I
A
Modern Business
A SERIES OF EIGHTEEN TEXTS, ESPECIALLY PREPARED
FOR THE ALEXANDER HAMILTON INSTITUTE COURSE IN
ACCOUNTS. FINANCE AND MANAGEMENT
EDITED BY
JOSEPH FRENCH JOHNSON
DEAK, NEW YORK UNIVERSITY SCHOOL OF COMMERCE, ACCOUNTS AND FINANCE
Titles Authors
ECONOMICS OF BUSINESS . . . Edward Sherwood Meade
ORGANIZATION AND MANAGEMENT Lee Galloway
MARKETING METHODS . . . . R. S. Butler
SALESMANSHIP ...... / Herbert F. DeBower
IJoHN G. Jones
ADVERTISING . f Harry Tipper
I George B. Hotchkiss
CORRESPONDENCE George B. Hotchkiss
CREDITS Peter P. Wahlstad
TRAFFIC Philip B. Kennedy
ACCOUNTING PRACTICE .... /Leo Greendlinger
I. J. William Schulze
AUDITING Seymour Walton
COST FINDING Dexter S. Kimball
CORPORATION FINANCE .... William H. Lough
TDA-NTTTTMrt / JoSEPH FrENCH JoHNSON
BANKING < ^^ ,, T
I Howard M. Jefferson
FOREIGN EXCHANGE Franklin Escher
INVESTMENT AND SPECULATION . /Thomas Conway
L Albert W. Atwood
INSURANCE Edward R. Hardy
REAL ESTATE Walter Lindner
Charles W. Gerstbn-
COMMERCIAL LAW \ berg
Thomas W. Hughes
ALEXANDER HAMILTON INSTITUTE
NEW YORK
Insurance and
Real Estate^
PART I: INSURANCE
BY
EDWARD R. HARDY
STAFF LECTURER ON FIRE INSURANCE AND INSURANCE LAW IN
NEW YORK UNIVERSITY SCHOOL OF COMMERCE, ACCOUNTS AND
finance; ASSISTANT MANAGER OP THE NEW YORK FIRE INSURANCE
EXCHANGE: SECRETARY, INSURANCE SOCIETY OF NEW YORK
PART II: REAL ESTATE
BY
WALTER LINDNER
GENERAL SOLICITOR OP THE TITLE GUARANTEE AVD TRUST
COMPANY OF NEW YORK CITY
Modern Business
Volume XI
ALEXANDER HAMILTON INSTITUTE
NEW YORK
A
^1'
' UiM
Copyright, 1911, bt
ALEXANDER HAMILTON INSTITUTE
COPTRIQHT, 1912, BT
ALEXANDER HAMILTON INSTITUTE
COPTRIGHT, 1913, BY
ALEXANDER HAMILTON INSTITUTE
Copyright, 1914, by
ALEXANDER HAMILTON INSTITUTE
Copyright, 1916, by
ALEXANDER HAMILTON INSTITUTE
TABLE OF CONTENTS
PART I: INSURANCE.
CHAPTER I.
HISTORICAL SKETCH OF INSURANCE.
SECTION PAQB
1. Insurance Defined 1
2. Early Instances of Insurance 1
3. Present Forms of Insurance 2
4. The Theory of Probabilities i. 4
CHAPTER II.
MARINE INSURANCE.
5. Marine Insurance Based on Indemnity 7
6. Lloyds of London 7
7. Underwriting 8
8. The policy 8
9- Warranties 10
10. General Average 10
11. Particular Average 11
12. Dangers Insured Against 12
13. Losses 13
14. Salvage 14
CHAPTER IIL
FIRE INSURANCE.
15. Fire Insurance Defined 15
16. Origin : . . 15
17. Barbon and Povey 15
18. An Experimental Science 16
19. Early Practices . » , , 1(5
V
347643
vi CONTENTS
SECTION PAGE
20. United States 17
21. Statistics 18
22. Number of Companies 18
23. Capital 19
24. Investment of Foreign Companies 19
25. Volume of Business 20
26. Premiums 20
27. Losses Paid 21
28. Rate of Premium 22
29. Dividends 23
30. Expenses 24
CHAPTER IV.
THE ORGANIZATION OF FIRE INSURANCE COMPANIES.
31. Methods of Organization 26
32. Lloyds 26
33. Mutuals 28
34. Stock Companies 28
35. Deposit Requirement 29
36. How Stock is Usually Sold 30
37. Organization SO
38. Special Agent .32
39. Adjuster 32
40. Inspectors S3
41. Other Employes 33
42. Work of Local Agent 33
43. Responsibilities of Local Agent 34
44. Underwriting S6
CHAPTER V.
OFFER, ACCEPTANCE AND INSPECTION OF RISKS.
45. Offer and Acceptance of Risk 38
46. Importance of Inspections 39
47. Methods of Inspection 41
48. General Information about Risk 42
49. Occupancy , 43
CONTENTS vii
SECTION PAOS
50. Protection of Machinery ......... 44
51. Dangerous Substances 44
52. Heating, Lighting, and Power 45
53. Facilities for Extinguishing Fire 46
54. Possible Sources of Fire 47
55. Qualifications of Inspector 48
56. Classes of Buildings 49
57. Frame Building 49
58. Ordinary Building 51
59. Mill Construction 52
60. Fireproof Construction 53
CHAPTER VI.
FIRE PROTECTION.
61. Fire Losses 56
62. Prevention of Fires . 57
63. Fire-Doors 58
64. Features of Door-Openings 58
65. Standard Fire Shutters 59
66. Wired Glass 59
67. Waterworks 60
68. Use of Hydrants 60
69' Arrangement of Pipes 61
70. Fire Boats 61
71. Public Fire Department 62
72. Private Fire Department 62
73. Standpipe Equipments 63
74. Automatic Sprinklers 63
75. History of Automatic Sprinklers 64
76. Value of Sprinkler Protection 65
77. Spread of Sprinkler Protection 67
78. Requisites of Sprinkler Protection 68
79. Automatic Alarm 69
80. Dry Pipe 69
81. Open Sprinklers 70
82. Chemical Fire Extinguishers . .70
83. Hand Extinguishers 70
viii CONTENTS
SECTION PAOB
84. Fire Pails 71
85. Signaling Systems 72
86. Electric Signal 73
87. Special Building Signal 73
88. Automatic Sprinkler Supervision 73
89. Watchmen 74
90. Safety Receptacles for Ashes, etc 74
91. Oily Waste 74
92. Packing Bin 75
93. Necessity for Standards 75
94. National Fire Protection Association 76
95. Laboratory Testing 77
96. Field Inspections 77
97. Place of the Engineer 78
CHAPTER VII.
FINANCIAL ASPECT OF FIRE INSURANCE PROTECTION.
98. Financial Phase 79
99. Illustration 79
100. Relation Between Cost and Saving 80
101. Engineer's Recommendations . 80
102. Examples 81
CHAPTER VIIL
RATING.
103. Early Forms of Rating 86
104. Classification System 87
105. Prospectuses 87
106. Segregation of Trades 88
107. Philadelphia Contributionship 89
108. Green Tree Company 89
109. Early Charges 89
110. Special Ratings 91
111. Summary 92
CONTENTS IX
SECTION PAQB
112. National Board of Fire Underwriters 93
113. Local Organizations 94»
114. Attack on Organizations 95
115. Value of Organizations 96
116. Rate Making in Kansas 97
117. Duties of Rating Organization 97
118. Types of Risks 97
119. Store and Dwelling 98
120. Business Building 99
121. Groups of Risks 99
CHAPTER IX.
MINIMUM AND SPECIFIC RATES.
122. Minimum Rates 102
123. Specific Rates 103
124. Schedule Rating 103
125. Difference in Risks 104
126. Variety of Schedules 106
CHAPTER X.
UNIVERSAL MERCANTILE SCHEDULE.
127. Origin of Universal Schedule 107
128. Fundamental Principles 107
129. Scope of Schedule 109
130. How is a Risk Rated.? 109
131. Key Rate Ill
132. Rating by Schedule Ill
133. Hazard on Stock US
134. Deductions for Fire Appliances 114
135. Exposure 114
136. Co-Insurance 115
137. Faults of Management 115
138. Rate on Contents 115
139. Simple Example 117
140. Recapitulation 117
X CONTENTS
CHAPTER XI.
ANALYTIC SCHEDULE.
SECTION PAGB
141. Origin II9
142. Percentage System II9
143. Relativity 120
144. Basic Rate 121
145. Factors Influencing Rate 121
146. Example , . . . . 122
147. General Considerations 123
148. Limitations of Rating 124
149. Application of Schedules 125
CHAPTER XII.
INSURANCE CONTRACT.
150. Policy Defined 127
151. Early History of Contracts . . . * . . . .127
152. Standard Policies Adopted 131
153. Provisions of the Law 132
CHAPTER XIIL
NEW YORK STANDARD POLICY.
154. General Provisions of New York Standard Policy . .134
155. Direct Loss by Fire 135
156. Limitation of Amount 135
157. Description of Property 136
158. Limitations of Contract 137
159. Voidance of Contract 138
160. Special Limitations of Liability 143
161. Items Excluded from Liability ..... . . 144
162. Liability Based on Actual Value of Property . . .145
163. Renewals, Cancellations, etc 145
164. Other Provisions 146
CHAPTER XIV.
CLAUSES AND WARRANTIES.
165. Riders 149
166. (a) The Average Clause 149
CONTENTS xi
SECTION PAGE
167. Average Illustrated 150
168. Co-Insurance 151
169. (c) Electricity Clause 152
170. Original Clauses . . 153
171. Additional Clauses 156
CHAPTER XV.
FORMS AND POLICY WRITING.
172. Forms 159
173. Drafting a Form l6l
174. Printed Forms l6l
175. Concurrent Policies 163
CHAPTER XVI.
LOSS SETTLEMENTS.
176. Losses 164
177. Adjusters 164
178. Losses in Standard Policy 165
179. Repairs and Replacements 166
180. Provisions for Settlement l67
181. Appraisal l69
182. Payment of Loss l69
183. Difficulties of Settlement 170
184. Standing of Companies 171
CHAPTER XVIL
BROKERS, BROKERAGE, MORAL HAZARD AND UNDER-
WRITING.
185. Brokers and Brokerage . .172
186. Moral Hazard 173
187. Underwriting 174
188. Problems of Underwriting 175
xii CONTENTS
CHAPTER XVIII.
ORGANIZATION OF LIFE INSURANCE COMPANIES.
SECTION PAQB
189. Life Insurance Defined 177
190. Early Conditions Unfavorable to Insurance . . . .177
191. First English Societies . 178
192. Five Periods of Development 179
193. Life Insurance in the United States 180
194. Three Early Companies 181
195. Developments Since 1835 181
196. Internal Divisions 182
197. Three Main Departments 184
198. Economic Importance of Life Insurance . . . .185
199. Investments of Insurance Companies 187
200. Insurance of Premium Loans 189
201. Life Insurance as an Investment 190
202. Insurance Companies Not Savings Banks . . . .191
CHAPTER XIX.
MORTALITY TABLES.
203. The Basis of Mortality Tables . . . . . . . I9S
204. Halley's Table . 193
205. Principles of Compilation 194
206. The Northampton Table . . . 194
207. The Carlisle Table 195
208. Other Tables 195
209- The American Experience Tables 196
210. Computing the Premium 199
211. The Law of Increasing Mortality ....... 200
CHAPTER XX.
POLICIES AND PREMIUM RATES.
212. Classification of Policies 201
213. Kinds of Policies 202
214. Annuities 202
CONTENTS xiii
SECTION PAGB
215. Classification of Risks 203
216. Influence of Climate on Mortality 204
217. The Moral Hazard 205
218. Features of the Insurance Contract 206
219. Paid-up PoHcies 207
220. Cash Value 208
221. The Medical Examination 208
CHAPTER XXI.
INDUSTRIAL AND ASSESSMENT INSURANCE.
222. Industrial Insurance Defined 212
223. Early Efforts in the United States 212
224. The First Company 213
225. Growth of the Prudential 214
220. Conditions in 1885 214
227. Four Basic Principles 215
228. Assessment Insurance 215
229. Origin 216
230. Weak Points 216
231. Fraternal Insurance 216
CHAPTER XXII.
CASUALTY INSURANCE.
232. Casualty Insurance Defined 218
233. General Status 218
234. Accident Insurance 220
235. The Travelers' of Hartford 220
236. Growth of Accident Insurance 221
237. Various Kinds of Accidents 221
238. Injuries Self-inflicted 223
239. Liability Insurance and Workmen's Compensation . . 224
240. The Law of Negligence 224
241. Negligence Defined and Illustrated 225
242. The Law Modified 226
243. The Employer's Three Defences . 227
xiv CONTENTS
8BCTION PAOB
244. First Policy in the United States 229
245. Types of Liability Insurance 230
CHAPTER XXIII.
WORKMEN'S COMPENSATION.
246. Workmen's Compensation Defined 232
247. Acts of Foreign Countries 232
248. Limitations in Foreign Countries 233
249. Fatal Injuries 234
250. Losses 235
251. Forms of Insurance Organization 235
252. Sick Fund 236
253. Legislation in the United States . 238
254. Compensation Acts Summarized 238
255. The New York State Law 241
256. Some Evil Effects in France 241
257. Experience in the United States . . . . . . . 242
258. Experience in New York 244
259. Accident Prevention 244
260. Co-Operation . . . 245
261. Safety Suggestions 246
262. Methods of Writing Workmen's Compensation . . . 248
263. The State Fund 249
264. Mutual Associations 249
265. Self Insurance 250
266. Stock Companies 250
267. The Element of Cost 250
268. Rates in the United States 251
CHAPTER XXIV.
OTHER BRANCHES OF CASUALTY INSURANCE.
269- Less Important Branches 252
270. Plate Glass Insurance 252
271. Steam Boiler Insurance 258
272. Origin 253
273. Boiler Insurance in the United States 253
CONTENTS XV
SECTION PAGS
274. Causes of Boiler Explosions 254
275. Inspection Service 254
276. Future of Boiler Insurance 255
277. Credit Insurance 255
278. Two Classes of Policies 255
279. Benefits Summarized 256
280. Automobile Insurance 257
281. Title Insurance 257
282. Burglary Insurance 258
283. Surety and Fidelity Insurance 260
284. Field Covered 260
285. Contract Policy 261
286. Fiduciary Bonds 26l
287. Bonds of Deposit 262
288. Excise Bonds 262
289. Fidelity Bonds 262
290. Unemployment Insurance 262
291. Vacation Insurance 263
292. War Insurance 264
293. Other Applications of the Insurance Principle . . . 265
PART II: REAL ESTATE.
CHAPTER I.
INTRODUCTORY.
1. Real Estate a Business^ Not a Profession .... 267
2. Ethics of the Business 267
8. Divisions of the Business 268
4. Investment 269
5. Operation 269
6. Agency 271
7. Real Estate, Property and Real Property Defined . .271
CHAPTER II.
INTERESTS IN LAND.
8. Rights of Ownership Divided 273
9. Limitations upon Ownership 273
xvi CONTENTS
SECTION PAQB
10. Police Power 274
11. Ultimate and Original Ownership of the State . . . 274
12. The Right of Eminent Domain 275
13. The Right of Taxation 275
14. Estate in Fee Simple 275
15. Estate in Fee upon Condition Subsequent . . . .276
16. Estate in Fee Determinable 276
17. Life Estates and Remainders 277
18. Dower 278
19. Estates by Curtesy 278
20. Chattel Interests 278
21. Method of Proving Ownership 279
CHAPTER III.
BROKERAGE.
22. Brokerage Defined 280
23. A Broker's Requirements 280
24. Methods of Making Sales 280
25. Agreement as to Commission Necessary . . . . .281
26. Obligation of Brokers to Principals . . . . . .281
27. Statements a Broker May Make 282
28. Necessity for Thorough Knowledge of the Property . 282
29. Who Pays the Commission 282
30. AVhen Commission is Earned 283
31. When Broker is Procuring Cause . . . . . . 284
32. False Representations 284
33. Good Business to See that Contract is Made . . . 285
34. Waiting for Commission until Title Closes .... 285
35. Broker Not Responsible for Failure to Complete . . 285
36. Splitting Commissions 286
37. Points of Difference Between Sales and Exchange Busi-
ness and Loan Brokerage 286
38. When Broker is Procuring Cause in Obtaining Loan . 288
39. Agreement Subject to Prior Closing of Transaction . 288
40. Get Agreement as to Commission 288
41. Rate of Commission 289
CONTENTS xvii
CHAPTER IV.
CONTRACTS.
SECTION PAGB
42. Contracts a Legal and Commercial Necessity . . . 290
43. Contracts Wise and Safe 290
44. Contracts a Commercial Necessity 291
45. Definition of a Contract 291
46. Essential Elements of a Contract 292
47. Forms of Contracts 294
48. Divisions of a Contract 295
49. Date 295
50. Statement of the Parties 296
51. Examination of Title the First Care of Purchaser . . 296
52. When the Seller is a Trustee or Corporation . . . 297
53. Earnest Money May be Placed with Bank or Trust
Company 297
54. Concern of Sellers Less than that of Purchasers . . 297
55. When Seller Must Know the Responsibility of Purchaser 298
56. "Witnesseth, that the Seller Agrees to Sell and Convey" 299
57. "And the Purchaser Agrees to Purchase" .... 299
58. "With the Buildings and Improvements Thereon" . . 299
59. Description 299
60. Selection of Form of Description 304
61. Property Sold Subject to Tenancy 304
62. Restricted Property 305
63. Easements 307
CHAPTER V.
CONTRACTS. (Continued)
64. Financial Statement 309
65. Earnest Money 309
66. Amount Paid on Delivery of the Deed 311
67. Taking Property Subject to Mortgage 312
68. Purchase Money Bond and Mortgage 314
69' Delivery of Deed 316
70. Apportionment of Rent, Interest, etc 317
71. Reading of Water Meter 317
xviii CONTENTS
SECTION PAGB
72. Form of Deed 318
73. Personal Property Included in the Sale 319
74. Violations of Law and Municipal Ordinances . . . 320
75. Earnest Money a Lien 321
76. Damage by Fire 321
77. Contract Binding on Heirs, Executors, etc 322
78. Agreement as to Commission 323
79. The Seal 324
80. Witness and Acknowledgment 325
81. Non-Performance of Contracts 326
82. Seller's Remedies 327
83. Exchange Contracts 328
84. Parties and Consideration 330
85. Description 331
86. Financial Statement 831
CHAPTER VL
AUCTION SALES.
87. Necessity for Auction Sales 333
88. The Involuntary Auction Sale 333
89. Terms of Sale 334
90. Protected Involuntary Sales 336
91. Voluntary Auction Sale 337
92. Protected Voluntary Sales 337
93. Secret of Successful Sale 338
94. Terms of Sale 339
CHAPTER VIL
LIENS.
95. Definition of a Lien S41
96. General and Specific Liens 341
97. Lien of Judgment 342
98. How Enforced, and Property Affected 342
99. How Lien of Judgment May be Discharged .... 344
100. Mechanics' Lien 344
CONTENTS xix
SECTION PAOU
101. How Asserted S45
102. Enforcement of Mechanics' Liens 345
103. How Property May be Discharged from Mechanics* Lien 346
104. Conditional Bill of Sale . 347
105. Lien of Decedent's Debts 348
106. Transfer Tax 349
CHAPTER VIIL
TAXES AND ASSESSMENTS.
107. Definition of Taxes 350
108. Taxes a General Lien 350
109. Various State and County Levies 351
110. Budget 352
111. Assessed Value 353
112. Determining of Tax Rate 353
113. Reduction of Assessment on Land 354
114. Reduction of Assessment on Buildings 354
115. Certiorari 355
116. When Taxes Become a Lien 355
117. Payment of Taxes 356
118. Interests Affected by Tax Lien 357
119. Definition of Assessments 357
120. Assessment Laid by Authority of Courts . . . . 358
121. Assessments Levied by Board of Assessors . . . .358
122. When Assessments Become a Lien 360
123. Water Rates 360
CHAPTER IX.
THE TRANSFER OF TITLE AND TITLE INSURANCE.
124. Two Ways of Transferring Title 36l
125. Growth of Modern Right of Transferring Title . . .361
126. Transfer by Delivery of Possession 362
127. Genesis of Transfer by Deed 362
128. Definition of a Deed 363
129. Conveyances Absolute and upon Security .... 363
130. Necessary Elements of a Deed .,,,,.. 364
XX CONTENTS
SECTION PAGE]
131. When Title Passes 365
132. Recording of Conveyances 365
133. Instruments for Record Must be Acknowledged or
Proved 367
134. Delivery Must be by Competent Person 369
135. Transfer of Property by Will 370
136. Inquiry into Public Records — How Directed . . . 371
137. Reasons for Employing Counsel 371
138. Responsibility of Examiner of Title 372
139. Origin of System of Title Insurance 373
140. Report of Title 374
141. Title Insurance Policy 375
142. Agreement of Insurance 375
143. Subject-Matter of Insurance 377
144. Exceptions and Limitations upon Subject-Matter of
Insurance 377
145. Conditions of Policy 377
146. Use of Title Policy 380
CHAPTER X.
DEEDS.
147. New York Form of Deed 382
148. "This Indenture" 383
149. The Date 383
150. The Parties 383
151. Consideration 383
152. Nominal Consideration 385
153. Consideration Imported by Seal 386
154. Granting Clause 387
155. Description 387
156. Uncertainty in Descriptions . 390
157. Ambiguity in Descriptions 390
158. Inconsistent Descriptions 391
159. Appurtenances 392
160. Habendum 392
161. Bargain and Sale Deed 393
162. Quit Claim Deed 393
CONTENTS xxi
SECTION PAGB
163. Bargain and Sale Deed with Covenants S94»
164. Full Covenant and Warranty Deed 395
165. Covenants which Run with the Land 397
166. Enforcement of Covenant of Warranty 398
167. No Redress under Covenants for Some Unmarketable
Titles 399
168. Testimony Clause 401
169. The Seal of an Individual 401
170. The Seal of a Corporation 401
171. Proof of Instrument Signed by a Corporation . . . 402
CHAPTER XI.
BOND AND MORTGAGE.
172. Transactions in which These Instruments are Appro-
priate 404
173. Legal Tender — "Lawful Money of the United States" . 406,
174. Interest on Bond 406
175. Privilege to Pay Off 408
176. Usury Laws 409
177. Default in Payment of Interest, Taxes, etc 410
178. Execution and Enforcement 410
179. Mortgage Recording Tax 411
180. Former Method of Pledging Property for Debt . . 412
181. Equity of Redemption 413
182. "Bearing Even Date Herewith" 416
183. "Secured to be Paid, Together with the Interest Thereon,
at the Time and in the Manner Expressed in Said
Bond or Obligation" 417
184. , "Together with the Appurtenances," etc 418
185. The Defeasance 419
186. First Covenant 420
187. Second Covenant 421
188. Third Covenant 422
189. Fourth Covenant 423,
190. Fifth Covenant 425.
191. .Sixth Covenant 426
192. .Seventh Covenant 426
xxii CONTENTS
SECTION p^Qia
193. Eighth Covenant 427
194. Special Clauses in Subordinate Mortgages . . . . 427
195. Lifting Clause 428
196. Foreclosure by Advertisement 428
197. Foreclosure by Action at Law 429
198. Method of Procedure 4S0
CHAPTER XII.
LEASES.
199. Definitions of Landlord and Tenant 434
200. Rent 434
201. Term of Lease 435
202. Assignment of Leases 436
203. Leases Created Verbally and by Writing .... 437
204. Tenancy at Will 437
205. Tenancy for Years 438
206. Obligations of Landlord and Tenant 438
207. Ground Lease 439
208. Tenancy from Month to Month 441
209. Termination of Leases 442
210. Repairs 445
211. Constructive Eviction 445
212. Option in Case of Fire 445
CHAPTER XIIL
ADJUSTMENTS AT CLOSING.
213. First Steps in Title Closing 451
214. Disposing of Encumbrances 452
215. Encumbrances Subject to which Purchaser Takes Title 453
216. Debits Against Purchaser 456
217. Purchaser's Credits 457
218. Payments to be Made by the Seller 458
219- Payments Made by the Purchaser 459
220. Encumbrances not Provided for in Contract . . . 459
221. Closing of Exchange Contract 460
CONTENTS xxiii
SECTION PAGB
222. Closing of Transfer of Leasehold 461
223. Closing of Loan Transaction 461
224. Rents Due and Not Paid 461
225. Methods of Figuring Interest 462
226. Rejection of Title 462
CHAPTER XIV.
METHODS EMPLOYED IN ARRIVING AT VALUATION OF
REAL ESTATE-
227. What Finally Determines in Land Value .... 464
228. General Rules for Determining Land Values . . . 466
229. Auction Prices 467
280. Valuing Short Lots 468
231. The Hoffman Rule 469
232. The Rule of William E. Davies 469
233. Valuing Lots More or Less than a Typical Lot Width . 471
234. Plottage 472
235. Illustration of Method of Appraising Property . . . 472
236. Valuation of Improved Property 474
237. Cost of Buildings 475
238. Property Taken in Condemnation Proceedings . . . 475
230. Expert Appraising 477
240. Specialization in Appraising . 478
241. Methods of Proving Values Before Commissioner . . 478
242. Valuing Irregular and Short Lots 479
243. Suggestions for the Expert on the Stand .... 480
244. Knowledge Useful to the Expert 482
245. Valuing Parts of Property, Easements, etc 482
CHAPTER XV.
THE SURVEYOR'S RELATION TO REAL ESTATE.
246. Necessity for Accurate Survey 484
247. The Survey 484
248. Encroachment upon Highway, etc 485
249. Beam Rights and Party Walls ....... 485
250. Encroachment by Neighbor .,,..,,. 486
xxiv CONTENTS
SECTION PAGE
251. What a Survey Should Show . .486
252. A Modern Subdivision Survey 487
253. Builder's Surveys 487
CHAPTER XVI.
WORK OF THE ARCHITECT.
254. Architect's Relation to Real Estate . . . . . .489
255. Preliminary Rough Sketch 489
256. Architect's Opinion as to Cost of Construction . . . 490
257. Working Drawings 490
258. Matters About which the Architect Should be Informed 491
259. Survey Furnished to the Architect 491
260. Walls which Lean . 491
261. Choice of an Architect 492
262. Superintendence 495
263. Charge for Small Work, etc 495
264. Specifications \ . 495
265. Permits 495
266. Detail Plans 496
267. Expert Service 496
268. Various Kinds of Contracts ........ 496
269. Subdividing Contracts 497
270. Drawing and Signing of Plans and Specifications . . 497
271. Extras 498
272. Method of Paying Contracts 498
273. Architect's Decision Impartial 498
274. Necessary Certificates 499
275. Planning an Apartment 499
276. Planning a Warehouse or Business Building . . . 500
CHAPTER XVII.
PROBLEMS OF MANAGEMENT.
277. Divisions of Management Business 501
278. Renting 501
279. Collection 502
CONTENTS XXV
SECTION PAGB3
280. Purchases and Expenditures upon the Property . . . 503
281. Accounting 503
282. Physical Care of the Property 505
CHAPTER XVIII.
UNSETTLED PROBLEMS.
283. Organization of Real Estate Interests 511
284. Expressing Consideration of Conveyances . , . .511
285. Tax on Mortgages 513
286. The Single Tax 514
287. Confidence and Good-Will 514
PART I: INSURANCE
CHAPTER I
HISTORICAL SKETCH OF INSURANCE
1. Insurance defined, — Insurance is a provision for
the distribution of risks; that is to say, it is a financial
provision against loss from unavoidable disasters. The
protection which it affords takes the form of a guaran-
ty to indemnify the insured if certain specified losses
occur. The principle of insurance, so far as the under-
taking of the obligation is concerned, is that for the pay-
ment of a certain sum the guaranty will be given to
reimburse the insured. The insurer, in accepting risks,
so distributes them that the sum total of all the amounts
paid for this insurance protection will be sufficient to
meet the losses that occur.
Insurance, then, indicates divided responsibility. This
principle is introduced in most stores where a division
is made between the sales clerk and the cashier's depart-
ment, the arrangement dividing the risk of loss. The
insurance principle is similarly applied in many other
cases of divided responsibilit3\ As a business, however,
insurance is usually recognized as some form of securing
a promise of indemnity by the payment of a premium
and the fulfillment of certain other stipulations.
2. Early instances of insurance. — Forms of insurance
were known to the Romans and to some extent were
practiced among the Collegia. In certain respects these
bodies resembled our benefit societies. For example,
xi-i 1
2 INSURANCE
they provided for burial and also made some form of
provision for promotion among the soldiers in their or-
ganizations. In reality, then, they were based on the
insurance principle since they accepted from their mem-
bers a certain stipulated sum and in return agreed to
perform certain services. Demosthenes describes marine
loans made to the ancient Greeks ; we also have record
that insurance existed among the Chinese 2500 years
ago. In none of these early instances, however, did
insurance reach anything like large proportions. In
fact, so far as we know, it entirely disappeared, many
centuries passing before there was a revival. It is true
that certain laws among the Romans governing an-
nuities necessitated a mortality table, but it was, how-
ever, for this sole purpose and apparently not in any
sense an insurance matter.
3. Present forms of insurance, — The business of in-
surance is divided into four main branches: marine in-
surance, fire insurance, life insurance and casualty insur-
ance. The first three state the form of disaster against
which insurance is provided. The fourth — originally
accident insurance — includes all forms not embraced
in the other three. An idea of the variety of events
against which insurance is offered may be had from the
following list :
1. Fire (including Rent) 8. Double Endowment
2.
Consequential Loss
9.
Foreign Residence
3.
Foreign (Home)
10.
Guaranteed Bonus
4.
Abstainers' Section
11.
Monthly Premiums
5.
Children's Deferred and
12.
Without Examination
Endowment
13.
Immediate
6.
Convertible Term
14.
Immediate (with return)
7.
Discontinued or De-
15.
Deferred Annuities
ferred Bonus
16.
Marine
HISTORICAL SKETCH OF INSURANCE
17.
Engines, Boilers and
34.
Burglary (All Risks)
Electric Plant
35.
Contract Guaranty
18.
Personal Accident
36.
Dentist's Indemnity
19.
Sickness and Accident
37.
Druggist's Indemnity
20.
Sickness with Life As-
38.
Fidelity Guaranty
surance
39.
Forged Transfers
21.
Coupon
40.
Insanity
22.
Cycles
41.
Keys
23.
Hailstorm
42.
Leasehold Redemption
24.
Lifts and Cranes
43.
Licenses
25.
Live Stock
44.
Mortgage
26.
Motor Cars
45.
Patents (Infringement)
27.
Plate Glass
46.
Property Owner's In-
28.
Third Party and Driv-
demnity
ing
47.
Railroad, Wagon In-
29.
Transit
demnity
30.
Workmen's Compensa-
48.
Registered Post
tion
49.
Solvency Guaranty
31.
Accountant's Indemnity
50.
Sprinkler Leakage
32.
Bad Debt and Credit
51.
Trusteeships
33.
Burglary
These fall under the following divisions :
Nos. 1, 2 and 3, Fire.
Nos. 4 to 15, inclusive, Life and Annuity, with a sub-heading
under Nos. 13, 14 and 15 of Annuity only.
No. 16, Marine.
No. 17 is not listed under any special branch.
Nos. 18, 19 and 20 under Personal Accident.
Nos. 21 to 30, inclusive, under Casualty.
Nos. 31 to 51, inclusive, under various forms of insurance
which do not lend themselves to any general classification.
Marine insurance antedates every other form, its his-
tory dating back over seven centuries. It appears to
have been practiced in the Mediterranean, and at least
one old policy has come down from the thirteenth cen-
4 INSURANCE
tury, proving that marine insurance was an established
practice among the commercial countries of that time.
A broad gap exists between that period and the con-
tinuous history running back now some four hundred
years, but since that time insurance has been an estab-
lished business among those engaged in maritime ad-
ventures.
Fire insurance, the second oldest form to become per-
manently established, dates from the great London fire
of 1666.
Life insurance followed a little later, although not
until 1760 was a company founded on a modern basis.
Casualty insurance owts its origin to the application
of steam to railway travel; its more common name of
accident insurance was due to the fact that the first
events to be insured against were those of accidents to
the person on a railway journey. It originated in Eng-
land in the first half of the nineteenth century.
4. The theory of ijr oh abilities. — All forms of insur-
ance have a fundamental basis in the theory of probabili-
ties. This theory deals with those events which seem-
ingly do not lend themselves to a fixed law but which in
reahty occur with such approximate regularity that a
definite law may be deduced from a sufficient number of
these uncertain events, the law being that these events
will occur with sufficient regularity over a period of time
so that conclusions may safely be drawn from them.
The possibilities contained in the theory of probabili-
ties were first brought to light by the famous solution
of a gaming problem. Two noblemen, engaged in a
game of cards called the Game of Points, were obliged
to cease play before the game could be finished. Being
unwilhng to separate witli each retaining his own stakes,
they asked Pascal, the eminent Frenchman, to suggest
HISTORICAL SKETCH OF INSURANCE 5
how the stakes should be divided. The stakes amounted
to $64, each having contributed $32, and it was neces-
sary for one of the players to make three points be-
fore he would be entitled to the stakes. At the time
they appealed to Pascal, one player had two points to
his credit and the other player had one. Pascal sub-
mitted the following solution: "Suppose," he said, "that
you had played another hand. One of two things
would necessarily happen: either the player who has
two points would gain one, and, having three points to
his credit, would claim the stakes; or the player with
one point to his credit would win another so that he
would have two points to his credit, the same as his op-
ponent. If this latter should happen, each would have
retained his individual stake. The chances of winning
I consider equal, and as it is evident that the player
with two points cannot, if he plays another hand, lose
his original stake of $32, the other $32 should be divided
into two parts and the player who has one point to his
credit retain $16 and the player with two points re-
ceive $16, or the whole stake be divided into proportions
of 48 and 16.
Pascal submitted two other suggestive solutions to
clinch his theory, but they need not be discussed here.
Gambling at that time was prevalent in the courts, and
nothing pleased the gamblers more than to be shown
ways whereby their games could be decided although
not played to a conclusion. Great intellectual interest
was aroused in the theory of probabilities, and out of
this condition the business of insurance in its modern
aspect originated. At this point it should be said that
insurance, although often compared with gambling —
possibly because of these early associations — is entirely
different from it in principle. Gambling is an attempt
6 INSUKANCE
to increase one's means by a venture not based on any
kno\^Ti factors ; that is, it is purely and simply a chance.
Insurance, on the other hand, takes into consideration
all the factors that enter into the problem and that may
affect the hazard insured against, or the factors that
may, if guarded against, prevent the contingency from
happening.
CHAPTER II
MARINE. INSURANCE
5. Marine insurance based on indemnity. — Marine
insurance is, as has already been said, the oldest form
which passed into a distinct commercial business. Like
fire insurance, it is based on indemnity, the purpose be-
ing to make whole a loss which has occurred, but not in
any sense to do more than that. Marine insurance was
undoubtedly practiced in the Mediterranean. Indeed,
in its basic form, so far as adventures at sea were con-
cerned, the principle of insurance was recognized in
remote times. Among the Rhodians there were un-
doubtedly forms of indemnity much like our modern
form of insurance. The Hanseatic League also pro-
vided for meeting the contingencies of maritime enter-
prises.
6. Lloyds of London. — Marine insurance among
English speaking peoples had its origin in the famous
coffee-house kept by Edward Lloyd in London. Lloyd
took such an active and successful interest in marine in-
surance that his name has become identified with the
most important marine insurance association in the
world. Lloyds of London is known the world over,
primarily for marine insurance and secondarily for other
forms of insurance. It was the custom among the mer-
chants who met at Lloyds to assume for each other a
portion of the risk of a voyage. Thus, a merchant send-
ing a ship with cargo to the West Indies for purposes
of trade and having at stake some 10,000 pounds in the
whole adventure, would get his fellow merchants, for a
7
8 INSURANCE
premium, to assume a portion of the risk m the event of
the vessel being lost. For a time these amounts assumed
were small — possibly 100 pounds, seldom more — and
each insurer wrote liis name at the bottom of the policy.
From the position of the name on the policy arose the
term "underwriter," which designates the one who as-
sumes or underwrites part of an insurance risk. As
wealth increased, men who had no interest in maritime
enterprises beyond that of insurers were induced to in-
sure marine adventures. In other words, a distinct body
of insurers arose, and, for the payment of a premium,
the merchant was relieved of that part of the burden of
his maritime enterprises.
7. Underwriting, — In the earlier forms of insurance
offices a number of persons associated themselves and
each person was obhged to sign the policy before it was
binding on the offices. Later there arose the practice of
empowering the keeper of the office, together with two
or three other members of the group, to sign or "under-
write" all policies. Signed in this way the policies be-
came binding on the whole group, but only to the extent
of their individual assumption of liability. Later came
the modern practice of having the single agent or attor-
ney sign for the office. Then followed the corporation
to undertake the business.
8. The policy, — The history of marine insurance has
been fraught with the romance which naturally pertains
to all customs of the sea. Modern inventions and appli-
ances have reduced the dangers of the ocean, although
occasional disasters remind us that the ocean's power has
not yet been curbed and that there is as much need as
ever — probably more need than ever — for insurance
against "maritime perils." A unique feature of marine
insurance is that the form of the policy has been estab-
MARINE INSURANCE 9
lished practically since 1770, when it was standardized
by Lloyds. In the following ancient language it states
the things which are insured against :
dTnttcMnff the adventures and perils which the said Sltlantic
f^ntml Sufiurance Companp is contented to bear, and takes upon
itself in this voyage, they are of the seas, men-oi-xvar, fires,
enemies, pirates, rovers, thieves, jettisons, letters of mart and
countermart, reprisals, takings at sea, arrests, restraints and
detainments of all kings, princes or people of what nation, con-
dition or quality soever, barratry of the master and mariners,
and all other perils, losses and misfortunes, that have or shall
come to the hurt, detriment or damage of the said vessel, or any
part thereof. AND in case of any loss or misfortune, it shall
be lawful and necessary to and for the assured,
factors, servants and assigns, to sue, labor and travel for, in and
about the defence, safeguard and recovery of the said vessel, or
any part thereof, without prejudice to this insurance, to the
charges whereof, the said Insurance Company will contribute
according to the rate and quantity of the sum herein insured,
nor shall the acts of the insured or insurers, in recovering, sav-
ing and preserving the property insured, in case of disaster, be
considered a waiver or an acceptance of an abandonment; hav-
ing been paid the consideration for this insurance, by the as-
sured or assigns, at and after the rate of
Within recent years the question of putting the policy
into modern language has been under serious considera-
tion. It is felt, however, that so much commercial prac-
tice is based on court decisions of the policy that to over-
turn this great bulk of law would be to the disadvantage
of maritime enterprises. Indeed, it is said that every
word in the policy has been construed by the courts, and
although its construction frequently differs from that
which the policy seems to set forth, nevertheless, as all
10 INSURANCE
parties to the agreement anderstand the meaning which
the courts have attached to the clauses, it is accepted by
all parties and but little trouble results.
9. Warranties. — Marine insurance always contains
certain conditions precedent to the liability of the under-
writer and incumbent upon the insured. These condi-
tions are known as warranties which, although not ex-
pressed, are of binding force. These are, that the vessel
is seaworthy; that the voyage will be made without
deviation; that the voyage or business of the ship is
legal, and that she has the necessary legal papers. The
violation of any of these warranties would be sufficient
to void the policy.
In marine insurance the terms "general average" and
"particular average" occur frequently. The word "aver-
age" means "damage," its meaning being taken directly
from the French word avarie meaning "damage to ship
or cargo," and not from the word "average" as we com-
monly use it.
10. General average, — General average embraces all
losses which arise when there has been a sacrifice made
for the purpose of the safety of the ship or of the
cargo. It is a most ancient principle of maritime
transactions and in the form of full insurance is brought
over into marine insurance. Previous to the invention
of insurance it was the established practice that when-
ever on a voyage it was necessary to make a sacrifice
of a portion of the cargo of the ship in order to com-
plete the voyage in safety, the loss should be divided
among all interested in the voyage. The interests usu-
ally fell into three groups: (1) the owner of the ves-
sel, (2) the charter party (the one who might have
hired the vessel for the voyage and who was interested
in the freight to be earned), and (3) those who owned
MARINE INSURANCE 11
the cargo. These three interests, commonly known
as the vessel, the freight and the shipper of the
goods, shared in proportion to their respective inter-
ests any loss, such as that of an anchor, a mast or
sails or any sacrifice of cargo for the safety of the voy-
age. A simple illustration will present it more clearly
than any other method. It can be well imagined that a
group of Romans — say ten — may have been journey-
ing across the Mediterranean taking some kind of a
cargo to Rome for sale. This may have been sheep,
and each may have owned ten head. A storm arising, it
becomes evident to all that if any are to be saved some
part of the cargo must be sacrificed. Naturally no one
of the ten desires to throw his sheep overboard, but the
suggestion is made that if one will throw his sheep over-
board the others will share the loss with him; hence ten
of the sheep are thrown over, and on arriving at Rome
each man has for sale nine sheep, one sheep having been
the contribution of each to the loss which was volun-
tarily accepted that they and as much of their cargo as
possible might be saved.
Summing up, then, the principle of general average
is this: Each one interested, and according to his inter-
est, must share the loss made for the benefit of all. The
owner of the vessel would have to contribute as well as
the shippers.
11. Particular average, — Particular average means
an individual loss. It applies only to the person inter-
ested and does not represent a sacrifice, as in the case of
general average. To refer again to the illustration just
used, if the sheep were not voluntarily thrown overboard,
but one of the shippers had been unfortunate enough to
have all his sheep fall overboard, he alone would have
bad to stand the loss. The loss is not for the benefit of
n INSURANCE
anybody. It is his misfortune, and is known as particu-
lar average.
Average existed, as it has been noted, centuries before
insurance was invented. Sometime, somehow and some-
where there was a person bright enough to conceive the
idea of having each person who was interested in a voy-
age contribute a small sum to cover any loss which might
arise from general or particular average. When that
was done, marine insurance was born. If, however,
marine insurance should be blotted out to-morrow, the
loss of particular and general average would at once
come into play, and every person interested in a voyage
would be his own insurer to the extent of his interest in
the voyage as represented by the value of his goods com-
pared with the value of all.
12. Dangers insured against. — The dangers insured
against have been grouped into four classes :
1. Those of the sea.
2. Those concerning the conduct of persons in charge
of the vessel.
3. Those arising from the outside; such as pirates.
4. All other perils, is the somewhat broad language
which apparently lets nothing happen to the vessel,
cargo, or freight that is not covered by the marine
policy.
We must not infer from the last of these groups that
everything, as a matter of fact, is covered by the marine
policy. The so-called ordinary wear and tear which hap-
pens to all things is not covered by the policy. That a
vessel may need repainting, the paint having worn away
with time, is not such a loss as is covered by the policy.
Perhaps the proper interpretation of this last group of
causes would be the uncontrolled disasters which may
happen to the ship.
MARINE INSURANCE 13
13. Losses. — The losses in marine insurance are
divided into four classes:
(a) Total loss.
(b) General average.
(c) Particular average.
(d) Salvage.
Total loss might seem to be capable of a very simple
definition. A moment's thought will show us that many
cases must arise where, while apparently a vessel is lost,
no absolute information exists concerning the fact. The
most complete case, of course, would be where a vessel
was sunk, or destroyed by fire, and due evidence of that
fact was available. It became necessary, however, in
marine insurance to establish a certain time when, if a
vessel was not heard from, she was considered k total
loss. At Lloyd's this is a period of seven years. When
this time has elapsed, from a special part of the room a
bell is tolled and the announcement made that such and
such a ship is a total loss. The insurance is then payable,
and even if, as it has happened in one or two cases, the
vessel may afterwards return, she is legally lost so far
as the insurance transaction is concerned. A vessel may
be captured by an enemy in a time of war and, although
in existence, may be a total loss to the owner.
A total loss may be constructive or actual. A vessel,
for instance, may run ashore, and the cost of getting her
off the rocks and repairing her may be more than her
value. That is a constructive total loss. While the
vessel is in existence in a sense, she is not in existence
from an insurance viewpoint. The rule in such cases
is, if the cost of saving the vessel, added to the cost of
repairs, is greater than the value of the vessel, the
loss is total. The same rule is applied in regard to the
14 INSURANCE
cargo when the cost of saving and forwarding it to its
destination would be greater than its value.
14 Salvage, — Salvage in marine insurance means
the reward permitted by law for services in saving life
and property at sea. It is required that the service must
have been of substantial assistance and have been ren-
dered by non-interested parties. Salvage is divided
among the various interests precisely as a loss would be
apportioned under general average. Thus in these mod-
ern days of course the insurer would have to step for-
ward and pay the final amount.
CHAPTER III
FIRE INSURANCE
15. Fire insurance defined, — Fire insurance is a pro-
vision made by the insured for reimbursement in the
event of a loss occurring by fire. On the part of the in-
surer it is a promise to reimburse the insured for the loss
that may occur. In making this promise, the insurer
will take into consideration everything that may pos-
sibly increase the chance of a fire and everything that
may decrease the chance of a fire, and, basing his cal-
culation on these two sets of factors, will undertake the
contract of indemnity and determine his charges and the
form of contract.
16. Origin, — The beginnings of fire insurance are lost
in antiquity. It is not known who was the first to
promise reimbursement for a loss ; that is, to do this in a
way that corresponds with our modern contract of in-
surance. There was in the early ages doubtless some-
thing approaching modern insurance, but it was not
until 1667 that the business of fire insurance in its mod-
ern commercial aspect was founded. In the preceding
year had occurred the Great Fire of London, the
greatest in history with the possible exception of that
at San Francisco in 1906. Considering the differ-
ence in money values of the two periods the damage
at London probably was equal to that at San Fran-
cisco.
17. Barhon and Povey. — Nicholas Barbon was the
first to open an insurance office in London (after the
Great Fire) , and to him credit should be given for plac-
15
16 INSURANCE
ing fire insurance on a modern commercial basis. An-
other name should be linked with that of Barbon —
Richard Povey; for, while Barbon led the way in the
insurance of buildings, Povey about 1706 introduced
the insurance of goods. These two names should be
linked together in any consideration of the origin of fire
insurance.
IS, An experimental science, — Although two cen-
turies have fixed the principles of fire insurance from a
practical standpoint, the science of fire insurance may
still be regarded as largely experimental. Special con-
ditions existing in every particular case must determine
whether property is insurable and what rates of premium
should be charged. The conditions met by one genera-
tion of underwriters are not likely to be exactly dupli-
cated in a succeeding age. The invention and installa-
tion of fire-detecting and fire-extinguishing apparatus
necessitate constant changes in premium rates. Other
conditions, too, may tend to increase or decrease the fire
hazard. This means that fire underwriters must keep
well abreast of the times.
As in the case of any science, the past of fire insurance
must be studied if the present principles and practices
are to be correctl}'- understood. In this connection it
should be remembered that the principles of fire insur-
ance can more readily be grasped when compared or
contrasted with those of marine insurance. Both forms
are based on the same principle of indemnity for mate-
rial loss. It is interesting to note that neither form
differs essentially from those of a century and a half
ago.
19. Early practices, — Fire insurance at first largely
drew its practices from marine insurance which was
at that time quite well established, its forms, laws, and
FIRE INSURANCE 17
customs being well crystallized. The development of
the business in Great Britain was along normal com-
mercial lines. At first it was conducted by individuals,
later by a group forming an office, and finally by a
corporation. The first corporations to be duly organ-
ized were the London Assurance, and the Royal Ex-
change Assurance, both being granted charters in 1720.
The Sun Insurance Office was the outgrowth of that
founded by Povey in 1706 and is the oldest organiza-
tion engaged in fire insurance.
20. United States, — In the United States, prior to
1735, the business probably was conducted in a small
way by individuals, but in that year at Charleston, S. C,
a mutual company was organized that apparently had
a prosperous existence for some years. This first com-
pany is not well known and only recently has come into
the light. The Philadelphia Contributionship, founded
at Philadelphia in 1752, of which Benjamin Franklin
was a director, is the best known of the early organiza-
tions. Indeed, ftie latter company, which was a mutual,
was for a long time supposed to be the first company
organized in the United States. After the Philadel-
phia organization other companies in the next fifty
years were organized at various points, such as Rich-
mond, Va., Charleston, S. C, Boston, Mass., Norwich,
Conn., New York City, etc.
In New York City no company appears to have
been organized until 1787, although the business was
fairly well established in other parts of the country
long before that time. From 1800 the growth of the
insurance business was very rapid, and generally suffi-
cient to meet the needs of the commercial interests of
the country. The only portion of the world, in fact,
where insurance capital may still be lacking is in the
XI— 2
18 INSURANCE
so-called congested portions of the larger cities where
the danger of a sweeping loss is such as to make capital
extremely careful. Probably not until our cities are
rebuilt with better safeguards will there be sufficient
fire insurance capital employed to meet the needs of
such congested locahties.
21. Statistics, — Before considering the forms of or-
ganization and the details of fire insurance, it is better
to glance at the general statistics of the business, in
order to realize the amounts of the different items.
All statistics quoted are based on the reports of the
Insurance Department of the Stato of New York.
There are some companies in the United States that
do not report to the New York Insurance Department.
These companies, however, are very small in comparison
with the volume of business written, probably 95 per
cent of the entire business done in this country being
reported to the Insurance Department of the State of
New York. The statistics of this department, being
the most complete, are commonly used as a basis for
comparison the world over.
22. Number of companies. — The number of stock
companies in the United States reached a high point
between 1871 and 1880, when 162 were engaged in
the business. The record for the twelve years ending
1913 was as follows:
Year Number of Companies
1902 145
1903 147
1904 144
1905 158
1906 156
1907 169
1908 162
1909 163
1910 175
1911 180
1912 183
1913 185
FIRE INSURANCE 19
The number of companies that have engaged in and
retired from business since 1860 is 1,000, representing
a capital of $150,000,000. As the capital now invested
is about one-half this sum, it will be seen that twice as
much capital has retired from the business as has con-
tinued.
23. CapitaL — The capital invested in this business has
not varied a great deal, possibly not so much as might
be expected, throughout the last fifty years, during
which time the business has been fairly well established
on this continent.
From 1860 to 1870 the United States companies had
an average capital investment of $45,000,000; 1871 to
1880, $51,000,000; 1881 to 1890, $57,000,000; and from
1891 to 1895, $51,000,000. The following is the record
for the twelve years ending 1913:
Year Capital
19.01 $54,000,000
1902 54,000,000
1903 56,000,000
1904 56,000,000
1905 59,000,000
1906 65,000,000
1907 68,000,000
1908 68,000,000
1909 68,000,000
1910 75,000,000
1911 77,000,000
1912 81,000,000
1913 87,000,000
24. Investment of foreign companies. — The capital
investment of foreign companies cannot be considered
except as special deposits may be required. It must be
remembered that a foreign company doing business in
the United States considers such business merely as one
of agency in the same manner that a company in Massa-
chusetts might consider the business done in Albany as
the business of the Albany agency. Hence, the funds
W INSURANCE
which the foreign companies may have on deposit with
the Insurance Departments or in the form of assets in
their United States office do not represent the entire
assets of the company, since the United States branch
may call on the home office if necessary and likewise be
called upon by the home office.
25. Volume of business,— In 1908 the risks written
amounted to $30,232,055,437. Some conception of the
growth of the business may be gained from the state-
ment that between 1860 and 1870 the business done
reached $36,000,000,000, hardly more for those ten
years than that done in the single year of 1908; 1871 to
1880 the business written was $62,000,000,000; 1881 to
1890, $100,000,000,000; 1891 to 1895, $70,000,000,-
000; and from 1902 to 1913, as follows:
Year Volume of business
1902 $21,000,000,000
1903 22,000,000,000
1904 24,000,000,000
1905 25,000,000,000
1906 28,000,000,000
1907 30,000,000,000
1908 30,000,000,000
1909 33,000,000,000
1910 36,000,000,000
1911 39,000,000,000
1912 41,000,000,000
1913 45,000,000,000
26. Premiums. — A conception of the growth in the
business may again be obtained by comparing the re-
ceipts for the single year of 1913 with $291,000,000, the
receipts for the decade following 1860.
Year Premiums received
1903 $190,000,000
1904 206,000,000
1905 216,000,000
1906 238,000,000
1907 252,000,000
1908 247,000,000
1909 262,000,000
FIRE INSURANCE 21
Year Premiums received
1910 $273,000,000
1911 280,000,000
1912 308,000,000
1913 324,000,000
It may be added that in the period of ten years from
1899 to 1908 inclusive the business practically doubled.
27. Losses paid. — This is the one item in the business
of fire insurance that shows the greatest variation.
Losses from 1860 to 1913 are as follows:
Year Losses
1860-1870 $169,000,000
1871-1880 315,000,000
1881-1890 , 488,000,000
1891-1895 366,000,000
1896 64,000,000
1897 60,000,000
1898 71,000,000
1899 85,000,000
1900 88,000,000
1901 93,000,000
1902 94,000,000
1903 92,000,000
1904 127,000,000
1905 103,000,000
1906 230,000,000
1907 117,000,000
1908 135,000,000
1909 126,000,000
1910 136,000,000
* 1911 151,000,000
1912 161,000,000
1913 172,000,000
The sum paid out including the San Francisco losses
of 1906 amounted to $230,000,000, a sum greater by
one- third than the entire loss from 1860 to 1870 and an
amount more than twice as large as that of 1905. It is
well to study these figures and carefully to bear in mind
that the companies may at any moment be called upon
to pay losses similar to those of 1906.
The increase in 1904 (more than that of any other
single year since 1896) was due to the conflagration at
Baltimore, which entailed a net loss of about $39,000,000.
22 INSURANCE
28. Rate of premium, — The rate of premium is the
amount charged for each $100 of indemnity; and so far
as each risk is concerned, there are the widest differences.
A large fireproof office building may be written as
low as five cents per year for each $100, and there are
buildings (for instance sweat shops) which command
a rate of four dollars for each $100 per year. Be-
tween these extremes nearly every rate is possible,
although the average rate is not subject to very large
variation.
In the ten years from 1871 to 1880 inclusive, the aver-
age rate was 94 cents; 1880 to 1890, 98 cents; 1891 to
1895, $1.06, and from 1902 to 1913, as follows:
Year Rate of premium
1902 $1.15
1903 1.18
1904 1.16
1905 1.16
1906 1.14
1907 1.16
1908 1.14
1909 1.12
1910 1.08
1911 1.05
1912 1.05
1913 1.04
It will be seen that since 1903 there has been a slight
tendency downward in the rate of insurance, probably
contrary to the general idea concerning this matter.
The importance, however, of an increase or decrease of
one cent in the average rate of insurance throughout the
country can be appreciated when it is stated that on
insurance of $1,000,000,000, one cent amounts to $100,-
000 of premium, and on $30,000,000,000 an increase or
decrease of one cent in the average rate means the in-
crease or decrease of more than $3,000,000 in the pre-
mium receipts.
FIRE INSURANCE 2S
It may be surprising to know that the rate of to-day
is much less than that of 1904, the year of the Balti-
more fire, when it was 2 cents less than in the year pre-
ceding. When San Francisco was destroyed the rate
was lower than it had been since 1902, the increase after
that date being very slight (a little over 2 cents). The
rate is now still lower than in 1906.
29. Dividends, — Only the data of the United States
companies are available in describing dividends. Fur-
thermore, foreign dividends are affected both by busi-
ness done in this country and by what is done in all coun-
tries. For fifty years fire insurance dividends have
averaged about 11% V^^ ^^^^ ^^ ^^^ capital invested.
From 1860 to 1870 it was 10 per cent; 1871 to 1880, 11
per cent; 1881 to 1890, 10 per cent; 1891 to 1895, 10
per cent. Since 1896 the rates have been:
Year ♦ Percentage
1896 11.24
1897 11.33
1898 11.64
1899 11.65
1900 11.18
1901 11.63
1902 11.96
1903 12.69
1904 13.37
1905 13.01
1906 10.97
1907 11.07
1908 11.98
1909 13.00
1910 16.00
1911 15.00
1912 16.03
1913 19.83
The greatest variation in regard to dividends exists
among the individual companies, a meager 4 per cent
in some cases, rising to ten times that amount in others.
The decided gain in 1910 and 1911 represents final
recovery from the Baltimore and San Francisco losses.
24 INSURANCE
For the risk entailed, that is, the possibility of failure
at almost any moment owing to a sweeping eonflagra-
tion, the dividends have been on the average rather mod-
erate, especially when it is borne in mind that the divi-
dends were declared on the capital and that the capital
at the present time is about one-seventh of the total
assets of the companies.
30. Ecvpenses, — When the expenses in fire insurance
are spoken of, neither amounts paid for losses nor for
dividends are meant, but only the sums of money the
company is called upon to pay in addition to those
items. The expenses, therefore, include commissions
paid to the agent, salaries, printing, assessments for in-
spection and rating organizations, and every other item
incidental to commercial business. This expense is
properly divisible into two parts: commissions, and all
others.
Practically all agents work on a commission basis, a
few being employed on other conditions. The commis-
sion is the one item of expense showing a steady in-
crease, as noted below:
Year Commission Percentage
1860-1870 11.32
1871-1880 14.89
1881-1890 17.95
1891-1895 18.77
1896-1900 15.64
1901 20.76
1902 20.28
1903 21.31
1904 21.29
1905 21.46
1906 21.45
1907 21.22
1908 21.89
1909 21.50
1910 21.61
1911 21.82
1912 21.90
1913 22.32
FIRE INSURANCE 25
This table shows that the commission has practically
doubled since 1860 to 1870, running nearly 22 per cent
at the present time as against 11 per cent for that dec-
ade. It has not fallen below 21 per cent since 1903.
Other expenses have not increased, but on the con-
trary have decreased. The expenses and commissions
combined from 1860 to 1870 were 31 per cent; 1871 to
1880, 33 per cent; 1881 to 1890, 35 per cent; 1891 to
1895, 35 per cent; and from 1896, as follows:
Year Expense Percentage
1896 36.14
1897 37.19
1898 39.35
1899 39.31
1900 38.42
1901 37.45
1902 35.73
1903 36.89
1904 36.93
1905 36.92
1906 38.85
1907 38.16
1908 39.24
1909 38.50
1910 39.16
1911 39.75
1912 39.14
1913 39.66
Deducting the commission from 1860 to 1870, which
was 11 per cent, we find the expenses were 20 per cent.
Deducting the commission from the commission and
expenses combined, the expenses for 1903, 1904, and
1905, were 15 per cent, and for 1906, 1907, and 1908,
17 per cent. The expenses other than commissions have
shown a decrease with the increase in business, the true
economic result to be expected.
CHAPTER IV.
THE ORGANIZATION OF FIRE INSURANCE COMPANIES
31. Methods of organization, — There are four meth-
ods of organization for insuring property from loss by
fire. An individual may undertake the risk ; it may
be undertaken by a group of individuals, commonly
called Lloyds; it may be undertaken by a mutual com-
pany; or it may be undertaken by a stock company.
It is very seldom in the United States to-day that any
individual assumes the responsibility alone. There are,
perhaps, individuals who are members of Lloyds that
undertake such risks, but these are exceptional cases.
Individual underwriting has practically passed away.
32. Lloyds. — The general name "Lloyds" is applied
to a London organization that originated in the seven-
teenth century at the Coffee-House kept by Lloyd.
This particular coffee-house was an attraction for men
principally interested in shipping and foreign trade.
The insuring of one another's property became as
much a part of their business as their individual deal-
ings in merchandise. Naturally when a group of indi-
viduals arose to undertake the specific business of in-
suring property they would resort to the place where
customers were to be found. This place was Lloyds'
Coffee-House. The coffee-house has long since passed
away, but the name Lloyds has become a part of the
common language of insurance, and out of it has grown
the famous organization known as Lloyds of London.
This organization does not insure property itself any
26
ORGANIZATION 27
more than the Stock Exchange, as an exchange, buys
or s^lls stocks. To become a member requires certain
quahfications ; such as a deposit of a certain sum of
money. As the number of members has now become
quite large a set of rules has grown up for their guid-
ance almost as minute as the regulations of any busi-
ness exchange.
Lloyds of London does no insurance business, but it
furnishes a room for meetings or a general place of
business where the members may conduct their affairs.
In addition to the headquarters, it has the most com-
plete system in existence for the survey of vessels, with
agents in every port to flash the news of their arrival
and departure.
Out of hundreds of members some underwrite as in-
dividuals, others as groups, and still others form a dis-
tinct group with one acting as attorney or agent having
the power to sign for all.
It is possible at Lloyds to insure almost anything,
though marine business is dealt in to a larger extent
than any other form of insurance. There are, how-
ever, certain groups which continuously underwrite
risks against fire in the United States and other parts
of the world. They may underwrite surplus business
which cannot be taken care of through regular chan-
nels, and they are at times active competitors with the
regular companies in the different countries.
In the United States the tendency is to regulate such
methods of underwriting, but even when regulated the
underwriting is morc or less by an individual, or group
of individuals. Each individual assumes a certain part
of the liability, but in the United States individual sig-
natures are not taken, the group acting through an at-
torney.
28 INSURANCE
33. Mutuals, — The mutual form of organization is
an agreement on the part of certain individuals, whether
few or many, to reimburse any member of the group
in case of loss by fire, it being understood that the sum
to make up this loss is to be figured on a pro rata basis,
each individual bearing the part he expects to receive.
The mutual form of insurance is naturally the oldest
form, since at first insurance was a part of the mer-
chant's business and he assumed a portion of the risk
of his fellow merchants and they assumed a portion of
his whenever he sent a vessel to sea. The mutual form
of insurance still exists and in two fields is quite suc-
cessful. First, local mutual companies; and second,
the so-called New England mutuals, which deal princi-
pally with large factories.
34. Stock companies, — ^Approximately 95 per cent
of fire insurance is done by stock companies. As
each country and state has its own laws for corpora-
tions, it would be almost impossible to give the law for
all of them; but the requirements of New York, which
has the largest number of corporations, may be cited
as tjrpical. These may be briefly stated as follows:
Thirteen or more persons may become a corporation
for the purpose of insuring dwelling-houses, stores, and
all other kinds of buildings, household furniture and
other property against loss or damage by fire, light-
ning, wind storms, and tornadoes. They may be in-
corporated for the purpose of insurance or re-insurance.
To do this they must file in the office of the Super-
intendent of Insurance a declaration of their intention
to form a corporation for the purpose of transacting
such business, which declaration shall comprise a copy
of the charter setting forth the name of the corpora-
tion, the place of location of its office, the manner in
ORGANIZATION 29
which the corporate powers are to be exercised, and
its directors elected. A majority of the directors must
be resident citizens of the state. In the case of a stock
corporation the director must be the holder in his own
right of at least $500 worth of the stock of the cor-
poration at its par value. The method of filling a
vacancy in the office of director must be set forth, the
beginning and end of the company's financial year, and
the amount of capital to be employed in its business.
This declaration must not be filed until it has been
published at least two weeks in a public newspaper in
the county where the office is to be located.
The business of such corporation is strictly limited
to fire insurance, and it is to be known as a fire in-
surance corporation. It may not deal in trade, or in
the buying and selling of goods, except such as it may
assume in the settlement of losses.
Upon filing the notice as previously set forth the
subscription books may be opened and the same kept
open until the full amount specified in the charter is
subscribed.
The surplus from which dividends may be declared
is that portion of the assets over and above the capital
stock and the unearned premium and all other manner
of indebtedness which the corporation may owe.
The directors, until the required amount of capital
has been entirely subscribed, are responsible for the
funds of the corporation.
Such in Brief are the main steps to be taken in the
formation of a fire insurance corporation.
35. Deposit requirement — All states and a great
many foreign countries require a deposit before per-
mitting an insurance corporation to isssue policies. In
the State of New York there must be deposited with
30 INSURANCE
the Superintendent of Insurance the sum of $200,000,
or stocks, bonds, or acceptable securities representing
that amount, before insurance business can be trans-
acted by a corporation chartered by the state.
It does not follow that each state requires a deposit.
The fact that the deposit has been made in one state
is frequently accepted by other states as equal to a
deposit in their own state. It is, in fact, an exception
for a state to require from an outside corporation a
specific amount if the state in which that corporation
is chartered requires a deposit. Nearly all states re-
quire at the present time a minimum deposit of
$200,000.
36. How stock is usually sold, — Inasmuch as $200,-
000 is usually required as a deposit, and of course as
only the income thereof is available to the company,
it can readily be seen that a company could hardly start
in business with the minimum capital only. It is
customary to place the stock of the corporation at a
premium, possibly at $125 for each par value of $100,
the. $25 above par furnishing the working capital to
pay the expenses of the corporation and the means of
beginning business. Of course, if the company's
original capital is larger than $200,000 this may not
be necessary. At the same time, as losses may occur
very early and the company may permit its capital to
be impaired to a slight extent only, these few losses
may serve to ruin it and to cause it to cease writing in-
surance until the impairment is made up.
The general opinion now is that a company to be
successful should, when organized, have its stock sold
at a premium, this premium to furnish the working
funds.
37. Organization,— The organization of a stock fi^-e
ORGANIZATION 31
insurance company is similar to that of any large cor-
porate body. The chief officer is the president, though
the representative chief officer of the foreign companies
in this country is usually termed a manager. In ad-
dition to the president there are vice-presidents, of
which there may be more than one, depending upon the
amount of business done. Next comes the secretary.
In many cases one officer is sufficient to discharge the
duties of this office, but there may be one or more
assistant secretaries. If an insurance company con-
fines all its business to a single locality it would have
no necessity for other offices than its head office, but
the fundamental principle on which an insurance com-
pany is founded, namely, that its liabilities must be
widely spread, kads to securing business from as wide
an area as possible. This makes what might seem an
unsettled business a settled business, since disasters are
not likely to occur in more than one place within a series
of years.
In the branching out of the business the company
may undertake the entire management from the home
office or may divide the country into districts, with a
responsible head in charge of each district. Both
methods have their advocates. The majority of com-
panies follow the district method, having what are
termed departments. Chicago, for instance, is the
center for the Western department; San Francisco for
the Pacific; Atlanta for the Southern; and New York
for the Eastern. Hartford, a very strong insurance
center, is the home office for several American com-
panies and the head office of some foreign companies.
The term "general agency" is usually applied to this
division or department.
Owing to its nature the insurance business must keep
32 INSURANCE
as close a touch as possible not only with the insured
but with its representative. With a general agent near
the local agent a greater degree of confidence will be
inspired in the local agent, since he feels that the dif-
ficult problems will be better understood by a general
agent located near him than by one located at the home
office in some distant state.
38. Special agent. — The special agent in the list of
oflScers comes next to the executive ofificers of an in-
surance company. He is the connecting link between
the head office and the local agent, or between the gen-
eral agent and the local agent. He is the commercial
drummer, so to speak, of the business. He supervises
the local agencies, settles the losses — at least all im-
portant ones — is in touch with the general underwrit-
ing conditions in his territory, and is more or less familiar
with the risks involved. Formerly he did a good deal
of the rating, if not individually at least as member of
a committee of other special agents; but as rating has
now become practically a branch of the business by
itself, the special agent is relieved from that duty. In
regard to loss settlements also, owing to the formation
of general adjustment bureaus, the special agent has
been partly relieved of that work, though not as much
as in the case of rate-making. He still retains the vital
connection between the company and the local agent
within his territory; is best informed as to the business
being done; the share his company is getting and the
class of risk to be written; and is thoroughly familiar
with the local conditions in any village, town, or city in
his jurisdiction.
39. Adjuster, — After the executive oflficers the ad-
juster holds probably the most important position con-
nected with an insurance company. Fifty per cent or
ORGANIZATION 33
more of the company's income is paid out in the form
of losses, so it can readily be seen that an inefficient
director of the loss department would cause a drain
upon the resources sufficient to make a difference be-
tween the profit and no profit, if not to bankrupt the
corporation.
40. Inspectors, — Not ranking as high as the special
agent is the inspector. Owing to the growth of man-
ufacturing industries and the necessity for accurate in-
formation about the various manufacturing risks, gen-
eral inspectors are required. It must be understood
that notwithstanding the information the company may
obtain through inspection bureaus, etc., there is still the
necessity of an inspection by a company employee, if
not in all at least in doubtful cases, concerning the risk.
41. Other employes, — The other employes of an in-
surance company are such as may be found in any
other corporation. In the large city department there
is a local secretary in charge of the business for that
city. Under him are the countermen, who meet the
people desiring insurance, and who probably take care
of a great majority of the cases, the more difficult ones
going to higher officials. Then come the clerks neces-
sary in any organization to perform clerical duties.
42. Work of local agent, — The local agent is an ap-
pointee of the company having the privilege of writing
risks for the company within a certain territory, hence
the name "local," but usually with a restriction as to
the kind of business to be written. A company seldom
gives to a local agent (unless he is a person of some
years' experience and one of sound judgment) the
privilege of writing all kinds of business without con-
sulting the company. The local agent is generally paid
by commission; hence it is to his interest to secure as
XI— 3
34 INSURANCE
much business as possible, since his remuneration de-
pends upon his exertions.
It is very rare that the local agent is the agent for
a single company; he may represent many others. As
representative of an insurance company a large re-
sponsibility rests upon him, not only to see that his
company gets its proper share of the business but that
the business secured is desirable and profitable to the
company.
Volumes have been written concerning the local agent
and more will probably be written. He is held by some
to be the most important employee of an insurance com-
pany. It is sufficient, however, to say that as the great-
est part of the business comes through the local agent
his importance should not be underrated.
The exact number of local agents in the United
States is not known, but there are single companies
having eight thousand or more. It can thus be seen
that while there may be several companies represented
by these eight thousand agents, their number through-
out the States is very large.
In the larger centers the local agent is not usually
engaged in any other business but devotes his time to
the insurance agency. Outside the large cities his
insurance business is usually united with real estate,
law, etc. The large number of diiferent companies'
agents in a small community results in the business be-
ing divided; it is therefore generally profitable only as
a side issue.
43. Responsibilities of local agent. — The responsibil-
ities of the local agent can be readily understood when
it is understood that the state courts have generally in-
terpreted the knowledge of the agent as being the
ORGANIZATION 35
knowledge of the company, although certain limitations
are placed by the company on the agent's authority.
The United States courts have not placed an inter-
pretation so broad upon the agent's powers. The agent
should bear in mind that whatever he does will gen-
erally be interpreted as though the company did it,
hence the necessity for care in the discharge of his
duties.
The local agent in his field may well consider himself
an underwriter having complete jurisdiction. It is
quite possible that he does consider himself in this light,
and to such view is due some of his errors. It may seem
reasonable that he should have unlimited sway within
his own territory, but it should be remembered that no
man, or firm, pays for his or its own insurance in the
sense that he or it contributes a sum of money sufficient
to pay that insurance in event of loss : each risk merely
contributes a certain proportionate sum with hundreds
of others and these various contributions, being brought
together into the treasury of the company, serve as a
fund to reimburse the few individuals who may meet
with a loss. It is well to remember that the average
rate of insurance is about $1, or 1 per cent on the prop-
erty insured. Taking 40 per cent of this for expenses
(which is about the average at the present time) 60
per cent is left to pay losses and maintain reserves. It
is evident that before any single risk could pay in a
sufficient amount to be reimbursed in event of a large
loss this amount must be paid in through a long series
of years. There are some cases, probably, such as firms
in business for a long time, where the premiums paid
equal the return in event of fire. These cases are ex-
tremely rare and are counterbalanced by the fact that
36 INSURANCE
from the minute that a firm takes out and until it dis-
continues carrying insurance, it has a claim, when a fire
occurs, upon this general fund for reimbursement.
To the local agent a rate may seem all right, or a
form appear correct, on a certain plant or risk, but he
must remember that the plant or risk is only one of
many contributing to pay the losses and that an undue
advantage to one is an injustice to all. If this is borne
in mind, it will suffice to make the local agent under-
stand why a risk that he has written is not accepted by
the company, or a form that he has passed comes back
for correction.
44. Underwriting, — In many features and in a large
portion of its work the fire insurance company does not
differ from any other corporation. It is engaged in
a distinctive work ; that of furnishing indemnity against
fire. It issues its policies, which provide that if the
party holding such policy suffers from a loss by fire
he will be indemnified up to a sum not exceeding that
stated in the policy, the amount of the policy being the
limit of the indemnity obtainable from the company.
It will readily be seen that in the general work of the
corporation its detailed clerical work is perhaps not much
more difficult than that of any other corporation ; neither
is the management of its finances more difficult than
that of the finances of another corporation. Every
moneyed corporation must of necessity have more or
less of its income in a transitory state, either uncollected
from the debtors or in the hands of agents or in process
of transmission. The character of these financial mat-
ters, and also the safeguarding of the funds, do not
call for higher abihty than that required for similar
service by any other corporation. Because of this fact
it frequently follows that the underwriter of the com-
ORGANIZATION 37
pany may not be the chief executive, or rather may not
be the one in charge of the financial matters. The un-
derwriter may be the secretary or the vice-president; in
most cases he is the president. Whatever his office, there
is always some one official in charge of this branch of
the business who is held responsible for the acceptance
or rejection of risks.
The underwriter does not see the papers in every
case. As a matter of fact, he sees them in few instances ;
but he does, however, determine the class of risk to be
accepted, the amounts to be accepted thereon, the
amounts to be accepted in different sections of a city
or state and similar important matters. It should be
remembered by the student that underwriting is what
the company is engaged in. Whatever else it does is
incidental. It hopes to make a profit by furnishing
indemnity, and to furnish indemnity certain risks must
be assumed. Without the assumption of these risks
there would be no income and there would be no profit.
Because it is his function to assume those risks which
will be profitable and reject others, the managing
underwriter is the most important member of the com-
pany.
CHAPTER V.
OFFER, ACCEPTANCE, AND INSPECTION OF RISKS
45. Offer and acceptance of risk, — In the beginning
of fire insurance it was the practice to have all applica-
tions submitted in writing over the signature of the
person desiring insurance. How complete a statement
concerning the property to be insured was required in
the early days we do not know, but the practice soon
developed of requiring on any business property a some-
what complete statement or survey, as it was called, of
the proposed risk. Naturally the more hazardous the
risk the more complete the statement required. A
building in whicE a person lived, or which was occupied
merely for dwelling purposes, would have fewer points
to be considered than a factory devoted to manufactur-
ing, or a store or warehouse used for buying or selling
goods.
In all cases the location of the property and its area
would be required, with a description more or less com-
plete of the kind of building — ^that is, whether wood,
brick or stone. Careful inquiries were made about the
stove and the stove pipes, and the method of lighting
the premises. In the case of a manufacturing plant
a minute description of the business was also required,
including the number of hands employed, and the ex-
tent to which the work was carried on, since some fac-
tories might only do a portion of the work of making
woolen cloth while others might carry through all the
processes from raw material to finished cloth. There
S8
J
ACCEPTANCE OF RISKS 39
would also be a report on any special apparatus for
fire-extinguishing purposes, the amount of insurance
desired, and the number of machines on the property.
These surveys, if approved by the company, were filed
with the other papers pertaining to the risk.
This method of application has practically passed
away. It is very doubtful whether in the United States
it is now used to any great extent. This is due to the
fact that the companies have developed inspection or
survey bureaus to cover the entire country. If the
bureau should not have an inspection covering a special
risk the company may send its own inspector. In fact,
a person at present seeking insurance simply makes a
direct request, and unless asked would not be required
to fill any special form, the company making its own
inspection and investigation.
As already stated, formerly the application had to
be in writing. This is not necessary now, most of the
business being done on verbal application and accept-
ance. The method of written application was necessary
in the early days as the companies were not so well sup-
plied with knowledge of the properties offered for in-
surance, and with maps, surveys, etc., concerning every
important risk in the country. Thus if a person some
years ago wrote from a distant point for insurance,
and the company possessed no knowledge of the prop-
erty, it would hesitate to accept insurance thereon with-
out first having made an inspection to be sure the risk
was desirable. It is sufficient to state that the accept-
ance need not be in writing.
46. Importance of inspections. — ^An accepted prin-
ciple of the commercial world is expressed by the Latin
phrase ''Caveat emptor'' — Let the buyer beware. The
insurance company stands in the position of a buyer.
40 INSURANCE
Whenever it is oiFered a certain risk it buys the op-
portunity of insuring that risk, receiving a certain sum
of money. It is something which men do not buy un-
less needed; hence the company being the buyer must
have the opportunity of inspection before purchasing.
And it does make a minute inspection of the property,
not from the owners' point of view but from its own.
A retail dry-goods store for the purposes of business
may have an admirable location in town or city, but
for the purposes of insurance it may be in the poorest.
Its advantages in the first instance may be disadvan-
tages in the second. The exact condition of the prop-
erty is necessary to a just estimate of the undertaking;
therefore the inspection. The inspector is probably
as old as the fire insurance business. Two hundred
years ago the Sun Insurance Office appointed a car-
penter and a mason to inspect properties.
The inspections were more or less simple affairs in
those early days as compared with those of the present
time, the development of inspection arising in the last
fifty years, or since the Civil War. It was the result
of the expansion of business following the war and the
tendency to increase the size of properties. At that time
the average business building was about 100 by 25 feet
and four or five stories high. Few merchants wanted
more than $50,000 of insurance, while $100,000 was a
large amount. At the present day single properties
carry millions, there being one block carrying six mil-
lions in New York City. It can thus be seen that the
problems to be solved to-day are wholly different from
those of fifty years ago.
The NTew England mutual companies were probably
the first to require detailed information regarding pro-
ACCEPTANCE OF RISKS 41
posed risks on which to base their writings. In time the
system spread to stock companies.
47. Methods of inspection, — To attain success in in-
specting a man must be of alert perception and have
accurate judgment. Tact he must possess or acquire.
He must note all that increases the possibility of fires
starting, entering, or spreading on the premises, and
all that tends to prevent such starting, entering, or
spreading. OBefore visiting the premises he should
gather information about its occupancy and the man-
ufacturing carried on, and then inform himself as to
whether the materials and processes of manufacture in-
volve any special hazard of fire. A map of the build-
ing would greatly simplify his task. In default of the
owner's map he should make one himself. This is the
first step in inspection. To do this, he will need a two-
foot rule, a tape measure or scale rule, and a supply of
co-ordinate paper, unless he uses the scale rule, with
which plain paper is preferable. First, he should de-
termine upon the longest, simplest line of the building
or group of buildings as a base line from which to make
all subsequent calculations. It is then plotted on co-
ordinate paper by allowing each section to represent a
certain number of feet, or with a scale rule on plain
paper by allowing each sub-division of the inch on the
scale rule to represent a definite distance. Then the
angle made by the walls at each end of it are to be
plotted. In most cases this is a right angle, but to be
certain the inspector should take two points; the first
one four feet from the corner in one wall and the second
three feet from the corner in the other. If the line
connecting these points is five feet long the inclosed
angle is a right angle. Acute or obtuse angles, how-
42 INSURANCE
ever, should be determined by triangulation. If the
wall to be drawn goes oiF at an obtuse angle from the
wall he has already drawn, he should make or drive a
stake at some point on this second wall. This point
may be call A. He should then return to the corner
and walk out from the building in a straight continua-
tion line from the wall he^has plotted. He should con-
tinue pacing until he is abreast of the point A. By
measuring the distance he has walked he can plot this
second point B. If at B he makes an accurate right-
angled turn toward the building and continues he
will come directly to the point A. By measuring
this last distance he can locate the point A on his map.
A line drawn from the end of the wall already plotted,
passing through A, will be the desired line representing
the second wall. An acute angle can be ascertained by
taking a point at a convenient distance from the corner
on the wall already drawn, starting at right angles to this
wall toward the wall to be drawn. Consider the point
at which this wall is reached as P. By measuring and
plotting the hne walked the point P of the second w^all
can be determined, and a line from this corner through
this point P will represent the direction of the wall de-
sired. The diameter of circular tanks, chimneys, etc.
can be obtained by measuring the base circumference and
dividing by 3.1416. If the inspector carefully deter-
mines one Hne or angle at a time he will have no diffi-
culty. Doors, windows, chimneys, etc. he can represent
by arbitrary symbols. Having completed his map he
checks off the information he gathers during his in-
spection.
48. General information about risk, — Starting with
outside details he should first examine surrounding build-
ings and industries to determine the risk from exposure.
ACCEPTANCE OF RISKS 43
Next come the features of the building itself; whether
of frame, mill, brick, or fireproof construction. Does
it communicate with adjacent buildings, and are there
proper doors and cut-offs to protect these communica-
tions? Is the roof protected by proper parapet and
covered with fireproof materials? Have skylights, win-
dows and doors, the proper screens and shutters to hinder
the breaking and letting in of flying embers in case
of near-by fires? Satisfactory information having been
gained on these points the inspector should then examine
the inside and make note of ( 1 ) materials of walls, floors,
ceilings, supports, etc.; (2) all unprotected metal or
light masonery which would warp or fall in case of fire
and pull down other parts; (3) all stair, elevator or
dumbwaiter shafts, belting, chutes or any other floor or
partition opening which would act as a flue in case of fire,
noting the provision for cutting off such openings; (4)
all concealed or inaccessible places; (5) condition of
building, whether walls or ceilings are cracked, allowing
fire to enter. These in general are the points to be inves-
tigated, although any building may present special fea-
tures.
49. Occupancy, — Then comes the occupancy of the
building, and here the inspector needs to go carefully
and not to be too credulous. He must not rely upon
the information furnished by proprietor or tenant who
wishes to present as safe a risk as possible, but must
investigate for himself. He should first find the names
of the tenants and what part of the building each oc-
cupies and for what purpose. If manufacturing is car-
ried on, the number of employees at dull and at pros-
perous seasons, and the number of these engaged in
hazardous processes must be ascertained. If parts of
the building contain stock he must find out whether
44 INSURANCE
it is in storage or for wholesale or retail trade, also
how this stock is arranged, whether on open counters,
shelves, tables, hooks, or skids six inches from the
floor, or packed in closed boxes or fireproof vaults.
50. Protection of machinery, -^Where manufactur-
ing is done it is necessary to know how many machines
are used and whether they are operated by mechanical
or manual power. It is important to report whether drip
pans are used under these machines and whether the floor
needs a metal covering to protect from oil soaking;
whether or not woodwork and dust machines have blow-
ers, and whether individual motors are used for power.
The inspector must ascertain whether any heat,
flame or fire other than for power is used for manufac-
turing purposes, and the number and purpose of these
appliances, what fuel they use, how they are set and
how the surrounding woodwork is protected. In case of
enclosures for baking, drying or steaming — such as
caul-boxes, drying-rooms or japanning ovens — the in-
spector must find their number, size, material, and
construction; particularly smoke pipes, ventilators, and
steam pipes, noticing if they are safely arranged or if
heated pipes come in contact with wood or other light
inflammable materials.
51. Dangerous substances, — Raw stock and mate-
rials used in the process of manufacturing are exceed-
ing liable to include highly volatile and explosive
liquids and substances. Here especially the inspector
must be sure to cover all the ground and to see all that
is going on in spite of the assurances of the tenant that
all is safe and needs no investigation. A list of the
dangerous substances most often found is of great value.
Chief among these are : Benzine, gasoline, naphtha, col-
lodion, rubber cement, paints, oils, varnishes, alcohol,
ACCEPTANCE OF RISKS 45
lacquers, thinners, and celluloids. All loose packing
materials, such as excelsior, hay, straw, and cut paper,
are a source of danger. Spontaneous combustion often
occurs from bituminous coal and where wet lime comes
into contact with wood. When any one of these danger-
ous substances is found, especial care should be taken to
report accurately the supply and how kept and if in
safety cans or bins. These receptacles should be exam-
ined for defects; nearby gas jets or flames should also be
noted.
52. Heating, lighting, and power. — Is the building
heated by steam, furnace, or stove? If by steam the
inspector should describe the size in H. P., the construc-
tion and location of the boiler, and test the whole system
for unsafe features, such as heated pipes coming into
contact with unprotected inflammable materials, etc.
If a furnace is used he should describe its location, size,
and any dangerous features. Where stoves of any kind
are used the inspector must report whether the surround-
ing woodwork, especially the floors, is properly pro-
tected, and what the stovepipe enters, whether wood,
glass, or lath and plaster partition. If gas is used it
is important to know how it is supplied, whether through
rubber tubes or not, and how the tube is attached and
protected.
Next the lighting is examined. If protected gas jets
are less than eighteen inches, or unprotected ones less
than thirty-six inches, beneath unprotected woodwork
or lath and plaster they should be considered unsafe.
Bracketed lamps and gas jets must not swing against
unprotected, combustible walls. The lights in the win-
dows should be protected by globes. Stables need safety
lanterns, and lights for work tables should be enclosed in
cages of suitable construction. If electricity is used the
46 INSURANCE
method of installation should be reported and the sys-
tem examined for defects that may cause short circuit-
ing and fire.
Now the inspector comes to the power. If it is man-
ual, pedal or animal, it is necessary simply to state it in
his report. If it is mechanical it must be more minutely
described. Its construction, location, size by H. P.,
setting, whether it is open, enclosed or cut off are all
important details. In addition, if gas or electricity is
used, the materials of their surroundings with their pro-
tection must also be described.
53. Facilities for extinguishing fire, — After the in-
spector has carefully examined for defects and unsafe
features of the power plant he should observe the means
provided to check a probable fire in its outbreak, and
the available aid for fighting it. There is given in Chap-
ter VI a list of the fire checking and fighting apparatus
in common use, and also the standard requirements.
These requirements furnish a guide for this part of
the inspection, and any deviation or defect or misman-
agement which might render any apparatus unfit for
instant use should be reported for correction. The wa-
ter supply must be ascertained in detail. If it comes
from the city main the available pressure must be de-
termined; if from a private supply the pump and tank
capacity must be disclosed as well as the pumps' supply.
Should it come from a creek the inspector must learn the
depth of the water in the dry season ; whether the suction
is in a crib sunk in the bed of the creek; what arrange-
ments are made to prevent sand and gravel filling the
crib and how often it is cleaned out. Besides these facts
he must not neglect to find out the distance to the nearest
fire engine house and alarm box, and whether the service
is volunteer or paid and what equipment it has.
ACCEPTANCE OF RISKS 47
54. Possible sources of fire, — Throughout his inspec-
tion the inspector should be alert to notice any faults
of management or defects in buildings, machinery or
apparatus which would increase the probability of fire.
This contingency largely results from carelessness and
untidiness ; such as broken plaster and windows, holes in
floors, walls, or ceihngs, uncovered stove holes, oil
sprinkling of floors, sawdust in cuspidors, ashes in
wooden boxes or barrels, gatherings of rubbish or waste,
whether inside on floor or in wooden boxes or barrels or
outside in yard, cellar, alley, vaults, or under sidewalk
gratings ; any floor opening or closet used for storage of
old clothes, oil-soaked rags, oil lamps, or any other dan-
gerous articles; all cotton waste and material used for
wiping and polishing which result in absorption of
hazardous chemicals if not kept in self-closing waste
cans ; crowded stock that leave aisles less than three feet
wide and not leading to windows; piling stock to ceil-
ing and obstructing windows, thus preventing entrance
of firemen.
This enumeration of the causes of fire could be con-
tinued indefinitely and yet not cover all points of danger
of this class. The inspector's ability is shown not only by
accuracy in obtaining information upon definite points
but by readiness in discovering the individual or unusual
point of danger. To indicate how widely these causes
of fire may difl*er the following are given: Friction
from a chafing belt, or from a shaft not running true,
may strike fire to the oil in the bearing, which would
spread to the nearby woodwork; an open fuse may be
too near combustible material; a rubber tube on a gas
heater may break; small scraps of oilcloth, harmless
when scattered over the floor, become dangerous when
collected in quantities; small heaps of iron scraps or
48 INSURANCE
shavings, more or less oily, on the floor of a machine
shop are likely to generate heat when they become rusty.
55, Qualifications of inspector. — As indicated by the
foregoing an inspector's work requires that he be in-
formed on a great variety of subjects. Some knowl-
edge of draughting, mechanics, electricity, and chemistry
is indispensable. To obtain all the information nec-
essary a tactful treatment of the tenant or proprietor
may be required. Minute questionings naturally arouse
the suspicions of a manufacturer who has secret pro-
cesses in his works. Only tactful questionings supple-
mented by keen observation should be depended upon to
determine the moral hazard. If a plant is extending its
operations and increasing the number of its employees
the chances of its being burned for its insurance are at
a minimum. If, however, poor transportation facilities
make raw stock more expensive there than to a more for-
tunately situated competitor or if building or machinery
shows evidences of neglect the inference is that the plant
is unprofitable to its owners. From such observations,
together with information gained from the answers to
seemingly casual questioning, such as "Business good?"
the inspector should draw his conclusions regarding the
moral hazard.
From the observations made the inspector is often
asked to recommend improvements for a risk. A point
to be observed in making recommendations is that the
additional protection afforded by carrying out his sug-
gestions should be sufficient compensation for the ex-
pense.
Though fire insurance engineering is a comparatively
new line of work an inspector should never forget its
importance. Every point of danger he can discover
and have remedied may mean a serious fire averted;
ACCEPTANCE OF RISKS 49
any point overlooked or neglected may cause, beside the
loss of thousands of dollars to his employers, the more
serious loss of life, property, and employment. His
work well done is of value not alone to the insurance
companies and the assured but to the whole community ;
it has been called "active philanthropy on a business
basis."
56, Classes of buildings. — From the foregoing gen-
eral considerations of the inspector's duties it is well to
consider the subject in detail. Buildings may be divided
into four classes:
1. Frame building.
2. ' Building of ordinary construction.
3. Slow burning, or building of mill construction.
4. Building of fireproof construction.
57. Frame building, — There are two distinct methods
of framing a building. The type in general use in the
larger part of this country a generation ago is known
as the braced construction and is a more expensive and
difficult style than the balloon construction which has
gained in popularity, the latter having proved itself well
adapted to withstand wind pressure and tornadoes, as
well as being a simpler and quicker method of fram-
ing.
In braced construction the beams are fitted together
with mortises and tenons and held by wooden pins, while
all angles are braced by cross pieces framed in by mor-
tises and tenons. In building a house the sills are first
laid on the foundation walls, then the corner posts, which
are to extend to the plate, are placed firmly in their
mortises and securely spiked. They are held rigid by
braces fitted into the mortises cut in both sills and corner
posts. Next the horizontal timbers or girts which tie
the frame and support the floors are framed into the
XI-4
50 INSURANCE
corner posts. The two of these, running parallel to the
floor beams, are on a level with them, the other two, run-
ning at right angles to these first girts, are dropped a lit-
tle to support the ends of the floor beams notched down
to them. The four angles made at each corner by the
corner posts and girts are strengthened by braces. Af-
ter the floor supports are put in the plate is added, the
angles of which are halved together and mortised en-
tirely through in order to fit over the long tenons left
at the tops of the posts; the angles between the posts
and plate are left braced. The frame is now ready to
receive the studs, which are mortised into sills and
girts so that each floor has a separate set.
When balloon construction is used in framing, the
sills are put in place on the foundation, and then the
studs of the outside walls as well as the corner posts,
all of which are to extend the entire length from the
sills to the plate, are erected and securely nailed. These
are now temporarily braced by stay lathes — pieces of
wood nailed diagonally across the studding. All these
uprights are next measured and cut off* at the proper
height to receive the plate, which is made of two thick-
nesses of 2'' X 4'' or 2'' x 6'' timber, the first laid directly
on top of the studs and nailed to each one, and the second
timber nailed to the first, but breaking joints with it
and overlapping at the corners. The studs are now
marked with two lines four inches apart at the proper
height for placing the ledger-board which supports the
beams of the floors above the first. The studs are next
notched between these lines, and a board an inch thick
and four inches wide is fitted into the notches and
finally nailed in place. This ledger-board, though suf-
ficiently strong as a support, is quickly burned off^ in
case of fire, allowing the floors to fall. To prevent the
ACCEPTANCE OF RISKS 51
building from springing under wind pressure long
pieces of board are applied diagonally over the studs
notched to hold them.
The form of construction most frequently found
varies in different parts of the country. ^ Often fea-
tures of one type are combined with those of the other
according to locality or use of the building.
The following is a description of a standard frame
building from the "Universal Schedule":
A standard frame building may be described as one not ex-
ceeding two stories in height, with a ground floor area not
exceeding 1,000 square feet, say 20X50. The building itself
and all chimneys should rest on substantial foundations of brick
or stone laid below the frost line. The sidewalls should be of
clapboard finish on substantial hardwood studdings, either filled
in with brick between studs ("brick-nogged") or instead with
back-plastering on inside of outside sheathing between studs.
(These two forms of finish are usually employed as non-con-
ductors of heat and as a protection against the weather, but
they are also admirable provisions for preventing the rapid
spread of fire, particularly in connection with certain fire stops
that cut off drafts from floor to floor.) If the building is
veneered with brick, or sheathed with metal, tin, or corrugated
iron, deductions are made in rate. Wooden side walls and roof
should be painted with good fire resisting paint. Roof should
be of metal or tile, or shingles laid in mortar."
58. Ordinary building, — The majority of this class
of buildings inspected for fire insurance have brick
walls, though the number of concrete buildings is rap-
idly increasing, while a few are found with an outside
of stone. A cast iron post is often used on such build-
ings if they are built or remodeled for store purposes.
Except in the material of these walls these three classes
do not differ from the frame building, i. e., the beams,
52 INSURANCE
floors, etc. are of wood and the finish of wood, lath, and
plaster.
Even when erected under the restriction of excel-
lent building laws a building seldom if ever conforms
to the following description of a standard building
as is given in the "Universal Schedule":
The standard building has walls of brick or stone (brick
preferred) not less than twelve inches thick at top story (six-
teen inches if stone), extending through and twenty-four inches
above roof in parapet and coped and increasing four inches in
thickness for each story below to the ground, the increased thick-
ness of each story to be utilized for beam ledges. Ground floor
area not over 2,500 square feet ; height not over four stories, or
fifty feet; floors of two-inch plank covered by seven-eighths or
one-inch flooring, crossing diagonally with waterproof paper or
approved fire-resisting material between ; wooden beams, girders,
and wooden story posts or pillars, twelve inches thick, or pro-
tected iron columns; elevators, stairways, etc., cut off^ by brick
walls or plaster on metal studs and lathing; communications at
each floor protected with approved tin-covered doors and fire-
proof sills; windows and doors in exposed sides protected by
approved tin-covered doors and shutters ; walls of flues not less
than eight inches in thickness, to be lined with fire brick, well
burned clay or cast iron, with throat capacity of not less than
ninety-six square inches if steam boilers are used; all floor tim-
bers to be trimmed at least four inches from outside of flue;
heated by steam ; lighted by gas ; cornices of incombustible ma-
terial; roof of metal or tile; if partitions are hollow or walls
are floored off there should be fire stops at each floor.
59. Mill construction, — A mill constructed building,
or building of slow-burning construction, is one hav-
ing brick walls and with all woodwork in the form of
heavy planks and timbers laid in compact thick masses,
with the least number of ignitable angles or projec-
tions. If the materials used are of sufficient size and
ACCEPTANCE OF RISKS 53
are properly put together a building of this type may
have excellent fire-resisting ability. To obtain this con-
dition the lumber used should be not less than eight
inches in either cross dimension. Over the floor and
roof beams there should be a covering of spliced or
tongued and grooved planks at least three inches thick,
while tongued and grooved boards an inch or more in
thickness should be laid diagonally and properly nailed
on top of the floor planking. Between these boards
and the floor planks two thicknesses of waterproof ma-
terial should be laid and flashed at least three inches
around all wells and posts or columns and openings
with moldings or base.
The cross sectional area of all wood supports for
floors and roofs except in top story should be at least
one hundred square inches, while each dimension should
be at least ten inches for the supports on the top story.
A cross sectional area of sixty-four square inches is
sufficient provided that neither dimension is less than
eight inches. These wooden posts should have caps
or boxes of cast iron which may serve as bases for
the posts above. The ends of the girders should be
fastened to the caps or boxes in such a manner as to be
self -releasing. There should be no openings through
the floors, all stairways, elevators, etc., being cut ofl* in
brick towers. A building of this type does not readily
ignite, though even in case it should catch fire it is likely
to burn so slowly that the fire could be put out without
serious difficulty, as all parts are easily accessible to a
stream of water.
60. Fireproof construction, — The chief point of dif-
ference between the ordinary building and the building
of fireproof construction is that in the latter the frame
work is usually of metal and the floors of fireproof
54 INSURANCE
material, an especial advantage as they separate the
various stories from one another.
Fireproof buildings should have walls of brick, stone,
Portland cement, or concrete, with floors and roofs of
wrought iron, or steel floor beams, which in stores and
warehouses and factory buildings should be placed not
more than five feet apart on centers but which on other
buildings may be eight feet apart on centers. Suit-
able tie rods should tie the beams together at short
intervals. Incombustible flooring should be put be-
tween the beams in both floors and roof. There
may be used for this purpose any fireproof material
approved by the insurance companies, such as brick
arches, hollow tile arches of hard burned clay, or porous
terra cotta, or arches of Portland cement, concrete,
plain or reinforced with metal. Stairs and landings
should be built of brick, stone, Portland cement, con-
crete, iron or steel, or a combination of these, and, like
all elevators and dumbwaiters, should be enclosed in
a non-combustible shaft. No kind of inflammable ma-
terial should be used in partitions, flooring or ceilings
and the frames and sashes of windows should be of
metal both inside and outside.
Four inches of hard burned brick, terra cotta, con-
crete or any other approved fireproof material should
be entirely fitted over all cast iron, wrought iron, or
rolled steel columns, including the lugs or brackets in
such a manner as to be without air space next to the
metal. All pipes, wires, or conduits of any kind should
run outside of and not be enclosed in fireproofing sur-
rounding columns, girders, or beams of steel or iron.
The exposed side of steel or iron beams should be cov-
ered with at least four inches of fireproofing material,
and two inches of such material is required to pro-
ACCEPTANCE OF RISKS 55
tect properly the exposed flanges of these girders or
beams.
The following is the standard fireproof building ac-
cording to the "Universal Schedule":
Walls not less than sixteen inches for the upper twenty-five
feet portion, thence increasing four inches for each twenty-five
feet to the bottom ; not exceeding five thousand square feet of
ground floor area; height not over eight stories; floor beams
and girders to be supported by masonry. (If skeleton con-
struction floors carried entirely by iron frame work, there is a
charge.) Not to be occupied above seventh floor for storage
of merchandise or other combustible material where burning
would injure the ironwork. All iron beams, girders, and pil-
lars, or story posts to be protected by approved fire resisting
material, except in office and hotel buildings, in which there is a
half charge for absence of covering. If wrought iron or steel
is used in construction that portion of the masonry in contact
with the metal should be free from cement or plaster of Paris,
lime mortar only being used. At least all stairways to be fire-
proof with metal treads, stone treads, whether marble or slate,
being dangerous.
