- /in shoor"euhns, -sherr"-/, n.1. the act, system, or business of insuring property, life, one's person, etc., against loss or harm arising in specified contingencies, as fire, accident, death, disablement, or the like, in consideration of a payment proportionate to the risk involved.2. coverage by contract in which one party agrees to indemnify or reimburse another for loss that occurs under the terms of the contract.3. the contract itself, set forth in a written or printed agreement or policy.4. the amount for which anything is insured.5. an insurance premium.6. any means of guaranteeing against loss or harm: Taking vitamin C is viewed as an insurance against catching colds.adj.7. of or pertaining to a score that increases a team's lead and insures that the lead will be held if the opposing team should score once more: The home run gave the team an insurance run, making the score 7-5.[1545-55; INSURE + -ANCE]
* * *IContract that, by redistributing risk among a large number of people, reduces losses from accidents incurred by an individual.In return for a specified payment (premium), the insurer undertakes to pay the insured or his beneficiary a specified amount of money in the event that the insured suffers loss through the occurrence of an event covered by the insurance contract (policy). By pooling both the financial contributions and the risks of a large number of policyholders, the insurer is able to absorb losses much more easily than is the uninsured individual. Insurers may offer insurance to any individual able to pay, or they may contract with members of a group (e.g., employees of a firm) to offer special rates for group insurance. Marine insurance, covering ships and voyages, is the oldest form of insurance; it originated in ancient times with loans to shipowners that were repayable only on safe completion of a voyage, and it was formalized in medieval Europe. Fire insurance arose in the 17th century, and other forms of property insurance became common with the spread of industrialization in the 19th century. It is now possible to insure almost any kind of property, including homes, businesses, motor vehicles, and goods in transit. See also casualty insurance; health insurance; liability insurance; life insurance.II(as used in expressions)Federal Deposit Insurance Corp.
* * *Introductiona system under which the insurer, for a consideration usually agreed upon in advance, promises to reimburse the insured or to render services to the insured in the event that certain accidental occurrences result in losses during a given period. It thus is a method of coping with risk. Its primary function is to substitute certainty for uncertainty as regards the economic cost of loss-producing events.Insurance relies heavily on the “ law of large numbers.” In large homogeneous populations it is possible to estimate the normal frequency of common events such as deaths and accidents. Losses can be predicted with reasonable accuracy, and this accuracy increases as the size of the group expands. From a theoretical standpoint, it is possible to eliminate all pure risk if an infinitely large group is selected.From the standpoint of the insurer, an insurable risk must meet the following requirements:1. The objects to be insured must be numerous enough and homogeneous enough to allow a reasonably close calculation of the probable frequency and severity of losses.2. The insured objects must not be subject to simultaneous destruction. For example, if all the buildings insured by one insurer are in an area subject to flood, and a flood occurs, the loss to the insurance underwriter may be catastrophic.3. The possible loss must be accidental in nature, and beyond the control of the insured. If the insured could cause the loss, the element of randomness and predictability would be destroyed.4. There must be some way to determine whether a loss has occurred and how great that loss is. This is why insurance contracts specify very definitely what events must take place, what constitutes loss, and how it is to be measured.From the viewpoint of the insured person, an insurable risk is one for which the probability of loss is not so high as to require excessive premiums. What is “excessive” depends on individual circumstances, including the insured's attitude toward risk. At the same time, the potential loss must be severe enough to cause financial hardship if it is not insured against. Insurable risks include losses to property resulting from fire, explosion, windstorm, etc.; losses of life or health; and the legal liability arising out of use of automobiles, occupancy of buildings, employment, or manufacture. Uninsurable risks include losses resulting from price changes and competitive conditions in the market. Political risks such as war or currency debasement are usually not insurable by private parties but may be insurable by governmental institutions. Very often contracts can be drawn in such a way that an “uninsurable risk” can be turned into an “insurable” one through restrictions on losses, redefinitions of perils, or other methods.Kinds of insuranceProperty insuranceTwo main types of contracts—homeowner's and commercial—have been developed to insure against loss from accidental destruction of property. These contracts (or forms) typically are divided into three or four parts: insuring agreements, identification of covered property, conditions and stipulations, and exclusions.Homeowner's insuranceHomeowner's insurance covers individual, or nonbusiness, property. Introduced in 1958, it gradually replaced the older method of insuring individual property under the “standard fire policy.”Perils insuredIn homeowner's policies, of which there are several types, coverage can be “all risk” or “named peril.” All-risk policies offer insurance on any peril except those later excluded in the policy. The advantage of these contracts is that if property is destroyed by a peril not specifically excluded the insurance is good. In named-peril policies, no coverage is provided unless the property is damaged by a peril specifically listed in the contract.In addition to protection against the loss from destruction of an owner's property by perils such as fire, lightning, theft, explosion, and windstorm, homeowner's policies typically insure against other types of risks faced by a homeowner such as legal liability to others for injuries, medical payments to others, and additional expenses incurred when the insured owner is required to vacate the premises after an insured peril occurs. Thus the homeowner's policy is multi-peril in nature, covering a wide variety of risks formerly written under separate contracts.Property coveredHomeowner's forms are written to cover damage to or loss of not only an owner's dwelling but also structures (such as garages and fences), trees and shrubs, personal property (excluding certain listed items), property away from the premises (such as boats), money and securities (subject to dollar limits), and losses due to forgery. They also cover removal of debris following a loss, expenditures to protect property from further loss, and loss of property removed from the premises for safety once an insured peril has occurred.Limitations on amount recoverableRecovery under homeowner's forms is limited to loss due directly to the occurrence of an insured peril. Losses caused by some intervening source not insured by the policy are not covered. For example, if a flood or a landslide, which usually are excluded perils, severely damages a house that subsequently is destroyed by fire, the homeowner's recovery from the fire is limited to the value of the house already damaged by the flood or landslide.Recovery under homeowner's forms may be on the basis of either full replacement cost or actual cash value (ACV). Under the former, the owner suffers no reduction in loss recovery due to depreciation of the property from its original value. This basis applies if the owner took out coverage that is at least equal to a named percentage—for example, 80 percent—of the replacement value of the property.If the insurance amount is less than 80 percent, a coinsurance clause is triggered, the operation of which reduces the recovery amount to the value of the loss times the ratio of the amount of insurance actually carried to the amount equal to 80 percent of the value of the property. However, the reduced recovery will not be less than the “actual cash value” of the property, defined as the full replacement cost minus an allowance for depreciation, up to the amount of the policy. For example, assume that a property is valued at $100,000 new, has depreciated 20 percent in value, insurance of $60,000 is taken, and a $10,000 