements necessary to make any kind of a contract. An insurance contract is peculiar in that it binds the insurer to pay damages for losses or injuries arising out of uncertain perils or hazards. It is in the nature of a gambling transaction. A large number of persons pool a portion of their assets, in order to pay losses of a certain character likely to befall only a small portion of the persons entering into the pool. For example, if ten thousand persons pay one dollar each to establish a common fund to protect the members against losses from fire, they do so under the belief and expectation that but few of the number ever will sustain loss from the peril of fire. An insurance contract is so closely akin to a gambling contract that persons are not permitted to take insurance on property, or upon the lives of persons, unless they have an individual interest, which they should have a purpose or interest in protecting outside of a mere disposition to wager. This interest is called insurable interest and is discussed under a separate section. It is true that many kinds of life insurance policies protect against death, and that death is an event certain to occur to the insured, but the real purpose of the policy is to give protection against the uncertainty of the time of death. The uncertainty of the thing sought to be protected against is as great in life insurance as in any kind of insurance.

169. Parties to Insurance Contracts. Primarily there are only two parties to an insurance contract, the party to be paid for the loss, in case the event insured against occurs, who is called the insured, and the party, who for a consideration agrees to pay an amount certain, or to be determined upon the happening of the uncertain event. This party is called the insurer or underwriter. In many insurance contracts, a third party is interested. For example, A may insure his life in B Co., for the benefit of his wife, C. C may have nothing to do with the contract except being named as beneficiary thereunder. She pays nothing for this benefit. It is a contract made for her benefit. After she has been made beneficiary, A cannot change beneficiaries without the consent of C. In case of C's death, A may voluntarily name another beneficiary. If A is indebted to B, and B, considering A insolvent, desires to secure the debt by taking out a policy of insurance on A's life in the C company, he cannot take out such a policy without the consent of A. While a third person may be interested in an insurance contract, or his consent may be necessary before the contract can be made, there are primarily only two parties to the contract, the insured and the insurer.

170. Kinds of Insurance. Probably the first kind of insurance written was marine. The next kind was fire; this was followed by life insurance, and this in turn, by the many varieties of modern insurance covering almost all kinds of hazards imaginable. The following kinds of insurance are in common use: marine, fire, life, accident, tornado, graveyard, fraternal, fidelity, boiler, credit, guaranty title, plate glass, mutual benefit, employer's liability, hail, hurricane and health. No attempt is here made to discuss all the different kinds of insurance. An endeavor is made to discuss some of the fundamental legal principles connected with the most common kinds of insurance. These principles apply to all kinds of insurance.

171. Insurable Interest. Courts refuse to recognize the validity of insurance contracts, unless the party taking the insurance has a pecuniary interest, present or reasonably expected, in the life or property insured. Such an interest is known in law as an insurable interest. Insurable interest cannot be exactly defined. It depends upon the circumstances surrounding each particular case. Some things have been decided by the courts to constitute an insurable interest. Cases are continually arising, however, which present new features which must be decided upon their merits. Insurable interest can only be described, it cannot exactly be defined. It is sometimes said to be a money or pecuniary interest possessed, or reasonably expected, by the party entering into the insurance contract. A father may insure the life of his child, of his wife, or his servant under contract for a period of service. A party cannot, however, insure the life of a person with whom he is in no way connected by close blood relationship, or upon whom he does not depend for present or future support. Such a contract is regarded as a mere wager, which a sound public policy refuses to enforce, or even to recognize as valid. A person may insure a growing crop, and the life of animals owned by him. A mortgagee, mortgager or pledgee of property may insure the property. A creditor may insure the life of his debtor; a person may insure his property against robbery. In fact a person may insure the life of a person or any property belonging to him or to another, the loss of which will cause him a pecuniary loss.

In case of life insurance policies, if there is an insurable interest at the time the insurance contract is made, the policy is valid, even though the insurable interest afterwards ceases. Any relationship, either by blood or marriage, close enough to make it of pecuniary advantage to the party taking the insurance to have the insured continue to live, is regarded sufficient to constitute an insurable interest. It has been held that a brother has no insurable interest in the life of his brother, nor a granddaughter in the life of her grandfather, nor a son-in-law in the life of his mother-in-law. A parent, however, has an insurable interest in the life of his child or wife; or a granddaughter in the life of her grandfather if she depends upon him for her support. A person may insure his own life or property in favor of any one else. The question of insurable interest arises only in case one endeavors to insure the life of another, or the property of another in which one has only a slight interest.

