I. Concealment. The insured is bound to disclose to the insurer every material fact known to him which affects the risk. But this rule is qualified in the United States, except as to marine insurance, by requiring that bad faith be shown in order to avoid a policy because of concealment.

Examples: 1. An attempt has been made to burn B's property. B becomes alarmed and effects insurance without disclosing this fact. The policy may be avoided by the insurer upon the ground of B's concealment.

2. B effects insurance upon his house, omitting to state that it is within a few feet of a fireworks manufactory. This concealment as to the risk is fatal to the validity of the policy.

The rule is very strict in marine insurance and extends to innocent nondisclosure due to forgetfulness or inadvertence; but in fire and life insurance it now probably extends in this country only to intentional concealment of some material fact amounting to bad faith. Where the insurer asks a series of questions in an application blank, a truthful answer to these questions is all that is generally required; but even in this case the insured cannot intentionally conceal a highly material fact, as that an attempt has been made to set fire to the property.

2. Representations. Representations are statements made by the insured, usually to give information concerning the risk, and inducing the insurer to issue a policy, but which do not become terms in the contract itself. A material false representation, however innocently made, will avoid the policy; there is an implied condition that a policy shall be enforceable only if the representations which induced the insurer to issue it are true. But a representation as to future conduct, that is, a promissory representation, is not a material one, because the insurer should not rely upon it unless he incorporates it into the written contract. So representations as to opinion or belief are not material; no one should rely upon them.

Examples: 3. B insures C's warehouse. C by mistake states that there is already $200,000 of insurance on the building; there was in fact but $30,000. This is material, since with $200,000 of insurance B's ratable portion in case of loss would be less than if there were but $30,000. If the building burns, C can recover nothing from B. It makes no difference that C believed his statement to be true.

4. Corally states to B that if B insures his building he will cease using a certain fireplace in it. The building burns. B seeks to avoid the policy by showing that C continued to use the fireplace. This is a promissory statement and it will not avoid the policy. If B wants the benefit of a promise, he must incorporate it into the written contract.

78. Warranties. Unless there be a waiver of it, or an estoppel to set it up, the breach of a warranty in an insurance contract will avoid the policy.

1. Warranties explained. A warranty is a representation or promise which is included in the policy itself, or in a separate paper incorporated into the policy by reference, and which is made an essential part of the contract. Its falsity or nonfulfillment will avoid the policy. A representation is merely an inducement to the making of the contract. A warranty is a part of the contract itself. Representations must be shown to be material, and it is enough that they are substantially complied with. Warranties are material because inserted in the contract, and they must be strictly and literally complied with. They may be either affirmative of an existing fact or promissory. Note that warranty has one meaning in insurance contracts and another in contracts of sale (see secs. 53, 54 ante). In the latter it is collateral, while in the former it is a vital term in the main contract. If a warranty in a sale is broken, an action for damages results. But if a warranty in insurance is broken it discharges the contract; no action for damages for its breach results.

Examples: 1. B represents that his vessel has twelve guns and twenty men. She has substantially this number and the policy is good.

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2. B warrants that his vessel has twelve guns and twenty men. has substantially this number, but the policy is avoided because there is a breach of the warranty in not having precisely the armament and force warranted.

3. B represents that ashes are taken out of his factory in iron hods. They are taken out in copper hods. The representation is substantially true and the policy is binding. But if B warrants that the ashes are taken out in iron hods, there is a breach of the warranty and the policy is avoided. (So stringent is this rule that the courts incline to hold statements to be representations when possible, and some states have statutes to relieve against forfeitures for technical breaches of warranty.)

4. B in the printed questions, which are made by reference a part of the policy, states that he is thirty years old. He is in fact thirty-five. The policy is not binding on the insurance company. This is a warranty.

5. B states as a warranty that the building insured is used "for winding and coloring yarn." He afterwards uses the building for another purpose. There is no breach of warranty. He did not warrant that the building would continue to be used for the purpose it was used for when the policy was taken out.

These rules as to warranties are so strict and work so many hardships that statutes in many states provide that warranties shall not avoid an insurance policy unless they are in fact material. This makes warranties more like representations.

In general, courts will, if possible, construe an insurance policy so as to save the just rights of the insured against forfeiture for a merely technical breach that does not in fact injure the insurer.

2. Waiver and estoppel. The doctrines of waiver and estoppel are frequently invoked to prevent the insurer from taking advantage of a misrepresentation or breach of warranty by the insured. Waiver is the voluntary relinquishment of a known right. Estoppel is a bar raised by the law to prevent one party from denying that he has relinquished a right when by his conduct he has led the other party reasonably to rely upon the conclusion that he has relinquished it.