loss occurs. The actual cash value of the loss is $8,000 ($10,000 minus 20 percent depreciation). The operation of the coinsurance clause would limit recovery to 6/8 of the loss, or $7,500. However, since the actual cash value of the loss is $8,000, this is the amount of the recovery.Recovery under homeowner's forms is also limited if more than one policy applies to the loss. For example, if two policies with equal limits are taken out, each contributes one-half of any insured loss. Loss payments also are limited to the amount of an insured person's insurable interest. Thus, if a homeowner has only a one-half interest in a building, the recovery is limited to one-half of the insured loss. The co-owners would need to have arranged insurance for their interest.Excluded perilsAmong the excluded perils (or exclusions) of homeowner's policies are the following: loss due to freezing when the dwelling is vacant or unoccupied, unless stated precautions are taken; loss from weight of ice or snow to property such as fences, swimming pools, docks, or retaining walls; theft loss when the building is under construction; vandalism loss when the dwelling is vacant beyond 30 days; damage from gradual water leakage; termite damage; loss from rust, mold, dry rot, contamination, smog, and settling and cracking; loss from animals or insects; loss from earth movement, flood, war, or spoilage (e.g., chemical deterioration); loss from neglect of the insured to protect the property following a loss; and losses arising out of business pursuits. Special forms for business risks are available (see below).Under named-peril forms, only losses from the perils named in the policy are covered. The named perils are sometimes defined narrowly; for example, theft claims are not paid if the property is merely lost and theft cannot be established.Earthquake and flood loss, while excluded from the basic homeowner's forms, may usually be covered by endorsement.ConditionsHomeowner's policies may include the following conditions: (1) Owners are required to give immediate written notice of loss to the insurer or the insurer's agent. (2) The insured must provide proof of the amount of loss. This suggests that owners should keep accurate records of the items in a building and of their original cost. (3) The insured must cooperate with the insurer in settling a loss. (4) The insured must pay the premium in advance. (5) The insurer has a right of subrogation (i.e., of pursuing liable third parties for any loss). This prevents an owner from collecting twice, once from the insurer and once from a liable third party. (6) A mortgagee's interest in a property can be protected. (7) The policy may be canceled by the insurer upon due notice, usually 10 days. If the insurer cancels, a pro rata refund of premium must be returned to the insured; if the insured cancels, a less-than-proportionate return of a premium may be recovered from the insurer. (8) Fraud by the insured, including misrepresentation or concealment of material facts concerning the risk, is ground for denial of benefits by the insurer.Also available is a form called renter's insurance, which provides personal property insurance for tenants.Business property insuranceInsurance for business property follows a pattern that is similar in many ways to the one for individual property. A commonly used form is the “building and personal property coverage form” (BPP). This form permits a business owner to cover in one policy the buildings, fixtures, machinery and equipment, and personal property used in business and the personal property of others for which the business owner is responsible. Coverage also can be extended to insure newly acquired property, property on newly acquired premises, valuable papers and records, property temporarily off the business premises, and outdoor property such as fences, signs, and antennas.Direct lossesCoverage on the BPP form can be written on a scheduled basis, whereby specific items of property are listed and insured, or on a blanket basis, whereby property at several locations can be insured for a single sum.Perils insured under the BPP are listed in the policy. All-risk coverage is also written, subject to specified exclusions.Losses may be settled on a replacement-cost coverage on the BPP by endorsement. Otherwise recovery is on an actual cash value basis that makes an adjustment for depreciation.Coverage for business personal property with constantly changing values is available on a reporting form. The business owner reports values monthly to the insurer and pays premiums based on the values reported. In this way, only the insurance actually needed is purchased.Indirect lossesAn entirely different branch of the insurance business has been developed to insure losses that are indirectly the result of one of the specified perils. A prominent example of this type of insurance is business income insurance. The insurer undertakes to reimburse the insured for lost profits or for fixed charges incurred as a result of direct damage. For example, a retail store might have a fire and be completely shut down for one month and partially shut down for another month. If the fire had not occurred, sales would have been much higher, and therefore substantial revenues have been lost. In addition, fixed costs such as salaries, taxes, and maintenance must continue to be paid. A business income policy would respond to these losses.Forms of indirect insurance include the following: (1) contingent business income insurance, designed to cover the consequential losses if the plant of a supplier or a major customer is destroyed, resulting in either reduced orders or reduced deliveries that force a shutdown of the insured firm, (2) extra expense insurance, which pays the additional cost occasioned by having extra expenses to pay, such as rent on substitute facilities after a disaster, and (3) rent and rental value insurance, covering losses in rents that the owner of an apartment house may incur if the building is destroyed. Rental income insurance pays for rent lost when a peril destroys an owner's property that has been rented to others.Marine insurance is actually transportation insurance. After insurance coverage on ocean voyages had been developed, it was a natural step to offer insurance on inland trips. This branch of insurance became known as inland marine. In many policy forms, the distinction between inland and ocean marine has disappeared; it is common to cover goods from the time they leave the warehouse of the shipper, even if this warehouse is situated at a substantial distance from the nearest seaport, until they reach the warehouse of the buyer, which likewise may be located far inland.Ocean marine contracts are written to cover four major types of property interest: (1) the vessel or hull, (2) the cargo, (3) the freight revenue to be received by the ship owner, and (4) legal liability for negligence of the shipper or the carrier. Hull insurance covers losses to the vessel itself from specified perils. Usually there is a provision that the marine hull should be covered only within specified geographic limits. Cargo insurance is usually written on an open contract basis under which shipments, both incoming and outgoing, are automatically covered for the interests of the shipper, who reports periodically the values exposed and pays a premium based upon these values. By means of a negotiable open cargo certificate, which is attached to the bill of lading, insurance coverage is automatically transferred to whoever has legal title to the goods in the course of their movement from seller to buyer.Freight revenue may be insured in several different ways. If there is an obligation by the shipper to pay the carrier's freight bill regardless of whether the goods are delivered, the value of the freight is declared a part of the value of the cargo and is insured as part of this value. If the freight revenue is contingent upon safe delivery of the goods, the carrier insures the freight as a part of the regular hull coverage.Major clauses or provisions that are fairly standardized are (1) the perils clause, (2) the “running down” clause, or RDC, (3) the “free of particular average,” or FPA, clause, (4) the general average clause, (5) the sue and labour clause, (6) the abandonment clause, (7) coinsurance, and (8) express and implied warranties. Each of these will be discussed in turn.Perils clauseUntil 1978 the main insuring clause of modern ocean marine policies was preserved almost unchanged from the original 1779 Lloyd's of London form. The clause is as follows:Touching the adventures and perils which we the assurers are contented to bear and do take upon us in this