CHAPTER VI
FIRE PROTECTION
61. Fire losses, — The annual loss from fire in the
United States amounts to nearly $3 per capita, and
shows but little diminution in the past fifty years. The
losses since 1878 are as follows:
Years Aggregate Property Loss
1878 64,315,900
1879 77,703,700
1880 74,643,400
1881 81,280,900
1882 84,505,024
1883 100,149,228
1884 110,008,611
1885 102,818,796
1886 104,924,750
1887 120,283,055
1888 110,885,665
1889 123,046,833
1890 108,993,792
1891 143,764,967
1892 151,516,098
1893 167,544,370
1894 140,006,484
1895 142,110,233
1896 118,737,420
1897 116,354,575
1898 130,593,905
1899 153,597,830
1900 160,929,805
1901 165,817,810
1902 161,078,040
1903 145,302,155
1904 229,198,050
1905 165,221,650
1906 518,611,800
1907 215,084,709
1908 217,885,850
1909 188,705,150
1910 214,003,300
1911 217,004,575
56
FIRE PROTECTION 57
These figures demonstrate the necessity for fire pro-
tection. The United States presents a fire-protection
problem unequaled in history. It may be safely esti-
mated that one-half of the fire losses in the whole world
occur in the United States, and it is probably equally
true that one-half of the amount paid in the world for
fire insurance is paid in the United States. On the
continent of Europe and in England the losses by fire
do not amount to more than a tenth of those in the
United States. This is due principally to improved
building construction, to better enforcement of fire
laws, and, apparently, to greater respect for law in
general.
62. Prevention of fires, — The foregoing facts among
others led to a study of the causes of fires, and then
to a study of the means of prevention. It is said that
90 per cent of the fires in a cotton mill start in the
picker-room. The fact that statistics enable us to locate
90 per cent of such fires enables us to determine where
prevention should first be applied. The work of the
fire-protection or "insurance" engineer deals with this
problem of fire-protection worked out through appli-
ances for preventing or extinguishing fires. The field
of his labor is shown in the following incomplete list :
a. Fire doors and shutters.
b. Wired glass.
c. Waterworks.
d. Fire departments, public and private.
e. Standpipe systems.
f . Perforated pipes.
g. Automatic sprinklers.
h. Chemical fire extinguishers.
1. Fire pails and buckets,
j. Signalling systems.
58 INSURANCE
k. Watchmen and watch-clock systems.
1. Safety receptacles.
m. Heat, light, and power.
n. Hydrants and hose-houses.
63. Fire-doors, — The necessity of confining the area
subject to a fire to small units is understood. There
is a difference of opinion as to how large that area
should be. In some cases 1,000 square feet constitute
the unit, charges being made for additional area; in
others 2,500 square feet, while in a fireproof building
5,000 feet. The conception of a business in a building
25x100, with an area of 2,500, grown to such extent
as to necessitate the use of the building adjoining, will
make clear the origin of the fire-door. A merchant
taking the second building may have an opening on
each floor cut into the adjoining building. Thus in-
stead of 2,500 square feet subject to fire on each floor
there are, by open communication with the adjoining
building, twice that area. In the very beginning of this
practice it was recognized to be dangerous and means
were sought whereby these openings might be suffi-
ciently protected to prevent fire passing from one build-
ing to another. Iron doors were the first protection
adopted after the wooden door was found to be of little
use.
64. Features of door-openings, — (1) Openings in
the wall should not exceed eighty square feet and should
be as few as possible.
(2) There should be one door on each side of the
wall, preferably both sliding, though one may be swing-
ing.
(3) The size and shape of the door and the sills and
lintels are covered by the specifications.
(4) The wood in the door, or the core, should be of
FIRE PROTECTION 59
well-seasoned white pine or of a similar non-resisting
wood. There should be three thicknesses of board, the
outer layers being vertical and the inner horizontal.
They are securely fastened together with wrought-iron
clinch-nails, leaving the surface smooth.
(5) The fire-resisting value of the tin-covered
wooden door depends upon preventing access of oxygen
to the wood. To obtain this result the covering must be
applied so that the joints between the tin remain intact,
provision being made for the escape of the gas from the
wood core.
Although the foregoing covers the more important
features of the standard door, the hardware, the hang-
ing, etc., should also be carefully noted.
The standard doors which operate automatically are
held open by a "fusible link." This link, melting under
the action of heat at about 160 degrees, releases the door,
which closes and covers the opening in the wall.
65, Standard fire shutters, — The standard fire shut-
ter on the outside of the building protects property from
exposure and is similar in form to the standard fire-door.
The objection to shutters is that when they are closed at
night the interior of the building cannot be seen.
66. Wired glass, — This kind of glass apparently was
first used in England at an election. It was desirable
to look into the ballot boxes while the votes were being
cast, at the same time having the boxes closed. A wire
mesh was placed between two panes of glass, thus fur-
nishing an opportunity to see within the box but keep-
ing the ballots safe. An accident disclosed that wired
glass was a fire retardent. Ordinary glass melts at from
800 to 1,000 degrees Fahrenheit, but by embedding a
wire mesh into it the melting point is raised to from
1,800 to 2,200 degrees.
60 INSURANCE
There is slight advantage in wired glass if a wooden
frame is used for the sash. Metal-covered wooden
sashes came into use, and later a hollow metal frame was
adopted. The window is occasionally double glazed;
that is, has two panes of wired glass with an air
space between them. The general opinion is that within
thirty feet the double wired glass in metal frame is as
good as the standard shutter, while beyond thirty feet a
single pane of wired glass in metal frame is as good as
the standard shutter. These are general working rules,
however, and are not to be implicitly relied upon in
every instance.
67. Waterworks, — The pressure for distributing
water through a system of pipes may be obtained in the
following ways: by gravity only; or by first pumping
the water to an elevated reservoir, whence it flows into
the pipe system by gravity ; or by pumping the water to
an elevated tank or standpipe ; or from pimips that force
the water directly into the distributing pipes. The pipe
system everywhere is practically the same. For fire
extinguishing purposes the gravity system, especially
if it receives and distributes in duplicate conduit, is the
best and the most reliable. It has less apparatus to get
out of order than the other systems.
68. Use of hydrants. — When the pressure in the
mains is sufficient, fire streams may be taken directly
from the hydrants. If the pressure is low, however,
steam fire engines are necessary. High pressure is of
great value, especially in small cities and towns, as it
eliminates the necessity of fire engines, though a few
of these should be kept in reserve for emergencies.
To be available for hydrant fire pressure the pressure
in the mains should produce at hydrants, when properly
spaced, a 240 or 250-gallon capacity in business districts
FIRE PROTECTION 61
and a 175 to 200-gallon capacity in the residential local-
ities. With high pressure, hydrants do not need to be
as closely set together as with low. With close hydrant
spacing a sixty-pound pressure for the residence district
and a seventy-pound pressure for the business district
are not uncommon, though for effective streams an 80-
pound and a 100-pound pressure are desirable. In small
towns supplied by the gravity system the sixty to sev-
enty-pound pressure may suffice, as a higher pressure
would not be sufficient compensation for the expense of
producing it.
69. Arrangement of pipes, — The best arrangement
of pipes for distributing water is one in which the mains
run at right angles to one another and connect at every
street intersection. By this "gridiron system" the mains
are fed at both ends. The amount of water needed in
any locality regulates the size of the mains and cross
pipes. Small cities and outlying districts of large ones
require six-inch cross mains with eight, ten or twelve-
inch pipes at intervals of from four to six blocks. Larger
places or compactly built districts require eight-inch
cross mains with an occasional twelve to sixteen-inch
main, or six-inch pipes running lengthwise and eight-
inch pipes crosswise. Unusually large areas may re-
quire larger feeders, such as twenty-four, thirty-six or
even forty-eight-inch pipes. As the safety and comfort
of a city depends upon its water supply, the efficiency of
the pumping station should be assured. It should be of
fireproof construction and removed from such hazards as
factories, electric light stations, etc.
70. Fire boats. — Fire boats are of valuable aid in
cities located near bodies of water. These boats are gen-
erally used for fighting fires along the rivers, although
they may supply water to special pipe lines running
62 INSURANCE
from the water front to other parts of the city. These
boats usually have very powerful pumps, equal in
efficiency to from ten to thirty-five or more fire engines.
71. Public fire department, — With the public fire de-
partment the fire-protection engineer has little to do.
The department grew out of the volunteer system, con-
tinued in force in the United States until the early
sixties, but now since the introduction of the steam
engine rapidly declining. It is only recently that the
necessity has arisen for a fire-protection engineer to take
charge of the public fire department, but several now
specialize in that branch.
72. Private fire department, — The necessity for a pri-
vate fire department is based on the fact that when a fire
starts there should be a trained organization always
ready to act, not waiting until a fire occurs and then
depending upon chance or the inspiration of the
moment.
The following is a descriptive outline of a private fire
department, taken from the standard rules :
PRIVATE FIRE DEPARTMENT.
Organization.
Chief. Assistant Chief. Battalion Chief.
Hose Companies.
Captain. Hydrant men (2).
Pipe men (3) for each hydrant outlet.
Extra hose men (3).
Ladder Companies.
CaptaiD. Six ladder men.
Salvage Corps.
Number of men to be determined by size of property.
Pump Men. Steam Pump. Rotary Pump.
Engineer in charge. Engineer in charge.
Extra men to fire boilers. Extra men to assist.
FIRE PROTECTION 63
73, Standpipe equipments, — In general all city or
mill buildings over three stories high and all open or
inclosed structures that cover large areas irrespective of
their height, require a standpipe equipment for their
proper protection against fire. If the buildings are so
near one another that the use of hose from the roofs may
be advantageous, the standpipes may be extended to
supply roof hydrants. The special function of the
standpipe is to carry water for hose streams to upper
floors, thus eliminating the difficult handling of hose and
ladders that causes so much delay. Minor details must
be determined by the local fire department and the local
insurance authorities with reference to each particular
building and the water supply available.
74. Automatic sprinklers. — It is an adage among in-
surance workers that any fire could readily be put out if
at the time of its origin someone were there to throw a
cup of water upon it. This adage emphasizes the time
element. Efficient fire protection depends upon being
ready to stop the small fires before they become power-
ful and destructive. Of the many means to effect this
immediate extinction the automatic sprinkler is perhaps
the most successful. It has been described by an au-
thority as follows:
The sprinkler head itself consists of a casting with a one-half
inch orifice, designed to screw into the pipe fitting, the orifice
being closed by a cap held in place by a strut or levers composed
of pieces of metal held together with fusible solder. There is
also a deflector or splash plate against which the water impinges,
and each sprinkler is designed to protect the floor area of from
80 to 100 square feet. The piping is attached generally to the
ceiling, the sprinklers being spaced eight to ten feet apart. It
is evident that for the sprinkler to be effective there must be a
water supply of sufficient pressure and volume, while for a
standard equipment two water supplies are required.
64 INSURANCE
75. History of automatic sprinklers, — The earliest
reference to any device considered as coming under the
automatic sprinkler class was in a patent granted in
1723 for a fire-extinguishing apparatus consisting of a
cask filled with a fire-extinguishing liquid to be released
and set into action by means of a small can of gun-
powder connected to a system of fuses. There is a
record in 1727 of a fire extinguished by this device.
In 1806 John Carey invented an apparatus for auto-
matically extinguishing fires, making use of perforated
sprinklers connected with piping. In 1809 Sir William
Congreve secured a patent covering an automatic fire-
extinguishing system. It appears to have been similar
to Carey's, but in 1812 he took out a second patent in
which a fusible substance instead of a cotton cord was to
be used for releasing the water. This appears to be the
earliest reference to the use of a solid substance melting
at low temperature and setting the sprinklers in opera-
tion. Nothing practical came of these early attempts.
In 1864 Major A. Stewart Harrison, who was con-
nected with the first London Engineer Volunteers, in-
vented what seems to have been the first automatic
sprinkler constructed on modern lines, yet it is now con-
ceded that the first commercially successful sprinkler
was invented by Henry S. Parmelee, of New Haven,
the patent thereof being dated August 11, 1874. In
1875, 2,500 of these sprinkler heads were installed in the
mills at Fall River. The Parmelee sprinkler used a
fusible solder that melted at 160 degrees. For ten
years, however, after the Parmelee sprinkler was in-
vented, but little progress had been made in introducing
the device. In 1881 Frederick Grinnell, of Providence,
invented the sprinkler that still bears his name. To
Grinnell more than any one else is due the commercial
FIRE PROTECTION 65
extension of automatic sprinkler protection. Subse-
quently other persons invented and placed on the market
successful sprinkler heads. To-day there are several on
the approved list.
While to Grinnell much credit is due for the improve-
ment in sprinkler protection, yet equal praise is due for
its advocacy and adoption to the mutual fire insurance
companies of New England. They were the first com-
panies to test the system and to instal it in the most
hazardous portion of the properties they insured, later
extending it to all. In due time the stock companies
discovered that they were losing business to the mutuals,
and they, too, adopted the sprinkler device.
76. Value of sprinkler protection, — The results of
sprinkler protection are well stated in a letter written
by President R. W. Toppin, of the Arkwright Mutual
Insurance Company of Boston, to the Automatic
Sprinkler bulletin. The letter states briefly and con-
cisely the loss from fire before and after the introduction
of the sprinkler :
The first automatic sprinklers put into m'lls insured by this
company were installed about 1875. During the fifteen years
of the business of this company prior to 1875, in round figures,
the
Insurance written aggregated $118,300,000.00
Losses 284,500.00
Average yearly loss per $100 .24
During the first years of automatic sprinkler protection the
progress of installation was somewhat slow, though it continued
steadily. In the second fifteen-year period, from 1875 to 1890,
the
Insurance written aggregated $509,000,000.00
The losses were 948,500.00
Average yearly loss per $100 ,186
XI— 5
66 INSURANCE
or, in other words,
Insurance written increased 33.8^
The loss ratio reduced 22.5^
As the value of automatic sprinklers for the extinguishing
of fires became more and more evident by their remarkable suc-
cess in reducing fire loss the Mutual Companies began to require
their installation throughout all parts of manufacturing plants
where formerly they were required only in rooms where the
more hazardous processes were carried on or which contained
large values, until to-day practically every part of our manu-
facturing risks is protected by automatic sprinklers, and they
have been extended to nearly all storage buildings insured by
us. The result of this has been a remarkably low loss ratio,
viz. :
During the ten years ending Dec. 31, 1907, the
Insurance written aggregated $1,552,000,000.00
The losses were 774,500.00
Average yearl}' loss per $100 ... . .05
Compared with the first fifteen years of our business with no
automatic sprinklers the
Insurance written increased over 1200^
The loss ratio reduced 79^
Taking all the business of the Mutual Companies represented
in the Senior Conference during the year 1907 the
Insurance aggregated $1,816,000,000.00
The losses were 1,420,000.00
Average loss per $100 written .... .078
It should be remembered that these results were obtained upon
manufacturing risks, the hazards of which are generally con-
sidered more than the average.
The figures presented speak forcefully for the value of fire
protection, of which automatic sprinklers form a very consid-
erable part.
FIRE PROTECTION 67
Additional testimony is furnished by reports of the
National Fire Protection Association, which has kept a
close record of sprinkler fires during the thirteen years
of its existence. Its records show 8,942 fires in sprink-
lered risks where the sprinklers operated. The operation
of the sprinklers was unsatisfactory in only 843 cases,
or 5 per cent. The causes of failure were generally due
to closed gate valves, defective equipment, defective
water supply, exposure or conflagration fires, faulty
building construction, and serious obstructions to the
distribution of water. The records also show that in 30
per cent of the fires only one sprinkler opened, thus
showing that the cup of water does a large part of the
work. In 55 per cent of fires three or less than three
sprinklers opened, and twenty-five or less in 90 per cent.
It is a rule that where more than twenty-five sprinklers
open, it is due to some condition not found in the ordi-
nary risk.
77. Spread of sprinkler protection, — The spread of
sprinkler protection is shown by the fact that one-third
of the property insured against fire in New England
comes under this system, while in New York City more
than $300,000,000 worth is thus protected. The total
amount throughout the United States is not now avail-
able in figures, but it is believed that within ten years
there will not be a single manufacturing or mercantile
risk of much value unprotected by automatic sprink-
lers. The reduction in the rate of insurance will be
enough to warrant this, while the inability to obtain in-
surance without such protection will hasten it.
The fusible metal or solder used in sprinklers is ad-
justed to different temperatures according to the char-
acter of occupancy of the building to .be protected.
The ordinary sprinkler head has a melting point of
68 INSURANCE
about 160° Fahrenheit, but heads melting at as high as
212° to 400° Fahrenheit are used in dry rooms, boiler
rooms, and other places of high temperature.
78. Requisites of sjmnkler protection. — The requi-
sites for obtaining the best automatic sprinkler protec-
tion are:
The building should be open in construction, the
sprinklers being so located that distribution may cover
all points on the premises. This means that sprinklers
should be installed in basements and lofts, under stairs,
inside elevator wells, in belt, cable, pipe, gear and pulley
boxes, inside small inclosures, such as drying and heat-
ing boxes, tenter and dry-room inclosures, chutes, con-
veyor trunks, cupboards, and in chests unless they have
tops entirely open and so located that sprinklers can
properly spray therein. Sprinklers should not be omit-
ted in any room merely because it is damp, wet, or of
fireproof construction. Special instructions should be
obtained as to placing sprinklers inside show windows,
boxed machines, metal air ducts, ventilators, concealed
spaces, under large shelves, benches, tables, overhead
storage racks, over dynamos and switchboards, plat-
forms and similar water-sheds.
The piping should be of sufficient capacity, as a sys-
tem is of little value unless the riser pipe and distribut-
ing mains are of sufficient size to supply the sprinkler
heads.
Steam, rotary and electric fire pumps should be in-
stalled in accordance ^\ith the rules of the National
Board of Fire Under A^Titers. It is required that with
five pounds pressure maintained at the sprinklers each
head shaH discharge approximately twelve gallons per
minute. The sprinklers should, therefore, be made with
an unobstructed outlet of sufficient size and suitable
FIRE PROTECTION 69
fcrm to accomplish this result. Siamese sidewalk con-
nections should be provided for the use of the fire de-
partment for direct attachment of fire engines to risers.
The circulation of water in sprinkler pipes is objec-
tionable owing" to increased corrosion and deposit of
sediment. For this reason the pipes of a sprinkler sys-
tem should not be used for domestic or other than fire
service. Hand hose for fire purpose only may be at-
tached to sprinkler pipes within a room under the fol-
lowing restrictions: Pipe nipple and hose valve are to
be one inch ; hose to be one and one-fourth inches ; nozzle
to be not longer than one-half inch. Hose is not to be
connected to sprinkler pipe smaller than two and one-
half inches and not to be attached to a day pipe system.
79. Automatic alarm, — In order to detect the pres-
ence of fire or of a leak in a sprinkler system every
equipment should have an automatic alarm device or
possess a watchman service. Sprinkler heads have been
kno^vn to open and permit water to flow from Satur-
day night to Monday morning, there having been no
alarm device to indicate the flow.
80. Dry pipe, — A dry pipe system should be used
only where a wet pipe system is impracticable; as, in
buildings or portions of buildings having no heating
facilities. The use of such a system is, however, far
preferable to shutting off entirely the water supply dur-
ing cold weather. To keep the water out of the pipes a
valve, called a dry valve, is employed. The sprinkler
pipes are filled with air under pressure and should so
remain throughout the year. When a sprinkler head
opens the air escapes, the reduction in air pressure al-
lowing the water pressure to open the dry valve auto-
matically. The water then enters the sprinkler system
and is discharged through the open sprinkler heads.
70 INSURANCE
81. Open sprinklers, — Open sprinklers are metal
orifices placed outside a building just over the windows
along the cornice on the side wall or along the ridge
pole. Their purpose is to protect from exposure fire
and to prevent flames from passing through the win-
dows from floor to floor. The sprinklers consist of an
orifice with a horizontal level-shaped disc for deflecting
the water into a sheet of spray. This spray can be made
to form a solid water curtain along the side of a build-
ing.
The failure of the sprinkler system is most frequently
due to a valve being closed at the critical moment or to
deficient water supply; therefore, in the interest of the
assured, the system should be periodically inspected by a
competent person.
82. Chemical fire extinguishers, — The use of other
substances than water or in combination with water as
a fire extinguisher attracted the attention of inventors
from an early period. Chemical fire extinguishers, both
hand and wheel, found in public and private establish-
ments, and chemical extinguishers used by fire depart-
ments, are devices for the use of chemicals combined
with water. The chemical itself does not add to the
extinguishing quality of the water. Its function is to
generate a gas to drive the water either to a greater
distance or with greater force.
83. Hand extinguishers. — There are now many
chemical devices for extinguishing fire, but with the ex-
ception of those operated by carbonic acid gas, they have
proved most unsatisfactory under actual test.
The carbonic acid gas extinguisher consists of a cylin-
drical copper tank with a small hose attached. It is
filled with a solution of bicarbonate of soda, while at
the top of the tank, kept separately, is a glass container
FIRE PROTECTION 71
of sulphuric acid, closed with a loose lead stopper. In
operation the extinguisher is inverted, the two fluids thus
mingling and generating carbonic acid gas. This pro-
duces considerable pressure and expels through the hose
the water charged with the gas, which is a non-supporter
of combustion.
With all the good points of extinguishers it must still
be said that they have not the simplicity and depend-
ableness of pails of water ; consequently they should not
entirely replace fire pails. Extinguishers may replace
one-half the number of fire pails on a floor, on the basis
of an approved three-gallon extinguisher for six pails,
but no more. They should be set and located very much
as fire pails. Extinguishers should be examined twice a
year, tested and recharged, as in this manner valuable
knowledge may be obtained by employes as to the opera-
tion of the device.
Wheeled engines are similar to hand fire extinguishers
in make-up and operation, but instead of three gallons
they usually contain forty. They are mounted on
wheels to permit easy movement. Each engine has fifty
feet of hose and throws a stream from twenty-five to
eighty-five feet beyond the nozzle. Such engines are
especially valuable for private fire departments in stores,
warehouses, hotels and factories, or about large country
residences.
84. Fire pails, — The oldest vessel used for the pur-
pose of extinguishing fires is the fire pail or bucket.
Long before fire insurance was devised the fire pail was
the only generally approved instrument for putting out
fire. This means that pails or buckets filled with water
were set aside to be used for this purpose. The factory
mutuals state that one-half of their fires are extinguished
by a pail of water. If used at the proper moment, a
72 INSURANCE
fire pail is of greater service than the entire fire depart-
ment a few minutes later. It is cheap; its purpose is
understood by all; and it may readily be kept in condi-
tion for use. Everyone can use a pail of water; while
the average person, especially when excited, does not
understand a patent fire extinguisher or may not know
how to turn a standpipe valve and use the hose. The
value of the fire pail is well recognized by all insurance
companies, by all fire departments, and by others inter-
ested in the safety of life and property.
Since the general purpose of all these various appli-
ances is to put out fires and that as quickly as possible,
it is apparent that whatever extinguishers are used
should be understood by the person responsible for their
use and that the appliances themselves be kept in good
condition. A fire pail is of little use unless filled and
kept within reach. For this reason the pails are usually
painted red and marked with black letters "For Fire
Only." Other regulations specify the number of pails
required, their location, and capacity; and when such
regulations are met, the insurance companies as a rule
grant liberal reduction in rates.
People with the best of intentions often instal. costly
fire protection equipment which through neglect is
found altogether useless when a fire breaks out. Knowl-
edge of this tendency to neglect things has caused insur-
ance companies to draw up certain rules and regulations,
the following of which are examples:
85. Signaling systems, — In addition to the means at
hand for putting out fire it is necessary that someone
should be present to use them. This is not always pos-
sible, especially when plants are not in operation, or busi-
ness is closed for the night, or on Sundays or hoh'days.
To overcome this difficulty systems of signaling have
FIRE PROTECTION 78
been devised, all of which may be embraced under the
general term of "Signaling systems."
Centuries ago, it was the custom to have towers in
each city and village, on which watchmen were stationed
throughout the night to raise an alarm in case of fire.
This system is still prevalent in certain foreign countries,
while on the Island of Nantucket it was not discon-
tinued until 1907.
86. Electric signal, — The system for the electrical
transmission of an alarm of fire was invented about
twenty years after the first telegraph was erected be-
tween Baltimore and Washington. Up to that time
notice had been transmitted by the lookout system, and
as cities grew larger a division into districts took place
so that an alarm for one would not arouse the whole city.
The automatic fire alarm operates by the action of
heat, notifying the fire department in this way not mere-
ly of the presence of fire but the exact location as well,
thus reducing to a minimum the time for reaching it.
87. Special building signal, — The special building
signal runs from a specific building to the fire depart-
ment headquarters. It operates, however, by hand, not
being automatic. To be successful, therefore, there
must be someone on the premises to operate it. This
feature is recognized by a difference in the insurance
rate for a building protected by a watchman during non-
business hours.
88. Automatic sprinkler supervision, — This is a sys-
tem of fire-signaling connected with sprinkler devices.
It is of value in that it operates when the water flows,
and to that extent is more efficient than the automatic
alarm that operates under the action of heat only. It is
evident that unless notice was received, in a system so
complicated as the sprinkler, an accident may occur that
74 INSURANCE
would turn the water on and without any fire do an im-
mense amount of damage.
89. Watchmen. — It is difficult to standardize human
beings, but with a watchman's service, public or private,
efforts have been made to reach as near to standardiza-
tion as possible. The watchman is a type of workman
who will probably never pass away despite all the im-
provements in mechanical devices that encroach upon
his field. Since ordinary prudence ought to forbid leav-
ing buildings and their contents without care or super-
vision during nights, Sundays, holidaj^s, or any other
non-business period, the employment of watchmen
against fire or burglar}^ has been the rule rather than
the exception. The fire insurance companies recognize
in the rate of a building, the presence or absence of an
approved watch service, having adopted this practice
after long experience with the discovery and prevention
of fire.
90. Safety receptacles for ashes, etc, — Fires are fre-
quently caused by hot ashes being thrown into wooden
boxes or barrels, or into receptacles containing combus-
tible materials. Fires so started during the night or
w^hen a place is deserted may gain considerable head-
way before discovery. Covered metal ash cans almost
entirely eliminate the possibility of such a fire. Cans of
good, galvanized iron or steel, reinforced with steel
staves and having hoops at the bottom, are recommended
for this purpose.
91. Oily waste. — Spontaneous combustion or ignition
is by no means a rare cause of fire. Fibrous, porous, or
finely divided materials if soaked with vegetable oil are
likely to catch fire. Vegetable oils have great affinity
for the oxygen in the air, forming a combination that
may generate enough heat to light a fire. For this
FIRE PROTECTION 75
reason, cotton waste, sawdust, fine shavings, etc., if at
all oily, need special attention. Such materials when
collected during the day's work should be put into a
metal receptacle known as the "self-closing waste can."
92. Packing bin, — A suitable receptacle should be
provided whenever excelsior, straw, hay, cut paper, or
other loose packing material is used. Since inflammable
material adds to the spread of fire in addition to the
danger of spontaneous combustion, or quick ignition by
sparks, matches, etc., the necessity of confining such ma-
terial in a proper inclosure is clearly evident.
General -standards are not available for some of these
devices. Those furnished in this chapter are the out-
growth of experience in one of the largest cities in the
country. They cover many points generally found only
in building codes, or in office rules, not subject to the
notice of the general public.
93. Necessity for standards. — The more delicate and
intricate a piece of mechanism is the more care it re-
quires. Even the fire pail, perhaps the simplest device
for fire fighting, requires a certain amount of care to
be kept in good condition and available for use when
wanted. Clearly the better the article at its installation
the less care will it require and the more efficient will it
be when called upon to do its work. It would be pleasant
indeed if fire fighting devices could be installed with a
guaranty of doing exactly what is wanted when a fire
occurs.
There always was some slight effort to keep an over-
sight of fire fighting devices, even in the days when
simplest methods were in vogue. Thus the fire pails
were required to be of a certain size, to be kept in a
certain manner, and to be used for no other purpose.
When sprinkler installation began it was found that
76 INSURANCE
these equipments — consisting as they did of many feet
of pipes with valves, water supply and various other
features — required a constant inspection. The sprinkler
itself — possibly the most vital part unless it be the water
suppl}^ — once installed must not be permitted to depend
upon a fire to test it out. It must be subjected to a
laboratory test before the installation.
94. National Fire Protection Association, — The
National Fire Protection Association, founded in 1896,
instituted the plan of devising certain standards for fire
fighting devices. The following list illustrates the re-
quirements :
Cast iron mains and their proper construction.
Fire pumps, steam, rotary, centrifugal and electric,
their construction and installation.
Hose and play pipes, their construction and care.
Hydrants, their construction and installation.
Valves for automatic alarm.
Carbonic acid gas fire extinguishers.
Dry pipe valves for sprinkler systems.
Fire doors and shutters.
Gate valves for outside and inside use.
Fire pails.
Hose houses for mill yards.
Private fire department.
Open sprinklers.
Reservoirs for pump or sprinkler supplies.
Signaling systems, watch clocks, thermostats, etc.
Steam pump regulators.
Tanks, gravity and pressure.
Wire glass.
Water supplies.
This list is sufficient to show the extension of the
business of fire protection. Insurance companies have
FIRE PROTECTION 77
given no special attention to the invention of fire pro-
tecting devices. They confine their efforts to standard-
izing those already existing which have been approved.
95. Laboratory testing, — If standards are to be
established, it follows as a matter of course that there
must be some place for testing the various devices. This
is now done at the underwriters' laboratory in Chicago,
established several years ago and now under the control
of the National Board of Fire Underwriters. It under-
takes to test the products of any manufacturer and
takes up problems submitted by the underwriters. The
standards recommended are published as the standards
of the National Board of Fire Underwriters, whose
headquarters are in New York City. In England the
work is done by the British Fire Prevention Committee,
which maintains a laboratory or testing station. Its
work corresponds somewhat to that done in the United
States, although it does not have, perhaps, as in this
country, the full official sanction of the insurance com-
panies. The mutual fire insurance companies also main-
tain a laboratory in Boston for the testing and carrying
forward of the work in which they are interested.
96. Field inspections, — The work of testing is taking
the form that will probably characterize it in the future.
It is evident that a manufacturer of fire doors would
find it inconvenient to ship every fire door to Chicago to
be tested. To overcome this difficulty, an inspector rep-
resenting the laboratory visits the manufacturing plant,
examines the work and places thereon the seal of ap-
proval. This is called "field inspection." The inspec-
tion at first covered only wires used for electrical pur-
poses, but is rapidly extending and now includes wired
glass windows, standard fire doors and shutters, and
many other devices.
78 INSURANCE
97. Place of the engineer. — The business of fire in-
surance is gradually becoming scientific, if that term
may be used in a somewhat modest manner. More and
more the fire engineer is coming to have a fixed place;
and as the nation awakes to the fact that it is of more
importance to prevent fire than to put it out, so will the
demand for his work increase.
An additional fact which has made the work of the
engineer necessary is the need for co-operation
among the insurance companies. If each one hundred
and sixty companies in the field were to adopt its own
standard and rules for the installation and making of
fire fighting devices, it is clear that there would be no
standard which the insured would adopt or even seri-
ously consider. The fire insurance field is largely co-
operative. A single company is able to insure only a
part of a plant; thus the insured must have the policies
of several companies to be fully protected. This being
the case it is desirable on the part of the companies
to unite on at least the fire engineering branch of the
business, a branch in which there is the least doubt as to
the success of co-operation.
CHAPTER VII
FINANCIAL ASPECT OF FIRE INSURANCE PROTECTION
98. Financial phase, — The financial phase of the
problem of fire protection is not unworthy of consider-
able attention. The whole problem of fire protection
is closely allied to the problem of fire insurance; and
it is probleniatic whether either has benefited by the
union or whether its development has been as great as
it would have been had the close connection not been
maintained. The fact remains, however, that when the
owner of a considerable property undertakes improve-
ments, having in view a lessening of the fire hazard,
he at once considers how much he can save on the rate
of insurance. This view of the matter is wrong in that
it tends to limit fire prevention to properties sufficiently
valuable to pay the cost of prevention at a reduced rate
of insurance.
99. Illustration, — For instance, the owners of prop-
erty carrying insurance of one miUion dollars, found
that by introducing sprinklers the saving in the rate
would be sufficient in three years to reimburse them for
the actual cost of the equipment. Thus, in the course
of time the equipment becomes the property of the
owners through a saving in the rate.
It can readily be seen that as a fire hazard a prop-
erty which may only want insurance of $25,000, may be
as bad as one carrying one milHon dollars of insurance,
but the saving in the insurance would not be sufficient
to pay for a sprinkler equipment.
79
80 INSURANCE
100. Relation between cost and saving, — Fire pails
are the cheapest form of fire prevention. They can be
placed in a building at so low a cost that the saving
in the premium on the smallest amount of insurance is
generally sufficient to pay for the installation.
Between these two extremes — the fire pail and the
sprinkler — come various other devices, of intermediate
cost, such as signaling systems, chemical extinguishers,
etc. Experience shows in nearly all cases that in order
to secure their installation the saving in the rate of in-
surance must be sufficient to reimburse the insured for
the expense. In other words, the insured entertains
the idea that the cost of a fire prevention device should
be equaled by a saving in the rate. This attitude has
limited the work of fire prevention to a large degree.
It is equally true when the insured is asked to con-
sider the re-arranging or changing of his plant; as di-
viding it into smaller units, placing fire doors at com-
munications, cutting off the more hazardous from the
less hazardous, or the manufacturing from the storage.
It generally comes back to the question of "How much
will I save on my rate of insurance?"
101. Engineer's recommendations. — The fire protec-
tion engineer is like all engineers in civil life. He must
consider the relation between the cost of his recommen-
dations and the gain to his client. He may suggest
that the mere limitation of the chances of fire should
be sufficient to the insured to induce him to install a
protecting device, but when the engineer also offers a
reduction in the rate sufficient to cover the cost of the
improvement the argument becomes additionally at-
tractive.
The pocket nerve has been defined as the most sensi-
tive nerve in the human body. This is especially true
FINANCIAL ASPECT 81
in the work of fire prevention, for when the increased
charge touches the pocket the insured is ever found
more amenable to the consideration of installing fire pre-
vention devices.
The supposition that fire prevention and the reduc-
tion in fire loss in the United States and elsewhere are
dependent upon the fire protection engineer is not alto-
gether true. On the contrary, such ordinary faults as
the failure to take care of waste, nibbish, etc., are re-
sponsible for more than one-half of the fire losses in
the United States. An improvement in the house-
keeping of the business-house porter is all that is neces-
sary to reduce the fire loss by 50 per cent.
102. Examples, — Under "A" below is given an actual
report. It may be added that this method of report-
ing has been in existence and has done good service for
many years.
Under "B" is given an example of a somewhat more
minute method already referred to in this work.
REPORT A 6 story and basement brick building, with 1
story and basement brick extension. Front. —
Stone, 1st and Gth floors and brick and stone
on other floors. Walls, — Independent east 20-
16, party west 24-16 walls beam bearing.
Parapet Walls. — Equal to more than 3 feet.
Roof. — Composition and gravel. Skylights. —
Wired glass on metal in roof, thin glass on
metal with wire screen protection over stairs,
elevators and dummy, wired glass on metal
with wire screen protection on extension. Shut-
ters.— Front none, rear and sides none, but rear
and side windows are of single wired glass in
kalamein covered sash and frame. — Cornice. —
Stone. Openings through floors. — Elevators, 2,
in one shaft, of 6 inch terra cotta blocks, from
basement through roof, opening to floors by
kalamein covered doors, with wired glass panels
hung by butt hinges to kalamein covered
trim, also transoms of single wired glass in
kalamein covered sash and frame; power open-
ing in basement to motor rooms, enclosed by
terra cotta blocks, the iron stairway forming
the ceiling of one room and the ceiling of the
other is plaster on expanded metal, each has
XI— G
82
INSURANCE
Entire Buildinc
Basement —
1st Floor —
2nd Floor —
3rd Floor —
4th Floor —
5th Floor —
6th Floor —
Employ —
Heating —
Lighting —
Petroleum Products or
Combustibles —
Fire Heating for Man-
ufacturing—
Power for Machinery —
Power foe Hoisting —
FiKE Appliances —
opening to basement by kalamein covered doors.
Dummy, in shaft of 4 inch terra cotta blocks,
from basement through roof, opening to floors
by kalamein covered doors hung by butt
hinges to kalamein covered trim. Stairs. — Of
iron frame, with iron treads and landings en-
closed in shaft of terra cotta blocks, openings
to floors by kalamein covered doors, with wired
glass panels, also transom lights of single
wired glass in kalamein covered sash and frame.
Floors. — Double, on wood beams, on steel gird-
ers and cast iron columns, also about one-half
of 2d floor filled in between beams with cinders
for deafening. Finish. — Walls plastered, ceil-
ings plaster on expanded metal. Interior par-
titions are plaster on expanded metal, on wood
studding, except some frame partitions on 2d
and 3d floors. Height. — 741/2 feet. Area. —
About 5,000 square feet. Building erected in
1907.
Stock of and manufacturing perfumes and
toilet articles.
Empty bottles in crates; bottle washing.
OflSice and sales room.
Stock, packing and shipping; packing ma-
terial kept in frame metal lined bins.
Stock and filling; 1 gas stove.
Stock and filling.
Work rooms; 2 filling, 1 closing, 3 pomade
washers and 1 mixing machine by electric mo-
tor; 2 stills and 3 kettles, steam heated; 1
gas stove, 2 barrels of vaseline in metal cans
and in barrel; 200-300 pounds of pomade in
metal cans; 5 barrels of alcohol in wood; per-
colating; stock of perfumes in barrels, tanks
and glass.
5 face powder sifting machines by electric
motor; frame metal lined steam heated dry
box; stock of essential oils in glass; supply
room.
75 hands.
Steam from two open set boilers under side-
walk, cut off from basement by brick wall,
with kalamein covered door at opening to base-
ment.
Gas and electricity.
As above.
As above.
As above.
Electric motors in basement.
12 fire pails each floor; 4 inch standi>i))o,
with 50 feet of £14 inch linen hose attached
to each floor, supplied by two tanks (one of
10,000 gallons and one 2,000 gallons) on roof
and outside steamer connection; fire alarm sig-
nal apparatus, not automatic, approved; I Un-
denvriters fire extinguisher on each floor;
FINANCIAL ASPECT
83
Exposures —
Condition —
REPORT B
IvOCATlOK
Owner —
Foundations-
Walls —
Flooring-
Beams —
Girders —
Columns —
Stairways-
Hoists —
Ceilings —
Sidings — •
Fire Escapes —
B.—
1.—
Pt. 2.—
watchman, with Holizer Magneto watch clock,
station each floor, hourly rounds, records dated
and filed.
East, adjoining brick dwelling; west, ad-
joining brick dwelling, with small frame ex-
tensions; rear, not serious.
Good.
REPORT ON ORDINARY CON-
STRUCTION
5 sty. and B.
Estate of Jno. R. Graham.
Agent, G. H. Walker, on premises.
Stone set in cement mortar.
Bearing, Ind. R & L.
Non-Bearing, F & rear.
16" — B— 2.
12" — 3—5.
B — 5, Single y^ in.
( 1 ) 3" X 12" X 16" X 20'. Y.P. Bridged.
4 & 5 3" X 12" X 20" X 20'. Y.P. Bridged.
1—10" X 10" X 12'. Y.P. S.R.
B. 1 row C.I. 5" X 8' X 10 bays.
(1) 1 — 5 In frame hallway y^", doorways on
all floors cut off by wood doors. Exterior win-
dows cut off by 14" plain glass in wood frame.
Wood stairs.
(1) in hallway. No shaft. H.C. traps.
1-2 Boards.
3-5 Open.
1-5 Boards.
F & Rear, 1-5.
Could not get on roof, trap door nailed.
OCCUPANCY.
Beer apparatus, storage, goods
in cases. I stove hole in wall.
Retail stationer & printer. 6
hands. Machines, 1 gas engine on metal, ex-
haust outside about 3" from wall. Exhaust
pipe ends about 3" from wooden trough.
4 power job presses.
1 hand emitter.
2 lines overhead shafting.
1 S. C. Waste can.
1 pint S. C. Benzine can, benzine bought as
used.
2 gals, oil, ordinary can.
1 ordinary 14 pint oil can.
No fire heat. Sweepings carried out every
day. Back of shop crowded.
Manufacture of Thermometers.
4 hands.
1 lathe, power, from first floor.
1 rolling machine, power, 1 power blower for
gas jet.
1 drill press, power, 1 foot power cutter.
1 grinder, power, 1 air tank, tin tube con-
nection.
84 INSURANCE
Fire heat — coal stove, on metal.
1 gas torch, rubber tube.
Packing material — 1 tin lined bin for excel-
sior, 1 bale of excelsior kept inside.
Pt. 2. — offices.
Pt. 3. — paper ruler, 3 hands.
3 ruling machines, power, from first floor.
1 cutter, power.
1 stitcher, power.
1 hand- punch.
Heat — coal stove on metal.
1 K. O. lamp. K. O. bought as used.
1 qt. machine oil in bottle.
Sweepings carried out every day.
Pt. 3. Occupied but could not get in'
Pt. 4. Used for machine shop, not running, could
not get in.
Pt. 4. machinist. 2 hands.
4 lathes, power from first floor.
1 shaper, power from first floor.
2 drills, power from first floor.
1 hack saw, power from first floor.
1 grinder, power from first floor.
1 grind stone, power from first floor.
1 rolling machine, hand.
Shafting fastened to ceiling.
1 hooded forge on metal.
4 swinging gas jets.
15 gals, oil in ordinary 5 gal. cans.
Oily waste in covered tin can.
Rags piled under work bench.
Pt. 5. manufacture tin boxes & toys.
6 hands.
1 stamp, power from first floor.
1 blower, power from first floor.
1 cutter, foot, power from first floor.
2 presses, foot, power from first floor.
Shafting on ceiling.
2 gas heaters for soldering iron, on work
bench, connected by iron pipes.
5 gals, paint in ordinary 1 gal. cans.
1 qt. shellac in bottle.
1 qt. turpentine in bottle.
Stove hole in wall.
Pt. 5. — Metal spinners, 2 hands.
2 speed lathes, power from first floor.
1 blower, power from first floor.
1 metal saw, power from first floor.
1 polishing machine, power.
1 hand press.
1 foot power cutter.
Shafting on ceiling.
1/2 gal. calcium carbide in ordinary can.
1 gal sulphuric acid in bottle.
Rubbish in end of shop.
Coal stove on brick floor.
1 forge on brick floor.
1 gas heater for soldering iron, on metal
covered bench, rubber tube.
FINANCIAL ASPECT 85
1 K. O. torch.
1 gal. muriatic acid in bottle.
Fire Pails—- B. — 1 O.K. 3 on shelves, blocked.
1. 4 O.K.
Pt. 2-4 O.K.
Pt. 2-9 O.K.
Pt. 4-1 O.K. 1 not filled.
Pt. 5-2 on shelves, blocked.
CHAPTER VIII
RATING
103. Early forms of rating. — From what data or how
the first tables of rates for fire insurance were compiled is
not known. But it is known that they were not based,
as is the practice of to-day, on the amount of property
insured but on its rental value. Barbon in 1667 made
his tables from such a basis. Although the earliest tables
known are those of the year 1681, yet there is evidence
to show their derivation from Barbon's office and that
they were based on the rental value of property. The
tables show the rate from one pound to ten and from
ten pounds up to one hundred. <^
There has never been a time in the history of fire
insurance when the same rates were charged for all
classes of property. In the beginning a difference was
made between buildings of brick and stone and build-
ings of wood, the rates for the latter being nearly double
those of the former. The first policies were written
usually for seven, fourteen, twenty-one, and thirty-one
years, corresponding closely to the leasehold periods in
England. Term policies apparently came into force at
the beginning of the business, and policies written for
twenty-one years did not take three times the rate for
each term of seven years but twice the rate for that
period of time. The difference of rate between the
brick and stone and the wooden building was the crude
beginning of the present minute system of differential
rating.
86
RATING 87
104. Classification system, — ^As already mentioned
Barbon insured houses only, Povey being the first to
insure the contents. The rate charged for the contents
was at first the same as for the building itself and ap-
parently continued in force for some years. After a
period of flat rates — ^the same rate was charged for a
brick and stone building and its contents or a wooden
building and its contents — an advance was made by the
Union Fire Office in 1714 or 1715. This introduced a
classification system for determining rates, a system
still in force to a certain extent to-day. Risks were di-
vided into Common Insurance, Hazardous Insurance,
and Doubly Hazardous Insurance. Between these
three divisions was also introduced One-Half Hazard-
ous Insurance. Between the first and second divisions,
for instance, there would be Common Insurance One-
Half Hazardous, and between the second and third
Hazardous Insurance One-Half Doubly Hazardous,
thus making practically a fivefold classification.
105. Prospectuses, — A few years later, in 1720, when
the Royal Exchange and the London Assurance were
incorporated, the practice of publishing prospectuses
had become established and was extended b}^ these com-
panies. Thus, the Royal Exchange stated that it
would insure any college hall, house, or any other build-
ing, and all goods^ wares and merchandise, except
notes, bills, tallies, books of account, ready money,
china and glass ware, jewels, plate, pictures, writing,
corn, hay and straw not in trade, to their full value,
the insured paying five shillings for every £250 on
brick and stone buildings and the goods and mechan-
disc therein, and eight shillings on timber, plaster and
thatched buildings and the goods and merchandise
therein. If the sum insured did not exceed £\ ,500 the
88 INSURANCE
rates quoted above were the first in force, but if the
insurance exceeded that amount the rates were seven
shillings and sixpence for each £150 of value in the
brick and stone class, and twelve shillings in the other
building classes.
106. Segregation of trades, — At this time certain
trades began to be segregated and classed as coming
within certain hmits. Thus the risks of brewers, dis-
tillers, chemists, apothecaries, powder men, ship and
tallow chandlers, sugar and bread makers, dyers, soap
boilers, oil and color men were considered more hazard-
ous than others and paid a proportionately higher rate.
Also the glass trade, including looking-glass, and china
ware trades, being more hazardous, were grouped with
this division.
The foregoing paragraph calls attention to the prac-
tise then prevaihng of increasing the rate of premium
when the insurance passed a certain amount. The ap-
plication of this principle became quite common in Great
Britain and lasted until about 1848, when it apparently
passed away. It seems never to have secured more than
a slight foothold in this country.
Down to 1848, the above were the methods of rating
in Great Britain, and for that matter practically in
the United States also, the system in other words being
nothing more than a rough grouping of the different
businesses into a few classes and rates being charged
accordingly.
In 1848 a tariff of fire rates corresponding in a
measure to the modern manufacturing schedule was in-
troduced into Great Britain. It applied to woolen
mills. From that time up to 1906 various other tariffs
have been put in force, generally applying to the whole
of Great Britain, although occasionally only to parts.
RATING 89
107. Philadelphia Contrihutionship, — In the United
States the early insurance practises followed very
closely the methods which prevailed in England. One
company, whose experience has come down to us, was
the Philadelphia Contributionship. It insured houses
for a minimum period of seven years. If the building
w^as of brick, the charge was twenty shillings for
<£100. If the building was of wood, the charge was
sixty shillings. In addition to this payment there was
a charge for the policy itself of one shilling and two-
pence for brick buildings and two shillings and sixpence
for frame. This practise of charging for the policy
continued in force for a long time.
108. Green Tree Company, — The third insurance
company was founded in Pennsylvania, the occasion of
its organization being interesting as it furnishes an
early instance of a charge being made for a specific
increase of hazard.
A building insured in the Philadelphia Contribution-
ship was ignited from a fire in the trees in front of
the house. The companies declared that all insurance
would be canceled on such properties unless the shade
trees were cut down. The insured protested and an-
swered that if the company did not abolish its rule they
would withdraw their insurance and form another or-
ganization. The company held to its position and the
seceders formed the Green Tree Company. This new
company established two sets of rates, one for houses
having no trees in front of them and a somewhat higher
rate for those having them.
109. Early charges, — There are no exact data as to
how charges were first determined for fire insurance
in the United States. It is sufficient to state that the
method was a duplicate of the English system with
90 INSURANCE
some increases to meet conditions then existing in the
United States. It is known, however, that when the
IMutual Fire Insurance Company was organized in
Boston in 1797 an extensive research w^as made to de-
termine the number of buildings destroyed by fire
within a period of thirty-eight years, statistics appar-
ently having been available for that number of years.
These records show that the average number of build-
ings standing throughout the period w^as three thou-
sand and the loss eighteen and a fraction per cent per
annum. On these statistics the company's rates were
based. The original insurance companies, of course,
could not have had any such data as it was not avail-
able.
The early rates were based on certain classes or
groups. Class one was 35 cents, the rates then increas-
ing 2^/2 cents for each class up to the fifth. The
sixth class bore an advance of 5 cents over class five.
In Virginia there were eight classes ; in New York, and
Norwich, Connecticut, seven. This method of rating
by a division into classes continued in force for many
years. There was also adopted in this country the
grouping of "Not Hazardous," "Hazardous," "Extra
Hazardous," and "Specially Hazardous," the goods em-
braced under each of these classes being as follows :
Not Hazardous. Coifee, flour, household furniture, linen, paints
ground in oil, etc.
Hazardous. Chinaware, plate glass, cotton in bales, and fire-
crackers.
Extra Hazardous. Apothecaries', fur dressers', printers', and rag
stores.
Specially Hazardous. Barbers', gas makers', and other heavy manu-
facturing risks.
The building was rated according to one of the fore-
going classes, and then to determine the rate on the
contents a charge was made accordingly as the contents
RATING 91
fell into the ''Not Hazardous," "Hazardous," "Extra
Hazardous," and "Specialty Hazardous" groui)s. In
the first class an addition of 5 cents was made; in the
second group an addition of 10 cents; in the third 25
cents ; and in the fourth a much higher rate was charged,
a special table of additional charges applying thereto.
Such was the system of rating fire insurance up to
about 1850.
110. Special ratings. — There had been adopted in
England a tariff applying to cotton mills. This had
its effect in this country and other special methods of
rating also began to be adopted, first applying to mills
Uke cotton, woolen, etc. This system of rating manu-
facturing risks corresponds in a measure to the
manufacturing schedule used in different parts of the
country to-day and has never been wholly and success-
fully superseded. It starts with a base rate according
to the business done in the mill, sundry charges being
added thereto. A copy of such schedule, now in use
for at least twenty years, is as follows :
Minimum Hazard Rate
Add for deficiencies
1 Walls, frame or not standard 50
Part frame 25
2 Roof not standard 05
Mansard according to exposure 05
Skylights 05
3 Cornice, not standard 05
4 Height, each story above five or 60 feet 05
5 Floors not standard 05
Ceilings 05
6 Floor openings, unless closed in accordance with standard. .10
7 Shutters, exposed sides, not standard
8 Communications 05
9 Heating, other than approved steam heat 05
10 Lighting, other than approved gas or electric light 05
11 Ground area: each additional 5,000 square feet 10
13 Fire appliances, no buckets or not in proper order 10
13 Watchman, no watchman, or watchman without approved
clock 05
CHARGE DISCRETIONARY.
14 File heat 10
15 Benzine or similar product 10 to ,55.
92 INSURANCE
16 Wood working, unless a wood worker 25
Hand 10
17 For each additional occupant
18 For exposure, bad construction or condition, charge ac-
cording to hazard
19 Waste, not properly cared for 05
HAZARD DEFICIENCIKS.
20 Oiling, Varnishing, Painting 05 and up.
21 Storage, Paints, Oil, Varnish, Turpentine, Alcohol 10. and up.
22 Drying, except in fire-proof room 10 and up.
23 Storage or use, hay or straw 05 and up.
24
25
Contents
%
Building
111. Summary, — Before entering on the subject of
schedule rating it is well to summarize the successive
steps leading to the present development of rating.
(a) There is no certain knowledge of how the early
rates were made.
(b) They were probably based on the rental value
of the property.
(c) They were divided into two classes according to
the construction of the building.
(d) The contents were insured at the same rate as
the building.
(e) There was a segregation of certain classes of
risks and a higher rate charged for building and con-
tents if such risks were in the building.
(f) Classification introduced of "Common insur-
ance," "Hazardous insurance," and "Doubly Hazard-
ous insurance" with the classification of "One-half" and
"Doubly Hazardous insurance" between the first and
second and second and third, thus making five classes.
(g) The first steps for schedule rating arose when
the first tariffs were adopted for sundry mills.
The classifications in paragraph "f" were the Eng-
RATING ^3
lish divisions; in this country they were "Not Hazard-
ous," "Hazardous," "Extra Hazardous," and "Speciall}^
Hazardous."
The following is a brief sketch of the origin and
growth of our modern system of rating :
112. National Board of Fire Underwriters, — This
board was organized in 1866. The necessity for some
form of co-operation had been obvious for many years.
A practically successful effort was made to establish such
a body in New York City as early as 1826. This body
was charged with the general supervision of the busi-
ness, or rather with the drafting of policy forms, the
fixing of rates, and the determination of general con-
duct. The early organization was more or less
tentative in its nature and did not exert a very strong
influence. In 1852 a meeting of all the companies en-
gaged in an agency business was held in New York City.
There were eight or ten companies represented at the
meeting, the questions taken up being much the same
as those considered at the present time.
On July 4, 1866, in Portland, Me., occurred one of
the most disastrous fires in the history of the United
States, excepting those in New York City of 1835 and
1845 and some early fires in San Francisco. It was
only a few days previous to this fire that a call had
been issued for a general meeting to consider the ques-
tion of organizing a national board of fire underwriters.
The fire naturally lent great impetus to the movement,
as a loss of $10,000,000 in those days was almost as
difficult to meet as the fifteen times larger loss at San
Francisco forty years later.
The National Board of Fire Underwriters undertook
in addition to many other things the determining of
the rates of insurance for the entire country, and as
94 INSURANCE
the companies' funds were rather low at that time the
work in the beginning was fairly successful. The
Board's method of fixing the rates w^as not directly ac-
complished by its own inspectors and raters but rather
through the organizations in the different states and
with the voluntary assistance of the special agents of
the various companies. The work was very successful
for a year or two, but as the companies recovered from
the Portland fire, more or less competition again ap-
peared and rates were partly disregarded. This func-
tion of the National Board continued to weaken until
at the time of the Chicago fire in 1871 it had practically
ceased. The loss at Chicago w^as so overwhelming as
to leave no dissenting voice in regard to the necessity
of increasing rates not only to, but beyond the point
originally fixed by the National Board. The condi-
tions were such that a higher rate was imperative, and
the insured, recognizing that a sufficient income must
be secured if the companies were to meet losses, were
willing to pay.
The Chicago fire was followed a year later by the
one in Boston. This fire also served to strengthen the
National Board. After a while, however, the policy of
rating by a national organization was recognized as
unwise. The problem was too large to be handled in
that way. The National Board was re-organized and
abandoned the rate-making function, but has since done
admirable work with the general conditions of the busi-
ness.
113. Local organizations. — After the abandonment
of rate-making by the National Board, local organiza-
tions again assumed the function. By local organ-
ization is meant such as might cover a city, a portion
of a state, a state, or even several states. It was usu-
RATING 95
<».
ally composed of the representatives of the companies
in these territories, these representatives being familiar
with the local conditions. Such organizations exist in
the larger cities, as in Boston, New York, Philadelphia,
Chicago, San Francisco, Cincinnati, Louisville, St.
Louis, and probably elsewhere.
114. Attack on organizatio7is, — The organizations
charged with the duty of rate making have been at-
tacked in nearly every state. With the exception of
some of the larger trusts no form of commercial enter-
prise has been subject to such violent denunciation as
the so-called insurance trust as typified in its rating
organizations.
An organization whose object is to secure a fixed
price for the article in which it deals seems at first
glance to partake of the nature of a trust; and little
distinction has been made in many states between a
rate making insurance organization and one whose ob-
ject is to control the price of commodities.
In the eastern states the rate making organizations
have been little disturbed, there being strong organiza-
tions in New England, New York, Philadelphia, and
Baltimore. Throughout the Middle West the con-
flict has raged fiercely. On the Pacific Coast the func-
tion of rate making has been allowed to remain undis-
turbed in the hands of the companies. In some states
the most extreme measures have been adopted, amount-
ing to absolute prohibition of practically any form of
organization of the various insurance companies. From
prohibition to tolerance there are all forms of control.
Thus, in some states the agents of the home companies
are permitted to make rates by conference. In other
states the local agents of the companies in those states^
whether representing a home company or not, are per
96 INSURANCE
mitted to make the rates. The larger organizations,
however, those which control the larger premium pay-
ing territories, are volunteer organizations.
115. Value of organizations, — As a matter of fact the
rating organization is an economic organization. Its
express purpose is to perform a certain duty for all
the companies that otherwise would have to be per-
formed by each individual company. That duty is the
inspection of the property, the determination of the rate
according to a schedule duly adopted, the regulation of
policy contracts within limits permissible by law, and
the determination of general practices not covered by
the law.
At the time of the San Francisco fire $40,000 of
insurance was desired by an insured. In order to se-
cure this amount a broker was compelled to visit forty
different offices, since $1,000 only could be placed in
each office or company. It is evident that if the inspec-
tion and making of the rate on this risk had not been
done by means of co-operative bureaus it would have
been necessary for each company to send someone to
do the work, with the result that this item of expense
would have cost forty times what it did. Hence, in its
primary essence a rating organization is economical,
doing for all what each would have to do for itself.
It is essentially important to the insured that the
rates for fu-e insurance should be the same under like
conditions for all parties concerned. Each insured
should pay for insurance a rate in accordance with the
experience developed in that class of business, and like-
wise with the deficiencies and credits shown in his in-
dividual plant.
Insurance is a necessity. One may go without oil,
without certain forms of groceries, without wearing
RATING »7
apparel, if he feels that the price is extortionate and
the control a menace to the public; but fire insurance
is something which the business man cannot do with-
out. That he must purchase, not because he wishes, but
because his credit is more or less dependent upon it.
Therefore, as it is a fixed charge in his business it is far
more important that he should get it at a price based
on the same conditions as those of his competitors than
that he should secure a temporary advantage; for he
will remain constantly in doubt as to whether his com-
petitor has not after all secured a far greater one.
116. Rate making in Kansas, — The latest phase of
rate making has appeared in the State of Kansas.
This state has practically undertaken the business of
rate making, or rather it requires the companies to
file with the State Department their charges for
the insurance of property. If the charges are con-
sidered too high the commissioner has authority to hold
an investigation. This step would appear to estab-
lish an equality of rates among the insured, since the
law provides that rebating or any other practices tend-
ing to reduce the rate shall be severely punished, even
to the extent of loss of license.
117. Duties of rating organization, — In order to
perform its work properly the rating organization must
have a reasonable control over the making of the rate,
the determination of privileges to be granted on policy
forms, a general oversight of the practices with regard
to methods of issuing policies, etc.; otherwise it would
be possible for an individual company to issue a policy
at a certain rate and then grant privileges so broad as
to make it actually low.
118. Types of risks, — If there were nothing to in-
sure but dwelling houses the method of computing the
XI— 7
98 INSURANCE
rate in fire insurance would be much simpler, as build-
ings would then be of comparatively uniform occupancy
and hence of a uniform hazard. Then the only ques-
tions remaining to be considered would be as to ma-
terials of construction, the situation with regard to
other buildings ; that is, exposure, etc. The rater is con-
fronted with a problem bearing no resemblance to this
simplicity. Buildings are occupied for all sorts of pur-
poses. The single-family dwelling, detached 100 feet
at least from all other properties, is as safe a risk as
it is possible to secure. Passing, however, from this
type of risk, there comes the dwelling occupied by two
families or more. In New York City there are single
blocks occupied by hundreds of families. All these
risks, however, present something in common — their
occupancy; for, while it is a multiple occupancy, never-
theless it is all of one character, that is, dwelling.
Hence, the business conducted in these buildings is
fairly uniform in character. The statistics for a few
years of any company, and especially of a few com-
panies, would suffice if all buildings were occupied for
living purposes only to furnish an average on which
rates of insurance could easily be based.
119. Store and dwelling, — The next step from dwel-
ling occupancy is the risk known as store and dwelling.
It may be a one story building with a store in front
and a dwelling in the rear, or, more usually, it may
be a store on the first floor and perhaps in the basement
with all dwellings above.
There has been introduced into the dwelling build-
ing a type of occupancy that presents several different
kinds of conditions. An enumeration of the uses
of the basement and first floor occupancy is sufficient
to disclose this. It may be a florist's or grocer's store,
RATING 99
a paint shop, a printing establishment, an apothecary's
or shoe shop, etc. In the early days, when the dwelling
and store were combined, these risks were usually rated
according to business occupancy and put into their cor-
responding hazardous groups. For a long time the
method continued of regarding a store and dwelling
as practically subject to the same rate, but later the
practice developed of segregating some of these occu-
pancies (as a paint shop when found in connection with
the dwelling) and regarding them as more hazardous
than others and charging additional rates for the build-
ing and dwelling tenants.
120. Business building, — After the dwelling, and
store and dwelHng, comes the building devoted entirely
to business purposes. It may be a small corner grocery,
totally distinct from any dwelling occupancy. From
this small business the type varies through all the
groups and sizes and constructions until the modern
department store occupying entire blocks is reached, in-
cluding adjoining blocks with tunnels beneath the
street and bridges overhead. In the domain of busi-
ness buildings there is no limit to the kind of business
occupancy and to the problems which the rater may
have to solve. Formerly the business building was usu-
ally 25 by 100 feet, and 5,000 square feet was an ex-
traordinarily large property. Nowadays the area may
be 100,000 square feet, and the problem of how to
meet the new condition becomes far more intricate than
the mere increase in area would imply.
121. Groups of risks, — Risks fall into certain groups
according to the occupancy.
Under (a) may be designated the dwelling class,
which includes the private dwelling, the multiple dwell-
ing or apartment house, hotels and clubs. These differ
100 INSURANCE
largely, nevertheless their chief purpose is to furnish
in some form or other living conditions for tenants.
Under (b) is grouped the class of buildings repre-
sented by theaters and churches, each having a different
purpose and therefore presenting a specific problem in
fire insurance. The theater is typical of any place of
amusement, whether a circus, a summer garden or any
other place of amusement. Owing to special building
requirements the theater presents a problem in regard
to the safety of the audience more important than any
question of insurance.
Under (c) may be represented stores and dwellings
forming a group by themselves and all buildings in
which the lower floor is occupied for business purposes
and the upper floor for dwellings.
Under (d) may be classed breweries, sugar refineries,
manufacturing plants, and risks of like character, rep-
resenting types of property erected for a specific pur-
pose and of no use for any other. Such and similar
risks represent buildings where even the machinery, be-
ing enormous, must be erected in the building while it
is in course of construction. It is needless to say that
these special types form but a small group of risks and
call for the special attention of the rater.
In addition to the manufacturing buildings men-
tioned under (d) there may be manufacturing build-
ings used for one purpose to-day and another to-mor-
row. They are usually loft buildings, where power
is furnished for driving the machinery, and differ from
business or mercantile buildings where goods are bought
and sold. They are not furnished so well nor so ex-
pensively built, and should be considered rather as
manufacturing plants.
A distinction in the different types of buildings
RATING 101
should be made, since the problem of rating a risk in a
building of fireproof construction differs from that in
a risk of non-fireproof construction.
In brief, the point of emphasis in the foregoing
paragraphs is that there are hundreds of classifications
used in rating, and that while each building furnishes
its own problem that problem may be complicated by
each tenant in occupancy.
CHAPTER IX
MINIMUM AND SPECIFIC RATES
122. Minimum rates, — Rates may be classified in
many ways, the customary way being as "Minimum"
and "Specific." The minimum rate is a rate applying
to a large class; a class so identical in size, experience,
and uniformity of hazard as to make specific rating un-
necessary. A type of this class is the ordinary dwelling
house, of which there are probably ten million in the
United States.
If the ordinary dwelling has a value of $5,000 and
a rate at 40 cents per annum there would be for each
$100 of insurance 40 cents; for each $1,000 of insur-
ance $4, and for the $5,000 of insurance $20. But in
a large portion of the country many policies may be
written for three years at twice the annual rate, hence
it would be a matter of paying $40 once in three years
to secure the insurance of $5,000 for that period. It
is evident that if the insurance can be furnished so
cheaply any money expended in inspecting or other
work would not yield results comparable with the ex-
pense and would add so materially to the cost as to
necessitate the increasing of the rate. This great body
of risks, therefore, may be considered as coming under
minimum rates, this minimum rate being the amount
fixed for the territory by the organization of insurance
companies and subject to no reduction, except, per-
haps, for the amount of insurance carried, that is, the
co-insurance clause attached.
102
MINIMUM AND SPECIFIC RATES 103
Minimum rates apply to any large body of risks, such
as dwelling houses, stores and dwellings, etc., which are
so numerous and of so uniform hazard as to make a
fairly safe average on which to base the rates.
123. Specific rates, — Specific rates apply to a certain
building on property occupying a certain location. The
specific rate is made for the risk to which it applies and
does not apply to any other.
In a computation of the specific rate it is necessary
to consider seven principal factors, namely:
1. Location.
2. Construction.
3. Occupancy.
4. Fire-fighting devices.
5. Exposure.
6. Co-insurance.
7. Losses in that territory.
Under these seven factors may perhaps be grouped
aU the information necessary for the making of the
specific rate.
The specific rate is based on a certain schedule made
to apply to the class, and it is necessary to consider
schedule rating before proceeding to analyze schedules.
124. Schedule rating, — Schedule rating differs from
other methods of rating in vogue in the United States
up to 1870 with the exception of one or two schedules
devised for rating cotton mills and some others, which
were in their essence schedule ratings.
Schedule rating may be defined as the making of
the rate in such manner as to penalize those items in
the construction, occupancy and care, which experience
has shown tend to cause fires ; and as a system of credits
to the risk for features that are helpful either in pre-
venting or putting out a fire. The idea of schedule
104 INSURANCE
rating may be better expressed in the following illus-
tration :
Suppose, for instance, that every hotel were charged
a flat rate of $1, the only question to consider being
"Is it a hotel?" If so, the rate is $1. Now it is
evident that while two hotels may be alike, yet it is very
unusual. There are hotels of frame construction in the
country far from all fire protection; and then hotels of
fireproof construction in the city under the best of fire-
fighting devices. If the rate of $1 is high enough to
yield a profit on the frame hotel it is evident that it
is several times too high for the fireproof hotel in the
city. In all probability the system of schedule rating,
which endeavors to treat each risk on its own merits, is
as necessary for the success of the insurance business as
it is equitable to the insured.
125. Difference in risks. — A system of schedule rat-
ing does not rate all hotels alike. It takes into consid-
eration whether the hotel is frame, ordinary, or fire-
proof construction, and makes a difference for that
one factor alone. It also takes into consideration the
height of the different buildings, the number of rooms,
the space the hotel covers, the conditions or relation of
the kitchen (an important factor in a hotel, as it con-
tains the furnace, stoves, etc.) and whether the hotel
is heated' by stoves in the individual rooms or by steam
from a central point safely installed. These are the
simplest of factors. The following shows an early at-
tempt to discriminate in the various features of a risk:
COTTON MILLS.
Note: Surveys to be sent to office for approval, before issu-
ing policy.
Brick or stone, slate or metal roof detached.
MINIMUM AND SPECIFIC RATES 105
Floors laid in mortar, if ceiled underside, or of heavy plank
with Norway pine 1% inches thick over plank.
Scuttle in roof, with permanent ladders on each side of building
reaching to ridge of roof, platforms connected with ladders
to one window in each story.
Picker in separate fire-proof building.
Lighted with gas, or by oil lamps enclosed in glass.
Good force pump that can be put in operation inside and out-
side of mill of sufficient power, and riveted leather hose
of sufficient extent to reach all parts of mill, with places
for attaching hose in each story, and hydrants outside.
Casks of water in each room with pails constantly filled.
Faithful watch every night and good watch clock.
Lightning rod with numerous points above roof.
No machine shop in mill.
Warmed by steam, pipes to rest on iron brackets, and to be one
to two inches from any wood work or combustible substance
(pipes should be kept clean and free from all combustible
substances.)
Elevators to be cased, and when not in use to have scuttles or
doors closed on each story.
Waste to be removed from mill daily, otherwise not insurable.
RATE OF PREMIUM 100 cts.
ADDITIONAL PREMIUM FOR
DEFICIENCIES.
Roof of wood or composition , 10 cents
Floors not laid in mortar nor of plank 10 "
Building of wood, floors not laid in mortar 50 "
If no scuttle or ladders 10 "
Picker in mill in fire proof room 25 "
Picker in mill not in fire proof room. 50 "
No force pump 25 "
No casks of water in each story 25 "
No watch, or watch without a watch clock 25 "
No lightning rod. 10 "
106 INSURANCE
Machine shop in mill, with forge. . . 25 cents
Machine shop in mill, with forge and wood worked . . 50 "
Warmed with hard coal 10 "
Warmed with wood (stove pipe to be cleaned once in
two months) 25 "
Steam boiler in the mill 25 "
Lighted with open lights, or waste not removable
daily . . . ., Not insurable
Additional for age and external exposure."
126. Variety of schedules, — The principle once rec-
ognized that no two risks were alike and that each
should be treated on its individual merits led to a variety
of schedules. Schedules, for instance, have been devised
for woodworking risks, for theaters, lodging houses,
and churches; for light and power stations, car barns
and repair shops for car barns; for sugar refineries,
breweries, and any other manufacturing plant, etc., and
it should be noted that the names of these schedules
indicate the class of risk to which they apply.
A fairly successful effort has been made to con-
struct one schedule applying to all manner and kinds
of risks. This may be possible. The tendency is in
that direction, but as yet a special schedule applying to
a certain specific class seems to be more satisfactory than
a general schedule applying to all properties.
Two schedules stand out before the insurance world
distinct from all others. Each should be treated in
turn, since its influence upon the question of schedule
rating has been great, the contest between the two not
yet being settled.
CHAPTER X
UNIVERSAL MERCANTILE SCHEDULE
127. Origin of Universal Schedule. — The Universal
Mercantile Schedule is the work of a committee that
devoted several years to the subject, bringing the work
out in its completed form in 1893. It was tested out
in some six preliminary editions, and in its final form
was published in the year mentioned. The schedule is
an attempt to construct a universal system of rating —
a system to abohsh all special schedules and permit
every risk of whatever kind, character, or occupancy
to be rated. Mr. F. C. Moore, ex-president of the
Continental Insurance Company, is the chief author
of the work, three other gentlemen and six co-operating
committees, representing underwriting organizations in
different parts of the country, and the National Board
of Fire Underwriters, being also associated.
128. Fundamental principles, — The seven funda-
mental principles on which the schedule is based are :
(a) A schedule should recognize a key rate as a
starting point, viz. : The rate of a building^ of stand-
ard construction in a standard environment, i. e., in a
city presenting the most favorable conditions for the
prevention, discovery, extinction and confinement of
fires to single buildings; and that the difference be-
tween the starting point, or base rate, of one city as
compared with another should be explainable by charges
for variation from standard. Unless differences be-
tween two cities as to the same character of structure
107
108 INSURANCE
are explainable, jealousies and antagonisms result in
inciting adverse legislation.
(b) Inasmuch as all the risks of a city can not have
the maximum benefit of the fire department, especially
where street water mains are of inadequate sizes, it is
clear that all risks in the city should not be rated alike,
even though identical in construction and occupancy,
but that they should differ according to the sizes of
street mains, proximity to hydrants, fire engine houses,
etc.
(c) Certain features of construction, as self -releas-
ing floor beams, for instance, which improve a build-
ing, are of no benefit to the stock. The stock, there-
fore, should not receive credit in the rate. A system
of rating by adding a fixed sum to the final building
to get the stock rate must by a process that recognizes
features that are not of advantage to the stock result
in an inadequate stock rate.
(d) Fire extinguishing appliances, especially for
throwing water, should not receive credit to the same
extent in computing the rates of stocks as in the rates
of buildings, because water throwing damages stocks
to a greater extent than buildings.
(e) Exposures should be treated differently from
stocks in the case of buildings. A building may be
so constructed as to be a complete protection to its
stock, but requires a charge in its own rate for possible
damage to its exterior paint, etc., etc.
(f ) The rate of a stock should relate to that of the
building in proportion as the latter is of poor construc-
tion, liable to be totally destroyed, and deficient in fire
extinguishing appliances; whereas there should be a
rate difference between the rate of a building and its
stock if the building is of standard construction and
UNIVERSAL MERCANTILE SCHEDULE 109
its fire extinguishing appliances are of the best. And
this difference in rate should never be determined as
a matter of judgment but by some automatic process
to adjust the difference in rate to the conditions. This
object the Universal Schedule accomplishes. No other
schedule has provided for this vitally important feature.
(g) The fire record of a city should be taken into
account in computing rates both at the beginning and
the ending of the term for which the rate is computed.
This is recognized by the Universal Schedule.
129. Scope of schedule. — The schedule has never
been applied as published — except perhaps in one in-
stance— but it has served as a basis with certain modi-
fications for nearly all the schedules in use to-day in
the larger cities and in different parts of the country,
and has the widest use of any schedule up to the present
time. The Dean Schedule, or Analytic System, which
will receive attention later, comes next.
Schedules and schedule ratings are very much like
tariffs in that they are never settled. Such questions
are said never to be settled until they are settled right,
but the right method of schedule rating does not appear
to be imminent, and in all probability the subject will
not be settled for many years if ever. The factors to
be considered are so many that the efforts of more than
one generation will be required before the proper solu-
tion is reached.
Life insurance bases its charges on the fundamental
principles of mortality. Fire insurance has no such
solid foundation; therefore, it will be subject to new
interpretations as experience proves the old order of
things to be wrong.
130. HotJo is a risk rated? — The initial question, how-
ever, is not "How were schedules made?" or "What
110 INSURANCE
was their origin?" but "How are they appHed?" This
is the very practical question, "How is a risk rated?"
It can be answered in no better way than by tracing its
operation.
Two things are necessary to this purpose — a report
on the risk and a schedule on which the risk is to be
rated. The example given below of a risk to be rated
is not taken from any actual property, but the schedule
on which it is based is an adaptation of the Universal
Mercantile Schedule.
(a) No. 35 A Street, Manhattan Borough, New
York City, is a six story and basement building, di-
mensions 65 by 100 feet, without any dividing walls,
having independent wall averaging eighteen inches of
brick, excepting front, which is hollow iron. The ad-
joining buildings on either side have walls entirely of
brick, and the risk itself is occupied by a single tenant.
(b) The floors are of single board one and one-
quarter inches thick, on wood joists, fourteen inch
centers resting on wood girders, which are supported
by exposed cast iron columns on all floors, the roof be-
ing supported by wooden posts and having a composi-
tion surface.
(c) Elevator and stairways at the front end of the
building, both being open and adjoining.
(d) Open dumb-waiter at the rear and pierces second
and third floors.
(e) The building is heated by a hot air furnace in
the basement, having a metal cold air box, the smoke
pipe of which is conducted to the chimney, the walls of
which are four inches thick.
(f ) The risk is occupied by one tenant, carrying a
stock of canned goods, which have no first column
charge and the second column charge is 40 cents.
UNIVERSAL MERCANTILE SCHEDULE 111
(g) Building is equipped with fire pails, which are
approved, but has no other allowance. What is the
final rate on building and contents?
131. Key rate, — The first point to be considered in
making the rate is the key or basic rate for the city.
This is usually determined for the entire city, or dif-
ferent districts in the city as the city may vary, and is
based on such general factors as the following: As-
suming the risk to be in a city under the protection of
a fire department, with efficient water supply, etc., the
special items to be considered in the key rate are the
waterworks, fire engines, fire alarm telegraph, police
organizations, fire department organization, fire marshal
or coroner, width of streets, building law, electric wires,
conflagration hazard, natural gas or oil for fuel, high
winds, previous fire record, exceptionally favorable or
unfavorable features of the city, chemical engines on
wheels, auxiliary steamers, and the number of hook and
ladder trucks to every four steamers. Credits should
be given when these conditions exist or are in accord-
ance with the standards, charges being made if they
do not exist or fail to reach the standard. The
schedule, in determining the key rate, assumes the ex-
istence of none of these things and makes an initial
charge of 20 cents.
132. Rating by schedule, — It is assumed in this case
that the key rate being duly measured is 20 cents.
Turning to the risk itself and to the report thereon, the
walls appear the first thing to be considered. The re-
port under the first paragraph describes a building of
six stories and a basement. The standard building six
stories high should have walls averaging twenty-two
inches. The building in the report has walls averaging
eighteen inches. In the charges provided is 1 cent for
112 INSURANCE
each four inches in variation from the standard, but
where the building is over four stories high there is
a double charge. The building in this case is six
stories high, therefore there is a charge of 2 cents for
each four inches variation. There is but one four inch
variation, hence the charge is 2 cents. The front of the
building is iron; iron fronts are bad and so an extra
charge of 3 cents is made.
The roof is a composition, as shown by the second
paragraph of the report, and according to the schedule
a charge of 1 cent should be made. The floors are one
and one-quarter inches thick with a charge of 5 cents
for single flooring and 2 cents for double flooring less
than three inches thick. The charge to be made is 5
cents. The finish of the building comes next, and as
the report does not state any deficiency, it may be as-
sumed that no charge is to be made.
The area is 65 by 100 feet, or 6,500 square feet. The
schedule permits 2,500 square feet without any charge,
leaving 4,000 square feet to be charged at 3 cents per
thousand, a total charge of 12 cents for area.
The height of the building is six stories; four stories
without charge is permitted. The fifth story has a
charge of 3 cents and the sixth story of 5, hence the
charge to be made is 8 cents.
The report states that there are elevators and stair-
ways at the front end of the building, both being open
and adjoining. An open elevator calls for a charge of
6 cents ; an open stairway 8 cents. One charge is made
where two deficiencies of this character are adjoining.
This charge would be the greater of the two, hence 8
cents is proper. A dumb waiter is at the rear of the
building and pierces the second and third floors. It
UNIVERSAL MERCANTILE SCHEDULE 113
should be charged 1 cent for each floor pierced, or a
full charge of 2 cents in this case.
The building is heated by a hot air furnace with
metal cold air boxes ; this entails a charge of 1 cent. The
chimneys are only four inches thick, and as eight inches
is the standard a high charge is accordingly made for
this deficiency, being 12 cents. Another item in con-
nection with the building calls for notice. In the
second paragraph of the report unprotected iron
columns are noted; the charge is 10 cents.
A summary at this point shows ;
Key rate 20 cents
Walls 2 "
Iron front 3 "
Composition roof 1 "
Floors 5 «
Area 13 "
Height 8 "
Stairways and elevators 8 "
Dumb waiter 2 "
Furnace heat 1 "
Four inch chimneys 12 "
Unprotected iron column 10 "
Total 84 "
The schedule makes provision for other items before
this total is reached, but they do not occur in the risk
and a sufficient number have been given to show the
method of operation.
There should be deducted at this point any item of
construction of exceptional value, such as tin or sheet
iron between the floors, the grade floor fireproof, all
posts, etc., twelve inches square. The property pre-
sents no features of exceptional construction; therefore
no reductions are made.
133. Hazar^d on stock, — The tenant who occupies the
building is a wholesale dealer in canned goods, the
hazard of this business being considered so shght that
XI— 8
114 INSURANCE
the building is not penalized because of occupancy.
The mercantile schedule was the first to emphasize the
fact that the hazard on stock could be divided into two
factors — ^the possibility of fire or the ease with which
a fire might start or be started by stock, and the damage
to stock caused by a fire. Canned goods, however, do
not present in themselves anything hazardous. They
would not start a fire of themselves, neither could a
fire be easily started in such stock.
134. Deductions for fire appliances, — Fire appli-
ances appear next in order, deductions being made for
any of the following devices :
Signalling apparatus.
Fire pails.
Standpipes.
Watchman's service.
Fire doors, etc.
Also if the building should be equipped with offices
throughout or for offices above the grade floor. The
building under consideration is not thus occupied, and
apparently has fire pails only, for which an allowance
of 5 per cent is to be made; hence from the 84 cents
5 per cent is deducted, or .042, leaving .798.
135. Exposure, — The next feature to be considered
is the relation of this property to the surrounding
properties, that is, its exposure on all sides. The table
of exposure provides that any building within one hun-
dred feet, on the right, left, front, or rear, may be
deemed as exposing the risk. Beyond that distance
no exposure is computed. The exposure table is some-
what complicated and takes into consideration not only
the distance but the height of the exposure; whether
there is a blank wall toward the exposure, or whether it
is pierced with windows, etc. Having determined the
UNIVERSAL MERCANTILE SCHEDULE 115
exposure by the table provided therefor, the charges
prove to be 8 cents, which, added to the .798, makes a
summary of .878.
136. Co-insurance. — Up to this point the schedule
has presupposed that co-insurance is not carried. Co-
insurance will be treated more fully later on, but at
this point it is sufficient to state that it is an agreement
on the part of the insured to carry a certain amount
of insurance. The amount commonly carried is 80 per
cent. The Universal schedule does not make any pro-
vision for a specific amount of co-insurance, but makes
a deduction on the non-fireproof schedule of one-fourth
of 1 per cent for each 1 per cent above 20 per cent.
Assuming that 80 per cent is carried there is 60 per cent
above the 20 per cent, one-fourth of which is 15 per
cent. Hence from the .878 there is to be deducted 15
per cent, or .132, leaving the rate .746.
137. Faults of management, — This item brings the
rate to the final group of factors to be considered,
namely, faults of management. There should now be
added any charges for carelessness, untidiness, broken
lath and plaster, and other similar glaring defects.
These charges are made at this point, and are made
large in order to secure their correction. When the
defects are corrected the charges are removed, leaving
the computation of the rate unaiFected. Assuming no
faults of management the building rate would be .746.
138. Rate on contents. — After the first column
charge has been added to the building rate there is then
deducted a certain percentage, say, 20, of the build-
ing deficiencies, since the entire sum of the building
deficiencies should not be charged against the contents.
There being no first column charge in this case the
amount from which we deduct 20 per cent of the build-
116 INSURANCE
ing deficiencies is .84. The building deficiencies are,
of course, .84, less .20, the key rate of the city not be-
ing a building deficiency. If we deduct 20 per cent
of this amount it leaves us 71 cents as the key rate for
our contents. The stock takes a second column, or occu-
pancy charge, of 40 cents. Stock distributed over sev-
eral floors is better than stock concentrated on one floor,
hence the insured is entitled to an average height charge
for the floors occupied. The basement is subject to a
5 cent charge, being one floor below the grade. The
grade floor is subject to no charge. Then from the
grade floor up the charge is 5 cents, w^ith an increase of
5 cents for each floor higher than the one below. This
charge is made up as follows :
Basement 5 cents
First floor Nothing
Second floor 5 cents
Third floor 10 «
Fourth floor 15 "
Fifth floor 20 «
Sixth floor 25 "
Total 80 «
Stock is distributed over each of the seven floors;
therefore the average height charge is .114, which,
added to the .40 occupancy charge and the .71 key rate,
gives a total of 1.224. The contents, as in the case of
the building, are subject at this point to a reduction
for any fire-fighting devices. Only fire pails apply,
and 5 per cent deducted from 1.224, is .061, which sub-
tracted leaves a remainder of 1.163. The exposure has
already been computed as 8 cents and this now added
makes the amount 1.243.
The deduction for co-insurance on the contents is
one-half that on the building, as it is not deemed worth
so much as is in the case of the building. Damage to
contents always amounts to a higher percentage than
UNIVERSAL MERCANTILE SCHEDULE 117
that of the building except in a very extraordinary
ease, so there is deducted for co-insurance 7% per
cent, or .093, leaving a rate on the contents of 1.149.
139. Simple example, — It should be understood that
the foregoing is a comparatively simple example of
the problems presented for consideration by the real
work of rating. In a growing American city, the dif-
ficulties are almost as numerous as the inhabitants, cer-
tainly as numerous as the buildings, since each build-
ing possesses an individuality of its own, and the rater
must give expression to that individuality in the rate of
insurance. The illustration, however, is sufficient to
furnish a guide to the application of any schedule.
Whether the problem be simple or intricate it is a mat-
ter of taking the data furnished by the inspection re-
port and measuring it by the standard of the rating
schedule; the result is the rate.
The Universal Mercantile Schedule makes provision
for rates on fireproof buildings and on frame build-
ings, being capable of wide application. A manufac-
turing plant, presenting as it does a large number of
varied processes, requires a somewhat detailed system
of occupancy charges. In Philadelphia this has been
worked out to a certain extent by means of the so-
called coupon system, which gives the occupancy
charges; but the Universal Mercantile Schedule is used
as the basis on which the building rate and the key rate
for contents is made.
140. Be capitulation. — As the entire rate may prove
of value to the student it is here appended :
Key rate 20
- Walls 02
Iron front 03
Roof, composition 01
Floors 05
Area 12
118 INSURANCE
Height 08
Stairway and Elevator 08
Dumb waiter 02
Furnace 01
Chimneys 12
Iron column 10
Total 84
Deduct 5%, fire pails 042
.798
Exposure. Add 08
.878
Co-insurance. Deduct 15% 132
Final building rate 746
The key rate for the contents is the building rate at
the point where the total is .84 less 20 per cent of
building deficiencies, or .71.
Key rate 71
Occupancy charge 40
Distribution stock 114
1.224
Deduct 5%, fire pails 061
1.163
Exposure, add 08
1.243
Deduct co-insurance, 7^% 093
Final contents rate 1.150
CHAPTER XI
ANALYTIC SCHEDULE
141. Origin, — The complete title of the schedule
is the Analytic System for the Measurement of Rela-
tive Fire Hazard. The schedule is the work of Mr. A.
F. Dean, of Chicago, Assistant Manager of the West-
ern Department of the Springfield Fire and Marine
Insurance Company, and is one of the two schedules
widely accepted throughout a large part of the United
States, the other being the Universal Mercantile.
The origin of the schedule is due to an attempt to
formulate a system for measuring exposure. After
the table was formulated a frame tariff was devised in
order to test it. This occurred the latter part of
1902, and the test was made in the small towns of
Illinois. It appears to have met with a favorable re-
ception and a schedule for brick buildings was added
and the frame schedule revised. It spread from the
smaller to the larger towns and from one state to an-
other, and is said to-day to be in use throughout the
Middle West from Nebraska to West Virginia and
from Minnesota to Tennessee.
142. Percentage system, — The principal departure
of the Analytic System from previous schedules is in
the extension of the percentage system. The Universal
Mercantile Schedule had already introduced this sys-
tem of percentage, additions or deductions in the credits
to be given to the risk. The Analytic Schedule departs
from other schedules and makes the deficiency charges
119
120 INSURANCE
as well as the credits subject to a percentage increase.
Thus, in the example given in the previous chapter
deahng with the Universal Mercantile Schedule it was
noted that the height charge, for instance, was a cer-
tain number of cents for the fifth floor and a certain
number of cents for the sixth floor; that is, the de-
ficiency charges were a fixed amount. In the Analytic
System these additional charges are a percentage of
the base rate, and it is this extension of the percentage
which indicates one of the widest departures of the
Analytic System from other schedules.
In its general approach to the problem the Analytic
System does not difl'er essentially from other schedules.
There is the basic rate. To this there are additions for
deficiency charges, credits for superior conditions,
charges for occupancy, credits for fire-fighting devices,
an addition for exposure charge, and finally charges
for faults of management, though in the Analytic
System these are called "after charges."
143. Relativity, — The matter of relativity in the
Analytic Schedule is one of its greatest contributions.
The rate is determined by percentage charges as well as
credits, a consistent whole being bound together in all
its parts, and relativity being reached by means of the
percentage system. Let us assume that the basic rate
of a city is 50 cents. If a charge of 10 cents is added
because of a defective wall, this is 20 per cent of the
basic rate. If the general conditions of the city are
improved so the basic rate falls to 40 cents and the
charge of 10 cents for the defective wall is continued, it
is then 25 per cent of the basic rate.
The Analytic System declares that the relation be-
tween the charges for deficiencies and credits should
ANALYTIC SCHEDULE Ul
always be a fixed percentage of the basic rate; hence,
in place of adding a flat charge of 10 cents for a de-
fective wall the charge might be 10 per cent, so that
if the city had a basic rate of 50 cents the charge for
the deficiency in the wall would be 5 cents, and when
the basic rate of the city fell to 40 cents the charge
would be 4 cents, still remaining at the same percent-
age. In other words, a fixed relation should always
exist in all parts of the rate.
144. Basic rate, — The basic rate in the Analytic
Schedule is the sum total of the items not susceptible of
analysis and hence are lumped together in one sum.
Having determined the basic rate which, of course, dif-
fers in different states and for different portions of
the same state, and for a city within a state, the
schedule is computed by adding to this basic rate per-
centage additions for deficiency charges arising from
height, area, walls, roof, ceilings, skylights, floorway
openings, partitions, chimneys, exterior attachments
and warerooms. The building may be of superior con-
struction, and a due percentage is allowed accord-
ingly.
145. Factors influencing rate, — The matter of occu-
pancy as affecting the rate is divided into three parts:
(a) As the cause of fire; (b) as an aid to fire when
started, and (c) as an effect of fire, smoke, or water.
The causes of fire, though many, are embraced under the
two general heads of inert and active; the first em-
braces those causes practically without hazard, and the
second those with a hazard of varying degree.
The combustibility of merchandise is divided into five
clauses, known as,
(el) Low,
122 INSURANCE
(c2) Middling.
{c3) High.
(c4) Quasi-incendiary.
(c5) Incendiary.
Two intermediate grades are recognized — c3l/2 for a
quantity measurement on large open stock, and c4%
principally for minor industrial risks. To assist in de-
termining causes of combustibility there is a labor table
dealing with the number of hands, a power, furnace,
and dry room table, all providing sub-divisions or
charges depending on number, arrangement, etc.
The third factor in occupancy is damageability ; that
is, what effect fire may have upon the merchandise.
Four grades, called "dl," "d2," "d3," and "d4," with
three intermediate grades, have been made.
In determining this part of the occupancy charge,
the schedule departs from the percentage system, mak-
ing a fixed charge. Naturally the location of the stock
on a certain floor is considered as well as the construction
of the building, brick or frame, and the important point
of the risk's being in a protected or unprotected town.
Public protection is divided into seven grades, the
divisions being made not by the schedule but by adop-
tion of the classes established by the Western Union.
Private protection furnished by the individual, as dis-
tinguished from public supplied by the community, re-
ceives due recognition on the percentage basis.
The principles of the exposure charge are based on
radiation, absorption, and transmission. The table of
exposure charges is worked out as minutely as may be
expected considering that the schedule grew out of an
attempt to solve this difficult problem.
146. Example. — The following is an example of a
completed rate : A two-story brick building in a fourth
ANALYTIC SCHEDULE 123
class town ; occupied on the first floor for banking pur-
poses and above for dwellings :
Base rate 49
Area. 60' X 30' =z 1,800 square feet, on first
floor 2%
Walls. Twelve inches each story. No
charge.
Parapets. Left, the building one story-
lower. No charge.
Right, twelve inches high. Deficiency .... 2%
Cornices. Not cut off 5%
Occupancy. Bank — no charge.
Dwelling — no charge.
Total 9% or 04
Individual Rate 53
Exposures:
Left 13
Left. Wall damage exposure 11
Right 25 49
Building Rate 1.03
Contents :
Bank. At building rate of 1.02, plus an
occupancy of .26, equals 1.28, less five
cents (one-half wall damage) 1.23
Dwelling. At building rate of 1.02, plus
occupancy charge of .35, equals 1.37,
less five cents (one-half wall damage) 1.32
147. General considerations, — The problem of rating
in fire insurance is one which has received full con-
sideration in the past and bids fair to receive it in the
future. No schedule has ever commended itself as
the proper schedule to be adopted for all times, places
and classes of business. Much discussion has been
spent over whether or not rating is a science. It is not
a science; it lacks the fundamental laws necessary to
any science.
It should be frankly admitted that the data obtain-
able are extremely meager for definite results. The
classifications are more or less at variance, no one sys-
tem applying to all businesses; some companies use a
classification of eighty different groups, others 125, and
from that point up to several hundreds. The greatest
124 INSURANCE
part of the business is probably classified under the
lowest group.
The business of fire insurance is constantly meeting
new hazards. It is evident that if old experience does
not meet new conditions there must be new adaptations,
a new working-over, and a new point of view.
148. Limitations of rating, — It should be pointed out
that rating has its limitations. It is not possible to de-
vise a system of rating to enable the underwriter to
write a risk without doing more than merely looking
up the rate. Rating can never be brought to a mathe-
matical certainty. Even when the best has been done
the insurance companies frequently decline to write at
the schedule rates but may be willing to write at a
higher rate. The difficulties of the problem wiU be
appreciated if a simple illustration is used. The con-
flagration at Chicago was caused by the kicking over
of a lantern by a cow that was being milked in Mrs.
Leary's stable. If every cow under like conditions
kicked over a lantern and started a conflagration we
should have a definite fact to depend upon which would
be as fixed as the law of mortality in hfe insurance.
As a matter of fact this was the only cow that ever
kicked over a lantern that caused a conflagration, and
it is this element of chance which is constantly present
in the business. If it were otherwise how simple the
problem would be! Knowing that the kick of a cow
causes a conflagration we should promptly dispense with
lanterns and find some other means for lighting the
premises, but the fact that it occurred only once, and
in all human probabihty will never occur again, does
not furnish very valuable data on which to base a con-
flagration charge.
The most that can be hoped from any system of
ANALYTIC SCHEDULE 125
rating is that it should make equal rates between similar
classes of business under similar conditions. If the
work of rating in fire insurance can be brought to that
admirable position it will have accomplished all that is
necessary and all that can be asked. Credits and
charges are empiric. If the latter is placed too high
an undue proportion of the rate comes from deficiency
charges. If placed too low there is no incentive to the
insured to correct conditions. A medium must be
reached. The same is true concerning the credits. It
is not known that 5 per cent is the proper allowance
to make for fire pails. They may or may not be worth
the sum mentioned. Their efficiency has been demon-
strated and it is deemed good practice to make the al-
lowance large enough to insure their installation in
every business property. Beyond that it is impossible
to go.
Sprinkler risk data are more complete. This has
been a necessity to the success of the business owing to
the cost of sprinkler installation, and again owing to
the large reductions granted in the rate of insurance,
making the profit exceedingly small and hence neces-
sitating the utmost care that an undue loss does not
occur.
149. ApiAication of schedules.— ^Vi requires no spe-
cial training beyond a certain amount of experience to
handle the mass of class rating. It is a different
problem, however, to approach the subject of specific
rating and the application of schedules as intricate as
the Analytic System and the Universal Mercantile
Schedule. To such an extent have these schedules de-
veloped that the work is almost entirely done by men
whose exclusive function is rating and who may or may
not be familiar with other branches of the business.
126 INSURANCE
The tendency in this direction will be even greater in
the future than in the past. It should be emphasized
that while the problem of rating is one of the most dif-
ficult yet the knowledge concerning it is constantly in-
creasing. The problem should be approached with an
open mind, and better results will be achieved if too
much is not claimed for any one system.^
1 The author is indebted for material in this chapter to lectures delivered
by Mr. H. M. Hess before the Fire Insurance Club of Chicago.
CHAPTER XII
INSURANCE CONTRACT
150. Policy defined, — A policy of insurance is a coh-
tract that does not differ in its fundamental principles
from other contracts. It requires that there shall be
an agreement to do or not to do a certain thing for a
fixed consideration. A contract once made can not be
altered by one party without the consent of the other.
In the beginning of fire insurance the contract, or
policy, was a comparatively simple document, and it was
customary in those days to include in the contract what
was called the "prospectus." This prospectus con-
tained a great deal of the material which has since
crept into the standard policy. In writing the con-
tract, or making out the policy, as it was called, the
prospectus was referred to and made a part thereof.
In the latter part of the eighteenth century Lloyds
adopted a certain policy form under which all marine
risks were to be written. This was probably the earli-
est effort to bring the policy contracts to uniform con-
ditions so far as the writing of the policy was concerned.
151. Early history of contracts, — Each fire insurance
company was privileged to adopt its own form. There
had been in different sections of the United States some
agreement as to a form of policy, but it was not bind-
ing, as the companies lacked legal authority, so that if
a company did not choose to write under the policy con-
tract it was privileged to use its own form. The con-
ditions resulting from this are best set forth by the
127
128 INSURANCE
Court in the case of Delancy v. Rockingham Farmers'
Mutual Fire Insurance Company, 52 New Hampshire,
581, June, 1873, as follows:
The principal act of precaution was to guard the company
against Habihty and losses. Forms of applications and policies
(like those used in this case) of a most complicated and elaborate
structure were prepared and filled with covenants, exceptions,
stipulations, provisions, rules, regulations and conditions, render-
ing the policy void in a great number of contingencies. These
provisions were of such bulk and character that they would not
be understood by men in general, even if subjected to a careful
and laborious study ; by men in general they were sure not to be
studied at all. The study of them was rendered particularly
unattractive by a profuse intermixture of discourses on subjects
in which a premium payer would have no interest. The com-
pound, if read by him, would, unless he were an extraordinary
man, be an inexplicable riddle, a mere flood of darkness and
confusion. Some of the most material stipulations were con-
cealed in a mass of rubbish on the back side of the policy and
the following page, where few would expect to find anything
more than a dull appendix and where scarcely any one would
think of looking for information so important as that the com-
pany claimed a special exemption from the operation of the
general law of the land relating to the only business in which
the company professed to be engaged. As if it were feared that
notwithstanding these discouraging circumstances, some ex-
tremely eccentric person might attempt to examine and under-
stand the meaning of the involved and intricate net in which he
was to be entangled — it was printed in such small type and in
lines so long and so crowded that the perusal of it was made
physically difficult, painful and injurious. Seldom has the art
of typography been so successfully diverted from the diffusion
of knowledge to the suppression of it. There Avas ground for
the premium payer to argue that the print alone was evidence,
competent to be submitted to a jury, of a fraudulent plot. It
was not a little remarkable that a method of doing business not
THE INSURANCE CONTRACT 129
designed to impose upon, mislead and deceive him by hiding the
truth and depriving him of all knowledge of what he was con-
cerned to know, should happen to be admirably adapted to that
purpose. As a contrivance for keeping out of sight the dangers
created by the agents of the nominal corporation, the system
displayed a degree of cultivated ingenuity which, if it had been
exercised in any useful calling, would have merited the strongest
commendation.
