CHAPTER XX FRATERNAL AND ASSESSMENT INSURANCE Yet Extent of Fraternal Insurance. The preceding chapters are descriptive of "old-line" life insurance, i.e. life insurance based upon the maintenance of an adequate reserve. a very considerable proportion of the total life insurance written in this country is carried by fraternal orders which for years have conducted their operations on the assessment plan. The 509 fraternal orders included in the statistics of the Insurance Year Book show insurance in force at the end of 1913 of $9,622,000,000, or an amount nearly equal to 47 per cent. of the $20,564,000,000 of insurance carried by the old-line companies. The number of fraternal benefit certificates in force exceeded 8,000,000, the amount of new business written during the year amounted to $1,065,000,000, the claims paid, $101,000,000, and the assessments, $129,000,000. As has been said, over one-fourth of the country's population is directly or indirectly interested in these societies. But while the regular life-insurance companies held reserves of $3,903,000,000 at the close of 1913 to guarantee the fulfillment of their obligations, the assets of fraternal orders, although the face value of their certificates amounts to nearly 47 per cent. of the total insurance in force with the regular companies, amounted to only $183,000,000. Organization, Government, and Legal Status of Fraternal Societies. The primary purpose of these societies is to enable their members, composed chiefly of persons with limited means whose aim it is to secure the protective benefits of insurance at the smallest possible cost, to unite in a fraternal way for mutual protection. In fact the strength of the system and the survival of most of the large societies for so many years, despite the inherently defective methods which have characterized their insurance business, are attributable chiefly to the fraternal tie which closely binds the members together. Generally speaking, the organization and government of a fraternal society assumes the following form: A parent society (or grand lodge), governed according to the terms of its constitution and by-laws, creates numerous local subordinate lodges. These local bodies, while usually allowed to regulate their affairs to some extent, especially as regards their purely benevolent features, are nevertheless subject in all important matters to supervision by the parent society and are governed by the rules which it adopts. As a rule some ritual is also observed. Another feature of such societies is the purely democratic form of government that prevails, all the members having the right to vote in their respective lodges on matters that affect the society as a whole, such as the selection of officers and the adoption of laws. The grand lodge usually consists of the representatives elected by the members of the local lodges, although in some instances there is a supreme lodge, composed of representatives selected by the various grand lodges, each of which in turn is made up of representatives chosen by the members of its subordinate local lodges. Some of the societies are incorporated bodies, while others are voluntary associations. From a legal point of view fraternal societies differ essentially from companies whose insurance operations are organized on a strictly business basis. Most of the states have enacted legislation regulating the organization and conduct of such societies, but in all instances their benevolent character is insisted upon. Unless illegal, their rules are generally enforced by the courts. The other important legal characteristics of fraternal orders have been concisely summarized by Mr. Walter S. Nichols as follows: 1 1 NICHOLS, WALTER S., "Fraternal Insurance." A lecture delivered at Yale University, published in Yale Readings in Life Insurance, i, 138-139. Nearly all of the societies have their own adjudicators for determining the standing and rights of their members, by whose decision the members must abide. These the courts will refuse to interfere with so long as they act honestly and fairly within their legitimate province. They are mutual societies, in which, like churches, the members are expected to abide by the form of government to which they have subscribed. A local lodge may be cut off from affiliation with a parent society or may cut itself loose just as a church may cut loose from its denominational connection. In neither case is the society itself dissolved. It simply loses the rights which belong to it as a member of the parent society and must surrender whatever is in its possession and belonging to the parent. If it has a charter from the state, the state laws governing it as a corporation are superior to any rules of the association itself. On one point, however, whether incorporated or not, the courts are insistent, that is, no rule or action of the society can deprive a local lodge or a member of insurance or other property interests which are already vested, that is, in which an unconditional ownership has been established. Where they are incorporated, like other corporations they are regarded by the law as artificial persons acting through their officers as their agents and with no personal liability on the part of the members