Examples: 6. A policy provides that it shall be forfeited if the insured increases the risk. The insured increases the risk by using the property for manufacturing purposes. The insurer with knowledge of the facts tells the insured that the forfeiture is waived; this is binding. Again with knowledge of the facts the insurer accepts the premium; this estops the insurer from denying that he has waived the forfeiture.

7. The policy provides that if the building insured is on leased ground the policy shall be forfeited. Although this is a warranty that the building is not on leased ground, still if the insured informed the insurer when the application was made that the building was on leased ground, the insurer is estopped to set up a forfeiture.1

1 Massachusetts and New Jersey hold that there is no waiver or estoppel in such a case because they refuse to permit a written stipulation to be varied by parol evidence of prior or contemporaneous oral communications, though it might be varied by subsequent communications. It is the theory that all prior and contemporaneous communications are merged in the written contract. This is, perhaps, the doctrine held by the United States Supreme Court also.

Whether a particular agent has authority to waive a stipulation in the policy is often a question of great nicety. Whether a restriction upon an agent's authority contained in the policy itself will operate as notice to the insured of such restricted authority is a question upon which the decisions are inharmonious. The weight of authority is that the agent who issues the policy may make a contemporaneous waiver, although he might not have authority to make a subsequent one.

79. Statutory or standard policies. In order to avoid the difficult questions and the uncertainties raised by the widely differing forms of fire-insurance policies, many states have passed statutes requiring the insurance companies to issue a uniform standard policy prescribed by the statute itself. The leading form is the New York standard policy. Copies of this may be obtained of any fire-insurance agent, and it should be carefully read by all who carry fire insurance, in order that there may be no inadvertent violation of the terms by the insured. Massachusetts has a standard policy which differs in some important particulars from that of New York.

For example, the New York form provides that the policy shall be void if the building insured becomes vacant or unoccupied and so remains for ten days, while the Massachusetts form allows thirty days. Many clauses found in the New York form are absent from the Massachusetts form. For example, the New York form provides that the policy shall be void "if the interest of the insured be other than unconditional and sole ownership," or "if the building be on ground not owned by the insured in fee simple," or "if personal property be or become encumbered by a chattel mortgage," while the Massachusetts policy is silent as to all of these conditions.

80. Marine insurance. In the insurance of a ship or cargo against risks at sea there are always three implied warranties, namely, that the ship is seaworthy, that there shall be no voluntary deviation from a specified route, and that the adventure shall be for a legal purpose.

General average is a contribution made by the various owners of a ship and cargo toward a loss sustained by one owner whose property has been voluntarily sacrificed for the common safety, as where, in a storm, goods are cast overboard to lighten the

ship. But the one whose goods are thrown over loses his pro rata share of the goods also. Throwing property over for such a purpose is called jettison. General average is a rule of the admiralty courts based upon the usages of maritime commerce. Example. B's property valued at $4800 is cast overboard in order to save the ship and the rest of the cargo. The ship is valued at $50,000; it earns $2000 on the goods saved and loses $200 on the goods jettisoned; the rest of the cargo is C's and is valued at $43,000.

=

Contributors: $4800 + $200 + $52,000 + $43,000 = $100,000.
Percentage loss for each, 5%.

B gets $4800 - $240 = $4560, of which the ship pays $2600 – $190 $2410, and C pays $2150.

This is a rule in admiralty only. If B's building is torn down to stay the spread of fire, he recovers no contribution from property thus saved.

A marine insurer is bound to make good to the owners of property saved the contribution they pay to one whose property was sacrificed. So also the marine insurer is bound to pay in full the one whose goods were sacrificed, and is then subrogated to his rights of contribution against those whose property was saved.

If the policy on a vessel or goods is merely a fire policy and not a marine policy, the rule of general average has no application.

REVIEW QUESTIONS AND PROBLEMS

SECTION 72. Explain the system and object of insurance. How did it originate? How are premiums fixed?

73. Distinguish between valued and open policies. Distinguish life, endowment, and term policies.

74. Define insurance; insurer; insured; premium; policy; risk; insurable interest. What is life insurance? What is tontine insurance? What is accident insurance? marine insurance? fire insurance? casualty insurance? guaranty or fidelity insurance and its kinds? What is reinsurance? May the party originally insured recover against the reinsurer?

75. Name the characteristics of the insurance contract. Is it a wagering contract? Is it an indemnity contract, and why? How much may be