Traveling agents were necessary to apprise people of their
opportunities and induce them to act as policyholders and pre-
mium payers under the name of "the insured." Such emissaries
were sent out. The soliciting agents of insurance companies
swarm through the country, plying the inexperienced and un-
wary, who are ignorant of the principles of insurance law and
unlearned in the distinctions that are drawn between legal and
equitable estates. Combs v. Hannibal Savings Insurance Com-
pany, 43 Mo. 148, 162; 6 Western Insurance Review, 467, 529.
The agents made personal and ardent application to people to
accept policies and prevailed upon large numbers to sign papers
(represented to be mere matters of form) falsifying an impor-
tant fact by declaring that they made application for policies,
reversing the material step in the negotiations. An insurance
company, by its agent, making assiduous application to an
individual to make application to the company for a policy,
was a sample of the crookedness of the whole business.
When a premium payer met with a loss, and called for the
payment promised in the policy which he had accepted upon
most zealous solicitations, he was surprised to find that the
voluminous, unread and unexplained papers had been so printed
at headquarters and so filled out by the agents of the company
as to show that he had applied for the policy. This, however,
was the least of his surprises. He was infonned that he had
not only obtained the policy on his own application, but had
obtained it by a series of representations (of which he had not
the slightest conception) and had solemnly bound himself by a
general assortment of covenants and warranties (of which he
was unconscious), the number of which was equaled only by
XI— 9
130 INSURANCE
their variety and the variety of which was equaled only by their
capacity to defeat every claim that could be made upon the com-
pany for the performance of its part of the contract. He was
further informed that he had succeeded in his application by the
falsehood and fraud of his representations — ^the omission and
misstatement of facts which he had expressly covenanted truth-
fully to disclose. Knowing well that the application was made
to him and that he had been cajoled by the skilful arts of an
importunate agent into the acceptance of the policy and the
signing of some paper or other, with as little understanding
of their effect as if they had been printed in an unknown and
untranslated tongue, he might w^ell be astonished at the inverted
application and the strange multitude of fatal representations
and ruinous covenants. But when he had time to realize his
situation, had heard the evidence of his having beset the invisible
company and obtained the policy by just such means as those
by which he knew he had been induced to accept it, and listened
to the proof of his obtaining it by treachery and guilt in pur-
suance of a premeditated scheme of fraud with intent to swindle
the company in regard to a lien for assessments or some other
matter of theoretical materiality, he was measurably prepared
for the next regular charge of having burned his own property.
With increased experience came a constant expansion of pre-
cautionary measures on the part of the companies. When the
court had held that the agents' knowledge of facts not stated
in the application was the companies' knowledge, and that an
unintentional omission or misrepresentation of facts known to
the company would not invalidate the policy, the companies, by
their agents, issued new editions of applications and policies
containing additional stipulations to the effect that their agents
were not their agents but were the agents of the premium payer ;
that the latter was alone responsible for the correctness of the
applications, and that the companies were not bound by any
knowledge, statements or acts of any agent not contained in
the application. As the companies' agents filled the blanks to
suit themselves and were in that matter necessarily trusted by
themselves and by the premium payers, the confidence which they
THE INSURANCE CONTRACT 131
reposed in themselves was not likely to be abused by the insertion
in the application of any unnecessary evidence of their own
knowledge of anything, on their own representations, or their
dictation and management of the entire contract on both sides.
Before that era it had been understood that a corporation —
an artificial being, invisible, intangible and existing only in con-
templation of law — was capable of acting only by agents; but
corporations pretending to act without agents, exhibited the
novel phenomena of anomalous and nondescript, as well as
imaginary beings, with no visible principal or authorized repre-
sentative; no attribute of personality subject to any law or
bound by any obligation, and no other evidence of a practical,
legal, physical or psychological existence than the collection of
premiums and assessments. The increasing number of stipula-
tions and covenants, secreted in the usual manner, not being un-
derstood by the premium payer until his propert}^ was burned,
people were as easily beguiled into one edition as another, until
at last they were made to formally contract w itli a phantom that
carried on business to the limited extent of absorbing cash re-
ceived by certain persons who were not its agents.
When it was believed that things had come to this pass, the
legislature thought it time to regulate the business in such a
manner that it should have some title to the name of insurance
and some appearance of fair dealing.
152. Standard 'policies adopted, — In 1873 the State
of Massachusetts adopted the first standard policy in
the United States. In 1886 the State of New York
adopted a standard poHcy, and since that time the prac-
tice has spread until in many states of the Union a
uniform policy is in force. The State of California is
the latest to adopt a standard policy, the law having
been passed to take effect July 1, 1909. The later
forms have been improved to a certain extent, but in the
main principles there is little if any departure from the
earlier forms.
132 INSURANCE
Although coming some years later than the Massachu-
setts standard policy that of the State of New York
has attained a much greater vogue and has furnished
a basis for other states. Even in those states where no
standard is required it is the practice of insurance com-
panies to use the New York standard form. Having
thus the largest use of any pohcy and well illustrating
the principles of the insurance contract it may form the
basis for a consideration of the standard policy. The
interpretations placed upon it have been sufficient to
make its meaning fairly clear and to give a certain
fixity to it, enabling both insured and insurer to act
intelligently.
153. Provisions of the law. — The law provides that
a printed blank form of a contract or policy of fire
insurance, together with the provisions, agreements and
conditions which may be endorsed thereon or added
thereto shall be filed with the Superintendent of In-
surance. The law also provides that no fire insurance
corporation may issue a contract under any other form
than the one prescribed, and it must conform in blanks
and size of type, in context, provisions, agreements and
conditions, with such printed blank form of contract
or policy; and no other is permitted, except the fol-
lowing :
(a) Name of the corporation; location; place of business;
date of incorporation or organization ; whether it be a stock or
mutual; the names of its officers; the number and date of the
policy, and if issued through a manager or agent these words,
"This policy shall not be valid until countersigned by the duly
authorized manager or agent of the corporation at "
(b) Printed or written forms of description or specification;
or schedule of the property covered by any particular policy;
or any other matter furnished clearly to express all the facts
THE INSURANCE CONTRACT 133
and conditions of insurance on any particular risk not incon-
sistent with or a waiver of any of the conditions and provisions
of the standard policy.
(c) If the Superintendent of Insurance approves and the
standard form makes no provision therefor, any state.nent which
the corporation is required by law to insert in its policies, if the
same do not conflict with the standard policy, is permissible.
Also the name, with the word "agent" or "agents" and place of
business of any insurance agent or agents, either by writing,
printing, stamping or otherwise, may be endorsed on the outside
of such policies.
CHAPTER XIII
NEW YORK STANDARD POLICY
154. General 'provisions of New York standard
policy, — The New York standard policy has been in-
dexed line by line, and for the convenience of reference
is usually referred to in that manner.
Line "a" reads as follows: "In consideration of the
stipulations herein named and of Dollars
Premium."
The point is likely to be overlooked that it is not the
mere paying of so many dollars premium which entitles
the insured to indemnity, but equally with the premiums
are the stipulations contained in the policy and which
with the premium form the consideration of the con-
tract.
Line "b" reads : — "Does insure for
the term of "
Line "c"— "From the day of
19 — , at noon, to the day of
19 — ' at noon."
The question has arisen as to what is "noon" under
the standard policy. Living as we do for practical
busmess purposes under standard time, which differs
materially from the sun or local time, it was almost
inevitable if a fire occurred which would make certain
policies liable for indemnity or which would relieve
them of indemnity in event of a fire starting and being
put out between the few minutes intervening between
the standard time at noon and the local time, that the
134
NEW YORK STANDARD POLICY 135
matter would have to be tested in the. court. It has
been so tested and the decisions have generally favored
tJie local time. In Massachusetts there is a statute to
the effect that standard time is the time referred to in
the word "noon" of the standard policy.
155. Direct loss hy fire. — Line "d" — "against all di-
rect loss or damage by fire, except as hereinafter pro-
vided."
Direct loss by fire includes, of course, the loss which
may be occasioned by water used by the Fire Depart-
ment in putting out a fire. The property would not
have to be touched by the fire — it would be sufficient
that water was used and damage resulted. That would
be a direct loss by fire. The fire itself must be what
is known as "vicious" or "uncontrolled." No loss could
be claimed, for instance, if one should hang a garment
too near the stove and the garment were singed or
scorched. The fire in that case is one strictly under
control, and in the stove where it ought to be, and loss
from it is not a loss under the insurance policy.
156. JLimitation of amount, — Line "e" — "To an
amount not exceeding Dollars." The amount
stated in the policy is the limit of indemnity. The
company is not liable, whatever the loss may be, beyond
the amount stated ; neither is it liable beyond the amount
of the loss, although it may only be a small part of the
amount stated. The amount stated has no bearing ex-
cept as fixing a limit to the amount which may be col-
lected for a loss. The contract of insurance is a con-
tract of indemnity. The insured is entitled to recover
from the company that which he has lost not exceeding
the amount stated on the face of the policy. The pol-
icies might be for $700,000 — to quote an actual case —
and the loss $75.00, which was the amount collected.
136 INSURANCE
The fact that the contract is one of indemnity has been
lost sight of in many cases, and so far lost sight of
that laws have been passed forbidding a payment in
certain cases on the indemnification basis. What are
known as valued policy laws prescribe that if a build-
ing (they never apply to contents) is totally destroyed
the amount stated on the face of the policy is the amount
to be paid. These laws have been severely attacked,
as they should be, but are still in force in several of the
western states. To repeat: A contract of insurance
is a contract of indemnity. It does not attempt and
should never be made to reimburse the insured for other
than actual loss. Fire insurance at once loses its true
function whenever it is considered to cover anything
except actual indemnity.
157. Description of property. — Line "f" — "to the
following described property while located and con-
tained as described herein, and not elsewhere, to-wit."
A blank space is then left for the description of the
property to be written in. As a matter of fact the
description of the property is usually in the shape of
a printed "form," as it is technically called, and this
form is attached to the policy to meet the conditions
of the description. In line "f " there is one word which
is interesting as pointing out how the insurance con-
tract has grovra. That word is **while." It came into
the standard policy in this manner: A buggy or car-
riage was insured, the policy stating that it was in a
bam or stable. It was destroyed by fire while away
some miles in a repair shop. The owner promptly called
on the insurance company to pay the loss, but they de-
nied liability, taking the position that they insured this
carriage while it was in a bam and did not insure it at
any other point. The case went to the courts and the
NEW YORK STANDARD POLICY 137
courts ruled that the owner was entitled to recovery
because the language giving the location of the car-
riage at the time insurance was taken out was merely-
descriptive language and not a warranty that the car-
riage was only insured in that location. Because of this
decree of the court the companies, in order to protect
themselves and fix the locality where the policy attached,
placed the word "while" in the policy,
158. Limitations of contract. — From this point on-
ward the lines are numerical, and it will not be necessary
to quote them in full. A brief running comment will
doubtless serve the purpose.
Lines 1 and 2 state that the company shall not be
liable beyond the actual cash value of the policy at the
time any loss or damage occurs, and make provision
for the method of ascertaining and estimating such
actual cash value, providing for depreciation, and also
providing that it shall not exceed what it would cost
the insured to repair or replace with material of like
kind and quality. These two lines, also lines 3 and 4,
have more bearing on loss settlements, which will be
noted in that connection.
Lines 7, 8, 9 and 10 provide for the voidance of the
policy if there shall have been concealment or misrep-
resentations on the part of the insured, or if the in-
terest of the insured has not been truly stated, or in
case of any fraud or false swearing touching any matter
relating to the subject of insurance, whether it shall
occur before or after a loss.
The contract assumes good faith on the part of both
insured and insurer. The moral hazard is a problem
which has always confronted the underwriter and prob-
ably always will. Many of the provisions which seem
to be somewhat harsh have been incorporated into the
138 INSURANCE
contract because of past experience where moral hazard
has been involved.
159. Voidance of contract, — Lines 11 to 30 inclusive
provide that the policy shall be void if certain things
are done, unless permission for the doing thereof shall
by agreement be endorsed upon the policy. The things
requiring such endorsement to avoid cancellation of
policy contract are:
(a) If there is any other contract of insurance on
the property of which the insuring company has no
knowledge. In other words, there must always be per-
mission for other insurance than that which the com-
pany carries.
(b) If the insured property be a manufacturing
establishment and it be operated later than ten o'clock
at night, or cease to be operated for more than ten con-
secutive days. Ten consecutive days may be held to
include Sundays and holidays; that is, ten consecutive
days, not ten working days.
(c) If the hazard be increased by any means within
the control or knowledge of the insured.
(d) If mechanics are employed in building, altering
or repairing more than fifteen days at any one time.
(e) If the interests of the insured are other than
unconditional and sole ownership. This does not mean
that the company would not insure if the ownership
were not as stated, but means that the fact must be
stated to the company at the time.
The earliest case ever tried in the English courts, in-
volving the question of fire insurance, brought into
question this very fact of ownership. A certain prop-
erty had been insured for many years by an insurance
office and was sold. The policy of insurance was not
transferred to the new owner, but the property being
NEW YORK STANDARD POLICY 139
destroyed by fire shortly after the sale, the new owner
brought suit against the insurance office on the ground
that the policy followed the title to the property and
that he was entitled to indemnity under the policy. The
company denied liability, taking the position that they
insured a certain individual; that the contract was be-
tween them and that individual and that it could not be
transferred to cover some other individual's property
without their consent. The courts sustained this posi-
tion and this is the accepted law so far as this question
is concerned since that date. The foregoing famous case
was that of Roger Lynch and John Lynch, appellants,
against Robert Dalzel, Henry Cartwright, and John
Everett, respondents, decided in the House of Lords,
the 13th day of March, 1729, reported in the 3rd of
Brown P. C, 497, also the fourth of the same reports,
page 431-3.
It may well be emphasized that the contract of in-
surance is a personal matter with a certain individual
or individuals. The company does not in fact insure
the property; it insures the individual or agrees to in-
demnify him for a certain loss by fire. The contract
is not transferable without the consent of the com-
pany.
(f ) If the insured property be a building and stands
on ground not owned by the insured in fee simple.
(g) If the insured property be personal property,
covered by a chattel mortgage. Here again the com-
pany may insure but prefers to know that fact. It
would not be necessary in case of real estate to admit
that there was a mortgage or state that fact except
as it might come out in case of the mortgagee's inter-
ests being involved, but in the case of personal property
it is absolutely a requirement of the policy that notice
140 INSURANCE
of an existing chattel mortgage be given to the com-
pany.
(h) If with the knowledge of the insured, foreclos-
ure proceedings be commenced and notice given of sale
of any property covered by the poKcy by virtue of any
mortgage or trust deed.
(i) If a change take place (other than by the death
of the insured) in the interest, title or possession of the
subject of insurance (except that there may be a change
of occupants without an increase of hazard) , whether by
legal process or judgment or by voluntary act of the
insured or otherwise.
As to what constitutes an increase of hazard there are
many different opinions. It is evident that where prop-
erty occupied for private dwelling purposes changes
to any other occupancy there would be an increase of
hazard. In such case the company should be notified.
From such a simple case there are any number of grad-
ations up to property already used for manufacturing
purposes where the increase occasioned by any other
tenant may not be appreciable owing to the already
existing use made of the building. A change of oc-
cupancy is a change of hazard from an insurance point
of view, and the question arises as to whether this change
in occupancy or use increases the chance of fire.
(j) The policy must not be assigned before a loss,
that is, without the consent of the company.
(k) If illuminating gas or vapor be generated in the
described building or adjacent thereto for use therein
permission is required from the company to use even
such simple devices as portable acetylene lamps, since
this, technically at least, generates gas on the premises.
Of course, permission would equally be required for
any other method of generating, but the simplicity of
NEW YORK STANDARD POLICY 141
the portable lamp is taken as an illustration to emphasize
the fact that permission is required.
(1) If any usage, custom, trade, or manufacture to
the contrary notwithstanding, there be kept, used, or
allowed on the above described premises, benzine, ben-
zole, dynamite, ether, fireworks, gasoline, greek fire,
gunpowder exceeding twenty-five pounds in quantity,
naptha, nitro-glycerine or other explosives, or petroleum
or any of its products of greater inflammability than
kerosene oil of the United States standard, which last
may be used for lights and kept for sale according to
law in quantities not exceeding five barrels, provided
it be drawn and lamps filled by daylight or at a distance
not less than ten feet from artificial light.
These lines, being practically the 23d to 28th inclu-
sive, are among the most important in the policy. The
extensive use, for instance, of benzine or gasoline in
every household for ordinary cleaning purposes, as the
cleaning of a pair of gloves, requires, of course, per-
mission on the policy. No permission to clean a pair
of gloves is given but permission to use a certain amount
of benzine. Efforts are constantly made to secure this
privilege — not in a specific but in a general form —
especially when a substance becomes as widely used as
gasoline and similar products. The utmost that has
been done to grant this general privilege has been to
form what is known as a *'work" and "materials" clause
which reads somewhat thus:
"PRIVILEGED to do such work and to use such
materials as are usual in the business of "
Whenever benzine or any of its products and the
other substances referred to might be used in the busi-
ness this general privilege would be considered as cover-
ing the use. It is exceedingly doubtful whether the
142 INSURANCE
work and materials clause adds anything more* to the
contract than the policy itself contains. If a property
is devoted to the business of manufacturing benzine
paint and the company insures the risk special permis-
sion for the use of benzine is unnecessary for the simple
reason that the company has insured this property while
engaged in a certain business which involves the use of
this material; that is, thej^ have entered into a contract
knowing precisely what they were insuring and to that
knowledge will be held in the event of a loss. They
wdll not be permitted to deny liability in case of loss on
the ground that the policy contained no specific permis-
sion for the use of this substance. This was decided in
the case of Harper Brothers in the State of New York,
and as a matter of fact, is simply common sense. How-
ever, the majority of cases are not so easy as the above.
Take the business of cloak and suit-making. The
use of benzine is not usual in the manufacturing of gar-
ments. It is customary, however, to have a small quan-
tity on the premises so that in the event of a garment
becoming stained or spotted during the process of man-
ufacture the damage may be instantly removed and the
garment not destro3^ed. In all such cases where it is
not absolutely a part of the business but is generally
used permission is given without charge. The privilege
will usually permit one quart and may prescribe the
manner in which it must be kept. It is interesting to
note in this connection that the New York standard
policy makes no provision for any benzine, but the prac-
tice of using a small quantity is so common that it has
led to the privilege being granted in the latest standard
policy to be adopted, namely, that of the State of Cal-
ifornia, where the policy permits one quart of gasoline
without notice to the company.
• NEW YORK STANDARD POLICY 143
(m) If the building described, whether intended for
occupancy by owner or tenant, be or becomes vacant or
unoccupied and so remains for ten days.
Here again this would be considered probably as ten
consecutive days. A vacant building is not as desirable
a risk as an occupied building. The mere presence of
a human being on the ground and in charge of property
is of value.
160. Special limitations of liability, — Lines 31 to
35 inclusive provide that the company shall not be liable
for loss arising from the following conditions:
(a) Invasion, insurrection, civil war, or commotion,
etc., or by order of any civil authority.
(b) By theft.
(c) By neglect of the insured to use reasonable means
to save and preserve the property at and after fire or
in danger of fire in the neighborhood.
(d) By explosion of any kind unless fire ensues (and
then for the damage only by fire), or a loss by light-
ning, although damage caused by lightning may be
assumed but is subject to a specific agreement.
Lines 36 and 37 provide that if the building or any
part of the building falls, all insurance represented by
the policy on either the building or its contents im-
mediately ceases. This is based on the simple rule that
the company insures the whole building or insures the
building in a certain form. If a building should be
thrown over by a tornado, assuming that no fire arises,
the insurance immediately ceases because the company
did not insure a wrecked building. It would not have
insured a mass of rubbish; therefore, the insurance
ceases. Furthermore, the measure of damage in such
cases is not the damage to the building before it was
blown down but such damage as was occasioned by the
144 INSURANCE
fire, assuming the fire took place after the building was
blown down. If the fire had started before the build-
ing was blown do^Ti the insurance company would
probably have to meet all the loss.
161. Items excluded from liability. — Line 38 for-
bids the company to assume liability for loss to accounts,
bills, currency, deeds, evidences of debt, money, notes
and securities.
This is one of the most misunderstood lines in the
standard policy. Dozens of forms have been printed ex-
cluding the company from liability for the items men-
tioned in line 38, when as a mere matter of fact the
standard policy forbids the company to insure any of
these items. In a state where a standard policy is the
law the insurance of such things would be beyond the
powers of the company and such insurance would prob-
ably be held illegal. If, however, insurance was taken
on one of the items mentioned in a state where the
standard poHcy was not law, although the standard pol-
icy might be used, the liability would undoubtedly be
good. It is well to point out that almost in the very
beginning the companies refused to insure such items.
It is evident that the difficulty of ascertaining a loss
and either proving or disproving it would be almost
insurmountable.
Lines 39 and 40 and a portion of 41 provide that
insurance may only be taken on certain things when they
are mentioned specifically. It is exceedingly difficult
to use general language and make the policy cover these
items, such as awnings, bullion, drawings, dies, imple-
ments, etc. All these are more than usually sus-
ceptible to damage and it is difficult to prove the loss,
and for that reason the company desires to know whether
it is to cover any of these items.
NEW YORK STANDARD POLICY 145
162. Liability based on actual value of property, —
The remainder of line 41, also lines 42, 43 and 44 pro-
vide that there shall be no liability to the company for
a loss except the actual value destroyed by fire if it
be occasioned by the ordinance or laws regarding the
repair of buildings or by interruption of business, man-
ufacturing processes, or otherwise ; nor for any greater
proportion of the plate glass, frescoes, decorations, etc.,
than that which the poHcy shall bear to the whole in-
surance on the building described.
A loss arising in regard to an ordinance within the
fire limits of a city may occur in this way: A frame
building situated in a certain place before fire limits
were established would be permitted to stand, but if
destroyed by fire and the owner wished to rebuild it
would be necessary to erect a brick or perhaps a fire-
proof building. It is evident that the amount of money
received from the loss of the frame building would not
erect a building of ordinary or of fireproof construc-
tion; so for this loss occasioned by ordinance, the com-
pany is not liable. Provision is sometimes made whereby
a much higher rate is paid, usually double, and the ad-
ditional loss is assumed.
163. Renewals, cancellations, etc, — Lines 45 and 46
merely provide that if there be an application, survey,
plan or description of property referred to it becomes
part of the contract and beyond that is also a warranty
by the insured.
Lines 47 and 48 state that imless duly authorized
in writing no person shall be deemed the agent of the
company in regard to the matter of insurance.
Lines 49 and 50 make provision for the renewal of
the contract under the original stipulations and con-
sideration of premium for the renewal, and also point
XI— 10
146 INSURANCE
out that should there be an increase of hazard at the
time of the renewal it is the duty of the owner to give
notice of that fact; otherwise the renewed policy is void.
Lines 51 and 55 cover what is known as the can-
cellation of the policy. A contract of insurance prob-
ably differs from some other contracts in that either
side is at liberty to cancel it. On behalf of the com-
pany five days' notice must be given of such cancella-
tion. This provision is to prevent an undue mishap
to the insured in suddenly finding himself without in-
surance. At the request of the insured, however, the
policy may be cancelled at any moment. The pro-
visions of cancellation provide that if the premium shall
have been paid and the policy cancelled by the company
it shall return to the insured the actual pro rata share
of the premium unearned, but if cancelled at the re-
quest of the insured the company has the privilege of
cancelling at what is known as "short rate," being some-
what higher than the pro rata share.
164. Other Provisions, — Lines 56 to 59 declare that
if there is a mortgage interest on the property the pro-
visions of the policy shall attach as set forth. The mort-
gagee is not held to that strict responsibility peculiar
to the owner. This probably grew out of the fact that
parties were unwilling to loan money on property where
there would be difficulty in regard to insurance. They
would hardly wish to assume responsibility for many of
the provisions of the insurance contract, and to that ex-
tent have they by special mortgage clauses been re-
lieved of a certain amount of responsibility.
Lines 60 to 66 make provisions for having the in-
surance cover the property if it has been necessary to
remove it to a place of safety during a fire. It pro-
vides that that part of the policy in excess of that re-
NEW YORK STANDARD POLICY 147
quired to cover the property at the original location shall
cover five days after the removal of the property, and if
moved to more than one location said excess shall cover
thereunder for such five days in the proportion that the
property of any one location bears to the value of all
in such new location. This is, perhaps, an extremely
cumbersome provision in order to meet the conditions
of covering property under special emergencies.
Lines 67 to 107 inclusive deal with the question of
loss settlement and are considered in a chapter deal-
ing with that subject.
Lines 108 and 109 state that wh'erever the word "in-
sured" occurs it shall include the insured or his legal
representative, and wherever the word '*loss" occurs it
shall be deemed the equivalent of "loss or damage."
This latter clause, "loss or damage," would, of course,
cover the loss of property damaged by water or smoke
rather than loss by fire.
Lines 110, 111 and 112 merely cover certain pro-
visions which are applicable to mutual insurance com-
panies only, providing that if there be any special agree-
ment in their charter applicable to that organization they
apply to and form part of the pohcy.
Lines 113 to 116 inclusive stipulate that the policy
is made and accepted subject to all that has gone be-
fore and to the provisions, agreements, and conditions
endorsed herein and added hereto. They also provide
that no officer, agent or other representative has power
to waive the provisions or conditions except those which
may be waived by the conditions of the policy itself and
which are, if waived, subject to (in order to note that
they are waived) endorsement upon the policy.
Lines 117, 118, 119 and 120 furnish the blank spaces
and the language pertinent thereto providing for the
148 INSURANCE
signing of the policy and the countersigning by the
officer or agent.
The standard poHcy represents the evolution of the
insurance contract. As a document it is of great in-
genuity, representing as it does the ability of man to
work out through the centuries a business contract quick
and effectual in performing its work. With the excep-
tion of leases covering property and bills of lading it
is perhaps a contract more commonly used in the busi-
ness of the world than any other.
CHAPTER XIV
CLAUSES AND WARRANTIES
165. aiders, — In the preceding chapter was con-
sidered the standard pohcy itself. The various clauses
used in connection therewith must now be considered.
When the standard policy was adopted provision was
made that certain clauses, called "riders," could be at-
tached to the policy, covering a specific manner of grant-
ing the privilege for a certain thing, which privilege the
policy permits.
In the State of New York the standard riders are
the following:
166. (a) The average clause, — This clause limits
the liability of the company to no greater proportion
of any loss or damage to the prescribed property than
the sum insured bears to a certain percentage of the
actual value of the property at the time of the loss,
and also provides that if the insurance be divided into
two or more items this clause shall apply to each sep-
arately.
No subject in fire insurance is so fundamentally im-
portant as the question of co-insurance, or average.
There should always be a fixed relation between the
value of the property and the amount of insurance car-
ried. By a fixed relation is meant a definitely stated
relation. Marine insurance always has this relation, and
the contract was based on the fact that the full insurance
was carried, that is, insurance to the full value of the
149
150 INSURANCE
property. A failure to carry tRe full amount makes the
insured liable for a proportionate part of the loss.
Now the question arises, as to whether there should
be any such provision in insurance. If every loss in
insurance w^ere total there would not be the slightest
necessity for an average or co-insurance clause. The
necessity arises only because losses are not total, being
the merest fraction of the value of the property up to
a total loss. If the losses were total everyone insured
would feel obliged to carry insurance to the full value,
but when it is considered that less than 10 per cent of the
losses are total it can readily be understood that the in-
sured may often be inclined to take the nine chances
and carry less insurance than the total amount or even
a fixed percentage. The average or co-insurance, is
merely a provision for equaling the rate of insurance on
property. A simple illustration will present this more
clearly :
167. Average illustrated, — Two owners possess
property of the same value. Assume that in one case
full insurance is carried and in the other insurance of
one-fourth without any provision in either for an aver-
age clause. In the event of fire damaging the property
to one-fourth of its value in each case the party who
carries insurance to the value of one-fourth would re-
ceive the full amount of his loss, and the party who
carries full insurance would receive the amount of his
loss in full also, but one party would have paid four
times more than the other, and to just such extent would
injustice be done.
From its very inception, therefore, the plan of estab-
lishing a fixed relation between the insurance carried and
the value of the property has been recognized. The
common value fixed is 80 percent.
CLAUSES AND WARRANTIES 151
168. Co-insurance, — All that the average clause re-
quires the insured to do is to carry insurance equal to
a certain percentage of the value of the property. If
he fails to do this, then he is a co-insurer, that is, he
insures himself to the extent of such deficiency and
having done that he loses such a part of the loss.
Assume that the 80 per cent average or co-insur-
ance clause is carried. When the settlement is made it
is ascertained that the actual or sound value is $20,000.
It is evident that with a value of this amount the in-
surance carried should have been $16,000. The loss
develops the fact that only $8,000 of insurance was car-
ried, or one-half of the amount which the insured stated
that he was carrying. . Such being the case, the insured
is then co-insurer for that amount. The loss is assumed
to be a partial one and may be placed at $8,000. If
the insurance carried had complied with the average
or co-insurance clause, and had been $16,000 the insured
would have recovered the $8,000 loss, but as he failed
to comply with this clause by the sum of $8,000 — in fact,
only carrying one half the amount he was supposed to
carry — he is co-insurer to the extent of that one-half.
Therefore, the company will pay one-half of the loss, or
$4,000, the insured losing the other amount. Expressed
as a rule it may be stated that the insured receives that
proportion of the loss which the insurance carried is to
that which he should have carried. This example may
be epitomized as follows:
Sound value $20,000
Insurance carried 8,000
Loss 8,000
Company pays 14 loss, or 4,000
Insured loses other 14, or 4,000
Amount of insurance which should have been carried 16,000
There are many cases where full insurance is car-
ried. Inasmuch as there is usually a reduction of the
152 INSURANCE
rate of insurance when this is done advantage is taken
to secure a lower rate. It is evident, however, that it
may be somewhat difficult to comply with the amount of
full co-insurance, as stocks are apt to vary, and ex-
perience would seem to show that the insured may lose
in such a case.
Loss settlements in New York City show that a sav-
ing of between 4 and 5 per cent has accrued to
the companies owing to failure of the insured to com-
ply with the conditions of the average or co-insurance
clause; or, to put it differently, the insured has become
a co-insurer to that amount. In a manufacturing plant
where values are more likely to fluctuate insurance to
90 per cent of the value is generally regarded as the
best working rule.
(b) Is also an average clause but makes provision
for no appraisal in case the claim for loss on the prop-
erty does not exceed 5 per cent of the amount named.
169. (c) Electricity clause, — Is a clause forbidding
the use of electricity. This clause is interesting his-
torically because it brings out another feature in the
growth of the standard policy. It has been shown that
the standard policy may be varied in certain cases only
and those cases must be provided for in the policy itself.
Now, with the advent of electricity, it becomes neces-
sary to have provision in the policy for this form of
lighting or power. In order to accomplish this, in the
opinion of the Attorney General it was first necessary
to have electricity mentioned in some form in the stand-
ard policy. This was done by attaching a clause which
forbids the use of electricity, and then having been for-
bidden on the policy unless permission was given thereon,
permission could be given. It was a method perhaps
CLAUSES AND WARRANTIES 153
of "Beating the devil around the stump," but it main-
tained the integrity of the standard pohcy.
170. Original clauses, — The three clauses, a, b, and
c, mentioned above, were not originall}^ filed when the
«itandard policy was adopted, but were filed in the year
1901 and are known as the riders of that year. The
original clauses filed when the policy was first adopted
are the following:
(a) The application or survey clause, is that which
covers that point in a policy where if there is a written
application for insurance and a survey of the property
on file, it makes them a part of the policy.
(b) Percentage value clause is that which provides
that if at the time of a fire the insurance on the prop-
erty exceeds a certain percentage of the cash value the
company shall not be liable to pay more than its proper
pro rata share, and. further provides that should the
whole insurance at the time of the fire exceed the said
percentage the pro rata return of premiums is to be
made of such excess.
(c) This is a percentage value clause applying to
each item in the policy as "b" applies to the whole policy.
(d) This is a co-insurance clause which provides that
if at the time of fire the whole amount of insurance on
the property shall be less than the actual cash value the
company shall be liable for such portion only of the
loss or damage as the amount insured by this policy shall
bear to the actual cash value of such property.
This is the clause filed for use in case of co-insurance
when the policy was adopted. In a large part of New
York City it is superseded by the average clause which
differs slightly in wording but accomplishes the same
purpose.
154 INSURANCE
(e) Is a co-insurance clause for application to
specific items of a policy.
(f ) Is a co-insurance clause for floating policies.
(g) Is what is known as the percentage co-insurance
clause and provides that if at the time of fire the amount
of insurance is a certain percentage — ^usually seventy-
five — of the actual cash value, the company in case of
loss or damage shall be liable only for such portion as
the amount insured by their policy shall bear to the
percentage of insurance which was supposed to be car-
ried. These clauses undoubtedly came into existence
when the properties grew somewhat large and the com-
panies wished to be sure that a certain amount of in-
surance was being maintained, otherwise a smaller
amount of insurance might have been carried, perhaps
a quarter or a third in place of three-fourths. Then in
time of fire the company would have met with a whole
loss ; but by limiting the payment on their policies to the
proportion of the percentage agreed upon to be carried
it is immaterial how much insurance was secured as the
policies bore a proportionate loss only under any cir-
cumstances.
(h) Is a percentage co-insurance clause for applying
to specific items of a policy.
(i) Is a percentage co-insurance clause with a certain
limitation clause. The principal point in this clause is
that if the percentage of insurance carried exceeded the
amount called for, the company did not become liable
for any greater amount but merely paid their pro rata
share of the percentage agreed upon at the time the
policy was taken out.
(j) A percentage co-insurance or limitation clause,
the same as the preceding, except that it has appUca-
tion to specific items of the policy.
CLAUSES AND WARRANTIES 155
(k) Known as the assessment, instalment, or credit
clause and makes provision that if any assessment or
instalment of any part of the premium for which credit
is given be not paid when due the whole premium is con-
sidered earned and the policy is void until the payment
has been made.
(1) Provides that if the policy becomes encumbered
by a mortgage, trust deed, judgment or otherwise, the
entire pohcy is void unless endorsement is added to the
pohcy noting that fact.
(m) Is the lightning clause. The lightning clause
illustrates one of those cases where the company or
companies assume a certain liability permitted by the
standard policy and agree upon the form in which the
Hability may be assumed. The standard policy per-
mits the liability for lightning and the companies have
agreed upon the form in which that permission may
be given, and in granting this privilege of accepting
liability for fire or damage caused by lightning this
clause must be used.
(n) This is the mortgagee clause. The principal
thing in connection with this clause is that it relieves
the mortgagee from certain conditions which apply to
the owners of the property. It is provided that the loss
under the policy shall be payable to the party named as
mortgagee or trustee, and that the insurance thereon as
to that interest shall not be involved by any act or
neglect of mortgagee or owner of the property, nor
by foreclosure or other proceeding, or notice of sale
relating to the property or change in the title or owner-
ship, nor by the occupation of the premises for more
hazardous purposes than that assumed by the policy.
If, however, the mortgagor neglects to pay the
premium it shall be paid upon demand by the mortgagee.
156 INSURANCE
The mortgagee, however, is supposed to notify the
company of any change in ownership and, of course,
of hazard that may come to his knowledge. It is well
to emphasize that the general effect of the mortgagee
clause is to make the loaning of money upon real es-
tate comparatively easy. To re-state for emphasis,
lenders of money would hardly care to loan if they had
to assume the duty of watching the property from the
insurance standpoint.
(o) Is the mortgagee clause where the owner has no
interest in the insurance and is merely provided to cover
that condition.
(p) Is the mortgagee clause with full contribution.
(q) Are blank forms for agency certificates and re-
newals.
171. Additional clauses, — The above completes a
summary of the standard clauses which are filed; they
are illustrative of the general character of such clauses
in those states where standard policies are in force.
There now remains for consideration another group of
clauses, warranties, and privileges which do not have
quite the legal authority of the preceding, not being
filed with the departments but having grown into ex-
istence in compliance with a general demand that cer-
tain privileges be granted in a certain fixed manner.
They also to a limited extent affect the rate of insur-
ance; Among them may be mentioned the following:
I. Automatic alarm clauses, automatic sprinkler
clauses and special signal building clauses, and others
of like nature. These cover the warranty or guaranty
of the insured that, having received a certain consider-
ation in the rate of insurance, he will during the life
of the policy maintain the working efficiency of these
CLAUSES AND WARRANTIES 157
devices in good condition. They exact of the insured
generally that he shall use due diligence in their main-
tenance, but they do not rise to the exactions usual of
a warranty, nor do they possess the same form in all
parts of the country, usually being worded by the in-
surance organizations within the territory covered.
II. Certain warranties dealing with conditions which
likewise have an effect upon the rate of insurance, as
(a) A warranty that the building shall be occupied
for dwelling purposes only, perhaps by a limited num-
ber of families.
(b) A warranty that the building shall be occupied
for dwelling purposes only, as an apartment house, but
without limitation as to the number of families.
(c) Warranty by the insured that a clear space
clause shall be maintained. This usually applies to
lumber mills and provides for a certain space between
the mill itself and the lumber which is piled.
(d) Private warehouse warranty, which usually calls
upon the insured to maintain certain conditions in the
building, principally dealing with the manner in which
stock shall be handled, the amount which shall be open,
etc.
These are sufficiently illustrative of the varied pur-
poses of these clauses and warranties which have come
into use.
There may frequently be added to the policies specific
forms of warranties dealing with the specific risk in ques-
tion. A form of this is the amount of steam which may
be carried in a boiler, the warranty stating that the in-
sured shall not maintain a pressure of over fifteen
pounds, or, again, the warranty may be that benzine shall
not be used on the premises. These, however, are mat-
158 INSURANCE
ters which arise in connection with individual risks and
for which general language is not adapted, but each
must be drawn to meet the conditions of the special
case.
CHAPTER XV
FORMS AND POLICY WRITING
172. Forms, — The form is that part of the contract
added to the policy to describe the property insured.
It may be written or typed directly on the policy itself
in the blank space provided, but as a rule it is a sep-
arate sheet attached to the policy.
The purpose of the form is to give the location of
the property, a description to show what is covered, and
it may or may not contain a memorandum as to the
clauses which are to be added; that is, the form may
merely indicate which clauses the company may add in
writing the policy, or in case of large properties, it may
contain these forms all duly printed. All companies
have sets of forms for the more common kinds of risks,
such as buildings, household furniture, churches, and
properties of like nature.
In the case of manufacturing or mercantile occu-
pancies a specific form applying to the individual risk
is, or should be, drafted. In the case of larger prop-
erties where there are a good many companies on the
risk it is customary to have printed forms, which are
complete in themselves. In the case of smaller risks
they may be merely typewritten.
Example A below is a form used covering buildings,
while Example B is a form used for covering contents.
A.
Borm 3145
$ On the .building and additions,
including steam, gas and water pipes, fittings and fixtures, plumbing, heat-
159
160 INSURANCE
ing and lighting apparatus and fixtures, dynamos, motors, engines, boilers,
pumps, tanks, elevators, with appurtenances and connections, cabinet work,
fixed mirrors and their frames, plain, plate and ornamental glass, frescoes,
papers and decorations, window shades, carpets, oil cloth on halls and stairs,
awnings, skylights, fire escapes, yard fences and fixtures, vaults, stoops,
railings, flagging and all permanent fixtures belonging to the building situate
No
B.
HOUSEHOLD FURNITURE FORM
On household and kitchen furniture, within or attached to building, use-
ful and ornamental, including beds, bedding, linen, wearing apparel and
materials for same, umbrellas, canes, billiard and pool tables with ap-
purtenances, tool chests and tools, trunks, toys, fishing rods and tackle,
guns, bicycles, photographic cameras, baby carriages and games, sporting
goods, and all articles used for amusement, travel, study or research,
printed books and music, pictures, paintings and engravings and their
frames (at not exceeding cost price), and shadow boxes, chandeliers, gas
and electric light fixtures, bronzes, statuary and other works of art and
objects of virtu, pianofortes, organs and other musical instruments, scientific
instruments, sewing machines, curtains, portieres, window screens, window
shades, carpets, oilcloth and other floor coverings in halls and on stairs,
stoves, plate, plated ware, diamonds and other precious stones, jewelry and
watches in use, clocks, mirrors, china, glass and crockery ware, fuel, food
and family stores, the property of the assured
or any member of the family, household guests or servants, all while con-
tained in, on and or about or attached to the
building and additions, extensions and connections occu-
pied as
dwelling, situate
The entire question of form writing and its possibil-
ities will be appreciated when it is stated that there are
several thousand forms in common use in the United
States. These are printed forms and do not include the
typewritten forms which may be prepared for a special
case or where only one or two copies may be needed.
The policy itself, since it has become standardized, does
not present any opportunity for the use of variation
in that portion of the insurance contract, but on the
form itself, which is still permitted to be drafted, there
is a large opportunity.
The form attempts to accomplish the following:
(a) To give the exact location of the risk.
\b^ To give the correct name of the insured.
FORMS AND POLICY WRITING 161
(c) To state the property covered.
(d) To give such a description of the property as
will make it clear beyond peradventure what the insured
wishes to have covered and what the company is as-
suming to insure.
(e) It will contain at least a notation that certain
clauses are to be added to the policy.
(f) It may contain the clauses themselves printed in
full. It is well to remember that all of the cases which
have come into the courts concerning fire insurance
policies have arisen from a failure to make clear in the
policy contract just what was intended to be insured.
173. Drafting a form, — To draft a form which will
accomplish its intended purpose is one of the most im-
portant features of the insurance business and con-
cerning which there is not the fullest intelligence. The
tendency in nearly all forms is to overdo and use more
words than are necessary. A short statement, clear,
concise, and comprehensive, is far better than a long
rambling one lacking these qualities.
The insured constantly seeks to use general language
to make the insurance as broad as possible, and practic-
ally requiring the company to insure everything he may
have on the premises at the time of the fire. The in-
surer, on the other hand, always seeks for the specific,
that is, the company always wishes to know what it is
doing. An insurance company never desires to cover,
for its own interest, if it can avoid doing so, an indef-
inite thing; it always desires the positive. It is evi-
dent that between two such opposites there will be more
or less effort to gain their individual ends, the insured
seeking the general and the company the specific.
174. Printed forms. — From the viewpoint of the in-
sured the danger in printed forms lies in the fact that
XI— 11
162 INSURANCE
such forms may not have been drafted originally to
cover his property but may be adapted forms from
some other risk. It has happened from such causes that
at the time of a loss the policy appeared to cover a great
many things but apparently did not cover those things
which the insured wished to have covered. There is al-
ways risk in adopting the ready-made article, the dan-^
ger being that it takes too much for granted and does
not carefully consider the personal aspect of each and
every risk, especially where the risk passes at all beyond
the ordinary hazard. The insured or his representative
should always take great care that the form is drafted
accurately ; as briefly as possible ; in general terms where
permissible ; and completely describing the business and
the things which he wishes covered.
Volumes have been written concerning forms, but
the entire subject may be included in the rules laid down,
viz : The form should be explicit and avoid all indefinite
expressions. The question is "What does the party wish
to insure?" and adequate language should be used to
describe it.
Another point to be mentioned in this connection, is
the effect upon the interests of the insured and insurer
as to whether the one or the other prepared the form.
It is an accepted principle in the construction of con-
tracts that doubtful or indefinite language will be con-
strued against the person who drafted the document.
This is true in the case of the insurance contract as it
is in any other. When all policies and forms were pre-
pared by the companies there was no question as to
whom the language would be construed to favor. In
case of doubt it would be against the company. In these
days when the employment of brokers is becoming well-
nigh universal and the form for the insured is prepared
FORMS AND POLICY WRITING 163
by his representative, the broker, it becomes the language
of the insured, and as such would be construed against
him in the event of a loss.
175. Concurrent policies, — It is perhaps needless to
point out that all policies should be concurrent, i. e.,
they should agree word for word and letter for letter.
Some of the most difficult problems in the settlement of
losses have occurred owing to the non-concurrency of
the policies covering the risk. All the various rules
drafted for the settlement of such losses would have been
avoided if sufficient care had been exercised in the be-
ginning that the policies covered alike. Too much em-
phasis cannot be laid upon the fact that the most ex-
treme care should be exercised in this respect.
CHAPTER XVI
LOSS SETTLEMENTS
176. Losses, — Insurance is written not because peo-
ple merely wish for it but because a loss may or rather
will occur. It has been shown that the average rate of
insurance is something over $1 and the average rate of
loss is between fifty and sixty cents; hence in amount
about one-half of the insurance collections is subject
to settlement under loss. It has been stated that in
1,000 policies thirty -two on an average are subject to a
loss. This, of course, represents all sorts and condi-
tions of policies, simply treating them as policies and
basing the average accordingly. If a loss never oc-
curred, insurance would cease, but whether it occurs or
not, all that the previous chapter explained is necessary
to bring the contract into effect.
177. Adjusters, — The person who settles losses is
called an adjuster. In England the term "assessor"
is used. The business of adjusting was originally in
the hands of the companies and their representatives.
Lately, however, there has grown up the business of
public adjusting. These adjusters hold themselves in
readiness to take up for the insured the settlement of a
loss.
The companies themselves for a great many years
handled all their own losses, each company acting for
itself. In the course of time, however, as risks grew
larger and the companies more numerous, it became cus-
tomary for all companies represented to appoint from
164
LOSS SETTLEMENTS 165
their number a committee of adjusters. Out of this
simple method has grown the Loss Bureaus, or Loss
Committees, of larger cities, and the conmiittees or bu-
reaus which cover several states. These committees or
bureaus handle the adjusting for the companies and
are probably able to do so more cheaply and more ef-
fectively than where each company was represented di-
rectly. The individual company, of course, is not
relieved from the necessity of conducting its own loss
bureau, but by the co-operative method it is enabled to
reduce expenses in the settlement of certain groups of
losses.
178. Losses in standard policy. — Lines 1 to 6 of the
standard policy, as well as other lines to be noted later,
deal with the question of losses.
Line 1 limits the liability of the company to the
actual cash value of the property at the time any loss
or damage occurs. It likewise states that loss or dam-
age shall be ascertained according to the actual cash
value with a proper deduction for depreciation no mat-
ter how that depreciation may be caused.
Line 2 states that in no event shall the cash value
exceed what it would cost the insured to repair or re-
place the property with material of like kind and
quality.
The ascertainment or estimate of this actual cash
value is made by the insured and the company, but (line
3 ) if they differ, then by appraisers, who are appointed
by a method which will be noted farther on.
The amount of the loss having been determined the
sum for which the company is liable shall be payable
within sixty days after due notice of the amount of the
loss settlement and the satisfactory proof has been re-
ceived by the company.
166 INSURANCE
179. Repairs and replacements. — Line 4 states that it
is optional with the company to take any or all of the
articles at the ascertained or appraised value. It is
also provided that it has the privilege of repairing, re-
building, or replacing the property loss or damage with
other of like kind and quality within a reasonable time,
provided that it gives notice of its intention so to do
within thirty days after the receipt of proof, but (line
6) the insured is not permitted to abandon the property
to the company. In other words, the company can if
it chooses take the property and pay the face of the
policy, thus reducing the amount of the loss by the
amount received from the salvage of the property taken.
The insured, however, does not have the option of mak-
ing a settlement with the company or of stating that
he will take the face of the pohcy and abandon the
property to them.
The company prefers at all times to make a settle-
ment wherever possible. It does not care to engage in
the business of handling damaged property by means
of salvage if it is possible to avoid doing so. It is some-
times necessary to do this in order to protect its interests
but it is done only as a last resort.
Neither does the company care to handle merchandise
for the purposes of salvage, nor to repair, replace, or
rebuild the premises if it be a building that has been
damaged. It is exceedingly difficult, in the first place,
for a company to repair, replace, or rebuild with like
kind and condition. The chances of fulfilling those
two requirements — kind and quality — are very small.
Furthermore, if the insured should be so minded he
might possibly convince the court that the company had
not carried out its part of the bargain and performed
its share of the contract.
LOSS SETTLEMENTS 167
There is an historical case which occurred in Tennes-
see where a building was damaged by fire. Failing to
effect a settlement the company elected to rebuild. The
insured, when the work was completed (although the
companies thought they were carrying out the exact
specifications), objected to accepting the property and
was able to convince the jury that the company had
failed to carry out its contract with him, and so he re-
ceived a cash settlement. This might not have been so
bad had it not been that the building also became his
property as it was erected on his land. With such a
possibihty confronting it, the company is extremely re-
luctant to* undertake the repairing, replacing, and
rebuilding of any property injured by fire.
180. Provisions for settlement, — Lines 67 to 109,
in addition to lines 1 to 6, deal with the settlement of
losses and should now be considered in detail. The in-
sured is called upon to act according to the following
schedule whenever a loss occurs :
(a) Give to the company immediate notice in writ-
ing of any loss.
(b) Protect the property from further damage.
(c) Separate the damaged from the undamaged per-
sonal property ; put it in the best possible order, making
a complete inventory of the same and stating the quan-
tity and cost of each article and the amount claimed
thereon.
(d) Within sixty days after the fire, unless the time
is further extended in writing by the company, he shall
render a statement to the company signed and sworn
to by said insured stating his knowledge and belief as
to the time and origin of the fire; his interest and of
all others in the property; the cash value of each item
thereof and the amount of loss thereon ; all incumbrances
168 INSURANCE
thereon; all other insurance whether valid or not cover-
ing any of said property.
(e) A copy of all descriptions or schedules in all
policies.
(f) Any changes in the title, use, occupation, loca-
tion, possession, or exposure of said property since the
issuance of the policy.
(g) By whom and for what purposes any buildings
herein described and the several parts thereof were occu-
pied at the time of fire.
(h) He shall furnish if required verified plans and
specifications of any building, fixtures, or machinery
destroyed or damaged; and furthermore,
(i) If required shall furnish a certificate of a magis-
trate or notary public not interested in the claim as a
creditor or otherwise, nor related to the insured, living
nearest the place of fire, stating that he has examined
the circumstances and believes the insured has honestly
ascertained loss to the amount of such magistrate's or
notary's certificate.
(j) The insured must as often as required exhibit
to the person appointed by the company all that remains
of any property described.
(k) He shall submit to examination under oath and
subscribe to the same.
(1) He shall produce for examination all books of ac-
counts, bills, invoices and other vouchers, or certified
copies thereof, if the originals be lo^t.
(m) He shall permit extracts and copies to be made
of these documents.
These lines — from 67 to 85 inclusive — practically
cover the duty of the insured and his attitude toward
the question of loss settlement. Needless to say, each
line has been subject to a legal decision, and probably
LOSS SETTLEMENTS 16ft
will continue to be so subject so long as man endures
and fire policies are written.
181. Appraisal, — Lines 86 to 91 provide for the ap-
praisal in event of an absolute disagreement between
the insured and the company. The Hues state that the
loss shall then be ascertained by two competent and dis-
interested appraisers, the insured selecting one and the
company the other. These two shall select a third.
The two appraisers then take the estimate and appraise
the loss, stating separate sound values and damage.
Should they fail to agree then the third appraiser, or
umpire, has the deciding vote. The award in writing
of any two of the three determines the amount of such
loss, and the parties thereto are obliged to pay the ap-
praisers respectively selected by them, and they shall
bear equally — the insured and the company — ^the ex-
penses of the appraisal and umpire.
Lines 92 to 95 provide that the company shall not
be held to have waived any condition or forfeiture of
any requirement, act, or proceeding as shown in its
attitude to the appraisal, neither shall the loss under an
appraisal become payable until sixty days after due
notice and separate proof shall have been received by
the company. This, of course, includes an award by
appraisers when an appraisal has been required. This
provision for the loss being payable sixty days after the
settlement is reached is an exceedingly old provision
in fire insurance contracts, dating back to the very be-
ginning and is for the purpose of preventing cheating.
182. Payment of loss. — It is generally held to be
poor policy to pay a loss too soon, especially when the
old question of moral hazard is involved as closely in a
business as it is in the business of fire insurance. The
provision of sixty days has in many instances proved
170 INSURANCE
sufficient to enable not only a proper checking of the
claim but at the same time to unearth many fraudulent
claims.
It is not customary, however, in minor losses to wait,
but to pay the claim inmiediately and always to pay
the larger losses whenever the discount duly provided
for is accepted by the insured.
The strongest asset that an insurance company can
possess is the reputation of paying its losses promptly.
It is too great a business asset to be lightly trifled with.
The personal connection always enters into the deal-
ings of any business, and the personal equation of the
adjuster and the insured are not unimportant factors
in reaching a settlement; but it should be noted that
where both parties honestly desire to secure a fair set-
tlement there is very slight chance of friction occurring.
If one party or the other does not desire such a result
then the chances of friction are many and can be utihzed
by either.
183. Difficulties of settlement, — ^Whenever a calam-
ity like the San Francisco fire occurs, and the insurance
companies play a somewhat leading part in straighten-
ing out conditions, one is likely to hear much of the
difiSculties of settling losses. As a matter of fact, those
in position to speak with authority of the San Fran-
cisco situation know that the volume of money which
passed from the companies to the insured at that time
was enormous, comparatively speaking, and the friction
exceedingly slight. The few cases were made much of,
but they were few in comparison to the entire number
of risks to be settled and the volume of money which
changed hands.
The element of competition in liberal methods used
in conducting the business of fire insurance is not an
LOSS SETTLEMENTS 171
unimportant item, and while a company may often wish
to do differently, it may by the competition of its neigh-
bors be obliged to do as they do.
It must not be gathered from what has been stated
that the settlement of losses is a difficult matter or
one attended with any serious complications. In pro-
portion to the volume transacted it is probable that the
business of fire insurance is conducted with as little fric-
tion and with as few cases reaching the courts as any
other business of like magnitude. In fact, it is probably
conducted with less friction than most businesses of an
equal importance.
184. Standing of companies, — The great essential
fact in the settlement of losses is that no company de-
sires to be known as not settling promptly and equitably.
To obtain such a reputation would be to put itself prac-
tically out of business. No agent would care to repre-
sent such company ; no broker would care to do business
with it, and the insured would not care for its policies.
There are too many companies in fire insurance for any
company to stand too strictly upon technicalities.
Most of the laws in force relating to insurance com-
panies and to the adoption of standard policies have
been occasioned not by the doings of the many but by
those of the few. Our penal laws are not made be-
cause everybody needs them, but because of that small
portion of humanity which apparently needs such re-
strictions.
CHAPTER XVII
BROKERS, BROKERAGE, MORAL HAZARD, AND
UNDERWRITING
185. Brokers and brokerage, — The broker in fire in-
surance is the individual who represents the insured.
He takes charge of the insurance interests of his cHents,
sees that the proper amount of insurance is secured,
the proper kind of poHcies issued, the rates charged cor-
rectly computed, and attends to all the details in con-
nection with that part of the insured's interests. He
is paid by commission, which is a certain percentage of
the premium paid by the insured. It forms part of
the rate of insurance and is deducted by the broker
when paying the premium. Although the commission
varies in different parts of the country 15 per cent is
probably general over a large section of the United
States. It may vary from 10 to 25 per cent and may
be more in some cases. It is less than 10 per cent on
a few classes of risks where the rates are very low and
for that reason the premium also.
The broker first appeared in the business shortly after
the great fire in New York City in 1845. While that
fire ruined many insurance companies the demand for
insurance called a larger number of others into exist-
ence than the business warranted. The companies be-
gan to soUcit business from the brokers and thus the
broker became an established factor. There was much
opposition at first to the broker, opposition which con-
tinued not for a year, but for two or three decades and
even later, and is not wholly absent to-day.
\n
BROKERS AND UNDERWRITING 173
The broker fills a legitimate place in the business of
fire insurance, especially in the larger centers where in-
surance is more or less difficult and technicalities enter
largely into the problem. For that reason it is reason-
able that there should be a broker to relieve the insured
of the many details connected with the business. It is
the duty of the broker properly to protect the interests
of his clients, and in doing that he needs to know as
much as the underwriter who assumes the risk. It
should be borne in mind that the tendency of the world
is to have a large number of services performed on a
commission basis. This is true of all lands where with
the growth of wealth business becomes more and more
sub-divided into diff^erent departments, each depart-
ment furnishing sufficient employment for a group of
individuals to devote themselves specially to its per-
formance.
The intricacy of the business of modern fire insur-
ance makes it a specialty with which the insured, deal-
ing only with his individual risk, can hardly hope to be
familiar. He will be sufficiently employed if he takes
care of his own business. These necessities make the
demand for the broker legitimate, and he seems to fill
the place to the satisfaction of his clients.
186. Moral hazard. — The question of moral hazard
is involved in all commercial transactions where credit
enters. It has always been present in fire insurance
and is generally considered to be present to an unusual
degree as compared with other businesses.
Moral hazard means the possibility that the insured
may burn his own property. Judgment differs as to
the amount of loss occasioned thereby, but it is suf-
ficiently large to be deserving of the most careful con-
sideration. Probably the most conservative judgment
174 INSURANCE
would place the loss from this cause at about one-tenth
of the total. It has been placed at one-third, at one-
half, and in some cases even higher, but in the best
judgment one-tenth would cover the loss.
The simple fact that fire destroys property and this
when successfully burned destroys with it the evidences
of the self -firing makes it more or less easy to commit
this crime. The widest knowledge is sought, using not
only the ordinary reports, the fire records, but all other
sources of information to keep track of the insured and
to form an estimate as to the moral hazard. It is con-
sidered, of course, that if the insured's record is not clear
on this phase of underwriting then the risk should be
declined, since no premium would compensate nor be
sufficiently large.
In making the inspection such factors as the general
prosperity of the business, the manner in which it is con-
ducted, the condition of the market covering the thing
offered for insurance at the time, projected changes in
style, the financial standing — in fact everything that can
throw any light on the subject is considered, but the
problem still remains to-day as insoluble as at first.
It is interesting to note that historically the problem
was considered almost as serious fifty or seventy-five
years ago as it is to-day. Those were the days before
immigration had set in, so it cannot be entirely due to
the advent of foreigners.
187. Underwriting, — From the earliest days of in-
surance contracts the name of the insurer or insurers
has been written at the bottom of the document. The
insurers signed their names underneath stating that
they would assume only the share of the risk to the
amount set opposite their names. From this position
of the name insurers came to be called underwriters.
BROKERS AND UNDERWRITING 17^
The term is in use to-day for any person or corpora-
tion that assumes a risk involving the principle of in-
surance.
Now that the various other divisions of the business
of fire insurance have been considered, the interesting
question remains as to what is embraced under the gen-
eral term of underwriting. Perhaps a better view can
be reached from a negative standpoint:
(a) It is not the mere organization of a fire insur-
ance company.
(b) It is not the care of the financial part of the
company's transactions nor the successful
management of the details incident to its
affairs.
(c) It is not the inspection of risks.
(d) It is not determining the rate to be charged in
a given case.
;(e) It is not drafting the policy form or otherwise
completing the contract or pohcy.
(f) It is not a knowledge of the law of insurance
and the standard policy.
It is not one but a mingling of these things, not
allowing any one of them to predominate, and re-
garding each as a part contributing its portion to the
whole.
Underwriting is the ability properly to estimate the
factors which must be considered when dealing with a
specific risk, and then having carefully considered them
to decide to accept or to refuse. The whole problem
of underwriting, therefore, lies in this acceptance or
rejection.
188. Problems of underwriting, — There are com-
panies which operate in a limited zone, as the small
mutual companies, which in the conduct of their busi-
176 INSURANCE
ness call for less skill than that of the stock corpora-
tions engaging in a world-wide business and attempt-
ing to handle all classes of risks that may be offered.
The lines of insurance should be accepted so as to
distribute the loss fairly and evenly throughout the
classes of risks. Lines must be accepted in such a man-
ner that there will not be an undue amount in a class
subject to loss at one fire. If, for instance, there were
ten lines of $5,000 each of a certain class and one line
of $50,000 it is evident that the burning of the $50,000
risk would entail a loss equal to the burning of the other
ten lines. The fundamental principle upon which suc-
cessful underwriting is based is the ability properly to
distribute the lines. The one who places or determines
the lines is the underwriter of the company whatever
his official name may be. To determine what lines to
accept, the amount, the class, the location, calls for the
best ability.
In the early days of underwriting lines were accepted
for amounts which would astonish the modern under-
writer. Modern underwriting is based wholly on the
principle of small lines well distributed. In the coun-
try the problem is rather what to accept than how much.
In the city it is not only what to accept but how much.
In the country the conflagration problem does not en-
ter, but in the city it is ever present, every city present-
ing this twofold problem. If it is estimated that a con-
flagration in a city might burn one hundred blocks then
it is evident that $10,000 at risk in each block, would
mean a loss of $1,000,000. The practice of underwrit-
ing in small lines well distributed is indeed the only safe
nde. The underwriter may not always choose.
CHAPTER XVIII
ORGANIZATION OF LIFE INSURANCE COMPANIES
189. Life insurance defined, — Life insurance is a pro-
vision against a hazard which is certain to occur. Here,
of course, the element of uncertainty is the time of death.
All policies of life insurance — and this is true of acci-
dent insurance — are not policies of indemnity, as in the
case of property insurance. There are legitimate limita-
tions as to the amount of insurance which may be carried
on an individual life, but these are based on moral and
financial conditions and have little, if any, relation to
indemnity conditions. In other words, it is obviously
difficult, if not impossible, to approximate, beyond a cer-
tain point, the value of any life.
190. Early conditions unfavorable to insurance. —
The theory of probabilities, as has already been ex-
plained, was what gave birth to the idea of insurance.
Although Pascal developed the theory by applying its
mathematical principles to various gambling games, it
was not until almost a century later that solid mathemat-
ical foundations were laid on which insurance premiums
could be based. Unfavorable sanitary and hygienic con-
ditions held back the development of life insurance for
some years. In addition to this handicap not only coun-
tries but continents were devastated by plagues. This
state of affairs placed a temporarily insurmountable
obstacle in the way of forming insurance institutions
whose business was to rest upon calculations as to the
length of life.
XI— 12 177
178 INSURANCE
From early history, especially from the time when
Guilds were formed, there were various attempts at
forms of help to a family when death occurred. Probably
the nearest approach to modern insurance, however, was
the provision made by a traveller who, before going into
a distant land, secured a sum which might be used as a
ransom if he fell into the hands of pirates. All such
projects were, of course, merely the early beginnings to
which the present remarkable status of life insurance
may be traced.
191. First English societies, — In 1699 the Society of
Assurance for Widows and Orphans was founded in
England. It had many elements of a modern life insur-
ance office, but had them only in a partial degree. Its
organization was somewhat similar, it had the premium
feature, and contained among other things the unique
provision that the clergy or laity "except such as lived
in the marsh and unhealthy parts of England" might
be admitted by proxy if known to the trustees of the
office or to some two subscribers or substantial house-
keepers living within the bills of mortality. In 1707
this society had about eleven hundred members. From
then on until 1760 there were many organizations for
the purpose of insuring lives. The successful ones owed
this success largely to the fact that they did not promise
a specific sum to the beneficiaries, but at the end of the
year divided among them the sums that were subject
to distribution that year. Hence, the amount which
the beneficiaries received varied according to the
number of deaths during the year. This meant,
naturally, that the greater the number of beneficiaries
the less there was to divide. In 1720 the London Assur-
ance and Royal Exchange companies were chartered.
Both had the privilege of doing life insurance business
LIFE INSURANCE COMPANIES 179
but neither developed it, in the early years at least, to
any great extent.
It was in the year 1760 that steps were taken in Great
Britain to found an insurance company on a true basis.
Although all that had been done previous to this time
was excellent educational work, it did not furnish
foundations for the later development of life insurance.
As nearly as can be estimated, the amount of insurance
on lives in Great Britain in this year, 1760, amounted to
350,000 pounds. Two years later "The Society for
Equitable Assurance on Lives and Survivorships" was
incorporated after several difficulties had been overcome.
The project was successfully launched, so that it may be
said that modern life insurance dates from the founda-
tion of this society.
All life insurance premiums were based on the tables
furnished by the bills of mortality of London and the
Breslau Tables. These, in turn, were based on tabulated
statistics including healthy and unhealthy lives and per-
sons engaged in all kinds of employments. Naturally,
the tables based on these conditions showed a much
higher death rate than the picked lives which the society
insured.
192. Five periods of development. — In England
future development of life insurance fell into fairly def-
inite periods. From 1698 to 1760 was termed "the spec-
ulative period," largely because of the uncertain data
upon which the societies were organized. From 1762 to
1815 was called "the transition period"; societies grad-
ually found it possible to build more substantial founda-
tions, although the development was slow. The third
period, from 1816 to 1844, was called the "Golden
Age." Considerable success rewarded the efforts of
these twenty-five years. The Fourth Period, from 1844s
180 INSURANCE
to 1855, was known as "the period of Bubble Com-
panies." Apparently almost any one could organize a
company in that period, in fact many were organized,
and on the flimsiest foundations. In due course, how-
ever, the crash came and only the solid companies
survived. The fifth period began in 1857 and for Great
Britain and the United States may be called "the period
of the modern insurance company." From that time,
except for slight setbacks, the growth has been steady.
193. Life insurance in the United States, — The ear-
liest recorded policy in the United States reads as fol-
lows:
Insurance is hereby made by Benjamin Lincoln, Esq., on his
natural life, age about 56 years, for and during the space of
twelve calendar months, to commence from the date hereof, and
we, the assurers, do agree that the life of the said Benjamin
Lincoln shall be rated at the sum of $1,000 lawful money, for
which we have received the premium due us of 5^. In case he
shall, during the said term, happen to die, then we will well and
truly pay unto his heirs the sums we have hitherto subscribed.
The wealth of the Colonies was not such as to make
such provisions feasible. Life insurance in this country
began in 1759 when the Presbyterians of New York and
Philadelphia secured a charter from the Colonial Gov-
ernment of Pennsylvania. The object of this body was
primarily the insuring of the ministers of the Presby-
terian Church. Ten years later the clergymen of the
Episcopal Church organized companies in the colonies
of New York, Pennsylvania and New Jersey. These two
institutions may be called transition life insurance com-
panies. Their work was not actual charity, neither was
it true insurance. The members did not pay the entire
premium, a portion being contributed by other parties
LIFE INSURANCE COMPANIES 181
interested in the project; to the extent, however, that
they were partially self-supporting, they marked a dis-
tinct advance from a purely charitable enterprise.
In 1801, it is stated, there were not one hundred
policies of life insurance in the United States. The In-
surance Company of North America, to be sure, had
been chartered in 1794 as a stock company and under its
charter could write life insurance. It wrote very little,
however. The slow growth of life insurance in this
country was due mainly to the same causes as operated
in Great Britain and on the continent, namely, the
uncertain living conditions. Smallpox and many other
epidemic diseases were prevalent.
194. Three early companies, — In 1818 Massachusetts
chartered the Hospital Life Insurance Company with a
capital of $500,000, but required that it should pay
into the state one-third of its profits from life insur-
ance, after deducting legal interest on the paid-up cap-
ital. This tax, seemingly, was sufficient to prevent the
development of this branch of the company's business,
if, indeed, the time was not too early for such develop-
ment. The State of New York organized a life insur-
ance and trust company in 1830 with capital of $1,000,-
000, and previous to this time there had been organized
in Pennsylvania the Pennsylvania Company for the In-
surance of Lives. All three companies are actively
engaged and successful to-day as trust companies,
but have done very little, if anything, with life in-
surance.
195. Developments since 1835, — The true beginning
of life insurance in the United States dates from 1835.
In this year the New England Life Insurance Company
was chartered in Massachusetts and the Girard Life &
Trust Company in Pennsylvania. Seven years later the
182 INSURANCE
Mutual Life of New York was organized. In 1843 the
New England company completed its organization, and
the Mutual Benefit of New Jersey was chartered. It
was in this year, too, that the New York Life Insurance
Company completed its organization. Although there
were ten companies in existence, the insurance in force
at this time was estimated not to exceed $6,500,000. By
1860 this had increased over twenty-five times, to
$166,000,000.
It was generally believed that the Civi] War would
show a lessening of life insurance. The contrary, how-
ever, proved to be the fact. While the southern business
was of necessity disturbed, the increase in the north was
so great that a larger, rather than a smaller, amount con-
tinued to be put in force each year. From 1870 to 1880,
the period of the great panic, the insurance business
went through a process of reorganization. Many com-
panies had been organized and some seventy-one in this
decade went out of business. It is estimated that in these
ten years the insurance in force decreased from $2,000,-
000,000 to $1,500,000,000. In 1880 an advance step
was taken and from that time until 1905 it was simply
a matter oY recording each year a larger success than the
past. In the latter year there occurred what is known
in history as the "Armstrong Investigation," and while
it was thought that the results would be disastrous, they
proved to be quite beneficial, so that the business, after
pausing very briefly for readjustment, has steadily ad-
vanced.
196. Internal divisions, — In many respects an insur-
ance corporation, in its general structure, resembles any
other corporation. One of the Hartford companies, for
example, divides its organization into the following
groups :
LIFE INSURANCE COMPANIES
18S
BOARD OF DIRECTORS
Committees of the Board:
Deliberative Bodies -l Executive, Finance, General
Conduct
Officials Charged with Execu- ( President
tive Functions J Vice-Presidents
( Treasurer
Officials Charged with Admin- ( Comptroller
istrative Functions -s Secretary
I Supt. of Agents
Officials Charged with Advis- ( Actuary
ory Functions -^ Medical Director
Counsel
OFFICE DEPARTMENTS:
Agency
Financial
Actuarial
Medical
Legal
Bookkeeping
Auditing
Claims
Real Estate Loans
Policy-Writing
Policy Loans
Inspection
Policyholders' Bureau
Editorial and Advertising
Supply
Mail
Filing
Committees of Officials
Chief of Depts
and
Agency Methods and Conduct
Review
Clerical Efficiency
Claims
Office Methods and Systems
184 INSURANCE
197. Three main departments, — Such a tabulation
usually tells its own story, because the majority of the
officials or departments might be common to any cor-
poration. There are, however, three departments of a
life insurance company which call for a special word:
(1) The Actuarial Department — This depart-
ment determines the amount of the premiums. Upon
its careful solution of the problems involved and upon
its correct determination of the charges, rests the success
of the company — that is, success in the sense that the
company will be receiving for the risk assumed the sum
which it ought to receive. The work of the actuary is
special and, in addition to caUing for mathematical
ability, requires a broad general training.
(2) The Medical Department — The medical de-
partment is the door, so to speak, through which the
applicant must pass before he can even be considered
from the premium standpoint. This and the actuarial
department are of equal importance. The medical
director, who is of course a trained physician, must have
in addition to that training expert judgment in passing
upon lives for the purpose of insurance. Such a quali-
fication is not, and cannot be, the result of school train-
ing, but is a special viewpoint which direct experience
alone is able to give to a satisfactory degree.
(3) The Agent — The insurance agent is the real
business-getter in life insurance, and the active force be-
hind any company's development and success. Men
may take the initiative in seeking out a company in order
to protect their property by policies of insurance, but
rarely do they do so in life insurance. It is even said
that if one does so he should be examined three times and
then rejected. This is because a person so rarely seeks
Ufe insurance that companies feel that there must be
LIFE INSURANCE COMPANIES 185
something unusual about the applicant's case which the
ordinary method of investigation will not reveal. Prob-
ably 99 per cent of all life insurance policies are sold by
the direct solicitation of the agent. In fact, the business
would stop to-morrow if the agent ceased to preach the
gospel of life insurance. The rewards in this field are
large to the successful agent, since he earns not only the
initial commission but also the renewal commission,
which normally runs through several years. Thus the
agent can build up a business which gives him a steady
income for his past labors.
The most effective form of agency organization, per-
haps, has not yet been decided upon. There is the home
office system where everything radiates from one cen-
tral office, and the so-called branch office system where
branches are built up in important centers. There has
always been a difference of opinion as to the relative
merits of each. It is safe to say, however, that the
branch office system is gradually being superseded by
the plan which controls the agency organization direct
from the head or home office.
198. Economic importance of life insurance. — The
status of life insurance as an economic factor can quickly
be grasped by considering a few general statistics deal-
ing with the various features of all the business, Decem-
ber 31, 1913, for example:
(a) Assets— These totaled $4,351,747,000, the fol-
lowing being the most important features :
Real Estate $147,000,000
Mortgage Loans 1,454,000,000
Policy Loans 589,000,000
Stocks and Bonds 1,948,000,000
Cash 55,000,000
186 INSURANCE
(b) Liabilities — Exclusive of capital, which
amounted to $11,000,000, these totaled $4,209,000,000,
leaving the net surplus over and above all liabihties
$131,000,000. The principal items were:
Reinsurance Reserve $3,677,000,000
Dividends for 1914. 102,000,000
Deferred Dividends 276,000,000
(c) Income— This amounted to $839,000,000, the
principal item being:
Premiums $628,000,000
This item should be divided into two groups, as fol-
lows: New premiums, $74,000,000; renewal premiums,
$430,000,000; interest, $188,000,000.
(d) Disbursements— These totaled $594,000,000,
principal items being:
Death Claims $193,000,000
Endowments 52,000,000
Lapsed, Surrendered and Purchased
Policies 87,000,000
Dividends 96,000,000
Commissions 56,000,000
Salaries, Medical Fees and Other
Charges 51,000,000
(e) Insurance in Force — The total was $18,000,-
502,971 ; the increase during the year 1913 being $1,-
033,055,496.
These statistics, taken from the reports made to the
Insurance Department of the State of New York, cover
the business of eleven companies of New York State,
twenty-three companies of other states, and one foreign
company. They are what are known as ordinary life
LIFE INSURANCE COMPANIES 187
insurance companies. Four of the companies are doing
the principal industrial business and these figures are
included in the reports which have been quoted. One is
a New York company, two are located in New Jersey
and one in Massachusetts.
The economic importance of life insurance may be
seen by comparing the assets with savings bank deposits
in the United States. These insurance assets for the
year 1913 totaled $4,727,000,000. Jhis shows that the
amount devoted to life insurance approximately equals
the savings bank deposits of the United States.
199. Investments of insurance companies. — The large
sums carried as reserves by life insurance companies, and
which must necessarily be carried, make the question of
their investment of more than passing interest. The
life insurance company stands in a unique position in
regard to its investments. Its practice is different from
most other corporations, since it is seldom, if ever, sub-
ject to a sudden or unusual demand upon its funds.
There is no danger, as in the case of fire insurance, of a
conflagration hazard which may call for 40 per cent of
all the assets engaged in the business of fire insurance
as in San Francisco in 1906. The life insurance com-
pany can determine with considerable accuracy the calls
that will be made upon it during a given year. It can
very well apportion in advance the expenditures and
can also fairly well determine its income. This peculiar
position, therefore, makes it possible for life insurance
companies to consider long-term investments which in
many other cases would not be possible. Since the Arm-
strong Investigation in 1905 the rules governing life in-
surance investments have been brought within a some-
what strict compass, and in due time the companies will
be expected to dispose of so-called stock holdings. This
188 INSURANCE
is a natural consequence of the view taken during that
year that stock holdings meant ownership and are not
strictly investment securities. As a matter of fact, it
was held that in owning stock the insurance companies
were putting themselves in the position of owners and
might, perhaps, in order to insure the success of an enter-
prise, be led to devote an undue part of their income to
one or more enterprises solely because they wished to
protect their stock holdings. To adjust matters, the
broad rule was laid down that within five years all stock
holdings must be disposed of and likewise any real estate
beyond that needed for the home office purposes and
beyond that acquired by foreclosure proceedings in
connection with loans. When the assets totaled $2,000,-
000,000 a compilation of the different types of invest-
ments showed the following results, round figures only
being used:
Foreign Government Bonds $50,000,000
United States Bonds 3,000,000
State and Municipal Bonds 75,000,000
Railroad Bonds 660,000,000
Electric Light, Water and Gas Bonds . . 25,000,000
Miscellaneous 42,000,000
Total bonds owned amounted to $855,000,000
Mortgages on Real Estate $550,000,000
Real Estate Owned 160,000,000
Railroad Stocks 50,000,000
Trust Company Stocks 42,000,000
Bank Stocks 21,000,000
Electric Light, Water and Gas Stocks . 5,000,000
Miscellaneous 10,000,000
Total stocks amounted to $128,000,000
LIFE INSURANCE COMPANIES 189
In the proportion of stocks to bonds this would be
about as one to six. The other investments at this time
were:
Premium Loans and Notes $120,000,000
Cash 92,000,000
Collateral Loans 59,000,000
Unpaid Premiums 37,000,000
Accrued Interest and Cash Assets 17,000,000
One investment feature, worthy of more than passing
notice, is the item "Premium Loans and Notes." In 1903
these amounted to less than $200,000,000. At the close
of business in 1913 the loans on policies amounted to
$589,000,000. In a period of ten years, then, this type
of loan, which in a sense is an investment, had practically
tripled.
200. Insurance of premium loans. — The increasing
tendency on the part of the insured to borrow against
the cash value of a policy is viewed with a good deal of
apprehension by insurance leaders. The main object of
insurance is to provide for the beneficiary. If the in-
sured cuts down this benefit by loans, the purpose of the
insurance is defeated. The panic of 1907 was largely
responsible for the increase in the loan item. Here is
what really happened. During the panic many people
were led to raise capital by means of loans on their life
insurance policies, other sources being closed. This
caused the practice of borrowing to spread, since panic
conditions drew attention to the fact that an insurance
policy was available at any moment for a loan upon its
cash value.
Unlike a savings bank, an insurance company cannot
protect itself by a sixty-day provision. In most cases,
if the cash value of the policy exceeds the required loan,
190 INSURANCE
the insurance company must let the applicant have the
money. A loan may be slightly better than cancelling
the policy, since the policy is still in existence and to that
extent has some hold on the insured. But the practice
of considering the cash value of an insurance policy
much the same as a savings bank deposit is having, and
undoubtedly will continue to have, a bad effect on the
main purpose for which the life insurance premium is
paid — that is, the protection of the beneficiary.
201. Life insurance as an investment, — In a sense,
perhaps, the modern method of selling life insurance as
an investment is responsible for emphasizing the loan
feature of policies. Loans at first were infrequently
taken out, and were given merely to take care of pre-
miums if the insured did not have the money at the time
the payment was due ; but long ago this condition passed
and loans have become a harmful feature.
It should be observed that although the insurance
company receives a fair rate of interest on these loans —
higher usually than their average return from other
sources — they are not thereby better off than as though
they had the funds in some other form of investment.
It is a special type of loan, one which cannot be called
and one, in fact, about which the companies can do noth-
ing so far as collecting it is concerned, unless the insured
chooses to pay it. If he pays the interest, the loan may
continue until the policy terminates and then be struck
off in settling the policy. An insurance company should
invest its funds to the best of its ability but the policy
loan feature ties them up as a special investment. One
curious fact about this type of loan is that it is seldom
repaid. This emphasizes its danger to the business of
life insurance. Apparently it is not regarded in the
same light as other loans but is considered by the insured
LIFE INSURANCE COMPANIES 191
as something which belongs to him, to which he is en-
titled, and which he will use as he pleases.
202. Insurance companies not savings hanks, — Some
insurance literature compares life insurance with the
savings bank deposits in such a way as to give the idea
to the insured that life insurance has in addition to insur-
ance protection, all the advantages of a savings account.
One insurance company emphasizes this point by a cir-
cular setting forth the advantage in favor of life insur-
ance in the following tables :
If Death
Occurs
at End
of Year
Amount
Invested
Amount Invested
Accumulated at
3h% Interest
Annually
Insurance
Return
Balance in
Favor of
Insurance
1
$21.70
$22.46
$1,000
$977.54
9.
43.40
45.70
1,000
954.30
S
65.10
69.76
1,000
930.24
4
86.80
94.67
1,000
905.33
6
108.50
120.44
1,000
879.56
6
130.20
147.11
. 1,000
852.89
7
151.90
174.72
1,000
825.28
8
173.60
203.30
1,000
796.70
9
195.30
232.87
1,000
767.13
10
217.00
263.48
1,000
736.52
11
238.70
295.16
1,000
704.84
12
260.40
327.95
1,000
672.05
13
282.10
361.89
1,000
638.11
14
303.80
397.01
1,000
602.99
15
325.50
433.37
1,000
566.63
16
347.20
471.00
1,000
529.00
17
368.90
509.94
1,000
490.06
18
390.60
550.25
1,000
449.75
19
412.30
591.97
1,000
408.03
20
434.00
635.15
1,000
364.85
21
455.70
679.84
1,000
320.16
22
477.40
726.09
1,000
273.91
192
INSURANCE
If Death
Occurs
at End
of Year
Amount
Invested
Amount Invested
Accumulated at
3^% Interest
Annually
Insurance
Return
Balance in
Favor of
Insurance
2S
8499.10
$773.96
SI, 000
$226.04
M
520.80
823.51
1,000
176.49
«6
542.50
874.79
1,000
125.21
S6
564.20
927.87
1,000
72.13
m
585.90
982.81
1,000
17.19
28
607.60
1,039.66
1,000
The advantage is in favor of Life Insurance for over 27 years.
Such comparisons are sure to make the insurance
appHcant feel that the cash value of the policy stands the
same as the savings bank deposit and that he may draw
on it at will. But he does not realize, unfortunately,
that he cannot have it both as a savings bank deposit and
as life insurance.
CHAPTER XIX
MORTALITY TABLES
203. The basis of mortality tables, — Premium pay-
ments and the interest return are, of course, important
matters in connection with life insurance. The real,
underlying plan of life insurance, however, is founded
on what are known as mortality tables. These tables in
turn are based on actual statistics and aim to show the
general rate of mortality and, in particular, the rate at
each age of life. Insurance companies may derive
mortality tables from two sources: (a) the general pop-
ulation of any territory as shown by the census returns,
including, of course, the births and deaths within the
territory, and (b) , so far as the life insurance companies
are concerned, tables derived from their own experience.
204. Halley's table. — In the beginning, naturally, in-
surance companies had no previous experience as a guide
so that all tables of mortality had to be founded upon
such general statistics as were available. The earliest
attempt — and it is interesting historically — to derive
such a table in what might be called modern times, was
that made by Halley, the English astronomer, in 1692.
For some years the journal published by the Royal So-
ciety had been dormant. Halley, among others, was
interested in its revival and offered to contribute an
article to the first revived number. In casting about
for some topic, he hit upon the idea of preparing a table
of mortality. When he came to look for his statistics he
found no information which he could use outside of
XI— 13 193
194 INSURANCE
Breslau in Silesia. Accordingly, he based a table on
their records, which are the oldest known records of this
form.
So far as the source is concerned, tables of some value
can be derived from a limited range of data. For exam-
ple, the length of life of the rulers of a country, such as
Great Britain, might be used as a foundation. A some-
what broader table, but still in the same class, could be
based on statistics covering the peerage of Great
Britain. In this latter case, more lives would be in-
volved, which would make the table of greater value.
In the same way, certain bodies, such as municipalities
where employes are fairly steadily employed under civil
service rules, furnish comparatively good data for the
compiling of mortality tables. This same principle
would also operate in the case of large corporations, es-
pecially those maintaining benefit funds.
205. Principles of compilation, — To compile a mor-
tality table, the following essential facts must be known:
(a) the number of people,
(b) their ages,
(c) the death record,
(d) the ages at death.
Given these statistics and assuming that the popula-
tion was stationary, a fairly reliable table could be com-
puted. If, however, the tabulation is affected at all by
emigration or immigration or by other factors, then the
results may be quite deceptive although the first set of
facts may exist.
206. The Northampton table. — An error of historic
interest may be found in the Northampton Table of
Mortality, published in 1783. This table, which enjoys
the unique distinction of being the first to be used by
life insurance bodies, was compiled by Dr. Price and
MORTALITY TABLES 195
was based on two parishes in the town of Northampton.
It was, in fact, a record of the deaths in these two par-
ishes, with the ages at death. There was also a record
of the baptisms which had taken place. In the period
mider observation, 1735-1780, Dr. Price noted that the
number of deaths exceeded the number of baptisms.
The additional deaths, he assumed, were caused by im-
migration into Northampton at the age of about
twenty. As a matter of fact, his assumption was erro-
neous, as there were a large number of Baptists in the
community whose children were not baptised. The
wrong assumption led to wrong conclusions. As a re-
sult of the error, Dr. Price's table over-estimated the
death rate and, while it was safe for a life company for
annuity purposes, it was grossly in error because it un-
der-estimated the term of life. For a long time this
table was the only one in use. It may even be found in
use to-day in certain parts of the United States.
207. The Carlisle table, — The second table, more
scientific and still in use, is the Carlisle Table, so called
because it was based on the statistics of two parishes in
the town of Carlisle, England. It was compiled in 1815
by Joshua Milne, who based his figures on the census of
1780 and the deaths in the two parishes from 1779 to
1787. Although using only a few lives, Milne's table
proved remarkably accurate and is to-day held in high
esteem for some purposes.
208. Other tables, — There have been as many as five
other tables based on population statistics in England.
One of the most important was that of 1851, based on
statistics of births and deaths from 1848 to 1853 in
sixty-three districts of England and Wales.
It is evident that, however valuable such tables as
have just been described may be when based on general
196 INSURANCE
statistics, the data cannot be as exact, even within a
small compass, as the carefully kept records of a life
insurance society.
As soon as such a plan was practicable, the insurance
companies turned to their own previous experience for
data. Mr. Arthur Morgan, actuary of the old Equi-
table society, published the experience of that company
in 1834. This was a valuable contribution to the sub-
ject, although, as the experience of merely one company,
it w^as necessarily narrow. Some seventeen English life
insurance companies combined their experience in 1843
and published a table generally know^n as the Actuaries
or the Combined Experience Table. This new table
was based on 84,000 policies running from 1762 to 1833,
some 14,000 of the policies having terminated by death.
The table brought out several interesting facts which
have been verified by later experience — that the mor-
tality among women between the ages of twenty and
fifty was greater than that among men, and that above
that age the reverse appeared to be the case. These facts
do not hold good, however, when dealing with annuity
experience, and that fact must be noted in the two forms
of contract. The conditions under w-hich the two forms
are taken out are usually quite different.
209. The American Experience tables, — In the
United States, the English tables w^ere, with adapta-
tions, the best guide until sufficient experience had
developed to compile tables on this side of the Atlantic.
Probably the most famous — perhaps because the first,
but also because it has stood the test of years — is the
American Experience Table of Mortality, which ranks
as the standard table in the United States. It was com-
piled by Sheppard Homans and appears to have been
published originally in connection with an act of the
MORTALITY TABLES 197
Legislature of the State of New York, May 6, 1868.
Much interest was aroused as to how the table was com-
piled, although the exact manner is still more or less a
matter of conjecture. One assumption^was that the sta-
tistics of the Mutual Life Insurance Company of New
York were used as a basis; in this connection, however,
it has been observed that the statistics available for the
older ages could hardly have been sufficient to serve as
the basis for such a table. Some adaptation, evidently,
must have been made, but just what or how extensive is
not known. In any event, the table stood the test well
and answered the purpose admirably. In fact, it made
a very important place for itself on this side of the At-
lantic and is the table usually prescribed by all the State
laws.
There have been many other important tables based
on different periods and used for different purposes. In-
vestigations have been and are still being conducted
both in England and in this country, and we may look
for improved tables as the work progresses, just as we
may expect changing conditions in the length of life
itself under improved sanitary and hygienic conditions.
The American Table of Mortality, which is now in
general use for computing the premium of American
companies, is here reproduced. It assumes that there
are 100,000 living at the age of ten and for each year up
to 95, when the table runs out, shows the number sur-
viving at the succeeding year. The percentage of mor-
tality is also shown, that is, the number who died within
the year in proportion to those living. The life expec-
tancy is also shown. As yet, these percentages are, of
course, tentative and provisional, but they are of consid-
erable interest in connection with a study of the general
subject. It should be remembered that the chief con-
198
INSURANCE
cern of the actuary is not in the expectancy of life, but
rather in the chance of loss when a policy is issued.
AMERICAN TABLE OF MORTALITY
Surviv-
Per Cent
of
Mortality
Expect.
Age
53
Surviv-
Per Cent
of
Mortality
Expect.
Age
ing
of Life
ing
of Life
10
100,000
.7490
48.7
66,797
1 . 6333
18.8
II
99,251
.7516
48.1
54
65,706
1.7396
18.1
12
98,505
.7543
47.4
55
64,563
1.8571
17.4
13
97,762
.7569
46. is
56
63,364
1.9885
16.7
14
97,022
.7596
46.2
57
62,104
2.1335
16.0
15
96,285
.7634
45.5
58
60,779
2.2936
15.4
i6
95,550
.7661
44.9
59
59,385
2.4720
14.7
17
94,818
.7688
44.2
60
57,917
2.6693
14.1
i8
94,089
.7727
43.5
61
56,371
2.8880
13.5
19
93,362
.7765
42.9
62
54,743
3.1292
12.9
20
92,637
.7805
42.2
63
53,030
3.3943
12.3
21
91,914
.7855
41.5
64
51,230
3.6873
11.7
22
91,192
.7906
40.9
65
49,341
4.0129
11.1
23
90,471
.7958
40.2
66
47,361
4.3707
10.5
24
89,751
.8011
39.5
67
45,291
4.7647
10.0
25
89,032
.8065
38.8
68
43,133
5.2002
9.5
26
88,314
.8130
38.1
69
40,890
5.6762
9.0
27
87,596
.8197
37.4
70
38,569
6.1993
8.5
28
86.878
.8264
36.7
71
36,178
6.7665
8.0
29
86,160
:8345
36.0
72
33,730
7.3733
7.5
30
85,441
.8427
35.3
73
31,243
8.0178
7.1
31
84,721
.8510
34.6
74
28,738
8.7028
6.7
32
84,000
.8607
33.9
75
26,237
9.4371
6.3
33
83,277
.8718
33.2
76
23,761
10.2311
5.9
34
82,551
.8831
32.5
77
21,330
11.1064
5.5
35
81,822
.8946
31.8
78
18,961
12.0827
5.1
36
81,090
.9089
31.1
79
16,670
13.1734
4.7
37
80,353
.9234
30.3
80
14,474
14.4466
4.4
38
79,611
.9408
29.6
81
12,383
15.8605
4.0
39
78,862
.9586
28.9
82
10,419
17.4297
3.7
40
78,106
.9794
28.2
83
8,603
19.1561
3.4
41
77,341
1.0008
27.5
84
6,955
21.1359
3.1
42
76,567
1.0252
26.7
85
5,485
23.5552
2.8
43
75,782
1.0517
26.0
86
4,193
26.5681
2.5
44
74,985
1.0829
25.3
87
3,079
30.3020
2.2
45
74,173
1.1163
24.5
88
2,146
34.6692
1.9
46
73,345
1.1562
23.8
89
1,402
39.5863
1.7
47
72,497
1.2000
23.1
90
847
45.4545
1.4
48
71,627
1 2509
22.4
91
462
53.2466
1.2
49
70,731
1.3106
21.6
92
216
63.4259
1.0
50
69,804
1.3781
20.9
93
79
73.4177
0.8
51
68,842
1.4541
20.2
94
21
85.7143
0.6
52
67,841
1.5389
19.5
95
3
100.0000
0.5
MORTALITY TABLES 199
210. Computing the premium. — ^A simple illustration
will show the principles according to which an insurance
premium is computed. It is desired, say, to insure 1,000
persons for $1,000 each. We will assume that they wish
to pay for this in one payment. We will also assume
that each member of the entire group is fifty years of
age at the time the insurance is taken out and that all
will die within a three-year period, the deaths being at
the rate of 200 the first year, 300 the second and 500 the
third. To meet this condition it is evident that the com-
pany must have on hand at the end of the first year
$200,000 to pay one thousand dollars to each beneficiary
for each of the 200 deaths. In the same way, there must
be $300,000 at the end of the second year and $500,000
at the end of the third year. But only these respective
parts— that is, $200,000, $300,000 and $500,000— will
be required at the end of the first, second and third years
respectively. The company need not, therefore, collect
the entire $1,000,000 at the beginning, since only a pro-
portion will be demanded at the close of that year. Let
us further assume that the interest will be 3 per cent. At
the close of the first year, as we have seen, $200,000 must
be paid. But what is the present value of this sum?
The present value of $1 for one year is .970874*, and for
$200,000 would be $194,174.80. The present value of
the $300,000 due at the end of two years is $282,778.80;
the present value of $500,000 needed at the end of the
third year is $457,571. Totalling these three amounts
at their present value, then, we have $934,524.60, and
as there are one thousand persons whose lives are in-
sured, each would pay one-thousandth part of this, or
$934.53. This sum, then, at the beginning of the three-
year period would provide for the payments of the
whole group.
^00 INSURANCE
Passing now to an example taken directly from the
American Mortality Table, suppose you wish to find the
sum of money for which a policy can be issued for a per-
son, age fifty, providing for a $1,000 payment at death.
Refer to the table on the preceding page and you will'
find that out of 100,000 persons who were aged 10, only
69,804 reached the age of 50. You will further note, on
looking at the 51st year, that 962 is the estimated num-
ber of those who will die within the year. Accordingly,
if a company insured the whole group, it should be in a
position to pay out $962,000 for the deaths of this year.
But the present value of this sum is only $933,981, since
with interest at 3 per cent it would amount at the end of
the year to $962,000. Now, likewise, for each succeed-
ing year the table shows the amount required and the
present worth is easily ascertained. The sum of all these
will show that each person at the age of fifty would pay
$555.22 to insure $1,000 being paid to each person at
death.
211. The law of increasing mortality. — The fact that
the death rate increases in the older ages is provided for
by adjusting the insurance premium so that in the
younger ages an increased sum is collected in order that
the proper reserves may be set aside. The annual pre-
miimis normally exceed the death claims for the first
thirty or forty years; after that, the losses by death
largely exceed the annual premiums. Failure to recog-
nize this law of increasing mortality in the older ages
has brought most of the trouble to the assessment insur-
ance companies. If enough is not collected at the
younger age to establish the proper reserve for the older
age, it naturally becomes necessary to increase the assess-
ment or premiums at the older age.
CHAPTER XX
POLICIES AND PREMIUM RATES
212. Classification of policies. — In considering life
insurance policies, one of the first classifications might
be into "participating" and "non-participating poHcies."
Participating pohcies entitle the holders to a share in the
company's profits. The payment of such amounts is
often referred to as "dividends," although in the ordi-
nary sense of the word there is no such thing as a divi-
dend to holders of life insurance policies. There would,
of course, be no reason for "dividends" if life insurance
costs could be figured exactly. Mortality tables and in-
terest calculations can, at best, furnish only the basis
for close approximations. What is meant, then, is that
the companies to be on the safe side arrange premium
payments which will absolutely protect them against
failure. This is done by means of so-called "dividends,"
that is, by paying back to the insured certain sums of
money on the policies taken out.
Some, however, prefer a lower annual charge without
the feature of dividend participation. To such parties
policies are issued on what is known as the "non-partici-
pating" basis; that is, they pay a fixed annual charge
for the policy so long as the term shall run or so long
as they shall live. Thus, they have the advantage of
knowing just what the insurance is going to cost them
and just what the return will be. It may safely be said,
however, that most policies are issued on the participat-
ing basis, the dividend feature being a not unpleasing
one to the average individual.
201
20e INSURANCE
213. Kinds of policies, — A life insurance policy may
be issued, and in the majority of cases is issued, for life;
that is, the amount of the policy is payable to the bene-
ficiary on the death of the insured. An endowment
policy is payable at death or at a fixed period of time.
For example, a twenty-year endowment policy would
be payable if the insured died within twenty years or, if
the insured were to live, would be payable at the end of
the twenty-year period.
Term policies are infrequently written and are usually
issued for some specific purpose, as to cover a life for a
short term of years. Such a policy may be taken out to
cover loss for a certain period, as, for example, on the
life of an inventor while he is engaged in developing an
invention ; or such a policy might be taken out to cover
the head of an institution where it was felt that the suc-
cessful development of the plant depended so much on
his life that in the event of death the money invested
might be a total loss. Such a form of risk may be in-
sured by the term policy. As might be expected, this
type of policy is cheaper than the other forms since it
covers onlj^ a limited number of years, usually a term of
years in early or middle life when the death rate is less
than in the later years.
21 4. Annuities, — An annuity, as far as its w^orking
principles are concerned, might be said to be the reverse
of life insurance, the company paying an annual sum to
the annuitant, after having received in one payment a
sum for this purpose. In other words, in an annuity, as
contrasted with life insurance, the company and the in-
sured change places. In an annuity, the risk is carried,
not by the company, but by the annuitant, for if he dies
prematurely the company is relieved from the obliga-
tion of further annual payments. The business of an-
POLICIES AND PREMIUM RATES 203
nuities is much smaller in the United States than in
England, the idea apparently not appealing strongly to
the American people. Possibly conditions may later
change so as to make annuities more popular in this
country. The annuity is without doubt a most useful
form of investment, since it provides a stated sum pay-
able according to definite terms, thus avoiding the dan-
gerous practice of entrusting large sums to persons
who, because unskilled in money matters, are often likely
to make unwise investments.
215. Classification of risks, — Theoretically, a life in-
surance company accepts only such risks as are up to its
standard. Some provision, to be sure, is made for "sub-
standard" lives, but comparatively speaking it is slight
since standard lives are the ones which insurance com-
panies are more desirous of insuring. It will readily
be seen that this policy differs radically from that of
property insurance, for while there are different stand-
ards, as in fire insurance, to which a risk should attain,
rarely, if ever, does it do so ; the substandard condition,
therefore, is the one most frequently met. From the
standpoint of the insurance companies, risks have been
classified as "preferred," "ordinary," and "doubtful."
In the doubtful class are the underweights and over-
weights. The following reasons have been set forth by
an authority for their being in that class :
(1) The Underweights.
(a) They are abnormal and die short of their ex-
pectation.
(b) They are prone to tuberculosis and nervous dis-
eases.
(c) They are frequently underfed and overworked
and suffer from dyspepsia and indigestion.
204 INSURANCE
(2) The Overweights.
(a) They are abnormal.
(b) They are prone to develop heart disease, apo-
plexy, and premature arteriosclerosis, diabetes,
rheumatism and gout.
(c) They frequently take little exercise, eat heartily,
and are often intemperate in their use of malt
liquors.
(d) They frequently succumb to accidents and surgi-
cal operations.
From the insurance standpoint occupation is impor-
tant. Some occupations are obviously so hazardous
(aviation, for example) as to cause a company to dechne
the risk, although other conditions might be favorable.
Insurance might be granted in such a case but the rate
would be almost prohibitive. As a rule, the company
expects the applicant to continue in the same line of
occupation as that in which he was engaged at the time
the policy was written for him, but statistics regarding
the hazards of various occupations have never been com-
plete enough to make possible any hard or fixed rule
about change of occupation. A change that did not
involve a radical degree of increased hazard would be
permitted without any question. The matter of race, of
course, is taken into consideration, since it is well known
that longevity varies widely in different races. This is
true not only in different countries inhabited by their
respective races but also where different races are f oimd
under the same climatic conditions.