172. Forms of Insurance Contract. The states generally provide by statute, that to be enforceable, contracts to answer for the debt, default or obligation of another, shall be in writing (See Statute of Frauds, chapter on Contracts.) The courts have decided that an insurance contract is not a contract to answer for the debt, default or obligation of another, but a direct contract by which the insurance company for a consideration agrees to pay its own debt in case of loss on the part of the insured. Insurance contracts need not be in writing. Oral contracts of insurance like other simple contracts are binding upon the parties thereto. For example, A, representing an insurance company, meets B, and agrees orally to insure B's house from twelve o'clock of a certain day, and accepts the premium for one year's insurance. The house burns the evening of the day after the insurance is to become effective. A's insurance company is bound by the oral contract of insurance. If A is not permitted by his company to make oral contracts of insurance, and A so tells B, or if B knows of this fact, the contract is not binding, since A acts without authority. If A meets B on Monday, and orally agrees to procure for him a written policy of insurance on B's house to take effect from Monday noon, and B's house burns Tuesday morning, A having failed to procure the written policy of insurance for B, the insurance company is not liable to B for the loss. B had a contract with A by the terms of which A promised to procure a policy of insurance for B. A did not orally promise to insure the house for B. B has an action for damages against A, but not an action on a contract of insurance against the company.

Insurance agents are often authorized to issue receipts, called binders, to the effect that insurance has been contracted by a party from a certain time. These binders constitute sufficient evidence to enable the insured to enforce his contract of insurance. Agents are sometimes authorized to enter a memorandum in their books of insurance, called entries in their binding books. These constitute sufficient evidence of the formation of a contract between insurer and insured, to enable the latter to enforce his contract in case of loss.

173. Warranties and Representations in Insurance Contracts. The term, warranty is commonly used in connection with contracts of sales of personal property, where it is used to designate a collateral contract connected with the principal contract in question. In connection with insurance contracts, it means a statement or stipulation which, by reference or express term, is itself made a part of the contract of insurance. The principal distinction between a warranty in connection with sale of personal property, and in connection with contracts of insurance, is that in the former case, breach of warranty usually does not discharge the contract, but simply gives rise to an action for damages, while in case of contracts of insurance, breach of warranty discharges the contract itself. Life insurance companies generally require formal written application by which the applicant for insurance is required to answer questions. These questions and answers are made a part of the policy or contract of insurance, either by reference, or by incorporation, and become warranties. If they are not true, the policy may be avoided by reason thereof. To constitute a warranty, a stipulation must be made a part of the insurance contract either by direct reference, or by express incorporation therein. To constitute a warranty, the contract of insurance must contain a stipulation that the statement or assertion in question is a warranty. If a warranty proves false, no matter if innocently made, the contract is discharged thereby. Warranties are strictly construed. Much injustice has been done by reason of warranties in insurance contracts.

Some states provide by statute, that neither the application for insurance, nor the rules and regulations of the company shall be considered as warranties unless expressly incorporated in the policy as warranties. A distinction is made between representations and warranties. A representation is a statement made as an inducement to enter into a contract of insurance. It is regarded as one of the preliminaries to the contract of insurance and not as a vital part of the contract itself. If a representation proves not to be true in some particular, the contract of insurance is not discharged by reason thereof. To constitute a ground for avoiding a contract, a representation must be false, fraudulent, and material to the contract. It is sometimes said that a warranty is a stipulation in the contract of insurance itself, and must be complied with whether true or not, while a representation is usually given verbally, or in a separate document, and need only be substantially complied with.

In case of doubt as to whether statements are representations or warranties, courts incline toward treating them as representations. Answers to questions were made in an application for insurance followed by the statement, "The above are true and fair answers to the foregoing questions in which there are no misrepresentations or suppression of facts, and I acknowledge and agree that the above statement shall form the basis of the agreement with the insurance company." The policy of insurance did not state that these questions were incorporated as warranties. In a suit on the policy, the court held the answers to be representations and not warranties.

