insurance (from Tonti, an Italian, who is said to have devised it) is a system whereby surplus funds, often derived from lapsed policies and often from the profits of investments by the insurer, are to be apportioned among those of the insured who - continue their insurance for the specified tontine or dividend period. There are various forms of the tontine or dividend system. An endowment policy is a form of investment by the insured as well as an insurance proper.

Accident insurance is a contract to indemnify the insured against personal injury resulting from accident, and usually includes a contract to pay a specified sum to his estate or to a designated person in case of death resulting from accident.

Marine insurance is a contract to indemnify the insured against loss to property (ships and cargo) arising from the perils of the sea during a certain voyage or a certain period of time. It may be issued to cover risks arising on any navigable waters whether sea or inland.

Fire insurance is a contract to indemnify the insured against loss of property or damages to it by fire.

Casualty insurance is a contract to indemnify the insured against damage to property arising from accidents, such as boiler explosions, floods, tornadoes, hail, failure of crops, breakage of plate glass, death of cattle, burglary, etc.

Guaranty and fidelity insurance is a contract to indemnify the insured against loss arising from fraud or dishonesty of agents (fidelity insurance); the negligence of employees resulting in damage to other employees for which the employer is obliged to pay (employers' liability insurance); the injury to passengers for which the carrier is obliged to pay damages (carriers' liability insurance); the insolvency or dishonesty of debtors (credit insurance); the failure of tenants to pay rent or the loss of rents incident to fires or other injury to premises (rent insurance); the defect or failure of title to real property (title insurance); or the interruption to business by strikes among employees (strike insurance).

Reinsurance is a contract whereby the reinsurer agrees to assume the risk, in whole or in part, which was undertaken by

the original insurer. If the reinsurance policy binds the reinsurer to pay the insured, the latter may maintain an action against the reinsurer upon the theory of a promise made to one person for the benefit of another person (see sec. 33 ante); but in the absence of such a clause the insured can look to the original insurer alone, and the original insurer will look to the reinsurer for indemnity. It often happens that an insurer takes a very large risk, and thinks it prudent to divide it by reinsuring some portion of it in another company. The reinsurance is a kind of guaranty insurance.

75. Characteristics. There are these main characteristics in the insurance contract.

1. The contract is aleatory, that is, depending upon an uncertain event. It is in the nature of a wagering contract. If one insures property or a life in which he has no insurable interest, the contract is called a wager and is illegal. If he has an insurable interest, the contract is valid, although it is still somewhat in the nature of a wager.

2. The contract is one of indemnity, that is, to make good against loss in the event that loss occurs. In the open policy the amount of the loss is to be ascertained after it occurs. In the valued policy the parties agree in advance upon the value of the subject-matter of the contract; if it is then destroyed, the loss is taken to be that so fixed by the parties. In lifeinsurance policies the sum is always fixed, subject to a possible increment in a tontine policy.

There is one important difference between an open fire policy and an open marine policy. If, in an open fire policy for $10,000 upon property worth $20,000, property worth $5000 is destroyed, the insured recovers its full value. In an open marine policy he would recover only that proportion of the amount insured ($10,000) which the loss ($5000) bears to the true value of the property insured ($20,000), namely, one fourth, or $2500. In order to be fully protected in a marine risk, the insured must insure to the full value and, of course, pay a larger premium.

Another incident of the indemnity feature is that if the property insured be destroyed by the negligent act of a third person, so that the owner might maintain an action against the wrongdoer for the damage, the insurer upon paying the loss to the insured is subrogated (that is, substituted) to

the rights of the insured in such action. Were it otherwise, the insured would recover his loss twice over. This does not apply, however, to life insurance where the insured is killed by the wrongful or negligent act of another.

If the insured has two fire policies in different companies upon the same property, the companies contribute ratably to indemnify for any loss. If one pays the whole loss, it may secure a ratable contribution from the other.

3. The contract indemnifies even against the carelessness or negligence of the insured. This is highly important, because if the insurer could defend after loss upon the ground that the insured by his negligence contributed to the disaster, the policy would not be nearly so valuable as a security against serious pecuniary losses. It does not indemnify against willful destruction by the insured, except that suicide will not, by the weight of authority, defeat a life-insurance policy unless the insured can be shown to have taken out the policy with the intent to commit suicide. There are also some terms and some warranties in insurance contracts, the breach of which will prevent the insured from recovering; for example, in accident policies that the insured shall not voluntarily expose himself to unnecessary risks, or in fire policies that the insured shall use reasonable care and means to save property after a fire begins.