216. Influence of climate on mortality,— The terri-
tory in which one lives or the part of the earth he occu-
pies has to be considered. In the Temperate Zones, for
example, which are the more highly settled and civilized,
POLICIES AND PREMIUM RATES g05
living conditions are fairly stable and all protective in-
fluences that make for long life are enforced by the gen-
eral authorities. In the Torrid Zone, however, the
Anglo-Saxon race does not flourish. Fifty years ago
the restrictions were quite severe, even in the United
States, where yellow fever was looked upon as a danger-
ous epidemic. To-day one may live in practically any
part of the United States without suffering thereby
from an insurance standpoint. There are differences,
of course; some sections are more healthful than others
but the differences in healthfulness are not as yet con-
sidered sufficient to affect insurance policies to any ex-
tent. Once a company is satisfied that certain regions
are not those in which lives should be insured, they will
cease to solicit insurance in those regions.
217. The moral hazard. — The moral hazard, of
course, exists in life insurance as in every form of insur-
ance and possibly in every station of life. It is not
enough that the insured shall have passed the medical
examination and otherwise have qualified. The ordi-
nary qualifications are important, to be sure, but in addi-
tion the company endeavors to ascertain something of
the moral standing of anyone who applies for insurance.
This information is secured by means of research work
and special investigations conducted quite independ-
ently of the usual sources of information. The extreme
care exercised is fully warranted, since a contract of life
insurance is, so far as the company is concerned, one
which it cannot cancel after the policy has once been
issued and the premium paid. For so long thereafter
as the insured shall pay the premium the policy con-
tinues in force. The insured, of course, may cancel the
policy at any time, although, as has just been mentioned,
the insurer may not. For this reason, therefore, it is ex-
206 INSURANCE
ceedingly important that the company use the utmost
care that its policy shall not be issued to cover risks
which, from the moral standpoint, would be undesirable.
Again, referring to suicide, it may be said that this has
always been one of the specific problems. It is a fact
that suicide in the United States is on the increase.
Statistics show that for each one hundred thousand of
the population in sixty-five cities the increase was from
12.3 in 1890 to 20.6 in 1909.
218. Features of the insurance contract, — The mod-
ern policy contract, in its general features, represents a
somew^hat simple condition. Formerly it was filled with
prohibitions; now it is filled with privileges. Brief men-
tion may be made of such points as are found in the
majority of policies.
The premium is due at the time stated in the contract
and is payable only at the home office of the company
unless other provision is made.
The contract is not subject to alteration, and the
policy with the application, if there be one, tells the
whole story. Other matters cannot be brought into it.
There may be a few exceptional cases but they would
be so rare as to be negligible.
Due notice of an assignment, if made, must be given
the company.
The average life insurance policy is incontestable
from date of issue except for suicide and usually is
incontestable for that feature one year after issue. In
connection with suicide, an attempt was made to do away
with the special provision for one year. It was found,
however, that with this restriction removed, the number
of suicides apparently increased so that the suicide
clause was restored as a protection to the insurance
companies. People contemplating suicide would, just
POLICIES AND PREMIUM RATES 207
before taking their lives, secure policies so long as they
could get those which were incontestable from date of
issue.
It might naturally be assumed that insurance appli-
cants could be relied upon to state their ages correctly,
and yet there have been sufficient cases of misstatement
to warrant rules being made to provide the proper means
of adjustment. The rule generally in force at the pres-
ent time is that if the age has been misstated the correc-
tion may be made and the proper payment under the
policy for the given age be made the basis of settlement.
Thirty days of grace had by custom become estab-
lished for the payment of premiums. In many states it
is now the rule and one month is allowed by law during
which payments may be made.
The beneficiary of an insurance policy in the early
days could not be changed without his or her consent.
This provision proved an unwise handicap in some cases ;
in fact, if it had been retained in insurance policies it
might, and probably would, have retarded the growth
of life insurance. The practice has, however, been
changed so that to-day the beneficiary can usually be
changed if the policy holder, when he takes out his insur-
ance, expresses his desire to have this privilege embodied
in the policy.
219. Paid-up policies, — A life insurance policy that
has been allowed to lapse after having been in force for
three years does not become a complete loss to the in-
sured. It is supposed to be of some worth, is carried as
a policy for that amount and is payable at the stated
time as though it had been carried to completion. If a
policy which has a paid-up insurance value is permitted
to lapse or is cancelled, it is customary, if the insured so
desires, to grant a paid-up policy for the amount.
208 INSURANCE
220. Cash value. — At the end of three years, the cash
value feature comes into play, so that the policy, if can-
celled, has a certain value; that is to say, the insured,
under the terms of the policy, is entitled to a certain
amount if he gives up his right to the pohcy. This
feature of the cash surrender value of a policy was intro-
duced into the business, on this side of the Atlantic at
least, by Elizur Wright, one of the early Commissioners
of Massachusetts. He held that as the payments in the
early days of life insurance constituted, in part at least, a
reserve for the payment of the policy, the insured should
not lose this total sum if he found it necessary to allow
his policy to lapse, but should have the benefit of a cer-
tain cash value. This provision is now a recognized
principle in all life insurance contracts.
221. The medical examination, — Practically all forms
of insurance are written only after some form of exam-
ination, or "inspection" as it is termed in fire insurance,
of the risk to be insured. The medical examination in
life insurance corresponds, in a sense, to the property
inspection in fire insurance. In early days, in fact for
several decades, there was no medical examination in
connection with life insurance. Under the existing con-
ditions it was hardly necessary, since the entire process
was a slow and formal affair and the work of the socie-
ties confined to local territories, where applicants were
generally known to two or more trustees of the society.
To-day, the medical examiner of a life insurance com-
pany is an important official. An applicant for insur-
ance covers the general questions to which the com-
pany desires answers before it issues a policy, but he is
not obliged to write out answers to purely medical ques-
tions. A typical medical examiner's report runs as fol-
lows,^ and a consideration of these questions will reveal
»See pages 210-11.
POLICIES AND PREMIUM PLATES 209
the points emphasized by the company in considering
the application .
One or two questions which involve a moral view-
point may be worthy of special attention. Under 14
(d) and (e), questions are asked in regard to intoxicat-
ing liquors, and under 36, with subdivisions running
from (a) to (h) inclusive, the subject is covered still
more fully. The word "temperate" does not mean the
same thing to everyone. To one applicant it might
mean a moderate use of alcoholic liquors; to another it
might mean excess or almost total abstinence. The word
is open to so many interpretations that nowadays it is
generally taken to mean, not total abstinence, but rather
the use of alcoholic liquors only to a certain extent. A
statement as to what that extent is must come from the
applicant. One who does not use such liquors would be
a total abstainer. As a matter of fact, but very little
trouble is experienced in finding out the exact status in
each case since the applicant is usually quite willing to
state whether he does or does not use liquors, and in the
event of his using them, to indicate the frequency of his
indulgence. Notice under question 36 (b) and (c) that
the times of use, daily, weekly, and monthly, are taken
up quite minutely, forming a record which runs back
over two years.
The use of drugs, apparently, stands on a different
moral basis from the use of alcoholic liquors. Probably
no applicant for insurance would confess to the use of
drugs. To detect a user of drugs, therefore, calls for
the keenest discernment and discrimination on the part
of the medical examiner.
XI-14
210
INSURANCE
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CHAPTER XXI
INDUSTRIAL AND ASSESSMENT INSURANCE
222. Industrial insurance defined, — Industrial insur-
ance is substantially life insurance, but owing to certain
principles in connection with its sale it has come to enjoy
the special definition, "Industrial Insurance." It has
been well stated to be mass insurance as distinguished
from class insurance; and when we consider that in
Great Britain some seventeen million policies of this
type are in force, we can appreciate its appeal to the
great mass of the population.
The descriptive word "industrial" it took from the be-
ginning. In 1849 the attempt to establish this type of
insurance was made in England by a company called
the Industrial and General, and because of its origin
this term has remained. The solicitations of the Indus-
trial and General were among the industrial wage earn-
ing classes.
Industrial insurance is not handled as the exclusive
activity of any one company, but is sold by companies
doing an ordinary life insurance business; it is, how-
ever, by them separately handled and managed.
223. Earhj efforts in the United States, — In the
United States as early as 1847 efforts were made to sell
policies on the weekly and monthly payment plans.
None of these efforts were successful, and as a matter of
fact amounted to but very little up to the year 1874.
Apparently, this period of educational work was neces-
sary in order to prepare the public for this type of insur-
ance. Possibly, too, the early efforts were not made by
INDUSTRIAL AND ASSESSMENT INSURANCE 213
those who could carry the idea through on a large
scale.
224. The first company. — To John F. Dryden of the
Prudential Insurance Company belongs the credit for
successfully establishing this form of insurance in the
United States. Mr. Dryden came to Newark, New Jer-
sey, in 1873, and a bill was passed by the legislature
chartering the Widows' and Orphans' Benefit Society.
Nothing came of this movement. In the Spring of 1875
the charter of this society was amended to the Pruden-
tial Friendly Society, and two years later it became the
Prudential Insurance Company of America. Business
operations on a true industrial insurance basis began on
November 10, 1875, the first application being written
on the life of Mr. W. K. Drake, cashier of the German
Bank of Newark. The object of the society was set
forth as follows: "It is the special aim of this society to
enable people of small means to provide themselves with
relief in sickness or accident; (2) for a pension in old
age; (3) for an adult burial fund; (4) for an infant
burial fund. The contributions charged for the above
named benefits have been computed by eminent actu-
aries of America and England, and are such as careful
study and close calculation have shown to be equitable
and necessary. They are as low as the Society can
afford, for the benefits granted, and are high enough to
make it safe."
The first of the four features just set forth was dis-
continued after a few years of experience, and the second
did not meet with much favor. On the third and fourth
branches, however, a great business was built. The first
is now coming into very active reconsideration, and in-
surance to cover sickness for the masses will doubtless
be established in time.
214 INSURANCE
225. Growth of the Prudential — The growth of the
Prudential Insurance Company of America was
phenomenal, showing that there must have existed a
real demand for this form of insurance. The first
policy was issued November 10, 1875, and by
May 22, 1876, the number of policies amounted to
five thousand. There were financial problems connected
with the growth of this company, which simple as they
look in the light of present day achievements, were not
simple in those times. For the year 1876 the total in-
come was about $14,495 and the total expenses $16,253.
The deficiency, together with the necessary reserve, had
been paid in by the stockholders. This was at the end of
fifteen months of operation, showing how difficult was
the work of placing the society on a sound financial
basis.
226. Conditions in 1885, — Three years later, in 1879,
there were sixty thousand industrial policies in force in
the United States, and some four companies were en-
gaged in the business. In 1885 it commanded the notice
of Mr. August F. Harvey, one of the leading actuaries
of the time, who spoke of it as follows:
I also made inquiry into some matters connected with the
industrial business. It is comparatively new here, but the re-
sults of the trial, so far, favor its excellence and its permanency.
The great advantage to persons of very limited means of being
able to carry a moderate insurance for a low weekly cost, col-
lected at their homes, extends beyond the mere convenience of
the matter to the individuals concerned. The system relieves
such beneficiaries from their worst anxiety — the dread of burials
at public expense — and has actually, in many of the more popu-
lous quarters of the large cities, where extreme poverty pre-
vails, had a marked influence in the reduced number of calls
for aid in the public press; it promotes small savings in
INDUSTRIAL AND ASSESSMENT INSURANCE 215
people of higher advantages and encourages a thrift among
the better classes who patronize the Company, which has its
effect in the increment of the public wealth. I inquired par-
ticularly with reference to the public assertion, that the plan
of furnishing insurances on infant lives was to invite child-mur-
der, or such neglect as to bring its fatal results within the
category of crime. If the statement is true in any degree, the
foundation for it is so limited that it has not been particularly
noticed.
In an earlier paragraph the total insurance in force at
the close of business, December 31, 1913, was stated to
be $18,000,502,971. Of this sum, industrial busi-
ness amounted to $3,656,000,000, and it is safe to
say that there were from ten to twelve million policies
in force.
227. Four basic principles, — Industrial insurance
has four basic principles upon which its success is based.
They are as follows: (a) the weekly payment principle;
(b) the principle of family insurance ; (c) the necessity
of a collector; and (d) the adjustment of the amounts
of insurance to a premium having five cents or any mul-
tiples thereof as a unit.
228. Assessment insurance, — Assessment insurance
is a form of life insurance based on the principle that it
is unnecessary to carry any large reserves but that as the
benefits become due the sums needed can be collected
by means of an assessment. Probably the early condi-
tions under which insurance was sold in the United
States up to, say, the early 60's, suggested the assess-
ment plan. At that time there were comparatively few
clear or sound ideas as to the proper foundation for a
life insurance company. The whole question of what
should be regarded as the necessary reserve was none too
well understood by those engaged in the business gen-
216 INSURANCE
erally, and probably was not understood at all by the
common people.
229. Origin, — Assessment insurance in this country
appears to have originated in Meadville, Pa., in 1868,
when a society was organized under the name "The
Ancient Older of United Workmen." It was formed
originally for other purposes, but as an insurance pro-
tection for the members, one dollar per member was paid
to the beneficiary on the death of any other member.
This type of insurance must have met the existing con-
ditions of that time, as it spread rapidly throughout
Pennsylvania and passed into other states.
230. Weak points, — The primary difficulty with as-
sessment insurance is that if only the necessary collec-
tions are made to pay the expenses as the institution goes
along, no reserve accumulates against the larger claims
which are sure to be made in later years as the members
grow older. Enough new blood cannot be brought in
to keep down the increased cost. The result is that as
the society grows older the increased assessments mean
an increased cost; this, in turn, frequently results in the
dropping out of the older members who, by so doing,
lose their insurance.
231. Fraternal insurance. — On a strictly business
basis, assessment insurance no longer exists in the
United States. In the form of fraternal insurance,
however, it does exist and is a very important factor in
the business of life insurance. The last available report,
that of December 31, 1913, shows that the fraternal or-
ders reporting to the New York State Insurance De-
partment had insurance in force of $6,193,259,000, and
assets amounting to $134,000,000. The difference be-
tween fraternal insurance and regular life insurance,
from the reserve standpoint, is forcibly illustrated by
INDUSTRIAL AND ASSESSMENT INSURANCE 217
the fact that the assets of the former represent about 2
per cent of the policy hability, while in the ordinary
insurance business, with policies in force aggregating
$18,000,000,000 and assets of over $4,000,000,000, the
proportion is about 22^/2 per cent. Assessment and fra-
ternal insurance companies, however, have done an ex-
traordinarily successful work in arousing the public to a
realization of the importance of insurance, not to men-
tion the immense sums which they have collected and
disbursed in the form of death benefits. It should be
remembered by one planning to take out life insurance
that there is a wide gulf between regular life insurance
and fraternal. The impregnable law of mortality — that
the deaths increase with increasing age — is one which
may bring confusion even to the best laid plans of the
fraternal type of organization.
CHAPTER XXII
CASUALTY INSURANCE
232. Casualty insurance defined, — Under the general
heading "Casualty Insurance" are embraced all forms
of insurance which do not strictly come under fire, life or
marine. Of the fifty-one types of insurance listed in
the first chapters of this work, nearly thirty would fall
under this group. The term "accident insurance" is
frequently used in referring to these types of insurance.
Accident insurance means that form of insurance which
covers dangers to the body of a person, including death
if caused by accident. Historically, however, the name
accident insurance came to be applied to a large body of
insurances because these different types of insurance
came into existence shortly after the invention of the
steam railway. Someone conceived the idea that be-
cause the dangers of accidents in that form of travel
were greater, people would buy insurance against them ;
at the same time the originator of the idea pointed out
that although the dangers were great, they were subject
to certain laws which could be worked out. His state-
ment proved to be correct. From its inception accident
insurance has been one of the most popular, widespread,
and successful branches coming under the head of
casualty insurance.
233. General status, — Before passing to a considera-
tion of specific branches, however, the general status of
casualty insurance business, as shown by the statistical
returns, should be considered. As in the other forms of
insurance, the figures filed with the New York State In-
218
CASUALTY INSURANCE 219
surance Department for the close of business December
31, 1913, are used. These reports show sixty- four com-
panies engaged in casualty insurance with total assets
of $170,000,000, represented principally by
Stocks and Bonds $112,000,000
Uncollected Premiums 19,000,000
Real Estate 10,000,000
Mortgages 11,000,000
The liabilities were $92,000,000, represented in part by
Special reserve for liability and
Workmen's compensation loss. .$16,000,000
Unearned premium reserve 52,000,000
Unadjusted and Adjusted but un-
paid losses ^. . 7,000,000
Other Habilities 11,000,000
The liabilities of $92,000,000 did not include capital,
which is $43,000,000. The net surplus was $34,000,000.
The income for the year was $135,000,000, the princi-
pal items being :
Premiums $122,000,000
Interest in Dividends 6,000,000
All other sources 5,000,000
The excess of income over disbursements was
$11,000,000. The disbursements totaled $124,000,000.
Claims $53,000,000
Commissions 29,000,000
Dividends 5,000,000
Salaries, travelling expenses and in-
spections 17,000,000
Taxes 3,000,000
All other disbursements 16,000,000
220 INSURANCE
The companies just noted were the stock companies
and there were twenty-six associations based on the as-
sessment principle. They had insurance in force of
$92,000,000; assets of $3,750,000; income was $2,856,-
000, and disbursements $2,684,000.
The special form of insurance dealing with titles and
the guarantee of mortgages may be considered as com-
ing under the general casualty branch. Since these re-
turns are made separately, the statistics are presented
apart from the others. There were eleven such com-
panies, with total assets amounting to $53,000,000 ; lia-
bilities exclusive of capital $17,000,000, and capital $19,-
000,000. Reported surplus was $16,500,000; income
$5,967,000; disbursements $6,229,000.
234. Accident insurance, — In taking up some of the
leading branches of casualty insurance, accident should,
historically, come first. Those who proposed this form
of insurance in England in 1848 were considered bereft
of reason; notwithstanding this fact, however, the Rail-
way Passengers Assurance Company was established
the following year (1849) by a special act of Parliament
and this company stands as the first one in the world
to undertake insurance against accidents to the per-
son or body. The original charter did not plan for a
very wide scope of liability. It was limited, rather, to
those accidents arising in connection with railroad
travel. But the plan was broadened to include ac-
cidents arising from any source and the necessary
amendment to the charter was secured from Parliament
on July 17, 1852. The company was successful from
the start.
235. The Travelers' of Hartford,— In the United
States, accident insurance was introduced by J. G. Bat-
terson of Hartford, Conn. While travelling abroad.
CASUALTY INSURANCE 221
Mr. Batterson noticed the operations of the newly-
formed companies, purchased one of the tickets and be-
came convinced that there was an opening in the United
States for a similar company. On his return he organ-
ized in Hartford the Travelers' Insurance Company, the
pioneer in the United States.
236. Growth of accident insurance, — As already indi-
cated, accident insurance has been constantly enlarging
its scope so as to cover not only injuries to the body from
physical contact with another body, but also so as to
cover against certain kinds of diseases. In 1897 there
were twenty-six companies which issued insurance
against the following diseases: typhoid fever, typhus
fever, scarlet fever and smallpox. This list was later ex-
tended, many companies including diphtheria, measles
and Asiatic cholera. By some companies an annuity
was granted for life in case of permanent disability, and,
furthermore, the benefits arising from injury in a rail-
road accident were doubled — that is, if an accident
occurred owing to a railroad disaster, the specified bene-
fit was twice that of an accident arising from other
sources. It is difficult to conceive of the broad range
which has come to be included under this type of policy.
It may even be said that in a short time there will not
be any human ill that will not be covered by some form
of insurance.
237. Various kinds of accidents, — The premiums for
this type of insurance in the United States now aggre-
gate nearly $25,000,000. During the first year of the
business, from April, 1864, to April, 1865, the receipts
were $32,148. A well-known compilation has been
made setting forth the proportion of accidents arising
under different circumstances. The table runs as fol-
lows;
222 INSURANCE
Per cent
Accidents to pedestrians 24.14«
At home (indoors) 18.80
Horses and vehicles 18.16
At home (outside) 15.98
Recreation 6.15
Railroad travel 4.77
Bicycle accidents 4.06
Street car travel 2.74
Use of firearms 1.73
Animal bites 1.52
Assaults 1.20
Steamship travel 70
Miscellaneous 05
100.00
When it is recalled that this form of insurance was
invented to cover the possibiHty of accident in railway
travel, and when it is noticed that railway accidents con-
stitute only a small part of the accidents for which
claims were paid in the above table, it can readily be
seen that accident insurance was extended to cover a
very wide field. In modern life accident insurance is
probably one of the most necessary forms to carry, par-
ticularly so since the cost is comparatively trivial. The
causes of accidents over a wide range is illustrated by a
compilation covering claims paid in the year 1912.
Cranking gasoline launch — bar slipped and cut lip.
Playing baseball — ball struck finger — dislocated finger.
Playing tennis — sprained ankle.
Riding horseback — ^horse fell — thrown under horse.
Fishing — fell on rocks.
On steamer — slipped while playing shuffle and injured knee.
CASUALTY INSURANCE 223
Bathing — knocked down by wave — injured foot.
Playing golf — handle of stick was rough and cut hand.
Rowing — bruised palm of hand with oar.
Playing ten pins — slipped and sprained thumb.
Playing with medicine ball — fractured finger.
Getting over fence — jumped on stone and sprained ankle.
Playing ball — collided with runner and fractured nose.
Playing handball — slipped and fell and injured knee.
In boat — knife which was on seat struck hip.
In swimming — was drowned.
In swimming at Y. M. C. A. — struck head on bottom of pool.
Playing tennis — burned arm on cigarette.
Getting out of rowboat — slipped and fell.
Shooting pigeons — gun kicked — injured shoulder and arm.
In bathing — stepped on sharp shell.
At picnic — lighting gasoline torch — burned hand.
Fishing and wading — cut foot on stone.
Playing golf — fell and sprained finger.
Walking on mountain — came in contact with poison ivy.
Camping — cut down tree — cut foot.
Bowling — crushed finger between balls.
Riding on merry-go-round — fell and dislocated shoulder.
Camping — spilled hot grease on hand.
Walking in woods — limb of tree struck eye.
238. Injuries self-inflicted. — It may seem strange
that persons will mutilate themselves to obtain money
benefits, but the experience of the companies shows that
such is the fact and emphasizes the importance of care-
fully guarding against this practice. The ordinary ele-
ments of moral hazard which would apply to life insur-
ance must be covered, of course, but in addition there
must be taken into account people who apparently pos-
sess the peculiar art of inflicting injuries upon them-
selves for which they can collect funds on their accident
policies. The number of people who did this increased
224 INSURANCE
so rapidly that an organization was finally established
to check up the claims made on the different companies.
The experience of a certain company shows how care-
fully the provisions of accident policies were studied by
unscrupulous persons. For many years this company
paid the same indemnity for the loss of either hand.
Statistics over sixteen years showed that in 92 cases the
right hand was lost, the indemnity paid being $48,511,
and that in 111 cases the left hand was lost, for which
the indemnity amounted to $88,879. This seemed dis-
proportionate, and the only theory in explanation
seemed to be that in many cases the insured selected the
hand which was of least value, disposing of it to the
insurance companies. Although this is a broad state-
ment it seems to be confirmed by the fact that the right
hand is more exposed to danger and more likely to be
injured than the left. Further confirmation is found in
the fact that the policy was changed so that a larger in-
demnity was paid for injuries to the right hand. With
the change in the policy, statistics changed, and in two
or three years 21 right hands were lost at an expense of
$71,000 as against two left hands at an expense of $2,-
500. This evidence, then, appears to be fairly conclu-
sive.
239. Liability insurance and workmen's compensa-
tion.— From its importance to the community and from
the volume of business, liability insurance and work-
men's compensation are the most important types of in-
surance in the whole casualty field and deserve most
careful consideration. To get into touch with the sub-
ject it is necessary to go back to early history and con-
sider what is called the law of negligence as it grew out
of the common law.
240. The law of negligence, — There are cases where
CASUALTY INSURANCE 225
one is liable in damages to another for injury growing
out of things other than contracts. These cases gen-
erally fall under what is termed "negligence," the im-
phcation being that the party has failed to do something
which he should have done to guard his premises care-
fully, with the result that one rightfully there has been
injured and has a claim for damages. To sustain a
claim in these cases the injury received must be one
recognized in law as a violation of a person's right,
241. Negligence defined and illustrated, — Negli-
gence itself is defined as "an omission to do something
which a reasonable man guided by those considerations
which ordinarily regulate the conduct of human affairs
would do, or the doing of something which the prudent
and reasonable man would not do." The connection be-
tween the accident and the cause must not be too remote.
The party against whom suit is brought must not be
expected to have forestalled or foreseen every type of
accident that might have happened. For example: a
van was washed in the public street. The weather was
cold. The water froze and a passer-by slipped on the
ice. He brought suit for the resulting injury but the
case was dismissed, the court taking the position that
there was not a true cause of action. The connection
between the two things — the washing of the van and the
freezing of the water — not being close enough. An-
other famous case illustrating the theory is that of Wil-
kins vs. Day. Some laborers were employed to carry a
roller from one field to another across a road. They left
it, however, in a ditch near the field with a portion of the
handle lying on the edge of the road. Mrs. Wilkins
happened to drive past the place; her horse shied, and
she was thrown out and killed. Suit was brought by
her administrator and recovery was allowed, the posi-
XI— 15
226 INSURANCE
tion being that the work was done in a negligent man-
ner and that for this the defendant was responsible.
Still another interesting example is the famous Squib
case, which arose at a fair in Milborneport, October 28,
1770. The defendant in the case lighted a squib — a
form of firecracker — and tossed it into one of the booths
at the fair. The party who owned the booth, wishing
to avoid injury to his goods, picked it up and tossed it
to another, who in turn tossed it to a third, where it burst
in the face of a fourth person, destroying the sight of
one eye. When the case came to trial there was much
argument as to who really was the responsible party.
The courts decided that the person who first lighted the
squib was responsible and damages were collected from
him. He was what is known as the proximate cause,
and that was the controlling fact. This is sufficient
to set forth in brief form the negligence theory of the
law.
242. The law modified. — For centuries it was only
under negligence that damages could be recovered where
there was an injury to the person, and the same rule
applied whether the person was an employe of another
or a stranger. No larger rights were enjoyed by the
employe in bringing suits than were enjoyed by a
stranger. If the party sued was liable, he was liable
under the general law of negligence and not from any
other relation existing between the two parties. Up to
the year 1837 it was the law in England and the United
States. If A was hurt by B's neglect, B was bound to
compensate A whether A was an employe or not and he
was not bound to compensate him any more because he
was an employe. In 1837, and from that period on, the
harshness of this law when it came to the employer and
employe was recognized, and there developed certain
CASUALTY INSURANCE 227
modified rulings where the employer and employe were
concerned. Common law had worked out the following
rules for an employer in connection with his employes :
(1) It was his duty to provide a reasonably safe place to
work.
(2) It was his duty to provide reasonably safe tools and ap-
pliances.
(3) It was his duty to be reasonably careful in hiring agents
and servants for the work they are to do, and
(4) It was his duty to provide suitable room for carrying on
the work.
243. The employer's three defences, — When it came
to actions between the employer and employe the courts
developed out of these four seemingly simple principles
certain rules which apparently were more favorable to
the employer than to the employe. Three "defences,"
as they have come to be called, were embedded in Eng-
lish law and constitute historic landmarks. They are as
follows:
(1) If the employe who is injured had failed to use
reasonable care himself and if this failure contributed to
his injury, he cannot recover from the employer in his
action at law. In other words, he must show that he was
free from contributory negligence if he wishes to make
out his case. This defence of the employer in a suit for
negligence has been a part of the common law of Eng-
land and the United States since the middle of the 18th
century.
( 2 ) The second rule that developed was known as the
"fellow servant" rule. If the employe was injured by
the negligence of a fellow servant, that fact would shut
off his recovery against the employer at common law.
This fellow servant rule developed out of the well-known
228 INSURANCE
case of Priestly v. Fowler, 3 M. & W. 1, decided by
Lord Abinger in the Court of Exchequer in 1837. In
1858 this decision was in another case confirmed in the
House of Lords. It was adopted in Massachusetts in
1842 and in New York State in 1851. The fellow servant
rule was the second defence of an employer when suit
was brought by an employe. A butcher's helper who
was injured by a wagon driver hired by the same em-
ployer sued the employer for damages. The judge who
made the decision considered somewhat minutely the
possible actions that might arise if every case where one
employe was injured by the negligence of another fur-
nished grounds for a legal action. In his illustration he
even went so far as to assume that the master might be
responsible for an illness arising from the negligence of
a chambermaid to put properly aired sheets on a bed.
Referring to this decision Lord Esher said, "I think it
may be suggested that the law as to non-liability of mas-
ter with regard to fellow servants arose principally from
the ingenuity of Lord Abinger in suggesting analogous
cases in the case of Priestly v. Fowler." This defence
seemed so harsh, however, that many of the United
States courts trimmed it down to somewhat narrower
proportions, in the following ways :
(a) They ruled that it would not apply as a defence
to the employer if the negligence of the fellow servant
was a failure of one of his duties which rested upon the
employer himself, such as the duty to provide a safe
place to work.
(b) They ruled that the superintendent in general
charge of work and so acting was not a fellow servant
within the meaning of the fellow servant rule but really
represented the employer himself, in fact, was the em-
ployer.
CASUALTY INSURANCE 229
(3) The third and final defence of the employer was
known as the "assumption of risk." This defence was
that the employe had assumed the normal risk of the
business ; that is, an employe entering employment must
be held to assume to consent to the ordinary risks inci-
dent to the employment and if he is injured thereby he
cannot recover from his employer for the ordinary risks
of the trade.
Needless to say, the claims which might arise under
these three main divisions are very numerous, and while
the law became fairly well defined, the whole process of
collecting damages for injuries under such cases fur-
nished one of the most unsatisfactory developments of
law.
What has so far been said is a necessary foundation
for the study of liability insurance. After the first crude
experiments in this field, some one conceived the idea
that an insurance business could be founded which
would assume the obligations of an employer, not only
for liability to accidents to the public in general, but also
for liability to his employes. Naturally, the latter
feature was the more important. Out of this idea grew
the famous form of insurance known as "employer's
liability," a development which was probably hastened
by the adoption of so-called "employer's liability laws."
The origin of certain forms of these laws may possibly
be traced back to Germany, but we are chiefly interested
in their development in England, since the English laws,
more or less modified, were the ones taken over by our
own country.
244. First policy in the United States, — The first
policy in the United States was issued in 1886 by an
English company which had been formed especially to
engage in this type of insurance. It is since that date
^30 INSURANCE
that employer's liability insurance has grown to its pres-
ent large proportions ; and under its new form of work-
men's compensation, it is undoubtedly destined to be one
of the leading branches, if not the leading branch, in
point of premiums.
245. Types of liability insurance. — The liability in-
surance companies issue policies as follows :
( 1 ) Pubhc liability insurance, which covers the liabil-
ity of the employer to persons not in his employ who
may visit his plant on business or come in contact with
the business in some other way.
(2) Employers' liability for contractors, covering the
liability of contractors and others employing labor on
work not confined to any given locality.
(3) Public liability insurance for contractors.
(4) General liability insurance, covering liability of
the owner of a building for injuries or death caused by
defects in or about the building or its operation for the
use of tenants.
(5) Elevator liabiHty insurance.
(6) Teams liability insurance, covering liability of
the owner of horses or vehicles for accidents caused.
(7) Theatre liability insurance.
(8) Vessel liability insurance, which protects the
owner against damages for injuries or death of any of
the crew or other persons visiting the vessel and in some
cases of the passengers.
(9) Physicians' liability insurance, covering the lia-
bility of physician, surgeon or dentist for injuries
or death caused by alleged malpractice in the profession
of the insured.
It will thus be seen that there are many varieties of
liability policies. The same principles, however, operate
CASUALTY INSURANCE 231
in most of the policies, although different bases are used
for computing the premium.
The expenses in liability insurance are exceedingly
heavy, approximately 50 per cent of the total premium.
The company, therefore, must see that its losses do not
exceed 40 per cent if it expects to have a margin of 10
per cent for profits and contingencies.
CHAPTER XXIII
WORKMEN'S COMPENSATION
246. Workmen's compensation defined. — The basic
difference between workmen's compensation and em-
ployer's liability is that under employer's liability about
one accident in eight and one-half that occurred in in-
dustrial plants was subject to compensation. This is
the record running through a series of years, leaving
seven accidents and a half to be borne by the individual.
Workmen's compensation aims to charge to the indus-
try the cost of the human material, so to speak, as well
as the cost of the other material used in the business. If,
say the advocates of workmen's compensation, you pay
for the machinery and raw material which you use, why
should you not pay for the humans you use up in turn-
ing out your product? There seems to be no room for
difference of opinion on this point. The accepted view
of workmen's compensation is that those engaged in an
industry should be compensated by that industry.
Workmen's compensation, in other words, should be re-
garded as part of the cost of a product, as an element of
the cost of production finally paid for by the ultimate
consumer of the product.
247. Acts of foreign countries. — In the United
States we lag behind other nations, so much so, in fact,
that the workmen's compensation acts of foreign coun-
tries should be briefly reviewed.
The first workmen's compensation act was passed in
Germany in 1884. Germany, therefore, has had con-
siderable experience with workmen's compensation. The
experience has been in the main satisfactory.
232
WORKMEN'S COMPENSATION 233
Germany began with a limited class of workmen who
were compensated. That class has been extended
somewhat, although the present proviso in Germany is
not as broad as in many other countries. Generally
speaking, the present German law is limited to work-
men in industries. This limitation will, in a gen-
eral way, be found in nearly all the countries in which
workmen's compensation has been adopted as the
basis for establishing the obhgation of the master
to the servant in the event of injury. Seamen are
usually treated separately, under a special act fitted
to their conditions. The same is true of miners, and
sometimes of railroad men. Occasionally the pro-
visions of these acts cover agriculture, as is true at pres-
ent in Great Britain, Denmark, France and Italy.
France and Belgium include employes in commerce, by
which is meant the ordinary clerical employe. Great
Britain adds employes in domestic service. Altogether,
there are twenty countries in continental Europe, in-
cluding England, in which workmen's compensation in
some form is now operative. Several Canadian prov-
inces, too, have workmen's compensation laws, based
largely upon the English act. All of these acts have
some limitations, although the general purpose of the
acts is to compensate for substantial injuries. It is
almost universally stipulated in these acts that the in-
jury must arise out of and in the course of the employ-
ment— that is, must be an occupational injury.
248. Limitations in foreign countries, — There is
a further limitation in many countries regarding
the amount of annual wages to which the act applies.
In some cases those earning more than these stipulated
amounts get no benefit of the workmen's compensation,
having only their rights at law; in others they get the
^34 INSURANCE
benefit of their compensation up to the stipulated
amount, and nothing beyond that. In England the
amount is $1,250. In Germany it is about $750 in some
kinds of employment, and unlimited as to workmen in
industry. In Norway the limitation is $325 per year;
in Denmark, $650 per year, with a further limitation to
$410 for agricultural pursuits. Belgium limits wages
to $480; Italy to $420; and Austria to $480. The meas-
ure of recovery, that is the proportion of wages usually
assessed for compensation, is 50 per cent in a great
many countries, England among them. In Germany
the compensation is two-thirds the wages, this percent-
age, however, being subject to variations under some
conditions. For instance, an injured workman may
accept so-called "hospital benefits," in which case he
receives only 60 per cent of his wages. There are also
certain cases where the Court, or the officer who has
jurisdiction, allows full wages for a limited period of
time, as, for example, in a case where the injured might
be in extreme suffering, necessitating the immediate
spending of large amounts of money for nurses and
expert medical services. Norway, Denmark and Aus-
tria provide 60 per cent ; Holland, 70 per cent.
249. Fatal injuries, — Provisions for fatal injuries
vary with the different countries. Great Britain pro-
vides simply for three times the annual wages, not to
exceed $1,500. Denmark follows the English rule and
provides four years' earnings, with a trivial allowance
for funeral expenses. In Italy five times the yearly
wages are allowed. Other countries generally allow a
percentage. Germany, for example, allows twenty
days' wages for funeral expenses, and thereafter com-
pensation proceeds on the theory of a pension to the sur-
vivors, equal to 60 per cent of the earnings. Austria
WORKMEN'S COMPENSATION 235
allows $10.00 for funeral expenses, and a pension of 50
per cent to the survivors. Sweden provides, a trivial
allowance for funeral expenses, and an annual pension
not to exceed $80. The provision in Holland is prac-
tically the same as that in Germany. In Belgium the
pension is but 30 per cent of the yearly wages; in
France it is 60 per cent. Pensions, where they exist,
continue so long as the dependency continues and then
cease. Pensions to minors usually cease when they be-
come of age, to widows when they re-marry, and to
other relatives when the dependency ceases for any
cause.
250. Losses, — The next proposition involved in work-
men's compensation is the distribution of losses. Five
continental countries — Germany, Austria, Holland,
Norway and Italy — distribute the loss by means of com-
pulsory insurance.
251. Forms of insurance organization. — In Germany
insurance organizations are customarily divided accord-
ing to trades and are called "Trade Unions." The
arrangement is representative, every employer being
obliged to be a member of the trade union in his particu-
lar locality, where those of his industry are also gathered.
These trade unions in one form or another handle both
the accident and the sickness. The accident obligation
is discharged entirely at the expense of the employer;
the sickness is divided between the employer and em-
ployes, the employes paying two-thirds, the employer
one-third. The arrangement, then, is representative in
its character.
In Austria a different plan is followed. There the
insurance organization is of the same character and com-
pulsory, but the trade unions, or guilds as they are some-
times called, are territorial.
236 INSURANCE
In Norway, the insurance is a state monopoly, oper-
ated entirely by the state, and it is a rule there to require
contributions for loss only, the state paying all expenses.
*In some of the other countries, with both voluntary
and compulsory insurance, there are state institutions.
Private or mutual insurance companies are usually per-
mitted to operate, however, and generally they operate
very successfully against the state institution, sometimes
almost to the exclusion of state insurance. This condi-
tion exists in Holland, where private institutions are
permitted to exist in addition to a state institution.
The German rule is to collect merely the premium
necessary for immediate disbursements. If a claim is
paid in Germany, it is paid by the post office. If any
particular guild or bund has occasion to pay one of its
number anything, the members go to the post office and
get the money. At the end of the year the statistics are
made up by the government. The sum is divided among
the members of the guild. Assessment is made, and
members are supposed to pay their premiums at once.
If they do not, the government collects the premiums as
taxes. When premiums are paid, the advances are re-
turned to the post office, and the debt is discharged. The
post office receives 5 per cent interest, which is also pro-
vided for in the assessment.
There are five more prominent countries representing
the other plan of workmen's compensation, where the
distribution is accomplished by voluntary insurance —
Great Britain, Sweden, Belgium, Denmark and France.
In Belgium there is a compulsory insurance for miners.
In France and Denmark there is compulsory insurance
for seamen. Otherwise, the insurance in all five coun-
tries is purely voluntary, as it is in this country.
252. Sick fund. — As a general rule, trivial injuries
WORKMEN'S COMPENSATION 237
are not admitted for compensation. In some countries,
notably Germany and Austria, the first period of inca-
pacity is taken care of by the sick fund. In
both countries there is a sick fund running alongside of
the accident fund. To this sick fund the employe has
to contribute two-thirds, the employer one-third. The
accident fund is paid entirely by the employer in Ger-
many; and nine-tenths by the employer in Austria.
The first period is variously provided for. In Ger-
many thirteen weeks must elapse before the accident
fund begins to apply; that is, if a man receives an injury
from which he recovers in thirteen weeks or less, his
compensation is charged to the sick fund. The sick
fund, it should be remembered, is supported two-thirds
by the employes and one-third by the employer. If the
injury incapacitates the employe for more than thirteen
weeks, everything beyond that becomes a charge upon
the accident fund, solely at the expense of the employer.
In Austria the same rule applies, except that the time
is five weeks. After this time the case becomes a charge
to the accident fund.
In connection with the German sick fund, if the sick-
ness is in the nature of a disease not due to accident, the
sick fund carries the case for twenty-six weeks instead
of thirteen.
In England certain occupational diseases are treated
as accidents, and are so compensated. The English
compensation act, however, provides no compensation
for the first week, nor is there any other provision for
this interval. Whatever sickness provision exists is
through the friendly societies, and through voluntary
insurance, just as in this country.
Norway follows the plan of Austria, excluding the
first five weeks, which are chargeable to a sick fund.
2S8 INSURANCE
This sick fund has a provision that is a little peculiar.
There, the workmen contribute six-tenths of the sick
fund, the state two-tenths, the employers one-tenth, and
the commune or local government one-tenth.
253. Legislation in the United States. — In the United
States there is a Federal act covering certain employ-
ments, such as the construction of drydocks. But so far
as the individual states are concerned, there were not in
force in this country, prior to September 1, 1910, any
workmen's compensation acts. On that date an act be-
came effective in New York State which covered some
eight dangerous employments. The act was declared
unconstitutional by the Court of Appeals on the ground
that it was taking property without due process of law.
This led to an agitation for the amendment to the State
Constitution. The amendment was duly passed and the
Workmen's Compensation in New York State based
on this constitutional amendment came partly into force
January 1, 1914, and became fully effective six months
later.
After having taken the matter under consideration,
the various states have moved with commendable zeal
to remove the employer's liability condition and to pro-
vide compensation acts. In twenty-two states these acts
are now in force, and in the near future similar acts will
doubtless be passed in the other states. These compensa-
tion acts provide, primarily, for the wiping out of the
three defences previously enjoyed by the employer and
place the whole question of accidental injury on a basis
of compensation.
254. Compensation acts summarized. — The general
summary of these twenty-two laws runs about as fol-
lows:
In sixteen of the states the law is elective, a provision
WORKMEN'S COMPENSATION 239
mainly for the purpose of covering some constitutional
condition, as wherever the law is elective it has usually
been adopted by the great percentage of employers and
employes. In six of the states the law is frankly com-
pulsory.
The laws do not provide for payment until a certain
period of time, known as a "waiting period." In four-
teen of the states it is two weeks and, in the others, one
week. Medical or surgical aid, although no other money
compensation, is furnished during this waiting period.
The benefits provided are based, naturally, on depend-
ency, which varies according to circumstances. For
example, the case under consideration may be a widow
with children, or orphan children, or there may be cases
where there are partial dependents or no dependents.
Where there are no dependents, burial expenses only
are provided, these expenses averaging about $100 in
each of the states. In the case of dependents, however,
there are greater variations, and it is probable that we
shall go through a process of evolution before the proper
amounts can be determined.
The compensation, of course, is based on the salary
which the injured party has earned, and the benefits
based on this salary run from 50 per cent up ; in two of
the states it is 66| per cent, and in one, 65 per cent. To
illustrate: In Arizona, a widow would receive 2,400
times the daily earnings, which, allowing 300 working
days to the year, would be the equivalent of eight years.
In New York State, the widow receives 30 per cent of
the weekly salary for life. As a rule, dependent chil-
dren receive, up to the age of eighteen, 10 per cent of
the weekly wage in addition to what the mother will
receive. Orphan children normally would receive more,
as there is no widow in their case to be taken care of or
240 INSURANCE
to assist in the care of the children. For partial depend-
ents the compensation is pro rata, that is, it is based on
the contribution which the deceased made when he was
living. For instance, if he was turning in a tenth of his
salary, the compensation would be based on that frac-
tional amount. In most of the states there is a minimum
limit, as of $5 per week, and in many there is a max-
imum payment. California, for example, sets the figure
at $5,000. Under the New York law, where the com-
pensation to a widow is for life, there is practically no
limit to the sum that may be paid. In the case of widows
the question of re-marriage enters and the practice is to
pay a lump sum at the time of the second marriage, the
benefits ceasing from that time. Total disability is
taken care of in much the same way as the death bene-
fits. It is recognized, of course, that total disabihty is
likely to bring with it quite an additional expense in the
care of the afflicted person. In New York these bene-
fits run from a minimum of $5 up to a maximum of $15
per week, the payments continuing, of course, until
death.
The problem of providing adequate or equitable com-
pensation is not especially difficult in a case of total dis-
ability or of death. Partial injuries, however, furnish
more of a problem. Provision has to be made for the
loss of fingers, beginning with the thumb and running
through each of the fingers, also for the toes and for the
hands, arms, feet, legs and combinations of such losses,
likewise for any accident affecting eyes or ears. Pay-
ments on these cases usually run for a stated number of
weeks according to the nature of the injury; thus, in
Connecticut the loss of a thumb furnishes compensation
for thirty-eight weeks, but not to exceed $380. None
of the other fingers rank as high, apparently, except the
WORKMEN'S COMPENSATION 241
index finger, which in many cases ranks the same as the
thumb.
255. The New York State Law. — The New York
State law^ is probably the broadest and most inclusive of
any now on the statute books. Practically every em-
ployment is included within its provisions, forty-two
groups of occupations being mentioned specifically and
to each the term "hazardous" applied. Farm labor and
domestic service, however, are excluded from this list
of employments, nor are states, municipalities or other
political subdivisions included under the term "em-
ployer." The law sets forth the various classes of in-
juries and the compensation appropriate to each, ex-
plaining, too, the method of procedure to be followed by
employes in securing compensation and by employers
in meeting the provisions of the law. The administra-
tion of the law is through a Workmen's Compensation
Commission.
256. Some evil effects in France, — The claim is made
that in the mind of the employe, workmen's compensa-
tion tends to aggravate injuries. In point, the experi-
ence in France for a certain period is of interest. In
minor accidents in France the judges have a tendency
to rule rather harshly against th-e employer; moreover,
the injured workman can select his own physician and
apothecary. The claim is made that these two things
combine to increase the cost. Statistics show that of the
number of employes injured in 1904, there were 1,753
cases of injury remaining for a period of five days. In
1906 this number had increased 25 per cent; while the
* A copy of this law may be secured from the ojBSce of the Workmen's
Compensation Commission, Albany, N. Y., and persons interested should not
fail to read the law and keep in touch with the work of the commission.
Those living in other states may secure information from their respective
commissions.
XI— 16
242 INSURANCE
number injured for seventy days or over in 1904, 1,533,
had in two years risen to 2,019, an increase of 32 per
cent. Taking all of the statistics, the increase of the
number of days of injury was 47 per cent. Between
1904 and 1906 the number of accidents not over ten
days had decreased 2 per cent, while those over ten days
increased 96 per cent.
Such conditions are largely due to special conditions
of the law which pays the return somewhat on the num-
ber of days of injury. There has been an increase in the
clinics and dispensaries that have been established espe-
cially to deal with these matters and in all probability
this has been because of the business element, that is, be-
cause there has been money in it for someone. The whole
compensation plan, too, has been adversely affected and
it is stated that physicians, too, have not hesitated to
advance prices in other things where such laws have
been estabhshed. The apothecaries, apparently, have
promptly followed suit. In many cases the physician's
charge has exceeded the sum which went to the work-
man for compensation.
257. Experience in the United States, — In the
United States these laws have not been in force long
enough to warrant conclusions as to their effect. A
period of five or ten years must elapse before trust-
worthy data can be secured. The first state in this
country to furnish any statistics was Washington. Here
the insurance companies are not allowed to operate,
the whole matter being handled by the State through
the Industrial Insurance Commission of Washing-
ton. A nummary of the first year of operations is as
follows :
WORKMEN'S COMPENSATION 243
Firms listed and assessed 5,750
Employes listed and protected 130,000
Total accidents reported 11,896
Claims allowed 6,984
Disallowed, suspended and waived 2,256
In process of adjustment 953
Accident report incomplete 1,703
Paid into accident fund $980,445.75
Paid out on claims 445,527.51
Invested in interest-bearing reserves to guarantee
pensions 243,984.95
Net balance in accident fund 290,933.95
Gross expense of commission 107,868.08
Total funds handled by commission 1,088,313.83
Expense of doing business 9.9 per cent
The financial statement of the Washington Commis-
sion showing two years' operations, closing October 1st,
1913, is as follows:
"Contribution first year, ending Oct. 1, 1912 $980,445.75
Contribution second year, ending Oct. 1, 1913. .1,604,093.05
Total contribution two years, ending Oct. 1 . . . $2,584,538.80
Claims paid first year, ending Oct. 1, 1912 $419,160.68
Claims paid second year, ending Oct. 1, 1913. . . .1,019,360.21
Total paid during two years ending Oct. 1 $1,438,520.89
Pensions paid first year, ending Oct. 1, 1912 $26,366.83
Pensions paid second year, ending Oct. 1, 1913. . . . 64,227.54
Total during two years $90,594.37
Balance in reserve, Oct. 1, 1913 $734,206.24
Cash balance, Oct. 1, 1913 321,217.30
$2,584,538.80"
244 INSURANCE
Some interesting figures are also shown covering cer-
tain kinds of injuries and their number for the year
1912-1913:
Kinds of Injuries Number of Injuries
Bruises 4i,6W
Cuts 1,860
Punctures 415
Sprains 899
Fractures ., 1,383
Dislocations 114
Amputations 580
Scalds and burns 299
Infections 650
Unclassified 527
Multiple injuries 1,027
Total— All injuries 12,380
258. Experience in New York. — In the State of New
York the law became effective for accident reports July
1st, 1914. The first month indicated that about 1,000
claims a day were being received, while in the first
twenty-three days there had been forty-eight deaths. It
is impossible to estimate what proportion of these claims
will prove to be entitled to compensation, but it is con-
sidered that, under the New York law, it will be about
one-third. This is larger than the Massachusetts experi-
ence, where the proportion was about one in four, prob-
ably because the New York law is more liberal than the
Massachusetts law. In the first twenty-three days in
New York State there were 48 deaths, and, assuming
that all these were subject to an award, it would indicate
624 fatal accidents for the first year.
259. Accident prevention, — It is not to be supposed
that as the source of many accidents becomes known they
WORKMEN'S COMPENSATION 245
will be or will have been permitted to remain unguarded.
Along with the work of fire prevention the work of
accident prevention is developing with rapid strides.
Here, again, the foreign nations have led the way, and
museums of safety have been developed on the other
side, some fifteen in number. In these museums are
gathered for exhibition the different types of devices
that may be used in preventing accidents from mlachin-
ery. Plans for quick aid or "first aid," as it is more
commonly called, are also illustrated fully by means of
models, and in the case of prevention devices, by actual
examples of the machinery in position with the devices
attached.
In this country we have as yet established but one
such museum, in New York City, but with the increas-
ing demand to keep down the cost of workmen's com-
pensation, we may look for the rapid multiplication of
these museums in various parts of the country. All the
insurance companies — and this of course is true of the
commissions in charge of the matter in those states
where companies are not permitted to operate — main-
tain extensive prevention bureaus which have developed
out of their experience in insuring risks, and through
the suggestions of their expert inspectors ; but what has
been done is probably very small as compared with what
will be done.
260. Co-operation. — The mistake must not be made
of supposing that mere machinery devices are of them-
selves sufficient to wipe out the cause of accidents. Some
will occur even when machinery perfection has been
attained. As a matter of fact, only a certain proportion
of the accidents (about 25 per cent) can be prevented
by protective devices. The others can be prevented
only by good management, and quite as important.
246 INSURANCE
by the effective co-operation of the employer and
the employe. The method of securing this co-operation
is to form in a shop or plant a committee of safety
whose duty it is to care for this part of the work. Some
form of reward or slightly extra compensation is granted
the members for their services, but the emphasis is placed
on the fact that the majority of accidents are needless
and that they should accordingly be prevented.
261. Safety suggestions, — One of the regulations
published prefaces its specific recommendations with
these general suggestions :
Do not give this booklet a mere glance and then throw it
away. Keep it, read it and study it until you understand it,
know it by heart. The men that compiled it know from experi-
ence that if instructions and warnings contained therein are
understood and followed in your daily work, you will be in-
strumental in lessening accidents in the shop where you are
employed.
You would not wilfully inflict an injury upon yourself, nor
upon your fellow workmen. Nearly all accidents are due to
carelessness on somebody's part. You owe it to yourself, to
those dependent upon you and to the nation of which you are a
part, to use all reasonable care to prevent accidents happening
either to yourself or to your fellow workmen. Remember, if
you are injured your income is decreased or stopped. If your
injury proves permanent, you are a cripple for the rest of your
life, which will decrease your chance for success. You want
to avoid this if possible and it is possible if you do your duty.
The owners of this establishment request your hearty co-op-
eration in making it safe for all employes. To this end if you
discover any dangerous places around the shops that could be
and are not guarded, notify your foreman at once and they
will receive attention. If you think that a certain class of
work can be performed by a safer method than the one now
used, draw your superior's attention to the fact and it will be
WORKMEN'S COMPENSATION 247
given immediate consideration. If you see one of your fellow
workmen particularly reckless, thereby jeopardizing himself or
others, tell him about it, caution him, and if this fails to make
him more careful, report him to the foreman or superintendent.
Carefully read these rules, be sure to understand them and
then carry them out in daily practice.
Another company prints on each policy the following
recommendations as to things that could be done:
Elevator openings on each floor should be guarded by gates
or floor doors. Persons using elevator should not, for any pur-
pose, be permitted to wedge or prop up gates. Unused sides of
shaft should be cased in to a height of at least seven feet, either
with joined boards or substantial wire screening.
All belts passing through floors, or vertical shafting operat-
ing through floors, should be cased in to the height of four feet.
All circular and band saws should be guarded, when possible
to do so, and employes compelled to use such guards at all times.
Protruding set screws in collars and couplings on line and
countershafting should be covered or countersunk.
Set keys in hubs or fly or other wheels should be cut off flush
with the end of shaft or covered with tin casing or other
material fitting closely to shaft, forming a smooth surface.
Shafting beneath sewing machine tables, and all other shaft-
ing on or near floors should be covered.
Loose pulleys should be used wherever possible, so as to
throw a saw, jointer, shaper or other piece of machinery out of
action, when not necessarily in use, and employes instructed to
throw out of motion such machine when leaving same even
temporarily.
Shifters should be used at all times, for shifting belts, and
no employe should be allowed to shift a belt with his hand or
stick. Belts should be laced and adjusted when machinery is
not in motion.
Shapers and jointers should be guarded and guards kept on
at all times.
^48 INSURANCE
All cog gearings should be completely cased in, casing to be
made of wood or metal and so constructed that it can be easily
removed when necessary to repair or oil.
All roll feed machinery should be well guarded by placing
strip of metal the entire length of roll, as close as possible to
roll, to prevent operator from getting fingers between rolls
while feeding.
All fly-wheels, engines and belt wheels should be enclosed by
casing in or placing substantial railing around them, either of
wood or gas pipe, the latter being preferable and more sub-
stantial.
Roller, suspended and sliding gates and doors should be care-
fully examined in order to ascertain that same are not liable
to leave their track and fall or be blown down by the wind.
Stairways should be carefully examined for projecting nails
or screws, and where rubber or other strips are placed on the
treads, said strips should be secure and lie perfectly flat ; ragged
carpets and oilcloths on both hallways and stairs should be re-
moved.
Fire escapes should be secure and in good condition and kept
clear.
No loose material likely to be blown from the roof by the
wind, should be permitted to remain on the roof.
Sidewalks around property should be kept in good condition
and coal hole covers and dead lights properly fitted and kept
in place.
The factory laws of your state provide that most of the above
mentioned suggestions and recommendations should be carried
out where and when necessary. Your compliance with these
laws will relieve you of additional liability in case of accidents,
and will enable you to secure liability insurance at the lowest
possible cost.
262. Methods of writing workmen's compensation. —
Insurance companies and other interests have been
WORKMEN'S COMPENSATION ^49
divided in their opinions as to the way in which insur-
ance should be written. In some states, notably Wash-
ington and Ohio, the entire matter is handled by a State
Commission, though in these states a small part of the
work may be done by stock companies. The State Com-
mission, acting under the law, makes the collections and
conducts what is in reality a regular insurance business,
limited, of course, to this line — workmen's compensa-
tion. Other states, notably Massachusetts and New
York, permit the companies to continue in the business,
but plan other forms in order to insure competition. As
a result there have developed four methods which are
known in the State of New York as (1) The State
Fund; (2) The Mutual Association; (3) Self Insur-
ance; and (4) Stock Insurance.
263. The state fund. — The state fund is, in a certain
sense, a Mutual Insurance Company, except that it has
the backing and help of the state to the extent of receiv-
ing for a certain time the payment of its administration
expense. This may prove to be, according to the volume
of work, a not unsubstantial aid, since if the total pay-
roll runs to half a million it will readily be seen what a
large amount this is, although this expense aid will con-
tinue for only a couple of years. The same plan was
followed in Massachusetts where the state fund was or-
ganized. In effect the state said, "We will set you on
your feet and give you a start by paying these expenses
for a couple of years. At the end of that time you
should have worked out your own position and require
no further state aid."
264. Mutual associations, — Mutual associations do
not differ in the main from other mutual bodies. The
general expectation is, of course, that they will be able
to do business at a lower expense cost, and at a lower
250 INSURANCE
compensation cost, perhaps owing to the fact that the
members theoretically may be more carefully chosen
than in the case of a company doing a general business.
The requirements are that there must be 40 employers
employing not less than 2,500 workmen, who shall have
agreed to take insurance in the mutual company before
it will be permitted to start business.
265. Self insurance, — As to self insurance, if an em-
ployer is so situated that his financial ability is absolutely
unquestioned and if he can furnish satisfactory proof to
the Commission, he will then be permitted to deposit
with the insurance Commission certain securities to cover
the expected liability. The somewhat high standard
necessarily imposed in this case to insure the payment
of the compensation makes it doubtful whether it will
be availed of to any large extent; and not many em-
ployers, probably, will care to assume the risk of a very
heavy payment due to some unusual disaster in the
plant.
266. Stock companies. — The stock companies con-
duct their business, as they always do, by accepting a
certain premium for the service, and relieving the in-
sured of any further liability in regard to the matter.
Some advantage is claimed for the stock companies in
that they are able to issue a policy which covers not
merely the compensation indemnity but also the
liability that may be outside of that act. In other words,
the employer might get a complete cover from a stock
company when it would be doubtful, to say the least,
if he could do so in any other of the three forms of insur-
ance.
267. The element of cost. — Experience has not yet
satisfactorily demonstrated which result is going to
prove best for the community. It is the community that
WORKMEN'S COMPENSATION 251
must be considered; that is, it must be determined
which method is the cheapest for the ultimate consumer.
In states where the companies have been permitted to
compete with the state funds they appear to have
obtained a good share of the business. The average
employer likes a freedom from contingent liability,
backed by good assets, and probably this, as much as
anything, explains the appeal which this form of insur-
ance has for him. It is stated that in Michigan 89 per
cent of the manufacturers continued their insurance or
took it out in the stock companies. When the New
York State act went into effect there were 32 stock com-
panies included in the business, and 14 mutual com-
panies.
268. Rates in the United States. — The rates in the
United States are apt to be more or less theoretical
owing to the fact that there is an insufficient amount of
American experience on which to base them. The
best judgment based on the experience of our own and
other countries has been used. This will be super-
seded by actual experience as the acts develop in
the different states and as experience is acquired. Only
actual experience, of course, will show what the rates
finally must be. In connection with the premium an
important factor is being introduced, similar to the
method of schedule rating in force in fire insurance,
whereby the bad features will be charged for and the
good features receive credit. Under the schedule now
being worked out in New York State it is estimated
that a maximum credit of 40 per cent may be allowed
from the established rate when the plant is put in the
best of condition. A most wholesome influence will be
brought into the work as this method of making rates
and determining premiums develops.
CHAPTER XXIV
OTHER BRANCHES OF CASUALTY INSURANCE
269. Less important branches. — The forms of casu-
alty insurance thus far treated represent the lead-
ing branches from a premium production standpoint to-
day, and probably will continue to do so in the future.
There are other branches which, while important, do
not from a premium standpoint compare or promise to
compare with the classes which have been considered.
These may be briefly noted.
270. Plate glass insurance. — Plate glass insurance
came into existence almost simultaneously with the
invention of plate glass. Its premium receipts now
amount to about $4,000,000 per year, and it is esti-
mated that something like 350,000 risks are insured
under this form of cover. Plate glass insurance has de-
veloped an interesting and historical experience of its
own, and those engaged in it find it an interesting spe-
cialty. The problems that have to be considered are due
to the different uses to which this type of glass is being
put, and the different forms which it takes. We are apt
to think of plate glass as related mostly to store fronts.
This, naturally, is its principal use. It may be said that
the larger panes of window glass are not looked upon
with any great amount of desire by the plate glass
insurer. The method of setting, whether in wooden or
glass frames, whether the glass be of the show-case
or the ordinary dwelling type; whether it be bent or
straight, whether it be cathedral glass, and whether or
not there be lettering upon it, — all these points and
252
OTHER BRANCHES OF CASUALTY INSURANCE 253
many other interesting considerations have to be taken
into account when plate glass is to be insured.
271. Steam holier insurance, — Steam boiler insurance
differs from many other forms in this one interesting
point, namely: that the basic idea is prevention of the
thing insured against rather than payment of indemnity
because the occurrence takes place. Losses are paid, of
course, when the accidents happen, but a larger part of
the premium is expended in inspection and prevention
work than in any other type of insurance.
272. Origin, — Boiler insurance originated in Eng-
land, in the year 1854, at Hudders-Field. This was not
a genuine insurance company as it paid no losses for
accidents, its purpose being merely to inspect boilers
and by this inspection point out weaknesses so as to pre-
vent accidents. The Steam Boiler Assurance Company,
organized at Manchester, England, took over this early
association, and may be considered as the first genuine
insurance company of this type.
273. Boiler insurance in the United States, — In the
United States the Hartford Steam Boiler Inspection
and Insurance Company was organized in 1866 and
was the first to engage in this type of insurance. Its
career has been unique because of the fact that for many
years it confined its business almost wholly to the insur-
ing of this type of risk. It is probably the only instance
of a company writing a single, somewhat restricted, line
of business, maintaining its position through so many
years. It now writes one or two other lines, but its
main work is still the steam boiler risk.
The steam boiler business is carried as a branch or
department by several of the casualty companies, and
probably a score or more are now engaged in this type
of insurance. Statistics for forty-four years show that
254 INSURANCE
in the United States, Canada and Mexico there were in
round numbers 11,000 steam boiler explosions, where
11,000 persons met their death, and where in addition
over 16,000 were injured.
274. Causes of holier explosions, — A boiler explodes
whenever any part is unable to stand the strain that is
placed upon it. Many, however, suppose that boilers
explode only when the water becomes too low. This
danger, therefore, is thought to be the only one which
must be guarded against. The assumption is wrong.
There may be plenty of water in a boiler which is not
strong enough to stand the strain in certain parts, and
which explodes when any of these parts give way.
Boilers explode, as a matter of fact, from a variety of
causes and not from any one single cause. The most
noted disaster due to a boiler explosion occurred when
the boiler of the steamer Sultana exploded on April
27, 1865, near Memphis, Tenn. The boat was loaded
with soldiers just released from southern prisons. The
boat was destroyed and 1,238 were killed.
The distance to which a boiler may be thrown horizon-
tally by an explosion can, of course, be easily deter-
mined, but the vertical measurement is another matter.
There is an instance where it was accurately determined
and found to be over 1,600 feet.
275. Inspection service, — The inspection service be-
gins before the insurance is accepted on the boiler, and
continues throughout the life of the policy. In this type
of risk, the insuring company has the privilege of in-
specting the boiler at any time it may choose. The
inspection service may be external or it may be internal.
Naturally, the first service would take into considera-
tion the general conditions when the plant is in opera-
tion; and the latter, of course, when the boiler was not
OTHER BRANCHES OF CASUALTY INSURANCE 255
in commission. The preliminary inspection makes it
possible to analyze the general management of the plant
in regard to the boilers, something which could not be
done when the plant was not in operation.
276. Future of hoiler insurance, — A division of the
expenses of one insurance company shows that approx-
imately 40 per cent of the income from boiler insurance
was paid for inspection expenses; the losses were about
10 per cent. This clearly indicates what is aimed at,
namely, to prevent the thing happening rather than to
indemnity for it after it does happen. Steam boiler
insurance may eventually pass away with the further
development of electric power, although there is no
prospect of this happening for many years. Whatever
future changes there may be, it maybe said that boiler
risks do not constitute a growing field of insurance
and the premium income has probably attained its
maximum.
277. Credit insurance, — Credit insurance is a very
new branch. It is claimed that prior to 1908 it did not
exist except in a tentative manner. It had been tried
out, but had not attained a stated position in the insur-
ance field. Credit insurance aims to protect the seller,
the manufacturer, or the jobber, against losses sustained
through the failure of creditors to pay their bills. It
was based on the theory that although there must be a
primary loss to be borne by the insured, losses above
that sum might be covered by insurance. It will readily
be seen that this type of insurance could be based on no
other principle; the moral hazard would be altogether
too great, and insufficient care in the selling of goods
would create a loss record against which no company
could safely insure.
278. Two classes of policies, — Credit insurance poli-
256 INSURANCE
cies fall into two classes, "Regular" and "Combination."
The former limits its cover to creditors who have ratings
in the first and second class; the combination type of
policy covers not merely these two types of creditors but
in addition includes certain coverings on creditors who
do not obtain so favorable a rating.
A credit insurance policy, of course, is based on the
amount of annual sales; thus, if the yearly sales were
$350,000, the pohcy would be for $8,000, while if they
ran to $1,000,000 the policy would be about $25,000.
279. Benefits summarized. — The benefits of Credit
Insurance are briefly enumerated by President E. M.
Treat of the American Credit Indemnity Company as
follows :
It adds to a merchant's capital, at small cost, a special re-
serve equal to the face of the bond, to meet unexpected losses
in business.
It offers collateral security upon inferior accounts, and pro-
tects against the calamities which come upon preferred cus-
tomers.
It affords a guaranty that losses on merchandise sold dur-
ing the year covered shall not exceed a normal, stated percentage
of the gross loss.
It protects profits against impairment through unexpected
and unavoidable losses.
It protects against a risk which every merchant must other-
wise take.
To carry credit insurance is to complete a chain of protec-
tion in business. All work is to the end that goods may be
sold. Every part of a business relies on the profits from the
sales of the product. Credit insurance protects against exces-
sive losses on the output of the business which ultimately passes,
with profits added, into the shape of accounts ; that part which
represents the finality of the combined efforts of the entire or-
ganization. It supplies certainty for hope and uncertainty.
OTHER BRANCHES OF CASUALTY INSURANCE 257
280. Automobile insurance, — The first policy which
approached the modern broad form of automobile insur-
ance was probably issued by the Boston Insurance Com-
pany of Boston in 1902. This type of insurance covers
the following :
1. Fire or explosion.
2. Transportation.
3. Against stealing.
4. The fire cover will include damage to any personal effects
as well as damage to the car.
5. Collision insurance. This covers damage to other prop-
erty which the automobile may strike.
6. The reverse of No. 5, covering the damage to the auto-
mobile itself.
7. Loss of life or any injury sustained by the occupants of
the car, and any legal liability which may be incurred in con-
nection therewith.
8. The same as No. 7 only to those who are in the car.
The immense growth of the automobile industry,
coupled with the fact that, without such insurance, heavy
damages might occasionally be collected from an auto-
mobile owner in case of accident, has made this branch
of insurance a very important one in the casualty list.
As there are no indications that the automobile will
decrease in favor, it may reasonably be supposed that
there will be a large increase in automobile insurance.
It is a protection which one certainly cannot afford to be
without if he owns a car or is in any way responsible
for the running of one. Hence, every car turned out
automatically increases the field for this modern form
of insurance.
281. Title insurance. — Title insurance, the returns
for which were noted in the statistical information given
XI— 17
258 INSURANCE
in the early chapters, states in its very name what it
aims to do. Its purpose is to insure against defective
titles. Along with it there has developed what is known
as the mortgage loan guaranty. As the companies
naturally have a close connection with the lending par-
ties, they have developed the practice of guaranteeing
the mortgages which are issued through them. The
business has been aided very largely by the fact that the
lender of money generally asks for a title guarantee
policy before he will authorize a loan on real estate.
The business has also been aided by the somewhat
archaic methods which are in force in connection with
real estate transactions. It is not reasonable to suppose
that the civilized world will continue to make the trans-
fer of real estate such a cumbersome process in the
future as it has been in the past centuries. The system
of title registration under Torrens laws, or something
similar, will probably be developed in time so as entirely
to remove the clouds which now hang over certain titles
so frequently as to make a title insurance policy desir-
able in all cases. In other words, the transfer of real
estate will in time be reduced to as simple a business as
a transaction in stocks and bonds. This, of course, will
take years of growth and education and there will still
be a need for companies to handle matters of title in-
surance and also, perhaps, to guarantee mortgages.
This type of insurance, in any event, is one which, with
the development of civilization, we may expect to grow
less rather than more. However, it has served, and is
serving, an extremely useful purpose.
282. Burglary insurance. — At first glance burglary
insurance might seem like an impossibility. How can
one possibly forecast what loss there will be or know
what rate to charge for such a type of risk? As a mat-
OTHER BRANCHES OF CASUALTY INSURANCE 259
ter of fact, what holds this type of insurance within the
reabn of possibility is the form of loss. The provision
contained in the policies reads as follows: "Felonious
abstraction of the insured article was accomplished by
an entrance into the premises effected by the use of tools
or explosives, and unless there are visible marks upon
the premises made by the tools or explosives of the
actual force and violence" the company is not responsible
for the loss. It is evident, of course, that the necessity of
showing some visible mark is a great deterrent to a
false claim, and this has made the business possible, and
probably it would not have been possible if this had not
been a provision of the insurance.
One type of burglary insurance covers theft or lar-
ceny by servants or other persons in the house, by a
guest, by sneak-thieves or outsiders. It covers a trav-
eler, his personal effects at his hotel or while in the pos-
session of a common carrier. It covers valuables which
may be entrusted to a messenger for delivery. It covers
the merchant against such losses by his employes; it
covers the clerk who may be sent to the bank to secure
the money for a pay-roll while it is in transit between
the bank and the place of business, or where the dis-
bursement will take place. Moral hazard enters, of
course, but so it does in all forms of insurance, and per-
haps after all it is not greater in this type than in many
others. Banks, naturally, are covered by a special form
of this type of insurance, bank burglary being rather a
special type of crime. It is not of much moment in the
city banks, but outside the metropolitan centres it is a
form of insurance of primary importance. The cover in
this case is against: (1) the ordinary breaking, and
entering, and stealing; (2) the form of robbery known
as the "hold-up"; and (3) damage to the property
260 INSURANCE
caused by the attempt to break into the vaults by means
of tools or explosives, and finally against robbery of the
messenger of the bank when he is engaged outside of
the bank.
Burglary insurance seems to have originated in the
United States about 1885, but now it has developed so
that many companies are writing it as one of their regu-
lar lines. In England, strangely enough, it has appar-
ently attained a greater prominence than in this coun-
try, the number of companies engaged in the business
or the companies writing this line being about four times
as many as those in the United States. The premiums
in the United States now amount to about $3,000,000
per year.
283. Surety and fidelity insurance, — There are few
types of business in the world older than that of going
sponsor for somebody in a transaction. As far back,
apparently, as we can go in commercial relations, we
find that some person undertaking a given piece of work
was called upon to furnish security or surety through
having himself guaranteed by another person. Such
forms of insurance come into play in cases where the
undertaking upon which one is entering is of so serious
a nature that failure of the party to perform the work
would mean an exceedingly substantial loss. In such
cases the task whose performance is guaranteed is not
something which can be done over again without any
material loss; on the contrary, if the party fails it may
mean a total loss of the sum invested and call for larger
sums to restore the actual condition existing before the
contract was entered upon.
284. Field covered, — For centuries this form of secu-
rity was furnished by individuals. It has now developed
into a very specific type of insurance, some companies
OTHER BRANCHES OF CASUALTY INSURANCE 261
devoting themselves solely to this form. The policies
issued by the companies cover contract bonds, court
bonds, bonds of deposit, license bonds, excise bonds, cus-
toms and internal revenue, and, as in the case of forgery,
some peculiar types of insurance.
285. Contract policy, — Probably the most important
branch of the business is that of the contract policy.
The immense number of contracts, let for construction
purposes both public and private, are to-day usually pro-
tected by a form of policy, the contractor being called
upon to furnish such a policy before he enters upon the
contract. The protection means that, should he fail in
his contract, the owner may look at once to the company
to make good; frequently the company cannot settle
and is obliged to take the contract over and carry the
work to completion. It is generally stated that this
form of the business has not proved very remunerative.
The public contract is rather a hazardous piece of busi-
ness. In connection with large tunneling operations,
such as the building of a subway, this type of risk must
be handled with extreme care. The statement has been
made by one underwriter, experienced with this type of
policy, that the less you have of this business on your
books the better off you are. The job to be done, if
based on stated lines of construction, has less risk than
the new types of construction such, for instance, as
concrete, which introduces hazards not yet well under-
stood.
286. Fiduciary bonds, — The bonds furnish, in form,
two classes: the fiduciary bond and the type of bond
given by one party to a suit to enable him to follow or
seek a legal remedy. In the first class one is dealing
with administrators and executors of estates so that the
insuring will be a joint contract. Little risk will attach
262 INSURANCE
to such a bond because the company has a careful scru-
tiny of every transaction. Policies are issued covering
bonds of receivers and trustees in bankruptcy, and they
rank as very good risks in their class.
287. Bonds of deposit, — Bonds of deposit are fur-
nished to secure the prompt re-payment of funds depos-
ited with banks. They run into very large figures.
Such security is usually demanded by a state, munici-
pality, or other political units having public funds in
their charge. Large losses may be sustained in this type
of risks, and even though such losses are not sustained,
it is a type of bond w^hich must be written with extreme
care, because the company must make good the loss im-
mediately, and some years may elapse before it can be
reimbursed.
288. Excise bonds, — The excise laws of the various
states have developed an enormous business for the com-
panies. This form of security must be given by the per-
son before the license may be granted, so there has been
created a steady demand for this type of insurance.
289. Fidelity bonds. — Fidelity insurance almost de-
fines itself. Its business is not, as is usually stated, to
guarantee the honesty of a person, but to make good
the loss which may be sustained if he proves to be dis-
honest. The business originated in this country about
1879, and the volume of premiums amounts approx-
imately to $8,000,000 at the present time. It is esti-
mated that more than 3,000,000 persons are covered by
this type of security, and that the coverage amounts to
more than $3,000,000,000.
290. Unemployment insurance, — From time to time
efforts have been made to develop this type of insur-
ance, but it is doubtful whether, as a private enterprise,
it will ever attain a very large volume. The form of
OTHER BRANCHES OF CASUALTY INSURANCE 263
risk is one on which it would seem we might have fairly
accurate statistics; as a matter of fact, however, these
remain to be gathered; insurance cannot be offered
upon them until we do have such figures. The work
has been undertaken by some countries, notably Great
Britain, and the following report is suggestive :
The report for the first year of the operation of the Unem-
ployment Insurance Law under which provision is made during
periods of unemployment and illness for the great body of em-
ployes in the United Kingdom shows that 2,508,939 unem-
ployment books were issued; 559,021 claims for benefit were
filed; 400,000 individual working men claimed benefits under
the act ; 774,494 payments were made ; the total benefits paid
aggregated $1,150,722; the lowest payment for any one week
was $23,359 and the highest $93,436; the year's gross income
amounted to $11,039,168; at the close of the year there was an
invested balance of $7,835,065 ; the maximum of unemploy-
ment falling within the provisions of the act was 118,000; and
the minimum 67,000.
Of the total annual income derived under the insurance act,
the employers and workmen contributed about three-quarters
and the State one-quarter. In a large proportion of cases the
unemployment was very short, 30 per cent falling within the
waiting week during which no claim could be made, 62 per cent
received benefits, while 7 per cent was excluded for various
reasons, and 1 per cent represented unemployment which con-
tinued after the period during which benefits are paid.
It is stated that the report is only preliminary in certain
respects, as some of the figures have not been fully analyzed.
It is to be noted also that while the insurance law has been
in operation for a year, there has been only six months experi-
ence of the payment of unemployment benefits.
291. Vacation insurance. — In many respects insur-
ance, or the principle, is probably in its infancy. In
264 INSURANCE
1913, as illustration of this, the following, known as
Vacation Insurance, was put forth at Lloyds, London:
Insurance of one's vacation against the hazards of rain may
now be effected through London Lloyds, according to a cable
dispatch to the New York Tribune. You may insure your
vacation by the day or by the week, and in varying sums. The
only stipulation is that a quarter of an inch of rain must fall
before the loss is paid. It does not matter at what hour this
rain falls. You may insure for one day, and the rain may fall
within that part of the twenty-four hours that you spend in
sleep, and the weather may be clear in the daylight hours. You
get paid. In the same fashion, if you insure for a week and
rain falls on three days, you get paid. You receive no payment
if it rains only two days in the week. The premiums vary in
size. For 60 cents the amount of the weekly insurance is $10;
a premium of $1.25 pays for a policy of $60; $5 brings you
$80 if it rains three days in the week. The daily insurance
costs about twice as much as the weekly, being one-eighth of the
amount of the policy.
292. War insurance. — The war in Europe in 1914
brought out the fact that the ocean-going trade mer-
chants' service was apparently not equipped on the
insurance side to carry the war risk. The govern-
ments promptly came to the rescue in the United States,
Great Britain, France, Belgium, Italy and others, and
assumed this risk. This left marine insurance on the
following basis, namely : to take care of all the ordinary
losses covered by the marine policy, the government
picking up the losses occasioned by war. This was a
development of the principle of insurance whereby
private enterprises carried a certain part of the bur-
den, the government stepping in and carrying the other
part.
OTHER BRANCHES OF CASUALTY INSURANCE m5
293. Other applications of the insurance principle. —
The several examples given in this chapter merely show
the possibilities that may exist in the use of the principle
of insurance to avoid loss. The principle of insurance
is used by the world in many ways which are not recog-
nized as such. What, for instance, does insurance
attempt to do? It attempts to distribute a loss or to
make provision that the loss will be a small one to
any given individual, to spread it, in other words, over
so many that there will be no substantial suffering be-
cause of the disaster. We have already called attention
to the practice in stores of having one person, the clerk,
sell the goods and another, the cashier, collect the pay-
ment. This system makes use of the insurance prin-
ciple by dividing the risk of loss between two parties.
Thus, there would have to be collusion before the store-
keeper could lose. There is less likelihood of there being
collusion than of an individual clerk tampering with the
receipts. Whenever, therefore, a risk is divided between
two or more persons, whether it be by means of an insur-
ance policy or in some other way, the principle of insur-
ance comes into play. With the development of busi-
ness relations, there should be many new uses for this
principle of insurance.
PART II: REAL ESTATE
CHAPTER I
INTRODUCTORY
1. Iteal estate a business, not a profession. — ^Real es-
tate is sometimes inaccurately spoken of as a profession,
but it is essentially a business. A profession applies
science, art or learning to the use of others, the profit
to the professor or person applying it being incidental;
whereas a business is engaged in primarily for profit,
and the profit is to the one engaging in the business.
A profession implies professed attainment in special
knowledge. A person may engage in business with
or without special knowledge and no one else is con-
cerned with the question whether he has any knowledge
of the business, because no one else is afi'ected by the
result. If he is successful the rewards are his; if he
fails he bears the loss. But let him attempt to practice
a profession and, if he be unskillful, others are directly
affected, and the fact that his reward is diminished
thereby is merely incidental to the fact that others suf-
fer.
2. Ethics of the business, — ^But whether real es-
tate be a business or a profession has no connection at
all with the body of ethics governing it.
Every business can be conducted upon a plane eth-
ically as high as the ideals of any profession, and the
men who have been conspicuously successful in the real
estate business have attained success because they have
267
REAL ESTATE
applied to their business the highest ideals of commercial
fair dealing. This does not mean that there is any eth-
ical requirement for the seller or the purchaser to give
away anything which belongs to him, or for either one
to disclose to the other his necessity for selhng or his re-
quirements for buying; but the bargain having been
made, it is absolutely necessary that it be lived up to by
both parties, according to its intent; and, if there be any
doubt of the intent of the bargain as it is expressed in
writing, that the spirit of the transaction be carried out
rather than that the catch words of a written instrument
should govern. Cases are frequent of men who to their
own detriment perform the thing which they have prom-
ised to do although not legally obligated, and the bigger
and more successful the man who makes the promise
the more surely will it be carried out. Important obli-
gations are often incurred upon the mere promise of a
well-known man to sell an important piece of property
at a definite price, although no legal and enforcible ob-
ligation exist; and the promise is always redeemed if
it is made by a man who knows the business, and it is
redeemed not merely from altruistic motives, but also
for purely business reasons.
3. Divisions of the business, — The principal divisions
of the real estate business are investment, operation
and agency. These differ from one another according
to the aims of the persons engaging in them and the
methods by which those persons expect to make their
gains. To conduct either of the first two divisions of
the business, investment or operation, actual money cap-
ital is required. The most important capital in the
agency business is the good will of its customers, and
that can be husbanded, increased and made very valu-
able.
INTRODUCTORY 269
Investment is the employment of capital in the ac-
quisition of real estate or interests therein for perma-
nent ownership or actual use of the person acquiring it.
Operation is the employment of capital in the acquisi-
tion or improvement of real estate or interests therein
for commercial operations.
Agency is dealing in or with real estate on behalf of
others.
4. Investment in real estate is generally made for
either of two purposes:
(a) to derive an income,
(b) to hold for re-sale in expectancy of an increase
in value.
Investment for income may be for one of two pur-
poses,
(1) the derivation of rental — ^that is, the direct re-
turn for the use of real property for definite periods, or
(2) the obtaining of income through others upon
money lent on the security of real property.
5. Operation, — Real estate operation may be carried
on
(a) for the purchase and sale of land,
(b) for the purpose of building,
(c) for the purpose of lending money upon mort-
gages.
The purchase and sale of land is that branch of oper-
ation which concerns itself with dealing in land as a
thing to be bought and sold for profit and loss. It may
be divided into two parts:
(1) Speculation, pure and simple, by which land is
bought in the hope of a rise in value and resold when
that hope is either realized or known to be unfounded.
(2) Development of land, the most conspicuous part
270 REAL ESTATE
of which is the development of vacant tracts by buying
them wholesale in their wild condition, making them
marketable by bringing them to such a state of develop-
ment as is implied by putting streets through them, pre-
paring them for use and then selling them in small
parcels. This is a most important and useful part of
the commercial side of the real estate business, and has
resulted in the development and settlement of many
parts of the country.
That portion of real estate operation which concerns
itself in building may be similarly divided into,
(a) Speculative building which consists in building
structures primarily for sale, and not necessarily for the
use of the constructor, and
(b) Building for investment which consists of the
erection of structures for rental or primarily for the use
of the person conducting the operation.
That form of operation which is concerned with the
lending of money upon real estate security is divided
into two parts,
(a) the making of permanent loans,
(b) the making of building or temporary loans.
Permanent loans are moneys lent upon mortgages at
current rates of interest, the security being deemed by
the lender sufficient to afford an ample margin between
the amount of the loan and the actual value of the prop-
erty, the sum being loaned usually for a definite time.
Building and temporary loans are moneys lent for in-
vestment in property, to aid either in putting structures
upon it, repairing structures or in the development of
wild tracts, the intention being that the money be repaid
when the development or reconstruction is finished.
Because of the greater risks in the operation and the
greater necessity for supervision by the lender, there is
INTRODUCTORY 271
compensation in an increased rate of interest over and
above the fair value of the loan of the money. For that
reason it is to the interest of the borrower that the loan
be made permanent and not temporary as soon as may
be.
6. Agency, — Agency is that branch of the real estate
business which engages the attention of the greatest
number of persons who are concerned with the business,
and in that respect it is of prime importance. It is di-
vided into two parts, brokerage and management.
A broker is a person who for compensation, usually
proportioned to the value of the subject-matter, brings
about transactions between principals.
Brokerage has two divisions according to the kinds
of business which usually engage the attention of the
broker.
The sales broker is a broker who devotes his time and
attention to the bringing about of the sale or exchange
of real property.
A loan broker is one who gives his attention to the ob-
taining of loans upon the security of real property.
One man may practice both branches of the business,
or a specialist may devote himself to either of these
branches.
Management, the second branch of agency, is the
operation of deriving income and caring physically for
real estate structures. It concerns itself not only with
the deriving of income, but with the keeping down of
expenses and the care in making expenditures. It is
popularly known as "Agency."
7. Real estate, property and real property defined. —
Real estate is a form of property. Property is the
right to possess and use. Real property, a technical
legal word, is the right to possess and use land for a
272 REAL ESTATE
time which may last for a life or lives or longer. All
other property is, in the eyes of the law, personal prop-
erty. A lease for 999 years, which is not measured by
any life, but which must expire at a definite time, is less
in term of time, in the eyes of the law, than a conveyance
of a piece of land, the duration of which is measured by
a life or by several lives.
When we speak of real property we use the words in
their technical legal sense. When we speak of real es-
tate as a commodity and as a business, it embraces the
various parts of the business which engage the attention
of those who follow it as a vocation, and includes inter-
ests which in the eye of the law are not real property,
as for example, leases, mortgages, etc.
Every business has in view finally, commercial trans-
actions resulting in the transfer of property of some
kind; so in our study of the real estate business we have
in mind the transfer of title to real property, and among
the various subjects we shall consider, are the interests
which there may be in land, limitations on ownership, the
making of a contract, the conveyances used, the liens
which may affect a piece of property — all of which have
an important relation to a final commercial transaction,
the transfer of title to real property.
The methods of dealing in real estate and the laws
governing it are not arbitrary and were not made for the
mystification of others or for the purpose of multiply-
ing legal fees. All systems of law are expressions of
two things, the historic customs of the people whom they
affect, and the modification of those customs, as changes
made those modifications advisable.
CHAPTER II
INTERESTS IN LAND
8. Rights of ownership divided, — Land has existed
from the beginning of property, and is indestructible in
its nature. Each piece of land has a history, and many
persons, having various and conflicting rights, may have
been interested, either successively or concurrently, in
its ownership. These various rights to ownership are
divided into estates and chattel interests.
Estates are rights in real estate which amount to real
property. They may be perpetual or be measured by a
life or lives.
All interests in land which, in the eyes of the
law, are of less importance or less duration than estates,
all rights which are not measured by a Hf e or lives or
longer, are chattel interests.
9. Limitations upon ownership, — The highest form
of ownership of anything, personal property or land,
would be unlimited in duration and unfettered by any
limitations upon use; but there is no such thing in any
civilized community. All property is liable, in every
civilized community, to those limitations upon its use or
ownership which the necessities of civilized life, as ex-
pressed in the law, impose; but our civilization is
founded upon the very greatest respect for private
rights and ownership, and any interference with these
can be justified only upon the highest grounds of public
policy.
The absolute dominion of the owner of real property
XI— 18 ^'^^
274 REAL ESTATE
over that which he owns is aiFected by four important
limitations arising out of the necessities of civiHzed life :
(1) The police power, (2) The ultimate and original
ownership of the state, (3) The right of eminent do-
main, (4) The right of taxation. The right to enforce
these limitations lies with the state.
10. Police power, — Ownership of land is confined
within the right of the community to keep property
from being used in such manner that it will hurt the Hf e,
health or morals of others. The owner of land on which
stands an unsanitary tenement house, which is a menace
to health, may think his right to keep the building there
cannot be questioned, but the police power of the state
will either order that the building be taken down, or that
such changes be made in it as the enlightened sense of
the community finds necessary for the preservation of
hfe and health. If the erection of a new tenement be
begun, certain standards of light and ventilation must
be observed, only a percentage of the land can be used,
certain appurtenances for cleanliness and opportunities
for escape in case of danger must be provided ; and un-
less the requirements of the law are observed, the police
power of the state will circumscribe the owner's domin-
ion over his land and prevent the erection of a tenement
house upon it.
The Tenement House Law of the State of New York
is one of the most drastic, enlightened and necessary
exercises of the police power of a civilized community,
and it has had to fight its way just because it is an in-
fraction of what persons have thought was their natural
right to the absolute ownership of that for which they
paid, or which they inherited from their ancestors.
11. Ultimate and original ownership of the state, —
Another limitation upon ownership of land is the prin-
INTERESTS IN LAND 275
ciple that the state is assumed to be the original proprie-
tor of all land and to have the ultimate title. Modern
ownership is traceable to some form of grant from the
sovereign, who may be the people or their sovereign
predecessors, the colonies, or the king. In the western
states title can frequently be traced to a grant from the
United States in very recent times. Although land is
assumed to belong to the person to whom the grant is
made and to his heirs and assigns forever, yet, if he
leave no heirs capable of inheriting, it escheats to the
state. It cannot be permitted that land which no one is
entitled to inherit become a subject for dispute or strife,
so the principle that the state is the ultimate owner is
necessary for the preservation of law and order.
12. The right of eminent domain, — If at any time
the state finds a specific necessity for the use of land, it
has a right to redeem it under the principle of eminent
domain; but the state's right of eminent domain is
limited by express constitutional requirement that it
shall be exercised only upon condition that fair com-
pensation be made for the property taken.
13. The right of taxation. — The necessities of civi-
lized government require that those enjoying its bene-
fits, contribute to its support. This is done, frequently
by laying a tax upon property, and as real property is
permanent and cannot be moved from the domain of
the tax gatherer, it is often the basis of state and local
taxation.
14. Estate in fee simple, — The largest estate in land
known to our law is a fee simple or a fee simple abso-
lute, the terms being synonymous. A fee simple is the
right to own land, to one, his heirs and assigns, without
limit as to time, but subject to the limitations above
mentioned, which are understood as affecting all land.
276 REAL ESTATE
Commercially this is the estate which is usually dealt in,
and a contract to sell a piece of property, unless other-
wise limited, implies a contract to sell the property in fee
simple.
All interests in land less than a fee simple imply that
somewhere else in some other person or persons there
is or will be the residue, which when added to the par-
ticular estate, will make up the fee simple absolute.
15. Estate in fee upon condition subsequent — This is
an estate which may last forever, unless an event occur
upon the happening of which the creator of the estate
or the heirs of such creator become entitled to reclaim
the property. If A give a piece of land to B, his heirs
and assigns forever, but upon the condition that if at
any time liquor be sold upon the property, then B's
right shall end, and A shall have the right to recover the
property, the estate of the person in possession is an es-
tate in fee upon condition; and left in A is the residue
of the fee simple, the possibility that the land will come
back to him, which is known technically as a possibility
of reverter. The possibility of reverter can be released
to the person who has the conditional estate, but in itself
it is inalienable, and is not a present property right.
16. Estate in fee determinable. — If instead of mak-
ing a condition which might or might not happen, A
gave the land to B to have forever, but provided, if B
should die leaving no children, that the property go to
someone else, B's interest would be a fee determinable
because it would terminate in case a contingency hap-
pened for which A provided, and it would be determined
within a definite time measured by a life or lives,
whether the contingency did or did not occur.
The difference between a fee determinable and a fee
upon condition is that in the fee upon condition there
INTERESTS IN LAND 277
may never come a time when it will be determined
whether or not the condition has been broken; whereas,
in the .fee determinable, it can be found out within a time
which may be determined, whether or not the condition
upon which the estate shall end has happened.
17. Life estates and remainders, — Estates may be so
granted that the present interest is not a fee, but is
measured absolutely by the duration of a life or lives,
and there belongs to another person or persons the right
to take the property after the present interest ends. A
right to own land during a life or lives is denominated
a life estate; the future interest which will vest in pos-
session after the end of a life estate is known as a re-
mainder. Life estates may be measured by the life of
the possessor, or of another person or persons. Re-
mainders may be contingent or vested. A vested re-
mainder is the indefeasible right to take real property
after the termination of a particular estate, or the right
to take the property if the particular estate were to
terminate immediately. A contingent remainder is one
which may vest in possession if events happen which de-
feat the vested remainder.
Examples of these two interests are as follows :
If A grant a piece of land to B to have during his
life, but provides that after his death it go to C, C's
right to possess the property after the life estate is
known as a vested remainder, there being nothing con-
tingent about it. B has the land during his life, and he
may sell this life interest, but when he dies, the right of
C, the remainderman, accrues, and it is always definitely
known who will take the remainder.
If A grant a piece of land to B, his heirs and assigns,
forever, but provide that if B die without children, then
it go to C, that which is given to C is known as a re-
278 REAL ESTATE
mainder ; and as it cannot be known until the time comes
whether C will ever get that remainder, it is called a con-
tingent remainder.
18. Dower, — There are two other important interests
in real property, which should be considered here.
Upon the death of the husband, the wife becomes en-
titled to the use for her life of one-third of his real prop-
erty or to one-third of the rents of his real property.
In many states, including the State of New York, no
act of the husband can defeat that right, and in those
states in order that upon a sale or conveyance of prop-
erty that interest be barred, it is necessary that the wife
shall join her husband in conveying or that she release
her interest to the owner. The act must be voluntary,
and in some states it is necessary that the wife shall pri-
vately acknowledge that it is her free act, without com-
pulsion on the part of her husband. In many other
states the wife is endowed only of such property as the
husband may own at the time of his death.
19. Estates by curtesy, — There is a similar right
which husbands have in the real property owned by their
wives, known as an estate by the curtesy. If there be
real property owned by a wife at the time of her death
not disposed of by will, or not having been alienated
during her life, and there has been a child or children
(whether the child survive or not) the husband is en-
titled to the use for life of the real property thus left,
or to take the rents of the property during his life.
That interest of the husband can be defeated at any time
by the wife.
20. Chattel interests, — The principal chattel interest
relating to real property is a leasehold or lease. A lease-
hold is a right to occupy the land of another in consid-
eration of paying rent. A lease for 999 years is a
INTERESTS IN LAND 279
chattel just as much as a letting from month to month.
Each is a leasehold ; in each there are the same incidents ;
the difference is only in the length of the term.
Another chattel interest in real property is a lien. A
lien is a claim upon the property of another which if not
satisfied, entitles the holder of the lien to sell or require
the sale of the property. Liens may exist in favor of
a money creditor or in favor of the holder of an obliga-
tion which cannot be easily expressed in money.
21. Method of proving ownership, — Historically the
earliest method of transfer of ownership of land was
by some open act upon or connected with the land. It
was customary for the buyer and seller to resort to the
place and publicly acknowledge that the buyer had be-
come the owner of the property. But transactions of
that sort rested only in the memory of living persons,
and might be forgotten ; and there might be disputes of
fact as to the persons between whom such transactions
had taken place, so that in more modern times it became
customary to evidence the transfer of land by a perma-
nent written instrument, or by an open acknowledg-
ment in court and a record of such acknowledg-
ment upon the court records. For years the English
method of conveyance by written instrument continued
until it became necessary (by reason of the fact that
written instruments may be lost and the evidence of
them lost) that there be some place in which they could
be recorded and their contents made matter of public
notoriety. From this necessity was evolved the present
method of public record, by which all instruments which
bear testimony to claims for or against land are made
matter of public record, and all who deal with
land are presumed to have notice of the contents of the
record.
CHAPTER III
BROKERAGE
22. Brokerage defined, — Brokerage is a branch of the
agency division of the real estate business. The per-
sons most interested, whose property and money are in-
volved in the transactions are the principals: and the
broker is the agent of one or both of them. Principals
employ brokers to bring about particular transactions,
and pay them compensation commensurate with the sub-
ject-matter, which is known as commission. A person
who is continuously employed to sell real estate is not a
broker but a salesman. There are sales brokers and
loan brokers. The sales broker is a person who is em-
ployed to bring about the sale or exchange of real prop-
erty. A loan broker is employed to procure loans upon
the security of real property.
23. A broker's requirements, — To achieve success in
the brokerage business, it is necessary to cultivate a wide
acquaintance, to increase one's circle of customers from
time to time among the people with whom one comes in
contact. The real estate broker must learn something
about values. He must know when and where and at
what price a property similar to that which he is trying
to sell has been sold. He must have the instinct of
salesmanship. A man who is a good salesman can suc-
ceed in the brokerage business, and a man who is not a
good salesman cannot.
24. Methods of making sales. — Brokers may find em-
ployment in making sales in one or two typical methods.
280
BROKERAGE 281
A broker may come to a person who has property for
sale, or of whom he beheves that he may be induced to
sell property, and seek employment on the plea that he
has or expects to find a purchaser for that property; or
he may first establish his relations with a prospective
purchaser of property of a specific kind, and then seek
the property, and having found it, approach the owner
in the hope of inducing him to enter into the desired
bargain.
It sometimes happens that the broker is the person
who conceives the transaction and presents it to both
principals. This is the highest class of brokerage, and
usually cannot be achieved without going through a long
course of apprenticeship.
25. Agreement as to commission necessary, — In or-
der that a broker be entitled to commission for his serv-
ices, it is necessary that he have an agreement that those
services will be paid for. There is no presumption that
a volunteer will be paid for his services. It is not neces-
sary that the agreement be in writing, as a contract of
employment may be implied from the relations of the
parties. If a man who is known as a professional
broker, enters into a business relation with one who has
property for sale, and accomplishes the bringing about
of a sale, a contract may very well be implied.
26. Obligation of brokers to principals, — The con-
tract having been made, a commercial and legal relation
has arisen between the two persons which brings with it
obligations on the part of both. The obligation of a
broker to his employer is that which every agent or em-
ploye owes to his employer — fair, honest service. If
a principal has confided to a broker his necessity for sell-
ing, or the lowest price he will take, the broker owes it
to his employer not to betray that confidence. He also
REAL ESTATE
owes to his principal the disclosure of anything he knows
or may learn during the course of his employment that
has a bearing upon the subject-matter of the transac-
tion.
27. Statements a broker may make. — A broker may
make such statements as he believes to be true, and ex-
press such opinions as he can defend with relation to the
subject-matter of negotiation — in the interests always of
his principal. A broker is not required to test the truth
of any representations his principal makes, which he has
no reason to believe to be untrue. A broker may make
comparisons between the transaction in hand and other
transactions, but good business ethics require that he
shall not violate previous confidences.
28. Necessity for thorough knowledge of the prop-
erty.— A broker should never start upon a transaction
until he knows as much as can be learned about the prop-
erty. He should examine it, see what it looks like, the
surroundings, what kind of tenants are in the property.
He should know its income-bearing possibilities, its
speculative aspects, the possibility of increase or de-
crease in value, the lettings, in what manner the tenants
pay rent and what rent they pay.
A broker must know the terms upon which the seller
can deliver. He should find out whether or not the
thing he is trying to sell is such that it can be used for
the purpose for which it is desired. It is not necessary
for a broker to search the title before he attempts to sell
a property, but it is utterly wasteful to bring about a
transaction which will break up just before it is consum-
mated. Much trouble and controversy would be saved
by procuring from the seller a memorandum showing
just what he has for sale.
