$10,000 was earned during the current year; two-sixths was earned on the three-year policies or $8,000; and two-tenths on the five-year policies or $4,000, which left at the end of 1919 an unearned premium of $31,000 on the business written in the second year. During the current year one-half of the premium income on one-year policies or $40,000 was earned; on the two-year policies one-fourth or $10,000 was earned; on the three-year policies one-sixth or $7,000; on four-year policies one-eighth or $3,000; on five-year policies one-tenth or $4,000. This made a reserve liability of $162,000 for the 1919 business, which, added to the unearned premiums of $31,000 for 1918 business and $8,000 for 1917 business, made a total unearned premium liability of $201,000 at the close of business on December 31st, 1919. This same operation is repeated year after year, always carrying over the unexpired portions of the policies written in previous years, with the results indicated by the table.

"In de

State legislation relating to the reserve. It has been explained that the reserve in fire insurance is a trust fund and, like every fiduciary relationship, is subject to State regulation. Knowing that the future depends on the solvency of the company, precautions are taken to see that the premiums paid in advance are properly safeguarded. The amount which a company is usually legally required to hold is calculated on page 251. To quote a typical State insurance law in this connection, the Insurance Commissioner is directed as follows: termining the liabilities of a fire insurance company, charge the insurance company 50 per cent of the premiums written in their policies upon all unexpired risks that have one year, or less than one year, to run, and a pro rata of all premiums on risks having more than one year to run; on perpetual policies, charge the deposit received less a surrender charge of not exceeding 10 per cent thereof." In regard to perpetual policies it should be mentioned that the company assumes that sufficient interest will be earned on the premium paid to be equivalent to the regular term rate. Therefore, practically the entire initial premium should at all times be intact. The accuracy of the above calculation in regard to term policies. has been discussed earlier in the chapter. It might be added here, however, that great difficulty confronts the State when any other assumption is used, since there is nothing in fire insurance comparable to the American Experience Table used

for life insurance reserve evaluation. It is assumed that the underwriting methods of the company are sufficiently safe and the premiums charged have been calculated with a view to making a profit. Therefore a reserve equal to the unearned premium liability is generally conceded to be sufficient when calculated in the above manner. This, as we have seen, may or may not be true, depending on the character of the risks and the distribution of business throughout the year.

It has even been argued that in many cases this method of ascertaining legal reserve requirements works an undue hardship on new and small companies. We have seen in Chapter VI that while life companies are allowed to evaluate their policies in various ways, such as the "preliminary term plan," the "modified preliminary term plan," etc., to enable them to meet the early incidence of expense, this privilege is denied to fire insurance companies. To demonstrate the effect of this on a new company, let us assume that a new fire insurance company with a capital of $100,000 began on January 1st, 1920. During the year the policy premiums collected on one-year policies amounted to $100,000. Suppose that the acquisition expense was $30,000 (which would be quite low for the first year of business), and that the claims paid or accrued amounted to $45,000; there would remain a surplus of $25,000 on hand to be applied as the unearned premium reserve. But the State law specified that the company should have had onehalf of its premium income on one-year policies, or $50,000, in reserve; since they had only $25,000, their capital was impaired to the extent of $25,000. Originally only $100,000, it is now reduced to $75,000. So even where the law allows a 20 per cent impairment of capital this company would not have met the legal requirements. From this it can be seen that a reserve requirement may hamper the operation of a young fire insurance company to a very great extent. There is no scientific method of ascertaining the reserve except by calculating the present value of future losses, a method which is impracticable because of the great diversity in classes of risks and the uncertainty of estimating the probability of future losses, an uncertainty far greater than in life insurance. In addition the frequent but irregular occurrence of great conflagrations makes additional precautions necessary; but fatal epidemics, such as the recent wave of influenza, rarely disturb the even course of human mortality.