except those imposed by the rules of the society itself. Where they are not incorporated their legal character is not so easily confined. They are often regarded as a peculiar kind of partnership qualified by the special purposes for which they were organized. Distinctive Characteristics of Fraternal Insurance.As insurance associations, fraternal societies issue to their members so-called "benefit certificates," according to which they promise, in return for "assessments" or "contributions" from the certificate holder, to pay certain stipulated "benefits" in the event of death or whatever other contingency may be covered. Yet it is apparent that “ any organization which guarantees the payment of a definite sum of money, under certain circumstances, dependent upon the contingency of human life, in return for certain contributions, does an insurance business." The document containing the promise to pay may be called a "benefit certificate" instead of a policy, the term "contribution" or "assessment” may be used instead of premium, and the final payment in the event of death may be designated as a "benefit" instead of a claim, yet the whole transaction is essentially a form of insurance. The ordinary life-insurance policy is simply a definite promise to pay, in return for a fixed consideration, a stipulated sum on the occurrence of the specified contingency, and contains all the conditions which govern the parties to the contract. In this respect fraternal societies follow a radically different plan. Although the certificate is issued on the basis of an application 2 which is similar to that required by regular old-line companies, the benefit certificate 3 differs from an ordinary policy in three important particulars: 1. The certificate is comparatively brief, usually stating that the holder thereof is a member of the society, that he is entitled to all its privileges and to a certain portion of the beneficiary fund, and that the society's promise in this respect is conditioned on the member's compliance with the constitution and laws of the society, which are declared to be a part of the contract. In other words the benefit certificate, unlike an ordinary life-insurance policy, does not specify in detail the conditions which govern the indemnity agreement; instead, these are found in the society's rules. 2. The certificate merely recognizes the holder's rights as a member in the society to share in the benefit for a specified amount. The certificate remains the property of the member, who is usually given the right under the rules to change the beneficiary at will, while the ordinary life-insurance policy is the property of the beneficiary designated therein unless the insured has expressly reserved the right in the contract to change such beneficiary at will. Usually the holder of a benefit certificate can only name as beneficiary some member of his family or other dependent. 3. The certificate, according to the laws of most states, 2 For a specimen of such application, see page 465 of this volume. 3 For a specimen copy of such benefit certificate, see page 464 of this volume cannot be an agreement promising the payment of a definite amount for a fixed premium as is the case with old-line contracts. From a practical point of view the most important difference between fraternal and old-line insurance has been the failure of the former to maintain a reserve sufficient to guarantee the payment of all obligations as they mature. In fact, until recently, the reserve idea was bitterly opposed by most fraternal orders as an unnecessary overcharge. Instead of accumulating adequate reserves, the societies proceeded on the plan of charging low premiums (which experience soon demonstrated to be woefully inadequate) and reserved to themselves the right, in case the funds on hand should prove insufficient to meet current claims, either to assess their members for an amount equal to the deficit or to scale down the amount of the benefit so as to make its payment possible with the funds on hand. In reality, therefore, the benefit certificate does not constitute a promise to pay a definite amount for a definite consideration. Since they have not promised to pay more than the funds on hand together with the assessments which they are able to collect from their members, enable them to pay, fraternal societies, considering the matter from a purely theoretical standpoint, cannot become insolvent. Yet a very large number of such societies have passed out of existence as utter failures because they were unable to obtain sufficient funds through assessments upon their members to pay the benefits upon which members were relying for the protection of their families in case of death and for which they had been contributing for years. The unfortunate experience of so many fraternal orders is primarily due to the failure to recognize, until too late, that the only practicable plan of life insurance, as already explained, is one involving the payment of a level premium and the accumulation of an overcharge in the early policy years with a view to meeting the deficit in the premium in the later policy years when it is insufficient to meet the cost of insurance. The societies operated on the plan of giving protec |