174. Life, Term, and Tontine Policies. Life policy is the term applied to a contract of insurance payable only at the death of the insured. Term or endowment policy is the term applied to insurance payable at the death of the insured, or at the expiration of a certain term or period of years, if the insured survives such period. The term, tontine insurance, is the name applied to insurance paid out of the proceeds of unpaid policies during a certain period or term. If the insured survives the term, and pays the premium he benefits by receiving a share of the proceeds received from the policies of those members who do not survive the period, or who let their policies lapse for other reasons. The term is taken from the name of the person who devised the plan. It is sometimes called cumulative dividend insurance. It is written in many different forms.

175. Marine Insurance. Contracts of insurance against injuries to a ship or cargo at sea are called marine insurance contracts. This is the oldest form of insurance. In securing insurance of this character, the insured impliedly warrants that the vessel is seaworthy. This is the only kind of insurance in which there is an implied warranty. The term general average is used in connection with marine insurance. If it becomes necessary to sacrifice a part of a cargo to save the balance, the owners of part of the cargo saved, together with the owners of the boat, must contribute pro rata toward the loss of the party whose goods are sacrificed. That is, all owners of cargo and boat must stand the loss in proportion to their holdings. The one whose goods are sacrificed is placed in no better or worse situation than the others.

176. Standard Policies. Some states require by statute, that insurance companies issue policies, the terms of which are fixed by statute. This gives the insured the benefit of a uniform policy, the terms of which are easily comprehended, and which are the same in all cases. These statutory policies are known as standard policies.

177. Suicide Clauses. Contracts of insurance frequently contain the stipulation that the contract shall be void if the insured suicides. This stipulation is enforceable if it can be proven that the insured suicided while sane. It is generally held to be unenforceable if the insured suicided while insane. An insurance company may stipulate that the contract shall be void if the insured suicides when either sane or insane. Such a stipulation is enforceable. The ordinary insurance contract, however, which contains any suicide clause provides against suicide only, and does not contain any stipulation as to the sanity of the insured at the time he commits the act. It is usually held that the burden is upon the insurance company to prove that the insured was sane at the time he committed suicide. If a policy contains no suicide clause whatever, suicide will not avoid the policy unless it is proven that the purpose of the suicide was to defraud the insurance company. If it is proven that one takes out a policy of insurance with the intent to commit suicide, the policy is not enforceable in case of suicide.

178. Fidelity and Casuality Insurance. Contracts of insurance by which the honesty and faithfulness of agents and employees are insured are termed fidelity insurance contracts. A, a bank, employs B as clerk. A requires B to furnish a bond, by the terms of which the signers of the bond agree to pay A for any losses arising from B's dishonesty or carelessness. This bond or contract is known as a fidelity insurance contract.

Insurance contracts providing against losses arising out of accidents to property are termed casualty insurance. Losses by theft or burglary, or from steam boiler explosions are common examples.

179. Reinsurance. One insurance company may insure its own liability upon policies issued, by entering into separate contracts covering the same risks with other insurance companies. For example, A, an insurance company, insures B's factory for $1,000.00. A may in turn insure its liability to B, by entering into a contract with C, another insurance company, by the terms of which C agrees to insure A against loss upon A's contract with B. A is not permitted to bind C by a greater responsibility than A is bound to B. In case B's factory is burned, in the absence of express stipulation to the contrary, A may recover from C regardless of whether he has first paid B. Even though A is insolvent and unable to pay B, this is no defense to C on his contract with A. C must pay A regardless of the insolvency of A. In case B has a fire and A settles with him for $500.00, C is liable to A for only $500.00. That is C's liability to A is the same as A's liability to B, unless by the terms of the re-insurance, C assumes only a portion of A's liability to B. In this event C must pay A the pro rata share of A's liability to B. B in no event has any rights against C. B's contract is with A, and the fact that A has entered into a contract with C involving the same subject matter, gives B no rights against C.