To further stabilize insurance companies and prevent insolvencies, the States frequently specify the types of securities in which the reserve may be invested, enforcing restrictions very similar to those for life insurance companies, as outlined in Chapter VII. Besides, it is frequently required that both domestic and foreign companies make a deposit of approved securities with the State for the purpose of guaranteeing solvency. This sum, however, is usually inadequate as a reserve, and does not approach the unearned premium liability. A more stringent requirement than a "special deposit" in the form of a flat sum is one which requires approved securities to an amount equal to the unearned premium liability. This serves the double purpose of subjecting the assets to close scrutiny and at the same time preventing fraudulent manipulation by placing this “trust fund" beyond the reach of the individual officers of the company. It should be mentioned that the above applies principally to the stock companies, mutuals usually being allowed to regulate the reserves as they see fit and make assessments when found necessary. The different conditions of organization and the relative merits of these two types of companies have been discussed elsewhere.

CHAPTER XVIII

SETTLEMENT OF LOSSES

Classification of provisions applying to loss settlements.The policy provisions which remain for discussion apply after a loss has taken place. They may be divided into four groups: (1). those referring to the preservation of the property, (2) those dealing with the proof of the amount lost, (3) those providing for the settlement of disagreements, (4) those determining the extent of the company's net liability. With regard to the requirements made of the insured, the courts have been lenient when they apply after a fire has occurred, while the requirements before a loss have been regarded as more important because they may serve to prevent a fire. We will discuss the policy provisions in the order in which they would naturally come into play in the course of the adjustment of a loss.

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Provisions referring to the preservation of property.-The policy requires that "the insured shall give immediate notice to this company of any loss or damage.' That the insurer is entitled to notice of this important event is clear, inasmuch as it enables him to take action to reduce the loss by protecting the property, to investigate the cause of the fire and better to determine his liability. Without such notice it is usually held that he is released from liability. But "immediate notice" is not always the prompt action which might be supposed. While it would be unsafe for an insured to presume upon the leniency of the courts, it has been held that immediate notice is notice given within a reasonable time and that a delay of thirty days may be justifiable under certain circumstances. In another case seven days has been held to be an unreasonable delay, sufficient to release the company from liability.

The next action required of the insured is to "protect the property from further damage." For such further damage resulting from neglect the insurance company is not liable, ac'Appendix XXX, lines 126-128.

'Appendix XXX, lines 128 and 129.

cording to several decisions, since the fire policy is not designed to protect the insured against his own negligence or carelessness, but only against the danger of loss by fire. The cost of protecting the property is naturally considered a part of the loss.

After this has been done the insured is required to "forthwith separate the damaged and undamaged personal property and put it in the best possible order." This tends to protect such goods as are undamaged and enables the representative of the company to make an examination of the property and to take necessary measures for further protection. The insured is not required by this provision to restore the goods to the same conditions as existed before the fire.

Estimation of amount of loss.-The next few requirements are designed to enable an estimate of the amount of loss. The insured is required to "furnish a complete inventory of the destroyed, damaged and undamaged property, stating the quantity and cost of each article and the amount claimed thereon." This is in the nature of a preliminary proof of loss. This provision is not a mere direction to the insured of what his action should be, but is essential to enable him to claim from the company.

"And the insured shall within sixty days after the fire, unless such time is extended in writing by this company, render to this company a proof of loss signed and sworn to by the insured, stating the knowledge and belief of the insured as to the following: (a) the time and origin of the fire; (b) the interest of the insured; (c) and of all others in the property; (d) the cash value of each item thereof; (e) and the amount of loss or damage thereto; (f) all encumbrances thereon; (g) all other contracts of insurance whether valid or not, covering any of said property; (h) any changes in the title, use, occupation, possession, or exposure of said property since the issuing of this policy; (i) by whom and for what purpose any building herein described and the several parts thereof were occupied at the time of the fire."5 We might call attention here to the policy provision previously referred to regarding false swearing and fraud, which is not lightly 'Appendix XXX, lines 129 and 130.

'Appendix XXX, lines 130-133.

* Appendix XXX, lines 133-145; and Appendix XLVI.

* Appendix XXX, lines 1-6.