voyage: they are of the seas, men-of-war, fire, enemies, pirates, rovers, thieves, jettisons, letters of mart and countermart, surprisals, takings at sea, arrests, restraints, and detainments of all kings, princes, and people, of what nation, condition, or quality soever, barratry of the master and mariners, and of all other perils, losses, and misfortunes, that have or shall come to the hurt, detriment, or damage of the said goods and merchandises, and ship, etc., or any part thereof.Although the clause reads as if it were an all-risk agreement, courts have interpreted it to cover only the perils mentioned. Essentially, the clause insures the voyage from perils “of” the sea. Perils on the sea, such as fire, are not covered unless specifically mentioned. Furthermore, although the perils clause indicates coverage from “enemies, pirates, rovers, thieves,” the policy does not cover losses from war. (War risk insurance is offered in some nations through governmental agencies.)In 1978, at the request of the UN Conference on Trade and Development, the 1779 language was modernized and a revised insuring clause was proposed. The new form restricts coverage on losses from poor packing, places the burden of proof of seaworthiness on the shipper rather than on the carrier, and excludes losses resulting from insolvency of the common carrier, with the burden of proof placed on the shipper that the carrier is financially sound. The revised form has not been adopted by all insurers.RDC clauseThe RDC, or “running down” clause, provides coverage for legal liability of either the shipper or the common carrier for claims arising out of collisions. (Collision loss to the vessel itself is part of the hull coverage.) The RDC clause covers negligence of the carrier or shipper that results in damage to the property of others. A companion clause, the protection and indemnity clause (P and I), covers the carrier or shipper for negligence that causes bodily injury to others.FPA clauseThe FPA, or “free of particular average,” clause excludes from coverage partial losses to the cargo or to the hull except those resulting from stranding, sinking, burning, or collision. Under its provisions, losses below a given percentage of value, say 10 percent, are excluded. In this way the insurer does not pay for relatively small losses to cargo. The percentage deductible varies according to the type of cargo and its susceptibility to loss.General average clauseThe general average clause in ocean marine insurance obligates the insurers of various interests to share the cost of losses incurred voluntarily to save the voyage from complete destruction. Such sacrifices must be made voluntarily, must be necessary, and must be successful. For example, if a shipper's cargo is voluntarily jettisoned in a storm in order to save the vessel from total loss, the general average clause requires the insurers of the hull and of all other cargo interests to make a contribution to the loss of the shipper whose goods were sacrificed. Other types of losses may also be covered. It has been held, for example, that losses suffered from efforts to put out a fire on shipboard, which result in damage to specific goods, can be included in a general average claim. Similarly, losses from salvage efforts to free a stranded vessel may qualify under a general average claim to which all interests must contribute.Sue and labour clauseThe sue and labour clause requires the ship owner to make every attempt to reduce or save the exposed interests from loss. Under the terms of the clause, the insurer pays for any necessary costs incurred in carrying out the requirements of the sue and labour clause. Thus, if a ship is stranded, under the sue and labour clause the hull owner would be required to hire salvors to attempt to save the ship. Such expenses are paid even if the salvage attempts fail.Abandonment clauseIf salvaging or rehabilitating a ship or cargo following a marine loss costs more than the goods are worth, the loss is said to be constructively total. Under such conditions, the ocean marine policy permits the insured to abandon the damaged ship or cargo to the insurer and make a claim for the entire value. In this case, the salvage belongs to the insurer, who may dispose of it in any way. Abandonment is not permitted in other forms of property insurance.Although there is no coinsurance clause as such in the ocean marine policy, losses are settled as though a 100 percent coinsurance clause existed. Thus, if an insured takes out coverage equal to 50 percent of the true replacement cost of the goods, only 50 percent of any partial loss may be recovered.WarrantiesIn the field of ocean marine insurance there are two general types of warranties that must be considered: express and implied. Express warranties are promises written into the contract. There are also three implied warranties, which do not appear in written form but bind the parties nevertheless.Examples of expressed warranties are the FC&S warranty and the strike, riot, and civil commotion warranty. The FC&S, or “free of capture and seizure,” warranty excludes war as a cause of loss. The strike, riot, and civil commotion warranty states that the insurer will pay no losses resulting from strikes, walkouts, riots, or other labour disturbances. The three implied warranties relate to the following conditions: seaworthiness, deviation, and legality. Under the first, the shipper and the common carrier warrant that the ship will be seaworthy when it leaves port, in the sense that the hull will be sound, the captain and crew will be qualified, and supplies and other necessary equipment for the voyage will be on hand. Any losses stemming from lack of seaworthiness will be excluded from coverage. Under the deviation warranty, the ship may not deviate from its intended course except to save lives. Clauses may be attached to the ocean marine policy to eliminate the implied warranties of seaworthiness or deviation. The implied warranty of legality, however, may not be waived. Under this warranty, if the voyage itself is illegal under the laws of the country under whose flag the ship sails, the insurance is void.Although there are no standard forms in inland marine insurance, most contracts follow a typical pattern. They are usually written on a named-peril basis covering such perils of transportation as collision, derailment, rising water, tornado, fire, lightning, and windstorm. The policies generally exclude losses resulting from pilferage, strike, riot, civil commotion, war, delay of shipments, loss of markets, illegal trade, or leakage and breakage.The scope of inland marine is greatly extended by means of “floater” policies. These are used to insure certain types of movable property whether or not the property is actually in transit. Business floater policies are purchased by jewelers, launderers, dry cleaners, tailors, upholsterers, and other persons who hold the property of others while performing services. Personal property floaters are used to cover, on a comprehensive basis, any item of personal property owned by a private individual. They may also cover the property of visitors, or the property of servants while on the premises of the insured. They exclude certain types of property for which other contracts have been designed, such as automobiles, aircraft, motorcycles, animals, or business and professional equipment.Liability insurance arises mainly from the operation of the law of negligence. Individuals who, in the eyes of the law, fail to act reasonably or to exercise due care may find themselves subject to large liability claims. Court judgments have been issued for sums so large as to require a lifetime to pay.There are at least four major types of liability insurance contracts: (1) liability arising out of the use of automobiles, (2) liability arising out of the conduct of a business, (3) liability arising from professional negligence (applicable to doctors, lawyers, etc.), and (4) personal liability, including the liability of a private individual operating a home, carrying on sporting activities, and so on.Practically all liability contracts falling in these four categories have some common elements. One is the insuring clause, in which the insurer agrees to pay on behalf of the insured all sums that the insured shall become legally obligated to pay as damages because of bodily injury, sickness or disease, wrongful death, or injury to another person's property. The liability policy covers only claims that an insured becomes legally obligated to pay; voluntary payments are not covered. It is often necessary to resort to legal or court action to determine the amount of these damages, although in