180. Assignment of Insurance Policies. By assignment, is meant a sale or transfer of some intangible interest by one person to another for a valuable consideration. In case of insurance contracts other than life, no real assignment can be made. The person whose property is insured is the one who really benefits by the contracts of insurance. Before loss, an attempted assignment of the insurance policy amounts merely to a designation of the person to whom the insurance is to be paid. In case of loss, the original party insured still holds the property insured or the insurable interest, and any breach of the insurance contract on his part avoids the contract. A policy of insurance cannot be assigned without the consent of the insurance company. If an attempt is made to transfer an insurance policy other than life, before loss, without the transfer of the property itself, the transaction does not amount to an assignment, but amounts to a contract between the seller and buyer, by which the latter is entitled to receive the proceeds of the policy if any ever arises. So far as the insurance company is concerned, acts of the seller after the attempted assignment are as complete a defense as before. If the property insured as well as the insurance policy is transferred to another, with consent of the insurance company, this is not an assignment, but amounts to a new contract between the insurance company and the purchaser. After a loss has occurred, the right of the insured against the insurance company amounts to a debt, which may be assigned the same as an ordinary debt.

In case of life insurance, if a third party has been named as beneficiary, he is supposed to have such an interest in the policy that a change of beneficiary cannot be made nor can an assignment of the policy be made without his consent. In case the proceeds of a life insurance policy are payable to the insured himself, or to his estate, the policy may be assigned at the will of the insured. If the policy provides against assignment, it cannot be assigned. Otherwise, it may be transferred as collateral security, or sold outright at the will of the insured.

181. Open and Valued Policies, and Other Insurance. Policies or contracts of insurance are said to be valued or open, depending upon whether the amount to be paid in case of loss is agreed upon in advance. Life insurance policies are examples of valued policies. The insurance company agrees to pay a certain fixed amount in case of death of the insured, or at a certain time. Fire insurance policies usually are open policies. The insurance company agrees to pay the amount the insured loses by fire which destroys or injures certain specified property. The fact that a limit is placed upon the liability of the insurance company does not make the policy valued. If, however, the insurance company agrees to pay a certain fixed amount in case of loss by fire the policy is valued.

A person may take as much insurance upon his life as he pleases, so long as he reveals the facts to the companies with whom he contracts. In case of insuring property, the insurer is not permitted to recover in excess of the value of the property, regardless of the amount of insurance he carries. If an insurer takes out a policy of insurance upon property already insured, he must not conceal this fact from the subsequent insurer. The second policy will provide for payment, in case of loss in excess of the first insurer's liability, but not in excess of the value of the property. Or it will provide that in case of loss each policy shall share the loss in the proportion that the amounts of the policies bear to the loss.

SURETYSHIP

182. Nature of Contracts to Answer for the Debt of Another. In the transaction of business, many contracts are made to answer for the debt or obligation of another, as distinguished from the direct debt or obligation of the person entering into the contract. These contracts are made for the purpose of adding security to the original contract, or for the purpose of enabling the original obligor to obtain credit. The general term applied to contracts to answer for the debts of another is suretyship. The arrangement by which one party agrees to answer for the debt or obligation of another is a contract. This kind of a contract requires all the elements of any contract. There must be a meeting of the minds of the contracting parties, consideration, etc. If A purchases goods from B, agreeing to pay $100.00 for them, A's obligation to pay B $100.00 is a primary one arising out of a simple contract. If A purchases goods from B agreeing to pay $100.00 therefor, and C, as a part of the same transaction, makes a promise in writing to B, to pay the $100.00 if A does not pay, C's obligation is one of suretyship. He is known in law as a guarantor. His contract is to pay the debt of another. He has agreed to pay A's debt if A fails to pay it. Any contract by which a person agrees to answer for the debt or default of another, no matter what its form may be, or by what technical name it may be known, is a contract of suretyship.