29. Who pays the commission. — It is usual that the
BROKERAGE 283
contract for compensation be made with the seller; al-
though, as the seller figures that out of the price which
he receives, he must pay brokerage, economically, in its
last analysis, it is the purchaser who pays the commis-
sion. In exceptional instances where a broker is em-
ployed to purchase a specific property or property of a
special character, he may be paid by the purchaser upon
an express understanding, and in that case he should ap-
proach the seller with the statement that he is employed
by the purchaser and intends to look to him for commis-
sion. A broker cannot serve two masters. He cannot
without the knowledge of his employer take compensa-
tion from the other party to the transaction, and if it
be known that a broker does this, he loses his commis-
sion.
30. When commission is earned, — Unless otherwise
stipulated as a term of the employment, a broker has
earned his commission when he brings to his employer a
person willing to enter into the transaction upon the
terms prescribed by or acceptable to the principal, pro-
vided that such person be able to carry out the trans-
action or is accepted by the principal as a person capable
of carrying it out. "Near" does not count in the brok-
erage business. There is no pay until the bargain has
been made, and there is no pay for "making impres-
sions," as it is called. A broker may have made an im-
pression on the mind of a prospective purchaser and al-
most brought about a deal; but later, another broker
who is a better salesman or who meets a better financial
condition may complete the transaction and earn the
commission.
It often happens that a seller is willing to sell a prop-
erty upon large terms of credit, and for a very small
cash payment, especially in transactions where the prop-
284 REAL ESTATE
erty is vacant and intended to be improved. In such
cases it is appropriate and often insisted upon, that the
purchaser shall be personally acceptable to the seller.
If there be no such condition, the broker is entitled to
commission when he has brought to the seller a person
willing and able to contract to purchase the property
upon such terms as the seller will accept. A broker
does not have to guarantee the solvency of his purchaser ;
all that is required is that he be a person of whom it is
not notorious that he is insolvent or unable to complete,
and one who is able and willing to make the contract.
As a matter of commercial practice, it frequently hap-
pens that the broker waits for his commission until the
title closes, but commission is earned and is due and pay-
able at the moment he brings about a meeting of the
minds of the parties; and, unless expressly stipulated
it is not a condition of the earning of brokerage that a
valid and binding contract be made between the prin-
cipals.
31. When broker is procuring cause. — In order to
save paying commission persons who have been brought
into relations by a broker will sometimes get together
behind his back and complete the transaction. If the
broker can show that this was done in bad faith, he is
entitled to comimission.
32. False representations, — If a broker so far for-
gets his obligations as to make false representations in
order to procure a purchaser, and the seller accept the
result of a broker's work and sign the contract know-
ing of the false representations, then, if the purchaser
be relieved of his contract by reason of the false rep-
resentations, the broker is still entitled to commission.
If, on the contrary, the purchaser be relieved of his
contract by reason of false representations of which the
BROKERAGE 285
seller did not know, then no commission is due from the
seller.
33. Good business to see that contract is made, — The
broker should try to see to it that the parties not only
come to an agreement, but enter into a contract which
is binding and enforceable. It is not satisfactory nor
conducive to future business to base a claim for com-
mission upon the fact that the broker has brought about
a meeting of the minds of the parties, without good
evidence to support the contention; and the contract is
the highest evidence that can be offered.
34. Waiting for commission until title closes, — ^Very
often, after the broker has earned his commission and
a contract has been made, it will be required of him that
he wait for the commission until title closes, and that
he stipulate that if the transaction be not completed,
he will get no commission. If that agreement be re-
quired of the broker, without consideration, it cannot
be enforced against him. If a person wants to have it
arranged that the broker's commission be not paid until
the title closes, he must make that a term of the employ-
ment before the broker enters on the work. There may
however, be consideration for such an agreement. If a
person is willing to sell his property provided he get
$1,000 down, and the purchaser has only $500, the
broker, in order to bring about the transaction, may
agree to wait for his commission until title closes, in
consideration of the seller accepting the $500. In that
case there is consideration; the seller has changed his
position upon the broker's promise, and such an agree-
ment may be enforceable.
35. Broker not responsible for failure to complete.
— If the seller should be unable to complete his con-
tract, having a bad title, or being unable to dispose of
REAL ESTATE
his encumbrances; or if, without fault of the broker,
the purchaser be unable or unwilling to pay the balance
of the purchase price, the broker does not lose any part
of his commission. To require it of him is without con-
sideration, and the broker can disaffirm such an agree-
ment and sue for his commission whether the title closes
or not.
36. Splitting commissions, — If, after a broker has
earned his commission, the seller should require him to
remit any part of it, that also is a condition imposed
after commission has been earned and it is without con-
sideration. To divide commissions with principals is
reprehensible on the part of the principals to ask, and
on the part of the broker to grant. One of the most
important things which has brought the real estate
business out of disrepute has been the attitude of brokers
with regard to giving away part of the commission to
principals. There is no objection to brokers dividing
commissions among themselves. There may be three
or four brokers in a transaction, and it is good business
and perfectly proper that they should divide the com-
mission upon any basis upon which they can agree.
Usually the two at the ends of the chain get the larger
part of the commission, and the other brokers all get
a little compensation for bringing the parties together.
The payer of commission is liable only to the man with
whom he makes the agreement to pay conmiission, but
frequently the other brokers will get orders on the
owner from the broker to whom the owner is liable, and
thus protect themselves.
37. Points of difference between sales and exchange
business and loan brokerage, — One difference between
the business of making sales and exchanges and the
loan brokerage business is that in the latter the employ-
BROKERAGE 287
ment is not to obtain an agreement to make a loan, but
to actually get the loan. There is seldom an enforce-
able contract to make a loan. A lender usually makes
no agreement in writing, except that he will accept the
application provided that all the things in relation to
the loan are acceptable to him or his legal adviser.
That does not necessarily mean that the broker never
gets commission until the money be actually loaned. If
a broker be employed to obtain a loan, and get an ac-
ceptance from a responsible lender, but, for some fault
or default on the part of the borrower, the loan be not
made, the broker is still entitled to his commission,
A man who intends to buy a house regards that as
quite an individual transaction. It makes very little dif-
ference to a lender which one of any number of parcels
of property of the kind upon which he is willing to loan,
he finally accepts. A man who has $15,000 to lend on
a $25,000 flat house, does not care in what block it is,
whether the tenants are of one nationality or the other.
All he wants to know is that there is a sufficient margin
of equity between the loan and the actual value of the
property.
The lender who agrees to make a loan seldom re-
ceives any money for the agreement. The only way
to make an enforceable consideration for his promise
is if by reason of that promise the other party has been
led into expenditures or has incurred other obligations
which it was known to the lender would be incurred upon
the faith of the promise. Unless that state of affairs
exists, one difficulty with enforcing a promise to make
a loan is that it is a promise without consideration.
One of the first and most essential elements of any
enforceable contract is that there shall be considera-
tion.
288 REAL ESTATE
38. When broker is procuring cause in obtaining
loan. — Cases may arise where a broker will get an
agreement from a person to make a loan, and the at-
torney of the lender when he examines the title will
make some objection to it. The intending borrower
will then go to the person or company who examined
his title and is responsible for it, and it may be that
they will make or procure the loan for him. There,
although the person whom the broker first obtained to
make the loan, did not make it, someone else did, and
the broker has been the procuring cause and is entitled
to commission.
Another peculiarity of the loan brokerage business
is that never by any chain of circumstances does it hap-
pen that the lender pays commission. The lender
quotes a rate of interest, which means a net rate free
of all expense to him; and he expects that all expenses
of procuring the loan, examining the title and the
preparation of all necessary legal instruments and put-
ting them of record will be borne by the borrower.
39. Agreement subject to prior closing of tr ansae-
tion, — The agreement with regard to brokerage in the
loan market, as in the sales market, is usually subject
to prior closing of the transaction with somebody else
in good faith. Very often a good loan will be in the
hands of half a dozen brokers. Lenders as a matter
of fairness consider that if they entertain an applica-
tion for a loan, they entertain it from the man. who
offers it first, but there is no obligation of any sort on
the part of the lender. There is no way that brokers
can call lenders to account for any act of favoritism.
40. Get agreement as to commission, — In the loan
business as in the sales business it is important that the
broker get a proper agreement as to his compensation.
BROKERAGE 289
and that it be expressly understood that he will be paid
for his eiForts. In the sales business it is sometimes
difficult for the broker to ask a man who employs him
to sell a piece of property for written authorization,
but with a loan application there are so many details
a broker must tell the intending lender, that it is easy
for him to ask the person who is about to employ him
to get a loan, to put these details on a blank form.
41. Rate of commission, — Rates of commission are
governed by custom and agreement. There is no legal
fixed rate of commissions, but the customary rate in the
community will be understood to be the rate, unless
there be express agreement for a different one. It is
poor business for brokers to accept less than the cus-
tomary rate.
CHAPTER IV
CONTRACTS
42. Contracts a legal and commercial necessity, —
The law has provided that in order that such frauds as
the failure to perform a deliberate engagement shall
not be perpetrated, certain transactions shall be re-
duced to writing. This statute is scattered through
the law books of various states in appropriate places.
In relation to real property the provision usually is
substantially to the effect that a contract for the leasing
for a longer period than one year or for the sale of
any real property or interest therein is void unless the
contract or some note or memorandum thereof express-
ing the consideration is in writing subscribed by the
lessor or grantor or by his authorized agent.
43. Contracts wise and safe, — There are men who in
spite of the statute will carry out their oral agreements,
but the requirements of the law are so well known and
so easily accepted that no man having made a bargain
to purchase or sell real property, should hesitate to have
that bargain expressed in a writing which will comply
with the law and make an enforceable contract. The
requirement that a contract shall be reduced to writing
means that the entire understanding shall be reduced
to writing. It is a principle of law that all the negotia-
tions are presumed to have been embodied in the writing,
and that whatever preceded the written agreement and
is not expressed there, was not a part of the final bar-
gain.
290
CONTRACTS 291
44. Contracts a commercial necessity, — There is also
a commercial necessity that a bargain to buy and sell
real estate shall be reduced first to a contract relating
to future acts. Bargains for the purchase and sale
of real estate are always important transactions to the
persons concerned in them, and no matter how pro-
fessional the parties may be, are not carried out with-
out deliberation. The purchaser is not prepared to
pay his money without waiting to ascertain whether the
seller can convey that which is the subject of the bar-
gain. It is necessary too before closing a purchase to
make financial arrangements to gather the money from
the places where it is deposited or the investments into
which it has been put; and it is often necessary that
the seller remove from his title such encumbrances or
rights of others as will enable him to deliver the prop-
erty. For these reasons it is the almost invariable rule
that the matter be reduced to an executory contract.
The broker should endeavor to bring his parties to the
place where the contract is to be drawn in such accord
and with the elements of the bargain so well understood
that he can hand to the person who is to draw the con-
tract complete instructions for putting the bargain in
writing; but it is not always possible to bring the bar-
gain to that state of perfection, and frequently when
the parties get together there will be some detail to be
discussed or some term to be finally settled.
45. Definition of a contract. — A contract is a delib-
erate engagement between competent parties, upon legal
consideration, to do or abstain from doing some act.
In the real estate business when we speak of a contract,
we arrogate that word, which is a generic legal word,
to our business : we mean a contract for the sale of real
property. When we speak of an exchange contract,
292 REAL ESTATE
we mean a contract for the exchange of real property.
46. Essential elements of a contract — (a) It is
essential to a contract that there be competent parties*
A man cannot make a contract with himself. A con-
tract implies reciprocal relations between two or more
parties. In order that there be competent parties to a
contract it is essential that they be parties who are free
to contract. A person who is incapable on account of
lunacy of caring for his own affairs is not a com-
petent person to make a contract. A person who is
under the legal age is not a competent party to a con-
tract. An executor or other fiduciary who by the terms
of his trust or by reason of the limited nature of his
powers will not be able to perform the obligation into
which he enters is not a competent party to a contract.
When entering into a contract with a person other
than an individual acting in his own behalf, it is the
part of prudence to inquire whether that other party
is a competent party, able to contract and perform his
obligations. When dealing with an executor, a trustee
or a person who purports to act as attorney for an-
other, it is necessary to inquire as to the limits of his
authority. It may be that persons who are incompe-
tent at the time they propose to enter into an agreement
can be authorized by legal proceedings to carry through
the transaction. An infant may be incompetent to
contract to sell property, but, by proper proceedings
of a court, his guardian may be authorized to make the
contract and convey the property. Similarly a trustee
who has no right to sell a property, may be authorized
by a court to enter into an agreement and to sell.
(b) It is essential to a contract that there be de-
liberate engagement, that is, that there be a promise
and an acceptance of that promise — and that implies
CONTRACTS 293
futurity. If A give something to B, that is an ac-
complished fact. It is not a conti-act, but a transfer.
A contract imphes the element of doing or abstaining
from doing something in the future.
(c) Another essential element in a contract is con-
sideration, which means that there shall be some change
in the condition or position between the parties. If A
promise B a house, and B give no promise in return,
that is a mere promise without consideration. Consid-
eration is found in a promise when the party who tries
to enforce the promise has changed his position in some
manner or given something of value or some enforce-
able promise in order to induce the other to enter into
the obligation.
The simplest form of consideration is money pay-
ment for a promise. Consideration may also consist of
an enforceable promise. If A agrees to sell B a house,
and B agrees to buy it and pay for it, B's enforceable
promise to buy and pay the price for the house is con-
sideration. There may be a third kind of consideration
where A makes B a promise, and relying on that promise
B changes his position or incurs secondary obligation;
but this kind of consideration is not often found in real
estate contracts.
(d) A contract can be on any kind of fabric, and
does not require to be written in ink, so long as it is
reasonably permanent. It is necessary that the writing
be subscribed, that is, the person to be charged with the
performance of a contract or obligation which is re-
quired to be in writing must subscribe his name or put
at the end of the record or instrument some character
intended to authenticate it. It may be in any charac-
ters that can be understood between the parties and
in any language. Contracts are enforceable in the
294 REAL ESTATE
courts of the United States so long as they can be trans-
lated and made understandable to the courts. The per-
son who subscribes may write his name or he may make
a mere X or other authenticating mark. The subscrip-
tion is complete when the mark has been made. The
words, " his mark" which will sometimes
be seen written about the mark are not part of the sub-
scription, but are a mere memorandum written by some-
body else for the purpose of identifying the instrument
afterwards.
(e) In order that contracts be enforceable, it is not
necessary that they be witnessed or acknowledged. If
they contain a complete agreement between competent
parties, upon proper consideration, and are subscribed
by the person to be charged, they are complete.
47. Forms of contracts. — There are many forms of
contracts in use. The one selected for consideration
and reproduced below is that in use by the leading title
insurance companies of New York. It is a form which
seeks to embody in the printed matter all of those stipu-
lations which are usually found in real estate contracts
and leaves blanks to be filled in with the matter which
varies in each contract.
AGREEMENT, made and dated
between
hereinafter described as the seller, and
hereinafter described as the purchaser,
WITNESSETH, that the seller agrees to sell and convey, and the pur-
chaser agrees to purchase all that lot or parcel of land, with the buildings
and improvements thereon, in the
described as follows: BEGINNING at
The price is
Dollars, payable as follows:
Dollars on the signing of this contract, the receipt of which is hereby ac-
knowledged.
Dollars in cash on the delivery of the deed as hereinafter provided.
[Here follows a blank space for other terms.]
The deed shall be delivered upon the receipt of said payments at the
office of
at o'clock, on 190 .
Rents and interest on mortgages, , if any, are to be apportioned.
If there be a water meter on the premises, the seller shall furnish a
CONTRACTS 295
reading to a date not more than thirty days prior to the time herein set
for closing title and the unfixed meter charge for the intervening time
shall be apportioned on the basis of such last reading.
The deed shall be in proper statutory short form for record, shall con-
tain the usual full covenants and warranty, and shall be duly executed
and acknowledged by the seller, at the seller's expense, so as to convey to
the purchaser, the fee simple of the said premises, free of all incumbrances
except as herein stated.
All personal property appurtenant to or used in the operation of said
premises is represented to be owned by the seller and is included in this sale.
All notes or notices of violation of law or municipal ordinances, orders
or requirements noted in or issued by the Tenement House or Building
Departments, against or affecting the premises at the date hereof, shall
be complied with by the seller and the premises shall be conveyed free of
the same. The seller shall furnish the purchaser with an authorization to
make the necessary searches therefor.
All sums paid on account of this contract, and the reasonable expense of
the examination of the title to said premises are hereby made liens thereon,
but such liens shall not continue after default by the purchaser under this
contract.
The risk of loss or damage to said premises by fire until the delivery of
the deed is assumed by the seller.
The stipulations aforesaid are to apply to and bind the heirs, executors
administrators, successors and assigns of the respective parties.
The seller agrees that
brought about this sale and agrees to pay the broker's commission tlierefor.
WITNESS the signatures and seals of the above parties.
In presence of
[L. S.]
[L. S.]
[L. S.]
48. Divisions of a contract. — This contract has four
main divisions:
1. A statement of the parties;
2. A statement and description of the property which
is the subject of the bargain;
3. The terms of the financial settlement;
4. Certain miscellaneous stipulations, including the
fixing of the time and place for the conclusion of the
bargain.
49. Date, — A date is not necessary to any legal in-
strument, and therefore it is not necessary to a contract.
It is a mere memorandum for the convenience of the
parties, and the date and time make no difference to
the effect of an instrument.
There is no common law Sunday in the United States.
REAL ESTATE
Those things are prohibited to be done on Sundays and
legal holidays which statutes prohibit, and if there be
no statutory prohibition against the transaction of the
business of making contracts or the sale of real prop-
erty on Sunday or on a holiday, a contract made on
such a day is good and enforceable.
50. Statement of the parties, — In this instrument the
parties to a contract are designated as the seller and the
purchaser. In some forms of contract they are referred
to as the party of the first part and the party of the
second part, and in others, as the vendor and the vendee.
These are all mere designations to avoid repeating the
names of the purchaser and seller.
These two parties are looking at the bargain from
different points of view. One has agreed to buy a
definite thing and is about to put down money to bind
his bargain and to show his good faith. The other,
having that definite thing for sale, is about to bind him-
self at some future day to deliver that property and in
the meantime not to sell it to anyone else, thus depriv-
ing himself during the time between the signing of the
contract and the delivery of the deed of the opportunity
of making a better bargain for his property. Each
party must necessarily look somewhat to the character,
relation, good faith and ability of the other.
51. Examination of title the first care of purchaser,
— The first thing the purchaser wants to know is what
security he is going to have for the earnest money which
is almost invariably paid when the contract is entered
into, and his first precaution should be to ascertain
whether the seller appears to be the owner of the prop-
erty. That cannot be done absolutely, but it can be
done to a sufficient extent to make it a fair commercial
risk to pay the money. The purchaser can ask the seller
CONTRACTS 297
to produce his deed, if he has one. If not, he can ask
when and where the property was bought, and can then
consult some rehable real estate index, or the records
of title insurance company to ascertain whether the
seller appears to be the latest person in whose name
the property has been put.
52. When the seller is a trustee or corporation, — If a
seller purports to be dealing as a trustee, the purchaser
should ascertain the instrument under which he claims
to be acting, get a copy of it, and see whether the trus-
tee is or is not able to sell the property. It may be that
an executor, trustee or guardian has not authority to
sell at the time the contract is made, but may by ap-
propriate action of a court be so authorized. In that
case the contract should be so conditioned that if the
proper authority do not approve and authorize, the
parties are not bound to each other.
When a corporation purports to act as seUer, the pur-
chaser should ascertain whether the officer who intends
to sign the name of the corporation and to receive the
money is authorized by the corporation. He may be
authorized by a general by-law or specifically authorized
by resolution, and if he is dealing in good faith, he will
not object to disclosing the source of his authority.
53. Earnest money may he placed with hank or trust
company, — If the purchaser does not know the man
who takes his money and cannot ascertain that he is the
owner or has a right to contract and deliver the prop-
erty, he can try to arrange that the earnest money be
placed in a trust company or bank or title insurance
company until it be ascertained that the seller has a right
to contract and deliver.
54. Concern of sellers less than that of purchasers, —
Sellers usually do not criticize their purchasers with
298 REAL ESTATE
the same particularity that purchasers criticize sellers.
Very often the seller knows nothing about his pur-
chaser except his ability to pay down the stipulated
amount, and frequently that is sufficient and sellers are
content with it. If a man stipulates that he shall have
$1,000 down, and agrees to deliver his property within
thirty days, knowing that if the purchaser does not
comply with the rest of the terms of the contract, he
will forfeit the $1,000, the seller often feels repaid for
his trouble and expense and for the fact that his prop-
erty has been off the market for that time.
Very often the person who signs the contract is
not the real principal, and may be a person without
financial responsibility and without ability to respond
to the contract except so far as to forfeit the earnest
money. If this fact be known to the broker who is
employed by the seller, he should let his employer know
of it. He may not be able to disclose the name of the
real principal, having learned that in a confidential man-
ner, but it is his duty to let the seller know that he is
dealing with a dummy, and thus give him an oppor-
tunity to take care of himself in the rest of the terms
of the contract. If the seller has sufficiently pro-
tected himself by getting such a deposit as earnest
money as will compensate him in case the purchaser is
not able to complete the bargain, he does not very much
care whether the signer of the contract be a dummy or
not.
55, When seller must know the responsibility of pur-
chaser.— If, however, the property be of peculiar value,
or sold on a rising market, or with a small down pay-
ment, it may very well happen that the seller desires to
know more of his purchaser than that he is able to pay
the earnest money, and wdli try to ascertain his responsi-
bility.
CONTRACTS 299
56. "Witnesseth, that the seller agrees to sell and
convey/' — ^"Witnesseth" means very little. If it were
not there the contract would proceed just as well. It
is almost the last vestige of legal verbosity to be found
in the instrument.
"Sell and convey:" The agreement is not only to
sell, but to make the necessary conveyance. What kind
of conveyance that may be and how it may be expressed
will be reverted to again. Practically, as soon as the
contract is signed, the purchaser becomes the owner of
the property. That relation is not important unless
something unforeseen happens; as, for instance, if the
seller become insolvent or incompetent.
57. ''And the purchaser agrees to purchase" — This
is the reciprocal consideration. The earnest money is
not a payment for the contract, but a payment of part
of the purchase price. The consideration for the prom-
ise to sell and convey is the promise to purchase, which
implies that the purchaser will pay for the property.
58. "With the buildings and improvements thereon/'
— These are not necessary words to a contract, as real
property includes the land as far down as you can go,
including all mines in it, and as high as structures can
be built connected to the land. It is well, however, to
leave these or equivalent words in the contract that there
may be no doubt between the parties.
59. Description, — The description is the most diffi-
cult and the most important part of a real estate con-
tract. The seller has been talking about something as
seller, and the buyer has been talking about something
as buyer, and as many minds as there are to the contract,
so many different points of view can there be as to the
description of a piece of property. The most impor-
tant thing in drawing contracts is to express the descrip-
300
REAL ESTATE
tion of the subject-matter in such manner that the
contract can be performed by the seller, and that the
description shall be the true expression of the intention
of the buyer.
Ave.
A.
2d Si
•
# 10^
23
ii>5
Lot
X
8
i-«
Ave.
1st St.
(a) The simplest case to be found is that iHustrated
in the diagram, which shows a vacant lot (X) with no
encroachments by or on it. Here there can hardly be
any difference in the point of view. This lot may be
described at length, as in a deed, but sufficient descrip-
tion would be: **Lot on the southerly side of 2nd Street,
distant 125 feet westerly from the westerly side of B
Avenue, being twenty-five feet wide in front and rear
by one hundred feet in depth, the side lines being par-
allel with B Avenue."
(b) If, however, the lot is one which the seller has
purchased from a map, and his deed calls for a lot
known as "Lot Number ten on the map of the D
estate," in that case the seller and purcliaser will look
at the transaction from different points of view. The
purchaser has made his offer upon the understanding
that he is buying a lot twenty-five by one hundred, and
his position is perfectly plain. The seller looks at the
proposition from the point of view that while he thinks
CONTRACTS 301
*
he is selling the thing that the purchaser is offering to
buy, he has always in mental reservation the fact that
he is offering to sell that thing as he owns it. If he
has any doubt, or if he learns that there is a limitation
upon his ownership, or uncertainty as to the quantity,
it is his interest to see that the contract expresses the
facts. It requires considerable experience in order to
know what is material and what is immaterial. In this
case, if the map be inaccurate the quantity of land con-
tained in ''Lot ten" may vary so as to be more or less,
and the parties may look at such a situation from two
sides. Very often a stipulation will be made that the
buyer will take less than the absolute amount he intended
to buy, but not less than a certain quantity.
The most frequent stipulation made is the words
"more or less." These words are very elastic, and mean
just what they say, that the thing which the seller is able
to give and which the purchaser will receive must not be
substantially different from the dimensions as they were
represented. A variance of an inch or so in width may
be substantial, whereas a variance in depth may make
no difference in the commercial value of a lot. It is all
a question of reasonableness, and no general rule can be
given. If the variance be of such a character that the
usefulness of the lot is impaired so that it cannot be
as conveniently used as if it were of full size, that vari-
ance would excuse the purchaser from taking, even if
the contract read "more or less." Whereas, if the vari-
ance be of such character or the lot of such size that it
is as useful for the purpose for which it is fitted with or
without the variance, then the subject of the bargain
has not been disturbed, and the purchaser would be com-
pelled to take the property.
The question of reasonable variance is more difiicult
302 REAL ESTATE
with vacant land than with improved property. Vacant
land is intended for improvement and is bought by
measurement. Its usefulness is in the clouds, and in
order that it may become income-bearing* a structure
must be put upon it. To the purchaser of improved
property it makes very little difference whether the lot
be twenty-five feet or 24'11''; it is all there, and brings
the same rent. While the words "more or less" afford
some leeway, they afford very little more than if they
were not in the description, especially where the land is
vacant and unimproved.
(c) When a person makes an offer for a piece of im-
proved property, there are three things he offers to buy :
First, the land; second, the structure as a rent producer
or as a thing capable of occupancy; third, the right of
permanently maintaining that structure upon the prop-
erty. The case of a rectangular lot with a house in the
middle of it is as simple as that cited in (a). Such
cases are found in suburban places and outlying parts
of cities, but when we come to the crowded parts of
cities, where houses are built contiguous to one another,
descriptions are more difficult.
(d) If there be a house on the lot^ known as number
105, which exactly fits the lot, the seller does not care
whether he puts into his contract the description of the
lot or the house: they are equal to each other. That is
the seller's point of view. The buyer, on the other
hand, wants to be assured of two things — ^that the prop-
erty is of the size represented to him, and that it is the
structure which he thought he was buying. The seller
might then appropriately add to the description of the
lot: *'Said premises being known as 105 Second Street,"
1 See diagram on page 238.
CONTRACTS 303
which has added nothing to the description but identi-
fication.
(e) If the lot on which stands house number 105
Second Street be diminished by a structure which is on
a neighbor's land, but encroaches on the lot, it would
be dangerous to attempt to sell that lot in the form
already given. In cases of that sort there are two forms
of description. The contract may be drawn: "All that
lot of land with the building and improvements thereon,
known as 105 Second Street." That would be complete
from the seller's point of view, but the purchaser might
ask for identification or for limitation of dimensions.
The seller can accede to a statement that the lot
is 25' wide, more or less; and he can accede to
a statement that it is 125' west of B Avenue,
more or less ; or, if he wants to be safe both against the
possibility of a rejection for misrepresentation as to size,
or the possibility of being charged with trying to sell
more than he has, he can describe the lot as 24' 10" in
width and known as 105 Second Street.
(f ) The owner may be in possession of all of the lot,
but his house may encroach upon his neighbor's lot, he
having an easement or right to keep his wall there. In
that case if he were to describe the property as "105
Second Street" he would be describing something which
was 25'2" in width, and the purchaser might very well
say that he agreed to buy all of the house and all of
the lot, and the seller would be held to deliver 25 '2" when
he only had title to 25' and an easement over the 2".
A proper form of description would be: "All that lot
of land with the building thereon erected, beginning
125' west of B Avenue," and then describe it as
if it were a vacant lot, letting it follow as a matter of
304 REAL ESTATE
inference and of law that all that is appurtenant to
the lot will go with it— in this case, the easement or
right to maintain a wall upon a neighbor's land. Then,
although the house and lot are not equivalent, the seller
having described the lesser of the two, is able to comply
with his contract. If, for any reason, the purchaser
require identification of the lot with the building, then
it is necessary for the seller's protection that while ac-
ceding to that requirement he provide or state in his
contract something to the effect that he does not con-
vey all of the land upon which the building stands. He
may say that the building encroaches 2'' on his
neighbor's land, but he conveys a good right to maintain
it there.
60. Selection of form of description. — No general
rule can be given for writing descriptions. The selec-
tion of the form of description and the use of words
can be acquired only by practice, and must be governed
by knowledge of human nature and the subject
and course of the negotiations. In some cases in order
to satisfy the parties, it is necessary to quote a full
description from a deed.
In modern practice there are no superfluous words
in instruments which are drawn by skilled draughts-
men. Every word means something, and every word
if omitted or changed would change the sense.
61. Property sold subject to tenancy, — A contract
containing a description of house No. 105 Second Street
would entitle the purchaser to receive the title to that
house in fee simple absolute, but the seller does not
always own his property as free and clear as that. The
most common limitation is the occupancy of tenants.
If property is improved and income-bearing and under
lettings to tenants, in describing the property, it is nee-
CONTRACTS 305 .
essary to give its limitations, and add after the descrip-
tion a statement as to the hiring or letting upon which
the property is held by those from whom the income
is derived.
Seller and purchaser look at this matter also from
diiFerent standpoints. The seller looks at it from the
point of view of protecting himself against being re-
quired to deliver the property subject to any tenancy
greater than the lettings subject to which he owns it.
The purchaser desires to know two things with relation
to the occupancy of tenants, the length of term and the
rent they are paying; and upon these subjects he re-
quires the most specific information. He would require
the contract to add after the description; e. g., "Subject
to a tenancy expiring November 1st, 1908, at a rental
of $100 a month." That is specific. It may be that
the property is occupied upon monthly tenancy only,
and the purchaser requires a statement to that effect.
It may be that the terms of hiring cannot be expressed
succinctly. They may be contained in an elaborate in-
strument of lease, and then it may be sufiicient to say:
"Subject to a lease to — (here naming the party or par-
ties to the lease) dated — (here insert the date of the
lease) ;" and then add something by way of identifica-
tion which would be particular and would operate to
protect both parties to the bargain.
62. Restricted property. — Another important and
frequent limitation upon ownership which it is necessary
to provide for in a contract is restrictions upon use. It
happens frequently that when property is in the course
of development from suburban to urban property or
from country or acreage property into suburban, in
order to further that development the future use of the
property is restricted by appropriate instrument. Fre-
XI— 20
306 REAL ESTATE
quently a covenant is inserted that it may not be appro-
priated to certain uses, which are generally known as
nuisances. Sometimes property will be restricted more
stringently — that no tenement house be put upon it,
that it be used for residences only, that nothing but pri-
vate houses for the use of one family only or for the
use of not more than two families be constructed upon
the property. These are all frequent restrictions, and
all have influence upon the values of property.
Restrictions enhance or detract from the values of
property, according as they are appropriate or inap-
propriate to the present situation of the property or ac-
cording as they do or do not seem to deprive the prop-
erty of the opportunity for future development.
Property which is restricted in its use need not be
taken by the purchaser unless the contract contains a
stipulation that it shall be taken subject to such restric-
tion, so it is to the seller's interest to see that the restric-
tion be inserted in the contract. It is to the interest of
the purchaser to see that the contract be specific. A
form of contract which contains the stipulation, "Sub-
ject to any restriction there may be on it" is manifestly
unfair, because in most cases the purchaser does not
take in the fact than an important stipulation of that
sort is run in with the ordinary printed matter. The
purchaser should consider every word of a restriction,
and should never buy property subject to a restriction
under the representation that it does not amount to any-
thing. Every restriction amounts to something: some
of them amount to a great deal. The seller who tries
to get a purchaser to take property subject to a restric-
tion of which he claims that it is not now binding by
reason of "change of neighborhood" is taking a very
CONTRACTS 307
dangerous position, both for himself, if he contracts to
dehver free of restriction, and for his purchaser if he
leads him to purchase believing that the neighborhood
has changed.
In order that restrictions be useful to the purchaser
and act as an enhancement of value, there must be an
element of mutuality. If a man buy a piece of prop-
erty restricted to the use of dwelling houses only, he
ought to have assurance in his contract or in the char-
acter of the neighboring improvements that the restric-
tion is appropriate to the property, and that the sur-
rounding property is similarly restricted. In framing
restrictions connected with the development of a tract,
it is wise not to make them perpetual, but to make them
run out at a definite time. Neighborhoods are fre-
quently retarded in their proper development because
of the fact that there are restrictions which were put
on to run without limit of time, as to which it cannot
be said the neighborhood has so far changed that the
restriction need not be enforced, but still the property
does not sell at its full value.
A restriction that property may be used for the pur-
pose of dwelling houses means any kind of a dwelling,
including private dwellings, flats, apartments, apart-
ment hotels, anything that is used for human habita-
tion. A restriction that property may be used for pri-
vate dwellings means a dwelling for the use of one
family only. A restriction against the use of property
for tenement houses is very difficult to construe.
63. Easements. — An easement is a right over or to
the use of part of property in favor of another adjacent
property. If A own a lot and B have a right to walk
over it to reach the street, B's right is known as a
308 REAL ESTATE
"right of way," and if A were selling his lot, he should
provide in the contract that it is sold subject to that
easement.
A party wall right arises either by agreement or
where one man owns sufficient land for two or more
structures, constructing them with a common wall, so
that the wall is upon the dividing line between the two
lots, and partly on each, the buildings on both sides
being supported by the wall. The owner of each build-
ing has an easement in the other's lot to the extent that
he has a right to have the wall remain as long as it will
stand, and to have support for any structure which he
may put upon the property, jirovided he does not bur-
den the wall so as to impair its usefulness. The owner
of each lot may build on the wall to its full width as
high as he pleases, but he cannot extend the wall further
back or forward on the lot. Where property is sold
subject to a party wall right, the contract should so
stipulate.
It may be that the wall is entirely upon the lot which
is being sold but must support a neighbor's building.
In such a case„ the neighbor's right is known as a beam
right. Cases frequently arise where one building has a
right to drain over another. When a property is sub-
ject to either of these rights, the contract should so pro-
vide.
Appurtenances go with the property whether spe-
cifically mentioned in the contract or not ; but all things
to which a property is subject which may detrimentally
affect its price or impede its use should be put into the
contract by the seller, so that they may not be objec-
tions to the title.
CHAPTER V
CONTRACTS (Continued)
64. Financial statement — A real estate contract is a
commercial transaction, which resolves itself finally into
the transfer of money against property. The most im-
portant thing in the bargain is the gross price at which
the property is sold, so in the form of contract under
consideration the first stipulation in the financial adjust-
ment is a statement of the price, a blank being left for
the amount. The payment of the gross price may be
divided into four parts:
1. The earnest money paid on the execution of the
contract.
2. The cash to be paid upon the delivery of the deed.
3. The amount of incumbrances subject to which the
property is bought.
4. The amount of purchase money mortgage.
The first and second items are usually present in all
contracts; the third and fourth or either of them may
be present or not, according to the nature of the trans-
action.
Q5. Earnest money. — The relation which the amount
of earnest money bears to the entire consideration
varies. Here again the bargain is looked at from dif-
ferent sides by buyer and seller. The buyer desires to
risk as little money as possible before he gets his title
because he wishes to have the use of his money pend-
ing the bargain, and he may not feel certain of the se-
curity which he is getting. In some jurisdictions it
309
310 REAL ESTATE
may not be certain that the purchaser has a Hen on the
property for the earnest money. For that reason a
clause has been inserted in this form of contract spe-
cifically creating such a lien, so that, whether by opera-
tion of law or express stipulation, the purchaser looks
to the property or such interest in the property as the
seller has or can bind, as security for the money paid on
contract. This is another reason why it is advisable to
ascertain whether the seller appears to be the owner of
the property.
The requirement of the seller is that the earnest
money shall be sufficient to indemnify him for at least
two things: one, the obligation for brokerage which he
has incurred as soon as the bargain is agreed on; and
the other, the fact that from the time of the execution
of the contract until the delivery of the deed, the prop-
erty practically belongs to the purchaser. The seller
has limited the amount which he can get for it and the
chance of speculation for a larger price is not with
him any longer, but with the purchaser. If the con-
tract does not go through, he gets the property back
with a blemish upon it by reason of the fact that for
some cause or other it has been the subject of an un-
successful bargain; and it is harder to sell property to
which that has happened. The seller requires in addi-
tion assurance that the purchaser will have sufficient to
lose when he has paid the earnest money to make him
desire to get the property for the balance of the con-
sideration which still remains to be paid.
Theoretically, the seller requires sufficient in the way
of earnest money on the execution of the contract to
leave the balance to be paid for the property an amount
less than its true value, so that the purchaser will have
the necessary incentive for taking the property; but it
CONTRACTS 311
is not always possible for sellers to so arrange their
contracts.
The amount of earnest money is seldom higher than
10 per cent of the purchase price and may be any sum
less than that on which the parties can agree. It may
be as little as a nominal sum. It may be that nothing
is actually paid on signing the contract, but the seller
is satisfied with the personal liability of an amply sol-
vent purchaser.
The amount paid on the execution of the contract is
generally paid by check. Delivery of actual money or
certification of the check is not usually required, for
if the check be not good, the contract could be set aside
for failure of one of the considerations for entering
into it ; i. e., the payment down of earnest money.
66, Amount paid on delivery of the deed. — This
amount may be the difference between the gross price
and the earnest money, or it may be the difference be-
tween the gross price and the earnest money added to
the third and fourth or the third or fourth division of
the purchase price. The form of contract under con-
sideration provides that the amount be paid in
cash, which means if required, in legal tender money.
It is customary and good business to accept a check
certified by a solvent banking institution, but nothing
less than a certified check is accepted on delivery of the
deed, between persons unacquainted with one another.
There are forms of contract in which it is stipulated
that this amount shall be paid in cash or certified check.
The seller who signs such a contract is ill advised, for
a check certified by an unknown bank in a little coun-
try town would be a good tender under that contract.
The contract should always call for cash on delivery
of the deed; then a certified check may be accepted,
312 REAL ESTATE
but in such a case there is no obhgation to deliver the
deed until the actual money is paid.
67. Taking property subject to mortgage, — It is
quite usual that property which is the subject of bar-
gain and sale shall be encumbered by mortgage, and it
is customary that property thus pledged be purchased
subject to such mortgage. The difference between
the amount for which the property has been mortgaged
and its value is known as the equity, value of equity,
or equity of redemption of the property. The mort-
gage or amount of mortgages is a part of the price.
If a person were to buy a piece of property for
$50,000, agreeing to pay $1,000 on signing the con-
tract, $24,000 when the deed was delivered, $20,000 in
a mortgage for that amount, and $5,000 in purchase
money bond and mortgage, the first three divisions of
the purchase price might be expressed in the contract
as follows:
$1,000 on the signing of the contract, the receipt of which is
hereby acknowledged;
$24,000 in cash on the delivery of the deed as hereinafter pro-
vided ;
$20,000 by taking the property subject to a mortgage for that
amount, now a lien thereon.
From the seller's point of view this statement with
regard to the mortgage would be satisfactory. He has
the purchaser bound to accept the property subject to
an existing mortgage; but the purchaser would require
to know when the mortgage was due and what rate of
interest he must pay for the use of the money. He
ought to inquire to whom the mortgage was made or
who holds it, because this will enable him to tell whether
it is likely that payment will be required the moment
CONTRACTS 313
the mortgage is due, or whether there is a probabihty
that it will be extended. As a matter of law, if a mort-
gage be referred to in a contract as an existing mort-
gage, no matter how onerous the terms of that mort-
gage or how extraordinary, the purchaser who has
signed the contract is held to have knowledge of those
terms and will be bound to accept the title. For these
reasons a complete clause for taking property subject
to a mortgage should read: "By taking the premises
subject to a mortgage for that amount, falling due
(here insert due date of the mortgage), and bearing
interest at the rate of — per cent per annum."
If there is a stipulation in the mortgage that it may
be paid off before it is due, the purchaser should re-
quire that the contract so stipulate. If he thinks
$20,000 a small mortgage on a $50,000 piece of prop-
erty, he should be careful to stipulate that he have the
privilege of paying it off, or see that he buys the prop-
erty subject to a mortgage which is due or will fall due
within a short time.
In the case cited there is no liability on the part of
the purchaser personally to pay the $20,000. There is
nothing he risks beyond the loss of his equity. But it
may be that the seller desires not only that the purchaser
shall leave the property as security for the existing
mortgage, but also, because he happens to be hable
personally to pay the $20,000, he may desire that the
purchaser shall also become liable, and that the seller
shall step back into the position of surety for the
amount, with the purchaser as first debtor. If the pur-
chaser does thus assume a mortgage, he becomes liable
not only to lose his equity in case the property is not
sufficient to pay the mortgage debt, but also to pay
any deficiency there may be between the amount re-
314 REAL ESTATE
alized on enforcing the mortgage and the amount of
the mortgage debt. He becomes as liable as if he him-
self had borrowed the money and given his bond or note
for it. In such a case the statement with relation to
the mortgage would be expressed:
$20,000 by taking the premises subject to a mortgage for
that amount, now a lien thereon, bearing interest at the rate of
per annum and due . ; payment of
which the purchaser shall assume when the deed is delivered.
It may be that the purchaser voluntarily desires to
be made personally liable for the payment of a small
mortgage. There may be very little chance that there
will be a deficiency between the amount that the prop-
erty will realize and the mortgage debt; and in some
states there is an extraordinary form of taxation on
personal property under which a man is able to set off
his liabilities against his personal property. For these
reasons buyers — especially rich buyers — when purchas-
ing property subject to comparatively small mortgages
frequently request that the transaction be shaped in
such manner that the contract and deed shall contain
an agreement by which the purchaser assumes the mort-
gage. The original obligor still remains liable for the
bond as between himself and the lender. He can only
be released from that liability in case there be some act
or change in the terms entered into between the holder
of the mortgage and some subsequent owner, for in-
stance, if the lender extend the time of payment with
a new owner.
68. Purchase money bond and mortgage, — In the
bargain under consideration the purchaser requires
credit for the balance of $5,000, and the amount is to
be secured by a purchase money bond or notes and mort-
CONTRACTS 315
gage. The balance of the purchase money which re-
mains unpaid upon the delivery of the deed, as between
the parties remains a lien on the property, but it is
necessary on the public records to warn anyone who
deals with the purchaser that he has not paid for the
property, so the seller exacts from the purchaser an
agreement that he shall give a bond or notes for the
payment of that balance, and shall secure the bond or
notes by a purchase money mortgage to be given on the
delivery of the deed.
It is necessarj^ for the protection of the seller where
a purchase money mortgage is given that the form of
that mortgage be stipulated between the parties. He
will require that a mortgage which is thus subordinate
to another shall contain a clause which permits the
holder of the subordinate mortgage to demand pay-
ment of his debt if default be made in any of the
stipulations of the previous mortgage. On the other
hand, the purchaser in contracting to give a purchase
money mortgage upon terms which make it due after
the time when the prior mortgage comes due, requires
for his benefit that there be a stipulation in the pur-
chase money mortgage that in case he pay off the first
or prior mortgage that then the second subordinate
mortgage shall still remain subject to a new first to be
placed on the property — usually the stipulation be-
ing that it shall not exceed the existing mortgage. If
the purchase money mortgage is to be paid off in install-
ments, as frequently happens, the seller requires and
is entitled to a stipulation that if any of the installments
be not paid that then the whole amount shall be due
and owing at the option of the holder of the mortgage.
A clause relating to a purchase money mortgage of
this sort may be expressed as follows :
316 REAL ESTATE
$5,000 bj the execution and delivery of the purchase money
notes or bond of the purchaser, secured by purchase money
mortgage on said premises for said sum, payable .
with interest at the rate of per annum, payable semi-
annually. Said bond and mortgage to be in the form usually
emploj^ed by (here insert some stipulation which will identify
the form of mortgage to be used) and to contain a clause that
if the first mortgage be discharged that this mortgage shall re-
main subordinate to any new mortgage placed on said premises
in place thereof.
There is some expense in connection with the giving
of a purchase money mortgage and as akeady stated
when speaking of loans, the borrower pays all expense
of securing the loan. In such a transaction the pur-
chaser must ask for credit, so it is stipulated that he
pay the expense of drawing and recording the mort-
gage. The instrument is for the security of the seller
so it is usually stipulated that the attorney for the
seller shall draw the mortgage. Where there is a mort-
gage recording tax this is another expense in connection
with the recording of a mortgage. Doubt has arisen
as to whether the purchaser should pay this tax if there
be no stipulation in the contract requiring him to do so.
Therefore the seller who desires to protect himself prop-
erly requires three things in the contract: (1) That
the mortgage and bond shall be drawn by his counsel.
(2) That the buyer shall pay the cost of preparing and
recording the mortgage. (3) That the buyer shall pay
the mortgage tax, if any.
69. Delivery of deed. — It is necessary, by way of
convenience, that a place be fixed for the delivery of
the deed and the payment of the money. It may be at
the office of either party or counsel for either party, at
the office of a title insurance company, prospective
CONTRACTS 317
lender or any place convenient. There is no custom
with regard to it. For the same reason a day is fixed
for the delivery and tender of money.
70. Apportionment of rent, interest, etc, — The next
stipulation is that rents and interest on mortgages are
to be apportioned. Rent is payable at stipulated times,
and the delivery of the deed may not coincide with a
rent day. Rents may have accrued from some prior
date and be unpaid, or rent may have been paid in ad-
vance. The contract stipulates that these sums are to
be apportioned, that is, justly divided between the par-
ties. As a matter of law, in some states, rents are ap-
portionable, but if there be no statute to that effect,
it is not certain that rents will be apportioned, so it is
appropriate to create this stipulation in the contract.
For the same reason the contract provides that inter-
est on mortgages shall be apportioned. There is a
blank in which it is often stipulated that insurance
premiums shall be apportioned, and this is distinctly to
the interest of the seller. If it be not so stipulated,
the purchaser is not bound to take and pay for the unex-
pired balance of the fire insurance policies. He may
leave them in the hands of the seller who will have to
take the rebate at short rates instead of getting a fair
apportionment for the unexpired term. In the inter-
est of the seller this clause should read: "Rents, inter-
est on mortgages and fire insurance premiums, if any,
are to be apportioned."
71. Reading of water meter. — Wherever water is
furnished by a municipality, the charge for the water
is a public charge and may be a lien on the property.
For that reason it is proper that when the title is de-
livered, it be free of lien of any water rate which has
become due.
318 REAL ESTATE
It is sometimes impossible to get a water meter read-
ing when desired, so this form of contract provides that
if there be a water meter on the property, the seller shall
furnish a reading to a date not more than 30 days prior
to the time set for closing, and that the parties shall
adjust the unfixed meter charge for the intervening
time upon the basis of such last reading.
72. Form of deed, — The next clause in the contract
relates to the form of deed to be delivered and the con-
tract requires that, *'The deed shall be in proper statu-
tory short form for record." At one time deeds were
very verbose and it got to be burdensome to read and
record such long instruments, so in some states statutes
have been enacted by which the covenants in a deed
were reduced to a simple form of words; and that this
simple form of words should be considered equivalent
to the long covenants. The stipulation that the deed
shall be in statutory short form is therefore appropri-
ate, where such statutes exist.
The contract also provides that the deed shall contain
the usual full covenants and warranty. Unless this
stipulation were in the contract a seller could deliver
any form of deed which was sufficient to convey the
property, without assuming any further obligation with
regard to it. The practice is that the purchaser exact
five covenants from the seller, when the seller is an in-
dividual owning property in his own right:
1. A covenant against incumbrances,
2. A covenant of seizin — ^that the seller is the owner of the prop-
erty and has a good right to convey it,
3. A covenant of quiet possession — that the purchaser shall ob-
tain and quietly retain the possession of the property,
4. A covenant of further assurance — that the seller will at any
time in the future execute any other instruments which
CONTRACTS 319
he can execute and which may be required to perfect the
title,
5. A covenant of warranty — that the seller will forever warrant
and defend the title.
If the seller be not contracting to sell in his own
right, he will not obligate himself to make these cove-
nants. A trustee selling property may obligate him-
self to give a covenant that he has not incumbered the
property or done anything to defeat the title: beyond
that no fiduciary or representative will go.
The stipulation further is that the deed shall be duly
executed and acknowledged by the seller. It must be
properly executed and acknowledged that it may be re-
corded. It must be executed and acknowledged "by
the seller," because very often purchasers will contract
to buy property and take the covenant of a person
whom they know to be solvent and amply able to re-
spond to any liability to which he may be held by the
operation of that covenant ; but a purchaser might buy
from a man who is known to be amply solvent and, if
these words were not in the contract, the seller might
convey to a dummy or intermediary without covenant
and give the purchaser a full covenant and warranty
deed of a person without responsibihty. If the deed
is not to contain full covenants or any covenant, it does
not make any difference whose deed it is. The contract
also stipulates that the deed shall be prepared and ex-
ecuted at the seller's expense. Another important
stipulation is that the deed shall be such as to convey the
premises in fee simple, free of all encumbrances except
as stated in the contract.
73. Personal property included in the sale, — The
next stipulation relates to personal property which
may pass as appurtenant to the land. If a purchaser
320 REAL ESTATE
were buying an apartment house, he would want the
lighting fixtures, janitor's tools, shades, gas stoves, etc.
All those things which go with a piece of improved
property as it stands as a going concern are commer-
cially intended to be included in the bargain, but if the
contract be one which relates purely and simply to real
property the seller might hide behind the terms of the
contract and refuse to deliver anything but the real
property, so the stipulation is that, "All personal prop-
erty appurtenant to or used in the operation of said
premises is represented to be owned by the seller and is
included in this sale."
74. Violations of law and municipal ordinances, —
The next stipulation relates to an important subject —
violations of law which do not amount to direct en-
cumbrances upon the title. Attached to the provisions
of building codes and other laws regulating use and
construction are specific penalties. The provisions of
these codes may be enforced by injunctions against the
use of the property or by the exaction of penalties which
become liens on the property; and to purchase property
without making stipulation concerning this matter may
subject a purchaser to unexpected burdens. Where
such regulations exist it is proper for a purchaser to
stipulate that the premises shall be delivered free of vio-
lations of law or municipal ordinances noted on the
books up to the date of contract, unless he is consciously
buying the property "as is" ; the seller, however, will re-
fuse to be liable for any such notices of violation issued
after the date of the contract, for if he did not thus
limit his obligation, there would be danger that un-
scrupulous purchasers might have inspections made and
departmental requirements noted between the time of
making contract and delivery of the deed
CONTRACTS 821
75, Earnest money a lien, — For reasons already given
a clause has been inserted in this form of contract
specifically creating such a lien, so that, whether by
operation of law or express stipulation, the purchaser
looks to the property or such interest in the property
as the seller has and can bind, to act as security for the
money paid on contract.
The form of contract under consideration goes fur-
ther than the law and says that the reasonable expense
of examination of title shall also be a lien on the prop-
erty but, for the protection of the seller, it is stipu-
lated that the lien shall not continue after the purchaser
has made default under the contract.
76. Damage by fire. — The next clause which appears
in the form of contract under consideration relates to
the visible condition of the property. When a pur-
chaser buys a piece of improved property, he buys with
reference to the state of facts which is apparent with
regard to its physical condition; and is entitled to have
it deUvered to him in practically the same condition as
when the contract was made. If there be any ap-
preciable change between the time of making the con-
tract and the delivery of title which is not the result
of ordinary wear and tear, overwhelming physical ca-
lamity, or destruction by the elements, it would seem
clear that the seller is not delivering that which was the
real subject of the bargain, to wit, the property in the
physical condition it was in when the bargain was con-
cluded. It is held by some, however, that the doctrine
that in equity the property belongs to the purchaser
after the making of the contract, has such influence
upon the rights of the parties that the purchaser would
be bound to take the property even though there wer^
injury by fire, because from that time he had an in-
XI— 21
Sn REAL ESTATE
terest in the property which he might have covered by
fire insurance. That there may be no misunderstand-
ing between the parties, it is advisable, if the risk or
damage by fire until the delivery of the deed is to be as-
sumed by the seller, that the contract so stipulate.
It may be that the transaction is of such nature that
the purchaser ought to take the property whether or not
there be destruction by fire or other calamity between
the time of closing the contract and the delivery of the
deed. Such cases are found where valuable property
is sold, when almost the entire value lies in the land, and
little or no value is placed upon the structures. It is
then customary to provide expressly that the purchaser
shall take the property notwithstanding there be loss
by reason of fire damage; and in such case it is usual
to state that the purchaser shall receive from the seller
whatever may be collected on the policy if there should
be a loss in the meantime.
Sometimes the transaction is of such importance to
the parties that it is stipulated that it shall go through
no matter what kind of damage there may be to the
building in the interim. When the land value rises so
high that the structures are incapable of earning inter-
est upon it, then the structures disappear from the val-
uation; and in such cases it is appropriate to stipulate
that no matter what change there may be in the physical
condition of the property between the time of making
the contract and the delivery of the deed, that the pur-
chaser shall take the property and pay the stipulated
price.
77. Contract binding on heirs, executors, etc, — *'The
stipulations aforesaid are to apply to and bind the heirs,
executors, administrators, successors and assigns of the
respective parties." If a seller should die before title
CONTRACTS 323
passes and the property go to his heirs, they must carry
out the contract ; if the title should fall to his executors,
they ought to be called upon to perform the contract.
The seller having made his agreement and being thus
bound, the purchaser should also provide in case he
die pending the contract that his executors or admin-
istrators shall pay the purchase money. If the seller
should sell his property pending the contract to one
who knows of it, his assignee — the person who buys —
is bound. If a purchaser should sell his contract to
an assignee another principle comes in, i. e., a person
can sell his assets, but not his obligations. If a pur-
chaser sell his contract to a person whose obligation is
worth having and desires to be relieved of the burden
of performance of the contract, he should get from the
man on whom he relies to take the property an agree-
ment that he will perform the contract in the stead of
the assignor.
78. Agreement as to commission, — The next stipu-
lation in the form of contract under consideration is
one which is really not part of the contract at all but
merely a stipulation between the seller and broker who
has brought about the sale and is inserted entirely for
the benefit of the broker. The parties formally ratify
the meeting of the minds which the broker has brought
about, stating that the seller agrees that the person
who has acted as broker brought about the sale, and
agrees to pay his commission. That clause was first
inserted in contracts at the time when the act of the
State of New York as to written authority was still
in force, and a broker having brought the transaction
between the parties to a successful conclusion and not
having written authority might have failed in an action
for commission.
324 REAL ESTATE
79. The seal, — The contract then calls to witness the
fact that the signatures and seals of the parties are at-
tached. It is subscribed in order that it may be en-
forceable. It must be subscribed by the person to be
charged, i. e., both parties need not sign each contract;
each of them must sign one counterpart. The con-
tract is also sealed. A seal originally was some sort
of impression attached to a writing to witness its
formal execution : men stamped their sign or their fam-
ily arms to witness instruments, because they could not
write. The seal has remained formal testimony to the
execution of documents from that time until the pres-
ent.
The use of a seal in modern times is twofold:
First, and most important, a seal imports considera-
tion. It raises the presumption that the person who
has affixed his seal to an instrument has received con-
sideration. The second use of the seal is in relation
to attempts to charge an undisclosed principal. In
dealing with a dunmiy, if the instrument be unsealed,
a person may go behind the instrument and charge the
principal or any one else who is responsible for the
transaction, but upon a sealed instrument, as matter of
law, only the person who has executed it can be charged.
When men are dealing with or through dummies, if
they fear they will have to charge some one else under
the instrument or desire that they shall be protected
against being charged under the instrument, they should
always be careful, under professional advice, to deter-
mine whether or not the instrument should be sealed.
However, real estate transactions usually are founded
upon the property under consideration and it is ap-
propriate to look only to the property and to the signers
of the instrument, and not through the instrument and
CONTRACTS 325
behind the instrument to others; so that it is usual that
contracts for the sale of real property shall be sealed.
Another influence that a seal has upon instruments
is in connection with the statute of limitations, which
provides that within a certain time a debt is outlawed
by limitation. In all states there is a difference in the
time of limitation between a sealed and an unsealed in-
strument, a sealed instrument having a greater length
of life than an unsealed. In the State of New York
upon a sealed instrument the time of limitation is twenty
vears; if the instrument be unsealed the time is six
years.
80. Witness and acknowledgment, — ^When a con-
tract has been subscribed by the parties it is complete,
and for purposes of enforcement need not have any
other formality: it need not be witnessed or acknowl-
edged. If it be witnessed it is merely as a convenient
memorandum of the fact that the person witnessing
it was present and saw the parties sign the instrument.
Contracts are not usually recorded upon the public rec-
ords unless default is feared. For that reason they are
very often not acknowledged or the signature proved.
Acknowledgment of an instrument is had if the person
signing the instrument appear before a public officer
authorized by law to receive acknowledgments, and ac-
knowledge to him that he executed the instrument.
The person must be known to the officer and known to
him to be the one who executed the instrument and the
officer must sign a certificate to that effect. If an in-
strument have such a certificate of acknowledgment, it
may be put on the public records. If the instrument
be witnessed and if parties have not acknowledged it,
the subscribing witness may go before a public officer
and swear to the fact that he was present and saw the
326 REAL ESTATE
parties execute the instrument, that he knew them, and
knew them to be the persons described in the instru-
ment and saw them execute it. Thereupon the pubhc
officer will indorse a certificate to that effect upon the
instrument, which is equivalent to a direct acknowledg-
ment, and then the instrument may be put upon the
public records.
81. Non-performance of contracts, — The failure to
perform a contract may be by either party. The seller
may not perform for one of two reasons, because he
will not, or because he cannot. If he is able to perform
and will not, the purchaser has three remedies: First,
he may disaffirm the transaction, ask to have his money
back and his expenses. If he gets what he asks for,
that ends it; and whether voluntarily or as a result of
a suit at law the contract has been disaffirmed and the
parties are back where they were before. Second, the
purchaser may want the property. Real property has
inherent qualities. A man may have bought a specific
piece of property for specific purposes and he is entitled
to have that piece of property. He may bring what
is technically known as an action for specific perform-
ance, the result of which is — if the purchaser be suc-
cessful— that a decree is made that the seller shall
specifically perform by conveying to the purchaser the
property in the manner in which it was contracted to
be conveyed. That decree is enforceable, if not com-
plied with, by punishment for contempt of court, not
by the sale of the property or execution by the sheriff.
The purchaser has a third remedy. If the seller can
sell and will not, a purchaser may sue for damage.
His damages are usually limited to the amount of
earnest money and interest and the reasonable expense
of examining the title, unless special damage can be
CONTRACTS 327
shown; and then it is usually limited to the difference
between the actual market value of the property and
the sales price. If a purchaser buy for $7,000 and
can show the court that the property is fairly worth
$10,000, he has lost a profit of $3,000 and his damage
may be estimated at $3,000, earnest money and interest,
and expenses for examination of title.
If the seller cannot perform — if, for instance, it is
found that his title is defective, that persons whom he
does not control have interests in the property which
prevent him from conveying, then it would be futile to
sue for specific performance. In such a case the pur-
chaser's remedy, if the seller has acted in good faith,
is limited merely to the recovery of his earnest money
with interest, and the reasonable expense of examining
the title. If he can show that the seller acted in bad
faith, that knowing he could not perform the contract,
he led the purchaser to make the bargain to his detri-
ment, the purchaser may obtain such secondary damage
as he can show, but he will not get speculative damage.
He must show by expert testimony the value of the
property and the value of the bargain of which he has
been deprived.
82. Seller's remedies, — A seller may not know the
infirmities of his title. He may not have had it ex-
amined; things entirely beyond his control maj^ have
happened or things of which he knew nothing; but a
man ought not to contract to buy a piece of property
without knowing whether or not he can pay for it.
When a purchaser fails to perform, a seller has three
remedies : First, he may retain the earnest money and
go no further; second, he may begin an action for
specific performance, which must be founded upon an
allegation that the purchaser can perform but will not.
328 REAL ESTATE
If the seller succeed in such an action, it can be enforced
by punishment for contempt of court. Third, the seller
may sue the purchaser for damage ; and here again the
measure of damage will be the difference between the
contract price and the value of the property. If a man
contract to buy a piece of property for $10,000 be-
cause he wants it very much, and when the time for
closing title comes the market has changed, or the prop-
erty is only worth $7,000 in the open market, the differ-
ence between the sales price and the contract price —
$3,000 — is the measure of the seller's damage. But at
all times the purchaser having failed to perform his
contract, no matter what remedy is resorted to, or if the
seller resort to no remedy, he is entitled to retain the
earnest money. Very often sellers are satisfied with
this, especially as the feeling is that purchasers who de-
fault in their contracts are usually of small personal
responsibility outside of the money which they have
paid on contract, so that it is seldom worth while to pur-
sue them further. A purchaser who has defaulted in
his contract naturally could take no advantage of the
contract which he had broken, therefore could not sue
to recover the money which he had paid down.
83. Exchange contracts, — Sometimes the contract is
not one by which property is sold for money, but par-
takes rather of the nature of a barter or exchange. A
man who owns a piece of property of a certain value
and desires to buy a piece of much greater value
may not be prepared to pay the necessary money. A
small piece and some money will buy the larger piece.
That larger piece and some money will buy a still larger
piece, until finally the man finds himself with a very
large real estate investment. Or the process may be
reversed, and a man who has a very large investment,
CONTRACTS 3^9
or a builder who has constructed an expensive improve-
ment, desiring to work out of it and finding customers
who have some real estate investments and some money,
will make a trade. He will take some money and a
smaller investment and thus gradually work out of the
large investment down to a cash basis.
There are men who give most of their time as brokers
or operators to the exchange of real property. Some-
times they work it as people trade on the stock ex-
change, to keep things moving, but oftener it is in the
course of the accumulation from small properties up to
larger ones, or in working from large properties down
to a cash basis. The contract which is brought about
when exchanges have been agreed on is of the same na-
ture as a contract in a cash sale. A standard form of
such a contract is given below.
AGREEMENT, made and dated between
hereinafter described as party of the first part, and
hereinafter described as party of the second part, for the exchange
of real property.
WITNESSETH, as follows:
The party of the first part, in consideration of one dollar, the
receipt of which is hereby acknowledged, and of the conveyance by
the party of the second part hereinafter agreed to be made, hereby
agrees to sell, grant and convey to the party of the second part, at
a valuation, for the purpose of this contract, of
Dollars,
ALL that land with the buildings and improvements thereon, in the
The party of the second part, in consideration of one dollar, the
receipt of which is hereby acknowledged, and of the conveyance by
the party of the first part hereinbefore agreed to be made, hereby
agrees to sell, grant and convey to the party of the first part, at a
valuation for the purpose of this contract, of
Dollars.
ALL that land with the buildings and improvements thereon in the
The premises which are to be conveyed by the party of the first
part shall be conveyed subject to the following encumbrances:
The premises which are to be conveyed by the party of the second
part shall be conveyed subject to the following encunibrances:
The difference between the values of the respective premises, over
and above encumbrances, for the purpose of this contract, shall be
deemed to be
Dollars, and that sum shall be due and payable as follows, by the
party of the
330 REAL ESTATE
The deeds shall be delivered and exchanged at the oflBce of
at o'clock on 190
It is agreed by the respective parties hereto that
brought about this exchange and that the brokerage shall be paid as
follows :
Rents and interest on mortgages, if any, are to be apportioned,
and the risk of loss or damage to said premises by fire, until the
delivery of said deeds, is to be borne by the respective sellers.
If there be water meters on the premises, the respective sellers
shall furnish readings to dates not more than thirty days prior to the
time herein set for closing title and the unfixed meter charges for
the intervening time shall be apportioned on the basis of such last
readings.
All personal property appurtenant to or used in the operation
of said premises is represented to be owned by the respective sellers
and is included in this exchange.
All notes or notices of violation of law or municipal ordinances,
orders or requirements noted in or issued by the Tenement House or
Building Departments, against or affecting the premises at the date
hereof, shall be complied with by the respective sellers and the prem-
ises shall be conveyed free of the same. The respective sellers shall
furnish the respective purchasers with authorizations to make the
necessary searches therefor.
Each of the parties agrees to convey the property hereinbefore
described as sold by such party respectively, free from all encum-
brances, except as above specified, and to execute, acknowledge and
deliver to the other party, or to the assigns of the other party, a deed
in proper statutory short form for record containing the usual full
covenants and warranty, so as to convey to the grantee the fee simple
of said premises free from all encumbrances except as herein stated.
The deed, in each case, shall be drawn at the cost of the party of the
first part thereto.
The stipulations aforesaid are to apply to and bind the heirs,
executors, administrators, successors and assigns of the respective
parties.
WITNESS, the signatures and seals of the above parties.
In presence op
[L. S.l
[L. S.]
[L. S.]
[L. S.]
84. Parties and consideration. — In exchanges of real
property there are really two sellers and two buyers.
The contract is really two contracts to sell. The agree-
ment is between the party of the first part and the party
of the second part. The consideration in this contract
is the mutual agreement by each party to sell his own
property and to accept the property of the other party.
CONTRACTS 831
85. Description. — The description should be written
with the same care as in a contract of sale and the limita-
tions on ownership with regard to each parcel as care-
fully set out.
86. Financial statement, — In place of the absolute
price the properties are said to be at a "valuation for
the purpose of this contract." These valuations need
not be actual: they may be nominal. Each property
may be put in at one dollar, or any reference to the
valuation may be struck out, but it is usual to fix arbi-
trary values. Sometimes they are inflated, and if both
sides of the contract are inflated equally, this is legiti-
mate. Brokers do not get commission, however, on in-
flated values, but only upon actual values. Those ac-
tual values are the subject of negotiation between the
parties and the broker before the contract is executed,
and necessarily ought to be agreed to so as to avoid
confusion or dispute afterwards.
The contract then provides that the premises shall
be conveyed subject to stated encumbrances. Appro-
priately the next step is to balance the figures — the dif-
ference between the values of the respective properties
over and above encumbrances — and the next clause
states that this difference "shall be deemed to be."
. . . The entire contract is subjective. The valua-
tions are fixed arbitrarily, and the difference is fixed
as something that is "deemed." The contract provides
as to the manner in which the difference between the
values shall be paid.
The remaining steps of the contract are practically
the same as in a contract of sale, but it is bilateral, not
unilateral. Each of the parties obligates himself to do
the same things with respect to the property which he
is selling or buying, as these things may be appropriate.
,332 REAL ESTATE
Rents and interest are to be apportioned, water meters
read on both properties. The personal property ap-
purtenant to the premises is included in the sale. No-
tices of violations are to be taken care of by the seller
in each instance. Each party agrees to convey his
property free from encumbrance except as specified,
and the stipulation binds both parties.
Remedies for failure to perform the contract in ex-
changes are similar to the remedies for failure to per-
form a contract of sale. They may be by action for
damage, specific performance or forfeiture of the earn-
est money, if the party paying the difference has put
up part of it as earnest money. The property which
is to be exchanged stands pledged for the performance
of the contract. If one party sues the other for breach
of contract, each may have incurred brokerage. The
person who is trying to enforce the contract may have
incurred and paid brokerage, but it is not a part of the
damage which can be claimed from the defaulter.
Brokerage is not an element of damage for breach of
contract, but payment for bringing about a contract.
CHAPTER VI
AUCTION SALES
87. Necessity for auction sales, — Another method of
bringing about a sale of real property is that of selling
it at auction. It may not always be possible to find a
purchaser at private sale for property at the time it is
desirable or necessary that it be sold, and it may then
be offered at public sale.
In most cities there are auctioneers' associations which
maintain public sales rooms at which property is offered
for sale at public auction. Public sales may be held not
only in public auction rooms, but in any place of public
resort. In the country they are very often held at the
railway station, the village hotel, or on the property.
Auction sales are of two classes, involuntary and volun-
tary.
88. The involuntary auction sale, — The involuntary
sale is not the free act of the o^ner of the property.
It may be the consequence of a voluntary act — and
usually is — or the consequence of the voluntary act of
the owner or a predecessor in the title; but the auction
of the property is not by the direct desire of the person
whose interest is being sold, but often is caused by a
default in carrying out an obligation or by the direction
of a court having jurisdiction over the property and
power to force it to be sold. If property be pledged for
the loan of money, and the money be not paid when due,
the lender can force the property to be sold at auction.
The act of borrowing the money and giving the mort-
S33
8S4 REAL ESTATE
gage is voluntary on the part of the borrower, but it is
involuntary on his part that the property be sold.
Involuntary auction sales are required to be adver-
tised, the advertisements usually appearing in one or
more newspapers. In the cities these sales are most
frequently conducted in the public sales rooms. In
the country they are often conducted upon the property,
at the door of the courthouse of the county in which
the property is situated, or at some other appropriate
place.
There are usually two persons who conduct an invol-
untary auction sale: First, the person who has control
of the property with power to sell it over the head and
against the will of the owner. He may be a referee,
an assignee, a creditor, receiver in bankruptcy, a sheriff
or other officer. Second, there is usually, though not
necessarily, a professional auctioneer.
89. Terms of sale, — At such a sale terms of sale are
read, on which bids are asked. After the property is
knocked down the purchaser is required to sign a memo-
randum of the sale. The terms of sale given below are
really the contract :
against
Terms of Sale
The premises described in the annexed advertisement of sale will
be sold under the direction of Referee, upon the following terms:
Dated New York, 190
1st. Ten per cent of the purchase money of said premises will be re-
quired to be paid to the said Referee at the time and place of sale,
and for which the Referee's receipt will be given.
2d. The residue of said purchase money will be required to be paid
to the said Referee at his office. No. in the Borough of
City of New York, on the day of 190 at
o'clock M. when and where the said Referee's deeds will be ready
for delivery.
3d. The Referee is not required to send any notice to the purchaser;
and if he neglects to call at the time and place above specified to
receive his deed, he will be charged with interest thereafter on the
whole amount of his purchase, unless the Referee shall deem it
proper to extend the time for the completion of said purchase.
AUCTION SALES 335
4th. AH taxes, assessments and water rates, which, at the time of
sale, are liens or encumbrances upon said premises, will be allowed
by the Referee out of the purchase money, provided the purchaser
shall, previous to the delivery of the deed, produce to the Referee
proofs of such liens, and duplicate receipts for the payment thereof.
5th. The purchaser of said premises, or any portion thereof, will at
the time and place of sale, sign a memorandum of his purchase, and
pay, in addition to the purchase money, the auctioneer's fee of Fifteen
Dollars for each parcel sold, and Two Dollars salesroom fee for each
knock down.
6th. The biddings will be kept open after the property is struck
down ; and in case any purchaser shall fail to comply with any of the
above conditions of sale, the premises so struck down to him will be
again put up for sale under the direction of said Referee under these
same terms of sale, without application to the court, unless the plain-
tiff's attorney shall elect to make such application; and such pur-
chaser will be held liable for any deficiency there may be between the
sum for which said premises shall be struck down upon the sale, and
that for which they may be purchased on the re-sale, and also for
any costs or expenses occurring on such re-sale.
MEMORANDUM OF SALE.
have this day of 190 purchased the
premises described in the annexed printed advertisement of sale, for the
sum of
and hereby promise and agree to comply with the terms and conditions of
the sale of said premises, as above mentioned and set forth.
Dated 190
190 Received from
the sum of being ten per cent of the
amount bid by for property sold to under the order in
this cause.
The first clause provides for the payment of 10 per
cent earnest money. There is seldom an auction sale
at which the deposit is less than 10 per cent, and some-
times it is more.
The fourth clause is different from the usual stipula-
tion in contracts of sale. In an involuntary public sale,
it is usual to stipulate that the referee or officer will
allow only such taxes, assessments and other public
charges as have accrued up to the date of the sale, not up
to the date of the delivery of the deed. The fifth clause
stipulates that the purchaser shall sign a memorandum
of his purchase. The sixth clause provides for a re-
sale, in case the purchaser does not comply with the con-
ditions of the sale ; and obligates him to pay any differ-
336 REAL ESTATE
ence there may be between his bid and the amount real-
ized on re-sale. This obligation to pay money may be
enforceable, whereas the main contract to purchase the
property, made by word of mouth, is not enforceable.
It is necessary that in the advertisement and in the
terms of sale the limitations on ownership be set forth
iwith the same particularity and care as in a contract.
If the purchaser is to take the property subject to mort-
gage, it should be so stated.
90. Protected involuntary sales, — In an involuntary
sale it is understood that persons who have interests in
the property to protect will be present to bid so far as
their ability goes and their interest requires. Such bid-
ding is not fraud nor ground for being relieved of a
purchase. The only thing required as to the character
of the bidding is that it shall be free to everyone who
desires to resort to the place where the sale is held.
There should be no favoritism. Everyone must have
an opportunity to bid as high as he will go, and until the
last bidder who desires to bid has had an opportunity to
do so, there ought not to be a knock-down. The par-
ties who are on the auction stand (the referee and the
auctioneer) are not the owners; except in a partition
suit, they do not even represent the owners. They rep-
resent only a person who has a claim against the prop-
erty. Over and above his claim are the rights of the
unfortunate owner who is being sold out, and he is en-
titled not only that the debt be realized out of his prop-
erty, but that it shall bring as much more as possible.
If a sale be unsuccessful by reason of fraudulent or
circumscribed bidding, it may be set aside by the court.
If, however, a bidder has been successful, no matter
how cheaply he gets the property, if he be guilty of no
fraudulent act and comply with the conditions of the
AUCTION SALES S37
sale, he is entitled to performance. The memorandum
of sale at the bottom of the form is to be signed by
the purchaser, and he receives a counterpart signed
by the referee or assignee or seller, who is the agent of
the parties interested. This memorandum of sale is
the contract, and both parties may be charged with its
performance in the same manner as if it were a con-
tract of sale.
01. Voluntary auction sale, — The voluntary auction
sale is a sale by a person who for his own purposes and
by reason of his own desire voluntarily puts his prop-
erty up at auction. It partakes more of the elements
of private contract than does the involuntary sale. A
voluntary sale may be by a seller acting in his own in-
terest and offering his property apparently unrestricted
and unprotected ; or it may be by a fiduciary acting vol-
untarily within the terms of his discretion, but still by
some compulsion of the power under which he is acting.
92. Protected voluntary sales, — An executor may
have a direction in the will under which he is acting to
sell the property of the decedent at public or private
sale, and may choose the medium of a public sale. He
may be under compulsion to raise money either to pay
the debts of the decedent or to make a division of the
funds. In cases of that sort, while the method, the
time and manner of sale are in the discretion of the per-
son offering the property, still there are interests under-
lying those which he represents which in the nature of
things have a right to protect themselves, and which de-
prive the sale of the character of a free and unprotected
auction sale. In a sale of that sort it is understood and
known that the persons whose interests are represented
— creditors, heirs whose property is being sold, devisees
who are to get the division of the fund — will be present
XI— 22
338 REAL ESTATE
to bid, either directly or through persons representing
them, in order to protect their interests. Such pro-
tected sales are not fraudulent, and cannot, because
thus protected, be set aside.
But if the sale be a purely voluntary sale by a person
acting under no compulsion, representing no other in-
terests than his own and taking all the increase which
comes by reason of raising the bids, then, unless it be
expressly advertised and understood that the sale be
protected, a protected sale of that sort is not a fair, un-
restricted sale at public auction. If a purchaser finds
that he has been led to raise his bid by reason of a seller
protecting the sale up to the point at which he was will-
ing to let the property go, he will be relieved from his
contract. Unfortunately, there seems to be a habit of
protecting sales which ought to be unrestricted. The
owner who puts his property on the block ought to have
sufficient confidence in it to let it go for what it will
bring, or withdraw it, if he finds the bids are not coming
up to the amount for which he is willing to sell the
property. By-bidders, "boosters" — whatever they may
be called — are frauds, and ought not to be permitted
to bid. It is not always the auctioneer's fault if there
be by-bidding, as he may not know of it, but when it
can be controlled, auctioneers who are careful of their
reputation do not permit it.
93. Secret of successful sale, — The principal thing
in a voluntary auction sale is to attract bidders. At an
involuntary sale there is often no desire to get the gen-
eral public to bid. The persons interested protect up
to the amount of their interests, and the rights in the
property are cleared under the sale. While the form
is that of a public sale, as a matter of fact the public has
not been attracted and has not bid. But a voluntary
AUCTION SALES 339
sale is an offer to the public to bid, and the public is
induced to buy by advertising. The secret of success
in auction sales is advertising, and the most successful
auctioneers of the present time are the most persistent
advertisers.
The booklets gotten up to advertise auction sales are
sometimes very elaborate, showing reproductions from
actual surveys, detailed description of the character of
the building and rentals, pictures of the property — ev-
erything necessary for a buyer to know, so that a man
who has one of these booklets knows as much with re-
gard to the property as if he had been going to a broker
for six months.
Having the crowd before him, the auctioneer must
draw the bids from them. This is a secret of person-
ality. The successful auctioneer can di^aw'a crowd up
and let it down again, until he has gotten the very last
bid there is in it ; then he will knock down the property.
94. Terms of sale, — The principal difference between
the terms of sale in a voluntary and an involuntary
sale is that in the referee's sale the 10 per cent is paid
to the official making the sale: at an involuntary sale
the money is paid to the auctioneer, who holds it for
the interest of the parties interested. He ought not to
part with it until the title has been closed. The practice
is that a receipt for this 10 per cent shall be surrendered
by the purchaser to the seller when the deed passes ; and
that receipt given to the auctioneer when he passes the
10 per cent on to the seller. The auctioneer protects
himself by providing that he shall not be responsible for
any interest on that money.
Another difference between the terms of sale of an
involuntary and a voluntary sale is that in the latter
there is an express arrangement that rents, premiums
340 REAL ESTATE
on insurance policies and interest on mortgages will be
apportioned. In an involuntary sale these matters are
allowed to take their due course, as the law requires.
In a sheriff's sale bids are asked only for the right,
title and interest of the party being sold out, but in any
sale where the entire title is purported to be sold, all
taxes, assessments and other liens are allowed out of the
total purchase price, unless bids are expressly taken for
the equity over and above stated encumbrances.
The terms of sale are usually signed by the seller, his
attorney or by the auctioneer. If signed by the auc-
tioneer he is constituted the attorney of the seller, and
that makes the contract enforceable. Offering the
property through a public auctioneer and permitting
him to sign the terms of sale raises the presumption of
due authority to bind the seller. On the other hand the
purchaser signs the terms of sale at the bottom of the
sheet, whereby he certifies that he has purchased the
property, and binds himself to pay the balance of the
consideration, and comply with the conditions of sale.
The terms of sale should be written as carefully and
with as much particularity as in a contract of sale.
CHAPTER VII
LIENS
95. Definition of a lien, — A sale of real property
may be brought about as the consequence of an act
which in its inception was intended rather as assurance
for a debt or security for a claim than an intention to
sell. Such an act is the creation of a lien on real prop-
erty.
A lien is the right of a creditor to have a debt or
charge satisfied out of property belonging to another.
The definition involves the elements of debtor and
creditor: in order that there may be a lien, there must
be a debt to be secured. Liens are of two kinds, gen-
eral and specific.
96. General and specific liens, — A lien is general
when it affects all property of the debtor or all prop-
erty of a class. A lien is special when it affects only
specific property. If a judgment were recovered
against a person, that judgment is a claim against all
the property he owns, or acquires, and is a general lien.
If A employ B to build a house for him and does not
pay for it, B has a claim on the house he has built, not
on all A's property; and his claim is a specific lien.
In order that there may be a lien, the debt must be
one which is enforceable at law against the will of the
debtor. If A make B a voluntary promise that some
time in the future he will give him $10,000, and to the
fulfillment of that promise pledge a house or all of his
341
342 REAL ESTATE
property, there can be no lien upon that voluntary, un-
enforceable promise.
Some of the liens which will be considered are: judg-
ments, mechanics' liens, conditional bills of sale, the lien
of decedent's debts, transfer tax, taxes and assessments
and — most important — mortgages. There may be liens
upon personal property as well as upon real property,
but this consideration of liens is concerned only with
relations to real property.
97. Lien of judgment. — A judgment is the determi-
nation of the rights of parties by action at law. All
judgments are not liens upon real property. In order
to be a lien upon real property a judgment must de-
termine the rights of a creditor to receive payment of
a debt. For example, a judgment which enjoins a
person from constructing a tenement house upon prop-
erty which has been restricted against the erection of
tenements is not a lien. There is no direction that any-
thing shall be sold in order to raise money. That judg-
ment may award a sum of money for damage and
another sum of money for costs, and direct that prop-
erty shall be sold by execution in order to satisfy those
money demands, which demands may then be a lien. A
lien of judgment involves necessarily the relation of
debtor and creditor for money only.
98. How enforced, and property affected. — A judg-
ment which finally determines that the creditor shall re-
ceive a sum of money from the debtor is enforceable by
sale of the property by the sheriff. The sheriff is an
executive officer whose duty it is, among other things,
to perform the mandates of the courts.
In order that there may be public notice of the fact
that a judgment has been awarded for a specific sum of
money it is required that a note of the judgment be
LIENS 343
made upon a book of public record kept according to
alphabetical index (indexed against the name of the
debtor) , which is known as a "Judgment Docket." The
judgment becomes a lien from the time of docket. It
is enforced by a writ of execution, under which the
sheriff sells the right, title and interest of the debtor in
any property which the sheriff can find belonging to
the debtor at the time of docketing, or which comes
into the ownership of the debtor at any time thereafter,
before the date of sale.
The lien of judgment continues to bind all property
of a debtor and all property which comes into his pos-
session for a definite time governed by statute, from
the time of recovery of the judgment. So long as a
judgment has validity and remains a lien it continues
to attach to the property even though that property
pass out of the possession or ownership of the debtor.
If this were not so, liens would be of little value. A
judgment -may be enforced by execution as often as
the creditor thinks there is property in the hands of the
debtor.
Selling the right, title and interest of a debtor means
that the sale does not purport to be a sale of the entire
property, but only of such interest in it as may have been
in the hands of the debtor while the lien continues.
The fact that the lien attaches only to such interest as
a debtor may have, causes the result that unless it be
provided otherwise by statute, if the debtor have parted
with the property before a lien attached, even though
no instrument be of record, the lien is cut out, i. e., a
lien is not a good lien as against a delivered but unre-
corded deed, or a delivered but unrecorded mortgage.
It may be a question of fact when the instrument was
delivered which is said to cut out the lien, but if a deed
344 REAL ESTATE
has been delivered in good faith before a judgment is
recorded against a debtor and title has passed out of
the hands of a debtor and there be no statute to the con-
trary, the lien does not attach. In making searches
for judgment liens, the search is made against the name
of the debtor or the person through whom the property-
has come, and not specifically for liens against the
property.
99. How lien of judgment may he discharged, — If
the person against whom a judgment is recovered feels
aggrieved by the decision and intends to appeal, it is
competent instead of paying the judgment and looking
for restitution, to give a bond by which the debt is suf-
ficiently secured. The lien of judgment will then be
discharged under proper supervision of the court in
which the judgment was recovered: the judgment lien
will be lifted from the property to which it applied,
and the judgment will be, "Suspended on appeal."
For every lien there is an appropriate instrument of
discharge or satisfaction. When a judgment is paid a
Satisfaction of Judgment is filed with the clerk where
the judgment was filed.
100. Mechanics' lien. — A mechanics' lien is a lien
upon real property given by statute to mechanics and
material men for the price or value of the labor or
material furnished in the improvement of real property.
A mechanics' lien must be founded upon a contract re-
lation. That contract relation may be directly with
the owner or may be with a person with whom the
owner has contracted to improve property. The lien is
in favor of all persons who contributed to the improve-
ment of the property either directly contracting with
the owner, or by contracting to furnish material or
LIENS 345
labor to others who are in direct contractual relation
with the owner.
101. How asserted, — A mechanics' lien must usually
be asserted by the fihng of a notice in a public office,
claiming the lien. This must be done within a specified
time fixed by statute after the material is supplied or
the work done for which the claim is made. The notice
must set forth with particularity the property against
which the claim is made, the ground of complaint and
it must be sworn to. The right of a mechanics' lien
usually attaches to property as against all unrecorded
instruments. In that respect it differs from a lien of
judgment.
102. Enforcement of mechanics' liens, — Having filed
his claim the lienor must begin an action to foreclose,
and in that suit he must prove his claim. All other
lienors who are brought in have the same rights, and all
rights are adjusted. If the lienors succeed in estab-
lishing their claims and there is a balance due from the
owner, he must pay that balance. It is then divided
under the direction of the court, or if payment be not
made, the property is sold in order to raise the fund.
The sale is by an officer of the court.
The lien lasts only a specified time fixed by statute
in each state. It must be asserted by suit, or renewed
before the expiration of that time. If the lien is paid
the owner is entitled to a discharge of record.
As matter of commercial practice, installments on
construction contracts are paid at certain times in the
construction, and a fund of 10 per cent or 15 per cent
held back until the final completion of the building,
^f a contract be entered into to make payments at cer-
tain times, and any sum be paid before it is due, then.
S46 REAL ESTATE
if the general contractor fail to pay his material men
or sub-contractors, they can hold the owner as if he
had not made an anticipated payment.
' 103. How ^property may he discharged from me-
chanics' lien, — The mere fact that a man claims he has
furnished work, labor or material for a building, does
not necessarily preclude the owner from contesting that
claim in a court of law. If, while such litigation was
pending, it were necessary that the property lie under
notice that a lien was claimed against it, this would
affect the owner's ability to sell his property, or use it
as security for a loan, so it is possible in cases of this
sort to lift the lien from the property without actually
paying the debt.
The owner may deposit in the office of the clerk with
whom the notice of lien is filed a sufficient sum of money
to answer to the amount claimed. If such a deposit be
paid, the lien will be lifted from the property and
marked, "Discharged by deposit," and any further liti-
gation with regard to that claim will proceed against
the fund which has been brought into court. Or the
owner may file a bond, under the direction of the court,
by which it is agreed that if the claim should succeed,
the amount claimed, and all costs and expenses will be
paid — not out of the property — but by the sureties wlio
gave the collateral security. The lien will then be
marked, "Discharged by bond," and any litigation that
may go on with regard to that mechanics' lien will pro-
ceed with respect to the security on the bond and the re-
covery be only against the sureties. With regard to the
money which is deposited or the bond which is given, if
at the end of the time when the lien would expire the
claimant has not begun action to foreclose, the lien is
LIENS HI
canceled, and any security given or deposit made with
respect to that hen will be released.
When the debt for which a lien stands as security is
paid in every case the person thus paying his debt is
entitled not only to have his property discharged, but to
have an instrument upon the same public record which
showed the lien showing a discharge of that record.
104. Conditional bill of sale, — The conditional bill of
sale is not strictly a lien upon real property, but upon
personal property which may be in or be used in con-
nection with real property. Appurtenances may have
been purchased upon condition that title should not pass
until they were paid for. In many states it is required
that such conditions be expressed in a written instru-
ment, which instrument is valid between the buyer and
seller of the property; and if it be filed in the proper
office of public record its conditions are enforceable not
only against the parties directly concerned, but against
any other person thereafter coming into possession of
the property.
If a builder buys an elevator for an apartment house
upon condition that title to the elevator shall not pass
to him until it is paid for, and a conditional bill of
sale be properly filed in the office of public record, then,
if a purchaser buy that house subject to that claim, and
the elevator be not paid for, the holder of the condi-
tional bill of sale may take it out. All things which
may be taken from the property without destroying the
structure may become the subject of conditional bills
of sale, w^hich, if properly filed, may be valid as against
subsequent purchasers of the real property.
One of the difficulties of dealing with conditional bills
of sale lies in searching for them. If the person who
has sold to the builder has bouo^ht the property from
348 REAL ESTATE
some one else, and the middleman has bought from some
one prior to that, upon a conditional bill of sale, it is
practically impossible to know when, where or how to
make search. Sometimes in important transactions an
inspection will be made of the important articles which
might be the subject of conditional bills of sale, their
makers or manufacturers ascertained and numbers
taken, and the title of the property traced back abso-
lutely to the manufacturer by direct inquiry of each
person through whose hands each specific piece of prop-
erty has passed. Fortunately, a conditional bill of sale
must be filed and renewed within a fixed time in many
states. It follows that if the property has been attached
to or in the building for more than the stated period
the owner is probably safe against the possibility of
having it taken from him under a conditional bill of
sale; but with new buildings it is very uncertain, es-
pecially if they have come through a foreclosure against
a builder who has failed in business.
105. Lien of decedent's debts. — When the owner of
property dies, from the moment of death the creditors
have a claim upon his property, both real and personal :
it must be administered by his representatives so that
before his heirs or next-of-kin receive anything justice
shall be done and his debts shall be paid.
The ordinary procedure is that personal property
which has not been specifically bequeathed shall be ap-
plied first to the payment of debts. If that property
be insufficient, the personal property which has been
specifically bequeathed shall then be applied to the pay-
ment of debts. If all the personal property be insuf-
ficient, the creditors have a right to resort to the real
property of the decedent for the payment of debts.
During a specified statutory period from the time let-
LIENS S49
ters of administration or letters testamentary are is-
sued, or, if no letters are issued, during another period
from the death of the decedent, a general lien applies
to all property which has come from the decedent to any
person claiming through or under him upon all property
of the class thus designated. A creditor may at any
time within the statutory period require that the ex-
ecutors or the administrators shall sell the property, or
sufficient of it to pay all debts of the decedent. The
proceeding is regulated by law, and the property sold
under the supervision of the surrogate's court.
106. Transfer tax. — Another lien which arises by
reason of death is the state's lien for a special transfer
tax. The State of New York and a very large number
of other states in the Union, tax the act of transferring
property from a decedent to those who claim to suc-
ceed. The tax is really not upon the property but upon
the privilege of succeeding to the property: to that ex-
tent it is more in the nature of an excise than a tax. In
its effect, however, it is a true tax, because it is taken
out of the thing as it is transferred, and before it reaches
the recipient.
The state can require that all property of the de-
cedent, or sufficient to pay the tax, shall be sold. The
property, no matter in whose hands it may be, is af-
fected by the general lien of the tax. It is a general
lien because it may affect any piece of property for the
whole amount of the tax.
The rate of taxation differs in various states. Usually
property going to descendants, husband, wife, father,
mother, brothers and sisters is wholly or partly exempt,
or taxable at a lower rate than property going to re-
moter collaterals or to strangers.
CHAPTER VIII
TAXES AND ASSESSMENTS
107. Definition of taxes, — Taxes are an enforced and
regular proportional contribution to the support of gov-
ernment. The first characteristic of this lien is that it
is an enforced lien. It does not depend upon the will
of the owner of the property affected by it, but is en-
forced against him by public authority.
One of the incidents of the ownership of all property
is that it or its owner must contribute to the expenses
of conducting civilized government, and in all civilized
governments the money to meet these expenses is col-
lected by tax upon property, in one form or another.
The head tax is not a civilized method of collecting
money.
The tax on real property differs from an assessment
in that it is a regular contribution. It comes at fixed
times, whenever the treasury of the government requires
replenishing for the purpose of carrying on the continu-
ous function of government.
108. Taxes a general lien, — The lien of taxes is a
general lien. It is a contribution to the support of gov-
ernment for no special purpose, but, while it may be
levied to meet a budget which may contain many items,
it is for the general budget. Persons are not taxed so
much for a city's paving and so much for salaries, but,
after the budget has been ascertained, the tax is spread
out over and apportioned in accordance with the value
of the property upon which it is laid, the proportion
350
TAXES AND ASSESSMENTS 351
being according to the needs of the government in gen-
eral.
Taxes are laid both upon real and personal property
The taxation upon real property is direct taxation be-
cause it is laid not upon transactions nor upon transfers,
nor upon acts of persons, but it is excised directly out
of and taken from the subject of taxation. Taxes may
be of various sorts while still remaining regular con-
tributions to the support of government.
109. Various state and county levies, — Taxation may
consist of a single annual levy for all purposes, such as
the levy in New York City, which covers the budget
for all governmental purposes of the state and city.
Or taxation may be such as it is known in the districts
which are outside of incorporated cities where there
may be levies in the order of their importance :
(a) State tax. This is a contribution for the sup-
port of the state government and is apportioned among
the counties each year.
(b) County tax. In addition to the state tax, the
counties raise a sum which is necessary for the conduct
of those functions which are committed to counties, i. e.,
the maintenance of roads, the support of the poor, the
repair of bridges, the keeping of hospitals and local cor-
rective institutions and all functions of local govern-
ment. This is known as the county tax.
(c) Town and county tax. The subdivisions of
counties have smaller functions given to them under the
direction of the county supervisor, for which taxes are
levied.
(d) School tax. In localities outside of incorpo-
rated cities a separate annual tax may be voted each year
by the voters of the school district for the support of
common schools. This tax is known as the school tax,
352 REAL ESTATE
and is voted by the tax-paying residents of the school
district, often without regard to sex. Women fre-
quently attend the school meetings and participate in the
deliberations.
(e) Highway tax. A tax is laid by the local high-
way commissioner, known as the highway tax, specific-
ally for the general support of the highways — not for
their improvement, but for their up-keep and repair.
(f ) City or village tax. This is another recurrent
tax. In some localities there may be a city or village
within a county and then there will be an annual city
or village tax for the conduct of the functions of gov-
ernment which are committed to the city or village
government.
There may be all of the above subdivisions of gen-
eral taxation, or, the tax for all or some of these objects
may be put together in one levy ; but in either case they
will be found to be regularly enforced, and recurrent
at specific periods, usually the same time of each year.
110. Budget, — The budget is the general way to
group the objects for which taxation is laid; it is ascer-
tained either by appropriations and estimates which are
made in advance of the time when the money is to be
spent, and cover the total amount of the allowance for
expenses for the following year, or the amount to be
raised may be ascertained after it has been incurred,
and the tax levy be made to cover specific obligations.
It is almost the invariable rule in American cities,
especially with respect to local taxation, that although
the money is appropriated in advance, the locality lives
upon credit for the greater part of a year and then,
having spent the money, raises it by taxation, thus waste-
fully paying interest which should be saved to the tax-
payers.
TAXES AND ASSESSMENTS 353
111. Assessed value, — Having ascertained the object
of taxation, the next procedure is assessment and ap-
portionment. The process of assessment consists in
ascertaining the taxable value of the property within
the jurisdiction subject to taxation. The value fixed
as the basis of assessment is not the actual market value
of the property, but is supposed to be the value which
it will bring at a forced sale. The market value of
property is the price it will bring upon a free negotia-
tion between two persons who are willing to do busi-
ness, but neither of whom is compelled by necessity to
buy or sell. The price at forced sale is necessarily
less than that because it is the price which property will
bring when the owner must sell.
The fact that property is supposed to be assessed
at the price which it will bring at forced sale has resulted
in an entirely false standard of assessment in most lo-
calities, and the property is not assessed even fairly at
that price, but at what is known as its "taxable value,"
an arbitrary portion of its market price. As the tax
is to be apportioned equally in accordance with assess-
ment, it does not make a very great difference, if the
proportion between the assessed value and the actual
value be maintained equally and honestly throughout
the tax district; but the evil which has crept into our
tax system by reason of the false assessed valuation is
that it gives room for favoritism between the assessed
value and the actual value, or value at forced sale.
People are coming round to the belief now that it
is futile to establish any false basis of assessment, and
the most conservative American cities are trying to get
the assessed values upon the basis of actual values.
112. Determining' of taoc rate, — The books of the
assessors are open for inspection for a stated period,
XI— 23
354 REAL ESTATE
and if there be objections to the amount of assessment,
notice of such objections must be filed before the books
close. When the books close the tax commissioners
consider such objections as may have been made, and
finally determine the assessed value of all property sub-
ject to taxation. Having ascertained this value, and
deducted from the budget the income of the locality
from sources other than taxation, the tax rate is obtained
by dividing the amount of money to be raised by the
total assessed value of the property to be taxed.
The levying of a tax is a legislative act. It is not
done arbitrarily by executive officers, but is ascertained
under the supervision of the legislative elective officers
of the locality and levied by and with their authority,
except in the case of the school tax, which is levied by
direct vote of the tax payers of the locality.
113. Reduction of assessment on land, — If the owner
of property considers that it has been over-assessed, he
should analyze the assessment and determine whether
the land or the building value is too high.
If the land value be too high, he must then consider
if there has been an error in assigning to that particular
spot too large an assessment; the unit may be a fair
unit, but a mistake may have been made. In that case
the owner can fairly ask to have the assessment reduced.
But generally he will have to face the proposition that
in his judgment, the unit adopted for the whole street
is too high, and must be changed. In order to support
a contention of that sort, the owner must have sales of
land, mortgages, rentals and other evidences of value to
support his contention. Commissioners will not often
change an assessment in the middle of a block without
changing the entire street unit.
114. Reduction of assessment on buildings. — If the
TAXES AND ASSESSMENTS 355
owner of property claim that the assessment on the
building is too high, he has a much better chance of get-
ting a reduction than if he claim the land assessment
is too high, because, the deputies must take the unit for
the entire block and stand by that unit in assessing land ;
but reducing the assessment on a building does not af -^
feet the assessed value of all the other property in the
block.
If an owner can give illustrations of buildings of the
same general style as his own and make companions
with other buildings, proving that his assessment is
higher than others, he may win his case.
If the result of an application for reductioik of assess-
ment is not satisfactory certiorari proceedings may be
commenced, but this must be done before a stated time.
115. Certiorari, — A certiorari proceeding is merely
a proceeding hj which a public official can be called
upon by a court to certify to it the record upon which
he has proceeded in doing an administrative act, so
that the court may determine whether the official pro-
ceeded in accordance with the principles of law by which
he is bound. The court has no right in a certiorari pro-
ceeding to arrogate to itself the discretion of an ad-
ministrative official. It can ci'iticise and give directions
that the thing be done in accordance with law, but the
court cannot do more than that. Every person under
a free government has a right to have an inquiry made,
if he feels aggrieved by the doings of any administra-
tive official, to ascertain whether that official has pro-
ceeded in accordance with the formalities and princi-
ples which have been adopted as safeguards and guides
to govern his acts.
116. When tawes hecome a lien. — The general rule
of law is that as between buyer and seller, the tax is a
356 REAL ESTATE
charge and must be borne by the seller as soon as it is
definitely fixed, even if it be not collectible until a future
time. By special law in the City of New York, taxes
are a lien and charge from the time when they become
collectible, and not previously.