The case of suicide has caused the courts much perplexity. The federal courts and some state courts refuse to allow the estate of the deceased to recover where the insured committed suicide when sane, regarding it as against public policy. Some states allow a third person named as beneficiary to recover where they do not allow the estate of the deceased to recover. All courts allow a recovery in any case where the insured committed suicide while insane, unless the policy expressly excepts that risk; but the exception of the risk of "death by suicide covers only suicide while sane; in order to exempt the insurer the policy should read "death by suicide whether sane or insane excepted." One or two states have by statute forbidden insurance companies to insert such a clause.

In case the insured is executed by the law for a capital offense the insurer will not be liable on the policy even though that risk is not expressly excepted.

Many life-insurance policies now contain a clause declaring the policy to be incontestable after a certain period (say two or three years after it is issued). In such case the insurer can contest the policy only for a lack of any insurable interest or for actual fraud in procuring it, or because the loss or death was due to an expressly excepted risk.

4. The insured must have an insurable interest (see sec. 76). 5. The contract requires the highest good faith on the part of the insured (see sec. 77).

6. The contract contains warranties, the breach of which may avoid the policy (see sec. 78). ̧

7. The statutes often prescribe the form of policy which must be issued (see sec. 79). Insurance contracts may be oral. Statutes prescribing a form of policy do not prevent oral contracts, but subject an oral contract to the provisions of the statutory policy. It is usual in large insurance offices to issue to the insured temporarily a "binding slip," which is a brief memorandum of the insurance contract and gives protection pending the delivery of the formal insurance policy.

76. The insured must have an insurable interest. In order that a policy should be valid it is necessary that the one taking it out should have an insurable interest in the property or the life upon which the policy is issued.

I. Insurable interest in property. An insurable interest in property is an interest in property, or a liability in respect of property, of such a nature that the loss of the property might cause a pecuniary injury to the one possessing such interest or under such liability.

Example. A pledgee has such an interest in the pledge that its destruction would or might result in a pecuniary loss to him; so also, of course, has the pledgor. Both the mortgagor and the mortgagee of property have an insurable interest. A stockholder has an insurable interest in the property of the corporation. A farmer has an insurable interest in crops to be raised in the future upon his land. A mere expectancy, like that of an heir who expects to inherit his ancestor's property, does not create an insurable interest. If one insures his interest and afterwards sells it, the policy does not pass to the new owner without an assignment with the consent of the insurer.

2. Insurable interest in a life. This is very difficult to define. Any reasonable expectation of pecuniary benefit from the continued life of another creates an insurable interest in that life. If one depends upon another for support or education, in whole or in part, he has an insurable interest in that other's life. Thus a wife has an insurable interest in the life of her husband. If one is entitled to the services of another, he has an

insurable interest in that other's life. Thus a husband has an insurable interest in the life of his wife, and a father has an insurable interest in the life of his minor children. If one

has a pecuniary claim upon another, he may insure that other's life. Thus a creditor has an insurable interest in the life of

his debtor. Mere relationship by blood or marriage does not of itself create an insurable interest. One brother has no insurable interest in the life of another brother merely because of the relationship; he might have if he were dependent upon the brother. One may value his interest in his own life, or in the life of one upon whom he depends, or to whose services by virtue of family relationship he is entitled, at any sum agreed upon. But a creditor cannot insure the life of his debtor for a sum greatly in excess of the debt. It seems not to be necessary that the person whose life is insured by another should consent to the insurance, but this matter is in some doubt. There are grounds of public policy which might require the consent of a person to have insurance taken out upon his life.

The insurable interest in property must continue throughout the term of the policy, or at least exist at the time of the loss. It is enough in life insurance that it exist at the time the policy is taken out. So also in life insurance the policy may be assigned to one who has no insurable interest, if it was taken out in good faith by one who had an insurable interest; and the insured may make his policy payable to any one if he takes it out himself. Where a policy designates the beneficiary, the right under the policy becomes vested in such beneficiary and cannot be disturbed without his consent. Should the beneficiary die, however, before the insured, a new beneficiary may be named.

77. The contract of insurance is one requiring the highest good faith. In ordinary contracts a party is not bound to disclose what he knows about the subject-matter of the contract; it is for the other party to discover whatever he may deem important. So long as there is no misrepresentation the contract is valid and binding, notwithstanding one party knew and did not disclose certain material defects. But insurance contracts stand upon a peculiar basis in this respect.