183. Kinds of Suretyship Contracts and Names of Parties Thereto. The term, suretyship, is the general or descriptive term applied to all contracts by which one person agrees to answer for the debt or obligation of another. It may be in the form of a contract of a surety, a contract of a guarantor, or a contract of an indorser. There are at least three parties to all suretyship contracts; the party whose debt is secured, called the principal; the one to whom the debt is owed, called the creditor; and the one promising to pay the debt of another, called the promisor. For example, if A, orders one thousand dollars' worth of merchandise from B, and, as a part of the transaction, C promises to pay the amount for A, when due, if A fails to pay it, the transaction is one of suretyship in which A is principal, B, creditor, and C, promisor. A promisor may be a surety, a guarantor, or an indorser of a negotiable instrument. Whether a promisor is a surety, a guarantor, or an indorser depends upon the particular kind of a contract made. In any event it is a promise to pay the debt of another. But the conditions and terms of the agreement may make it that of a surety, a guarantor or an indorser. The distinguishing features of the different kinds of promisors are discussed under separate sections.

184. Contract of a Surety. A surety is one who unconditionally promises to answer for the debt or obligation of another. For example, A gives the following promissory note to B:

Chicago, Ill., Jan. 2, 1908.

Thirty days after date I promise to pay to the order of B—Five Hundred Dollars.

Signed—A.
Signed—C, Surety.

This note constitutes an obligation of suretyship in which B is creditor, A is principal, and C is surety. C's obligation is the same as that of A, his principal. By signing this note as surety, C binds himself to pay the note when due. He does not bind himself to pay on condition that A does not, or cannot pay the note when due, but binds himself to pay the note when due. His obligation is the same as the obligation of A. His obligation is not conditioned upon A's failure or inability to pay. When the note is due, B, the creditor, may bring suit against C, the surety, disregarding the principal, A. B may bring suit against C, the surety, without making any demand of payment of A, or without receiving A's refusal to pay. If the note is signed by C as above, without using the word, surety after his name, it may be shown by oral testimony that C signed as surety, if such is the fact. A surety may sign any kind of a contract as surety for another. In this event, his obligation is to do the same thing that his principal contracts to do. If the obligation of the one signing as security is conditioned upon anything, it is not the obligation of a surety, but that of a guarantor, no matter by what term designated in the contract. It has been said by some writers that a surety promises to pay the debt of another if the other does not, and a guarantor promises to pay the debt of another if the other cannot. This definition is not correct and is not supported by the cases. This definition applies only to guarantors, since it is a conditional promise to pay the debt or obligation of another. A surety's obligation is absolute, and not conditional in any way upon the failure or inability of the principal debtor to pay. In commercial practice, the contract of a surety is infrequently used as compared with the obligation of a guarantor.

A 40-FOOT WIDE MACHINE TOOL BAY IN THE CLAREMONT, N. H., FACTORIES OF THE SULLIVAN MACHINERY COMPANY

185. Contract of a Guarantor. Anyone who agrees to answer for the debt, default, or obligation of another upon condition that the other does not or cannot pay the debt, or upon any condition whatever, is a guarantor. For example, A gives B the following promissory note:

Cleveland, Ohio, Nov. 27, 1909.

Sixty days after date, I promise to pay B, or order, One Hundred Dollars.

Signed—A.

The back of the note contains the following statement:

I guarantee the payment of this note when due.

Signed—C.

The contract of C is that of a guarantor. If A fails to pay the note when due, and B demands payment of A, and promptly notifies C of A's failure to pay, C is liable. Technically, C need not be notified, but it is good business practice to give him notice. C's liability depends upon A's failure to pay the note when due. C's liability is a conditional one as distinguished from the liability of a surety, which is absolute.

Contracts of guaranty are commonly used in commercial affairs. In obtaining credit, contracts of guaranty are common. They may be used apart from promissory notes or negotiable instruments. Any kind of an obligation or contract of another may be guaranteed. A retail dry goods merchant desires to purchase $2,000.00 worth of goods from B, a wholesaler. B does not know A, but knows C, a friend of A. B offers to sell A the goods on credit, on condition that A furnish him a letter of guaranty signed by C. A furnishes B the following guaranty, signed by C:

Mr. B.,

New York City.

On condition that you sell A an order of goods which he may select, I hereby guarantee the payment of the amount thereof, not to exceed $2,000.00 in amount.

Signed C.

By this contract, C binds himself to pay B the purchase price of the goods, not exceeding $2,000.00, if A fails to pay same.

