CHAPTER XVI THE POLICY CONTRACT1 GENERAL PRINCIPLES A Contract of Indemnity.-The relationship between insurer and insured is governed by the terms of the insurance policy and by the principles of law applicable to its interpretation. Basically, the policy is a contract of indemnity—a promise by the insurer, in consideration of a premium payment, to indemnify the insured for loss arising from certain specified events. From the principle of indemnity it follows that an insurable interest is prerequisite to a valid contract of insurance. Insurable interest is "every interest in property or in relation thereto or liability in respect thereof, of such a nature that a contemplated peril may directly damnify the insured.” 2 Although the agreement is aleatory or speculative in one sense, that is, the parties may not know whether the event insured against will occur or not, and in return for a comparatively small sum of money the one party 1 1In this chapter the essential and peculiar features of the contract are considered. For more complete information the reader is referred to the form of contract contained in Appendix B and to the text books on insurance law. Thorough study of the provisions of the contract form is advised. 2 Elliott on Insurance, p. 40. assumes the risk of incurring liability to a much greater amount, nevertheless, compensation for a real loss, rather than a purely speculative venture, must be the aim and object, and consequently the party insured must be able to show an insurable interest in the subject of insurance, an interest of a material and valuable character, and not merely moral and sentimental, or else the contract will be altogether void. The doctrines of indemnity and of the necessity of an insurable interest are correlative and complementary in all branches of the law of insurance.3 The rule requiring an insurable interest to give support to the contract exists in this country irrespective of statutory provisions, and everywhere is grounded upon important considerations of public policy. Without it the contract would be a wager, and a wager policy is more to be condemned than an ordinary wager, since it is not only at variance with sound business ethics, but it also offers peculiar inducements to the assured to bring about fraudulently the event insured against.1 A Personal Contract. The insurance policy is a personal contract binding only as between the original policyholder and the insurer, unless the latter consents to an assignment.5 The risk assumed by the insurer is conditioned in large degree by the character and habits of the insured through his supervision of the operations covered by the contract. To allow assignment without permission would be unjust since it might involve an increased moral hazard. In liability and compensation insurance the moral hazard is deter 3 Richards on Insurance, pp. 28-9. 4 Richards, op. cit., p. 32. 5 The life insurance policy is an exception to this general rule. mined by relative attention to the prevention of industrial accidents and to care for injured employees. Rules of Construction.-Two rules followed by the courts in the construction of contract provisions are particularly important; the rules that the insured is to receive the benefit of any doubt, and that endorsements take precedence over the original terms of the contract. The first of these was adopted on the theory that the insurer, who had drawn up the contract, should be responsible for the elimination of ambiguity and should not be allowed to take advantage of the policyholder by the use of equivocal expressions. Doubtless the unfair practices of some of the earlier companies in inserting provisions in their policies for the express purpose of avoiding liability on technical grounds had much to do with the attitude of the courts. The rule that endorsements which disagree with the terms of the original contract shall control is an application of the familiar principle of contract law that, in event of conflicting agreements, the latest meeting of the minds shall govern. An endorsement is assumed to be of later date than the policy itself. EMPLOYERS' LIABILITY CONTRACT The Obligation Assumed.-The employers' liability contract is in no sense an agreement to provide compensation to injured employees; its sole purpose is to relieve the employer of the financial consequences of injuries received by his workmen. But it is more than a contract to reimburse the employer for actual loss incurred, it is also a contract of service. The insurer agrees to assume the losses due to legal liability of the employer on account of accidental bodily injuries to his employees, to investigate such accidents and adjust resultant claims, to defend damage suits whether groundless or not, and to pay court costs and other expenses arising out of injuries and claims. Indemnity for loss on account of legal liability for damages is limited to a certain sum for one injured person, and the total indemnity payable for one accident is likewise limited. The "standard limits" are $5,000 and $10,000; other limits involve an adjustment of premium to reflect the changed hazard. The policy covers all employees of the insured whose compensation is stated, with the usual exception of children employed in violation of an age law ("or under the age of fourteen years if there is no legal age limit") and of convict labor. Injuries resulting from the business operations of the insured are covered, including ordinary repairs; but extraordinary repairs, alterations, and construction work may be included only under a special classification or endorsement. Injuries occurring on the premises of the insured or on those immediately adjoining, or in other places if the injured is a driver or driver's helper, are always covered; and some policies include other specified classes of employees wherever they may be, or make no restrictions as to location. Premium Computation.—The premium paid by the employer is based on the total remuneration received by his employees during the policy period. An estimate of the payroll is furnished to the insurer in the application for insurance as a basis for the payment of an advance premium. At the end of the period the premium is adjusted to the actual payroll, the employer paying an additional charge if the actual is greater than the estimated and the insurer returning a proportionate amount if the estimated payroll is greater. In all cases the insurer is entitled to a minimum premium named in the policy. The insurer has the right to examine the books of the insured at any reasonable time while the policy is in force and within one year after its termination for the purpose of determining the actual remuneration paid. Inspection. The right is reserved to inspect the place of business of the insured while the policy is in force in order to suggest means of accident prevention and to learn of changes of hazard. Cancellation. The contract may be cancelled by notice to either party stating the date thereafter when cancellation is to become effective. If the insured cancels the policy and is retiring from the business described in the policy or if the insurer cancels, a pro rata premium for the period during which the policy has been in force is retained by the insurer. If the insured cancels and is not retiring from business, a short rate premium, an amount somewhat larger than the pro rata and never less than the minimum premium, is retained. Provision for short rates is justified by the fixed charges connected with the handling of all policies. Notices. The insured is required to give immediate written notice to the insurer of all accidents which occur, of all claims made, and of all suits brought, and must forward all papers served upon him. He must |