a vast majority of cases the damages are settled out of court by negotiation between the parties.All liability insurance contracts contain clauses that obligate the insurer to conduct a court defense and to pay any settlement, including premiums on bonds, interest on judgments pending appeal, medical and surgical expenses that are necessary at the time of the accident, and other costs. Liability insurance has sometimes been termed defense insurance because of this provision. The insurer agrees to defend a suit even though it is false or fraudulent, so long as it is a suit stemming from a peril insured against. The insured is required to cooperate with the insurer in all court actions by appearing in court, if necessary, to give testimony.Limits of liabilityPractically all liability insurance policies contain limitations on the maximum amount of a judgment payable under the contract. Further, the cost of defense, supplementary payments, and punitive damages may or may not be paid in addition to the judgment limits. Separate limits often apply to claims for property damage and bodily injury. An annual aggregate limit may also be purchased, which puts a maximum on the amount an insurer must pay in any one policy period.Limits may apply on a per-occurrence or a claims-made basis. In the former, which gives the most comprehensive coverage, the policy in force in year one covers a negligent act that took place in year one, no matter when a claim is made. If the policy is made on a claims-made basis, the insurance in force when a claim is presented pays the loss. Under this policy, a claim can be made for losses that occur during the policy period but have their origins in events preceding its starting date; the period of time before this date for which claims can be made is, however, restricted. For an additional premium the discovery period can be extended beyond the end of the policy period. The claims-made basis for liability insurance is considered much more restrictive than a per-occurrence policy.Liability insurance contracts have in common the fact that the definition of “the insured” is broad. An automobile liability policy, for example, includes not only the owner but anyone else operating the car with permission. In business liability insurance, all partners, officers, directors, or proprietors are covered by the policy regardless of their direct responsibility for any act of negligence. Other parties may be included for an extra premium.Another element common to all liability insurance policies is certain exclusions. Policies covering business activities almost invariably exclude liability arising out of the personal activities of the insured. Each kind of liability contract tends to exclude the liability for which another contract has been devised: a personal liability coverage in the homeowner's contract, for example, excludes automobile liability because a special contract has been created for this particular type of liability.Another common element in liability policies is subrogation: the insurer retains the right to bring an action against a liable third party for any loss this third party has caused.Business liability insuranceBusiness liability contracts commonly written include the following: liability of a building owner, landlord, or tenant; liability of an employer for acts of negligence involving employees; liability of contractors or manufacturers; liability to members of the public resulting from faulty products or services; liability as a result of contractual agreements under which liability of others is assumed; and comprehensive liability. The latter contract is designed to be broad enough to encompass almost any type of business liability, including automobiles. There has been increasing use of coverage for liability stemming from defective products, because some court judgments have awarded huge compensations.Business liability contracts may be written to cover loss even if the act that produced the claim was not accidental. The only requirement is that the result of the act be accidental or unintended. Thus if a contractor is making an excavation that produces large amounts of dust and this dust causes loss to neighbouring property, the contractor's liability policy would respond to claims for loss, even though the act that produced the dust was a deliberate act.Professional liability insuranceKnown as malpractice, or errors-and-omissions, insurance, professional liability contracts are distinguished from general business liability policies because of the specialized nature of the liability. Professional persons requiring liability contracts include physicians and surgeons, lawyers, accountants, engineers, and insurance agents. Important differences between professional and other liability contracts are the following:1. No distinction is made between bodily injury or property damage liability, and there is no limit on the number of claims per accident but rather a limit of liability per claim. This recognizes the fact that one negligent act on the part of a professional person may involve more than one party, each of whom could bring a legal action against the professional person. Thus a doctor might administer the wrong medicine to a number of patients, each of whom could bring a legal action.2. Claims against a professional person may have an adverse effect upon his or her reputation. The policy therefore permits the insured to carry any action to court, since an out-of-court settlement might conceivably imply guilt in the eyes of the professional's public or clientele.3. In professional liability insurance there is an exclusion for any agreement guaranteeing the result of any treatment. Suits stemming from clients' dissatisfaction with the service performed are thus not covered.Personal liability insuranceThe most common form of personal liability insurance is issued as part of the homeowner's liability insurance policy. It is an all-risk agreement and contains relatively few exclusions. The policy covers any act of negligence of the insured or residents of the home that results in legal liability. It may also include medical payments insurance covering accidental injury to guests and other nonresidents without regard to the question of negligence.Nearly half of all property-liability insurance written in the United States is in the area of automobile insurance. Set up as a comprehensive contract in most parts of the world, automobile insurance covers liability, collision loss of the vehicle, all other types of loss (called comprehensive loss), and medical expenses incurred by the driver, passengers, and other persons. Coverage usually applies to anyone driving the car with permission of the owner. Thus, drivers are insured whether driving their own or someone else's car.Automobile liability coverage is mandated by law in many countries up to specified monetary limits. The policy states what happens if the driver is covered by other automobile policies that may cover the loss. It also covers the liability of persons, such as parents, who have legal responsibility for actions of the driver. Coverage includes legal defense costs, usually in addition to the policy liability limits. Many policies exclude coverage for the time the automobile is driven in a foreign country.Theft generally covers all acts of stealing. There are three major types of insurance contracts for burglary, robbery, and other theft. Burglary is defined to mean the unlawful taking of property within premises that have been closed and in which there are visible marks evidencing forcible entry. Such narrow definition is necessary to restrict burglary coverage to a particular class of criminal act. robbery is defined as that type of unlawful taking of property in which another person is threatened by either force or violence. In the robbery peril, therefore, the element of personal contact is necessary.Perhaps the most common of all burglary coverages is on safes. Often the loss in the form of damage to the safe itself from the use of explosives and other devices is as great as the loss of the money, jewelry, or securities it contains. Accordingly, the policy covers both types of claims. Another common burglary policy applies to mercantile open stock. In this type of policy, there is usually a limit applicable on any article of jewelry or any article contained in a showcase where susceptibility to loss is high. In order to prevent underinsurance, the mercantile open stock policy is usually written with a coinsurance requirement or with some minimum amount of coverage.Another common theft policy for business firms is a comprehensive crime contract covering employee dishonesty as well as losses