Contracts of guaranty are of many kinds. They are frequently given to secure contracts of personal service, for the construction of buildings, for mercantile transactions, or in fact for any kind of business transaction. They are contracts, and must contain all the elements of a simple contract, such as consideration, mutuality, competent parties, etc. If a contract of guaranty is given at the time the original contract is made, and is a part of the same transaction, the consideration which supports the original contract supports the contract of guaranty. Otherwise, the contract of guaranty must be supported by a separate consideration.

186. Contract of an Indorser. One form of suretyship obligation, or obligations, to answer for the debt or default of another, is that of an indorser to a negotiable instrument. The contract of an indorser differs from that of a guarantor, and from that of a surety. For example, A gives the following promissory note to B:

Chicago, Ill., Jan. 4, 1909.

Ninety days after date I promise to pay to the order of B, one thousand dollars.

Signed A.

B indorses the note by writing his name across the back thereof, and delivers it to C for $985.00. The contract now existing between A, B, and C, is one of suretyship, in which A is principal, B creditor, and C promisor. A promisor in suretyship may be either a surety, a guarantor or an indorser. In this particular case the obligation of C, the promisor, is that of an indorser. The principal obligation of C to B is that if the note is presented for payment to A at maturity, and upon A's failure to pay, due notice is promptly given to C, C will be responsible to B for the amount due on the note. An indorser is also liable upon certain implied warranties in addition to his primary liability as above set forth. In the language of the courts, the technical liability of an indorser is as follows:

"I hereby agree by the acceptance by you of title of this paper, and the value you confer upon me in exchange, to pay you, or any of your successors in title, the amount of this instrument, providing you or any of your successors in title present this note to the maker on the date of maturity, and notify me without delay of his failure or refusal to pay. And I warrant that all the parties had capacity and authority to sign, and that the obligation is binding upon each of them. And I will respond to the obligation created by these warranties even though you do not demand payment of the maker at maturity, or notify me of default."

An indorser is usually defined to be one who writes his name on a negotiable instrument for the purpose of passing title. By so doing, he agrees to answer for the debt of another. That is, he agrees conditionally to pay the obligation of the maker of the instrument if the maker does not, and if the indorser is promptly notified of the failure of the maker to pay.

Irregular indorser is the term applied to persons who sign negotiable instruments outside the chain of title. For example, if A is the maker of a promissory note and B is the payee, and C places his signature on the back of the note, C is an irregular indorser. He signs outside the chain of title. B is the one who must first place his signature on the back of the note to transfer title. The courts of the different states have not been in harmony in fixing the liability of an irregular indorser. Some make his liability that of a surety, some that of a guarantor, and others that of an indorser. Many of the states at the present time have statutes regulating the making and transfer of negotiable instrument. The codes generally fix the liability of an irregular indorser to be that of an indorser.

187. Consideration to Contracts of Suretyship. An agreement to answer for the debt, default, or obligation of another, to be binding, must constitute a contract. It must contain all the elements of a simple contract, including a valuable consideration. A valuable consideration may be defined to be anything of benefit to the one making the promise, or anything of detriment to the one to whom the promise is made. A promise made in return for a promise, usually termed "a promise for a promise," is considered a valuable consideration as well as something of value actually given to the one making the promise. A consideration need not be adequate. It need not be commensurate with the obligation entered into. In the absence of fraud, a consideration of one dollar will support a contract for $10,000.00 as well as an actual consideration of $10,000.00. In a suretyship contract, three persons are concerned; the party owing the original debt, the one to whom the debt is payable, and the one promising to answer for another's debt. By reason of the third party to a suretyship contract, the question of consideration is sometimes confusing. If the obligation of the promisor, or the party agreeing to answer for the debt of another, is made at the same time, and is a part of the same transaction as the contract between the original debtor and his creditor, the consideration supporting the contract between the original debtor and the creditor supports the contract of the promisor. For example, if A endeavors to purchase $100.00 worth of goods of B, and B refuses to make the sale unless C signs a contract of guaranty for the value of the goods, and C signs such a contract of guaranty which is delivered to B before the goods are delivered, the consideration, namely the receipt of $100.00 worth of goods delivered to A which supports A's promise to B, will support C's promise to B to pay the $100.00, if A fails to pay it. If the suretyship contract is entered into after the original obligation is incurred, and independently of it, there must be a separate and independent consideration to support it. For example, if A purchases $100.00 worth of goods from B, agreeing to pay for them in thirty days, and after fifteen days have elapsed after delivery of the goods, B, fearing A is insolvent, asks him to furnish a guaranty of C, C must receive a valuable consideration to support his contract of guaranty, separate and distinct from the consideration which supports A's obligation to B.