117. Payment of taxes, — In order to induce prompt
payment of taxes, it is usual to allow a discount off the
face of the tax, and to charge interest or penalties for
failure to pay promptly. The method of enforcing
the payment of taxes finally is by selling the property
upon which the tax is laid, or an interest therein. The
procedure is regulated by statute. If it be followed,
the purchaser gets the right of possession. Generally
the sale is not of the entire fee, but of a leasehold inter-
est. Announcement is made of the amount which is
necessary to be paid in order to raise the tax, with all
penalties and expenses of advertising, and bidders are
asked the least number of years for which they will
take the property in consideration of advancing the
amount required. The bidder who offers the least
number of years is the successful one, and to him the
property is knocked down.
The term is supposed to begin on the day of sale, but
the bidder does not get immediate possession. Having
advanced the amount of the tax with penalties and ex-
penses, he receives not a tax lease, but a certificate which
states that if the property be not redeemed within the
time prescribed by law, that then he will be entitled to a
tax lease.
Having received that certificate, it is the duty of the
bidder to give notice to the occupants of the property
and to the true owner (ascertaining that owner at his
peril) of the fact that the property has been sold at
auction, that he is the successful bidder, and that it must
TAXES AND ASSESSMENTS 357
be redeemed within a time fixed by law. At the end of
that time, if there has been no redemption — and redemp-
tion must be by paying the amount advanced together
with an exorbitant rate of interest — then, if all the
proceedings have been regular, the purchaser will be-
come entitled to possession of the property for the bal-
ance of the term which he has bid.
All procedure from the first step toward assessment
up to and including the giving of notice of redemption
must be carefully followed before a tax sale can be
held valid. There are very few tax sales which will
stand critical examination.
118. Interests affected hy tax lien. — The tax lien
when laid upon property affects the interest of every-
body. If a tax be levied upon property, it affects every
interest which there may be in the property. The tax
lien is a lien against the thing — against the interest of
the entire world in that thing. In some states where
tax sales are not highly technical, they are a favorite
method of clearing titles.
119. Definition of assessments, — Assessments are
special taxes levied upon specific property benefited by
local improvement for the purpose of paying or con-
tributing to the expense of such improvement. They
are levied by public authority, and are laid in propor-
tion to the assessed value of the property. The as-
sessed value is fixed upon the same principles as the
assessed value for general taxation, but the apportion-
ment is different. The apportionment of assessment
is not equal over the entire area of assessment, but is
in proportion to the benefit to be derived from the im-
provement. If there were a local assessment for open-
ing a street, the lots immediately fronting on the street
would be assessed at a higher rate than those further
358 REAL ESTATE
away. The rate dwindles as the distance of the prop-
erty from the benefit of improvement increases. The
area of assessment is arbitrarily fixed by public author-
ity, and very often it is hard to see wherein the benefit
to remote parcels consists.
120. Assessment laid by authority of courts, — As-
sessments are laid either in a proceeding in court or by
a board of assessors. Assessments are laid by courts
in proceedings in which property is being acquired for
public purposes by condemnation. The money to be
raised for the improvement is raised by an assessment
which is laid by the commissioners in the condemnation
proceedings, who are for that purpose not only com-
m vsioners of estimate to fix the cost of the property to
be taken, but also commissioners of apportionment.
They have to determine the area upon which their as-
sessment will be laid, fix according to just principles
the cost of the improvement upon the assessed area,
and then give notice of the fact that their report is
ready to be filed, and may be examined.
The principle of notice must attach to all special
assessments. Taxation is periodical. It is an obliga-
tion that always attaches and is to be expected at recur-
rent periods. The laying of a special assessment is un-
expected unless notice is given. It amounts to the tak-
ing of private property, and private property cannot
be taken except by due process of law, which means
efficient notice and regular and orderly procedure after
notice. One test of the validity of every assessment
where laid by a court or by an administrative act must
always be, "Was there efficient notice of the intention
to lay the assessment?"
121. Assessments levied hy board of assessors. — The
principles applicable to assessments levied by authority
TAXES AND ASSESSMENTS 359
of a board of assessors are similar to those applicable to
assessments levied by authority of a court. The board
of assessors is often limited by a mechanical rule, how-
ever, that it cannot lay an assessment upon any specific
piece of property for more than a definite proportion
of its assessed value. While in one respect that is a
protection to the taxpayer, in another respect it op-
erates to retard needed public improvements, especially
in suburban districts where land values are low, and in
districts not fully developed. In such cases public
authorities will often refuse to put through improve-
ments which really add to the land value ; and will wait
until the assessed value rises by reason of other improve-
ments and settlement in the neighborhood before they
will do the work which is necessary to develop such lots.
Within the limit allowed them, the assessors are sup-
posed to proceed according to sound economic principles
in laying assessments for public improvements. The
assessments which they most frequently lay are for
sewering, regulating and grading, paving and laying
of cross walks. The making of physical improvements
to complete a street are the first thing for which assess-
ments are laid. After an assessment is made, it adds
to the land value: the assessed value for taxation the
following year should rise not only by the amount of
the assessment, but by so much as the usefulness of the
lot has been increased, which is very often more than
the amount paid for the mere physical work.
Notice of assessment by a board of assessors is given
in the same manner as with respect to other assessments.
If their decision is unsatisfactory, after a hearing, there
may be an appeal. After they have decided there is
no way to appeal except by a separate judicial pro-
ceeding.
360 REAL ESTATE
122. When assessments become a lien, — Usually, ex-
cept in the city of New York, assessments are a fixed
lien and chargeable between buyer and seller as soon
as the assessment is definitely determined ; but in the city
of New York an assessment is not a lien or chargeable
between buyer and seller or deemed to be fully con-
firmed until it is entered and ten days thereafter have
passed.
If assessments be not paid the payment is enforced
by assessment sale, which is regulated in exactly the same
manner as the tax sale, and the consequences of which
are exactly the same as the consequences of a tax sale.
123. Water rates, — Water rates are not a tax at all
in their proper analysis. Where water is furnished by
a municipality, the rates are enforced like taxes, but they
are payment for a commodity. In most large cities
there is municipal ownership of water, and monopoly
of its service, and this is necessary as a health measure.
The city charges for the water in accordance with its
consumption. It lays the charge in one of two meth-
ods, either by fixing an annual charge for each tap
which uses water, or by measuring the consumption
through a meter. A city has a right to fix the charge
by municipal ordinance, but it is not a tax measure.
The owner of property does not have to use the water
in his building if he does not want to. If he does have
a water main enter his building, he must pay a certain
fixed frontage charge, whether he consume the water
or not, because water may be used for his fire protection.
Taxes, assessments, water rates and charges for in-
stalling water meters are all liens, and, if not paid, the
lien may be enforced by a sale of the property, which
is the final step in the collection of all items of taxation.
CHAPTER IX
THE TRANSFER OF TITLE AND TITLE INSURANCE
124. Two ways of transferring title. — Title to land
may be transferred in one of two ways, either by con-
veyance, voluntary or involuntary, or by operation of
law. The strictly legal classification is that land is
transferred by operation of law only in case of descent
without a will, and every other transfer of title is con-
sidered a transfer by purchase ; but from the commercial
side, all transfers by death, including those by descent
and those by devise under a will, will be considered to
be transfers by operation of law, and all other transfers
of title to be transfers by conveyance.
125. Growth of modern right of transferring title. —
Probably the natural genesis of the transfer of title
between living persons was merely the taking of pos-
session from the weaker by the stronger. As society
developed and finally crystallized into the feudal system
of the Middle Ages, land was held mainly by tenure,
a personal relation between the subject and his over-lord,
founded upon the necessity for mutual defense, and
carrying with it the obligation on the part of the lord
to his tenant of protection, and on the part of the
tenant to his lord of fealty and aid. The relation being
thus personal, it was inappropriate that the tenant should
be enabled to sever it and put in his place a person other
than one selected by and acceptable to his over-lord, so
the holder of land had no say when he relinquished his
holding as to who should be put in his place, and there-
361
REAL ESTATE
fore no commercial transaction was possible with respect
to his quitting his holding and giving it to another.
This method of land tenure finally led to a system
of sub-infeudation, i. e., the tenant who desired to part
with his holding or some of it, unable to sever his own
relation to his lord, would put another as tenant under
him, and thus there would be a double relation, which
might be sub-infeudated indefinitely. The king, as
over-lord of all, who was the original proprietor, had
below him his tenants-in-chief, who, in their turn, had
below them other tenants, and those tenants had tenants
under them; and theoretically a system of sub-infeuda-
tion might be continued indefinitely. The evils of the
system and the necessity for free land finally resulted
in a statutory provision by which it was possible for a
tenant to sell a holding and substitute another as tenant
in his place. Upon this is founded the modern business
of dealing in real estate.
126. Transfer by delivery of possession. — The first
method of transferring land under the EngHsh system
to which we must resort to imderstand our methods of
transfer, was by the delivery of possession, the doing
of some symbolic act and words of delivery such as, *T
put you in possession of this land." This was a crude
method of transferring title, and one, the evidences
of which could very easily be lost and pass out of mem-
ory. If a man was in possession of property, and there
was no one who remembered that he or his ancestors had
not always been in possession, it became necessary to be-
lieve that he was rightfully in possession, and no one
could contradict his title. This is the foundation of our
present title by limitation or adverse possession.
127. Genesis of transfer by deed, — Disputes neces-
sarily arose in a sj^stem founded on delivery by posses-
TITLE AND TITLE INSURANCE
sion; frauds were perpetrated; men got into possession
wrongfully, and held possession forcibly ; the courts and
over-lords were continually settling disputes upon ques-
tions of fact. Finally an expedient was resorted to,
as conveyances became more frequent and more impor-
tant, of making a written record of the fact of transfer ;
and a statute was enacted requiring that there should
be such a record. This was known as the Statute of
Frauds, which is intended to guard against the frauds
and uncertainties incident to the former method of trans-
fer, and is the genesis of the modern instrument of con-
veyance, known as a deed.
128. Definition of a deed, — In law every formal
instrument under seal is a deed, whether it be a convey-
ance of land or a conveyance of personalty or an instru-
ment declaring trusts, therefore the use in the real estate
business of the word "deed" as meaning the instrument
of conveyance of land is too inclusive. On the other
hand, in New York State and many other states in the
Union, a conveyance of land need not be under seal,
so the word "conveyance" is exactly inclusive of a con-
veyance of land, because the conveyance may be under
seal, in which case it is a deed; or it may not be under
seal, and still be effectual. However, in this discussion
of the subject the word "deed" will be used, as in com-
mon parlance, to mean a conveyance of real property
effectual to transfer title, whether that instrument be
under seal or not.
129. Conveyances absolute and upon security, — Con-
veyances are of two kinds, absolute and upon security.
Absolute conveyances are those which by operation of
the instrument immediately transfer the title from the
grantor to the grantee. Conveyances upon security,
known in some states as mortgages and in other states
364 REAL ESTATE
as deeds of trust, are conveyances in form as if the title
were conveyed immediately, but having added to them
the condition that the grantor shall remain in possession
and retain the ownership of property until he default
in payment or performance of the obligation which the
instrument secures; and usually the loss of title is not
immediately upon the default, but must be followed by
procedure at law or sale for the purpose of collecting
the amount of the obligation which the instrument
secures.
130. Necessary elements of a deed. — The statutory
provisions which relate to a conveyance or deed of land
require only that the instrument shall be in writing, and
that it shall be subscribed and in some states, sealed or
witnessed. All the rest with relation to the deed or
conveyance is formality, or adds incidents, but if a deed
be understandable and the subject matter capable of
identification, and it be executed in proper form, it will
transfer title. It need not express consideration, as a
contract must. The necessity that the instrument be
in writing is patent. The rights under a deed are per-
manent; they will last as long as the property which is
transferred remains capable of identification. In this
country titles are now traced through deeds of convey-
ance which have been upon the records 100 and 150
years. In England they take their titles through con-
veyances very much older. The persons concerned in
a conveyance of land are not only the immediate parties,
but all persons who may thereafter be interested in the
land, which is another reason why there should be a
written testimony to the transfer.
The subscription to a deed must contain the same
elements as the subscription to a contract. It is usual,
and where the grantor can write, practically requisite
TITLE AND TITLE INSURANCE 365
that he shall write his name; but if the grantor cannot
write or is physically incapable, he may make any mark
at the end of the instrument which will testify to the
fact that he executed it. The instrument thus sub-
scribed is efficient between the parties, but the law has
thrown around it another safeguard in order that it
shall be efficient as against third persons : the instrument
must be either witnessed and properly acknowledged,
or proved. The witnessing of an instrument is the
writing of the name of a person who was present at the
execution of the instrument opposite or near the signa-
ture of the subscriber. The instrument which bears a
subscription and is attested by a witness is efficient not
only between the parties, but also as against third per-
sons claiming rights in the land affected. If a person
get a deed which is not witnessed or acknowledged, and
go to court and sue for possession, the instrument being
good as between him and the seller, the court will award
him the possession; but he might find difficulty in sus-
taining that instrument against a third person claiming
lien against the property or a subsequent grant from
the seller, without notice.
131. When title passes, — Title passes only by deliv-
ery of the instrument. So long as the instrument has
not been voluntarily surrendered by the transferrer to
the person to whom it is to be transferred, title does
not pass. If the transferee gets into possession of the
deed by any unconscionable means, if he steals it or gets
it by fraud, the transfer may be set aside. From the
instant of delivery of the instrument, there is transfer,
and an end of all rights of the transferrer which the in-
strument is efficient to carry ; and all rights of the trans-
feree which the instrument is efficient to carry, begin.
132. Recording of conveyances. — There is not neces-
REAL ESTATE
sarily from the fact of the passing of the instrument,
any notice to the pubHc of the transfer of title. If
property be improved and occupied, the fact that the
occupant changes may operate, and in law does operate,
to give notice of the fact of transfer, the principle of
law being that all the world is required to take notice
of the rights of the occupant. But where property is
not actually occupied by the owner or where it is vacant,
there is not in the mere delivery between private persons
any element of notice to the world of the fact of trans-
fer, and a seller having delivered a valid deed of con-
veyance to a purchaser, might turn round and take
money from another person, delivering to him another
instrument, and leave the two to fight out their rights.
In order to avoid that possibility there has been devised
the system of public record of conveyance under which
by public authority a safe place is provided where the
testimony of conveyances may be recorded, so that all
persons may resort to the public record to ascertain that
a transfer has taken place. The provisions of law now
result in the presumption that each person dealing with
property has notice, which the law designates as "con-
structive notice," of all matters which are spread upon
the records concerning that property. Constructive
notice is no better than actual notice, but it is an efficient
substitute. If A transfer property to B for a valuable
consideration, B thereupon becomes entitled to the own-
ership of the property. If thereafter A transfer the
same property to C, but C actually knows of the con-
veyance to B, it is manifestly improper that C should
be able to take the property from B. But if B fails
to record his instrument, and C becomes a purchaser for
value of the property, without notice, either actual or
constructive of B's prior purchase, then, if C record his
TITLE AND TITLE INSURANCE 367
instrument before B offers his instrument for record,
C, being an innocent purchaser for value, becomes en-
titled to the property, as against B who has not recorded
his instrument or offered it for record. But if B buys
property and records his instrument, and then C pur-
chase the same property, C is charged with construct-
ively knowing of B's recorded instrument, whether he
actually goes to look at the record or not. That is the
principle which makes the constructive notice of record
effectual.
133. Instruments for record must be acknowledged
or proved. — In order that an instrument may be ac-
cepted for record, it is not only necessary that it shall
be subscribed and witnessed, but that the public official
who spreads it upon the record may know of its authen-
ticity, it must be acknowledged or proved. It is mani-
festly impossible that public officials shall know the
signatures of all grantors, but it is theoretically possible
that they shall be familiar with the handwriting and
authority of a limited number of public officials who are
authorized to testify to the fact that the grantor has
acknowledged that he executed the instrument, or to
whom the instrument has been proved by a subscribing
witness.
The acknowledgment of an instrument is the admis-
sion by the person who executed it to a public official
charged with authority to take such acknowledgments,
that the grantor executed it.
Prefixed to the certificate of acknowledgment for pur-
pose of convenience, not as a necessary element of it,
is usually a statement of the place in which the acknowl-
edgment was made. That is convenient, because the
officers authorized to take acknowledgments are officers
whose juri3diction is limited territorially. With relation
368 REAL ESTATE
to some of these officials, consuls, mayors of cities, com-
missioners of states residing in other states, it is often
necessary by statute that they shall certify that the ac-
knowledgment was taken within the territorial limits
of their jurisdiction. If there be no statutory require-
ment in that regard with respect to the official taking
the acknowledgment, there is no necessity for a state-
ment of the place in which it is taken, although it is
convenient. The presumption of law is that a public
official acts within the limits of his authority, unless it
be shown that he has acted beyond those limits.
Officials who are authorized to take acknowledgments
are: notaries public, commissioners of deeds, justices of
the peace, judges of courts of record, mayors of cities,
ambassadors and ministers residing abroad, consuls,
vice-consuls, consular agents and commissioners of
deeds appointed by the governors of states to take ac-
knowledgments in other states. In order that an in-
strument may be recorded in any state, when it was
acknowledged before an official of another state, it is
usually necessary that there shall be added to the ac-
knowledgment a certificate by the clerk of a court of
the county or city in which the acknowledging officer
resides or acts to the effect that the acknowledging
official is authorized to take acknowledgments of instru*
ments intended to be recorded in the state in which he
resides, and that the certifying officer knows his signa-
ture, and that the signature is genuine.
It may not be convenient or possible for the person
who has subscribed to the instrument to go before an
official authorized to take acknowledgments. If, how-
ever, the subscribing witness go before such an official
and swear that he is acquainted with the grantor and
knows him to be the person described in and who exe-
TITLE AND TITLE INSURANCE 369
cuted the instrument, that he was present and saw him
execute it, and that he thereupon subscribed his name
as subscribing witness, that is proof of a deed or instru-
ment, and is the exact equivalent of a personal acknowl-
edgment by the grantor.
A deed may be acknowledged or proved, and is as
valid in one case as the other, and then may be recorded.
The official who takes a proof must be one who would
be entitled to take an acknowledgment, and his signature
must be authenticated or certified in the same manner
or to the same extent as if it were the signature to a
direct acknowledgment.
It is a penal offense in many states for a notary to
take an acknowledgment unless he knows the person
who appears before him to be the person who is described
in and who executed the instrument. There would be
no safeguard to conveyances, if a man on the street
could walk into an office and say, "I am John Smith.
I acknowledge that I executed this instrument." Many
acknowledgments are taken that way and lead to serious
frauds. If a person be credibly introduced to the no-
tary by some one he knows, and in whom he has con-
fidence, he may certify that he knows the person thus
introduced. It is careless work, but it may excuse the
notary. Careful notaries keep a register showing the
acknowledgments which they take and the persons who
bring in the subscribers ; and there have been litigations
in which these memoranda have proved very useful.
134. Delivery must he by competent person, — ^Deliv-
ery of an instrument must be by a person competent
to make delivery. It is not only necessary that the
grantor shall be competent at the time he signs the
instrument, but it is necessary that he shall remain com-
petent until the instrument is delivered. An incompe-
XI— 24
370 REAL ESTATE
tent person cannot make delivery of a deed. A dead
man cannot deliver a deed. If a man execute an instru-
ment now and retain possession of it and sometime in
the future become a lunatic, and while thus incompetent
make delivery of the instrument, it may be set aside.
If an instrument be found recorded after the death of
the grantor, the question will always be asked and usu-
ally be carefully investigated, whether the instrument
was actually delivered in the lifetime of the grantor.
135. Transfer of property by will, — If it be intended
to make a voluntary transfer by operation of law
in such manner that the owner shall retain all domin-
ion over the property until his death, but that then
it shall pass to persons who are designated, it is com-
petent that it be transferred by will. There is required
not only the voluntary act of the conveyor in the exe-
cution of the will, but also the operation of law upon
it. By reason of the death of the testator the title is
carried forward by a legal operation to the beneficiary
designated in the will. Persons who take under the
operation of wills are designated as "devisees." They
are not, in contemplation of law, purchasers for value
any more than are the heirs of the testator, so that the
rights of an heir or devisee would be barred by a deed
to a purchaser for value which had been made by the
testator or decedent in his lifetime, even though the
instrument were not recorded. The principle of con-
structive notice can be invoked only among purchasers
who have parted with value.
In some states, as in the State of New York, it is
sufficient if a will be subscribed by the testator in the
presence of two witnesses who in his presence and at
his request sign as subscribing witnesses. In other
TITLE AND TITLE INSURANCE 371
states three witnesses are required. The transfer of
title must be executed with the formaHties required by
the law of the state in which the land is situated, not
with the formalities of the law of the state of the domi-
cile of the testator.
136. Inquiry into public records — how directed, — An
instrument having been properly acknowledged or
proved, it may be placed upon the public records and
it then operates as constructive notice to all persons
dealing wjth the real property. The presumption of
law is that a person who is about to enter in any dealing
with respect to real estate knows all that is spread upon
the public records with relation to past dealings with
or the title to the property with which he is concerned.
In order that one may get full information upon the
subject of ownership of property, the inquiry into the
public record should be directed, first, towards ascer-
taining the history of the property under consideration ;
arid, second, towards ascertaining whether there be any
defects in or encumbrances upon the chain of title dis-
closed by the history or abstract of title.
137. Reasons for employing counsel, — The law of
real property is a technical and complicated set of rules,
an important part of general jurisprudence, and to ex-
amine a title one must have some familiarity with the
principles of law applicable to the subject, considerable
experience with the effect of the record and ability to
handle and read the indexes to the record. The ordinary
layman who is dealing with property as a commercial
proposition, has not the time nor the technical knowl-
edge to determine for himself the subject of the inquiry.
For that reason the practice has become universal of
employing counsel or conveyancers to make inquiries
372 REAL ESTATE
into the title of the property about to be dealt with,
attorneys or abstractors who make a specialty of this
line of work being known as conveyancers.
138. Responsibility of examiner of title. — The first
thing that must be noted in relation to this employment
is the degree of responsibility placed upon the profes-
sional examiner of titles. Every professional employ-
ment implies on the part of the person thus employed,
first, a representation that he is competent to deal with
or examine into the subject; and, second, that he will use
his knowledge in accordance with the rules of the art
or science in which he is employed and with due dili-
gence; but no professional employe guarantees the re-
sult of the employment. A physician will agree to give
competent skill and to employ it according to the rules
of his science. He will not and cannot undertake to
guarantee the result of his treatment. The profes-
sional conveyancer undertakes to examine a title, giv-
ing to it expert professional knowledge according to
the rules of the art and science applicable, and to give
his opinion upon the result. The man who examines
a title upon the record does not know whether the instru-
ment which he is reading is a copy of an authentic in-
strument. He is entitled to presume, from the fact
that he finds the instrument on record, that it is
a copy of an authentic instrument and not a forgery.
He presumes that the person who made it was compe-
tent, i. e., mentally fit to understand the meaning and
result of his act. He is entitled, when he examines a
will and finds that citations have been served upon cer-
tain persons as the heirs-at-law of the decedent who
are disclosed by a verified petition, to assume that those
were the only persons. He is entitled to believe in the
authenticity and correctness of the record and of the
TITLE AND TITLE INSURANCE 373
facts shown of record, and if, believing those facts, he
draws an erroneous conclusion of fact, he is excused
and is not liable to his employer, who must carry the
burden and risk of such error. If a conveyancer has
given to his employer an opinion that a title is good
and marketable, but it should turn out that a deed in
the chain is a forgery, that there is an undisclosed heir —
who according to ordinary rules would not have been
discovered — or any other casualty, the attorney is not
liable and the loss falls upon the employer.
There is not only a conclusion of fact to be drawn
upon each link in the chain of title, but there is also a
conclusion of law. The attorney undertakes in this re-
gard also to apply ordinary professional skill; and if,
applying ordinary professional skill, he is mistaken in
drawing a conclusion of law, he is again excused: he
is not liable to his client, and the loss again falls upon
his employer.
139. Origin of system of title insurance, — The greater
number of defects in title develop a long time, some-
times generations, after the erroneous conclusion has
been drawn. Very often a person who believes he owns
a piece of property occupies it peaceably for years,
and when he sells it, finds that the title is defective.
The attorney then examining it may examine with
greater skill or have more reliable sources of informa-
tion than the one who examined the title before. That
long interval of time adds another risk, and by the time
an error or mistake in title has been discovered the
attorney who made the search may not be living. If he
was responsible when employed, he may have become
irresponsible. He may have died and left no estate.
There are a hundred things that may happen to pre-
vent an owner being paid for his loss. Realizing these
374 REAL ESTATE
risks, American business men invented the system of
title insurance, by which a corporation formed for the
purpose of, and authorized to guarantee the result of
the examination of title, assumes not only the profes-
sional risk but all the rest of the risk of the validity of
title which lies over and beyond the professional risk,
and carries it for a consideration or premium. It is
a purely American system and is possible only in those
places where public records are as complete as in the
United States. It is a development of the American
system of the division of the risk over the entire com-
munity, which we know as our general insurance sys-
tem. A title insurance company makes the examina-
tion with the best professional skill it can command and
then deals with the public by making, first, a prelim-
inary report of the condition of the title, which is really
a statement of the terms upon which the risk will be
assumed; and, second, if those terms are accepted, it
issues its policy in a definite form.
140. Report of title, — When dealing with a title in-
surance company, one should always insist before
closing the transaction upon having a written report
of the title. A policy of title insurance is not issued
until after the transaction, the result of which is to be
insured has been consummated, therefore something pre-
liminary is required both as a guide in title closing and
to serve as a binder. Every part of the report should
be clearly understood before going into a title closing.
The report may not necessarily show that the seller has
such a clear and unencumbered title as he has contracted
to sell. It will show the state of the title as it is at the
time of the examination, with the matters remaining
to be disposed of in order that the title may be merchant-
TITLE AND TITLE INSURANCE 375
able according to the contract or transaction which is in
contemplation, all set out so that they may be disposed
of.
Having made the title adjustments and having re-
corded the instruments which would transfer the title in
the manner intended, and disposed of the encumbrances
and defects in the manner which was pointed out, the
company issues its guarantee according to its promise
in a clear and understandable form. A policy of title
insurance should always be carefully examined to see
whether it insures the title in the manner in which it was
promised or understood that it would be insured, and that
it contains no exceptions from the insurance which were
not assented to before the transaction closed.
141. Title insurance policy, — The policy issued by a
title insurance company usually consists of four parts:
First, the agreement of insurance; second, a schedule
setting forth full details of the subject-matter of the
insurance; third, a schedule of the exceptions or limita-
tions of the subject-matters of insurance; and, fourth,
the conditions governing the relations between the in-
surer and the policy holder.
142. Agreement of insurance, — The charges of title
insurance companies are fixed, like every other insurance
premium, upon a rate per cent commensurate with the
subject of insurance, or with the limitations upon the
loss. A title insurance company will require that a
policy be taken for at least the fair value of the prop-
erty, or for the amount paid for the property in pur-
chasing. There is no objection to the insured taking
as much extra insurance beyond the present value or the
cost of the property as he is willing to pay for; and
sometimes it is quite appropriate that this be done. A
376 REAL ESTATE
person may contemplate improving property and mak-
ing it more valuable, and may desire, in case of loss,
that he should be fully compensated.
In consideration of the premium the company guar-
antees to the insured and to his heirs and devisees — but
not to the assigns of the insured — that it will insure
them against all loss or damage, not exceeding some
specified amount, which the insured shall sustain by
reason of any defect in the title affecting the premises
described in the schedule annexed. The policy is dated,
and goes as of its date. The date, in order to protect
the insured, should be on or after the time of closing
of the transaction, the result of which is to be insured.
If there be a loss upon a title insurance policy, the
amount to be paid upon the policy is not more than will
indemnify or make whole the loss, not necessarily the
whole amount of the policy, but not more than the
whole amount, unless the company should call for a
conveyance to it of such title as the insured may have,
in which case it pays for the property its full value, as
if the title were as good as insured.
The premium is a level, single premium, paid once,
and once only. It does not differ with relation to the
kind of risk assumed. It varies only with the amount
of the risk. Titles which present troublesome and haz-
ardous questions of law or troublesome questions of fact,
if insured, should be insured at the same rate as easy
and clear titles.
A policy of title insurance is issued under seal and
time does not begin to run against it until a loss has
been incurred, therefore a policy of title insurance con-
tinues enforceable against the insurer not only for the
full period of limitation after it is issued, but for a sim-
ilar period after the time loss was incurred.
TITLE AND TITLE INSURANCE 377
143. Subject-matter of insurance, — A title insurance
policy sets forth the subject-matter of insurance in a
schedule in which is stated, first, the character of the
ownership or lien which is insured. That interest may
be a fee simple or a mortgagee's interest. Then fol-
lows, for purposes of identification, a statement of the
deed or instrument by which the interest of the insured
was acquired, and then a description of the real property
affected. That real property should be described with
common certainty so that the insured can understand the
description. It is a mistake to accept a policy from a
title insurance company which does not describe the
property so that it can be identified upon a map or upon
the ground in some clear and unmistakable manner.
The policy of title insurance covers all that is real prop-
erty upon the land, but to those things that are essen-
tially personalty it does not apply.
144. Exceptions and limitations upon subject-matter
of insurance, — The encumbrances subject to which the
property has been accepted should be set forth in a title
policy in a clear and understandable manner. Very
often the title insurance company will require, before
it closes title, that the intended exceptions to be put in
the policy should be assented to in writing, before it
will assume the responsibility of closing the transaction.
All the matters that aiFect the property, as shown by
survey, should be set forth; or if no survey has been
furnished upon which the company is willing to rely,
it will set forth that it does not insure against such facts
as an accurate survey would show.
145. Conditions of policy, — The first and most im-
portant condition of a policy of title insurance is that
the company will defend at its own expense all actions
or proceedings founded on a claim of title or encum-
378 REAL ESTATE
brance prior in date to the issue of policy and insured
against. A policy of title insurance is not only an
insurance of indemnity against actual loss, but it is
also an insurance against being harassed by litigation
respecting the title.
A policy of title insurance insures also that the title
is not only good and can be defended against attack, but
that it is marketable, that is, that a purchaser can be
compelled to take it. All such proceedings are con-
ducted and defended by a title insurance company under
its direction and at its expense, both as to counsel fee
and risk of costs.
A policy of title insurance usually provides, unless it
be a policy issued to a mortgagee, that it is not trans-
ferable. In the nature of things it is not consistent
that a policy issued to the owner of a fee title should be
transferred. The agreement of a title insurance com-
pany is to indemnify against loss, and that the title is
marketable. If the insured parts with his property and
receives compensation for thus parting with it which is
satisfactory to him, then the title insurance company has
performed that part of the contract under which the
policy holder was assured that he had a marketable title ;
and to permit a policy upon that branch of insurance
to remain open and a continuous obligation would be to
multiply the risk, so that each subsequent policy holder
would have a new and fresh claim for insurance in-
demnity.
But when the insured has parted with his property,
all the risk of the insurer has not ended. When a piece
of property is sold, it is customary to give a deed con-
taining covenants, and the seller may be held liable
upon these covenants. A policy of title insurance pro-
TITLE AND TITLE INSURANCE 379
vides, in addition to indemnification with regard to the
marketabihty of title, that even if a person has parted
with property, in case he should be held upon any cove-
nant in the deed, that he will be indemnified if there be
any loss for that reason. Because that indemnity re-
mains and continues to the original policy holder, it is
again inappropriate that a policy of title insurance
should be transferable.
A mortgage policy is usually expressly transferable
with assent of the company, so long as the mortgage
interest which is insured remains, because when a mort-
gage is transferred all the collateral ought to go with
it, and a policy of title insurance is appropriately col-
lateral that goes with a mortgage. There are usually
no covenants except as to present state of facts in an
assignment of mortgage.
- The policy of title insurance necessarily stipulates
that any untrue statement made by the applicant or
policy holder leading the insurer into the issuing of a
policy will vitiate the policy.
Although a limit is placed upon the amount of in-
surance, a title insurance company may have to pay out
a great deal more than the cost of the policy in order
to properly adjust its loss. That is because of a pro-
vision of the policy that the insurer shall have the option,
if there be a loss, of either paying the loss or taking
over the property; and if the company calls upon the
insured to turn over the property, it must pay its full
value, not the amount limited by the policy. Very often
when a loss happens on a policy of insurance, it is not a
total loss. There may be considerable loss, but if the
title be taken, and proper proceedings conducted, it
may be possible to minimize the loss. In such cases the
380 REAL ESTATE
title insurance company will call upon the policy holder
to deliver to it the salvage, and will pay for the property
as much as it is fairly worth.
If there should be a total loss, the amount of payment
would be limited by the face of the policy. In the case
of a policy upon a piece of property which came through
a deed which proved to be an absolute forgery, the
policy holder would have nothing to give, and the com-
pany would have to pay the face of the policy, pro-
vided the property was worth that much; and its loss
would be limited by the amount of the policy. But if
it should turn out that only a part of the title was de-
fective, a title insurance company might very well call
on the policy holder to turn over the property at the
sales price or at its fair value, which might be a con-
siderable sum above the face of the policy. Usually
defects in title can be cleared up by the use of time and
skill.
Whenever a company settles a claim, it is entitled to
be considered as having acquired every right which the
policy holder has against persons who are liable to him
by reason of the loss. If a company is held because a
mortgage or tax has not been paid, and the insured
has a full covenant and warranty deed, it is entitled
after paying the policy holder his loss, to sue the man
who made the full covenant and warranty deed so that
it may recoup the loss. This is known as subrogation.
The policy of title insurance expressly provides that
it does not cover "defects and encumbrances arising
after the date of the poHcy." Everything that happens
after that date is in the control of the policy holder.
146. Use of title policy. — A title policy should be
used whenever the property insured is being sold or any
agreement is being made with respect to it. Care should
TITLE AND TITLE INSURANCE 381
be taken to make the contract or agreement with respect
to the title as it is insured, so that if there be any defect
in title or marketability, the insured can fall back on
the insurer. In order to be certain of that, it is cus-
tomary to have the title insurance company prepare the
contract or agreement with relation to the property;
and then there cannot be any question as to who is re-
sponsible.
CHAPTER X
DEEDS
147. New York form of deed. — There are various
forms of deeds used in the different states. In the
State of New York there is in use, by legislative enact-
ment, a short form of deed which contains all the ele-
ments, clearly expressed, that are in the long and verbose
form. This short form, which is reproduced below, is
the exact equivalent of the instruments in use in the
other states.
THIS INDENTURE, made the day of
in the year nineteen hundred and
BETWEEN
, part. . of the second part:
WITNESSETH, that the said part., of the first part, in consideration of
the sum of
dollar.., lawful money of the United States, paid by the said part., of
the second part, do., hereby grant and release unto the said part., of the
second part,
heirs and assigns forever, ALL
TOGETHER with the appurtenances and all the estate and rights of the
part., of the first part in and to said premises.
TO HAVE AND TO HOLD the above granted premises unto the said
part. . of the second part, ,
heirs and assigns forever.
IN WITNESS WHEREOF, the said part.. of the first part ha., here-
unto set hand., and seal., the day and year first above written.
In the Presence of
[L. S.]
STATE OF NEW YORK, COUNTY OF , ss.:
On this day of , in the year
nineteen hundred and , before me came
to me known to be the individual . . described in, and who executed the fore-
going instrument, and acknowledged that . . he . . executed the same.
An analysis of this instrument will be useful and in-
teresting.
382
DEEDS 383
148. "This indenture," — In ancient times it was cus-
tomary to prepare instruments in duplicate upon the
same sheet, to tear them apart so that the edge would
be indented ; and the authenticity of the instrument was
proved by bringing the torn sheets together and show-
ing that the two counterparts had been torn from the
same sheet. Thus has arisen the custom of calling
formal and permanent instruments "indentures," even
though they are no longer prepared in duplicate.
149. The date, — The date is not a necessary element
but, as in contracts, it is a convenient memorandum.
It is useful because when instruments are found of
record, if the time of record be later than the date of
the instrument, the presumption is that the instrument
was delivered on the day of its date, if nothing else can
be found out about it.
150. The parties, — The person from whom the title
goes is usually designated "the grantor." He may be
known as "the party of the first part"; any designation
is appropriate so long as he be identified as the person
from whom the title is to flow. The other party is
usually known as "the grantee," sometimes as "the party
of the second part."
151. Consideration, — Consideration may be within
the intent of the law, either good consideration or val-
uable consideration. Without the passing of anything
of value or the change in financial condition of either
of the parties, one party may be moved by a desire, by
reason of blood relationship or his natural love and affec-
tion, to transfer to the other valuable property. If
there be such relation, it is said to be "good considera-
tion." A good consideration will support a transfer as
against everyone except creditors of the transferrer
whose claims are in existence and valid at the time of
384 REAL ESTATE
the transfer. Creditors who acquire their claims after
a transfer supported by a good consideration cannot
attack the transfer. A consideration such as blood re-
lationship or natural love and affection has been called
by the courts not only "good," but sometimes as "mer-
itorious" ; a man may be considered to be under obliga-
tion in times of prosperity to place his family in a safe
position where their livelihood will not depend upon the
uncertainties of his business.
But if there be another kind of consideration, which
is known in the law as "valuable consideration," then
the transfer is safe in the hands of the transferee as
against any attack. Valuable consideration may be the
transfer of money or any other thing of value. Any-
thing which causes one person to change his financial
condition either presently or potentially in favor of
or toward another is valuable consideration; money,
barter or exchange, an enforceable promise, the accept-
ance of security — all are valuable considerations.
It is not necessary that the instrument shall set forth
the consideration. It is well that it shall say that there
is consideration, as instruments, although delivered and
recorded, if they be actually without consideration, can
be attacked by the creditors of the grantor as a fraud
upon their rights; and if it be shown that the grantee
gave no consideration and was aware of the intended
fraud upon the creditors, the conveyance will be set
aside.
Consideration may be void by reason of public policy.
A conveyance against public policy would be a wagering
contract, a transfer as part of a lottery scheme, the
obtaining of property by fraudulent devise or fraudu-
lent representation, by duress or force, or anything of
that sort which the law frowns upon.
DEEDS 385
If a deed express consideration, then it is upon him
who attacks the instrument to rebut the presumption of
the truth of the statement of the deed. For that reason
an expression of consideration is not only useful, but
important. If in the examination of title one finds a
deed which does not express consideration, it may lead
to the inquiry whether it was or was not a voluntary
conveyance without consideration; and if one were to
learn that such a conveyance was voluntary, and execu-
ted without consideration, it might lead to complications
and possible rejection of the title. Especially is this
true in deeds from fiduciaries or persons acting in a
representative capacity. Fiduciaries necessarily seldom
have authority to give away the property over which
they have power. Their power usually is to dispose of
the property for valuable consideration and most fre-
quently for money consideration only. A trustee or
executor or attorney seldom has power to exchange
property or to barter it; and a conveyance made by a
fiduciary or representative who has not power to do
anything but convey for valuable consideration, which
does not state a valuable consideration, will be questioned
at all times in the future whenever it is seen of record,
and the question will be raised whether or -not there was
adequate consideration.
152. Nominal consideration, — The consideration ex-
pressed in a deed need not be the true or full expression
of the consideration. A deed may be made upon a
valuable consideration, but the parties may not desire to
disclose to everyone resorting to the records the extent
of that valuable consideration, and the expedient is re-
sorted to, in cases of that sort, of expressing a nominal
consideration, i. e., a sum less than the amount actually
paid. It may be expressed as 'one dollar," ''one dollar
XI— 25
386 REAL ESTATE
and other valuable consideration," "one hundred dol-
lars," "one hundred dollars and other valuable consider-
ation;" or any other nominal expression may be used.
Where property is of very considerable value even "ten
thousand dollars'* may be known to be a nominal sum
and will then hide the true consideration. Conveyances
of that sort would not import that no consideration
passed, but that an actual valuable consideration did
pass.
When dealing with a fiduciary or representative an-
other principle applies. A man may deal in his own
behalf and with his own property for any considera-
tion which pleases him. So long as there is considera-
tion, he is accountable to no one. But a fiduciary or
representative is called upon not only to obtain consider-
ation but to see that it is adequate consideration, and a
deed by a fiduciary should express the full consideration
or, if a nominal consideration be expressed, there should
accompany the deed such a declaration of the true con-
sideration that if in future the question is raised whether
the consideration of the conveyance was or was not ade-
quate, the evidence may be not only in written form but
in recordable form setting forth what was the actual
money which passed.
153. Consideration imported by seal, — ^While it is im-
portant that a deed should express consideration, there
is another way in which the presumption of considera-
tion may be raised, and that is by executing the instru-
ment under the formality of a seal. At common law,
before modified by modern statutes, a seal conclusively
presumed that the instrument was with consideration.
That was a mere artificial rule, and as in modern times
we are breaking away from mere technicalities and get-
ting down to actualities, the modern statutory rule is
DEEDS 387
that a seal imports consideration, so that the one who
claims as against a sealed instrument must rebut the
presumption of the instrument; but if he can rebut it,
the seal does not help the claim under the instrument.
It merely shifts the burden of proof from him who
asserts title under the instrument to the one who at-
tacks it.
154. Granting clause, — "Doth hereby grant and re-
lease unto the said party of the second part, his heirs and
assigns forever." The important part of the instru-
ment is that part by which the title is transferred from
grantor to grantee. The title which is conveyed is men-
tioned in the granting clause, and unless expressly lim-
ited in some other part of the instrument, the granting
clause will control every other part of the instrument
as to the quality of title conveyed. If it is intended
to convey anything less than a fee simple absolute, care
should be taken to modify the granting clause or the
clause which comes after the description, known as the
habendum, the principle being that unless the contrary
appears, every instrument will be considered to transfer
all the title which the grantor has or has power to con-
vey. That principle is modified only where a grantor
has a personal or individual interest, and also has power
to convey in a representative or fiduciary capacity. In
such case his conveyance may be considered to convey
only his individual interest, unless he expressly states in
the instrument that he conveys in his representative
capacity.
155. Description, — ^A description by which the prop-
erty may be identified with common certainty is suffi-
cient, but it is usual to be more particular than that in
a deed. Unlike a contract, a deed remains testimony
of the transfer forever. It must be construed not only
388 REAL ESTATE
by the parties to the instrument itself, but by those
who come after; and we owe it to posterity to leave
behind us clearly defined and dependable descriptions
of the subject-matter of conveyances.
Descriptions in deeds may be divided into two classes,
descriptions by metes and bounds, and descriptions by
reference to maps or monuments. A description by
metes and bounds is one which can be ascertained and
the property identified with exactness by resorting only
to the recorded description and definite monuments.
A description which reads: "Beginning at a point on
the southerly side of One Hundredth street, distant 25
feet westerly from the westerly side of Eighth Avenue"
begins at a definite point which anyone with instruments
of precision and knowledge of the location of the monu-
ment at the corner of Eighth Avenue and One Hun-
dredth street can definitely locate. Assuming that
point of beginning has been found, if the description
then proceeds: "running thence southerly, parallel with
the westerly side of Eighth avenue 100 feet 11 inches to
the center line of the block," it has gone from the point
of beginning in a definite direction, i. e., parallel with a
known Avenue, a definite distance i. e., 100 feet and 11
inches to another definite monument i. e., the center line
of the block. And if the description then reads : "thence
westerly, parallel with One Hundredth street, 25 feet;
and thence northerly parallel with the westerly side of
Eighth avenue 100 feet and 11 inches to the southerly
side of One Hundredth street; and thence easterly along
the southerly side of One Hundredth street to the point
of beginning," that is a definite description, which, the
point of beginning having been ascertained proceeds
by its metes — i. e., its measures — and its bounds, — i. e.,
the controlling direction of its lines absolutely and
DEEDS 389
definitely ascertainable on the ground. That is a simple
description by metes and bounds. A description by
metes and bounds may be as long and complicated as
is necessary to describe a large farm of many hundred
acres but, so long as it begins at a definite place and
runs by some surveyor's measures, if the place of be-
ginning can be definitely laid down without resorting
to anything else, so long it remains a purely metes and
bounds description.
A description by natural monuments is one which de-
pends not only on metes and bounds but is controlled
by natural monuments and cannot be ascertained except
by a knowledge of matters of geography or topography
outside the recorded description. A description which
reads: * 'Beginning on the side of the road running
from Westchester to Yonkers, at the northwest corner
of the farm of John Smith, and thence southerly along
John Smith's farm to a rock at the corner of Jones's
farm, and thence westerly along Jones's farm to a
blazed tree at Robinson's barn — etc., is a description
which depends entirely for its identity upon matters
outside of the record title to the property which is under
investigation, and is controlled not by the distances
stated, but by the natural monuments. Descriptions
of that sort are frequent, and if the property is capable
of identification by resorting to the ground and find-
ing the natural monuments, it is sufficient. One hun-
dred years from now it may be very troublesome to
construe and in order to identify the property it may
be necessary to examine the title to all the surrounding
property, and make surveys and topographical maps of
all the surroundings; but if, in accordance with all
known methods which an engineer may suggest, it can
be ascertained in any dependable way what was the
390 REAL ESTATE
subject of that conveyance, it is a valid conveyance, and
will convey the property therein described.
A description which is absolute in its metes and bounds
is the one extreme ; a description which depends entirely
upon monuments, natural or artificial, is the other ex-
treme; and between these there are many descriptions
which partake of the character of both.
It helps to identify the property to be conveyed if
reference be made to other conveyances or to the maps ;
after a description by metes and bounds, the deed may
recite that this is the same property which was conveyed
to the seller by a certain deed, citing it by its parties,
its date and place of record. If then a mistake has been
made in copying the description from the other deed,
the mistake will correct itself by reference to the deed
mentioned.
156. Uncertainty in descriptions. — If a description
be so indefinite and uncertain that the property, at the
time the conveyance is made, be incapable of identifica-
tion, then the entire instrument is void for uncertainty.
If a deed convey, "One of many houses" owned by the
seller, it is incapable of identification, and would be void
for uncertainty in describing the subject-matter.
157. Ambiguity in descriptions, — There is a very
wide space between mere ambiguity and absolute un-
certainty. If a description be ambiguous, it does not
necessarily follow that it is void for uncertainty. A
deed may be exceedingly ambiguous on its face, and
still capable of identification, for instance, it may con-
vey "the most easterly of the three houses," owned by
the seller on One Hundredth street, and on its face
that would be an ambiguous instrument, but if it can be
ascertained that the seller owns numbers 2, 4 and 6,
West One Hundredth street, the subject-matter is capa-
DEEDS 391
ble of identification and the deed is not void for uncer-
tainty. That leads to the principle that if there be
patent ambiguity in an instrument, it is only fair in the
attempt to support the transaction to resort to any means
outside of the instrument to seek identification of the
subject-matter.
158. Inconsistent descriptions, — If a description con-
sists of several elements which are inconsistent in them-
selves, resort may be had to evidence outside the instru-
ment to ascertain the intention of the parties. Such
a description would be, "The most easterly house on the
southerly side of One Hundredth street of the three
houses owned by Jones," followed by a description by
metes and bounds describing a house in another block.
There are two descriptions, either of which may be a
complete description and capable of identification, but
they are inconsistent with each other, and it is com-
petent to inquire outside the record what was the real
intent of the parties. Sometimes ambiguity may be
solved by reference to the natural situation of the prop-
erty.
There is no ambiguity, however, in a description by
metes and bounds which is referred to natural monu-
ments; the natural monuments control the metes and
bounds. If a description begin at a definite point and go
thence one hundred feet to an oak tree, and if the distance
from the definite point to the oak tree be more or less
than one hundred feet, the distance will have to give way
to the monument which controls ; and there would be no
ambiguity in the instrument, because, by legal construc-
tion of the instrument, its intent is definite. If the
instrument be unambiguous on its face, it must be con-
strued by itself, and it is improper to seek evidence
outside of the record as to what was the intention of the
392 REAL ESTATE
parties. In dealing with the instruments which have
been placed upon the public record, no matter what
have been the mistakes or ambiguities or misunderstand-
ings between the parties, those who come after them are
secure as against any claim that there was an ambiguity
or misunderstanding between the parties. A very dis-
tinct line is drawn between latent ambiguity and pat-
ent ambiguity.
159. Appurtenances, — The property is to pass as it
is described, "with the appurtenances." Appurtenances
are those things which depend upon and are part of
the real property, although not contained within the
described bounds. The right to keep a wall on a neigh-
bor's lot is an appurtenance. The right to travel over
a neighbor's field to reach the highway is an appurte-
nance. As matter of legal construction appurtenances
go with the land, whether specifically conveyed or
not. The clause, "together with the appurtenances and
all the estate and right of the party of the first part
in and to said premises" is rather rhetorical than useful.
The property would be conveyed just as effectually
without that sentence.
160. Habendum, — The habendum of the deed, which
follows the description, may limit the quality of the
estate conveyed by the granting clause. It is expressed
in formal language, the last vestige of really formal lan-
guage in the instrument: "To Have and To Hold the
above granted premises unto the said party of the sec-
ond part, his heirs and assigns forever." Our present
system of land holding is traceable back to the feudal
system; and to understand the real significance of this
clause, we must go back to the time when ownership
of land was not an absolute ownership, but was a mere
"holding" of the land from the feudal over-lord. Only
DEEDS 393
in modern times was it appropriate to say, "Unto the
party of the second part, his heirs and assigns for-
ever."
There should be a clear expression of what it is in-
tended to convey. If only a life estate is being
granted, this clause should read: "To have and to hold
the above granted premises unto the said party of the
second part, for and during the term of his natural life."
Indeed if the conveyance were carefully drawn, the
quality of estate would be limited both in the granting
clause and in the habendum. If the property were
being conveyed upon trusts, after granting the property
to the grantee, his successors or assigns, the deed should
say: "To have and to hold the above granted premises
unto the party of the second part, his successors and
assigns forever, upon trust, however, to and for the fol-
lowing uses," and then set forth upon what trust or
confidence the property was conveyed to the trustee.
161. Bargain and sale deed, — The form of deed un-
der consideration then calls to witness the signature
and seal of the party of the first part. That completes
a deed of bargain and sale, and it would be a perfectly
efficient deed to give under a contract which did not
specifically require any specific covenants to accompany
the grant.
162. Quit claim deed, — ^Another short form of deed is
a quit claim deed, which is exactly similar in form to
a bargain and sale deed, except that in place of the
words used being, "grant and release," they are "remise,
release and quit claim." A quit claim deed is just as
efficient to convey the entire estate of the grantor as is
a bargain and sale deed, but it is more properly used for
the purpose of releasing some claim upon the property,
rather than the Vntire estate.
394 REAL ESTATE
163. Bargain and sale deed with covenants, — If the
grantee under an instrument desires not only a present
transfer, but some other or further collateral assurance
with relation to the estate conveyed or the character of
title which the grantor or transferrer has, it is appropri-
ate and usua,l that there shall be such collateral assur-
ances in the instrument, and they are known as
covenants. A deed of bargain and sale may contain a
covenant by which the grantor covenants with the
grantee that he has done nothing by which the estate
conveyed may be encumbered or defeated, but he may
covenant nothing as to the future nor as to what any
predecessor in title has done. A deed containing such
a covenant is known as a deed of bargain and sale, with
covenant against grantor's acts.
This covenant is usually made by persons dealing in
fiduciary or representative capacity. A trustee or ex-
ecutor or other person carrying out a power to sell in
behalf of somebody else is not responsible for the doings
of any predecessor in the title, nor is he in any way obli-
gated to bind himself as to what will happen in the
future. If he covenants at all, he merely covenants as
against his own doings.
If, however, a purchaser desires to have assurances
not only as to the present situation, but as to the past
relations of the title, and assurances that all will be done
that can be done to protect him in the future, so far as
the grantee can do anything, he requires in his contract,
that he shall get a full covenant and warranty deed, in
which, after the habendum, there are five covenants on
the part of the grantor.
The form of such a deed, in use in New York, is as
follows:
DEEDS 395
Warranty Deed. — Full Covenants. — No. 3134 N. Y.
THIS INDENTURE, made the day of
, in the year nineteen hundred and , between
part . . of the first part, and
part., of the second part: WITNESSETH, that the said part., of the
first part, in consideration of
dollars, lawful money of the United States, paid by the part. . of the second
part, do. . hereby grant and release unto the said part. . of the second part,
, heirs and assigns forever, all
TOGETHER with the appurtenances, and all the estate and rights of
the part. . of the first part in and to said premises. TO HAVE AND TO
HOLD the above granted premises unto the said part. . of the second part,
, heirs and assigns forever.
AND the said
do . . covenant with said part . . of the second part as follows :
First. — That said
seized of the said premises in fee simple, and ha., good right to convey
the same.
Second. — That the part., of the second part shall quietly enjoy the said
premises.
Third. — That the said premises are free from incumbrances.
Fourth. — That the part., of the first part will execute or procure any
further necessary assurance of the title to said premises.
Fifth. — That the said
will forever warrant the title to said premises.
IN WITNESS WHEREOF, the said part. . of the first part ha. . here-
unto set hand . . and seal . . the day and year first
above written.
In the presence of:
[L. S.]
State of , County op , 55. :
On this day of , in the year
nineteen hundred and , before me came
to me known to be the individual . . described in, and who executed the
within instrument and acknowledged that . .he. . had executed the same.
164. Full covenant and warranty deed, — ^With re-
spect to all these covenants, knowledge of the facts
which make the breach does not deprive the covenants of
their efficiency. If the seller is willing to give the pur-
chaser a full covenant and warranty deed where the
property is encumbered, and the purchaser is willing
to take it, the fact that the purchaser knew of the en-
cumbrance is no defense. These covenants divide them-
selves into two classes, those which relate to the past and
those which relate to the future. The covenants which
396 REAL ESTATE
relate to the past are said to be covenants not running
with the land. Covenants which relate to the future
are said to be covenants which do run with the land.
Those covenants which relate to the past are the
covenant of seizin and the covenant against encum-
brances. The covenant of seizin assures that the grantor
is seized of the property, i. e., that he is then the owner
and in possession of it. The entire covenant imports
that the grantor owns the property, possesses it, and has
a good right to convey it to the grantee. If any of
these elements do not exist at the moment of delivery
of the deed, there has been a breach of covenant, and
cause of action for breach of the covenant has arisen
immediately upon the delivery of the deed. It is, there-
fore, a covenant which does not run with the land.
The other covenant which does not run with the land
is that the premises are free from encumbrances. That
covenant may be modified, if the property be conveyed
subject to encumbrance, by enumerating the encum-
brances in an appropriate place in the deed, either after
the description or after the habendum; and then that
clause will read: "That the said premises are free from
encumbrances, except as aforesaid." Then, if the prem-
ises be not free from all encumbrances, except as stated
in the deed or such as the expression, "except as afore-
said," covers at the time of the delivery of the deed, there
is immediate breach and cause of action.
While it is said that these covenants do not run with
the land, to distinguish them from the others, it does
not necessarily follow that subsequent conveyances do
not operate to assign cause of action for breach. They
may. But the cause of action will have arisen, damage
will have accrued, and the time of limitation will have
begun to run from the time of delivery of the deed.
DEEDS S97
165. Covenants which run with the land, — With re-
gard to the covenants which do run with the land, there
is no cause of action at the time of dehvery of the deed,
but the cause of action arises when a covenant is broken
at some time in the future, and accrues to the owner of
the property at the time of the breach; therefore the
covenant itself, not the cause of action for breach, runs
with the land, and runs with the land until broken.
The first of these covenants in the form of deed under
consideration is, "That the party of the second part shall
quietly enjoy the premises." Thdt covenant is broken
if the owner is disturbed in his possession by reason
of some right or cause of action which existed at the
time of the delivery of the deed, but was not asserted
until some time in the future. If, for instance, the
seller has the title upon a fee which may be defeated on
the happening of a contingency, that would not amount
to breach of the covenant of seizin because he has the
title to the property and has possession and good right
to convey it ; but if, after he has conveyed the property,
the contingency or condition were to happen which de-
feated his estate, and the grantee or those claiming under
him were to be ousted from their enjoyment of the
property, there would then arise a cause of action for
breach of the covenant of quiet enjoyment; and that
cause of action would accrue to and be enforceable by
the person who then owned the property. Thereafter
cause of action might pass with the property by implied
or specific assignment, but the covenant having been
broken, it would not thereafter run with the land except
by assignment.
The next of the covenants which run with the land
is the fourth: "That the party of the second part will
execute or procure any further necessary assurances of
398 REAL ESTATE
title of said premises." That covenant is not broken
unless it be necessary that the grantor shall give some
instrument other than the deed in order to perfect the
title. If, for instance, the deed should have been im-
perfect in its execution or not properly acknowledged,
the grantor can be sued either for specific performance
or, if performance has been demanded and refused, for
damage.
The last and most important covenant is the covenant
of warranty, and that again in its history and in the
limits of the measure of damage leads us back to feudal
history. The covenant is: "That the said party of
the first part will forever warrant the title to said prem-
ises." When the feudal lord put his tenant in possession
he was obligated not only to give him the possession,
but, if he were disturbed in that possession, to give him
other land as good as that from which the tenant was
ousted. In the same manner the covenant of warranty
implies that the grantor guarantees the title of the
grantee, but if the grantee should be ousted of his own-
ership and lose his property, while the covenant runs
with the land to the remotest grantee, the measure of
damage is not the value of the land at the time of breach,
but the consideration paid for the conveyance in which
the covenant is contained. The grantor is not bound
to give the grantee anything more than the property
was worth at the time be bought it.
166. Enforcement of covenant of warranty, — Before
the covenant of warranty can be invoked, however, there
must be actual ouster, i. e., the person who holds the
covenant and claims recompense under it, must have
actually been deprived of the land or some essential
portion of it, before he can claim damage under this
covenant. It results, therefore, from this principle that
DEEDS 399
the covenant of warranty is in no manner an assurance
that the title of the property conveyed is marketable.
Neither in the covenant of warranty nor in any other
covenant is there obligation to respond until there is loss
or liability through actual loss. In that respect the New
York rule in relation to the covenant against encum-
brances is more limited than in some other states, where
the mere existence of an encumbrance may be sufficient
to call upon the maker of that covenant to respond. In
New York the holder of the covenant must actually buy
his way out before he can recover against the covenantor.
167. No redress under covenants for some unmarket-
able titles, — There are many ways in which a title may
prove unmarketable for which there is no redress upon
any covenant in the deed. A house may encroach upon
a neighbor's land, and the owner have no right to main-
tain it there. If he tries to sell the house, the purchaser
may decline to take the title. He will be in possession
of an unmarketable title, but he has not been ousted
of anything which is within the bounds of the land
described in the deed and has not been deprived of any
valuable thing which was conveyed to him; and, there-
fore, has no redress under the covenant of warranty.
A building may have an important projection upon a
public street, so that the title is unmarketable, and a
purchaser would not take, neither would a lender lend
on it, and yet there be no redress under any covenant.
A title may be unmarketable because the chain of title
is defective and still there be no liability under the cov-
enants in the deed. For instance, if a purchaser owns a
piece of woodland or salt meadow which has never been
enclosed or reduced to cultivation, and has a chain of title
which does not go back to the Sovereign or some other
known source of title but nevertheless no one has or is
400 REAL ESTATE
likely to attack the actual possession. If that state of af-
fairs exists, the grantee is in possession and seized of the
property and there may never come a time when he will
be ousted or deprived of any of his rights as possessor.
Still a purchaser may be excused from taking the title
and the title be unmarketable because the chain does not
reach back far enough and physical possession cannot
be shown.
Another case in which a title might be unmarketable
without giving the holder recourse upon any covenants
in a prior deed would be if a former owner had died
seized of the property leaving debts which, if within the
statutory time they are enforced, may be a lien upon the
property, but leaving personal property which may or
may not be sufficient to pay those debts. Until the
statutory time within which the lien might be asserted
had run out or it developed whether the personal
property was sufficient or insufficient to pay the debts, a
purchaser might be excused from taking the title be-
cause of unmarketability, but yet it may turn out that
the debts are never asserted against the property or the
personal property is sufficient to pay them.
Another case may arise as follows: An owner may
sell a piece of improved property with which there would
naturally go appurtenances necessary to the conduct of
the building as a going concern, such as gas fixtures, etc.
These articles may not be owned by the seller free and
clear, being affected by conditional bills of sale or other
liens, and the title under the contract would therefore
be unmarketable but no covenants in a deed of real
property warrant the title to such articles, if they be not
technically real property.
In each of the illustrations given the title in itself, in
the chain of title, was clearly unmarketable, but as there
DEEDS 401
was no present loss and might be no deprivation, there
was no recourse upon any covenant.
168. Testimony clause. — The covenants in the form
of deed under consideration are followed by the testi-
mony clause. It is purely formal; the deed would be
just as good if it were not there, and if at the end of the
covenant the names were subscribed.
169. The seal of an individual, — In most states it is
necessary that a deed be sealed. In the State of New
York deeds by individuals need not be sealed; they are
just as efficient to convey title whether they be sealed
or unsealed. It is to the advantage of the grantee, how-
ever, that he require formal instruments to be sealed,
especially deeds, as, under a sealed instrument, the cov-
enants will last longer after breach.
170. The seal of a corporation, — A corporation, not
having hands, and not being able to write its own name,
must act through agencies, usually through its officers,
who are authorized to act by the legislative body of the
corporation, whatever that may be. Corporations may
be of various characters : they may be business, in which
the legislative body is the board of directors or trus-
tees; they may be municipal corporations, in which the
legislative body is the board of aldermen or super-
visors; they may be the people of a state in their char-
acter of state, in which case the legislative body
authorizes a board or officers to act; they may be mem-
bership corporations, which act by the voice of its
members or by the act of its trustees. Any of these
corporations acts by the agency of some authorized per-
son, usually, but not necessarily, an officer who is author-
ized to do the important act of affixing the corporate
seal to the instrument.
A corporation does not usually subscribe. The name
XI— 26
402 REAL ESTATE
of the corporation may be written under the instrument
with a memorandum that it is written by one of the offi-
cers, but the important thing, and the thing under which
the corporation acts is its corporate seal, if it have one.
A corporate seal is more formal than an individual
seal: a mere scroll or device scratched upon the paper
will not suffice. A corporate seal is an impression either
directly upon paper or upon some substance affixed to
the paper, the impression bearing some device which
has been adopted as the common seal of those persons
who constitute the corporation to testify their aggregate
act. The most common form of corporate seal of a
business or a stock company consists of two concentric
circles, with the name of the corporation between the two
circles, and sometimes the date or place of its organiza-
tion. Accompanying the seal and by way of memoran-
dum of how and when the seal came to be affixed, it is
customary for the officers to sign their names at the place
where a deed is usually subscribed by individuals; and
sometimes they also write the name of the corporation.
If there be more than one corporation signing the in-
strument, it may serve as convenient memorandum as
to which corporation the officer meant to represent, if
he sign the name of the corporation, especially where
that officer may belong to several other corporations
acting. If a corporation has not adopted a corporate
seal, then it is proper that the instrument be subscribed
by officers of the corporation, and be attested by the
individual seals of the persons signing the instrument,
171. Proof of instrument signed by a corporation, —
In either event, whether the corporation has or has not
a seal, the execution of the instrument must be proved
by an officer who has executed it. It is bad practice to
DEEDS 403
have an officer who is not the executing officer make the
oath as to authorization to affix the seal.
The person executing the instrument should appear
before a public officer entitled to take acknowledgments
of deeds or conveyances. That officer certifies, some-
what in the form of an acknowledgment, that on the
day mentioned, in the year mentioned, before him per-
sonally came the officer executing the instrument, who
being to him known and being by him duly sworn,
swears first, to the place of his or her residence ; second,
to the official connection which he has with the corpora-
tion, and that it is the corporation described in and which
executed the instrument; third, that he knows the seal
of the corporation; fourth, that the seal affixed to the
instrument was such corporate seal, and that it was
affixed by the order of the board of directors, or what-
ever might be the name of the legislative body of the
corporation ; and that he signed his name thereto by like
order. A deed thus executed, with its seal thus proven,
is evidence in all courts, and is entitled to be recorded
in the same manner as the instrument of an individual
properly acknowledged or proven.
CHAPTER XI
BOND AND MORTGAGE
172. Transactions in which these instruments are ap-
propriate,— Deeds are appropriate instruments for the
immediate conveyance and the transfer of title, but there
are many transactions in which the transfer of title is
not immediately contemplated but merely potential, in
that land may be pledged as security for debts. In such
a transaction the loan is secured by two instruments, one
and the most important, being the evidence of indebted-
ness, and the other the mortgage. In New York State
the bond is the principal instrument securing a loan of
money. There are many states in which the evidence
of indebtedness is a note; and there are places where
the evidence of indebtedness is not only a single note
for the principal but there are also issued at the same
time notes for all the installments of interest contem-
plated.
A form of bond in use in New York is as follows :
KNOW ALL MEN BY THESE PRESENTS,
That
hereinafter designated as the obligor, do . . hereby acknowledge
to be indebted to TITLE GUARAN-
TEE AND TRUST COMPANY, hereinafter designated as the obligee, in
the sum of
dollars, lawful money of the United States, which sum said
obligor do . . hereby covenant to pay to said
obligee, its successors or assigns, on the day of
, nineteen hundred and , with
interest thereon, to be computed from the day of
, 19. ., at the rate of per centum
404
BOND AND MORTGAGE 405
per annum, and to be paid on the day of
next ensuing the date hereof, and semi-annually thereafter.
AND IT IS HEREBY EXPRESSLY AGREED THAT the whole of the
principal sum shall become due at the option of said obligee after de-
fault in the payment of interest for thirty days, or after default in the
payment of any tax or assessment for thirty days after notice and de-
mand. All of the covenants and agreements made by the said obligor in
the mortgage covering premises therein described and collateral hereto, are
hereby made part of this instrument.
Signed and sealed this day of >
19..
In the presence of
The form of bond given above begins with a rhetorical
flourish: ''Know all Men by these Presents." It does
not mean anything. The "obligor" means the person
who obligates himself or makes the undertaking. It
may be plural, and, if so, the word "ourselves" follows
"acknowledged." If it be the bond of one person noth-
ing is inserted after the words, "to be" ; if more than one,
they contract "jointly and severally." Upon a "jointly
and severally" obligation all the makers of the obligation
can be sued, or any of them. If only one is sued, he
must seek contribution from the others; but with that
the creditor has no concern.
The bond then proceeds to name the holder of the
evidence of indebtedness and the principal sum. The
modern form of bond provides only an obligation for
the principal sum. Until within recent years it was usual
and is customary still in a great many states that the
bond should be in the form of a double obligation, the
double amount being then known as "penal sum." If
the obligation is written in the penal form, there follows
it a condition in which the parties say that while they
obligate themselves for double the amount the condition
of the obligation is such that if they pay half the penal
sum the obligation is void and of no effect. No more
than the amount of the condition can be collected, no
matter how many times the bond be broken.
406 REAL ESTATE
173. Legal tender, — ''Lawful money of the United
States'' — That is the usual obligation, which means all
the kinds of money which are legal tender under the laws
of the United States : gold, United States notes and sil-
ver dollars, and fractional currency for a limited amount.
Bank notes are not legal tender. Certificates of deposit,
silver certificates and gold certificates are not legal ten-
der. As some foreign lenders feel there may not
always be parity between the paper money of the
United States and actual gold coin, it is appropriate
when dealing with them, instead of expressing an obli-
gation to pay in "lawful money of the United States,"
that the obligation be to pay "in gold coin of the United
States of the present weight and fineness." If the obli-
gation be written in that form it is usually known as a
gold bond.
If the bond is in the plural after "hereby" the words
"jointly and severally" may be again inserted. Then
follows the due date. Unless the instrument provides
that it may be paid on or before the due date, the obligor
has no option to pay the amount earlier than the due
date. If he desires to pay off the debt before the day
specified, he must have an express provision in the bond
for that purpose. It may be expressed by putting after
the word "on" the words "or before." It may then be
paid at any time without notice, but cannot be demanded
until the due date. The privilege to pay may also be
expressed in a clause, providing for payment on notice,
or on special terms.
174. Interest on Bond, — The interest is usually com-
puted from the day the money is lent. The first in-
terest payment may be six months from the day on which
the loan is made, or upon the first of any month, or
upon an arbitrary date. Large money lenders, espe-
BOND AND MORTGAGE 407
cially corporations, have specific interest days, and they
will make the first interest day the first of the special
days on which they like their money to come in ; and then
interest will be paid, usually, semi-annually thereafter.
That is mere custom: there is no reason, in law, why
interest should not be paid every day as it accrues and
there are places in which it is paid quarterly. Interest
is not payable in advance ; it is paid, after it has accrued,
in the installments specified.
The rate of interest is limited in some states by law,
so that no more than a certain rate may be taken for the
loan of money. If interest be paid in advance at the
full legal rate for any considerable period, the lender
not only gets his interest, but also the use of the interest
money before it has been earned, therefore he is really
getting something in excess of the legal rate as it has
accrued, and the courts have held that a transaction of
that sort may be usurious. Banks are expressly author-
ized to take discount in advance. Lenders who are
getting the full legal rate should not take interest in
advance. If interest be taken at a greater rate than the
lawful rate, that constitutes usury. The penalty of
usury, if it be pleaded and proven, differs in various
states, in some the lender may lose the entire sum loaned
and the interest thereon. In many states a corporation
cannot plead usury. If, therefore, money be loaned to
a corporation, the lender can get any rate of interest or
any sum over the lawful rate which he is able to obtain,
without the danger of committing usury.
Savings banks often have their mortgages written for
a year at a specified rate greater than they exact. They
do not require the money to be paid when it is due, nor
do they take all the interest which is written in the bond,
but they will notify their borrowers from time to time
408 REAL ESTATE
with what rate of interest they will be content. Espe-
cially do they do this with overdue loans, and they always
like to have their loans overdue so that they can call
the money when they want it, or whenever they feel the
security is depreciating; and ask for such rate of interest
as is satisfactory to them. They do not usually exact
as great a rate of interest as other lenders, because they
try to get and keep the best loans : they are content with
better security and lower interest rates. There is a pit-
fall in some forms of bond on this very subject. Some-
times the bond reads : "With interest to be paid at the
rate of — per cent per annum and to be paid on
and semi-annually thereafter until said sum be fully
paid and discharged." There is a contract that the
rate of interest shall be so much until the sum is fully
paid and discharged. When such an obligation is over-
due the obligee may not notify the borrower that unless
he pays on a specified day that thereafter he will charge
him such rate of interest as is satisfactory to the obligee,
up to the legal rate. If the obligor has contracted to pay
only 4% per cent "until said sum be fully paid and dis-
charged," he can refuse to pay more than 4% per cent
no matter how long the obligation may remain overdue.
In cases where mortgages are written without this stip-
ulation, but in ordinary short form, the best opinion is
that lenders have a right to insist upon such interest after
demand of payment, as is satisfactory to them, up to
the legal rate.
175. Privilege to pay ' off, — If the borrower has
agreed with the lender that he will pay his debt at a
certain time, but desires to have the privilege of paying
off at some earlier time, the space left in the bond is
appropriate for that purpose. Large sums of money
are usually kept out at interest, and are not always capa-
BOND AND MORTGAGE 409
ble of investment immediately; for that reason lenders
will insist that if they accord a privilege to pay off be-
fore the due date, that before such a privilege is exer-
cised, they shall have notice in writing of the intention
to make payment. Sometimes, in addition to notice,
they will insist that they have interest not only up to
the time of payment but to some later time in advance,
sometimes thirty or sixty days. Such payment is not
usury, because there is no obligation to pay it; it is a
mere payment for a privilege which the borrower may
or may not exercise, as he sees fit. If he exercise the
privilege, he must pay the stipulated price for the ac-
commodation. There are some money lenders who insist
that there shall be provision in the bond that if it be
not paid on the due date, it cannot be paid until some
time after notice, and such a provision is not usury, be-
cause there is no obligation to make the payment; it is
merely a penalty for non-payment.
176. Usury laws, — Economically and at base all usury
laws are wrong. They are all fallacious; they do not
protect the borrower. The needy borrower who must
pay the legal rate when money is worth more than the
legal rate will pay that excess in the shape of commis-
sion or expenses, and not only the excessive rate which
money is worth over and above the legal rate, but he
will pay more than that, because lenders who are willing
to commit usury will want a bonus for the risk they are
running; so that the direct operation of a usury law is
not to protect the needy, but to make the needy pay
more than the full worth of the money. If the lender
did not fear that the money could be traced to his hands,
if he did not have to get expert counsel to show him
methods of evading the usury law, the borrower would
pay only what the money was worth and not, in addition,
410 REAL ESTATE
insurance against usury and fees to expert counsel to
get around the usury law.
177. Default in payment of interest, taxes, etc, — The
next stipulation in the bond is intended for the protection
of the lender, indeed all the instruments which are ex-
changed at a loan are framed for the protection of the
lender. He is the one who parts with money, and he
does not have to part with it unless he gets satisfactory
security. This clause stipulates that if the interest be
not paid when due, the borrower still has, say, thirty
days in which to pay it, but if at the end of such thirty
days it is not paid, then the holder of the bond may call
the whole amount due and demand payment of the
entire sum, with interest. If he does so demand, he can
sue on the bond or foreclose the mortgage for the whole
amount; and coming in on the thirty-first day with the
interest will not reinstate the term of credit. In the
same manner, if there be default in the payment of taxes
or assessments for a stipulated period, and the default
be ascertained and the holder of the bond exercise his
option, he may forbear so long as he pleases, but that
does not necessarily reinstate the term of credit. If the
borrower wants a stipulated time thereafter, he must get
a new agreement. If the interest or taxes be paid be-
fore the lender exercise his option, the default is waived.
All options of the lender may be waived; even if a
lender has exercised an option he may, by agreement,
waive it and reinstate the credit.
178. Execution and Enforcement. — The bond next
proceeds by incorporating into it all the covenants
and agreements made by the obligor in the mortgage,
which is collateral to the bond, and which is made part
of the instrument. Thus, by reference, all the valuable
parts of the mortgage are made part of the principal
BOND AND MORTGAGE 411
obligation. The instrument is then signed and sealed.
It should be signed, sealed, subscribed and executed in
the same manner as a conveyance. It is not necessary
to its enforcement that it be either acknowledged, proved
or witnessed; so long as the instrument is subscribed,
it is enforceable. It is an obligation for the payment
of money only, and may be enforced separately from
the collateral security. If the obligor so elects he may
sue on the bond and collect as much as he can, and then
hold the mortgage, which is collateral, for the balance,
and foreclose it, the only stipulation in that regard which
the law makes being that if he proceed first on the bond,
the obligor must exhaust his remedies under that instru-
ment before he can enforce the mortgage. If he does
not want to sue on the bond first, he can sue to foreclose
the mortgage, and in the same action ask, not that the
whole bond be paid, but that if there be any deficiency
after the mortgage has been enforced against the prop-
erty, that he get judgment on the bond for that de-
ficiency.
A person can sue on a sealed bond within the time of
limitation for sealed instruments after it is due, or after
there is a payment of principal or interest. If the bond
be unsealed, the time of limitation is shorter. Limita-
tion upon an obligation for money begins to run from
the due date or the last time when there was any pay-'
ment on account of the debt, or acknowledgment of
the obligation.
The law of supply and demand affects interest rates
more quickly than it does any other commodity. Money
is a mere commodity in the lending market. When the
demand is great and the supply short, the interest rate
goes up ; when money is plentiful the interest rate falls.
179. Mortgage recording taoc, — Mortgages are per-
41£ REAL ESTATE
sonal property. If the owner of a bond has no debts
to offset against it, he is Kable to be taxed as the owner
of so much personal property. The taxing of debts
only imposes the burden of the tax upon the borrower.
The lender will insist, whether he pays tax or not, upon
getting net for himself the current rate of interest
which the most fortunate lender can get. If there be
a lender who does not pay any tax, who can get 4 per
cent for his money, every other lender will want 4
per cent for his money net over the taxes. The result
is that the lender who does not pay taxes, who lends
his money at net 4 per cent and has to give nothing out
of it, will get the first chance at the good loans.
Seeing the falsity of taxation upon debts, some states
have provided that instruments of debt secured by mort-
gage upon real property, instead of being generally
taxable as personal property, shall be subject to a special
tax (sometimes a recording tax, which is paid once for
all, and sometimes an annual recurrent tax), and that
thereafter the mortgage, the bond and the debt which
it secures all are free of any kind of taxation in the
state, except that the mortgage is Hable to transfer tax
upon the death of the holder, where there is such a tax.
The question will come up very frequently whether
if money is lent at the full legal rate, it can be required,
in addition, that the borrower shall pay the mortgage
tax. If there be no express provision against it, the
best opinion is that such payment by the borrower does
not make the loan usurious.
180. Former method of pledging property for debt, —
Before modern forms of conveyance were invented,
when land served to secure the payment of money, the
title to the land was actually transferred by the borrower
to the lender, who became to all intents and purposes
BOND AND MORTGAGE 413
the owner of the land, and was entitled, if he so desired,
to take possession. The borrower had a mere right in
equity and good conscience that if he paid his debt, he
might redeem his land.
181 Equity of redemption, — The interest which the
owner retained in the property, the potentiality of get-
ting it back upon payment of a stipulated debt became
known as the "equity of redemption"; and that term
has continued to designate, until the present day, the
right which remains in the owner of the land over and
above the interest of the pledgee.
In some states a mortgage transfer to this day is an
actual transfer of the title; except for the fact that the
borrower retains possession and collection of rents the
mortgagee is regarded as the owner of the property;
and when the debt is paid off the fact of payment is
evidenced by a quit claim deed, transferring the title
back from the mortgagee to the person redeeming. In
New York State, and in many other states, the interest
of the lender is not an ownership of the land, but is a
lien upon the title. It falls naturally within the classifi-
cation of liens which are known as, "voluntary liens,"
and within the classification of a special lien. It has
all the general incidents of liens upon real property.
A mortgage interest, being personal property, passes
at death to the personal representative, and not to the
heirs. It is taxed to the holder as personal property,
unless it be exempt because it has paid special tax. It
passes by assignment or by delivery, and not by deed,
and in order that title under it may be taken from the
owner of the equity of redemption there must be some
legal procedure to cut off the right of redemption. Be-
cause it is a chattel interest and a lien upon the land, and
not an effectual transfer of title, there may be a first,
414 REAL ESTATE
second or third or as many mortgages as the borrowing
capacity of the land will stand, each taking its rights
in the order of its precedence, the subordinate or junior
being subject in their rights to the senior or prior mort-
gages.
Taking up the instrument by which the creation of
this lien is accomplished it will be seen that in its struc-
ture it seems to be an absolute conveyance of the
property, but upon condition that if certain things be
performed that then the conveyance of title transferred
shall be void and the property shall revert to the mort-
gagor. This is a vestige of the old form of the transac-
tion, but as a matter of fact in those states in which a
mortgage is a lien and not a conveyance of title the
transfer is not accomplished until the equity of redemp-
tion has been cut off by foreclosure ; and the instrument,
notwithstanding its form, creates a lien or personal prop-
erty interest only.
The following is a form of mortgage in use in New
York:
THIS INDENTURE, made the day of
in the year nineteen hundred and ,
between
hereinafter described as party of the first part,
and
hereinafter described as party of the second part.
WHEREAS, the said
by virtue of a certain bond or obligation bearing even date herewith,
justly indebted to the said party of the second part in the sum of
dollars,
lawful money of the United States, secured to be paid, together with the
interest thereon, at the time and in the manner expressed in said bond or
obligation.
IT BEING THEREBY EXPRESSLY AGREED, that the whole of the
principal sum shall become due after default in the payment of interest,
taxes, or assessments, as hereinafter provided.
NOW THIS INDENTURE WITNESSETH, that the party of the first
part, for the better securing the payment of the sum of money mentioned
in the said bond or obligation, with the interest thereon, and also for and in
consideration of one dollar paid by the party of the second part, the re-
ceipt whereof is hereby acknowledged, does hereby grant and release unto
BOND AND MORTGAGE 415
the party of the second part, and to
., and assigns, forever, all
TOGETHER with all fixtures and articles of personal property at-
tached to, or used in connection with said premises, all of which it is de-
clared are to be covered by this mortgage.
TOGETHER with the appurtenances, and all the estate and rights of the
party of the first part, in and to said premises. TO HAVE AND TO
HOLD the above granted premises unto the party of the second part,
and assigns forever. PROVIDED ALWAYS, that if the party of the first
part
or the heirs, executors, or administrators of the party of the first part,
shall pay unto the party of the second part,
or assigns, the said sum of money mentioned in the said bond or obligation,
and the interest thereon, at the time and in the manner mentioned in the
said bond or obligation, that then these presents and the estate hereby
granted, shall cease, determine and be void.
AND the party of the first part covenants with the party of the second
part as follows:
First. — That the party of the first part will pay the indebtedness as pro-
vided in this mortgage and if default be made in the payment of any part
thereof, the party of the second part shall have power to sell the premises
herein described, according to law. Said premises may be sold in one par-
cel, any provision of law to the contrary notwithstanding.
Second. — That the party of the first part will keep the buildings on the
said premises insured against loss by fire for the benefit of the party of
the second part. Should the party of the second part by reason of such
insurance against loss by fire, as aforesaid, receive any sum or sums of
money, such amount may be retained and applied by the party of the
second part toward payment of the sum hereby secured, or the same may
be paid over either wholly or in part to the party of the first part,
or assigns, to enable the party
of the first part to repair said buildings or to erect new buildings in their
place, or for any other purpose or object satisfactory to the party of the
second part, without affecting the lien of this mortgage for the full amount
secured thereby before such damage by fire, or such payment over, took
place.
Third. — And it is hereby expressly agreed that the whole of the said
principal sum shall become due at the option of the party of the second part
after default in payment of interest for thirty days, or after default in the
payment of any tax or assessment for thirty days after notice and de-
mand; and also, that the whole of the said principal sum shall become due
at the option of the party of the second part upon any default in keeping
the buildings on the premises insured against loss by fire as required by
paragraph marked "second" above, or immediately upon the actual or threat-
ened demolition or removal of any building erected upon said premises,
or if after application by any holder of this mortgage to two or more fire
insurance companies lawfully doing business in the State of New York, and
issuing policies upon real property situate in the place where the mortgaged
premises are situate, the companies to which such application has been made
shall refuse to issue such policies.
Fourth. — That the holder of this mortgage, in any action to foreclose
it, shall be entitled, without notice and without regard to the adequacy of
any security for the debt, to the appointment of a receiver of the rents
and profits of said premises; and in the event of any default or defaults
in paying said principal or interest, such rents and profits are hereby as-
signed to the holder of this mortgage as ^i^^ther security for the payment
of said indebtedness.
416 REAL ESTATE
Fifth. — That until the amount hereby secured is paid, the party of the
first part will pay all taxes, assessments and water rates which may be
assessed or become liens on said premises, and, in default thereof, the
holder of this mortgage may pay the same, and the party of the first part
will repay the same with interest, and the same shall be liens on said prem-
ises and secured by this mortgage.
Sixth. — In the event of the passage after the date of this mortgage of
any law of the State of New York, deducting from the value of land for
the purposes of taxation any lien thereon, or changing in any way the
laws for the taxation of mortgages or debts secured by mortgage for state
or local purposes, or the manner of the collection of any such taxes, so as to
aff'ect this mortgage, the holder of this mortgage, and of the debt which it
secures, shall have the right to give thirty days' written notice to the owner
of said land requiring the payment of the mortgage debt, and it is hereby
agreed that if such notice be given, the said debt shall become due, payable
and collectible at the expiration of said thirty days.
Sevekth. — That the mailing of a written notice or demand by deposit-
ing it in any post-office, station or letter box, enclosed in a post-paid en-
velope addressed to the owner of record of said mortgaged premises and
directed to such owner at the last address actually furnished to the holder
of this mortgage, or, if no such address has been furnished, then to such
record owner at the mortgaged premises, shall be sufficient notice and de-
mand in any case arising under this instrument.
Eighth. — That the party of the first part will execute any further nec-
essary assurance of the title to said premises, and will forever warrant said
title.
IN WITNESS WHEREOF, the said party of the first part has signed
and sealed this instrument the day and year first above written.
Ik the presence or
STATE OF NEW YOBK, COUNTY OF NEW YORK, ss.:
On this day of , 19. ., before
me, came
to me known to be the individual. . described in and who executed the fore-
going instrument, and acknowledged that ..he., executed the same.
182. ''Bearing even date herewith^ — In its com-
mencement the instrument is like a deed. It then
recites, "Whereas the said" (the party of the first part)
"by virtue of a certain bond or obhgation bearing even
date herewith." It is usual that the bond or note shall
be dated on the same day as the mortgage/although this
is not absolutely necessary in law. It is possible to se-
cure by mortgage an antecedent debt. The lender may
desire additional security for an antecedent debt, and the
borrower may pledge his real property to secure that
antecedent debt; and the transaction would then, so far
as its effect upon the real property was concerned as be-
tween the parties, be entirely similar to one in which the
BOND AND MORTGAGE 417
pledge accompanied the making of the loan. Or a per-
son may pledge his land to secure the debt of another,
and in its effect upon the title the result will be the
same as if he were pledging his land to secure a loan
made to him at the time of giving the pledge. Cases
of that sort arise frequently. Lenders may loan upon
the bond of a man, and get a mortgage upon his wife's
property. No matter whose obligation it is, so long
as the pledge is to secure some specific obligation, it is
quite appropriate that land be pledged as security.
After "justly indebted to the said party of the second
part in the sum of" is inserted the principal amount of
the loan.
183. ''Secured to he paid^ together with the interest
thereon, at the time and in the manner expressed in said
bond or obligation" — This is a recent frill in convey-
ancing, making a mortgage which does not disclose any-
thing as to the terms of the loan, except the amount of
the principal sum. The bond never goes on record, and
it is very often desirable, both from the view-point of the
borrower and of the lender, that no more of their transac-
tion be disclosed to the public than is necessary ; and this
form of mortgage is gradually forcing itself into gen-
eral acceptance because it discloses that which it is neces-
sary to disclose, and does not disclose those things which
are really only matters which interest the parties to the
transaction.
There is no reason why the business of dealing in real
estate, being now a commercial business, should be con-
ducted with any greater publicity than private transac-
tions with relation to any other commercial business.
A merchant who discounts his paper at a bank is not
obligated to tell all the world upon what terms he can
borrow money ; and a bank which lends its money to one
XI— 27
418 REAL ESTATE
customer at such rate as is appropriate to the security
which he offers and the soundness of his business reputa-
tion, is not obhgated to disclose those terms to the next
borrower who has not as good security or whose business
standing is not as high as that of the first man. It is
also an embarrassment in a commercial transaction be-
tween two persons, who ought to be free to negotiate
upon the basis of their own affairs only, to know that
people are necessarily invited into their confidence, and
are able to instance what has been done by them.
If it is desired to disclose the rate of interest and the
due date, a blank is left in which they can be added after
the words "bond or obligation." There is always a way
to obtain the due date: where mortgages are made by
large institutions, they always keep a record of the
terms ; and they will usually be disclosed to persons who
have a right to know them. If this form of mortgage
finds general acceptance, the business community will
adapt itself to it.
The instrument then recites the clause to which atten-
tion was called in the bond. This is followed by a clause
granting, in the form of a deed, the real property in-
tended to be the subject of the loan, to the mortgagee,
his heirs and assigns forever. The description of the
real property should be inserted in this instrument with
the same care and particularity as in a deed.
184. ''Together with the appurtenances f' etc, — This
is a distinct departure from the deed. The instrument,
not being the result of a contract which provided that
certain articles of personal property which were appur-
tenant to and used with the land, should pass by the deed,
the mortgage expressly provides that the conveyance
shall include not only the land, but all fixtures and arti-
cles attached to or used in connection with the property
BOND AND MORTGAGE 419
covered by the mortgage. It is intended thereby to
catch under the Hen all those things which are personal
property, but which are generally used with and neces-
sary to the use of the property as a going concern. The
mortgagee would not get a man's furniture under that
clause, but he would get the gas fixtures which were at-
tached to a house, and the ranges which were appurte-
nances of a flat building. This clause is followed by the
habendum.
185. The defeasance, — If the instrument stopped
here, it would be a complete deed, but the habendum is
followed by the defeasance, !^o called because it provides
that the title of the lender or mortgagee may be defeated.
The law provides in many states that if a conveyance
be made accompanied by a defeasance in writing, that
unless the defeasance be recorded at the same time that
the conveyance is recorded, the grantee shall take no
benefit from the recording of the instrument, the inten-
tion being that there shall be, so far as the law can con-
trol it, no hidden conditions of this sort.
It is therefore customary that the defeasance be writ-
ten immediately after the conveyance and in the instru-
ment which creates the lien.
As already stated, the interest of the mortgagee is
usually a personal interest, and while in the part of this
form that looks like a deed an interest is conveyed to
the mortgagee, his heirs and assigns ; and in the haben-
dum it reads, "to the party of the second part, his heirs
and assigns," it must be remembered that the debt be-
longs to the mortgagee or his personal representative or
assigns, and the defeasance provides that if payment be
made to the mortgagee or his personal representative —
not to his heirs — ^that this will defeat the title which has
just been conveyed, and that then, "these presents and
420 REAL ESTATE
the estate hereby granted, shall cease, determine and be
void."
If the instrument stopped there, it would be a com-
plete mortgage, perfectly efficacious to carry out the in-
tention of the parties, but there are a number of im-
portant covenants in the instrument, which lenders exact
in order to improve their security.
186. First covenant. — The first covenant is a repeti-
tion of the obhgation in the bond, a promise by the
party of the first part to pay the indebtedness, and then
a stipulation that if default be made, the party of the
second part shall have power to sell the premises accord-
ing to law. That is an important stipulation. It con-
fers a power under which the holder of the mortgage
may transfer the title to the land ; and if the law had not
stepped in to protect borrowers and save their equity for
them, under this clause the lender could, upon any de-
fault, execute a deed in the name of the mortgagee, con-
veying the property, and thus cut out all intervening
interests.
The last sentence of the first covenant provides that,
**The premises may be sold in one parcel, any provision
of law to the contrary notwithstanding." The general
provision of law upon this subject is that when the
premises comes to sale under a foreclosure, if it consist
of more than one lot, the property, for the benefit of
the mortgagor, shall be sold in separate parcels. If
there are several lots they must be offered for sale in
such separate lots as form natural divisions, so that no
more is sold of the owner's property than is sufficient to
raise the debt. But lenders make loans very often not
only upon the value of the separate lots but also taking
into consideration the fact that they are more valuable
by reason of being in one ownership, and that structures
BOND AND MORTGAGE 421
upon the property may be more useful when operated
together than separately; they therefore require that
they shall have the right to sell the property in one par-
cel. However, if a property is foreclosed by action of
the courts, they will relieve from this stipulation, if it be
too harsh, and if the owner who is about to be foreclosed
of his rights can show that the property falls into natural
divisions and will probably raise enough money if part
only be sold. Then the courts will require that the prop-
erty be sold in separate parcels, but provide that if the
sale of the property in separate parcels does not raise
enough to pay the entire mortgage debt, that then the
mortgagor may offer the property as a whole.
187. Second covenant, — This covenant relates to fire
insurance. The structures upon real property are as
much real estate or real property as the soil itself.
Where the property is adequately improved, they are usu-
ally the most important part of the security of the loan.
Loans are made upon improved property usually at a
lower rate and for a longer term than loans upon unim-
proved property. Improved property is the subject of
investment or use by its owner. Some lenders require
for their security that there shall be adequate fire insur-
ance obtained by the owner of the property, and this is
provided for specifically in the second covenant. The
form of that transaction usually is that the policy is
issued with loss payable to the owner of the property,
but with a slip attached by which the insurance company
agrees that if there should be loss it will pay that loss,
first, to the holder of the mortgage to the extent of the
interest of the mortgagee ; and after that, the owner may
have any surplus of insurance that remains. It is usu-
ally enacted that the original policy or policies be de-
posited with the holder of the mortgage, and the owner
422 REAL ESTATE
of the land must be content with a copy or with a cer-
tificate of the insurance company. Mortgage clauses
usually provide that while there may be contribution
among the insurance companies who have issued poli-
cies to the mortgagee, that there need not be contribu-
tion by those companies who have not issued policies
to the mortgagee, thus the mortgagee gets his money
out of such companies as have issued policies to him
or policies which bear this mortgage clause, without
caring whether the owner has or has not outside insur-
ance.
The next sentence in this covenant provides that if
any sum of money be paid by the insurance company by
reason of a loss, that the amount thus paid may be re-
tained by the holder of the mortgage and credited to the
debt, or it may be paid over to the owner of the land
to enable him to repair the building, or for any other
purpose satisfactory to the holder of the mortgage,
without affecting the lien of the mortgage for the full
amount.
188. Third covenant, — This covenant contains stipu-
lations under which the mortgage may become due
earlier than the term of credit prescribed in the bond.
The thirty days' notice is not absolutely necessary;
it may vary according to agreement of the parties.
The interest clause is very often twenty days; the tax
and assessment clause is very often sixty or ninety days,
or some period after notice and demand has been made.
This clause also stipulates that, at the option of the
holder, the amount owing shall become due immediately
upon the "actual or threatened demolition or removal
of any building erected upon said premises." It must
be remembered that the owner of the property remains
in possession, and the holder of the mortgage has no
BOND AND MORTGAGE 4ga
control over the uses of the property so long as his in-
terest is paid and the principal sum has not become due.
The owner may at any time tear down a building or
remove an important part of the security. If the mort-
gagee knows of it soon enough, he can get an injunction
enjoining the owner of the land from committing waste.
But, for the reason that the holder of the mortgage may
not know of the removal or demolition before it is ac-
complished, in addition to enjoining the destruction of
the building, it is provided that if the building should
be demolished or threatened to be demolished that the
holder of the mortgage may call for payment of the
whole amount owing.
If the owner put a new building on the property, it
becomes part of the realty and immediately falls under
the mortgage: there need not be any other instrument.
The mortgage attaches to the land and all that is real
property so long as the lien continues. This clause also
provides that the loan shall come due if for any reason
it shall be impossible to obtain fire insurance. It may
happen that property has been put to some extra haz-
ardous use after the mortgage was made, and in order
to prevent that casualty, the holder of the mortgage
stipulates that if that sort of thing happen, he does not
have to leave his money on that property but can demand
payment.
189. Fourth covenant, — The fourth covenant con-
tains stipulations by which the income may be paid to
the holder of the mortgage in certain cases. First, it is
provided that if action be brought to foreclose, a receiver
of rents and profits shall be appointed. It may happen
that it will be necessary to foreclose, and that the land
and improvements at that time will be found to be rather
slender security for the amount owing. Interest and
424 REAL K^rATl^
taxes may have been allowed to run; the property may
have run down ; or the holder of the mortgage may find
that he has made a mistake and loaned more upon the
property than is safe. He may want to have the rents
applied as soon as possible to the payment or redemption
of his debt ; he stipulates, therefore, that if he must fore-
close, he can apply to the courts for the appointment
of a receiver. The courts, however, are jealous of their
prerogative, and claim that parties cannot stipulate for
the appointment of a receiver of the court to act as
their collector unless there be reasonable ground to fear
that the property will be slender security or will not
bring enough to answer to the debt. The courts say the
mortgagee by contract cannot force them to appoint
their officer, but if colorable reason be shown for the
intervention of a receiver the courts will act upon this
clause. Even if there be no receiver's clause, after due
notice, and if there be danger to the holder of a mort-
gage, the courts may appoint a receiver.
This covenant further proceeds to pledge the rents
and profits in case of any default in payment of princi-
pal and interest of the mortgage, as further security
of the indebtedness. This assignment can be enforced
only through the instrumentality of a receivership in a
foreclosure suit, or through the voluntary giving up of
possession by the owner of the land. There is no way
by which the holder of a mortgage, to whom rents and
profits have been pledged and assigned, can push aside
the owner of the land, and require the tenants to pay
to him. If he tried to give notice that the rents were
pledged to him, they would pay nobody; not that the
tenants would be actually relieved of the obligation to
pay rent, but that is the way it would work out. If,
however, in order to obtain forbearance, the owner of
BOND AND MORTGAGE 425
the land voluntarily gives up his possession and instates
his mortgagee under this clause or under any other vol-
untary arrangement, to collect the rents and become
thereby a mortgagee in possession, that does not deprive
the owner of his equity of redemption, but merely adds
security to the lien. It puts upon the holder of the
mortgage the obligation of managing the property pru-
dently not only for the reduction of his lien, but also
for the benefit of the owner who has put him in posses-
sion and makes the mortgagee in possession practically
trustee of the income, to apply it first to the fixed
charges upon the property, and then to the reduction of
the principal debt; and, if the mortgagee does while in
possession work out income enough to pay off his debt,
from that moment the owner is entitled to resume his
possession, to be reinstated in the collection of his rents,
and to have an accounting and discharge of his mort-
gage. If there is not enough income to pay the entire
principal and interest, then, in case of foreclosure, there
will be an accounting taken and anything that may
have been collected by a mortgagee in possession will
be credited upon the mortgage debt. A mortgagee
who is thus in possession never acquires an adverse title
to the owner; he is merely a trustee until there is an
accounting or a conveyance.
190. Fifth covenant, — This covenant relates to taxes
and assessments. Under the operation of the third
covenant, the owner is required to pay all taxes and
assessments within a stipulated time, or the property
may be foreclosed. Under that clause also the holder
of the mortgage may require from time to time, if he
manage his affairs prudently, that all tax receipts be
produced to him, so that he may keep in touch with the
situation and know whether the taxes have been paid.
426 REAL ESTATE
But if the taxes are allowed to run into default, and the
security be ample, the holder of the mortgage may not
care to demand payment of his debt, and may under
this fifth covenant pay any taxes or assessments which
are upon the property, and add them to the amount
owing to him. If he does so, then he will be entitled
not only to the payment of his principal and interest,
but also to whatever he may advance for taxes on the
property, with interest on that amount; and if he fore-
close, he may have his foreclosure for the total debt
thus built up.
191. Sixth covenant, — This clause relates to the sub-
ject of special taxation of mortgages. Very many
forms of taxation on mortgages have been tried, all of
them unsatisfactory because the borrower finally pays
all taxes on debts; and no matter in what way it was
attempted, the result necessarily was to increase interest
rates by the amount of the special tax. The proper
theory is that there should be no tax at all upon mort-
gages, either special or general, because the needy bor-
rower must always pay the tax on debts.
Lenders making their loans with the understanding
that they are getting a tax exempt security, require in
this clause that if there be any legislation on the sub-
ject of mortgage taxation, so as to affect the security
which has been given to the lender, that then the lender
does not have to leave his money out liable to some new
form of taxation, but may demand payment.