on money and securities both inside and outside the premises, loss from counterfeit money or money orders, and loss from forgery. This policy is designed to cover in one package most of the crime perils to which an average business is subject.A broad form of crime protection for individuals is offered both as a separate contract and as part of a “homeowner's policy.” It covers all losses of personal property from theft and mysterious disappearance.Aviation insuranceAviation insurance normally covers physical damage to the aircraft and legal liability arising out of its ownership and operation. Specific policies are also available to cover the legal liability of airport owners arising out of the operation of hangars or from the sale of various aviation products. These latter policies are similar to other types of liability contracts.Perhaps the major underwriting problem is the “catastrophic” exposure to loss. The largest passenger aircraft (aviation) may incur losses of $300,000,000 or more, counting both liability and physical damage exposures. The number of aircraft of any particular type is not large enough for the accurate prediction of losses, and each type of aircraft has its special characteristics and equipment. Thus a great deal of independent individual underwriting is necessary. Rate making is complex and specialized. It is further complicated by rapid technological change and by the constant appearance of new hazards.Policies are written to cover liability of the owner or operator for bodily injury to passengers or to persons other than passengers and for property damage. Medical costs, including loss of income, are usually paid to passengers suffering permanent total disability without the requirement of proving negligence. This type of coverage has been called admitted liability insurance.workers' compensation insuranceWorkers' compensation insurance, sometimes called industrial injury insurance, compensates workers for losses suffered as a result of work-related injuries. Payments are made regardless of negligence. The schedule of benefits making up the compensation is determined by statute.The scope of employment injury laws, originally limited to persons in forms of employment recognized as hazardous, has, as the result of associating the right to compensation with the existence of a contract of service, been gradually extended to clerical employment. Nevertheless, the large exception of agricultural employees continues in some Third World countries, Canada, much of the United States, and the countries of eastern Europe. Other classes of exception are employees in very small undertakings and domestic servants. The exclusion of employees with middle-class salaries persists in parts of the former British Empire. In a few countries, working employers are permitted to insure themselves as well as their employees.The notion of employment injury was at first confined to injuries of accidental origin, but during the 20th century it was extended to include occupational diseases in increasing number. To entitle the worker to benefit, the accident must occur during employment, and many laws also require the accident to have been caused by the employment in some way; however, the trend seems to be toward accepting the former condition as sufficient. Following the German law of 1925, some 30 countries included accidents occurring on the way to and from work. Injuries due to the employee's willful misconduct are generally excluded. Occupational diseases are covered to some extent by virtually all national laws.Classes of benefitsFour classes of benefits are provided by compulsory insurance, and, except for certain diseases, a right to them is acquired without any qualifying period of previous employment. First is a medical benefit, which includes all necessary treatment and the supply of artificial limbs. If its duration is limited, the maximum is likely to be one year. Second is a temporary incapacity benefit, which lasts as long as the medical benefit except that a waiting period of a few days is frequently prescribed. The benefit varies from country to country, ranging from 50 percent of the employee's wage to 100 percent; the most common benefits are 66 2/3 percent and 75 percent. Third is a permanent incapacity benefit, which, unless the degree is very small, in which case a lump sum is paid, takes the form of a pension. If the incapacity is total, the pension is usually equal to the temporary incapacity benefit. If the incapacity is partial, the pension is proportionately smaller. In some 60 countries an additional pension is granted if the victim needs constant attendance. In cases of death, the pensions are distributed to the widow (or invalid widower) and minor children, and, if the maximum total has not then been attained, other dependents may receive small pensions. The maximum is the same as for total incapacity.In a growing number of industrialized countries (Austria, France, Germany, Ireland, Israel, The Netherlands, and Switzerland) the fourth type of benefit—systematic arrangements for retraining (employee training) and rehabilitation of seriously injured persons—is provided, and employers may even be required to provide employment to such persons.Financing and administering employment injury insuranceAlmost all systems of employment injury insurance are financed by employers' contributions exclusively, and in almost all these systems the contribution is proportional to the risk represented by the class of activity in which the employer is engaged. Usually the insurance institution adapts the contribution to the accident experience of the undertaking individually or to any special preventive measures it may have taken. On the other hand, mainly for simplicity, but partly perhaps in order to subsidize basic but dangerous industries, a uniform contribution rate for all classes of activity has been established in several countries.Social insurance against employment injury, as against other risks, is in most countries administered by institutions under the joint management of employers and employees and often of government representatives as well; in eastern Europe, however, the administration is entrusted to trade unions. Disputes are settled by arbitral organs without resort to the courts.In the United States an employer may comply with the provisions of most workers' compensation laws in three ways: by purchasing a private workers' compensation and employer liability policy from a commercial insurer, by purchasing coverage through a state fund set up for this purpose, or by setting aside reserves sufficient to cover the risks involved. Most workers' compensation benefits are financed by the first two methods.State laws in the United States are not uniform with respect to the amount of the monetary compensation or length of time for which income payments are made. For example, only about half the states give lifetime income benefits for occupational injuries. In others there is a statutory limitation of between 400 and 500 weeks of payments. Again, most states provide liquidating damages for an injury that is permanent but does not totally incapacitate the worker, such as the loss of an arm or leg. The size of these liquidating damages varies greatly. Most state laws also provide complete medical benefits, including rehabilitation expenses, and survivors' benefits in the event of the worker's death.CostsFollowing the publication in the early 1970s of about 40 studies revealing inadequacies in workers' compensation in the United States, most states passed laws increasing the number of workers covered, raising weekly benefits to equal or exceed 66 2/3 percent of the average weekly wage, and making other improvements. Compensable claims now include those involving back pain, stress, and heart conditions traceable to employment conditions. Many claims also involve court litigation, which greatly magnifies settlement costs. For employers, these and other factors have increased the average cost of benefits from less than 1 percent of wages before 1960 to 2.3 percent in 1992.Credit insuranceThe use of credit in modern societies is so various and widespread that many types of insurance have grown up to cover some of the risks involved. Examples of these risks are the risk of bad debts from insolvency, death, and disability; the risk of loss of savings from bank failure; the risk attaching to home-loan debts when installments are not paid for various reasons, resulting in foreclosure with subsequent loss to the creditor; and the risk of loss from export credit because of war, currency restrictions, cancellation of import licenses, or other political causes.Merchandise credit