188. Contract of Suretyship Must be in Writing. About 1676, the English Parliament passed a statute known as the Statute of Frauds. Among other things this statute required contracts of suretyship to be in writing to be enforceable. The statute was in part as follows, "No action shall be brought whereby to charge the defendant upon any special promise to answer for the debt, default or miscarriage of another person unless the agreement upon which action shall be brought or some memorandum or note thereof shall be in writing, signed by the party to be charged therewith or some person thereunto by him lawfully authorized."

The states of this country generally have re-enacted this statute. An oral contract of suretyship is not void. The parties may voluntarily carry it out if they choose. The law does not make it illegal. The law simply says that it is not enforceable. If an action is brought by a party on an oral contract of suretyship and the other party objects for that reason, the court will not enforce the contract. To satisfy the Statute of Frauds it is not necessary that the entire contract be in writing, but the substance must be stated, and the writing must be signed by the one promising to answer for the other's obligation.

A promise to pay one's own debt is not within the Statute of Frauds, and need not be in writing to be enforceable. If a promise is made for the primary purpose of benefiting the promisor, even though it takes care of the debt of another, it is regarded as an original promise of the promisor, and need not be in writing.

189. General, Special, Limited and Continuing Guaranties. Guaranties may be directed to some particular person or firm, or may be addressed to anyone who desires to accept them. An open guaranty, or one addressed to anyone is called a general guaranty. A guaranty addressed to a particular person or firm is called special guaranty. In case of a special guaranty, only the person to whom it is addressed can accept it. Anyone can accept a general guaranty. A letter of guaranty addressed, "to whom it may concern," is a general guaranty, while one addressed to "The A. B. Co.," is a special guaranty.

A guaranty limited as to time, either by specifying the date on which it is to expire, or by specifying the number of transactions or the transactions it is to embrace, is a limited guaranty. If no limit of time or of number of transactions is placed therein, it continues until withdrawn by the guarantor. This is called a continuing guaranty.

190. Notice to Guarantors. A guarantor may be entitled to two kinds of notice. He may be entitled to notice of acceptance of the guaranty, and he may be entitled to notice of default of his principal. The first is called notice of acceptance of a guaranty, the second, notice of default of a guaranty. If a person stipulates in his letter of guaranty that he requires notice of acceptance of his guaranty, the creditor must give him such notice to hold him. Without such stipulation he is not, in most jurisdictions, entitled to notice. A addresses the following letter of credit to B:

Cleveland, O., Jan. 4, 1909.

Mr. B.

Give A credit at your store to the amount of $25.00. I will pay you if he does not.

Signed—C.

The letter of guaranty does not require B to notify C of its acceptance. In the Federal Courts, the rule requires notice of acceptance of guaranties. It is sound business practice always to notify a creditor of acceptance of a guaranty. If a letter of guaranty contains a stipulation that the guarantor is to receive notice of default of his principal, such notice must be given, or the guarantor will be discharged to the amount of his damage resulting from failure to receive this notice. In case of guaranties involving the payment of a definite amount at a definite time, for example, in case of guaranty of payment of a promissory note, no notice is necessary on the part of the creditor to the guarantor of the failure of the principal to pay. In other cases it may be stated as a general rule that notice should be given the guarantor of default of his principal. It is safe business policy for a creditor to give notice to a guarantor of default of payment on the part of his principal.

191. Defense of Payment. Suretyship obligations are obligations to answer for the debts or default of another. They may be in the form of a contract of a surety, of a guarantor, or of an indorser. Certain things constitute suretyship defenses. They apply equally to a surety, a guarantor and an indorser. If a principal debtor pays or settles the debt which another promises to pay, the promisor is thereby discharged. Payment by a principal is a complete suretyship defense. For example, A owes B $100.00. C in writing promises to pay A's debt when it is due. A pays B. C is thereby discharged.