192. Seventh covenant, — This clause provides merely
for the giving of such notice as the holder of the mort-
gage desires to give to the owner. Under the form
of mortgage security given above there is no notice
that the holder of the mortgage must give to the owner.
It is the duty of the borrower to seek his creditor, under
BOND AND MORTGAGE 427
every stipulation in this instrument. But if the lender
does desire to ask for fire insurance to be renewed, the
production of the tax receipt, to send notice that interest
will become due or to make demand or give notice of
any sort, it is here expressly stipulated that if he send
it by mail to such address as is furnished by the owner,
that this is all that is required.
193. Eighth covenant — This clause is borrowed from
the deed form. It covers the covenant of further as-
surance and the covenant of warranty found in deeds.
Under the operation of the covenant of warranty, if, at
the time the loan is made, the borrower does not own
the entire title to the premises which are mortgaged,
and afterwards acquires any additional interest in the
premises, that additional interest immediately, by action
of the warranty clause, comes under the lien.
194. Special clauses in subordinate mortgages.— All
the above are clauses which are required in ordinary loans,
but there are other clauses which may be appropriate
in special mortgages. A piece of property may be en-
cumbered by two, three or any number of mortgages,
one taking precedence of the other. The rights of a
second mortgagee are subordinate to those of the first
mortgagee. If there be default on the first mortgage,
and the holder begins to foreclose, and if the second
mortgage be not yet due, the interest of the holder of
the second mortgage may be seriously jeopardized.
For that reason it is usual to stipulate, in subordinate
mortgages, that if proceedings be commenced to fore-
close the prior mortgage, or if interest be not paid, or
if there be any other default upon the prior mortgage,
that the holder of the second mortgage may demand
the amount owing to him; and further, that if there be
any default in taxes, or interest on the prior encum-
428 REAL ESTATE
brance, that the holder of the subsequent encumbrance
may pay those charges and add them to his security;
and may thereupon call his debt for payment. Very
often in order to stop a foreclosure upon a first mort-
gage, the holder of a second mortgage will pay the taxes
and the interest on the first and then start to foreclose
the second, in order to avoid embarrassment and to ob-
tain for the property the benefit of the terms of credit
still remaining on the first mortgage. All those con-
tingencies are provided for in a properly drawn second
mortgage form.
195. Lifting clause, — Suppose a purchaser buy a
piece of property for $10,000, on which a savings bank
has an overdue first mortgage of $5,000, and he is to
give a second of $3,000 payable in five years. If the
mortgagee wants his money and goes to the bank and
gets it to foreclose, that five-year term of credit does not
do much good; so that it is often stipulated in sub-
ordinate mortgages, that if the prior encumbrance be
paid off, the mortgagor may borrow the same amount
upon a new first mortgage, and that the amount so
borrowed shall be secured by a new first mortgage, the
second mortgage remaining second to the new instru-
ment. This is known as a "lifting clause"; the prior
mortgage is lifted out and another put in its place. It
is appropriate that there should be such a clause pur-
suant to contract, or where a longer term of credit is
desired than the term in the prior encumbrance.
196. Foreclosure hy advertisement, — There are two
methods of foreclosure, the first, most simple and least
employed being the procedure known as, "Foreclosure
by advertisement." This is not a proceeding at law,
but is applicable only as the execution of the power
to sell the property which is granted in the mortgage
BOND AND MORTGAGE 429
instrument. If our system of law had not regulated
and circumscribed the power to sell which is contained
in the instrument, it would be feasible for the holder
of a mortgage whenever there was default, to step into
possession of the property, sell it at the best price he
could obtain, bid it in if there was no one to bid against
him, and then cut off the equity and all interests sub-
sequent to the mortgage. The statutes with regard to
real estate mortgages do not deprive the holder of a
mortgage of his power to sell, but requires the giving
of notice to the owner of the equity — if he can be found
— the posting of notices in public places, and then the
sale at a public auction in a pubHc place. If these for-
malities be observed, the certificate of the sale is suffi-
cient to entitle the purchaser to possession of the prop-
erty. The trouble with using this method of foreclosure
is, that the owner of the property, not having had a
chance to test the validity of the lien and require it to
be adjudicated and it not being a process of a court
under which the purchaser can get possession, it may
happen that after he has properly executed his power
of sale, he may not get into possession. The owner of
the land may retain the possession, and then there is
no other way to get in except by the costly and cumber-
some action for ejectment. For that reason, although
apparently the most direct method for foreclosing mort-
gages, it is the least used.
197. Foreclosure by action at law, — The customary
method of foreclosing mortgages is by action at law.
The mortgage being in default for some reason, the
first step in foreclosing is to make search to ascertain
!what interests there are subject and subsequent to the
mortgage all the holders of which must be made de-
fendants to the suit. Every person who has or claims
430 REAL ESTATE
an interest in the property which is subsequent to the
mortgage, should be made a defendant. Any person
who has or claims some interest superior to the mortgage
may be made a defendant, but nothing is gained by
this. A person who has an interest superior to the
mortgage, properly recorded, if made a defendant, is
not required to answer the allegation, and the judgment
of foreclosure does not affect his rights. All that can
be cut off is some subsequent and subordinate interest.
If the holder of a second mortgage wants to affect
the right of the first mortgagee, he must make a further
allegation with regard to it which the first mortgagee
is called upon to answer, for instance, that his right,
while appearing to be first, is really second.
Another important class of cases in which it often
happens that persons are made parties is where they
are owners of conditional bills of sale. The owner of
a properly executed and filed conditional bill of sale
claims, not an interest in the property which is subject
and subordinate to the mortgage, but that the property
on the premises never became real estate, but still retains
its character as personal property, and was never sub-
ject to the mortgage; and if the owner of a conditional
bill of sale has properly safeguarded his interest, he
does not care how many times he is made a party to a
foreclosure suit: he would still be able to take out his
property, if it were not paid for.
198; Method of procedure, — All parties whose in-
terest is subject and subordinate to the mortgage hav-
ing been ascertained, they are made parties to an action,
and are entitled to be served with a summons, and given
an opportunity to defend the action. If there be an-
swer on the part of any person, the issue must be tried
out. If there be no answer, then the plaintiff obtains
BOND AND MORTGAGE 431
judgment as matter of course. Whether the issue be
tried or the plaintiiF obtain judgment upon an uncon-
tested case, when it is ascertained that he is entitled to
judgment, the amount owing is computed either by the
court or by a referee. The amount of the hen having
been ascertained in that manner, a judgment is entered
directing the sale of the property by a master, referee or
sheriff, under the direction of a court. All parties to the
action who have appeared, are entitled to notice of the
sale, which must be advertised. Then the sale must be
had at public auction in a public place, and all persons
who desire to bid must have a fair opportunity to do so.
The property having been offered for sale, and
having been bid in, one of two things may happen.
Enough may be bid to pay the mortgage and those
encumbrances which are ahead of it, or the amount paid
may not be enough to pay these charges. The plaintiff
in framing his complaint may allege of any person who is
liable for the principal debt that that person is so liable,
and claim, in addition to getting his judgment of fore-
closure and sale, that if there be any deficiency that he
have a personal judgment for the amount of that de-
ficiency. In cases where there is more than enough to
pay the mortgage, the defendant is entitled — unless
there be a special provision in the mortgage to the con-
trary— ^to have the property sold in such separate lots
or divisions as it may fall into naturally. This is prin-
cipally for the reason that if it should develop that the
plaintiff's lien can be raised by the sale of less property
than the whole, as soon as enough has been sold to raise
the lien, that ends the plaintiff's interest; of course
the referee or officer of the court is authorized to sell only
enough property to raise the claim for which judg-
ment is obtained.
432 REAL ESTATET
The defendants' are entitled to have the divisions of
the property sold in a special order, in order to protect
purchasers. Persons who have paid for their lots and
who have purchased from the owner of the equity sub-
ject to a mortgage or other claim, are entitled to have
the property sold in the inverse order of alienation, that
is, in the inverse order from that in which the common
owner of the property has parted with it.
At the conclusion of the sale, the referee gets the
purchaser to sign the terms of sale, and after the period
fixed for examination and closing of title, he receives
the price bid for the property. Out of that price he is
directed to pay first all taxes and assessments which
there may be against the property; second, to pay the
costs and expenses of the foreclosure suit, his fees and
the expenses of advertising the sale; and third, to pay
the plaintiff's debt. If there is not enough money on
hand to pay the plaintiff's debt, he gives the plaintiff
what he has and reports the amount of the deficiency.
As soon as the report of sale is filed with the county
clerk, the deficiency may be docketed as a money judg-
ment; and the plaintiff is then entitled to the same rem-
edies as he would be on any other money judgment.
If, however, the referee finds more than enough money
to pay the plaintiff's debt, the extra amount is called the
surplus. In that case he pays the plaintiff's debt and
pays the surplus into court; and then all persons who
have claims against the property which would be valid
if not cut off by the foreclosure suit, give notice of their
claim against the surplus, which stands as a substitute
for the land. It is then ascertained in what order those
claims should be paid, and the amount of the surplus
which remains in the court is equitably divided and paid
over to the persons claiming it, according to legal pri-
BOND AND MORTGAGE 433
ority, just as if they were making their claim against
the land. If there is enough to discharge all liens, the
owner of the property gets what is left. All persons
who have claims against the property are inter-
ested to see to it that at the sale it brings all that it is
worth. The purchaser, having paid his money to the
referee, is entitled to two things: first, to a deed, which
becomes a record evidence of his ownership ; and, second,
to possession. If he does not peaceably obtain posses-
sion upon presentation of the referee's deed, he is enti-
tled to the aid of a court in a process under which the
sheriff is entitled to go to the property and assist the
purchaser to get possession ; and under a writ of assist-
ance the sheriff is authorized to put out of possession
every person bound by the judgment or named as a de-
fendant in the action. That is the utility of making
tenants parties. If a person is willing to take a prop-
erty subject to a tenancy, it is not wise to disturb the
tenants, because just as soon as they are served with a
summons, they may stop paying rent. If they are made
parties, they are bound by the effect of the judgment
and can be put out of possession if they will not pay
their rent to the new owner.
XI— 28
CHAPTER XII
LEASES
199. Definitions of landlord and tenant, — A landlord
is an owner of an estate in real property or of an interest
therein, when considered with relation to another hiring
the property and agreeing to pay rent, who is known as
a "tenant."
200. Rent. — Rent is a definite, periodical return for
the use of land. The expression "definite" does not
necessarily mean absolutely ascertained by the agree-
ment, but that which can be made definite, is definite.
If A rent a farm to B, and in return is to get a definite
share of the produce, while neither party knows what
that share is to be worth, the fact that when the return
is to be paid, it can be definitely ascertained, makes it
a definite return; and "leasing upon shares," as it is
called in the country, is an appropriate method of estab-
lishing the relation of landlord and tenant.
In addition to the fact that the return shall be definite,
it is necessary that it be periodical, i. e., that the period
when the return shall be paid be specified. It may be
that the entire rent is paid when the tenant enters upon
the premises, or that he pays it in installments, once a
month, once a year, or even once a day, but it must be
at a fixed time or period.
A janitor of an apartment house who is paid wages
and permitted to occupy an apartment, is not a tenant.
He is a mere employe, part of whose wages is paid by
a right of occupation. If the landlord end the employ-
434
LEASES 435
merit, he does not have to go to the trouble he would
be obliged to take to remove a tenant from the premises.
For that reason, when permitting a person to occupy
property, although the owner may look at the relation
as a hiring in all its essentials, if he wants to protect
his property from the right of occupation becoming such
that it is difficult to end it, it is best to raise the conven-
tional relation of landlord and tenant. If a purchaser
is let into possession under a contract, it is best to give
him a lease for a definite term, even if at a nominal rent,
so that it is a definite, periodical rate; and make him
sign an instrument under which he agrees to go into
the property as tenant, and in no other relation.
201. Term of lease. — The time during which occu-
pancy is to last is known as the "term of the lease,"
or, technically, as '*the term." There is no limit to the
term of a lease, as matter of law: it can be made for
999 years or for one year.
The landlord's interest in the rent, the right to re-
ceive rent and his expectation of being restored to pos-
session of the property at the expiration of the term,
remains real property. The tenant's interest, no mat-
ter how long the lease may be, remains personal prop-
erty, and is assignable as personal property and goes to
the personal representatives rather than to the heirs.
It is customary in New York State in writing leases,
where it is intended that they shall run for a longer
term, than twenty-one years, to make provision for an
apparent term of twenty-one years, with the privilege
or right to renew. The reason is that in order to keep
all property from being tied up with leases in fee
which will never end, or leases for a very long term,
the tax law of that state provides that on a lease for
more than twenty-one years, in addition to the ordinary
436 REAL ESTATE
tax upon the land, the rent may be taxed as personal
property to the person who is entitled to receive it. If
that person is not within the state, it may be taxed
against the tenant ; thus on leases for more than twenty-
one years in New York State there is a double burden of
taxation, and so the expedient has been adopted of
writing the lease for twenty-one years, with covenant
and conditions in relation to renewal.
202. Assignment of leases, — Unless the lease ex-
pressly provides against assignment, a tenant's right
may be assigned. It may be mortgaged, the mortgage
being a lien upon the tenant's term or right to occupy.
If a lease provides by covenant that it shall not be as-
signed by the tenant, as leases usually do, and if the
tenant, notwithstanding that covenant, assigns the lease,
and the landlord receive rent from the assignee, know-
ing of the assignment, that is held to be a waiver of for-
feiture; and subsequent assignments would not amount
to another breach of that covenant, but the term of the
lease would then be freely assignable. If the landlord
wants to protect himself not only against his tenant as-
signing, but against all assignments subsequent to the
first, he must make express provision not only that the
tenant shall not assign, but that no subsequent assignee
shall assign.
It is usual to provide, as penalty for breach of the
covenant against assignment, that it shall operate as a
forfeiture of the term, but the landlord is not entitled
to summary proceedings for breach of that covenant ; he
can regain possession only by the cumbersome method of
an action for ejectment.
If the term be assigned, under a properly drawn
lease, the tenant still remains liable upon the covenant to
pay rent, but is entitled to be credited with the amount
LEASES 437
paid by his assignee. He is bound for the balance
on his covenant to pay the rent, and may be sued when-
ever the installments of rent are due or at the end of the
term for the whole amount. Any occupant of the
premises, not the original tenant, may be held liable
for his occupancy at a fair rental, but unless an express
agreement or obhgation to pay rent can be shown, an
occupant cannot be sued except for the value of the
occupancy during his actual use.
203. Leases created verbally and by writing, — ^A lease
for the term of one year or less may be created verbally.
A lease for a term exceeding one year must be in writing
and must be subscribed by the person to be charged, in
the same manner as the other writings which have been
considered. The elements of subscription, and the ne-
cessity for clearly expressing the entire contract in the
instrument are the same as in regard to other instru-
ments. A lease for a term greater than one year may
be valid. not only between the parties but binding upon
third persons without necessity of record, for if the
tenant be in occupancy, and claim the benefit of his
term, no matter how long it is, it must be remembered
that the principle of notice by occupancy applies to
leaseholds just as it does with regard to the fee or any
other interest. A purchaser or person dealing with
property is bound to respect the rights evidenced by
occupancy and claim, just as much as though they were
of record, so it is not safe to conclude, when dealing
with real property, that because the tenant has not re-
corded his lease, his term is not over one year.
204. Tenancy at will. — Leases may be divided ac-
cording to the length of term, the first and longest in
the eyes of the law, being a tenancy at will. This is the
tenancy which is entered into at will without limitation
438 REAL ESTATE
of time : it may last forever, at the will of the parties, and
can be terminated only upon giving notice by either
party of the intention to terminate. If it is desired
to make a hiring anything else than a tenancy at will it
should be made definite.
205. Tenancy for years. — A tenancy other than at will
may be a tenancy for a year or years or from month
to month. A tenancy for years may last for twelve
months or longer. It is usually fixed upon the basis
of an annual rent payable in installments. A tenancy
for years, or a tenancy which is a definite hiring for
longer than from month to month, ends of its own force,
without notice, on the day fixed. If there be hold-over,
the landlord has the option of treating the tenant as a
hold-over from month to month or, if the term has been
for a year or more, of treating him as an annual tenant
for another year; or, if he requires possession, a land-
lord can put the tenant out.
A landlord has those three options, if he exercises his
rights promptly; and it is the part of prudence to ex-
ercise the right on the very day the term ends. If the
tenant be held as hold-over, he is liable for the rent in
accordance with the terms of the hold-over. If nothing
be said on either side, the presumption is that he is a
hold-over as an annual tenant upon the same terms as
the former lease. The relation having been entered into
and the rent accepted, the landlord will be bound for an-
other yearly term.
206. Obligations of landlord and tenant — The obli-
gation of a landlord is to accord the tenant the posses-
sion of the property he has hired, and to protect him in
that possession. The obligation of the tenant is re-
ciprocal. He must protect his landlord's interest, give
him prompt notice of all matters which affect that in-
LEASES 439
terest of which he learns by reason of his occupancy;
and he may not recognize any person as landlord or pay
rent to any person who claims in hostility to the maker
of his lease. The tenant must be loyal to his landlord
and is liable for damage if he breaks that obligation.
207. Ground lease, — A form of lease for years is
the lease which is known in some cities as a "ground
lease," and in other cities as "ground rent." It is a form
of lease the characteristics of which are: first, a term
longer than ordinary hiring; second, the incident that
the improvements on the property are usually made by
the tenant, which is the reason that it is known as a
"ground lease," because the first subject of hiring and
the basis for fixing rent in the beginning of the term,
is the value of the ground or land as vacant ground.
Leases of that sort are appropriate from the standpoint
of the landlord, where he has either a large tract or some
valuable property without capital to erect a valuable
improvement, or without the desire to invest large sums
of capital and do intricate financing for the purpose of
raising money to put into construction. In some cities
it is a favorite method of fixing investment values of
land. In New York, partly because of the operation
of the public policy law against long term leases, and
partly because its operation there has been to show that
tenants whose terms are not assured for very long terms,
do not put upon the property improvements commen-
surate with the rest of the neighborhood, it is not such
a favorite method of leasing.
In order that it shall be possible for a tenant to erect
upon land which he has leased a building commensurate
with the surroundings and of sufficient character not
to retard the progress of the district, it is necessary that
the tenant can at least expect to be able to get out of
440 REAL ESTATE
the difference between the ground rent which he pays
with the interest, and the actual rents thereon from
occupancy, enough to make the investment attractive.
Or the tenant must be assured that when the first term
is over, he shall have a right to renew, even though he
does lose the ownership of the building, upon such terms
as will really operate as an extension of the first term.
The improvements when they are made, although the
tenant has a limited ownership in them, immediately
become the property of the landlord, no matter whether
or not as one of the terms of the lease it is required
that at the end of the term the landlord shall pay the
value of the improvements. The impr£)vements are real
property; the landlord has an insurable interest in the
property, and the entire property passes to his heirs, or,
under his will, by devise.
The stipulation with regard to rent may be for a
rental fixed upon the basis of the land value alone, with
provision for periodical readjustment of the rent, but
for practically a perpetual option of renewal upon the
part of either the landlord or the tenant. In New York
City that form of lease is usually for a term of twenty-
one years, with provision that at the end of the term
the landlord shall have the option either of renewing
^'he lease or of paying the tenant the value of the im-
provement. If they cannot agree, it is usual to make
provision in the lease for arbitration. The basis of
rental being fixed at a percentage, the only thing to be
ascertained by the arbitration is the value of the land.
Another form of lease is that which provides, not for
perpetual renewal, but for a limited number of periods
of renewal. Still another, and a most important form
of lease, is that which provides for one term and renewal,
or at most two renewals. The tenant is required to put
LEASES 441
up an expensive improvement, the landlord very often
making a loan to aid the tenant in constructing the
building, and taking a mortgage on the building for
the amount of the loan. The problem of the tenant, in
a case of that sort, becomes the problem of amortization
of the investment ; the rent must be so much lower than
the expected return from the building that at the end
of the terms and renewals the tenant will get back his
cost of construction, a fair return upon his investment,
and a fair compensation for the rest of the transaction.
That is a very complicated problem of financing, and
few can engage in it successfully.
208. Tenancy from month to month, — The shortest
tenancy known to the Jaw or commercial experience is
the tenancy from month to month. It looks like a sep-
arate arrangement for each month, but in reality it is
not. It is usually a continuous term, self-renewing,
continuing forever, the incidents of the tenancy being
that the rent is payable monthly, that the tenant can
vacate at the end of any monthly term, but that the land-
lord cannot terminate the tenancy at any time except
upon the last day of a monthly term and upon giving
notice of his intention to require possession, and cannot
raise the rent unless he give the tenant notice to vacate,
if he will not voluntarily pay the increased rent. In
all legal computations, Sundays and holidays count,
except when they are the last day.
In the city of New York there is a very thin wall
between the tenancy at will and the tenancy from month
to month; and a tenancy at will will tie up the property
to the first of May, while a monthly tenant can be put
out at the end of any month. If it is a tenancy from
month to month, the landlord should see to it that the
receipt reads plainly to that effect, and the tenant should
442 REAL ESTATE
understand when he goes into possession that he is a
tenant from month to month, and not upon a yearly-
hiring or a hiring without term.
209. Termination of leases, — First, and most impor-
tant, every lease ends at the expiration of the term.^
Except at the end of the term, leases may be terminated
by a voluntary offer of surrender on the part of the
tenant, and a voluntary acceptance of that offer by the
landlord. If there be such surrender and acceptance,
from the time thereof, all obligations under the lease,
on the part of both landlord and tenant, are ended. The
tenant is liable for rent up to the time of surrender, but
not beyond that.
Surrender and acceptance may be implied from the
acts of the parties. Unless the landlord has a provision
in his lease that if the property become vacant he may
resume possession for account of the tenant and con-
tinue charging him rent up to the end of the term, it
may be implied from the act of the landlord in taking
possession of the property when the tenant left it
vacant, that there has been an offer of surrender by the
tenant and acceptance of possession by the landlord.
Landlords who have taken possession of property in
order to protect it against depredation have found them-
selves in the position of having accepted surrender of
the property. A verbal surrender, followed by the
actual occupancy by the landlord, is sufficient. It is
not varying the terms of the written instrument, but is
the limitation or ending of an obligation. Anything
that is an exclusion of the tenant from the property
may be predicated as an acceptance of an offer to
surrender.
The relation of landlord and tenant may be severed
by breach of a condition of the lease. The conditions
LEASES 443
in the lease may be divided into two classes, those for
which the landlord can get a summary dispossess, and
those for which he cannot get a summary dispossess.
A landlord can get dispossess and sunmiary possession
of his property for three causes :
First: If the tenant hold over after expiration of
the term;
Second: For non-payment of either rent, taxes or
water rates, if the tenant has covenanted to pay these
charges ;
Third : For unlawful use of the premises.
For any other breach of the covenant of the lease
a landlord is not entitled to a summary dispossess, but
must sue his tenant for ejectment under the lengthy
process of an action. In order to obviate that necessity,
important leases are often drawn in such manner that
all the conditions of the lease which call for payment
of any sort by the tenant are put in such form that those
payments, if they become owing, are made additional
rent; for instance, if the tenant should be liable for
damages to the premises, or should be required to make
repairs, or to comply with the orders of municipal de-
partments and fail to do so, the landlord is at liberty
to do these things, all of which can be liquidated in
money payments ; and those payments thereupon become
additional rent, collectible with and in the same manner
as the fixed rent reserved. All other covenants should
be maSe conditional limitations upon the length of the
term, i. e., it should be provided in the lease that if a
covenant be broken, the landlord shall have the right
to give notice that he elects to end the term of the
lease at a fixed time. That is known technically as a
"conditional limitation." If the tenant remain in po-
session after the time thus fixed, he remains as a mere
444 REAL ESTATE
hold-over, and can be put out in the same manner as
if he were a hold-over after a natural expiration of the
term. Complicated clauses of that sort are only worth
while in leases for long term of valuable property. In
cases where the tenant is not put in occupancy of the
entire building, there is seldom anything which the
tenant is required to do for which, in case of default,
the landlord has no efficient remedy.
A dispossess proceeding is brought, not in the su-
preme court, but in a court of minor jurisdiction. In
cities it may be brought in the city courts or in the
municipal or district courts; in the country it may be
brought in the courts of justices of the peace. No one
has ever been so harsh as to question the right of a
judge in a district court to withhold signing the war-
rant for a few days when the tenant has made an appeal
to his compassion; but, as matter of legal right, the
landlord is entitled to the signing of the warrant im-
mediately.
The signing of the warrant results in the breach of
the relation of landlord and tenant; and only such cov-
enants remain enforceable as are expressly made to
continue after the owner has regained possession. If,
after the warrant is signed, the tenant will not volun-
tarily quit the premises, the warrant will be executed
by a public official who will physically remove the ten-
ant and his belongings from the premises. That ends
the situation, so far as the summary proceeding can
accomplish it.
In some states in long term leases if, after the dis-
possess, there remain more than a specified number of
years of the term, notwithstanding the issue of a warrant
of dispossess and its execution, a tenant may come back
any time within a specified time, pay up the back rent,
LEASES 445
and redeem the premises. That situation is met in long
term leases by requiring from the tenant an express
waiver of the right of redemption.
210. Repairs, — Unless it be expressly covenanted in
the lease, there is no obligation on the part of the land-
lord to do anything in the matter of repairs. The
landlord is not obligated to do anything except to let
the tenant occupy and pay rent. The tenant has a gen-
eral obligation to commit no waste upon the premises
but is not obligated to make permanent repairs. He
can let the premises go along in ordinary wear and tear
until they are worn out, so long as he does not commit
actual waste.
211. Constructive eviction, — ^Another way in which
the relation of landlord and tenant may be severed is
by a constructive eviction, which occurs where a tenant
is not accorded the occupancy of the premises by reason
of some act or omission of the landlord, or where the
property is not kept in such a manner that it may be
used for the purpose for which it was hired with the
knowledge of the landlord. If a tenant rent an apart-
ment in an apartment house, in which he depends for
heat upon the steam-heating apparatus of the building,
and there is no heat in his apartment so that he cannot
use it for the purpose for which it was hired, i. e., for
living purposes, that would amount to constructive evic-
tion and give the tenant the right to remove from the
premises ; but he must take advantage of it at the time.
212. Option in case of fire, — In some states a lease
terminates if there be a fire on the premises so as to
render them untenantable. If there be no such law,
or if there be express stipulation to the contrary, the
tenant remains liable under his lease no matter from
what cause the premises become untenantable. A fire
446 REAL ESTATE
does not necessarily break the lease, but if, by reason of
the fire, the premises are made untenantable, and the
tenant has the option to vacate, he must exercise that
option within a reasonable time, and if he does not va-
cate the obligation of the lease remains. It is usual in
ordinary leases to extend that option to the landlord by
the fire clause, which may be seen in many printed forms.
The following is a form of lease which may be studied
with advantage:
THIS INDENTURE, made the ! day of
, in the year one thousand nine hundred and , BE-
TWEEN REALTY ASSOCIATES, a corporation organized under the laws
of the State of New York, hereinafter designated as Landlord, and
hereinafter designated as Tenant,
WITNESSETH, that the Landlord has agreed to let and hereby does
let, and the Tenant has agreed to hire, and hereby does hire from the Land-
lord all that portion of the premises in the Borough of Brooklyn, County
of Kings, City and State of New York, known as and by the street num-
ber
more fully described as follows : —
; for a term of
which term shall commence on the day of
and end on the day of ,
unless sooner terminated as hereinafter provided, for the annual rent or sum
of dollars.
AND THE TENANT COVENANTS AND AGREES:
1st. To pay the rent as aforesaid as follows: —
2nd. To make all repairs, both exterior and interior, and also all repairs
to elevators and elevator machinery, and any other apparatus belonging
to the building, and the Landlord shall not be liable for any manner of
repairs in or about said premises or to any part of the street, sidewalk or
vaults in front thereof;
In case of default by the Tenant under this paragraph, then, and in that
event, the Landlord, its successors or assigns may make such repairs as may
be necessary, and all necessary expenses consequent thereupon shall be
borne by the Tenant and shall be deemed collectible as additional rent, and
shall become due and payable by the Tenant to the Landlord immediately
after the same shall have been paid or incurred by che Landlord, and the
Landlord shall have the right to enter in upon said premises to make such
repairs ;
3rd. IN CASE the Tenant shall have repairs made to the building and
a lien shall be filed upon the premises, forthwith to take such action as
will remove the lien from the premises, and in default thereof for ten
days after notice, the Landlord may pay the amount of such lien or dis-
charge the same by deposit and the amount so paid or deposited shall be
deem-ed additional rent reserved under this lease and payable with interest
LEASES 447
from the date of such payment upon the next day upon which rent shall ac-
crue under this lease;
4th. To make good all damage resulting from misuse or neglect;
3th. To take good care of the premises and suffer no waste or injury;
6th. To pay as additional rent on or before the thirty-first day of July in
each and every year a sum equal to all charges which may be made for the
use or rent of Croton or other water in said premises, and also to pay
within sixty days after the same shall have become payable all taxes im-
posed on said premises, except as follows,
7th. To pay as additional rent at all times during the said term, all premi-
ums upon policies of fire insurance which may be taken upon the said prem-
ises ;
8th. At all times during the said term at the expense of the Tenant to
insure and keep insured in favor of the Landlord, all plate glass in the
store fronts, windows and doors of the above described premises in such
amounts as shall be satisfactory to the Landlord, and to furnish the Land-
lord with policies of insurance covering the same;
9th. In case the Tenant fails to furnish such insurance as above pro-
vided or to pay the premium or premiums upon the same, or in case the
Tenant shall fail to pay such water rates or any charge of tax, as above
provided, the Landlord may in each and every case procure such insurance
or pay such amounts and may add the amount of such premiums or pay-
ments to the next installment of rent falling due and the same, with inter-
est thereon from the date of payment, shall be additional rent reserved
hereunder, payable on the next day provided for the payment of rent suc-
ceeding ,the payment of such premiums or payments by the Landlord ;
10th. To furnish the Landlord at all times during the term of this lease
with security in the sum of ^
dollars, which security shall be furnished as follows: —
11th. To allow the usual notice of "To Let" to be placed upon the walls
or in a conspicuous place upon the exterior of the said premises for six
months prior to the expiration of the term of this agreement, and "For
Sale" notices at any time during the term, and to permit such notices to
remain thereon without hindrance or molestation, and also to permit ap-
plicants to inspect the interior of said premises during such period be-
tween the hours of 10 A. M. and 5 P. M. on each and every business day
during such time;
12th. To admit representatives of the Landlord into said premises at all
times for the purpose of making alterations or improvements;
13th; To comply at the expense of the Tenant with all rules, orders, ordi-
nances and regulations of each and every department or bureau of the city,
county, state or national government applicable to the said premises, and
of the New York Board of Fire Underwriters ;
14th. In case of fire to give immediate notice thereof to the Landlord,
which shall cause the damage to be repaired as speedily as possible. If the
damage be so extensive as to render the premises untenantable, the rent
shall be paid up to the date of the fire, and shall cease until such time as
the building shall be put in proper repair, and thereafter the Tenant shall
again pay the rent herein reserved, and have no option to cancel this lease;
but if the destruction be total, the rent shall be paid up to the time of
such destruction, and then and from thenceforth, this lease shall cease,
provided, however, that such damage or destruction be not caused by the
carelessness, negligence or improper conduct of the Tenant, or the servants
or agents of the Tenant.
15th. To quit and surrender the premises at the expiration of said term
in as good state and condition as they were at the commencement of the term,
reasonable use and wear thereof and damages by the elements excepted;
448 REAL ESTATE
16th. Unless the written consent of the Landlord shall first be obtained,
not to
a. Make any alterations in the premises,
b. Sublet the whole or any part thereof for any business which may be
obnoxious or detrimental to the neighborhood,
c. Use the premises or any part thereof for any purpose deemed extra
hazardous,
d. Assign this lease;
17th. To indemnify and save harmless the Landlord for and against any
and all liability, losses, damages and expenses, causes of action, suits,
claims and judgments arising from injury to person or property of any
and every nature, and for any matter or thing growing out of the occupa-
tion of the demised premises, the demolition by the Tenant of the build-
ings now thereon, the construction of any building thereon, or arising or
growing out of the use, occupation, management, possession or control of
the demised premises, or of any building thereon, or of the streets, side-
walks or vaults adjacent thereto, occasioned by the Tenant, the agents,
employes, assigns of the Tenant or by sub-tenants, or by their sub-tenants,
their agents or employes, sub-tenants or assigns, respectively, or which may
be occasioned by any person or thing whatever, at any time during the term
of this lease;
18th. To hold the Landlord harmless from and indemnified against all
damages including counsel fees and expenses to any person or persons by
reason of an act commonly known as the "Civil Damage Law," or any other
act of similar purport;
19th. That, in case of default on the part of the Tenant or on the part
of any person or persons claiming through or under the Tenant in the pay-
ment of any of the rents herein reserved, or reserved in any renewal
hereof, or in the performance on the part of the Tenant of any of the
covenants contained herein, or in any renewal hereof, to be kept and per-
formed by the Tenant, neither the Tenant nor any such person or cor-
poration shall have or claim any right of redemption in said premises under
Sections 2256 or 2257 of the Code of Civil Procedure, nor under any law
now in force or hereafter enacted, after any termination of this lease by
re-entry by the Landlord or by its obtaining possession under summary
proceedings or otherwise in any lawful manner; and the said Tenant for the
Tenant and every such person hereby releases all such right of redemption;
AND the Tenant for the Tenant and every such person agrees that in the
event of any action of ejectment brought by the Landlord, its successors or
assigns for failure to perform any of the covenants herein, or in any re-
newal hereof, the Tenant for the Tenant and every such person waives all
right to any second or further trial as matter of right or favor under Sec-
tions 1525 and 1526 of the Code of Civil Procedure, or any other law of
similar import now existing or which may hereafter be enacted.
IT IS SPECIFICALLY UNDERSTOOD AND AGREED BETWEEN
THE LANDLORD AND TENANT: THAT
1st. All improvements made in, to or upon said premises by the said
Tenant shall become the property of the Landlord at once when made;
2nd. The Landlord shall not be liable for any personal or property dam-
age caused by other tenants or persons in said building, or resulting from
electricity, water, rain, snow or gas, which may leak or flow from any
part of said building, or from the pipes or plumbing works of the same,
or from any other place, nor for any interference with light or otherwise,
by neighboring owners, or caused by the operations of the city in the con-
struction of any public work;
3rd. The Landlord shall not be responsible for any latent defect or
change of condition in any building now on the premises or in any build-
ing which may be put on the premises during the term of this lease or
any renewal hereof, nor be liable to any person for damages to any such
LEASES 449
building nor for damage to persons or property by reason of anything afore-
said; and the rent shall not be withheld or diminished on account of any
such defect or change;
4th. If the Tenant shall make default in fulfilling any of the covenants
and conditions of this lease or in making any payment herein provided, or
in case the Tenant abandons the premises and the same shall become va-
cant, the Landlord may re-enter said premises and remove all persons there-
from, either by any suitable action or proceeding at law or by force or
otherwise without being liable to indictment, prosecution or damages there-
for, and in any such case the Landlord may give to the Tenant five-days'
notice of its election to end the term under this lease, and thereupon the
term under this lease shall expire and all right of occupation thereunder
on the part of the Tenant shall end, and the Tenant will quit and surren-
der the said premises to the Landlord, and at the option of the Landlord,
it may relet the premises as the agent of the Tenant and receive the rents
therefor, applying the same first to the payment of such expenses as it
may be put to, and then to the payment of the rent and other payments
which may be or become due according to the terms of this lease, and the
balance, if any, at the expiration of the term of this lease, shall be paid over
to the Tenant;
5th. IN CASE of re-entry or of termination of this lease by summary
proceedings, or otherwise, whether the premises be relet or not, the Tenant
shall remain liable until the time when this lease would have expired but
for the termination thereof, for the yearly rent and additional rent re-
served herein, less the avails of reletting, if any there be, and shall pay
the same monthly, or otherwise, as hereinbefore provided for payment of
rent;
6th. The failure of the Landlord to insist in any one or more instances
upon strict performance of any of the covenants or conditions of this lease,
or of any renewal hereof, or to exercise any option herein conferred, shall
not be construed as a waiver or relinquishment for the future of any such
covenant, condition or option, but the same shall continue and remain in
full force and effect.
7th. ALL NOTICES provided for in this lease shall be given in writing
and may be given by mailing and depositing the same in any post-office sta-
tion or letter-box enclosed in a post-paid envelope addressed to the Tenant at
the demised premises.
8th. This lease shall be subject and subordinate at all times to the lien
of the 'mortgages now on the demised premises and subject and subordinate
to the lien of any mortgage or mortgages which at any time may be made
a lien on the demised premises, and the Tenant covenants that the Tenant
and all persons having any interest in this lease will execute proper sub-
ordination agreements to this effect at any time upon request of the
Landlord. If the Landlord shall at any time fail to pay the interest or any
installment of principal which may become due and payable by the terms
of such mortgage, or shall fail to pay the taxes and assessments charged
against the said premises, or shall fail or neglect otherwise to comply with
the terms of such mortgage or mortgages, and the holder or holders of such
mortgages shall have previously demanded such payments or such compli-
ance, the Tenant shall have the right to make payment of such interest,
taxes or assessments, or any other payment required by the terms of such
mortgage. or mortgages and, to the extent of such payments, to be subro-
gated to the rights of the holder of such mortgage, and the Tenant shall
have the right to consider such payment as an advance rental of said
premises; and if the Tenant shall not have the use of the said premises for
the entire period for which such advance rental shall have been paid, the
Landlord hereby agrees to pay to the said Tenant the entire amount of such
advances, less, however, such proportion thereof as may be properly charge-
able as rent for the period of the Tenant's occupancy of said premises.
XI— 29
450 REAL ESTATE
THE LANDLORD FOR ITSELF, ITS SUCCESSORS AND ASSIGNS
COVENANTS TO AND WITH THE TENANT,
That if, and so long as the Tenant pays the rent and additional rent re-
served under this lease and observes the covenants thereof, the Tenant shaU
quietly enjoy the demised premises and every part thereof, subject, however,
to the terms of this lease and to mortgages as aforesaid, which may at any
time be or become liens on the demised premises.
THE LANDLORD AND TENANT COVENANT TO AND WITH
EACH OTHER
That this lease and each and every covenant herein shall bind and run in
favor of the Landlord, its successors and assigns and the Tenant, and the
executors, administrators, successors and assigns of the Tenant.
IN WITNESS WHEREOF, the Landlord has caused its corporate seal
to be hereto affixed and same to be signed by its proper officers, and the
"f enant has executed the same.
REALTY ASSOCIATES,
By
[L. S.]
Tenant.
CHAPTER XIII
ADJUSTMENTS AT CLOSING
213. First steps in title closing, — Before proceeding
to an adjustment in a title closing, two things are neces-
sary: First, a clear understanding of the commercial
transaction which is to be adjusted; and, second, accurate
understanding as to the present state of the title.
As to the first: if it be a sale or exchange of prop-
erty, the closing of a mortgage loan or the making of
a lease, there must be an intelligent study of the pro-
visions of the contract or arrangement which is about
to be carried out. It must be remembered that what is
contemplated is the adjustment of a debit and credit
account, which will adapt the present state of the title
to the contemplated transaction, so that when the title
closing is completed, each shall have his due, the pur-
chaser will have his property, with all necessary allow-
ances, and the seller will have his money without any
deductions except such as he should justly suffer. If
the transaction be the making of a loan, on the comple-
tion of the closing, the borrower should have the pro-
ceeds of the loan less only such things as he should justly
pay out of it; and the lender should have parted with
no more than the amount of the money which he is to
lend.
The next step in a closing is to have a concrete and
intelligible report of the present state of the title. It
is not possible to adapt the present state of the title to
451
452 REAL ESTATE
the intended transaction unless there be such intelligible
written report.
Having these two things before him, a person can
determine whether the title is marketable, meaning
thereby whether it is a title which the purchaser must
take under the contract, whether making necessary ad-
justments, he will get a title of such character and with
such encumbrances, and such encumbrances only, as were
agreed to in the bargain. In order to determine
whether a title is marketable, it must first be determined
what is the estate to be transferred, and then if the seller
or mortgagor can transfer that estate. If the purchaser
has bought a title in fee simple, the report of title
should state clearly and succinctly that the seller is
vested with or can convey a title in fee simple absolute,
subject only to the encumbrances specifically enu-
merated.
If a purchaser buy only a life estate or an undivided
interest, he will be able to judge from the report whether
he will be able to get it out of the transaction. If the
seller be acting in any fiduciary capacity, it should be
stated specifically whether the fiduciary has power to
convey the estate which the purchaser expects to get.
214. Disposing of encumbrances. — Having a clear
report of the state of the title the encumbrances can be
considered with reference to the money which should be
available in the transaction. If the property is so en-
cumbered that the seller cannot get along with the
money available to give such title as the purchaser should
have, then the first inquiry is how to dispose of the
encumbrances. It may be that the seller has outside
means or methods of removing those encumbrances in
some way other than out of the money due him from
the transaction. When that has been determined, the
ADJUSTMENTS AT CLOSING 453
report of title may then be considered with respect to
the details of the encumbrances.
215. Encumbrances subject to which purchaser takes
title, — Encumbrances are of two classes with respect
to a title closing; first, those subject to which the pur-
chaser is to take the title; and, second, those which are
to be removed. If a purchaser is to take subject to a
mortgage, he should ascertain from the report of title
the date of expiration of the mortgage, what rate of
interest it bears, what special clauses, if any, it contains,
and should compare them with his contract to determine
whether or not they are in accordance with his agree-
ment.
If there has been any reduction of the principal or
rate of interest, or any extension or shortening of the
time of payment, the purchaser is entitled to have evi-
dence which can be recorded, to adapt the mortgage
to the terms of the contract. If a mortgage does not
by its terms disclose the expiration date or interest days,
courts have held that this is no defect of marketability
of title ; but the purchaser is entitled to have a reasonable
opportunity to ascertain whether the mortgage does or
does not comply with the contract. If he cannot ascer-
tain this, if, for instance, the holder of the mortgage
is away, or does not answer his inquiry, although the
question has not yet been decided, it may be that the
purchaser is entitled to hold up the closing until such
time as will give him a reasonable opportunity to ascer-
tain those important particulars.
In the same manner the leasing or lettings which are
reported as affecting the property, should be examined
before proceeding to a title closing. If there be a vari-
ance and the purchaser or person closing the transaction
be not actino^ in his own behalf, he should not take the
454 REAL ESTATE
responsibility of waiving the variance without instruc-
tions.
A purchaser should require that the property be
inspected and should check up to ascertain whether the
rents are in accordance with representation. He should
be particular to ascertain whether there is any one in
possession claiming a title hostile to that about to be
conveyed to him, because occupancy is notice of the
claim. He should ascertain from the occupants not
only whether they claim title, but the terms of the let-
ting which they claim. It is not enough at a closing if
the seller produce a set of leases which seem to comply
with the contract. The purchaser should go to the
property and find out what each tenant claims as to his
rights in the property. A purchaser may be handed
a set of leases, but he may not be told of the agreements
for renewals, the promises of rebates and extraordinary
repairs, unless and until he make an inspection to find
out whether the tenancies and occupancies are in accord-
ance with his contract.
A property may be encumbered by restrictive agree-
ments. The purchaser should have precise information
as to the form of restrictions and restrictive covenants
which affect the property, before proceeding to the clos-
ing adjustment. It frequently happens that upon a
report of closing there will appear restrictions or re-
strictive covenants which were not mentioned in the
contract, and often they are considered not to be detri-
mental to the property or to injuriously affect its value;
but a closer should not waive them at the closing, if he
is only a representative, without referring the matter
to his principal. If the purchaser finds that the cove-
nants and restrictions are in accordance with the con-
tract or do not injuriously affect the value, he is ready
ADJUSTMENTS AT CLOSING 455
to enter upon the financial adjustment, if there be no
other encumbrance or defect.
A purchaser is entitled to delivery of a house in prac-
tically the same physical condition as it was at the time
the contract was made. If it has been materially in-
jured or changed to its detriment, he can decline to take
it. Orders and requirements of municipal departments
are not encumbrances for which a purchaser can reject
title or for which he can require adjustment, unless he
has specially stipulated in his contract to that effect.
After looking over a report of title and contract, and
determining whether he will or will not take the prop-
erty, a purchaser should inquire what are the encum-
brances which are to be removed from the property and
whether the proper discharges are present. If they
are not present, he should inquire of the holders of the
encumbrances where the discharges are and what sum
of money is required to obtain them. He should also
inquire how to draw the checks. The purchaser is en-
titled to have his property free of taxes, assessments or
specific encumbrances before he pays his money. It is
the seller's business to have the title clear and to have
all instruments which are necessary to clear it present
at the time of closing. It is customary, if satisfaction
pieces are in known places in the hands of holders who
can be found when they are wanted, for the purchaser
to go and get them, if the other adjustments have been
made; but, as matter of legal right, he is not required
to do it.
Under the contract, the seller is entitled to insist
upon legal tender money. It is customary that certi-
fied checks be accepted, but nothing less than a certified
check, or the check of a well-known financial institution
is usually accepted. Checks of a bank, or savings bank,
456 REAL ESTATE
or insurance company, or title insurance company, are
usually accepted, if the signatures are known.
216. Debits against purchaser, — The adjustment is
made in the form of a debit and credit account. The
first debit against the purchaser is the gross price which
he agreed to pay. Assuming for the purpose of illus-
tration that a transaction closes on the 1st of March,
in which the purchaser has agreed to buy a piece of
property for $25,000, this amount would be the gross
debit against the purchaser. Usually, the only other
debit to adjust is the value of the fire insurance policies.
Assuming, in this case, that the purchaser either is under
obligation or is willing to take and pay for the insur-
ance policies, the method of adjustment is to take the
gross premium and apportion it, so that the purchaser
pays the proportion of the gross premium represented
by the unelapsed time of the policy. If the policy had
three years to run when it was issued, for which $10
was paid, and has still six months to run at the time of
closing, the value of the premium for that unelapsed
time would be one-sixth of $10 — $1.66, which is a debit
against the purchaser. There may be one other debit;
for instance, if the closing is as of the 1st of March,
but the actual exchange of instruments and payment
of consideration does not take place until the 9th. If
the contract provided for closing on the 1st, and there
had been adjournments as of the original date, there
would be interest chargeable against the purchaser upon
the unpaid balance of the purchase price from the 1st
until the 9th of March. If no stipulation had been made
as to the interest rate, it would be at the legal rate.
The stipulation may be that the rate shall be greater
or less than that, and it would not be usurious if it were
greater, because it is not payment for a loan of money,.
ADJUSTMENTS AT CLOSING 457
but a stipulated penalty for an adjournment or variance
of the terms of the contract.
217. Purchaser s credits, — The purchaser's first credit
is the amount which he has paid upon making the con-
tract. Assume in this case the amount so paid to be
$1,000. Although the seller may have had this money
since the contract was signed, he does not pay any in-
terest on it, because it was part of the transaction that
$1,000 be paid when the contract was signed.
The next credit on the purchase price is the mort-
gage subject to which the purchaser takes the property.
Assume in this case that the amount of the mortgage
is $15,000, the interest rate 5 per cent, and the interest
days the first of December and the first of June. On
the first of June the purchaser will be required to p^^y
six months' interest, but the seller has had the use of
the money during December, January and February,
therefore the next credit will be three months' interest
—$187.50
If, in addition to taking the property subject to mort-
gage, the purchaser gives back a purchase money mort-
gage of, say, $3,000, that would be the next credit.
If a property be tenanted, and some tenants have
paid their rent beyond the time, as of which the adjust-
ments are made, the purchaser is entitled to have ad-
justed to him at the closing or that he have cause of
action against the seller for rent collected out of the
premises beyond the time as of which the adjustment
is made. In this case, if some of the tenants have paid
in advance from 15th to 15th, the seller will have on hand
rent from the 1st to the 15th belonging to the purchaser;
and if there be a store which has paid rent quarterly
in advance on January 1st, the seller will have on hand
rent for the store for the month of March. Assuming
458 REAL ESTATE
that he has advance rents of $125 on hand, this amount
would be the next credit. It is customary that the rent
allowance be made on the gross amount of the rents,
not on the net amount. If the seller has employed an
agent to collect his rents, the purchaser does not bear
a part of the agent's commission.
218. Payments to he made by the seller, — A report
of title may show that the property is encumbered by
taxes. Unless the contract specifically provides that
there shall be a division of the taxes, it is not customary
that there be any adjustment on that subject, but a
memorandum should be made elsewhere of the things
that the purchaser expects the seller to pay. There will
really be two balances, one the balance between buyer
and seller, which will be the money which the buyer must
provide ; and the other, the net balance, which will be the
money the seller will carry away with him.
Assume the amount of taxes to be paid to be $350.
If this title were to close the day before the taxes became
a lien, the seller would not pay them; if it closed the
day after the taxes became a lien, the seller would have
to bear them. If there are assessments against the prop-
erty which have become a lien, the seller must pay them.
Assume assessments of $25. There may also be water
rates. There is no adjustment customary with respect
to water rates; if they have become a lien, they are
chargeable against the seller. If water has been used
and measured by meter, such meter charges as are fixed
by the reading of the meter by the public authorities are
chargeable against the seller from the last time when
the meter was read up to the time of adjustment, either
by estimating and averaging or by holding up a deposit
so that when the meter is read the exact amount may
ADJUSTMENTS AT CLOSING 459
be taken out. Assume in this case, the water charges
against the property to be $10.
219. Payments made by the purchaser. — These in-
clude the drawing and recording of the purchase money
mortgage and the mortgage tax on it, if there be any.
From the above figures, the final statement can be
made.
Dr, Cr.
Purchase price $25,000.00 Paid on contract $ 1,000.00
Insurance premium 1.66 Sub. to mtge 15,000.00
3 mos. int. allowed 187.50
$25,001.66 Purchase money mtge 3,000.00
Rent collected by seller. . . 125.00
$19,312.50
Amount on debit side. .. 25,001.66
Gross balance $ 5,689.16
Payments to be made by Seller.
Taxes $350.00
Assessments 25.00
Water rates 10.00 $385.00 385.00
Net balance $5,304.16
Payments to be made by Purchaser.
Drawing mortgage $10.00
Recording mortgage 3.00
Mortgage tax -. . 15.00 $28.00
The purchaser must provide, in order to carry through
this transaction, $5,689.16. In addition he must pay
the seller's attorney $28. Out of this $5,689.16 the
seller must pay $385, leaving his net balance $5,304.16.
The amount paid by the purchaser to the seller has been
called the "gross balance" ; that which the seller carries
away the "net balance."
220. Encumbrances not provided for in contract, —
Every transaction may not be as simple as the fore-
going. It may be that there are encumbrances upon
the seller's property which are not provided for in the
460 REAL ESTATE
contract. The general rule with respect to such en-
cumbrances is that it is the duty of the seller to remove
them at his expense, and to discharge them of record.
If there were a second mortgage, all the expense of pay-
ing principal and interest, paying for drawing of
satisfaction piece and of recording satisfaction of mort-
gage would have to be paid by the seller. Where there
are judgments which are liens upon the property, or
decedents' debts or mechanics' liens, things which while
encumbrances and troublesome, could perhaps be ad-
justed in a few days, the custom is that the seller shall
leave with a safe depository which both parties are will-
ing to trust a sum of money which is estimated to be
sufficient to provide for clearing those encumbrances,
and something in addition, both as safeguard to the pur-
chaser and as incentive to the seller to get his encum-
brances off.
221. Closing of exchange contract. — The adjusting
of the closing of an exchange of real property is made
upon the same principle as that just outlined. It is a
debit and credit account. If it is desired to simplify the
account, instead of charging each buyer and each seller
with the purchase price or the fictitious contract price
of each parcel, if there is a difference to be paid in cash
as the result of the exchange, that difference may be
charged to the person who is to pay it, as a first debit,
and then the items adjusted in each parcel which do not
figure in the contract. For instance, if a person were to
exchange one house for another, and it was lin even ex-
change, it might be that the permanent encumbrances
could be eliminated from the contract; and in that case
all there would be to adjust would be the interest on the
respective mortgages and the rents collected. Each
party would be charged with these items, and the differ-
ADJUSTMENTS AT CLOSING 461
ence between them paid by check by the one who owed
that diiFerence. If there was a payment to be made of
the diiFerence of exchange, that would also be charged
against the one who was to make it.
222. Closing of transfer of leasehold, — The adjust-
ing of the transfer of a leasehold is simple, except where
the ground rent is paid at the end of the term, as it often
is, when the seller would be charged not only with the
rents which he had collected from the tenant, but, hav-
ing had the property for the period from the time up
to which the ground rent was paid up to the time of
adjustment, he would turn over not only the advance
rents which he had collected, but also a proper adjust-
ment of the ground rent. If the situation were re-
versed and the seller had paid rent in advance, he would
be entitled to get from the purchaser the ground rent
for the unexpired term up to which rent had been
paid.
223. Closing of loan transaction. — In a loan transac-
tion the principle is entirely different; the only principle
that governs a loan transaction is that the borrower pays
everything. The lender does nothing but advance the
principal sum which he has agreed to lend, and all ad-
justments are on the other side of the account. The
borrower pays the expense of examining the title for
the lender, the expense of title insurance and furnishes
the fire insurance policy ; he pays off all other mortgages
and encumbrances, all taxes, brokerage, the mortgage
tax, and the expense of recording all instruments.
There is no debit and credit account ; it is all debit.
224. Rents due and not paid, — This is a difficult mat-
ter to adjust. If there be a responsible agent in charge
of the property, it is customary to permit him to finish
collecting, and give him instructions as to the division
462 REAL ESTATE
of the rents. It is a delicate matter for a purchaser to
refuse to trust a seller to collect such rents, or for a
seller to refuse to trust a purchaser; it must be adjusted
by mutual accommodation.
225. Methods of figuring interest, — Interest is cus-
tomarily figured, in real estate transactions, on the basis
of a 360-day year; each month is considered to be one
twelfth of a year; and it is customary for the purpose
of short figuring to take each day as the thirtieth of
a month, so as to use the ordinary 6 per cent method of
calculating interest. As matter of law, when figuring
interest for a period consisting of months and days, each
month is considered to be one-twelfth of a year, and only
the odd days are figured on the basis of a 365 -day year.
When figuring interest, it is proper to exclude the first
day and include the last day.
226. Rejection of title, — If a purchaser has good rea-
son for rejecting the title, he is entitled to have returned
to him any sum whicfi he has paid on the contract, to-
gether with interest at the legal rate from the time when
he made the payment up to the time when it was re-
turned to him. He is entitled also to have returned to
him his reasonable expenses of examination of title,
which means that a person can charge merely the actual
value of the expense of examining title in accordance
with the customary rate. He cannot obtain consequen-
tial damage or compensation for loss of prospective
profit, or brokerage incurred upon the re-sale of the
property, unless the seller is convicted of fraud in mak-
ing the contract, then only can the purchaser get sec-
ondary damage.
In a contract of exchange, if there be rejection and a
payment has been made, the purchaser is entitled to re-
cover the amount paid and also his reasonable expense
ADJUSTMENTS AT CLOSING 463
of examination of title to the property which he was to
receive. He is not entitled to recover commission paid
for bringing about the contract. Commissions are paid
for obtaining the purchaser and bringing about the mak-
ing of a contract.
CHAPTER XIV
METHODS EMPLOYED IN ARRIVING AT VALUATION
OF REAL ESTATE
227. What finally determines in land value, — The
value of land is not what the owner can sell it for, or
what he must take for it, if he wants to get rid of it, but
the actual value of land in its last analysis is based on
the income, actual or potential, which is to be derived
from the ownership of the property when it is ade-
quately or appropriately improved. Experts agree that
an inadequate or inappropriate improvement does not
actually figure in the selling price of property, but
only those improvements which can be made to bring in
income in competition with neighboring structures
figure in real estate values.
In America we have a rather more difficult problem
in determining land values than in a settled country like
England. In England a piece of property is worth so
many years' purchase of the net income. Because of
the continual growth, the shifting and changing of popu-
lation and the constantly differing methods of utiliza-
tion of specific land, it is more a speculative article in
America. As the value of land is determined very much
by its income-bearing capacity, it is highest in those
places where the most lucrative business can be trans-
acted, and grades down from that to the places where
the greatest space is required without a commensurate
ability to earn large return.
(a) In great cities and great money centers the most
464
METHODS OF VALUATION 465
expensive land is the land which is used for the housing
of the financial centers. In the city of New York, Wall
street and the streets adjoining it, which are used for
the office buildings of the financial centers of the coun-
try, are the most expensive land.
(b) After the financial center, the next in income-
.bearing value, and therefor in absolute value, is land
used for high class retail business; and in places where
there is no financial center that is the highest priced land.
(c) The third in value is high class residential prop-
erty, property used for the mansions of people who can
afford to pay high prices for fine and exclusive sur-
roundings. They will pay almost as much for land
which they desire to occupy as the owners of retail shops.
(d) The next in value is land used for hotels or high
class residential apartments, and office buildings not in
the financial center.
(e) Next in value is land which is in wholesale busi-
ness districts. Often the highest priced land which is
used for wholesale business is that which is nearest the
retail shopping district.
(f ) The next in value is land which is useful for or-
dinary tenement purposes, which takes in anything from
the six-story apartment house in a reasonably good
neighborhood to the flat or tenement of any character
which can be constructed; and land which can be used
for small residences, the latter being a little lower than
land which may be used for apartments and tenements.
(g) Next in value is land which can be used for sub-
urban or detached residences.
(h) Land which can be used for factory purposes.
(i) Farming lands.
(j) Lumber lands.
(k) Wild and unimproved tracts.
XI— 30
466 REAL ESTATE
228. General rules for determining land values, — No
absolute rule can be given for determining the land value
of any specific piece. All that can be done is to give
arbitrary rules to aid in determining the value, after the
first important steps have been taken.
In valuing improved property, the land value should
always be separated from the value of the land with the
improvement on it and the land value as thus separated
should be considered first. In so doing the first step is
to determine the value of a typical lot, say 25 x 100, of
the character under consideration. To determine this
value the appraiser must have information of sales, in
the neighborhood, of lots similarly situated and similarly
used. He must take into consideration not only the
present use of the lot, but its potential use. Often he
must leave the present use out of consideration alto-
gether.
With respect to the use or possible use of the prop-
erty, the appraiser must consider its relation to transit
facilities; even if it is right in the middle of the city,
the transit facilities add to the land value, the value
tapering off as the property leaves the lines of transit.
He must consider the land with respect to nuisances and
detriments to the neighborhood ; especially is it necessary
to look out for nuisances or undesirable occupations in a
neighborhood where land is being valued for use for
residential purposes. A school is not a nuisance in itself,
but land immediately adjoining or opposite a school is
not as valuable for living purposes as if the school were
not there. If there are factories in the immediate neigh-
borhood which employ large numbers of workmen who
pass back and forth, that will detract from the value of
the property, although the factory may be run in such
manner as not to be a nuisance.
METHODS OF VALUATION 467
When a property is off the line of transit or out of the
centers of population, the capacity of being reached by
transit lines at some time in the future will affect its
present value. For the same reason the appraiser must
look at the permanence of desirable features of the
neighborhood. He must consider the trend of popula-
tion and of changes in business. It may be that a lot
which is good for residential purposes may be more
valuable after a while because the present residential pur-
pose will be supplanted by an important business pur-
pose, which may be tending toward the neighborhood,
and that tendency will cast its influence before it.
The price actually paid for property is not necessarily
a true criterion of its value, and in making valuations
even though the appraiser knows prices in the neighbor-
hood, he must bear that in mind. The true value is not
what A paid for it or what B had to sell it for, but the
nearest thing to the true value which may be called the
ruling price, is what B would sell it for if he were willing
to sell it but did not have to, and what A would give for
it, if he were willing to buy it and did not have to. The
true value may be very much higher than the ruling
price, because A may have some knowledge of a special
use to which the property may be put; and the value
of land is not the use to which it can ordinarily be put,
but the greatest use to which it can be put.
229. Auction prices, — Prices at foreclosure sales are
entirely misleading. Unless it happens to be a par-
ticularly choice parcel and very attractive terms are
offered, there is not usually public bidding at fore-
closure sales. To begin with, the property is usually
offered all cash. If a second mortgage is being fore-
closed, and the property is offered subject to a prior
mortgage, it is usually one which is due or about to be-
468 REAL ESTATE
come due, and no definite terms of credit are offered.
It is understood that the person to be foreclosed is not
able to pay his debts, and there is not likely to be any-
body there who will bid more than the plaintiff. Prices
at partition sales may be nearer value, but they are not
absolute either. Auction prices at a big sale are mis-
leading, as people may be carried away by enthusiasm
and men who need pieces of property in order to help out
other lots may pay extravagant prices.
230. Valuing short lots, — Computations in real estate
are based on a typical lot ; for example, a lot twenty-five
feet wide in front and rear by one hundred feet in depth,
the side lines being at right angles to the street. If
the appraiser knows the typical lot value, it is easy
enough to say that a similar lot in the same neighbor-
hood is worth the same money. But if the lot were only
eighty feet deep, it would be a different proposition.
Looking at it superficially, it might appear if the lot
25x100 were worth $10,000, a lot eighty feet deep
would be worth four-fifths of that, or a $8,000; but an
owner could not get $8,000 for an eighty-foot lot in a
$10,000 neighborhood. The most important part of any
lot is the frontage to the street, and the rear is the least
valuable part; and in order to determine the value of
the lot the appraiser must know what relation those two
parts of the lot bear to each other. There is no absolute
modern formula by which this can be ascertained, but it
does not need an expert to see that a lot eighty feet deep
cannot be put to many uses for which a hundred-foot
lot can be used,^ nor that a hundred-foot lot can be used
for purposes for which an eighty- foot lot would be abso-
lutely useless. If it were a neighborhood of shops and
loft buildings, it would not make so much difference
if the lot were short, as if it were a neighborhood where
METHODS OF VALUATION 469
you had to have every foot of depth you could get in
order to come within some arbitrary rule of the tene-
ment house law. All this must be taken into considera-
tion.
231. The Hoffman rule. — In attempting to determine
the relation of the parts of a lot to each other and to the
total value, people have, by a system of inductive reason-
ing established certain rules. The rule most frequently
referred to in New York is known as the "Hoffman
rule," compiled by Murray Hoffman, a corporation
counsel for the city of New York, who acted for a time
as commissioner in condemnation proceedings. He di-
vides a typical lot into strips five feet wide across the
lot, and then arbitrarily assigns values to each of those
strips, premising that each part of those five-foot strips
would be of equal value throughout.
THE HOFFMAN RULE.
A ffff resratc
A lot of ground 25 X 100 feet $1,000 Per cent.
'^' ^' 10 X 25 ^' l60 16
15 X 25 " 235 23.50
20 X 25 " 310 31
25 X 25 " 375 37.50
30 X 25 " 440 44
" " 35 X 25 " 500 50
" " 40 X 25 " 560 5Q
" " 45 X 25 " 615 61.50
« " 50 X 25 " 670 67
" " 55 X 25 " 715 71.50
" " 60 X 25 " 760 76.
« " 65 X 25 " 800 80
" " 70 X 25 " 840 84
« •' 75 X 25 " 875 87.50
80 X 25 " 910 91 i
85 X 25 " 935 93.50
« " 90 X 25 " 960 96
95 X '25 " 980 98
100 X 25 " 1,000 100
232. The Rule of William E. Davies. — Recently
William E. Davies, a New York real estate broker of
experience in New York city, worked out and published
a rule agreeing in many particulars with the Hoffman
470 REAL ESTATE
rule, and better in some respects, because it ascribes a
value to each foot in the lot, instead of assuming that
every foot of each five-foot slice is of the same value.
He has also made allowance for a modern condition
which did not exist when Mr. Hoffman's table was
made ; that is the added worth of the land back of a line
one hundred feet from the street, wHch has arisen by-
reason of modern conditions. Mr. Davies has allowed
for the fact that a lot may now be two hundred feet
deep, and the land all the way back may be worth money.
DAVIES RULE.
TABLE, BASED OX THE FOLLOWIXG FORMULA, FOR ESTIMATING THE VALUE OF
STRIPS OF LOT 25 X 200.
Y= V 1.45 (X + .0352) — .226
Note. — This equation of the parabola is not arbitrary, but deduced from
the mean of thousands of actual sales.
Depth Ratio Depth Ratio Depth Ratio Depth Ratio
1
.030
51
.662
101
1.006
151
1.267
2
.057
52
.670
102
1.012
152
1.272
3
.082
53
.678
103
1.018
153
1.277
4
.105
54
.686
104
1.024
154
1.282
5
.126
55
.694
105
1.030
155
1.287
6
.146
56
.702
106
1.036
156
1.292
7
.165
57
.710
107
1.042
157
1.297
8
.183
58
.718
108
1.048
158
1.302
9
.200
59
.726
109
1.054
159
1.307
10
.217
60
.734
110
1.060
160
1.312
11
.233
61
.742
111
1.066
161
1.317
12
.248
62
.750
112
1.072
162
1.322
13
.263
63
.757
113
1.077
163
1.327
14,
.278
64
.764
114
1.082
164
1.332
15
.292
65
.771
115
1.087
165
1.337
16
.306
66
.778
116
1.092
166
1.342
17
.319
67
.785
117
1.097
167
1.347
18
.332
68
.792
118
1.102
.168
1.352
19
.345
69
.799
119
1.107
169
1.357
20
.358
70
.806
120
1.112
170
1.362
21
.370
71
.813
121
1.117
171
1.367
22
.382
72
.820
122
1.122
172
1.372
23
.394
73
.827
123
1.127
173
1.377
24
.406
74
.834
124
1.132
174
1.382
25
.417
75
.841
125
1.137
175
1.387
26
.428
76
.848
126
1.142
176
1.392
27
.439
77
.855
127
1.147
177
1.397
28
.450
78
.862
128
1.152
178
1.402
29
.461
79
.869
129
1.157
179
1.407
80
.471
80
.876
130
1.162
180
1.412
31
.481
81
.883
131
1.167
181
1.416
METHODS OF VALUATION
471
epth
Ratio
Depth
Ratio
Depth
Ratio
Depth
Ratio
32
.491
82
.890
132
1.172
182
1.420
33
.501
83
.897
133
1.177
183
1.424
34
.511
84
.904
134
1.182
184
1.428
35
.521
85
.910
135
1.187
185
1.432
36
.531
86
.916
136
1.192
186
1.436
37
.541
87
.922
137
1.197
187
1.440
38
.550
88
.928
138
1.202
188
1.444
39
.559
89
.934
139
1.207
189
1.448
40
.568
90
.940
140
1.212
190
1.452
41
.577
91
.946
141
1.217
191
1.456
42
.586
92
.952
142
1.222
192
1.460
43
.595
93
.958
143
1.227
193
1.464
44
.604
94
.964
144
1.232
194
1.468
45
.613
95
.970
145
1.237
195
1.472
46
.692
96
.976
146
1.242
196
1.476
47
.630
97
.982
147
1.247
197
1.480
48
.638
98
.988
148
1.252
198
1.484
49
.646
99
.994
149
1.257
199
1.488
50
.654
100
1.000
150
1.262
200
1.492
Example. — To find the value of lot 110 feet deep, if standard lot worth
$75,000, multiply 75,000 by 1.06 = $79,500.
For depths with parts of foot or more than 200 feet, or where greater
accuracy is desired than three places of decimals, use the formula in which
Y = the proportion of value of lot in question to value of standard lot, and
X =: the proportion of depth of lot in question to depth of standard lot.
233. Valuing lots more or less than a typical lot
width. — ^We come now to another problem. All lots are
not twenty-five feet wide, and all improvements are not
capable of being put upon a twenty-five-foot lot. The
lot under consideration may be more or less than twenty-
five feet wide. If an owner is offering less than a typ-
ical lot in the neighborhood, he will find that he will
not get quite the same proportion for it as the width
bears to twenty-five feet. If it is a private house street
and if he offers so much for sale as is useful for a private
house of the character which the neighborhood will bear,
he will get nearly the proper proportion of the lot value ;
but if he offer less than that, he will be told that it is
too small to do anything with unless the next lot is
bought. Rentable space is always rentable, but if a lot
is too small for the purpose of improvement, the owner
cannot get as much for it proportionally as for a lot that
is a little too large. There is no absolute rule for figur-
472 REAL ESTATE
ing the ratio of a lot to the typical lot with regard to
width; that must be governed by the judgment of the
parties concerned, and the advice of their appraisers.
If a lot be irregular, that is another problem. It is
usual to take the average of the two lines, and say that
that is the depth of the lot. But if the irregularity
of shape make the property difficult to improve,
that would not be reasonable. Very large allowances
would have to be made for difficulty of construction,
and lack of income after the improvements have been
made.
234. Plottage. — Where more than one lot can be ade-
quately and economically improved to better advantage
proportionately than can a single lot treated alone, it is
self-evident that the putting together of the two lots
into a plot adds immediately to the value of each of the
lots concerned. It has added to each lot an element
known as "plottage." In sparsely settled neighbor-
hoods, and where vacant lots are plentiful and cheap,
and it is an easy matter for builders to obtain adjoin-
ing plots, plottage is not as valuable as in a neighbor-
hood where vacant lots or lots with old buildings are
scarce. In the former case the additional value, by
reason of plottage, may be 10 per cent, whereas, in the
latter case, it may amount to 25 per cent or even more.
If a person has two lots which were each, when separate,
worth $1,000, and he put them together, as soon as he
has done so he has more than $2,000 worth : if plottage
be figured at 10 per cent, he now has $2,200 worth.
235. Illustration of method of appraising property, — •
The lot illustrated in the diagram is an irregular plot
containing fifteen thousand square feet. It is obvious
that it would be absurd to value this as though it were
a regular plot. Assume that the plot is situated on a
METHODS OF VALUATION
AVENUE "L."
473
25
25
25
25
25
25
25
25
s
-^
-._G^^
^
^ -E
o
vi
--^^?CJ4r~
~~^£^
B
._.A
- 'I,
more or less important thoroughfare, and is suitable
for improvement with a building having stores on the
ground floor, and good apartments above, and assume
that an ordinary, inside lot in the vicinity is worth
$25,000.
For the purpose of valuation the plot is divided into
lots each twenty-five feet front, varying in depth from
fifty to one hundred feet. Lot A, being a corner, would
be worth 50 per cent more than the inside lots, or $25,000
plus $12,500— $37,500. Unless there be some good
reason to the contrary, it is usual to value corner lots at
50 per cent more than inside lots. This lot has an aver-
age depth of ninety-six and one-half feet, and is a double
corner; it is the corner of L avenue and C street, and
also of M avenue and C street. On the first count, ap-
plying the Hoffman rule, it is worth 98 per cent of a
full lot, or $36,750. On the second count something
must be added for the extra corner. Extra frontage is
considered as adding 25 per cent to the value of the lot.
In this case it is fair to add 33-1-3 per cent — $12,250,
which gives a value of $49,000 for that corner lot.
Lot B has an average depth of ninety feet. Again
using the Hoffman rule, 96 per cent of $25,000, is
$24,000, plus 25 per cent for the extra frontage or
474 REAL ESTATE
$6,000, makes B worth $30,000. The same theory holds
good right through the hne. Then to the whole plot
it is safe to add 10 per cent for plottage, which works
out a valuation of $270,000. This is at the rate of $18.00
a square foot for the entire plot, as against a lot basis
value of $10.00 a square foot.
236. Valuation of improved property, — In making a
valuation of improved property the appraiser should
always separate the land value from the value of the
land with the improvement, but should not try to sepa-
rate the value of the improvement from the value of the
land because there may be a very expensive building
on a very poor lot, and the expensive building would not
be worth the cost of construction and, in such a case,
if the cost of construction and the land value be figured
separately the appraiser's estimate will be too high on
that building. He must figure the lot and the improve-
ment according to the income which can be obtained
out of the lot and the improvement as it stands, allow-
ing for the lot value, what the lot will bring when
adequately improved, allowing for the building what
it would cost to reconstruct it — if it is an adequate and
permanent improvement upon the land.
An adequate improvement put upon a lot is worth
the cost of construction so long as the lot value has not
risen beyond the place where the improvement is ap-
propriate and adequate, and the best thing that can be
done with the lot. The rule is that the land value in-
creases by reason of the better use which can be made
of the land; and therefore old buildings are incapable
of competing with those which will bring greater income
in the neighborhood. For that reason a time may come
when the land value rises so high that the value of the
construction disappears entirely, and there are lots in
METHODS OF VALUATION 475
old and superannuated neighborhoods where the land
value has gone up so that the buildings, for the neigh-
borhood, will not bring adequate rentals, and will not
sell for more than vacant lots.
237. Cost of buildings, — The usual method of ascer-
taining the cost of a building is by taking the cubic
contents of the building, and then figuring the cost
per cubic foot of a typical building of similar character.
That cost will of necessity rise or fall. Math the rise or
fall in the cost of building material, and of labor. In
New York city appraisers in figuring cost, after allow-
ing for depreciation or superannuation, say a non-fire-
proof loft building, which is really a shell of walls with-
out interior decoration, costs about 10 cents a cubic foot.
They figure tenement houses, put up in the manner that
a speculative builder puts them up, at about 12 or 15
cents, frame dwellings at about 15 cents, steam-heated
apartments (walk-up, without elevators), at 16 to 20
cents, elevator apartments non-fire-proof at about 20
to 25 cents, elevator apartments of the speculative order
about 30 to 35 cents, hotel buildings about 35 to 50
cents, fire-proof loft buildings about 25 to 30 cents,
office buildings about 45 to 50 cents as high as $1.00
a cubic foot.
The object of the ownership of land is to derive in-
come, so that the way to check a valuation is to compare
it with the actual income from the property. If the
property be properly and adequately improved, it will
bring in a proper return on the investment; and ap-
praisers after having tried other methods will check
back their appraisals by comparing the rentals with
their estimate of the value.
238. Property taken in condemnation proceedings, —
As already explained there has always been attached to
476 HEAL ESTATE
the ownership of land the incident that whenever it was
required for a pubHc purpose it could be taken for that
purpose under the right of eminent domain. It might
be that under the public power of eminent domain prop-
erty could be claimed by the public and applied to the
public use, but under a free government we have given
one another constitutional guarantee that when real
property is required for a public purpose, it may be
taken, but it must be upon due process of law, and upon
the giving of just compensation. Due process of law
involves not only notice but a just trial, and that such
a trial shall result in the giving of just compensation
for the right of property of which the owner has been
deprived.
When we say that property may be taken for a public
purpose, we use the word "public" in its very widest
acceptation. We mean not only for the uses of the
United States government, but for the uses of a state
or a county, city or village upon which has been con-
ferred the right to take property by eminent domain for
public purposes. The words "public purpose" are
wider yet. It is a public purpose if the needs of the
public be served in a matter which individual effort
could not accomplish without the aid of governmental
intervention. If it is necessary that the public shall
be able to travel by road or railroad, or to communicate
with one another by telegraph or telephone, the rights
which are necessary to be exercised over real property
for construction of such a road or railroad, or telegraph
or telephone lines are a public purpose, and may be
obtained under the right of eminent domain. So,
wherever a public purpose is to be served, the pubhc
confers its right of eminent domain upon its public
METHODS OF VALUATION 477
service corporations, and the use of property for those
purposes is a pubhc use.
When corporations take property under the right of
eminent domain, they may take so much as is necessary
for their pubhc purpose, and no more. They cannot
say they want a house, without showing why they need
it. The power to take property under eminent domain
or by condemnation is a legal proceeding in which two
issues are tried, first, the issue of the necessity for tak-
ing the property; and, second, if that be decided in
favor of the corporation or authority desiring to take,
the issue as to what compensation shall be given.
As to the necessity for taking, it may be declared by
legislature, and if so there is no absolute issue to try.
The people may delegate that authority to their agencies
of government, municipal corporations, counties, cities,
villages, towns. They cannot delegate that authority to
private corporations, even though those corporations be
clothed with the right of eminent domain. A corpora-
tion other than a direct governmental agency seeking
to take property must show, if the issue be raised, the
necessity for taking. If that necessity be decided in
favor of the corporation, then it must proceed to try the
issue of what the property is worth. Values of real
property are never absolute, and it often becomes a
battle of experts. The public authority will offer
through its expert evidence as to the value of the prop-
erty to be taken, and the owner of the property will
offer the evidence of his expert. They may differ very
widely. The proceeding may be before a court, or it
may be referred by the court to a commission appointed
for the purpose of determining the issue.
239. Expert appraising, — The business of experts
478 REAL ESTATE
who make it their work to make appraisals and defend
them upon examination and cross-examination in con-
demnation proceedings is the highest paid, and in many
respects the most difficult branch of the real estate busi-
ness. It is difficult to lay down any rules as to how
to testify as an expert in a condemnation proceeding.
The following suggestions have been given by a suc-
cessful New York real estate expert appraiser.
240. Specialization in appraising, — First, and most
important, the expert must know his subject. He must
be able to appraise the real estate taken in the proceed-
ing in which he is employed, and he must be able to
prove the values. It is a very difficult thing for a lay-
man to go on the stand and by simply answering the
questions which are put to him convey the information
and knowledge which he has.
The best witnesses are those who confine themselves
to one particular section of a city or one character of
real estate. If a man, in his mind's eye, can see the
surroundings of a piece of property, not only the very
block, but the district for a mile in every direction, and
can call to mind almost automatically the character of
the buildings, recent changes, contemplated improve-
ments, recent sales, leases and mortgages, and their true
consideration, the inside history of the transactions, his
testimony carries a great deal more weight and convic-
tion than the answers of a witness who makes mistakes
of fact.
241. Methods of proving values before commissioner.
— The simplest and most effective way to prove the
value of a conventional piece of property is by quoting
sales of similar pieces in the immediate vicinity or sim-
ilar locations. This is not always possible for various
reasons. First, there may not have been any recent
METHODS OF VALUATION 479
sale« analogous to the plot in question; or, second, the
sales may have been at a figure below or above actual
value, by reason of special conditions. Lack of sales
in some neighborhoods does not necessarily mean that
there is no demand for property there, but may mean
merely that there is no property in the market for sale.
In some cases, where figures do not represent actual
values, the expert must fall back on his general knowl-
edge, and if in his qualification he has shown that he is
thoroughly familiar with the neighborhood, his general
knowledge will carry weight. A good deal of the value
of the testimony of an expert is in the effect that it has
on the commission, more than from what actually ap-
pears on the record.
Frequently a witness is asked in cross-examination
if he knows of such and such a sale at possibly a wide
diversity in price from that which he quoted as his basis
of value. Then again his familiarity with the section
stands him in good stead. He must know the why's and
wherefore's of the sale ; if improved, what kind of build-
ings are erected thereon. It may be that it is a su^
perior improvement, or it may be inferior, or it may be
that while the building is a good one, it is not a proper
improvement for the land. If the property is vacant
there may be a host of reasons why the price is above
or below the one he has quoted. There may be rock
or bad bottom or vice versa as compared to the plot in
question, or it may be a small lot between two substan-
tial buildings, the owners of neither of which care to
buy, and which lot by itself is too small for an adequate
and proper improvement.
242. Valuing irregular and short lots, — One of the
most important things with which an expert should be
familiar is the valuing of small lots less than one hun-
480 REAL ESTATE
dred feet in depth, and those of irregular shape. Many-
real estate men differ as to the values of irregular lots,
easements, plottage and added value for improvement.
No fixed rule as to the handling of these subjects should
be made, but it is advisable to work out a theory and
stick to it. The use of the Hoffman and Davies rules
must be intelligently applied, or they will prove to be
valueless. A rule may work smoothly in one case, and
work against a person in another, where it is not ap-
plicable. A double frontage may add very little to a
certain class of private dwelling but may be of immense
advantage to a certain kind of office building or high-
class apartment house. It is safe to limit a general
rule to specific cases, as a theory that at the time the tes-
timony is given seemed to be true for all cases, may
react against a person in some widely diverse case, where
it is not applicable.
243. Suggestions for the expert on the stand, — As a
general rule, it is well to avoid on the stand the valuing
of property off hand on a different theory from the
one adopted. Depend on notes, especially for figures,
as far as possible, thus keeping the mind clear and wits
sharp to parry apparently innocent questions. Fre-
quently a question must be answered by "y^s" or "no,"
and qualification or explanation of the answer may not
be allowed. If possible, get the explanation in first,
before the "yes" or "no;" then, even if it is struck from
the records, its effect will remain.
The larger general knowledge of real estate an expert
has, the more valuable witness he is, all other things be-
ing equal. Everyone whose property is taken for a
public purpose is entitled to receive a fair and equitable
compensation, and its fair market value. It is distinctly
part of the duty of the expert to value the real estate
METHODS OF VALUATION 481
thus condemned under its most favorable circumstances,
i. e., he must know what are its most valuable uses, its
most advantageous methods of subdivision and all its
favorable aspects ; and be able to bring these out in the
answers to direct questions. This method can only be
successful after long experience, with good judgment,
and knowledge of the methods of cross-examination.
A good working knowledge of the rules of evidence is
a very valuable adjunct to the witness.
The simpler and more direct a witness can make his
direct testimony, the less likely it is to be shaken on
cross-examination. Most condemnation lawyers under-
stand this, and ask only the most necessary questions in
the examination.
In appraising vacant ground care must be taken to
examine the physical aspects very carefully and com-
pare with the damage map. The expert should study
the grade, the abutting property, the condition of sur-
rounding streets, and the status of the assessment. If
there is rock on the property and the bottom is bad, he
must find out the cost of putting the property in shape
for building. It is convenient to value land as at grade,
and then make such additions or deductions as may be
necessary by reason of existing conditions. In con-
sidering all these conditions the appraiser should be
able to explain their effect on the final estimate of value.
Nothing he has left unsaid is taken for granted, and
if some feature beneficial to his side of the case is not
brought out by the questions while under cross-examina-
tion, it is his duty to try to bring it out. The expert
witness should call things by their right names. He must
know the difference between a street laid out on a map,
one that is graded and regulated, and one that is paved
and sewered. A common error is confounding open
XI— 31
482 REAL ESTATE
streets with those that are not only opened, but regulated
and sewered. A street is legally open whenever title
for the same is vested in the city, and is not necessarily
one over which access is possible, as in the case of a
graded and regulated street.
244. Knowledge useful to the expert, — If an expert
has some knowledge of the building business, so much
the better, but lack of such technical knowledge does
not prevent his being able to value simple buildings in
connection with land. Every real estate man knows
the cost of the standard type of building most commonly
erected, and can tell, after inspection of such a building,
very- close to what it can be built for, although he may
not know the price of lime, brick, etc. An expert must
also have some knowledge of the existing building laws,
and keep himself in touch with the amendments to these
laws.
245. Valuing parts of property, easements, etc, —
Where the entire fee is taken in a proceeding, and noth-
ing remains, the case is simpler than one in which only a
part is taken, or none of the land or improvements, but
only some inherent right, as light, or air, or access in
whole or in part. In these cases there usually enters
an element of consequential damage.
If an easement over land be taken, as a right of way
for a railroad or a right to tunnel under land or to put
telephone or telegraph poles in front of a house, it is
difficult to find a rule, but one rule that must always
be observed is that there shall be at least compensation
for that which is taken away. If a man own two lots,
one of which is taken in a condemnation proceeding,
the benefit which accrues to one lot cannot be offset
against the damage to the other. It is a rule of law
METHODS OF VALUATION 483
that benefits may not be offset against damages for
condemnation.
It is also true that, in addition to the absolute value
of that which is taken, the owner is entitled also to
consequential damage. Consequential damage is dam-
age to the remainder of a plot, part of which is taken,
in addition to the actual value of the land taken. In
some instances, where only a part of the land is taken,
the remainder may be of so little substantial value, that
the damage may be considered as total, but where a
part of a plot is taken, and the remainder has intrinsic
value, the approved method of appraising is to value
the whole piece in its entirety, then value the part that
remains, and the difference between these two will rep-
resent the damage. Damage to a piece of property by
taking away an easement, such as light, air or access,
may be computed in the same way. The element of
consequential damage may be very important, as the
erection of a structure in front of a property may change
the character of a neighborhood, and the plot which
may have been suited for a high-class apartment or
hotel, may become fit only for a stable or a factory.
CHAPTER XV
THE SURVEYOR'S RELATION TO REAL ESTATE
246. Necessity for accurate survey, — ^When dealing
with land as the subject of commercial transactions or
as an article of use it is important that the extent of
the land be ascertained with minute accuracy, as well
as the relation to the land of the structures upon it
and surrounding it. This is the subject of a separate
profession — the profession of the surveyor. A sur-
veyor has nothing to do with the question as to whether
the title be good or bad, and it is an assumption on his
part when he attempts to give his opinion as to market-
ability of title.
247. The survey, — Having been provided with a
description of the property concerning which he is em-
ployed, the surveyor makes his return upon a diagram.
These diagrams are horizontal projections of all struc-
tures and encroachments that are found upon or bound-
ing the premises. There are two elements to be taken
into consideration in determining the result of a survey,
first, the property owned by the person whose land is
being surveyed; and, second, the relation of the struc-
tures and encroachments to the land thus owned. Hav-
ing in mind the extent of ownership of the person whose
land is being surveyed, the first and most important
thing to consider, is, are the structures entirely within
the bounds? Every time they are not, an important
question of marketability of title arises, and in order
to solve the question of marketability of title, a person
484
THE SURVEYOR 485
must be familiar with the principles of law applicable
to the situation.
248. Encroachment upon highway, etc. — An im-
portant consideration always is not only to find out
whether the building encroaches upon a neighbor's land,
but whether it keeps off the public highway. The public
streets of cities are often owned in fee by the city, but
charged with the public use. In country communities
they may be owned in fee by public authorities, or the
public authorities may have acquired, on behalf of
the public, an easement to use the highway for travel, the
title to the land remaining in the original owners or
their grantees or successors in title. In either case, ex-
cept with the authority of the legislature, no person has
a right to obstruct the highway, especially with a per-
manent structure, and appropriate it to his own use.
The fact that a person may be liable to pay damage for
an encroachment, or the fact that he is liable to have
his building removed from a neighbor's ground, makes
his property not as useful as it would otherwise be ; and
may make it a diff'erent thing essentially and commer-
cially from what it was represented to be when the con-
tract was made. A purchaser is not compelled to take
a title unless he gets upon the property those structures
which were the subject-matter of his bargain, with a
good right to maintain them.
249. Beam rights and party walls, — If a building
has three walls and a good beam right in an adjoining
wall to maintain the fourth, that three-walled structure
would be a good delivery, and a marketable title. In
the same manner if a house is supported by party walls,
and a person purchased the building with a good party
wall right, it is a good delivery and the title is market-
able with respect to that. It need not be specifically
486 REAL ESTATE
set forth in the contract, but it is usual to be fair and
mention it.
A good party wall right may arise either by special
agreement between the owners of the two neighboring
structures, or because the builder of the houses described
his line as running through a party wall. A party wall
must remain so long as it will naturally stand and either
party wishes it to remain for support of his structure.
If it be destroyed by natural means, unless there be
special agreement to that effect, neither party has a
right to have it restored. If one owner remove his
building he must leave the entire wall for the support
of the remaining building; and if he wants to put a
new structure on his land, he must either incorporate it
or build around the party wall.
250. Encroachment by neighbor, — A building may
be entirely within its bounds and somebody else may be
encroaching with his structure upon it. In such a case
the title to what remains unencroached upon is not af-
fected by the fact that another wall comes over upon the
lot. When considering a survey where property is en-
croached upon, the question is not so much a question of
marketability of title, as it then becomes a commercial
question, and the courts will so consider it. If the court
finds that the encroachment by the neighbor's structure
does not materially diminish the property purchased,
so as to make it substantially different in value from the
subject of negotiation, the purchaser will be compelled
to take. If the court does find that it is substantially
different, the purchaser will not be compelled to take,
or will be given an allowance for the difference in area,
depending upon the facts of the case.
251. What a survey should show, — In rural communi-
ties or residential streets of cities, it is often important
THE SURVEYOR 487
that houses shall set back from the street lines, and that
there shall be restrictions as to the character of the en-
croachments. The information to determine these
things should be upon the survey.
In cities there are various encroachments upon public
streets which are not clearly authorized, such as bay-
windows, porches and porticos, and a survey should show
all encroachments of this character.
Another important subject which should be shown by
a survey is the relation of the premises with regard to
street changes. Village communities are laid out either
by selling lots along a road or street or having a map
made by a surveyor who simply takes a field and cuts
it up into such number of lots as seems to him advisable.
He seldom locates his streets accurately, or monuments
them in any way. As a city grows, it takes in these
village communities, and imposes its accurate street
system upon these inaccurate street and lot lines, and
it is important that a survey should show the relation
of the present or projected street system to the former
lay-out of the lots and streets.
252. A modern sub-division survey, — In making a
survey of a tract to be subdivided the surveyor gives the
meridian to which he refers his line, and the distances
of the salient corners of the property from a definite
assumed point. He locates a definite street, or road
and the perimeter of his tract ; then he is prepared to
cut it up. There is not only a definite piece of land to
be cut up and shown in its divisions, but the places from
which to measure in order to find any subdivision of any
piece of land are shown and can be identified on the
ground by monuments.
253. Builder's surveys. — Another important function
of surveyors is to furnish to persons intending to erect
488 REAL ESTATE
structures, information as to how and where to locate
those structures. A person may own a lot, and think
he knows just where it is, but if he were directed to put
a wall around the perimeter of that lot, he might not
be able to pace it off. It is the duty of a surveyor to
make marks on the ground indicating where structures
may be put with relation to the ownership of which he
has been informed, and also indicating the perimeter of
the lot. He furnishes a diagram showing where those
marks are, and gives information as to where the high-
est point in the curb is opposite the property, and also
gives the grade. Very often the entire lay-out of the
building is importantly influenced by the depth of sewer
level. Having a proper survey an owner can do two
things : he can instruct the architect what kind of build-
ing he wants; and can send the builder there to strain
his line from the marks on the curb to the back of the
lot, and start his foundation work.
It is not wise to assume when negotiating for a build-
ing operation, that having gotten a building mark from
a surveyor, that is the end of the survey. After the
builder has put in his foundation, it is the part of
prudence to call the surveyor in again and test the lines
before starting the brick work.
CHAPTER XVI
WORK OF THE ARCHITECT
254. Architect's relation to real estate, — ^The archi-
tect's work touches the real estate business at many
points. Some of these are as follows:
While negotiating for a sale, a broker frequently
consults an architect in order to obtain from him the
approximate cost of a prospective improvement. The
value of the property as an investment is largely de-
pendent upon the solution which the architect makes
of the problem, and not necessarily upon the cost of the
structure itself. The responsibility for determining the
type of building to be put upon the lot rests with the
real estate man. The architect does not claim to be a
specialist in what may rent best in a particular locality;
all he claims to be able to do is to take the real estate
man's advice upon such matters, and to apply that ad-
vice to the solution of the particular problem.
255. Preliminary rough sketch, — It is frequently
necessary and often desirable, before purchasing a piece
of property for the purpose of building, to secure from
an architect a rough sketch of what may be placed
upon it. Some problems are so simple that they solve
themselves, but with the many complications of ten-
ement house laws and sanitary codes, it is the cautious
way to obtain such sketches from an architect. These
differ radically from the sketches an architect would
make for the construction of a building. They show
489
490 REAL ESTATE
a typical floor, to demonstrate how many rooms can be
gotten out pf the space available, what space they would
occupy, and how they would be lighted; and from that
the real estate man is able to figure out the rentals, and
the approximate cost.
A matter which the architect finds very important
to determine is the possibility of the light being shut
off. Surveys usually show the height of the adjoining
buildings, and their relation to the lines of the property,
and having these data an architect can determine with
reasonable certainty what the light is likely to be in a
particular house.
256. Architect's opinion as to cost of construction, —
After the rough sketch is made, the broker asks the
architect what the contemplated building would cost,
and the architect gives his opinion. That opinion is not
as definite as the real estate man usually takes it to be.
Many people have an idea that the architect must be
familiar with the building trade, and able to tell within
a few hundred dollars, what a building should cost.
That is absolutely impossible for an architect, because
the building market is changing continually; and the
cost can only be approximated on the basis of things
which have been done of a similar character. The courts
have decided in this country that the architect is not
bound to the estimate unless there is a specific order to
that effect before he begins. In the English courts it has
been decided that an architect does his duty if he comes
within 15 per cent of his instructions.
257. Working drawings. — These drawings contain
a great deal of construction information, as to the thick-
ness of walls, size of doors, etc. From these drawings,
with the aid of specifications, the contractors take off
accurate quantities, and figure out the cost of the build-
WORK OF THE ARCHITECT 491
ing. In obtaining estimates, it is astounding to learn
the extent to which they vary. The only explana-
tion is that one contractor gets his sub-bids from men
who are busy, and the next contractor gets his from
men who have more time. One man may agree to put
up a building for $10,000, and another man may ask
$20,000 for the same building.
258. Matters about which the architect should be in-
formed.— A matter which affects tenements and apart-
ments is the grade of the street. There are a number
of city streets where the city ordinances may differ with
regard to projections; the questions of easements,
electricity, steam heat, the kind of foundation, whether
or not there are party walls — all are matters about which
the architect must consult the real estate man.
259. Survey furnished to the architect, — The first
thing an architect asks for, before he makes his work-
ing drawings, is a survey of the lot. The surveys in
the real estate office are different from those furnished
to the architect: the architect gets a different type of
information. He not only wants the size of the build-
ing and the lot, and the size of the adjoining buildings,
but he requires the height of the adjoining building,
the building line, depth of sewer below the street and
the pitch of the curb. After the lot has been thus sur-
veyed, the surveyor puts upon the adjoining walls or
stakes, marks corresponding to those indicated upon
his survey, upon which the levels are started top and
bottom. It is of great importance that the first mea-
surement be absolutely true.
260. Walls which lean, — It is frequently necessary
to find out if the adjoining walls lean. Unfortunately,
very few walls are plumb, and it is a great annoyance
in building a steel frame building to find that the wall
492 REAL ESTATE
of a neighbor projects over at the top, although it may
be on Hne at the bottom.
Another important thing to know is the depth of a
neighbor's wall, as under existing laws the burden of
protecting the wall may cause considerable expense.
261. Choice of an architect, — The first man consulted
in a building operation is the architect : he comes into the
operation first, and is the last man to get out. In
private work the architect is selected by direct appoint-
ment; in large or public works, by competition. There
are competitions of various kinds: the public competi-
tion, where anybody may submit a set of drawings ; the
limited competition, to which certain men are invited,
and which others may enter if they want to do so; and
the invited competition, in which every man is paid for
his services.
After the selection, the architect proceeds to make the
sketches already described. There may be an agree-
ment that if, for instance, the property be not sold, that
the architect shall not be paid for these sketches;
but under ordinary circumstances, he expects to be paid
for them. After they are approved, the architect is
instructed to make his working drawings. If he pro-
ceed with that work, and then the owner comes back and
makes radical changes, the architect has a right to charge
for that extra service. It is the architect's duty to make
as many of the small sketches as necessary, but when the
scheme is determined upon, and he begins his working
drawings, the owner is committed to that scheme. The
architect's charge is usually 5 per cent upon the cost of
a new building. His services include — to quote from
Schedule of Proper Minimum Charges indorsed by the
American Institute of Architects : —
WORK OF THE ARCHITECT 493
1. The Architect's professional services consist of the neces-
sary conferences, the preparation of preliminary studies, work-
ing drawings, specifications, large scale and full size detail
drawings, and of the general direction and supervision of the
work, for which, except as hereinafter mentioned, the minimum
charge based upon the total cost* of the work complete, is six
per cent.
2. On residential work, alterations to existing buildings,
monuments, furniture, decorative and cabinet work and land-
scape architecture, it is proper to make a higher charge than
above indicated.
3. The Architect is entitled to compensation for articles pur-
chased under his direction, even though not designed by him.
4. If an operation is conducted under separate contracts,
rather than under a general contract, it is proper to charge a
special fee in addition to the charges mentioned elsewhere in
this schedule.
5. Where the Architect is not otherwise retained, consultation
fees for professional advice are to be paid in proportion to the
importance of the question involved and services rendered.
6. Where heating, ventilating, mechanical, structural, elec-
trical and sanitary problems are of such a nature as to require
the services of a specialist, the Owner is to pay for such services.
Chemical and mechanical tests and surveys, when required, are
to be paid for by the Owner.
7. Necessary traveling expenses are to be paid by the Owner.
8. If, after a definite scheme has been approved, changes in
drawings, specifications or other documents are required by the
*The total cost is to be interpreted as the cost of all materials and labor necessary to complete the
work, plus contractors' profits and expenses, as such cost would be jf all materials were new and all labor
fully paid, at market prices current when the woik was ordered.
494 REAL ESTATE
Owner ; or if the Architect be put to extra labor or expense by
the delinquency or insolvency of a contractor, the Architect
shall be paid for such additional services and expense.
9. Payments to the Architect are due as his work progresses
in the following order: Upon completion of the preliminary
studies, one-fifth of the entire fee; upon completion of specifi-
cations and general working drawings (exclusive of details),
two-fifths additional, the remainder being due from time to time
in proportion to the amount of service rendered. Until an
actual estimate is received, charges are based upon the proposed
cost of the work and payments received are on account of the
entire fee.
10. In case of the abandonment or suspension of the work,
the basis of settlement is to be as follows: For preliminary
studies, a fee in accordance with the character and magnitude
of the work; for preliminary studies, specifications and general
working drawings (exclusive of details), three-fifths of the fee
for complete services.
11. The supervision of an Architect (as distinguished from
the continuous personal superintendence which may be secured
by^ the employment of a clerk of the works or superintendent
of construction) means such inspection by the Architect or his
deputy of work in studios and shops or a building or other work
in process of erection, completion or alteration, as he finds neces-
sary to ascertain whether it is being executed in general con-
formity with his drawings and specifications or directions. He
has authority to reject any part of the work which does not so
conform and to order its removal and reconstruction. He has
authority to act in emergencies that may arise in the course of
construction, to order necessary changes, and to define tlie
intent and meaning of the drawings and specifications. On
WORK OF THE ARCHITECT 495
operations where a clerk of the works or superintendent of con-
struction is required, the Architect shall employ such assistance
at the Owner's expense.
12. Drawings and specifications, as Instruments of service,
are the property of the Architect.
262. Superintendence, — Superintendence by the ar-
eiiiteet does not require his presence on the work con-
tinually. The average architect, with moderate prac-
tice, will visit the work once or twice a week, but the
number of times would entirely be determined by the
progress of the work, and whether things were going
smoothly. In larger pieces of work, it is necessary to
have a clerk of the work, who is in charge all the time,
and represents the architect. He is paid for by the
owner, but reports daily to the architect's office.