insuranceCredit insurance for domestic buyers and sellers is available in the United States, Canada, Mexico, and most European countries. It is sold only to manufacturers, wholesalers, and certain service agencies, not to retailers. The insurance is designed to enable the seller to recover a certain percentage of losses from insolvency of the debtor, but the contracts list a number of conditions under which the creditor may initiate a claim regardless of the question of insolvency. The policy is designed primarily to meet the needs of those sellers whose business is concentrated on a few buyers, insolvency of any one of which would seriously jeopardize the financial stability of the seller.Export credit insuranceA special form of credit insurance is available to exporters against losses from both commercial and political risks. In the United States, for example, export credit insurance is written through a consortium of insurance companies organized by the Foreign Credit Insurance Association (FCIA). The Export-Import Bank of the United States assumes the ultimate liability for loss, while the FCIA serves as the underwriting agency. Coverage is usually limited to 90 or 95 percent of the account. Prior approval from the FCIA is usually required before export credit insurance is granted. In some cases, the exporter is required to purchase coverage on all credit sales in a given country as a device to reduce adverse selection.Export credit insurance is used more widely in some countries than in others. In the United Kingdom approximately one-quarter of all export sales are covered, compared with about 6 percent in the United States. Export sales are not eligible for insurance if they are made for cash or financed directly or indirectly through government-guaranteed loans.Title insurance is a contract guaranteeing the purchaser of real estate against loss from undiscovered defects in the title to property that has been purchased. Such loss may stem from unmarketability of the property because of defective title or from costs incurred to cure defects of the title.The need for title insurance arises from the fact that real estate transactions are complex and technical. Any legal error, no matter how detailed or minute, may cause a defect in the title that impairs its marketability. Examples of such defects are forgeries, invalid or undiscovered wills, defective probate proceedings, or transfers of property by persons lacking full legal capacity to contract.Miscellaneous insuranceSpecial casualty (casualty insurance) forms are issued to cover the hazards of sudden explosions from equipment such as steam boilers, compressors, electric motors, flywheels, air tanks, furnaces, and engines. Boiler and machinery insurance has several distinctive features. A substantial portion of the premium collected is used for inspection services rather than loss protection. Second, the boiler policy provides that its coverage will be in excess of any other applicable insurance. In this sense, it may be looked upon as an “umbrella policy” to fill in gaps in the insured's program. Third, the policy lists the specific losses that will be paid, such as the loss of the boiler or machinery itself due to accident, expediting expenses, property damage liability, bodily injury liability, defense settlement and supplementary payments, business interruption, outage (interruption of service), power interruption, consequential loss due to spoilage of goods, and furnace explosion. The policy will satisfy each of these claims in the order in which they appear, up to the limit of the coverage.The extensive use of plate glass in modern architecture has produced a special comprehensive insurance that covers not only plate glass but glass signs, motion-picture screens, halftone screens and lenses, glass bricks, glass doors, and so forth. It may be written to cover loss from any source except fire or nuclear radiation.Increasing international business activity has caused greater use of policies generally termed difference-in-conditions insurance (DIC). The DIC policy insures property and liability losses not covered by basic insurance contracts. It can be written to insure almost any peril, including earthquake and flood, subject to deductibles and stated exclusions. It is often written on an all-risk basis. An international business firm may use the DIC to secure uniform coverage for all countries in which it operates and to obtain higher policy limits than those available from domestic insurers in the various foreign countries.SuretyshipSurety contracts are designed to protect businesses against the possible dishonesty of their employees. Surety and fidelity bonds fill the gap left by theft insurance, which always excludes losses from persons in a position of trust. A bond involves three contracting parties instead of two. The three parties are the principal, who is the person bonded; the obligee, the person who is protected; and the surety, the person or corporation agreeing to reimburse the obligee for any losses stemming from failures or dishonesty of the principal. The bond covers events within the control of the person bonded, whereas insurance in the strict sense covers loss from random events generally outside the direct control of the insured. In bonding, the surety always has the right to try to collect its losses from the person bonded, whereas in insurance the insurer may not attempt to recover losses from the insured. Of course, under property and liability policies the insurer may attempt to recover from liable third parties under the right of subrogation, but subrogation rights are often not possible to enforce in practice. Bonds are not usually cancelable by the insurer, whereas most insurance contracts, except life, are cancelable by the insurer upon due notice.Fidelity bonds are written to cover the obligee, usually an employer, against loss from dishonest acts of employees; surety bonds cover not only dishonesty but also incapacity to perform the work agreed upon. Surety bonds are normally written on principals who are acting in an independent or semi-independent capacity, such as building contractors or public officials, whereas fidelity bonds are written on employees acting under the guidance and supervision of their employer. Finally, surety bonds are often issued with the requirement of collateral, whereas fidelity bonds are not. The surety bond is an instrument through which the superior credit of the surety is substituted for the uncertain credit of the principal; hence, if the surety is asked to bond a principal of somewhat doubtful credit, the requirement of cash collateral is frequently imposed.Major types of fidelity bondsFidelity bonds differ according to whether specific persons are named as principals or whether all employees or persons are covered as a group. The latter are most frequently used by employers with a large number of employees, because they offer automatic coverage on given classes of workers, including new employees, and greater ease of administration, including simpler claims procedures. Fidelity bonds are usually written on a continuous basis—that is, they are effective until canceled and have no expiration date. The penalty of the bond (the maximum amount payable for any one loss) is unchanged from year to year and is not cumulative. The bonds specify a discovery period (usually two years) limiting the time for discovering losses after a bond is discontinued. When a new bond is put into effect, it can be written to cover losses that have occurred but are undiscovered before the effective issue date of the bond. A salvage clause also is included, stating the way in which any salvage recovered by the surety from the principal is to be divided between the surety and the obligee. This clause is significant, because the obligee may have losses in excess of the penalty of the bond. Some salvage clauses require that any salvage be paid to the obligee up to the full amount of all losses, and others provide that any salvage be divided between the surety and the obligee on a pro rata basis, in the proportion that each party has suffered loss.Major types of surety bondsThere are various classes of surety bonds. Contract construction bonds are written to guarantee the performance of contractors on building projects. Bonds are particularly important in this field because of the general practice of awarding commercial building contracts to the lowest bidder, who may promise more than can actually be performed. The surety who is experienced in this field is in a position to make sounder judgment about the liability of the various bidders than anyone else and backs up its judgment with a financial