193. Defense of Granting Extension of Time to Principal. If a creditor enters into a contract by which the principal is given an extension of time, the promisor is released. This does not mean mere delay in enforcing the collection of the principal debt, nor does it mean leniency of a creditor with his debtor. If, however, a creditor makes a contract based upon a valuable consideration, by which the principal debtor is granted an extension of time within which to pay his debt, the promisor is discharged. For example, if A owes B $1,000.00 on March 1st, and C in writing promises B to pay if A does not, if B does not collect from A on March 1st, but lets the debt run until March 15th or indefinitely, C is not thereby discharged. If, however, B in consideration of A's promise to pay him interest at a certain rate after March 1st, extends the time until April 1st, C is discharged. To discharge the promisor, the agreement with the principal to extend the time of payment must be based upon a valuable consideration, and must be for a definite time.

194. Defense of Fraud and Duress. Fraud practiced by the creditor upon the principal or upon the promisor is a defense to the promisor. For example, if A is indebted to B and C guarantees A's debt, and if B procured the contract with A by fraud, or procured the guaranty from C, by fraud, C can avoid the contract of guaranty by reason of the fraud. If the fraud is practiced by the principal upon the promisor, it is no defense to the promisor as against the creditor. For example, if C guarantees A's debt to B and the guaranty is procured through the fraud of A without B's knowledge or consent, the fraud will not avail C as a defense to an action brought by B upon the guaranty. The same is true of duress. For a fuller explanation of fraud and duress see sections on Fraud and Duress under Contracts.

195. Surety Cannot Compel Creditor to Sue Principal. Unless so provided for by statute, a promisor to a suretyship contract cannot compel a creditor to sue a principal when the debt secured is due, or claim his discharge for failure on the part of the creditor to comply with this request. A few states provide by statute that a promisor may by notice compel a creditor to sue a principal upon a suretyship obligation when due, or be discharged for his failure so to do.

196. Surety Companies. At the present time, corporations are organized for the purpose of entering into suretyship obligations for profit. Bonds of public officials as well as of private individuals, judicial bonds given in appeal of cases at law from one court to a higher court are commonly signed by surety companies. These companies, for an agreed annual consideration called a premium, sign as surety these bonds for responsible individuals. Sureties were once said to be favorites of the law. This was for the reason that individual sureties signed private, official or judicial bonds as a favor to the principal, ordinarily without receiving any compensation therefore. When a liability arose the surety escaped if possible, since it was not his obligation, but another's which he was called upon to pay. The courts favored him and technical defenses were recognized which were not recognized as a defense by persons primarily liable. In the case of surety companies, however, there is no reason for this favoritism, since the surety engages in the contract for a consideration, and not as a favor to anyone. The tendency of the courts is to hold surety companies strictly to the terms of their contracts.

197. Subrogation. By subrogation is meant the substitution of the promisor for the creditor in case the promisor to a suretyship obligation pays his principal's debt. For example, if A signs a guaranty by the terms of which he agrees to pay B's debt to C, when the debt is due if B fails to pay it, and A pays it, A is placed in C's position and may collect the debt from B. Any securities of B that C held for the debt now belong to A. If C has a judgment against B for the debt, A is subrogated to the judgment and may himself enforce it.

198. Indemnity. The law implies a contract on the part of the principal to a suretyship contract to pay the promisor when the latter pays the suretyship obligation. For example, if A guarantees B's debt to C, as soon as A is obliged to pay C, and does pay C, A may sue B on an implied contract of indemnity for the amount he has paid C.

199. Contribution. Contribution is the term applied to the right of one of two or more co-promisors to a suretyship obligation to secure a pro rata share from his co-promisors of the amount he is obliged to pay the creditor on a suretyship contract. For example, if A, B and C guarantee D's debt of $150.00 to E, and when the debt is due, E sues A and collects $150.00 from him, A can sue B and C for $50.00 each. If A pays C only $50.00 he can collect nothing from B and C, since this is only his share of the debt. But if A settles the debt with C for $50.00, he can recover one third the amount from both B and C. A can pay the debt when it is due, without waiting for suit if he so desires, and proceed to collect one third the amount from both B and C.