Another pernicious tendency of popular legislation in the United States is found in the Valued Policy laws, the first of which was adopted by Wisconsin in 1874, providing that when any insured building is wholly destroyed by fire the amount of the policy shall be conclusively taken as the amount of the loss. This principle, with various modifications and extensions, has become law in some twenty states of the Union, though in many of them its enactment has been vigorously resisted by the executive government; several governors have vetoed such bills, while most of the supervising officers have had the intelligence to disapprove them. The provision is regarded by all insurance authorities as highly dangerous, inviting over-insurance and incendiarism; and there is no doubt that it has this tendency in many instances. But the statistics available, while showing that in general the rate of loss has increased where such laws are in force, do not demonstrate any such wide and ruinous stimulation of fraudulent practices as has been apprehended by thoughtful critics. The actual result is commonly to throw upon the insurer the responsibility for providing in advance against over-insurance by minute surveys and, in special cases, for continual watchfulness against depreciation. Like all other interference of government with private contract, however, it has a marked effect in increasing the difficulty and expense of business transactions.
The direction in which fire insurance as a social institution calls most pressingly for improvement is the extension of the principle of co-insurance. The importance of this can only be understood by remembering that the Need of co-insurance. aggregate losses of the community by fire are chiefly made up of innumerable small fires and not of sweeping conflagrations. The experience of every company confirms the general truth, that the number of fires in which a building is totally destroyed, or in which the loss amounts to the greater part of the property exposed under the same risk, is comparatively very small. It may be asserted with confidence that, in the grand aggregate of the business, much more than three-fourths of the loss occurs in fires in which less than one-tenth of the insurable value at risk is destroyed. The practical result is obvious. If fires destroy a million of dollars’ worth in property insured for its full value, and a million’s worth more in property insured for one-tenth of its value, the insurers will pay $1,000,000 upon the first group and more than $750,000 upon the second. But if all the insurance is taken at the same rate the insurers will have received premiums ten times as great on the former group as upon the latter. This rough illustration shows that in an equitable adjustment of rates the amount insured as compared with the value exposed is a prime element, and that premiums might justly form a scale, highest on the smallest fractions of 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 Taxation of insurance. parchment or sheet of paper upon which any policy 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 2½% 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 in insurance for gain ought to contribute to the state the same share of its profits as other capital, yet the premiums, agencies, policies and entire machinery representing only losses, and providing for their distribution, should be exempted, as far as the necessities of the public treasury permit.
One aspect of the taxation of fire insurance is of especial interest, namely, the very general disposition of legislatures and municipal authorities to impose upon the underwriters the cost of fire departments. The systematic prevention and extinguishment of fires are everywhere assumed to be proper work for the community at large. But the first license granted by the crown to issue insurance policies in London in 1687 was conditioned upon regular contributions by the authorities to support the king’s gunners as a fire brigade, and in the public mind the privilege of insuring the prudent has ever since been vaguely associated with the duty of guarding the property of the whole community. The voluntary support of fire patrols by the companies in London, New York and other cities has done much to promote this view; and a substantial part of the taxes paid upon fire policies in the United States is levied for the support of fire departments, the pay and pensions of firemen and similar purposes. The tendency to increase such taxes, under the pretext that the protection afforded is for the special benefit of the companies, is strong in some of the states; though it would be equally rational to compel life insurance companies to maintain general hospitals for the sick.
The most complete statistics of the fire insurance business collected in any country are those presented in the United States to the National Board Statistics. of Fire Underwriters at each annual meeting. The following summary of part of the information submitted by the committee on statistics, 10th May 1900, giving the amount of fire risks insured in the United States, premiums received for them, and losses paid upon them, by all joint-stock fire insurance companies for the year 1899 will serve as an example:—