guarantee.Court bonds include several different types of surety bonds. Fiduciary bonds are required for court-appointed officials entrusted with managing the property of others; executors of estates and receivers in bankruptcy are frequently required to post fiduciary bonds.Other types of surety bonds include official bonds, lost instrument bonds, and license and permit bonds. Public official bonds guarantee that public officials will faithfully and honestly discharge their obligations to the state or to other public agencies. Lost instrument bonds guarantee that if a lost stock certificate, money order, warehouse receipt, or other financial instrument falls into unauthorized hands and causes a loss to the issuer of a substitute instrument, this loss will be reimbursed. License and permit bonds are issued on persons such as owners of small businesses to guarantee reimbursement for violations of the licenses or permits under which they operate.Life and health insuranceLife insurance may be defined as a plan under which large groups of individuals can equalize the burden of loss from death by distributing funds to the beneficiaries of those who die. From the individual standpoint life insurance is a means by which an estate may be created immediately for one's heirs and dependents. It has achieved its greatest acceptance in Canada, the United States, Belgium, South Korea, Australia, Ireland, New Zealand, The Netherlands (Netherlands, The), and Japan, countries in which the face value of life insurance policies in force generally exceeds the national income.In the United States in 1990 nearly $9.4 trillion of life insurance was in force. The assets of the more than 2,200 U.S. life insurance companies totaled nearly $1.4 trillion, making life insurance one of the largest savings institutions in the United States. Much the same is true of other wealthy countries, in which life insurance has become a major channel of saving and investment, with important consequences for the national economy.Life insurance is relatively little used in poor countries, although its acceptance has been increasing.Types of contractsThe major types of life insurance contracts are term, whole life, and universal life, but innumerable combinations of these basic types are sold. Term insurance contracts, issued for specified periods of years, are the simplest. Protection under these contracts expires at the end of the stated period, with no cash value remaining. Whole life contracts, on the other hand, run for the whole of the insured's life and gradually accumulate a cash value. The cash value, which is less than the face value of the policy, is paid to the policyholder when the contract matures or is surrendered. Universal life contracts, a relatively new form of coverage introduced in the United States in 1979, have become a major class of life insurance. They allow the owner to decide the timing and size of the premium and amount of death benefits of the policy. In this contract, the insurer makes a charge each month for general expenses and mortality costs and credits the amount of interest earned to the policyholder. There are two general types of universal life contracts, type A and type B. In type-A policies the death benefit is a set amount, while in type-B policies the death benefit is a set amount plus whatever cash value has been built up in the policy.Life insurance may also be classified, according to type of customer, as ordinary, group, industrial, and credit. The ordinary insurance market includes customers of whole life, term, and universal life contracts and is made up primarily of individual purchasers of annual-premium insurance. The group insurance market consists mainly of employers who arrange group contracts to cover their employees. The industrial insurance market consists of individual contracts sold in small amounts with premiums collected weekly or monthly at the policyholder's home. Credit life insurance is sold to individuals, usually as part of an installment purchase contract; under these contracts, if the insured dies before the installment payments are completed, the seller is protected for the balance of the unpaid debt.Insurance may be issued with a premium that remains the same throughout the premium-paying period, or it may be issued with a premium that increases periodically according to the age of the insured. Practically all ordinary life insurance policies are issued on a level-premium basis, which makes it necessary to charge more than the true cost of the insurance in the earlier years of the contract in order to make up for much higher costs in the later years; the so-called overcharges in the earlier years are not really overcharges but are a necessary part of the total insurance plan, reflecting the fact that mortality rates increase with age. The insured is not overpaying for protection, because of the claim on the cash values that accumulate in the early years; the policyholder may borrow on this value or may recapture it completely by lapsing the policy. The insured does not, however, have a claim on all the earnings that accrue to the insurance company from investing the funds of its policyholders.By combining term and whole life insurance, an insurer can provide many different kinds of policies. Two examples of such “package” contracts are the family income policy and the mortgage protection policy. In each of these, a base policy, usually whole life insurance, is combined with term insurance calculated so that the amount of protection declines as the policy runs its course. In the case of the mortgage protection contract, for example, the amount of the decreasing term insurance is designed roughly to approximate the amount of the mortgage on a property. As the mortgage is paid off, the amount of insurance declines correspondingly. At the end of the mortgage period the decreasing term insurance expires, leaving the base policy still in force. Similarly, in a family income policy, the decreasing term insurance is arranged to provide a given income to the beneficiary over a period of years roughly corresponding to the period during which the children are young and dependent.Some whole life policies permit the insured to limit the period during which premiums are to be paid. Common examples of these are 20-year life, 30-year life, and life paid up at age 65. On these contracts, the insured pays a higher premium to compensate for the limited premium-paying period. At the end of the stated period, the policy is said to be “paid up,” but it remains effective until death or surrender.Term insurance is most appropriate when the need for protection runs for only a limited period; whole life insurance is most appropriate when the protection need is permanent. The universal life plan, which earns interest at a rate roughly equal to that earned by the insurer (approximately the rate available in long-term bonds and mortgages), may be used as a convenient vehicle by which to save money. The owner can vary the amount of death protection as the need for it changes in the course of life. The policy offers flexibility and saves the owner commission expense by eliminating the need for dropping one policy and taking out another as protection requirements change.Settlement optionsThe death proceeds or cash values of insurance may be settled in various ways. The insured may take the cash value and lapse the policy. A beneficiary may take a lump sum settlement of the face amount upon the death of the insured. The beneficiary may, instead, elect to receive the proceeds over a given number of years or in some fixed amount, such as $100 a month, for as long as the proceeds last. The money may be left with the insurer temporarily to draw interest. Or the proceeds may be used to purchase a life annuity, which in effect is another insurance policy guaranteeing regular payments for the life of the insured.Other provisionsLife insurance policies contain various clauses that protect the rights of beneficiaries and the insured. Perhaps the best-known is the incontestable clause, which provides that if a policy has been in force for two years the insurer may not afterward refuse to pay the proceeds or cancel the contract for any reason except nonpayment of premiums. Thus, if the insured made a material misrepresentation when the policy was originally obtained, and this misrepresentation is not discovered until after the contestable period, beneficiaries may still receive the value of the policy so long as the premiums are maintained. Another protective clause is the suicide clause, which states that after a given period, usually two years, the insurer may not deny liability for subsequent suicide of the