263. Charge for small tcork^ etc. — The architect's
charge is different on smaller works which include the
drawing of a large number of details, such as the de-
signing of elaborate monumental works. Some archi-
tects make a practice of charging 8 per cent for new
work that costs under $5,000, because it is difficult to
make it pay at 5 per cent; for monumental work 10
per cent; and for work involving alterations 10 or 12
per cent. The prices quoted are those of the best prac-
tice; they have been adopted by the Institute of Archi-
tects; and have been recognized by the courts as right
and proper. There are a great many architects who
charge less than these figures.
264. Specifications. — After the working drawings
are made, the specifications are prepared, in which the
trades are divided UD^ mason work, carpenter work,
stael and iron, plumbing, electric work, steam fitting, etc.
265. Permits. — Contractors who are invited to send
in estimates on the proposed work are provided with a
496 REAL ESTATE
copy of the drawings and specifications. While that
is going on, the architect usually obtains the various
permits which are necessary from the different munici-
pal departments. After the permits are obtained, the
next step is the selection of a contractor, by the owner,
naturally, in consultation with the architect. The con-
tract is usually what is known as the "Uniform Con-
tract," which has been adopted by the Institute of
Architects, and is amended from year to year.
266. Detail plans. — After the contract is made the
architect begins to make his other working drawings.
He then makes the framing plans, i. e., the details of
the steel, which are sent to the mill, and from which
the steel sections are gotten out, the details of door trim,
doors, cornices, woodwork, terra cotta, galvanized iron,
etc. That work proceeds practically during the con-
struction of the building.
267. Expert service, — The architect frequently finds
it necessary, in addition to the services spoken of, to pro-
vide expert service. That does not apply to ordinary
work, but in the building of large hotels or public build-
ings. For instance, the science of electricity may have
gone beyond the knowledge of the average architect,
and he must retain a consulting engineer, the architect,
however, retaining the control. The system of paying
these experts is not definitely determined. The archi-
tects of larger practice who are able to dictate their
terms have their clients pay for this additional service.
In a large number of cases, the architect divides the
commission on that particular part of the work with
the expert. It is also sometimes necessary to have a
sanitary engineer, who is compensated in the same way.
268. Various hinds of contracts. — Upon the basis of
the uniform contract, contracts of various kinds are
WORK OF THE ARCHITECT 497
made. The sort of contract entered into by the build-
ers with the largest business and the best reputations
is that based upon the cost plus a definite profit, usu-
ally 10 per cent.^ As a rule these contracts are only
entered into by men of considerable means, who can
afford to be placed in a position before going ahead
with a building, where they are not exactly informed as
to the cost. There is also the contract based on the
cost plus percentage, but upon which the contractor
gives a guarantee that the building will not cost over
a specified amount. In most of these contracts the
builder will submit his bill to the architect once a month
or once in two months ; that will be audited, and he will
get the amount thus audited, plus 10 per cent.
269. Subdividing contracts. — The contracts on the
10 per cent basis are nearly all general contracts. In
this country it is a rather rare thing, except in the case
of very large construction companies, for the owner
to employ directly those who do the work of the various
sub-trades. The other system is that of dividing the
work into four or five contracts, and it is probably the
form used in the largest number of medium-sized opera-
tions. The divisions generally made are: mason work,
carpenter work, plumbing, heating, electricity, and iron
and steel. In that way the owner saves the profit which
the general contractor would make upon each of those
trades, if they were put into one contract. Even in
this subdivision one class of work may include various
sub-trades; for instance, masonry may include plaster-
ing, concrete, tiling, etc.
270. Drawing and signing of plans and specifications.
— An important clause in the uniform contract is that
which provides that the drawings and specifications be
signed by the parties to the contract. This sometimes
XI— 32
498 REAL ESTATE
seems unnecessary, but it is frequently of great im-
poi-tance, as it establishes beyond a doubt that they are
the particular drawings which are called for. Some-
times there may be two sets of drawings for a specific
lot, and the question will arise, which was the set in-
tended to be included in the contract; consequently, the
signatures are most important. The care with which
the plans and specifications are drawn is also of great
importance. The general clause of the specification, in
particular, if properly written, will prevent many of
those extra orders, which are so much trouble to owners.
271. Extras. — The system provided in most care-
fully drawn contracts is that when extra work is
required the contractor shall submit an estimate for that
extra work, and receive a written order from the archi-
tect. It is advisable that the owner or his attorney
sign the order also, so that they may know that they
are spending an extra amount. Such matters are more
easily settled when the work is going on than when it
is finished.
272. Method of paying contracts, — The method of
payment of the contracts is sometimes by payment of
a certain amount when a certain percentage of the work
is done. That is the system in a great many contracts
of the 10 per cent type, but it is apt to lead to a great
deal of unnecessary controversy. The better way is to
make a certain definite amount of money due when cer-
tain definite things are done, that payment being
usually on the basis of 70 to 90 per cent of the value
of that work, the balance being left for the last pay-
ment, so that the owner may be able to protect himself.
273. Architect's decision impartial, — The architect's
position, in deciding upon these payments and all mat-
WORK OF THE ARCHITECT 499
ters in relation to the interpretation of the plans and
specifications, is supposed to be impartial. There is a
belief that the architect is bound to decide with the
owner, because he receives his fee from him, but that is
not the position in which the architect considers himself.
He considers that he should be an impartial judge; and
that the owner employs him to act as his agent because
he has technical knowledge, and is able to conduct the
business of building better than he is.
In large undertakings an important part of the busi-
ness of building is the conferences between all the people
interested in the work. If one man does not do his work
on time, the whole line is inconvenienced, so it is
important that everybody be thoroughly informed as
to the way the work is progressing.
274. Necessary certificates. — When a building in a
city is completed, certificates are required from proper
authorities before it may be occupied such as, for in-
stance, a board of underwriters, departments of water
supply, gas and electricity, the bureau of buildings,
and the gas company. If the building be a loft build-
ing, the building law often requires that the amount of
load which the floors will hold be posted upon the floors,
the idea being to avoid accidents from over-loading.
275. Planning an apartment. — The general principle
which governs an architect in planning a building for
income is that there must be as much rentable space as
possible, with the public space as small as possible. It
does not follow that large spaces are convenient spaces,
so the architect in providing large rooms, must place
his fixtures and openings in such a position as to permit
the maximum amount of use. He usually attempts to
obtain large wall spaces by massing his openings.
500 REAL ESTATE
The architect must plan within the apartment so that
some rooms may be reached by the private hall, but that
hall may be no larger than necessary.
Stairs and elevators are always placed, if possible, in
a position equally distant from each apartment ; and an
attempt is made to mass the plumbing, so that it is back
to back, not only for purposes of economy, but also for
the purpose of sanitation, as the fewer pipes, the more
free from obstruction they are likely to be.
The closet space is something which the American
architect has learned to consider valuable, as it sometimes
makes or unmakes an apartment; and he must utilize
every possible space for the purpose of closets.
The occupancy of the basement and the height of the
stories are determined by law; in fact the pecuHarities
of the buildings of almost every city in the world, in
their last analysis, are legal peculiarities.
276. Planning a wurehouse or business building. — In
the planning of a warehouse, the problem is simple. It
is mainly the securing of light, and the placing of stairs
and elevators, depending on the size of the lot. If it is
a single lot, the question of division does not present
itself so strongly, but in the large buildings over twenty-
five feet it is usual to try to place the elevators so that
the loft can be divided, if necessary, and to place the
plumbing and wiring in such a position that, if the
building be altered, each tenant may have his own cur-
rent and plumbing fixtures.
CHAPTER XVII
PROBLEMS OF MANAGEMENT
277. Divisions of management business, — The man-
agement of real estate is really housekeeping on a large
scale, and includes not only the deriving of income, but
also the keeping down of expenses. The difference be-
tween a good manager and a poor manager lies in two
elements: First, the ability to keep tenants, that is to
say, to get through with the fewest possible vacancies;
and, second, the keeping down of expenses, still giving
the tenants all that is due to them.
The work of management has five divisions :
First: Renting, that is, the securing and retaining
of tenants ;
Second : Collection ;
Third: Purchases and expenditures upon the prop-
erty;
Fourth : Accounting ;
Fifth : The physical care of the property.
278. Renting, — The first thing a renting agent must
understand is that he cannot regulate the price. The
price is regulated by the law of supply and demand.
There is practically no building so unique that the rent-
able space in it cannot be duplicated in some other
building. There is practically no building so advan-
tageously situated, either for business or residential
purposes, that there is not another practically as good.
All the renting agent can get is his share of the pros-
501
502 REAL ESTATE
pective tenants by showing his building in its most
attractive form, by calling it to the attention of the most
people by proper advertising, and by so framing his
business transactions with them as to get from them the
most advantageous contract for the owner.
There are a hundred different ways by which the
good renter brings his property to the attention of
possible tenants. One of the most effective of these is
by keeping his building attractive, particularly outside
and in its public parts. The most important thing in
the getting of tenants is the first impression a person
gets when he enters a building.
The renting agent should make his contract upon a
fair basis, and should not attempt to write a cut-throat
lease in favor of the landlord. The man who tries to
use a lease with too many clauses will never be a success-
ful renter. The contract should be simple and under-
standable. The renting agent should not be afraid to
tell a prospective tenant what the landlord's require-
ments are; if the landlord will not rent for less than a
year, it is not worth while wasting time with a person
who says he is only a monthly renter. It is not wise
to try to change misunderstanding into understanding
after the negotiations and when the parties should be
ready to sign the lease.
279. Collection. — Having gotten the tenants and
installed them, the next proposition is the organization
of a collecting force. This force ought to be devoted,
not only to collections, but to the care of the building.
Collectors should be instructed, not only to go to the
property and collect the rent, but also to watch the phys-
ical aspect of the property, and report its condition.
When they meet the tenants, if any comments are made
with regard to the property, whether by way of com-
PROBLEMS OF MANAGEMENT 503
mendation or complaint, it is the duty of the collectors
to make note of these comments and report.
The collection force is the eyes of the office. The
collectors see the property most frequently, and upon
their discretion in handling tenants, a great deal of the
success of the business depends. Where the force is
large, it should be adapted as far as possible to the char-
acter of the property.
Rent and collections together are the usual entrance
into the real estate business, and the quickest road to-
ward the other parts of the business. They are not the
easiest, for the renting and collection business involves
practically all the discretion and care that are required
in the rest of the business.
280. Purchases and expenditures uponHke property,
— The man who does a renting and collection business
also, usually, has the care of the property itself. This
includes the purchase of supplies and the care of the
other expenditures of the building, and it is here that
the difference in results can be shown. The man who
makes his purchases with care will be able to show a
profit, as against the man who buys at random without
giving any thought to the matter. The man who knows
qualities, and is careful to get sufficient quantities, can
at the end of the year show a difference in net profit
over the man who is careless with regard to these sub-
jects. The man who scrutinizes his expenditures, who
comes the nearest to collecting all his telephone bills
from the tenants, who keeps a good janitor happy and
contented at no more salary than his neighbor has to
pay, is doing a great deal for his landlord. These
things reduce themselves really to a housekeeping prob-
lem— care in purchasing and economy in expenditure.
281. Accounting, — The form of rent accounts varies
504 REAL ESTATE
in different offices. It reduces itself to a simple debit
and credit ledger account. The rent account is usually
kept as a single entry account, and does not get into
the double entry system of general bookkeeping until
the results are obtained. It is a book in which there
are columns: First, the designation of the floor or
number of apartment which is occupied; second, the
name of the tenant. Then, running across the page,
there are columns, very often for as many as six months,
for the rental. The larger the folio used, the less often
the names of the tenants have to be transcribed. In
the proper column for each month the full rent is
charged, and a note made of the day from which the
rent runs; then in the parallel column is credited the
amount received. If the full rent is not received dur-
ing the month for which it is charged, it is customary,
in addition to the charge for the next month's rent, in
the next column to make a new charge by carrying over
the unpaid balance. That gives with regard to each
tenant for the current month the whole amount that he
owes. The column is closed for each month at its end
and carried over so that the agent can tell how much his
collections have been, and what his arrearage is.
At a convenient period of the month, usually toward
the end, accounts are made up and carried over into the
general ledger, and rendered by the collecting officers
to the landlord. The account rendered to the landlord
is again a simple debit and credit account. He is given
an account of the receipts of his building in detail, and
also the expenditures, with vouchers. It is usual for
the agent either to get duplicate vouchers, or to send
the originals to the landlord, trusting to get them back.
Some offices do not submit vouchers, but merely an
account of the expenditures, and have the vouchers ready
PROBLEMS OF MANAGEMENT 505
for examination in case any items are questioned. It
is uniformly customary, however, to render specific ac-
counts of all income and expenses and to accompany
that report by check to balance. It is usual to deduct
commissions upon collections at the time of rendering
each account and sending in each monthly check.
Those commissions are then credited over into the profit
account of the firm. Commissions are computed upon
the gross rental.
282. Physical care of the property, — It is the duty
of the man in charge of a property to keep it in good
physical condition for two reasons : First, for the pur-
pose of attracting tenants ; and, second, for the purpose
of avoiding liability to action for damages by reason of
persons being injured upon the property.
As a renting proposition, it pays to take good care of
a property, not only when trying to get new tenants,
but all the time. That does not mean that it is neces-
sary to be extravagant. It means that the property
should be kept in as good condition as the tenants
reasonably have a right to expect, having regard to all
other property in the neighborhood of similar character.
There are more tenants lost in houses in which the mere
matter of removing dirt is carelessly done than by any
other means. The janitor's service and the cleanliness
of the building are most important matters.
Care should be taken to repair all evidences of wear
as soon as possible. In the upkeep of a building the
maxim that, "A stitch in time saves nine" applies with
as much force as in any other pursuit. A little paint,
a little cheap carpenter work or a little work that the
janitor can do, if properly and quickly done as soon as
the trouble is discovered, will often save a very trouble-
some and expensive job later on.
506 REAL ESTATE
The janitor should be carefully instructed and held
to account for obeying all the little regulations which
are put upon owners by municipal ordinances. He
should see to the removal of garbage and ashes
promptly; he should see that the fire escapes are clear
of obstructions ; he should report to the office as soon as
possible whenever any representative of the municipality
calls to make a complaint, or to give any directions with
regard to the property. As part of the duties of man-
agements, whenever any report of that sort reaches the
office, it is the duty of the man in charge of the building
to follow it up. If there has been cause of complaint
against the building, it is best to remove the cause. If
an inspector has called, and it is not known whether or
not he has found any violations of the law, it is not
advisable to wait until the owner has been served with
a notice of violation: it is better to find out from the
department if any violations have been reported.
If a building operation is going on in the neighbor-
hood, the janitor should be instructed to report imme-
diately, as soon as any construction is commenced; and
it is the agent's business to watch his building carefully
to see that no harm comes to it, and, when necessary,
to report the facts to the owner immediately, so that he
may take such steps as he may think advisable to pro-
tect his interests.
It is also necessary to keep a building in such con-
dition that it will be safe for people to resort to it.
The question as to who is charged, as matter of law,
with liability to third persons resorting to a building
and suffering injury by reason of improper conditions,
is to be solved in the first instance by the question, "Who
is in charge of the building?" The person who has
charge of the building, or of the part of it in which the
PROBLEMS OF MANAGEMENT 507
injury occurred, is the person who is primarily liable.
If an owner is conducting an apartment house, he
has charge of the public halls, the sidewalks, the cellar,
the janitor's apartment, the roofs, the plumbing fix-
tures, all the general appurtenances of the building, and
the elevator. He has charge also of the water pipes
running through from one part of the building to
another. The tenant has particular control over his
apartment. The fact that there are tenants in the build-
ing does not excuse the landlord from liability for acci-
dent happening or damage done in any part of the
building which is under his control. If there be
overflow of water from one apartment to another, doing
damage to the second apartment, if the damage was
caused by one tenant letting the water run in his apart-
ment from an outlet which was in good condition, and
by reason of his act alone, the tenant would be liable.
But if the overflow, for instance, should be by reason
of a failure to repair, if the water pipe was out of order,
the landlord having general charge of that utility in the
building would be liable, the test being, "Who was in
fault?"
If, however, the landlord has rented out his entire
premises, and placed them in charge of a tenant, unless
he has covenanted in his lease that he will make repairs,
if the premises be in good condition when they are turned
over to the tenant, then the liability for any damages
accruing afterwards either to persons in the building or
persons resorting to it, is upon the tenant.
In a case where the landlord has covenanted to make
repairs, he would be liable only if he had notice of the
defect, and an opportunity to make the repairs. In the
same manner, if a person be engaged in construction
upon his property, if he exercise reasonable care in
508 REAL ESTATE
hiring an experienced contractor, giving him charge of
the property, the contractor becomes hable to all third
persons damaged by reason of the operations, and the
owner is not liable.
A person who receives property, whether by purchase
or inheritance, is not liable for damage to third persons
occurring upon the property, unless its defective condi-
tion has been called to his attention, and he has had an
opportunity to repair. All of these questions of notice
and opportunity must be treated reasonably. A man
may very well be called upon to make immediate repairs
in an apartment house in which there are tenants living,
which he actually sees when he is purchasing, whereas
a person who inherits a pier, to which he does not often
resort, may know nothing of its defective condition until
it is specially called to his attention.
An owner is liable to those persons whom he may
reasonably expect to resort to his premises : they do not
have to show that they were there upon proper business.
An owner is liable only to keep his property safe for
ordinary and customary use. A person who goes upon
a freight pier has no right to expect it to be as safe as
a pier used for the landing of passengers, and if he is
hurt by reason of merchandise being rolled on him, or
stumbling over inequalities in the pier, the owner is not
liable. If, however, an owner invite the public upon his
premises for his benefit, as, for instance, if he keep a
store and invite the public to come into the store to do
business with him, he is not only required to keep his
premises in reasonably safe condition, but he is held to
have made a representation to the public, that the prop-
erty was a safe place of resort, and, if it be not in that
condition, he is liable for damage. If a man conducts a
theater, and does not supply all the necessary exits which
PROBLEMS OF MANAGEMENT 509
the law calls for, and the appliances for safety which
are not only called for by law, but which are customary
beyond the requirements of the law, if there be a fire,
he is liable for damages. If he has done his full duty
he will not be liable. He is not held to a warranty of
absolute safety, but to a representation that all has been
done that can be done.
Another thing to be considered is how to cover oneself
against loss, because no matter how careful an owner
is, he cannot do it all himself. He has to leave his
property in the charge of a janitor or superintendent;
he does not always know the moment something falls
into disrepair or someone gets in danger upon his prop-
erty; and even though he exercise all the care which
would exempt him from liability if sued, still no matter
how well he will succeed in a suit for damage, he must
hire a lawyer so that he may be successfully defended.
For these reasons, the custom has arisen of taking lia-
bility insurance.
Liability insurance is covered by a policy under which
the insurance company agrees to insure in an amount
limited as to each item of loss, and undertakes, not only
to indemnify, but also to defend an action for liability.
The person who carries a liability policy is thus able to
cover himself unless the action be brought for more than
the amount of the policy, but the owner carries the risk
beyond the company's limit.
A liability policy provides that the company must
have immediate notice of any accident. Every time they
do not get such notice — and it is very seldom they do —
they will try to escape liability. Liability pohcies
ought, in fairness, to be written so that the insured is
obligated only to give notice within a reasonable time,
and as soon as the owner learns of the accident: that
510 REAL ESTATE
is really all an owner can do. If the janitor report as
promptly as possible, and the owner report as soon as he
hears of the accident, that ought to satisfy the require-
ments of immediate notice. It does in every other kind
of policy, and should in this.
There is also an insurance of boilers and elevators.
The first use of the elevator policy is the inspection,
which is a periodical and expert inspection of the ele-
vator and its machinery, and after which the owner is
told if he ought to make repairs. When he gets notice
from the company, it is advisable to make the necessary
repairs, because the company has nothing to gain by
requiring them. If they involve hundreds of dollars,
it might be wise to ask expert advice, but, in small
matters, it is the interest of the owner to do what the
company asks.
In apartment houses the question of boiler insurance
is not important, but in large manufacturing plants or
office buildings, liability may be thrown on an owner by
reason of a boiler explosion. Here again, the principal
use of boiler insurance is the periodical inspection. If
an owner employ a really expert engineer, he hardly
needs boiler insurance. If he is not sure of the ability
of his engineer, it is safer to carry a policy of boiler
insurance.
CHAPTER XVIII
UNSETTLED PROBLEMS
283. Organization of real estate interests. — In the
real estate business there are a number of problems and
questions upon which the people in the business disagree,
and others upon which, if they do not actually disagree,
they have at least not yet made up their minds.
There are organizations of real estate owners, organi-
zations of tax payers, organizations of tenement house
owners, boards of brokers, each looking out for their little
special interests. There are also organizations like the
Allied Real Estate Interests in New York City, which
make it their business to look after the larger general
problems affecting the business, such as the watching
of legislation. But all of these organizations are now
alive with the idea that while each of them is caring for
its specialty, they have a general interest — ^the interest
of those, dealing and making their living out of real
estate and the various pursuits which relate to it, and
the idea of general organization in the real estate busi-
ness is spreading — not that there is any necessity for
individuals engaged in the business to protect their in-
terests as against others, but that it is necessary that
they protect their mutual interests. This is a problem
of growing importance.
284. Expressing consideration of conveyances, —
Another problem that is before the real estate world is
the question of whether or not it is proper and feasible
to disclose the considerations of conveyances. There are
511
512 REAL ESTATE
two questions involved in that problem: first, the ques-
tion of taxation; and, second, the business question as
to whether or not it would tend to the advantage of the
business.
As to the first question : We raise most of our money
for local taxation by direct tax on real estate, and in
order that that tax may be just, the assessment must be
equitable. The taxing officers would like to know what
is paid for each piece of property in every transaction
so that they may, if possible, out of the multiplicity of
transactions draw an average price. The objection to
that is, on the one side, that prices are not necessarily
values. Prices may be indexes of values, if enough of
them not only in number but also in time can be obtained
from which to draw an average of the actual value, but
value economically consists in and is measured by earn-
ing capacity, so that the man who wants to buy invest-
ment capacity only, is the man who governs values.
Whether, as a business proposition, it is desirable or
not that values be disclosed, the assessors could get a
better index of the value from an intelligent study of
the record of mortgages, for here there is no reason for
using fictitious amounts, and they have the opinions of
the most expert appraisers in the market— the advisers
of the lending institutions.
The other question involved in this matter of dis-
closing the actual considerations is the question of its
influence upon the trade and the lending markets. It is
contended, on one side, that the disclosure of the actual
price will encourage purchasers to offer reasonable
prices, and that they will be encouraged to know that the
property is supposed to be worth quoted prices. On the
other hand, it is claimed that to disclose prices will abso-
lutely discourage trade, that when a man knows what
UNSETTLED PROBLEMS 513
the seller has paid, he will not give any more than a
mere trades profit; and that in no other business is it
seriously contended that the seller should be required
to apprise the purchaser of what he has paid for the
thing he is oiFering for sale. It is said, on one side, that
every store discloses its price, the price at which it de-
sires to sell; but the answer to that is, that no store dis-
closes the price at which it buys, and, while every store
discloses the prices which it asks for staple goods, few
stores disclose except to a possible purchaser, the price
asked for specific goods.
285. Taoo on mortgages. — Another question which is
still unsettled in many states is that of taxation of mort-
gages. The taxing of debts, and especially of interest-
bearing debts, is taxing for the support of the govern-
ment the most needy part of the community, that is,
the part of the community which must borrow. It is
placing a tax upon industry, and is a discourager of
enterprise. The man who is satisfied to do business only
on such capital as he has, without borrowing upon his
security, is circumscribing his business, and is not enter-
prising. The man who keeps his security working in
the world by borrowing upon it to a reasonable extent,
and using that capital in other enterprises, is helping
to carry forward the world's work. When a tax is
placed upon debts, the result is that the interest rate is
increased. The lender never really pays the tax and
the enterprising and needy are required to contribute
more to the support of government than the wealthy.
The mortgage tax would seem clearly to be a mis-
directed and harmful effort. All taxation upon debts,
as a matter of public policy and public economy, is
wrong.
In the State of New York, the mortgage tax is one-
XI— 33
514 REAL ESTATE
half of 1 per cent upon mortgage debts, which is paid
once, and thereafter the mortgage is free of all taxation
for state, county and local purposes. In other states
the problem is still an unsettled one, and wherever it
comes up for discussion, it will have considerable influ-
ence upon land values.
286. The single taw. — ^Another question which is up
for consideration is the question of the abolition of gen-
eral taxation on personal property, leaving real prop-
erty the only object of direct taxation. This subject
involves numerous considerations. It is true that it
is difficult to frame a just tax law applying to personal
property generally. On the other hand, it should be
remembered that real property is not the only property
which gets the safeguards of the State's protection and
the benefits derivable from civilized government. Nor
is the argument valid which claims that all persons use
real property and, therefore, taxation on real property
will fall on everybody, for the tax will not fall on every-
body in accordance with the benefits derived. For ex-
ample, a diamond merchant can do a much more lucrative
business in a small office than a produce merchant can
do in the same space. The topic will have to be con-
sidered with regard to local conditions and tax laws in
each state.
287. Confidence and good-mil. — It should be remem-
bered that the real estate business is one in which the
only stock in trade is confidence and good-will. The
greatest problem of the business is so to conduct it as
to gain the respect, good-will and confidence of the
community. The man who has done satisfactory busi-
ness with you is your best advertising medium. Never
try to get a man to do a piece of business which you think
will turn out to his loss, even though you may make a
UNSETTLED PROBLEMS 515
commission on it. The man who has made money from
the transactions into which you have put him, is the man
who will let you make money again. Try to have as
large a number of such customers as possible.
QUIZ QUESTIONS
PART I
INSURANCE
{The numbers refer to the numbered sections in the text,)
CHAPTER I
HISTORICAL SKETCH OF INSURANCE
1. What is insurance? Does it guarantee against
disasters occurring or against loss from them?
2. What peoples early made use of insurance?
3. Name the four main branches of insurance. Illus-
trate each by a concrete example.
4. Upon what theory is the insurance business based?
How does it differ from gambling?
CHAPTER II
MARINE INSURANCE
5. Among whom was marine insurance early de-
veloped?
6. Trace by the history of Lloyds the origin of the
underwriter. The premium.
7. What change has taken place historically in the
group who do the insuring?
8. Why is not more modern language used in word-
ing marine policies?
517
518 INSURANCE
9. What conditions violated will render a policy
void?
10. What is meant by general average? Illustrate.
11. Explain the difference between particular aver-
age and general average.
12. In general, what dangers are insured against and
what not?
13. In what connection at Lloyds is the bell tolled?
Explain the term, constructive total loss.
14. To whom is salvage paid? Who pays it?
CHAPTER III
FIRE INSURANCE
15. How may fire insurance be defined?
16. What was the origin of fire insurance? How did
the great fire of London compare with that at San
Francisco?
17. What were the contributions of Barbon and
Povey?
18. Why must fire underwriters be alert to the
times?
19. Whence did fire insurance draw its practices?
20. Sketch briefly its history in the United States.
21. Whence may be secured reliable statistics of the
business?
22. About how many companies are engaged in the
business ? What of changes in the number of these com-
panies?
23. What amount of capital is now invested? Does
this vary much from year to year?
24. What can be said of the capital investment of
foreign companies?
QUIZ QUESTIONS 519
25. What is the amount of fire insurance written per
year at the present time?
26. To what extent are its premium receipts expand-
ing?
27. Why is it difficult for insurance managers to esti-
mate losses? Have losses in your town been even or
fluctuating widely?
28. How is the rate of premium stated? Is this rate
increasing or decreasing?
29. What are the rates of dividends? Why do they
vary? Are they exorbitant?
30. Distinguish between expenses and losses. Into
what two classes may expenses be divided and what is
the share of each?
CHAPTER IV
THE ORGANIZATION OF FIRE INSURANCE COMPANIES
31. Under what four forms of organizations may fire
insurance be conducted?
32. Discuss the history of Lloyds, and its present
method of doing business.
33. In what does the essential principle of the mutual
form consist?
34. Of what importance comparatively is the stock
form of organization? How is such a company formed?
35. Explain the deposit requirement. Must a com-
pany deposit in each state where it does business?
36. To what reason is due the practice of selling fire
insurance stock at a premium?
37. Does an insurance company favor concentrated
or widely spread business? What two forms of organi-
zation of territory?
520 INSURANCE
38. Discuss the duties of the special agent.
39. Of what importance is the adjuster's work?
40. What service do inspectors furnish to the com-
panies?
41. State briefly the duties of the other employes.
42. Discuss the work of the local agent. With what
other businesses does the small town agent combine his
insurance ?
43. What are the local agent's responsibilities? His
relations to the home office?
44. In what consist the essentials of insurance as a
business? In this connection why does the managing
underwriter's work assume such importance?
CHAPTER V
OFFER^ ACCEPTANCE AND INSPECTION RISKS
45. What information must the insured furnish in
applying for insurance? Compare the present method
of securing this information with that formerly em-
ployed.
46. Of what value to the assuring companies are
inspections?
47. Describe briefly the method of making a plan of
the risk.
48. Mention several points that are considered in re-
porting on the risk.
49. Why must the inspector beware of believing all
that is told him?
50. How does machinery enter in to affect the risk?
51. Explain how materials affect the risk.
52. What attention is to be paid to heating, lighting,
and power?
QUIZ QUESTIONS 521
53. What information should be secured concerning
appliances for extinguishing fire?
54. Mention some causes of fire.
55. State the qualifications of an inspector, and his
method of securing information.
56. Into what classes may buildings be divided?
57. What is a frame building?
58. Due to what advantages is the ordinary building
of less risk than a frame structure?
59. Explain what is meant by mill construction.
60. How is a building fireproof ed?
CHAPTER VI
FIRE PROTECTION
61. How much is the annual per capita loss from
fires in the United States? Compare this with other
countries.
62. In what way do statistics provide a sure basis for
fire protection work?
63. How did the fire door come to be developed?
64. Describe a standard fire door. How can these
be made to close automatically?
65. What is a standard fire shutter?
66. What was the first use of wired glass? To what
fact is its value due?
67. In what different ways may pressure be obtained
for forcing water through pipes?
68. Of what capacity and pressure should hydrants
be to produce an efficient water supply?
69. How should water pipes be arranged?
70. Of what use is a fire boat?
71. Out of what system did the public fire depart-
ment grow?
522 INSURANCE
72. For what reason have concerns often developed
a fire department of their own? How might such a
department be organized?
73. What is a standpipe system and of what use
is it?
74. Upon what does the special value of the auto-
matic sprinkler depend?
75. Give a brief sketch of the history of these
sprinklers.
76. Show by comparative results the value of these
sprinklers in fire protection.
77. How widespread is the use of sprinklers likely
to become? In what way is the sprinkler head adapted
to particular conditions?
78. What are the general requirements for sprinkler
protection?
79. Why is an alarm system needed in connection
with sprinklers?
80. How does the dry pipe system differ from the
wet pipe system?
81. What is the purpose of open sprinklers?
82. What function is served by the chemicals in fire
extinguishers?
83. For what special properties is a chemical engine
on wheels adapted?
84. What percentage of fires is estimated to be put
out by means of fire pails?
85. What object is sought through the installation
of signaling systems?
86. In what way does the best type of electric sig-
nal act?
87. In what way do insurance companies encourage
firms to employ watchmen?
QUIZ QUESTIONS 523
88. What purpose is served by the automatic sprin-
klers alarm system?
89. Are mechanical devices likely to supersede watch-
men?
90. What regulations apply to ashes?
91. How prevent fires starting from oily waste?
92. Name several materials particularly inflammable.
93. Why are inspection standards needed?
94. What standards have been promulgated by the
National Fire Protection Association?
95. Describe the work of the laboratories.
96. How is the work of the laboratories supplemented
by field inspection?
97. What part does the engineer play in fire protec-
tion work?
CHAPTER VII
FINANCIAL ASPECT OF FIRE INSURANCE PROTECTION
98. How is the development of fire protection bound
up with insurance ratings?
99. Illustrate how this works out in practice.
100. What has limited the work of fire prevention?
101. Upon what consideration must the engineer
make his recommendations?
102. What is the chief difference in these sample
reports?
CHAPTER VIII
RATING
103. Upon what basis were the early rates made?
104. What was the first classification system
adopted?
5U INSURANCE
105. When were prospectuses first used?
106. What rating practice was common in Great
Britain but never prevalent in the United States?
107. Name provisions of the Philadelphia Contribu-
tionship correct in principle.
108. How did the Green Tree Company originate?
109. What investigation was made in founding the
Mutual Insurance Company?
110. In the schedule shown, upon how many items
does the special rate depend?
111. Name the important steps in developing rates.
112. Sketch briefly the work of the National Board
of Fire Underwriters.
113. What were local organizations?
114. On what grounds have the attacks on rating
organizations been based?
115. What may be said in their defence?
116. In what way does Kansas seek to regulate
rates ?
117. Over what elements should the rating organiza-
tion have reasonable control?
118. What are some of the complexities in rate
making?
119. In what way do stores combine with dwellings
to complicate it still further?
120. Name some intricate risks found among busi-
ness buildings.
121. What is the main point of this chapter? '
CHAPTER IX
MINIMUM AND SPECIFIC RATES
122. How may rates be classified? Of what advan-
tage is the minimum rate?
QUIZ QUESTIONS 525
123. Contrast specific rates with minimum rates.
How would the former be determined?
124. What is the principle upon which schedule rat-
ing depends?
125. Point out the difficulties that may exist in clas-
sifying some risks such as hotels.
126. Which seems more successful at present, a gen-
eral schedule or a class schedule?
CHAPTER X
UNIVERSAL MERCANTILE SCHEDULE
127. Tell how this schedule was originally prepared.
128. Upon what fundamental principle is it based?
129. Why are schedules behig continually modified
and adopted?
130. What two things are necessary in order that a
risk may be rated?
131. What is a key rate, and how is it determined?
132. Explain how the schedule is applied in rating
a building.
133. Into what elements is the hazard on stock di-
vided?
134. How does the presence of fire appliances modify
the rating?
135. Explain what is meant by the exposure of a risk.
136. What amount of co-insurance is usually car-
ried?
137. Name some faults of management. Why is
their rating made high?
138. In what way does the location of stock affect
rates?
526 INSURANCE
139. Why is rating risks a very complex problem?
140. Summarize in general terms the process of find-
ing a rate.
CHAPTER XI
ANALYTIC SCHEDULE
141. What two schedules are most widely used?
142. In what particular principle does the second
schedule differ from the first?
143. Show how the percentage system, as compared
with the fixed amount system, secures relativity.
144. What is made the basic rate?
145. Name some elements that affect the rate.
146. Compare the example here given with that of
the other schedule, section 140.
147. Why are schedules necessarily being studied
and changed constantly?
148. What is the most that can be hoped from any
system of rating? Apply this general statement to a
concrete problem.
149. Why is rating coming to be the work of spe-
ciahsts?
CHAPTER XII
INSURANCE CONTRACT
150. What is a policy?
151. What was the early history of the insurance
contract? What evils developed?
QUIZ QUESTIONS 527
152. In what state was the first standard pohcy used?
The standard policy of what state is now most widely
used?
153. What are the general provisions of the law ap-
plying to standard policies?
CHAPTER XIII
NEW YORK STANDARD POLICY
154. Does the word "noon" in a policy mean local
or standard time?
155. What is included under direct loss by fire?
156. Explain the limits of indemnity.
157. Why is the location of property so carefully
specified?
158. Why is the contract limited?
159. Mention certain things that may void a contract.
160. In what respects is the contract specially lim-
ited?
161. For what items will an insurance company as-
sume no liability?
162. Why should the limit of Mability be based upon
the actual value of the property?
163. What are the provisions concerning the cancel-
lation of a policy?
164. Why should one appreciate highly the form and
wording of our present policies?
CHAPTER XIV
CLAUSES AND WARRANTIES
165. What is a "rider"?
166. Explain the term "co-insurance," and the diffi-
culties it involves in practice.
528 INSURANCE
167. What percentage of a property's value is usu-
ally fixed on as a limit of insurance?
168. Illustrate how the average clause operates in
practice.
169. How does the forbidding clause in regard to
electricity illustrate the method by which standard pol-
icies are gradually involved?
170. Name other standard clauses.
171. How is the contract still further modified for
particular cases?
CHAPTER XV
FORMS AND POLICY WRITING
172. What is a form? What are its essentials?
173. Show how insured and insurer each prefer a
different sort of statement.
174. What difiiculties are met in drawing up a form?
175. What is meant by saying all parts of policy and
form should concur? Why is this important?
CHAPTER XVI
LOSS SETTLEMENTS
176. Of a thousand policies written, about how many
are subject to loss?
177. State the conditions out of which loss bureaus
have grown.
178. In insurance terms what is the cash value of the
property?
QUIZ QUESTIONS 529
179. Why do companies prefer not to make repairs
on damaged property ?
180. When a loss occurs, what things must the in-
sured do?
181. Why are appraisals sometimes necessary?
182. Why is it deemed not good practice immediately
to pay insurance loss?
183. In general are insurance losses difficult to set-
tle?
184. Of what advantage is it to a company to settle
losses promptly and fairly?
CHAPTER XVII
BROKERS^ BROKERAGE^ MORAL HAZARD^ AND
UNDERWRITING
185. What duties in fire insurance are performed by
the broker?
186. Explain what "moral hazard" means. What
percentage of losses is ascribed to it?
187. How did the name underwriter come to be used
in connection with policies?
188. What are some of the difficulties which the un-
derwriter has to meet?
CHAPTER XVIII
ORGANIZATION OF LIFE INSURANCE COMPANIES
189. What is life insurance? Is its policy based on
indemnity ?
190. How did the lack of a scientific basis retard the
development of life insurance?
XI— 34
530 INSURANCE
191. Tell what you can of the early English societies.
When was life insurance first successfully launched?
192. Into how many periods may life insurance devel-
opment be divided?
193. Upon whose life was the first American policy
written ?
194. Name some of the early American companies.
195. Since what year has the advance of insurance
been uninterrupted?
196. Discuss the internal organization of an insur-
ance company.
197. Name the three main departments, and briefly
state the duties of each.
198. How do the assets of life insurance companies
compare with savings bank deposits?
199. What advantage in investing have Hfe insurance
companies over fire insurance companies? May they
invest in stock?
200. Why does difficulty arise in connection with the
borrowing of money on policies?
201. How is the prevalency of this practice to be ex-
plained ?
202. What argument is made for hfe insurance as a
savings account?
CHAPTER XIX
MORTALITY TABLES
203. What is a mortality table?
204. Discuss the invention of these tables by Halley.
205. Upon what data are such tables compiled?
206. How did Dr. Price construct his table?
QUIZ QUESTIONS 531
207. From what statistics was the Carhsle table con-
structed?
208. Explain why insurance companies come more
and more to use their own records in compiling tables.
209. Why may new and better tables be expected?
Describe the American Table of Mortality.
210. How is the amount of premium computed?
211. Why have the mutual companies so often been
obliged to raise their rates of assessment?
CHAPTER XX
POLICIES AND PREMIUM RATES
212. What two classes of policies are there? How
account for "dividends" issued by life insurance com-
panies?
213. Explain life policy, endowment policy, term pol-
icy.
214. Contrast the annuity with the usual policy?
215. Into what three classes may risks be classified?
What influence has weight? Occupation?
216. How does climate affect mortality?
217. What are the rights of company and insured in
canceling life insurance contracts? Of what importance
is the moral hazard?
218. Name some of the special provisions of the pol-
icy.
219. What provisions have been made for the lapsing
of policies?
220. Explain the cash value provision.
221. Why is medical inspection with modern com-
panies much more thorough than with the early soci-
eties? Judging by the sample report, are all essential
points covered?
532 INSURANCE
CHAPTER XXI
INDUSTRIAL AND ASSESSMENT INSURANCE
222. What is the chief diif erence between life and in-
dustrial insurance?
223. Were the first attempts at industrial insurance
successful?
224. Describe the early efforts of Dryden.
225. What can be said of the early growth of the
Prudential?
226. What seemed to be Mr. Harvey's opinion of the
industrial business?
227. Upon what four principles is its success based?
228. Upon what plan is assessment insurance based?
229. To what fraternal order is due the original use
of the assessment plan?
230. What fact of mortality has often not been pro-
vided for by the assessment companies? What results?
231. Among what organizations does the assessment
plan still widely prevail?
CHAPTER XXII
CASUALTY INSURANCE
232. What is casualty insurance ? Which branch of it
is most popular?
233. Of what volume is the casualty business?
234. To what risk was casualty insurance first ap-
plied?
235. What company was the pioneer in America in
assuming accident risks?
QUIZ QUESTIONS 533
236. To what forms of risk is accident insurance now
coming to be applied?
237. Are these relative proportions of losses the same
as most people would suspect?
238. Is it true that injuries are inflicted for the sake
of premiums?
239. Of what importance do you consider the work-
men's compensation form of insurance?
240. In law, what is the meaning of negligence?
241. Illustrate the difficulty in determining negli-
gence.
242. How were the rules of common law worked out
to cover the employer's responsibility?
243. Name the three defences of the employer, and
illustrate each by concrete example.
244. What is the outlook for volume in liability and
compensation insurance?
245. Of what various types is liability insurance com-
posed?
CHAPTER XXIII
workmen's compensation
246. What additional advantage has workmen's com-
pensation over employer's liability? Who pays, in the
end, the compensation?
247. Briefly discuss the experience of foreign coun-
tries with such laws.
248. In what ways do these countries limit compen-
sation ?
249. What provisions do they make for fatalities?
250. How do they distribute losses?
534 INSURANCE
251. What are some of the plans of organization
followed?
252. Explain the provisions these countries have
made for the sick fund.
253. To what extent is workmen's compensation now
found in the United States?
254. State briefly the general provisions of these
laws.
255. How may one secure the full text of any state's
compensation law?
256. Name some abuses that have already crept in.
257. Why cannot authoritative opinions be given at
present regarding such laws?
258. About what proportion of claims are followed
by compensation?
259. Discuss the movement for accident prevention.
260. How can executives cut down the hazard in their
factories?
261. What suggestions might be made in a printed
pamphlet or posted on bulletins?
262. Is it agreed as yet how the risk attached to work-
men's compensation should be carried?
263. Describe the state fund plan for carrying this
risk.
264. How may employers co-operate to carry their
risk?
265. Is it advisable for an individual employer to as-
sume the risk?
266. What advantages do the regular stock com-
panies appear to offer the employer?
267. By what general test must be decided which is
best of these different ways of carrying industrial risks?
268. What wholesome influence will rate making ex-
ert upon hazardous industrial conditions?
QUIZ QUESTIONS 535
CHAPTER XXIV
OTHER BRANCHES OF CASUALTY INSURANCE
269. What forms of casualty insurance have now
been treated?
270. Comment briefly upon plate glass insurance.
271. What is the aim of steam boiler insurance?
272. Where did boiler insurance originate?
273. What was the first American company to write
boiler insurance and what may be said of its career?
274. Are boiler explosions due to one or many causes?
275. In what way do the insurance companies reduce
the risk of explosions?
276. What is the outlook for the future business in
boiler insurance?
277. When did credit insurance develop?
278. Explain how risks are classified.
279. What may be claimed as the benefits of credit
insurance?
280. What provisions are included under automobile
insurance, and what are the prospects for such insurance
increasing?
281. Discuss briefly title insurance.
282. What are some of the risks covered by burglary
insurance?
283. What sort of risk is covered by surety and fidel-
ity insurance?
284. Name the general classes of surety and fidelity
insurance.
285. In what respects is contract insurance business
difficult to handle?
286. On the other hand, which form of surety bond is
of little risk to the insurer?
536 INSURANCE
287. Why must insurance on bonds of deposit be
written with special care?
288. For what reason has excise insurance so in-
creased ?
289. What is the purpose of fidehty insurance?
290. Would you advise stock companies to write un-
employment insurance?
291. What is your opinion of Lloyds' vacation insur-
ance?
292. In what way during the war in 1914 did the
government co-operate with its marine insurance com-
panies?
293. Upon what principle, simply stated, is insurance
based? Is its importance hkely to diminish or increase?
PART II
REAL ESTATE
CHAPTER I
INTRODUCTION
1. Tell why the vocation of the real estate man does
not rank as a profession.
2. State the necessity for high ethical standards in
real estate business.
3. Name the divisions of the real estate business.
What capital is required in order to engage in them
respectively? Define the divisions of the business.
4. State the purposes for which investments in real
estate may be made.
5. Enumerate the various ways in which real estate
QUIZ QUESTIONS 537
operations may be carried on, and state how these ways
subdivide, and explain them.
6. Define agency; name and define the parts into
which agency is divided.
7. Define "real estate" as used in the business and
"real property" and explain the distinction between
them.
CHAPTER II
INTERESTS IN LAND
8. Into what two main divisions are interests in land
divided? How are they measured?
9. What are the limitations upon the absolute owner-
ship in land?
10. What is the police power of the State as it affects
ownership of land?
11. Explain the principles on which the original and
ultimate ownership of land in the State is founded.
12. Define Eminent Domain. What is limitation
upon the right to exercise this power?
13. Define the power of taxation.
14. Define estate in fee simple absolute.
15. Define an estate upon condition subsequent.
16. Define an estate in fee determinable. What is
the difference between an estate upon condition, and
one in fee determinable.
17. Define a life estate. Define a remainder. Dis-
tinguish between vested and contingent remainders.
18. Define dower.
19. Define estate by the curtesy.
20. What is the principal chattel interest in land?
Define it. What is a Ken on land?
21. What is the earliest historical method of trans-
538 QUIZ QUESTIONS
f erring title to land? State the later methods of trans-
ferring title. What is .the present method of giving
notice of interests in land?
CHAPTER III
BROKERAGE
22. Define the word "broker" (See Section 6).
23. What are the requirements of success as a broker ?
24. How do real estate brokers find employment?
25. What is necessary to entitle a broker to compen-
sation for services? What is this compensation called?
26. What are the obligations of a broker to hi-s
principal?
27. What statements may a broker make to the
persons with whom he deals ?
28. What information should a broker obtain before
commencing work upon a transaction?
29. Who pays the brokerage, apparently and in fact?
Can a broker take compensation from both parties to a
transaction ?
30. When and how is a broker's commission earned?
31. What is the claim of a broker who procures a
transaction to be made between parties, who try to
consummate the business so as to defeat his claim?
32. What is the situation of the broker's claim for
commissions when a transaction is brought about by
false representations, and then not consummated?
33. Why should a broker see to it that an enforceable
contract is made between the principals?
34. Can a broker be required to wait for commis-
sions until title closes? How?
35. Is a broker responsible if either party fails to
complete a transaction?
QUIZ QUESTIONS 539
36. What is "splitting commissions"? When and
how is it proper to spht commissions?
37. When is a commission for getting a loan earned?
When is a contract to make a loan enforceable against
the lender?
38. Who pays commissions on loans?
39. Is a lender bound to accept a loan from any
particular one of a number of brokers who offer the
same application?
40. Must an agreement for commission on a loan
be in writing?
41. How are rates of commissions ascertained?
CHAPTER IV
CONTRACTS
42. What contracts in relation to real property must
be in writing? Give the provision of law in this regard.
43. What part of the final understanding should be
expressed in writing?
44. What are the commercial, as distinguished from
the legal necessities for a written contract ?
45. Define the word "contract." In real estate busi-
ness what is meant by the word "contract"?
46. What are competent parties to a contract?
What is the element of futurity in a contract? What
is consideration? What is subscription of contracts?
What authentication is necessary to their enf orcibility ?
47. Describe a good form of contract.
48. What are the main divisions of a typical con-
tract for sale of real estate ?
49. Is a date necessary to a contract of sale?
50. How are parties to a contract stated?
540 QUIZ QUESTIONS
51. What should a purchaser about to enter into a
contract investigate before signing?
52. What investigation should be made of the au-
thority of trustees or corporation officers to enter into
contracts of sale ?
53. How can the earnest money be made secure if
the responsibility of the seller cannot be determined
satisfactorily ?
54. To what extent do sellers investigate their pur-
chasers ?
55. When should the seller investigate the responsi-
bility of the purchaser carefully ?
56. Wliich of the parties is the practical owner pend-
ing a contract of sale?
57. What is the consideration of a contract of sale?
58. What does real property include?
59. Show the different points of view from which a
seller and a purchaser may look at the drafting of a
description for a contract of sale.
60. What considerations finally govern the selection
of the form of description in a contract of sale ?
61. How do the parties to a contract require the
tenancies to be stated?
62. What is restricted property ? How do restrictions
affect values?
63. What is an easement? Describe a party wall.
How may it be created? What is a beam right? How
and why should they be mentioned in a contract?
CHAPTER V
CONTRACTS (Continued)
64. What is gross price? How may it be divided in
a contract ?
QUIZ QUESTIONS 541
65. What considerations govern the amount paid
down on making a contract?
66. How is the amount which is to pass on dehvery
of the deed paid ?
67. What should a purchaser require to be stated in
a contract concerning a mortgage which is to remain on
the property? Explain the difference between buying
property subject to, and assuming a mortgage.
68. What clauses should a purchaser and a seller re-
quire to be inserted in a purchase money mortgage?
Why ? Who pays the expenses incidental to the giving
of a purchase money mortgage ? Why ?
69. Where is the deed usually delivered?
70. What are the usual stipulations as to division of
rents, interest and mortgages and insurance premiums?
71. How are water charges provided for?
72. What form of deed complies with a contract
where no special form is stipulated? What is a full
covenant and warranty deed?
73. What personal property is usually deemed in-
cluded in the bargain to purchase real estate ?
74. What is the reason for requiring a clause that
premises sold shall be free of violations of law?
75. Is earnest money a lien?
76. If premises be damaged by fire pending the
contract, who bears the loss, if there be no stipulation
on the subject.
77. What happens if either party to a contract dies
before delivery of the deed ? .
78. Why is a commission agreement in a contract?
79. Must both parties sign each counterpart of a
contract? What is a seal? What is the effect on a
contract of sale ?
80. What is the utility of having a contract wit-
542 QUIZ QUESTIONS
nessed? What is acknowledgment of an instrument?
What is proving an instrument?
81. What remedies has a purchaser if a seller fails
to perform a contract of sale?
82. What remedies has a seller if a purchaser fails
to perform a contract £)f purchase ?
83. What is an exchange contract?
84. What is the consideration of an exchange con-
tract ?
85. How should descriptions be stated in exchange
contracts ?
86. How is the value of the properties to an exchange
stated ? How is the amount to be paid arrived at ?
PROBLEM 1. {Sections 42-80,)
John Smith owns a house in your town, which he sells
to Henry Jones; the property is known as 17 Sycamore
Street, 50 feet wide and 100 feet deep, the sidelines being
parallel with an avenue which you will name; it is ten-
anted, there being a store which is rented until May 1st
next at $600 per annum, and apartments held by monthly
tenants who pay $75 per month; all rents are payable
monthly, but the store keeper pays from 15th to 15th
and the other tenants pay on the first of each month.
The property sells for $15,000, of which $500 is paid on
contract, $9,000 is in mortgage falling due on a date to
be named, about a year and a half from now, bearing
interest @ 5% per annum; $2,000 is in purchase money
mortgage falling due in instalments of $200 every sice
months, bearing interest @ 6% per annum, and the
balance in cash on closing title.
Draw a contract dated now to carry out this trans-
action on a printed form usually employed in your
QUIZ QUESTIONS 543
locality, filling in all other terms as you would consider
reasonable. Send same in duplicate,
PROBLEM 2. ( Sections 83-86, )
Henry Jones, who bought No, 17 Sycamore Street
as stated in problem No, 1, now exchanges that prop-
erty with Robert Robinson, for ten vacant lots in a
recent addition to your town; the lots pass subject to
a mortgage for $5,000 due June 1st five years hence,
but they may be released on payment of $600 per lot or
the whole amount may be paid on ten days notice,
Jones gets $1,000 difference on the exchange of equi-
ties. Draw a contract dated now, to carry out this
transaction, using a printed form if possible. Fill in
all other terms as you would consider reasonable. Send
same in duplicate,
CHAPTER VI
AUCTION SALES
87. Why are auction sales resorted to?
88. What is an involuntary auction sale? How is it
brought about?
89. What are terms of sale? How should the
property and its limitations be described in terms of
sale?
90. May persons interested in the property bid at
an involuntary sale? When may property at an invol-
untary sale be knocked down?
91. What is a voluntary auction sale?
92. When may there be protection bids at voluntary
sale? When may there not be such bids?
93. How is the public attracted to auction sales ?
544 QUIZ QUESTIONS
94. How do the terms of sale at a voluntary sale
differ from those at an involuntary sale?
CHAPTER VII
LIENS
95. Define a lien on real property.
96. Distinguish between general and specific liens.
97. Define a judgment.
98. How is a judgment lien enforced? What inter-
est in real property is sold under a judgment lien?
99. How may the lien of judgment be discharged?
100. Define mechanic's lien.
101. How is a mechanic's lien asserted?
102. How is a mechanic's lien enforced?
103. How may a mechanic's lien be discharged pend-
ing litigation of its validity?
104. Define a conditional bill of sale.
105. Explain how debts of a deceased owner may
become liens on real property.
106. What is the transfer or inheritance tax?
CHAPTER VIII
TAXES AND ASSESSMENTS
107. Define taxes.
108. Why is taxation on real estate considered
direct?
109. Enumerate various regular taxes which may be
levied and state their purposes.
110. What is a tax budget?
111. What is assessment for taxation? How is it
done? Distinguish between market value and value at
forced sale.
QUIZ QUESTIONS 545
112. How is the tax rate fixed?
113. What is remedy when an assessment of land
value is too high ?
114. What is the remedy when the assessed value of
the building is too high?
115. If the assessing officers will not correct their
errors what is the remedy ?
116. When do taxes become a lien?
117. How is payment of taxes induced and enforced?
118. What rights in property does a property tax
affect ?
119. Define assessments. How are they appor-
tioned ?
120. How are assessments laid?
121. State how a board of assessors proceeds to lay
an assessment.
122. When do assessments become a lien? How are
they enforced?
123. How is payment of water rates enforced when
furnished by a municipality? How is the rate fixed?
CHAPTER IX
TRANSFER OF TITLE AND TITLE INSURANCE
124. In what ways is title to land transferred?
125. What was the method by which sales of land
became transferable?
126. What was the original English system of trans-
ferring land?
127. What was the Statute of Frauds?
128. What is a deed, as the word is commonly used
in relation to real estate?
129. What are the two kinds of conveyances now in
use?
XI— 35
546 ' QUIZ QUESTIONS
130. What are the provisions of law respecting a
deed in your State? What are the necessary elements
of a deed? What is necessary to the subscription of a
deed? What is witnessing of a deed? What does it
accomplish?
131. When does title pass by deed?
132. State the principle of notice by occupation.
Explain the necessity for and operation of the system
of public record of conveyances.
133. What is acknowledgment of conveyances?
What is accomplished thereby? Name officials who
are authorized to take acknowledgment of instruments
to be recorded in your State. What is the proof of an
instrument? How is it made?
134. Who can make delivery of an instrument ?
135. How is property transferred by a Will ? What
are the requirements as to execution of wills in your
State ?
136. What is to be ascertained from an examination
of the record of a title?
137. Why is it necessary to employ counsel to ex-
amine title to real property?
138. What is the responsibility assumed by a con-
veyancer who examined title to real property ?
139. What is title insurance? What responsibility
does a title insurance company usually assume ?
140. What is a report of title? How should it be
used?
141. What are the parts of an ordinary form of title
policy?
142. What does the insurer undertake when it issues
a policy of title insurance ?
143. How is the subject matter of such a policy set
forth?
QUIZ QUESTIONS 547
144. What are " exceptions " in a title policy?
145. Name some conditions of a title policy.
146. How should a title policy be used wheik the
property is sold?
CHAPTER X
DEEDS
147. What is the New York form of deed?
148. What is an indenture? How did the term
arise ?
149. Why does a deed bear date?
150. How are the parties to a deed designated?
151. Distinguish between good and valuable consid-
erations. Explain how they severally affect the trans-
fer of title. Why should a consideration be expressed?
152. What is a nominal consideration? How is it
expressed? Why is it used?
153. What is the effect of a seal on a conveyance
with regard to consideration?
154. What is the granting clause in a deed?
155. How should real property be described in a
deed ? What is a description by metes and bounds ?
156. What is the effect if a description be uncertain?
157. What is the effect of ambiguity in a descrip-
tion?
158. What happens if a description is inconsistent
with itself?
159. What are appurtenances to real property?
160. What is the '^habendum" in a deed? What is
its function?
161. What is a bargain and sale deed?
162. What is a quit claim deed?
548 QUIZ QUESTIONS
163. What are covenants in a deed? What are
''covenants against grantor's acts?"
164. Does knowledge of defects or encumbrances on
the part of the grantee affect the liabiUty of the grantor
in a deed? What are the usual covenants in a full cov-
enant and warranty deed ? What covenants do not run
with the land?
165. What covenants in a deed run with land? Ex-
plain them.
166. How and when can the covenant of warranty
be enforced?
167. Give some illustrations of unmarketable titles,
which do not give rise to a claim on covenants in deeds.
168. What is the utility of the testimony clause in a
deed ?
169. Is it necessary that a deed be sealed in your
State ?
170. What is a corporate seal? What is its effect on
a deed ?
171. How is the execution of an instrument by a cor-
poration authenticated?
PROBLEM 3. {Sections 14'^ to 171.)
Prepare a full covenant and warranty deed to be de-
livered pursuant to the contract drawn under Problem 1,
Use the printed form usually employed in your State,
Send same in duplicate.
CHAPTER XI
BONDS AND MORTGAGES
172. What are the instruments by which a loan on
security of real property is secured?
QUIZ QUESTIONS 549
173. Explain the difference between an instrument
calling for lawful money and gold coin.
174. When and how is interest usually payable on a
mortgage? What is usury? What is the penalty for
usury in your state ?
175. What stipulation may be made with regard to
the privilege to pay off a loan before it is due?
176. How do usury laws operate on the borrower?
177. If under a clause in the bond permitting the
debt to be called before it is due, on default of paying
the interest on taxes, the holder of the mortgage exer-
cises his option, does subsequent acceptance of the pay-
ment reinstate the original term of credit ?
178. How is a bond enforced?
179. What is a mortgage tax? Who pays it?
180. What was formerly the method of pledging
real property for debt?
181. What is equity of redemption?
182. Must a mortgage be dated the same day as the
obligation it secures ? Give reason for answer.
183. Can a mortgage be prepared in such manner as
not to disclose on record the terms of the loan?
184. Why is personal property sometimes expressly
included in a mortgage of real estate?
185. What is the defeasance clause in a mortgage?
186. What is the stipulation under which the prem-
ises may be sold to raise a mortgage debt? Is the prop-
erty to be sold as one piece or in parts ?
187. Explain the fire insurance clause in mortgages,
and how it operates.
188. Enumerate and explain the utility of the clauses
under which a mortgage debt may be called for payment
before the stipulated due date.
189. Explain the receivership clause in a mortgage.
550 QUIZ QUESTIONS
How does it work in your State? What is "a mort-
gagee in possession"?
190. How may a mortgagee protect himself against
taxes in arrears ?
191. Is there special taxation of mortgages in your
State?
192. How may mortgagee give notice to owner ?
193. What is the effect of the warranty clause in a
mortgage upon interests in the premises subsequently
acquired by the mortgagor?
194. What special clauses are appropriate in subor-
dinate mortgages? Explain them respectively.
195. What is a lifting clause in a mortgage?
196. How may a mortgage be foreclosed without suit
at law?
197. Who should be parties to a suit at law to fore-
close a mortgage?
198. What is the procedure in such a suit? What
happens after the j udgment is rendered ?
PROBLEM 4. {Sections 172-195,)
Prepare the purchase money bond and mortgage de-
livered pursuant to the contract drawn under Problem
1, Use the fullest printed form in use in your State.
Send same in duplicate,
CHAPTER XII
LEASES
199. Define the words landlord and tenant.
200. Define rent.
201. What is the term of a lease?
202. Is the tenant's right of occupation salable?
What is the effect of prohibition against an assignment
of the tenant's rights?
QUIZ QUESTIONS 551
203. Must lettings be in writing?
204. Define tenancy at will.
205. What is a tenancy for years? Explain its inci-
dents.
206. What are the obligations of landlord and ten-
ant toward each other?
207. Explain the operation of a "ground lease" or
"ground rent."
208. What are the rights of the parties under a ten-
ancy from month to month?
209. How may leases be terminated before the expi-
ration of the term? Explain the proceedings for sum-
mary dispossess. What is a conditional limitation
clause in a lease?
210. What are the obligations of landlord and of
tenant, with relation to repairs?
211. What is constructive eviction of a tenant?
212. What happens to the relation of landlord and
tenant when there is a fire on the premises?
CHAPTER XIII
ADJUSTMENTS AT CLOSING
213. What is a title closing? What should be as-
certained before entering into the transaction?
214. Where property is found encumbered for more
than the money available at closing, what should be as-
certained regarding the ability to dispose of encum-
brances?
215. What investigation should be made concerning
encumbrances which are to remain upon the property
after closing? What should be made concerning en-
cumbrances which are to be removed in the closing?
552 QUIZ QUESTIONS
What kind of funds or checks are used in final settle-
ment of a title closing?
216. What debits may there be against a purchaser
in closing a title ?
217. With what items may a purchaser be credited
in closing a title ?
218. What items must a seller pay which do not
figure in the adjustment at title closing?
219. What payments should be made by purchaser?
PROBLEM 5. {Sections 213-219,)
Prepare a closing statement for closing the transac-
tion pursuant to the contract prepared under Problem
1, The property is found to be marketable as pre^
scribed in the contract, but there are taxes due amount-
ing to $157, The value of the fire insurance policies is
$7. The transaction has been adjourned for 15 days
from the time fixed in the contract and is to close as of
the original day. Show the adjustments, gross balance
and net balance, in closing this transaction,
220. What happens when there are encumbrances
upon property at the time of closing which are not pro-
vided for in the contract?
221. How are exchanges adjusted at title closing?
PROBLEM 6. {Section 221, )
Prepare a closing statement for closing the transac-
tion pursuant to the contract prepared under Problem
2, The transaction closes as, and at the time provided
in the contract,
222. What special items are to be adjusted in closing
a transfer of a leasehold?
223. How are the adjustments made in closing a
mortgage loan ?
QUIZ QUESTIONS 553
224. What adjustment is made of rents due but un-
paid?
225. How is interest figured in closing titles?
226. What payments or adjustments are made if title
be rejected, and not closed?
CHAPTER XIV
VALUATION
227. What is the basis of land values? What is the
order in which land values are estimated, from most val-
uable down to those less valuable?
228. What are the steps by which a specific piece of
improved property is analyzed for valuation?
229. What consideration should be given to auction
prices in making a valuation ?
230. What considerations must be taken into account
in comparing the value of "short" lots?
231. What is the "Hoffman Rule?"
232. What is the "Davies Rule?"
233. How does the value of a narrow lot compare
with that of a typical lot?
234. What is plottage in fixing valuations?
235. What is usually added to typical lot values by
reason of being corner lots?
PROBLEM 7. {Sections 230-235,)
Compute the value of the plot shown on following
diagram.
55i
QUIZ QUESTIONS
5th Avenue
using as a basis a value of $10,000 per typical LOt of
25 00 100 fronting on 5th Avenue,
236. How should the land value and the value of the
building be treated in valuing improved property?
237. How is cost of buildings estimated? How can
you check back an appraisement of improved property?
238. When may property be condemned under the
power of eminent domain? What property may be
taken ?
239. What is expert appraising?
240. What general preparation for his work should
the expert appraiser have?
241. How does an expert appraiser prove his valua-
tion?
242. How does an expert appraiser value irregular
or short lots?
243. From what point of view should an expert ap-
praiser fix values? In what manner should he testify?
244. What should an expert appraiser know about
building as a business?
245. What is consequential damage? How is dam-
QUIZ QUESTIONS 555
age by reason of taking property in condemnation to be
computed where part only of a plot is taken? How,
when an easement only is taken?
CHAPTER XV
SURVEYS
246. Why are surveys necessary to real estate trans-
actions ?
247. What is shown on surveyor's map or diagram?
248. How do encroachments affect the marketability
of title to land?
249. How does a beam right affect marketability of
title? What is a party wall? What are the ordinary
incidents attached to a party wall?
250. What is the effect of encroachment by neigh-
boring structures upon the marketability of title?
251. What should a survey show regarding the rela-
tion of structures to the lines of streets?
252. What should be shown on a sub-division survey?
253. What should be shown on a builder's survey?
CHAPTER XVI
WORK OF THE ARCHITECT
254. Do architects control the kind of buildings to
be put on premises?
255. What are rough sketches? How are they used?
256. With what accuracy can an architect estimate
the cost of a projected building?
257. What are architects' working drawings? What
do they show?
258. State some of the circumstances of the property
556 QUIZ QUESTIONS
which an architect should ascertain before preparing
plans ?
259. What information does the architect require
from the survey?
260. What must the architect ascertain about abut-
ting walls?
2-61. What services does the architect render in a
building construction? How is he usually paid?
262. In what manner does the architect superintend
the construction of a building?
263. What are architects' charges on small jobs and
alterations ?
264. What are architects' specifications?
265. What preparations for proceeding with the work
does the architect make after the plans and specifications
are approved?
266. What are detail plans?
267. How are expert services of others than archi-
tects utilized in planning buildings ?
268. What is a cost plus profit contract? What is
the usual profit? How are builders paid under such
contracts ?
269. How are smaller constructions contracted for?
270. How are plans and specifications identified in
contracts ?
271. What are extras? How are they contracted
for?
272. What is the usual method of payment under a
construction contract?
273. What is the attitude of the architect as between
owner and contractors?
274. What certificates are usually required in cities
after buildings are completed?
QUIZ QUESTIONS 557
275. State some of the requirements when planning
an apartment dwelling.
276. State some in planning a warehouse or business
building.
CHAPTER XVII
MANAGEMENT
277. What are the divisions of the work of manage-
ment?
278. What regulates the amount of rents ?
279. What are the duties of rent collectors ?
280. How are purchases and expenditures of supplies
to be treated ?
281. Describe the method of keeping a rent account.
Describe the account rendered by an agent to his land-
lord.
282. To what two objects is the physical care of prop-
erty to be directed? Detail some of the janitor's du-
ties. What is the agent's duty with regard to viola-
tions of law or ordinances in a building? Who is liable
for injuries to persons caused by defective conditions in
buildings? Who is liable for damages when a tenant
has hired entire premises ? How far is a landlord liable
in such a case, if he has agreed to make repairs ? What
is the liability toward members of the public of the
owner of a place of public resort? Describe a liability
policy.
CHAPTER XVIII
UNSETTLED PROBLEMS
283. What is the utility of organizations devoted to
real estate interests?
558 REAL ESTATE
284. What are the arguments for and against re-
quiring conveyances to disclose consideration ?
285. What is the result upon real estate transactions
of taxation of mortgages.
286. What is the single tax? What are your views
on it?
287. How are confidence and good will to be sus-
tained in real estate business?
INDEX
A
Acceptance,
Of an insurance risk, 38.
Accident,
Caused by negligence, 225 et seq.
Insurance, 218, 220 et seq.
Prevention of, to workmen, 245.
Accounting,
Rent, 504.
Acknowledgments,
Officials authorized to take, 368.
Actuarial department of insurance
company, 184.
Additional clauses to insurance
contract, 156.
Adjuster,
The, of insurance companies, 32,
164.
Adjustments,
At closing title, 451-463.
Agency,
Real estate, 271.
Agent,
The insurance, 32, 33-36, 184.
Alarms,
Automatic, 69.
Allied real estate interests, 511.
American experience table of mor-
tality, 196, 197, 198.
Analytic schedule of insurance rates,
119-126.
Application of, 125.
Basic rate, 121.
Example of, 123.
Factors influencing rate, 121.
Limitations of, 124.
Origin of, 119.
Relativity, 120.
Work of A. F. Dean, 119.
Ancient Order,
Of United Workmen, 216.
Annuities, 202.
Apartment,
Planning an, 499.
Application clause.
The, 153.
Application for insurance, 39.
Appraisal,
Of loss, 169.
Of property, 472.
Of property, by experts, 478.
Appurtenances in a deed, 392.
Architect, the.
Charge for small work, 495.
Choice of, 492.
Decision of, impartial, 498,
Detail plans, 496.
Drawings of, 490.
Duties of, 493.
Expert service, 496,
Opinion as to cost of construc-
tion, 490.
Permits obtained by, 496.
Relation of, to real estate, 489.
Should have survey, 491.
Specifications, 495.
Superintendence, 495.
Work of, 489-500.
"Armstrong Investigation,"
Of life insurance companies, 182,
187.
Assessed value.
Of property, 353.
Assessment,
By board of assessors, 359,
By court order, 358.
Definition of, 357.
Reduction of, 354.
Assessment clause.
The, 155l
559
560
INDEX
Assessment insurance, 215-217.
Assets,
Life insurance, 185.
Assignment of lease, 436.
Auction sales, 333-340.
Involuntary, 333, 336.
Necessity for, 333.
Of mortgaged property, 431.
Prices of property, 467.
Secret of successful, 338.
Terms of, 334, 339.
Voluntary, 337.
Automatic alarms, 69.
Automatic sprinklers, 63-69.
Automobile insurance, 257.
Average, meaning of word, in in-
surance, 10.
Average clause.
The, in an insurance contract, 149.
B
Baltimore,
Loss by fire at, 21.
Banks,
Rates of interest on loans, 408.
Barbon, Nicholas,
First to open insurance office, 15.
Bargain and sale deed, 393, 394, 395.
Batterson, J. G., and accident in-
surance, 220.
Beam rights, 485.
Bill of sale.
Conditional, 347.
Bond and mortgage, 404-433.
Bonds,
Excise, 262.
Execution and enforcement, 410.
Fidelity, 262.
Fiduciary, 261.
Form of, 404.
Interest on, 406.
Language of, 405.
Of deposit, 262.
Uses of, 404.
Breslau Tables, 179.
Broker,
The real estate, by whom em-
ployed, 283.
Commission, 281.
False representations of, 284.
Methods of making sales, 281.
Must know property, 282.
Must know terms, 282.
Not responsible for failure to
complete contract, 285, 286,
Obligation of, to principals, 281.
Procuring of loan by, 288.
Qualifications of, 271, 280.
Splitting commissions by, 286.
Verbal statements of, 282.
When entitled to commission,
283, 284.
When paid, 285.
Brokers and brokerage.
Insurance, 172.
Brokers, brokerage, moral hazard
and underwriting, 172-176.
Brokerage, 280-289.
Definition of, 280.
Loan, 286.
Builder's surveys, 488.
Building,
Certificates on completion, 499.
Building contracts, 497.
Building permits, 496.
Buildings,
Classes of, 49.
Cost of, 475.
Burglary insurance, 258.
Cancellation of insurance contract,
145.
Capital invested in fire insurance, 19.
Carey, John, and automatic sprink-
lers, 64.
Carlisle table of mortality, 195.
Cash value of life insurance policies,
208.
Casualty insurance, 218-265.
Definition of, 218.
General status of, 218.
INDEX
561
Casualty insurance — Continued.
Origin of, 4.
(See also Accident Insurance)
Causes of fire, 47.
"Caveat emptor,"
An accepted principle in business,
39.
Certiorari,
Definition of, 355.
Charleston, S. C, first insurance
company at, 17.
Chattel interests, 278.
Chemical fire extinguishers, 70.
Classes of buildings, 49.
Classification system of rating, 87.
Clauses and warranties in insurance,
149-158.
Climate,
Influence of, on mortality, 204.
Co-insurance, 115, 151.
Clause, the, 153.
Collection of rent, 502.
Combined experience table of mor-
tality, 196.
Commission,
Agreement as to, 323.
Brokers, 281, 283.
In fire insurance, 24.
Rate of, 289.
Commissions, splitting, 286.
Companies, fire insurance, 26-55.
Compensation, Workmen's, 232-251.
Acts of foreign countries, 232.
Definition of, 232.
How written, 249.
Legislation in United States, 233
et seq.
Limitations, 233.
Organizations abroad, 235.
Rates, 251.
Concurrent policies, 163.
Condemnation of property, 476.
Conditional bill of sale, 347.
Confidence an asset, in real estate,
514.
Congreve, Sir William, and fire ex-
tinguishers, 64.
Consequential damage, 483.
XI-36
Consideration, in a contract, 330.
In a deed, 383-387.
Of conveyances, 511.
Construction, cost of, 490.
Contract, building, 497.
Extras in, 498.
Methods of paying, 498.
Subdividing, 497.
Contract, insurance, 127-158, 261.
Clauses and warranties, 149-158.
Early history, 127.
New York standard policy, 134-
148.
Provisions of the law, 132.
Voidance of, 139-143.
Contract of life insurance, 206.
Contracts,
Real estate, 290-332.
A commercial necessity, 291.
A consideration necessary in, 293.
A legal necessity, 290.
Acknowledgment, 325.
Agreement as to commission, 323.
Apportionment of rent and in-
terest, 317.
Binding on heirs, 322.
Damage by fire, 321.
Date of, 295.
Definition of, 291.
Delivery of the deed, 311, 316.
Description of property in, 299-
304.
Divisions of, 295.
Earnest money, 297, 309-311, 321.
Essential elements of, 292.
Exchange, 328-332.
Financial statement, 309, 331.
Form of deed, 318.
Forms of, 294 et seq.
Language of, 299.
Non-performance of, 326.
Parties and consideration, 330.
Personal property in sale, 319.
Purchase money bond and mort-
gage, 314.
Reading of water meter, 317.
Remedies of seller, 327, 332.
Seal, 324.
56^
INDEX
Contracts — Continued.
Statement of parties, 296.
Two persons necessary to, 292.
Violations of law, 320.
When seller is a trustee, 297.
Wise and safe, 290.
Witness to, 325.
Conveyances,
Absolute and upon security, 363.
Consideration of, 511.
Recording of, 366.
Corporation, seal of a, 401.
Cost of buildings, 475.
Of construction, 490.
Of insurance, relation to saving,
80.
Covenant deeds, 395 et seq.
Covenants of a mortgage, 420 et
seq.
Credit clause, the, 155.
Insurance, 255.
Credits to purchaser, 457.
D
Davies, William E., rule for valuing
property, 4G9-471.
Dean, A. F., and the analytic sched-
ule of rates, 119.
Debits against purchaser, 456.
Deductions for fire appliances, 114.
Deed,
Acknowledgment of, the, 367.
Definition of, 363.
Delivery of, 311, 316, 369.
Elements of, 364.
Form of, 318.
Instruments for record, 367.
Subscription to, 364.
Deeds, 382-403.
Appurtenances, 392.
Bargain and sale, 393, 394, 395.
Consideration, 383-387.
Date, 383.
Description, 387-392.
Full covenant and warranty, 395.
Granting elapse, 387,
Habendum, 392.
Indenture, 383.
Individual seal, 401.
New York form, 382.
Parties, 383.
Proof of instrument, 402.
Quit-claim, 393.
Seal of a corporation, 401.
Testimony clause, 401.
Default in payment of interest, 410.
Defeasance, the, in a mortgage, 419.
Departments of an insurance com-
pany, 184.
Deposit requirement of insurance
companies, 29.
Description in a deed, 387-392.
Description of property, 299-304.
Difference in insurance risks, 104.
Disbursements, life insurance, 186.
Dispossess proceedings, 444.
Dispossession of tenant, 443.
Dividends, in fire insurance, 23.
Dower rights, 278.
Drawings, architect's working, 490.
Dry pipe systems, 69.
Dryden, John T., and industrial in-
surance, 213.
Early forms of insurance rating, 86.
Earnest money, a lien on property,
321.
Earnest money, in a contract, 309-
311.
Easements, 307, 482.
Economic importance of life insur-
ance, 185.
Electric fire signals, 73.
Electricity clause in insurance, 152.
Elevator insurance, 510.
Eminent domain, right of, 275, 476.
Employer's defences, in accident,
227.
Encroachment by neighbor, 486,
On highway, 485,
INDEX
563
Encumbrances outside of contract,
459.
To title, 452.
Endowment policies, 202.
Enforcement of covenant, 398.
Engineer, fire protection, 80.
English life insurance societies, 178.
Equity of redemption of property,
413.
Estate in fee determinable, 276.
By curtesy, 278.
In fee simple, 275.
In fee upon condition subsequent,
276.
Life, 277.
Eviction of tenant, 443 et seq.
Examination of title, 296.
Exchange and sales, 286.
Contracts, 328-332.
Closing of, 460.
Excise bonds 262.
Execution and enforcement of bond,
410.
Expenses in fire insurance, 24.
Exposure, fire, 114.
Extinguishers, fire, 70.
Fee simple, estate in, 275.
Fidelity bonds, 262.
Fiduciary bonds, 261.
Field inspections, of risks, 77.
Financial aspect of fire insurance
protection, 79-85.
Fire,
Damage by, 321.
Possible sources of, 47.
Prevention of, 57.
Fire appliances, deductions for,
114.
Fire boats, 61.
^ Fire departments, public and pri-
vate, 62.
»» Fire-doors, 58.
Fire extinguishers, chemical, 70.
Fire extinguishing facilities, 46,
Fire insurance, 15-25.
An experimental science, 16.
Capital invested in, 19.
Clause in mortgage, 421.
Commissions in, 24.
Definition of, 15.
Deposit required for companies,
29.
Dividends, 23.
Early practices, 16.
Expenses, 24.
How difl'erent from life, 109.
Losses paid in, 21.
Origin of, 15.
Premiums paid, 20.
Protection, financial aspect of,
79-85.
Rate of premium, 22.
Risks, 38-55.
Statistics of, 18.
Stock companies, 28.
Underwriting, 36.
Volume of business, 20.
Fire insurance companies, 26-55.
Adjuster for, 32.
Deposit requirement, 29.
Employes of, 33.
How stock is usually sold, 30.
Inspectors, 33.
Local agent, 33-36.
Lloyds, 26-27.
Methods of organization, 26.
Mutuals, 28.
Number of, in L^nited States, 18.
Organization of, 26-37.
Special agent, 32.
Stock, 28.
Fire insurance rating, 86-126.
Analytic schedule, 119-126.
Minimum and specific, 102-106.
Universal mercantile schedule,
107-118.
Fire loss.
Limitation of, 135.
Table of, 56.
Fireproof construction, 53-55.
Fire protection, 56-78.
poor openings, 58,
564
INDEX
Fire protection — Continued
Fire departments, 62.
Fire doors, 58.
Fire extinguishers, 70.
Fire pails, 71.
Fire shutters, 59.
Open sprinklers, 70.
Stand pipes, 63.
Signaling systems, 72.
Sprinklers, 63.
Waste in buildings, 74.
Watchmen, 74.
Waterworks, GO.
Wired glass, 59.
Fire shutters, 59.
Floating policies, 154.
Forms,
Insurance, 159.
And policy writing, 159-163.
Drafting, 161.
Printed, 161-162.
Frame buildings, 49-51.
France,
Workmen's compensation in, 241.
Fraternal insurance, 216.
G
General average, meaning of, 10.
Girard Life and Trust Company,
181.
Good-will, an asset in real estate,
514.
Granting clause in a deed, 387.
Green Tree Company, the, 89.
Grinnell, Frederick, and automatic
sprinklers, 64.
Ground lease, 439.
H
Habendum of a deed, the, 392.
Halley's table of mortality, 193.
Hand extinguishers, 70.
Harrison, A. Stewart, and automat-
ic sprinklers, 64,
Harvey, August F., on industrial in-
surance, 214.
Health insurance, 221.
Heating of an insured building, 45.
Highway, encroachment on, 485.
Hoffman, Murray, rule for valuing
property, 469.
Homans' table of mortality, 196.
Hospital life insurance company,
181.
Household furniture form, 160.
Hydrants, use of, 60.
Improved property, 474.
Income, life insurance, 186.
Indemnity, marine insurance based
on, 7.
Industrial and assessment insur-
ance, 212-217.
Inflammable material, 44.
Injuries, self-inflicted, 223.
Inspection of insurance risks, 39-
42.
Inspector, fire, qualifications of a,
48.
Inspectors for insurance companies,
33.
Instalment clause, the, 155.
Insurance, 1-265.
Accident, 218, 220 et seq.
Automobile, 257.
Boiler, 253, 510.
Brokers, 172.
Burglary, 258.
Casualty, 4, 218, 265.
Clause in mortgage, 421.
Covering contracts, 261.
Credit, 255.
Definition of, 1.
Early instances of, 1.
Elevator, 510.
Fire, 15-25.
Four main branches of, 2.
Health, 221.
History of, 1-6.
INDEX
565
Insurance — Continued.
Liability, 224, 230, 509.
Life (see special entry below)
Marine, 3, 7-14.
Moral hazard in, 173.
Plate glass, 252.
Present forms of, 2.
Safety and fidelity, 260.
Steam boiler, 253, 510.
Title, 258, 361-381.
Underwriting, 174-176.
Unemployment, 262.
Vacation, 264.
War, 264.
Insurance Company of North Amer-
ica, 181.
Insurance contract, 127-158.
Clauses and warranties, 149-158.
Early history, 127.
New York Standard Policy, 134-
148.
Provisions of the law, 132.
Special limitations, 143.
Voidance of, 138-143.
Insurance hazard on stock, 113.
Insurance, life.
Agents, 184.
As an investment, 190.
Assessment, 215-217.
Compared with savings banks, 191.
Computing the premium, 199.
Contract, 206.
Definition of, 177.
Early American companies, 181.
Early conditions, 177.
Economic importance of, 185.
First English societies, 178.
How companies are managed, 1
et seq.
Industrial, 212-217.
In force, 186.
In the United States, 180.
Investments of companies, 187.
Medical examination, 208.
Mortality tables, 193-200.
Organization of companies, 177-
192.
Policies and premium rates, 201-
209.
Premium loans, 189.
Interest,
Apportionment of, 317.
Computing, 462.
Default in payment of, 410.
On bond, 406.
Interests in land, 273-279.
Investment, real estate, 269.
Investments of insurance com-
panies, 187.
Items excluded from insurance lia-
bility, 144.
Janitor, duties of a, 506.
Judgment, lien of, 342.
K
Kansas, rate making in, 97.
Key rate, the, in fire insurance, 111.
Laboratory testing of fire devices,
77.
Land, interests in, 273-279.
Land value, determination of, 464-
483.
Landlord,
Definition of, 434.
How he may terminate lease, 442-
443.
Liability of, 506 et seq.
Obligations of, to tenant, 438.
Repairs by, 445.
Leases, 434-450.
Assignment of, 436.
Conditional limitation, 443.
Form of, 446.
Ground, 439.
Limited, 440.
566
INDEX
Leases — Continued.
Repairs, 445.
Tenancy at will, 437.
Tenancy for years, 438.
Term of, 435.
Termination by fire, 445.
Termination of, 442.
Verbal, 437.
Violation of, 443.
Written, 437.
Leasehold, transfer of, 461.
Legal tender, 406.
Liability based on actual value of
property, 145.
Liability insurance, 224, 509.
Types of, 230.
Liability of owner, 506 et seq.
Liabilities, life insurance, 186.
Liens,
On real estate, 279, 341-349.
Definition of, 341.
General and specific, 341.
Interests aflFected by tax, 357.
Mechanics', 344.
Of decedent's debts, 348.
Of judgment, 342.
Transfer tax, 349.
When assessments become, 360.
Life estate, 452.
Life estates and remainders, 277.
Life insurance,
Agents, 184.
As an investment, 190.
Assessment, 215-217.
Compared with savings bank, 191.
Completing the premium, 199.
Contract, 206.
Definition of, 177.
Early American companies, 181.
Early conditions, 177.
Economic importance of, 185.
First English societies, 178.
How companies are managed, 182
et seq.
How diflPerent from fire, 109.
Industrial, 212-217.
In force, 186.
In the United States, 180.
Investments of companies, 187.
Medical examination, 208.
Mortality tables, 193-200.
Organization of companies, 177-
192.
Policies and premium rates, 201-
209.
Premium loans, 189.
Lighting of an insured building, 45.
Lightning clause, the, 155.
Limitation of fire loss, 135.
Limitations in insurance contract,
143.
Limited lease, 440.
Lloyds of London, history of, 7,
26-27.
Loan brokerage, 286.
Loan transaction, closing of, 461.
Local agent, work of, for insurance,
33-36.
London Assurance Company, 17,
178.
Loss settlements, 164-171.
Adjusters, 164.
Appraisal, 169.
Difficulties, 170.
In standard policy, 165.
Payment, 169.
Provisions for, 167.
Repairs and replacements, 166.
Standing of companies, 171.
Losses,
Four classes of, in marine insur-
ance, 12, 13.
In standard policy, 165.
Paid in fire insurance, 21, 56.
M
Machinery in an insured building,
44.
Management,
Property, divisions of, 501.
Problems of, 501-510.
Marine insurance, 7-14.
Average in, 10.
Based on indemnity, 7.
INDEX
567
Marine insurance — Continued.
Dangers covered by, 12.
Earliest form, 3.
Losses in, 12, 13.
Originated by Lloyds, 7.
Salvage in, 14.
The policy, 8.
Underwriting, 8.
Warranties, 10.
Mechanics' lien, 344.
Medical department of insurance
company, 184.
Medical examination in insurance,
208.
Mill constructed buildings, 52.
Milne's table of mortality, 195.
Minimum and specific insurance
rates, 102-106.
Moore, F. C, and the Universal
Mercantile Schedule, 107.
Moral hazard in insurance, 173, 205.
Mortgage,
The, covenants, 420 et seq.
Foreclosure, 411, 420, 421, 425,
427, 428, 429, 430, 431.
Form of, 414.
Insurance clause, 421.
Interest, 407.
Language of, 416 et seq.
Lifting clause, 428.
Privilege of paying off, 408.
Property subject to, 312.
Purchase money, 314.
Recording tax, 411.
Rent clause, 424.
Rights of holders, 427.
Tax clause, 425, 426.
Tax on, 513.
The defeasance, 419.
Mortgage and bond, 404-433.
Mortgagee clause, the, 155.
Morgan, Arthur, records of mor-
tality, 196.
Mortality, law of increasing, 200.
Mortality tables of insurance, 193-
200.
Basis of, 193.
Mutual Benefit Insurance Company,
182.
Mutual insurance companies, 28.
Mutual Life Insurance Company,
182.
N
National Board of Fire Under-
writers, 93.
National Fire Protective Associa-
tion, 76.
Negligence and accident, 225 et seq.
New England Life Insurance Com-
pany, 181.
New York,
First insurance company in, 17.
State law on workmen's compen-
sation, 241.
Workmen's compensation claims
in, 244.
New York Standard Policy, the,
134-148.
Cancellations, 145.
Description of property, 136.
Direct loss by fire, 135.
General provisions, 134.
Items excluded, 144.
Liability based on property value,
145.
Limitations of contract, 137.
Provisions of, 146.
Renewals, 145.
Special limitations of liability,
143.
Voidance of contract, 138-143.
Non-participating policies, 201.
Northampton table of mortality,
194.
Occupations, effect of, on insur-
ance, 204.
Occupancy of a building insured,
43.
568
INDEX
Offer and acceptance of an insur-
ance risk, 38.
Operation real estate, 269.
Open sprinklers, 70.
Ordinary buildings, 51-52.
Organization of fire insurance- com-
panies, 26-37.
Original clauses in insurance, 153.
Ownership,
Of property, limitations upon,
273.
Proving, 279.
Rights of, 273.
State, 274.
Paid-up policies, 207.
Parmelee, Henry S., and automatic
sprinklers, 64.
Participating policies, 201.
Particular average, meaning of, 11.
Parties to a contract, 330.
Parties to a deed, 383.
Party walls, 308, 485.
Pascal,
On probabilities, 5.
Payment of fire loss, 169.
Pennsylvania Company for the in-
surance of lives, 181.
Percentage co-insurance clause, the,
154.
Percentage value clause, the, 153.
Permits for building, 496.
Philadelphia contributionship, the,
17, 89.
Pipes, water, arrangement of, 61.
Plans and specifications, architects,
497.
Plate glass insurance, 252.
Plottage, meaning of, 472.
Police power over property, 274.
Policies,
And premium rates, life insur-
ance, 201-209.
Life insurance, cash value of, 208.
Classification of, 201.
Concurrent, 163.
Definition of, 127.
Kinds of, 202.
Paid up, 208.
Standard, 131.
Policy writing, 159-163.
Povey, Richard, a pioneer in insur-
ance, 16.
Power in an insured building, 45.
Premium rates.
In fire insurance, 20, 22.
In life insurance, 199, 201-209.
Prevention of fires, 57.
Price paid and taxation, 512.
Price's table of mortality, 195.
Private fire departments, 62.
Probabilities, theory of, 4.
Problems of management, 501-510.
Problems, unsettled, in real estate,
511-515.
Property,
Appraisal of, 472.
Assessed value of, 353.
Condemnation of, 476.
Description of, 299-304.
Description of, in New York
policy, 136.
Disputed ownership, 454.
Encumbrances, 453 et seq.
Improved, 466, 474.
Management of, 501, 510.
Pledging for debt, 412.
Price paid for, 467.
Purchases and expenditures, 503.
Real, 271.
Restricted, 305-307.
Sold subject to tenancy, 304.
Subject to mortgage, 312.
Transfer of, by will, 370.
Upkeep of, 502, 505.
Value of and insurance liability,
145.
Prospectus, the insurance, 87, 127.
Protection, fire insurance, financial
aspect of, 79-85.
Prudential Insurance Company,
213, 214.
Public fire departments, 62.
INDEX
569
Public purpose, property devoted
to, 476.
Purchase money, bond and mort-
gage, 314.
Purchaser,
Credits, to, 457.
Debits against, 456.
Payments by, 459.
Purchaser vs. seller, 298.
Q
Quit-claim deed, 393.
R
Rate,
Basic, of the analytic schedule,
121.
Factors influencing, in analytic
schedule, 121.
Of interest, on bond, 407.
Of premium in fire insurance, 22.
Rating, fire insurance, 86-126.
Analytic schedule, 119-126.
Application of schedules, 125.
By schedule. 111.
Classification system of, 87.
Deductions for fire appliances,
114.
Difference in risks, 104.
Duties of organization, 97.
Early charges, 89-91.
Early forms of, 86.
Exposure and its effect upon, 114.
General considerations, 123.
How risks are reckoned, 109-111.
In Kansas, 97.
Limitations of, 124.
Local organizations, 94.
Minimum and specific, 102-106.
National Board of Fire Under-
writers, 93.
Not a science, 123.
On contents of buildings, 115.
Percentage system, 119.
Schedule, 103.
Special, 91.
Specific, 103.
Summary, 92.
Types of risks, 97-101.
Universal mercantile schedule,
107-118.
Value of organization, 96.
Real estate, 267-515.
A business, not a profession, 267.
Agency, 271.
And property, 271.
Architect's relation to, 489.
Auction sales, 333-340.
Bond and mortgage, 404-433.
Brokerage, 280-289.
Closing of title, 451-463.
Confidence and good will an as-
set, 514.
Contracts, 290-332.
Deeds, 382-403.
Divisions of the business, 268.
Easements, 307.
Ethics of the business, 267.
Form of deed, 318.
Investment, 269.
Leases, 434-450.
Liens, 341-349.
Methods of making sales, 281.
Operation, 269.
Organizations, 511.
Problems of management, 501-510.
Restricted property, 305-307.
Surveyor's relation to, 484-488.
Taxes and assessments, 350-360.
Transfer of title, 361-381.
Unsettled problems, 511-515.
Valuation of, 464-483.
Work of the architect, 489-500.
Real property, 271.
Redemption of property, 413.
Renewal of insurance contract, 145.
Rent,
Apportionment of, 317.
Definition of, 434.
Due and not paid, 461.
In relation to a mortgage, 424.
570
INDEX
Renting,
Problems of, 501.
Repairs and replacements, 166.
Repairs by a landlord, 445.
Restricted property, 305-307.
Riders in insurance policy, 149.
Right of eminent domain, the, 275-
Right,
Of taxation, the, 275.
Of way, 307, 482.
Rights of ownership, 273.
Risks,
Fire, types of, 38-55, 97-101.
General information about, 43.
How rated, 109-111.
Inspection of, 39-42.
Insurance, difference in, 104.
Life insurance, 203 et seq.
Royal Exchange Assurance Com-
pany, 17, 178.
Safety and fidelity insurance, 260.
Sales and exchange, 286.
Sales, auction, 333-340.
Involuntary, 333, 336.
Necessity for, 333.
Of mortgaged property, 431.
Secret of success, 338.
Terms, 334, 339.
Voluntary, 337.
Salvage, in marine insurance, 14.
San Francisco, loss by fire at, 21.
Savings banks vs. insurance, 191.
Schedule,
Rating of insurance risks, 103.
Universal mercantile, 107-118.
Schedules,
Insurance, variety of, 106.
Seals of persons and corporations,
401.
Segregation of trades, 88.
Seller,
Remedies of, against broken con-
tract, 327.
Vs. Purchaser, 298.
Settlements of loss, 164-171.
Adjusters, 164.
Appraisal, 169.
Difficulties, 170.
In standard policy, 165.
Payment, 169.
Provisions for, 167.
Repairs and replacements, 166.
Standing of companies, 171.
Sheriff's sale, 340.
Sick fund, workmen's, 237.
Sickness, insurance against, 221.
Signaling systems for fire, 72.
Single tax, the, 514.
Society,
For Equitable Assurance, etc., 179.
Of Assurance for Widows and
Orphans, 178.
Sources of fire, 47.
Special agent of insurance com-
panies, the, 32.
Specifications and plans, 497.
Sprinklers,
Automatic, 63-69.
Open, 70.
Standard insurance policy of New
York, 134-148.
Cancellations, 145.
Description of property, 136.
Direct loss by fire, 135.
General provisions, 134.
Items excluded, 144.
Liability based on property val-
ue, 145.
Limitations of contract, 137.
Provisions of, 146.
Renewals, 145.
Special limitations of liability,
143.
Voidance of contract, 138-143.
Standard policies of insurance, 131.
Standpipe equipments, 63.
State,
Aid to workmen, 249.
Ownership of, in private proper-
ty, 274.
Statistics of fire ijisurance, 18.
Statute of frauds, 363.
INDEX
571
Steam boiler insurance, 253, 510.
Stock companies and fire insurance,
28.
Stock insurance, hazard on, 113.
Sun Insurance Office, 17.
Survey,
Builder's, 488.
Encroachments, 485, 486.
Given to architect, 491.
How shown, 484.
Necessity for an accurate, 484.
Sub-division, 487.
What it should show, 487.
Clause, the, 153.
Surveyor's relation to real estate,
the, 484-488.
Tax,
Rate, determination, of, 354.
Transfer, 349.
The single, 514.
Taxes,
A general lien, 350.
And assessments, 350-360.
And price paid, 512.
Budget of, 352.
City or village, 352.
County, 351.
Definition of, 350.
Highway, 352.
In relation to a mortgage, 425.
On mortgages, 412, 513.
Payment of, 356.
School, 351.
State, 351.
Town, 351.
When a lien, 356.
Taxation,
Right of, 275.
Tenancy,
At will, 437.
Effect of upon sale of property,
304.
For years, 438.
From month to month, 440.
Tenant,
The, constructive, eviction of, 445.
Definition of, 434.
Dispossession of, 443.
Obligations of landlord to, 438.
Term policies, 202.
Termination of lease, 442.
Testimony clause, 401.
Theory of probabilities, 4.
Title,
The, clearance, 454 et seq.
Encumbrances, 452 et seq.
Examination of, 296.
Examiner of, 372.
In fee simple, 452.
Instruments for record, 367.
Inquiry into records, 371.
Modern right to transfer, 361.
Money consideration, 455.
Private search, its defects, 373.
Reasons for employing counsel,
371.
Recording of conveyances, 366.
Rejection of, 462.
Transfer by deed, 363.
Transfer by delivery of posses-
sion, 362.
Transfer of and title insurance,
361-381.
Two kinds of conveyances, 363.
Two ways of transferring, 361.
Unmarketable, 399 et seq.
When it passes, 365.
Title closing.
Adjustments at, 451-463.
Debits against purchaser, 456.
Encumbrances outside of con-
tract, 459.
Exchange contracts, 460.
First steps, 451.
Loan transaction, 461.
Payments by purchaser, 459.
Payments by seller, 458.
Purchaser's credits, 457.
Rents due and unpaid, 461.
Transfer of leasehold, 461.
Title insurance, 258.
Conditions of policy, 377.
Defence of policy, 378.
Guarantees, 376.
572
INDEX
Title insurance — Continued.
Indemnity clause, 378.
Limit of loss, 379.
Mortgage policy, 379.
Not transferable, 378.
Origin of system, 373.
Premiums, 376.
Policy, 375.
Rates, 375.
Subject matter, 377.
Use of policy, 380.
Written reports, 374.
Toppin, R. W., on automatic sprink-
lers, 65.
Trade unions in Germany, 235.
Trades,
Segregation of, 88.
Transfer,
Of leasehold, 461.
Of title and title insurance, 361-
381.
Tax as a lien, 349.
Travelers' Insurance Company, 220.
Treat, E. M., on credit insurance,
256.
Types of fire risks, 97-101.
U
Underwriting,
Brokers and moral hazard, 172-
176.
How it arose, 8.
Insurance, 36, 174-176.
Unemployment insurance, 262.
United States,
Life insurance in the, 180.
Workmen's compensation in the,
238.
Workmen's compensation claims
in, 242.
Universal mercantile schedule, 107-
118.
Fundamental principles, 107-109.
Origin of, 107.
Scope of, 109.
Universal schedule, the, of fire-
proof buildings, 55.
Unsettled problems in real estate,
511-515.
Usury laws, 409.
Vacant land.
Value of, 481.
Vacation insurance, 264.
Valuation,
Of real estate, 464-483.
Of short lots, 468.
Value of sprinkler protection, 65.
Values in property, proving, 478.
Valuing irregular lots, 479.
Variety of insurance schedules, 106.
W
Walls,
Leaving, 491.
Party, 485.
War insurance, 264.
Warehouse, planning a, 500.
Warranties and clauses, in insur-
ance, 149-158.
Watchmen and fire protection, 74.
Water pipes,
Arrangement of, 61.
Water rates.
How fixed, 360.
Waterworks,
Systems of, 60.
Will,
Transfer of property by, 370.
Wired glass doors, 59.
Wright, Elizur, on cash value of
policies, 208.
Workmen's compensation, 224, 232,
251.
Acts of foreign countries, 232.
Definition of, 232.
How written, 249.
Legislation in United States, 238
et seq.
Limitations, 233.
Organizations abroad, 235.
Rates, 251.
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