insured. If suicide occurs within the period, the insurer tenders to the beneficiary only the premiums that have been paid. If the age of the insured was misstated when the policy was taken out, the misstatement-of-age clause provides that the amount payable is the amount of insurance that would have been purchased for the premium had the correct age been stated. Many life insurance policies, known as participating policies, return dividends to the insured. The dividends, which may amount to 20 percent of the premiums, may be accumulated in cash left with the insurer at interest, used to buy additional life insurance, used to reduce premium payments, or used to pay up the contract sooner than would otherwise have been possible.Special ridersThe insured may, at a nominal charge, attach to the contract a waiver-of-premium rider under which premium payments will be waived in the event of total and permanent disability before the age of 60. Under the disability income rider, should the insured become totally and permanently disabled, a monthly income will be paid. Under the double indemnity rider, if death occurs through accident, the insurance payable is double the face amount.In many countries health insurance has become a governmental institution. In some, doctors and other professional staff are employed, directly or indirectly, by a government agency on a full-time or part-time salaried basis, and health facilities are owned or operated by the government. This has been the practice in Australia, Brazil, Canada, Chile, Greece, Ireland, Mexico, New Zealand, Sweden, Turkey, and the countries of eastern Europe. In other countries the government pays for medical care provided by private physicians; these countries include Austria, Denmark, The Netherlands, Norway, and Spain. In some countries private health insurance programs exist along with, or as part of, the government program. Various combinations of programs are possible, and it is difficult to summarize all the arrangements that actually exist. The United States provides government-run medical services in veterans' hospitals and mental hospitals, and it also has a governmental health insurance program for citizens age 65 and over (Medicare) under the Social Security Act amendments of 1965, but most health insurance in the United States still consists of private programs. Much private health insurance in the United States is operated on a group basis, generally through groups of employees whose payments may be subsidized by their employer. The following is a description of the principles of private health insurance. government medical services are discussed in the article social security: government welfare programs (social security).)Types of policiesThe major types of health insurance coverage are hospitalization, surgical, regular medical, major medical, disability income, dental, and long-term care. Health insurance contracts are not highly standardized. The policy provisions discussed below should be considered as typical, not universal or invariant.Hospitalization insurance indemnifies for room and board in the hospital, laboratory fees, use of special facilities, nursing care, and certain medicines and supplies. The contracts contain specific limitations on coverage, such as a maximum number of days in the hospital and maximum allowances for room and board. Surgical expense insurance covers the surgeon's charge for given operations or medical procedures, usually up to a maximum for each type of operation. Regular medical insurance contracts indemnify the insured for expenses such as physicians' home or office visits, medicines, and other medical expenses. Major medical contracts are distinguished from other health insurance policies by offering coverage without many specific limitations; usually there is only a maximum per person, a deductible amount, and a percentage deductible, called coinsurance, under which the insured usually pays 20 percent of each medical bill above the deductible amount. Disability income coverage provides periodic payments when the insured is unable to work as a result of accident or illness. There is normally a waiting period before the payments begin. Definitions of disability vary considerably. A strict definition of disability requires that one be unable to perform each and every duty of one's regular occupation for a given period, say two years, and thereafter be unable to perform the duties of any occupation for which one is reasonably fitted by training or experience. More liberal definitions of disability require only the inability to perform the duties of one's usual occupation.Dental insurance, usually sold on a group plan and sponsored by an employer, covers such dental services as fillings, crowns, extractions, bridgework, and dentures. Most policies contain relatively low annual limits of coverage, such as $2,500, as well as deductibles and coinsurance provisions. Some policies limit benefits to a percentage of the cost of services.Long-term care insurance (LTC) has been developed to cover expenses associated with old age, such as care in nursing homes and home care visits. LTC insurance, though relatively new, is already attracting strong interest because of the rapid growth of the elderly population in the United States. Policies specify a maximum limit per day plus an overall maximum benefit amount, with the result that the insurance typically covers the expenses of a maximum of four or five years in a nursing home. A common provision is a 20-day waiting period before benefits begin. Some policies exclude certain conditions such as Alzheimer's disease and do not cover custodial care. For an additional premium, some LTC policies offer an inflation provision, which increases the daily benefit by some percentage, such as 5 percent a year.An important condition of health insurance is that of renewability. Some contracts are cancelable at any time upon short notice. Others are not cancelable during the year's term of coverage, but the insurer may refuse to renew coverage for a subsequent year or may renew only at higher rates or under restrictive conditions. Thus the insured may become ill with a chronic disease and discover that upon renewal the policy excludes all future coverage for this disease. Only policies that are both noncancelable and guaranteed renewable assure continuous coverage, but these are much more expensive.ProblemsPrivate health insurance contracts are in general quite restricted in coverage, to the point that many consider them to be inadequate for modern conditions. They also lend themselves to abuses such as overutilization of coverage, multiple policies, and insuring for more than 100 percent of the expected loss. Health insurance, by its very existence, helps to escalate rising medical care costs; for example, insured medical losses tend to run higher than noninsured losses because physicians often charge according to “ability to pay,” and insurance increases this ability. Through insurance it is also easier to pass on rising hospital costs to the patient. Finally, since there is a tendency for those most likely to have losses to take out health insurance, an element of adverse selection exists. Careful underwriting to screen out those who are trying to take advantage of the insurance mechanism to pay for known bills is considered essential, but this undoubtedly denies coverage to many who need protection.Groups have always been important in the insurance field, from the burial societies of the Romans and the insurance funds of the medieval guilds to the fraternal and religious insurance plans of modern times. In the 20th century private insurance companies have written increasingly large amounts of group insurance, particularly in life insurance, health insurance, and annuities. In 1990 more than 95 percent of the industrial labour force in the United States was covered by group life and health insurance plans established by employers. Much of the impetus for these employee benefit plans came from the labour unions, which pressed for such “fringe benefits” in bargaining with employers.Group insurance is widely used throughout the world, both in the form of private plans and as social insurance plans. Social security plans with group coverage exist in more than 140 nations. Private group plans are generally offered wherever private life and health insurance companies operate. Group life insurance is the most commonly offered plan; group health plans are government-operated in many nations. In many countries, group pension plans are common as a supplement to social insurance pension schemes.Group insurance has been especially popular in Japan, where many employees serve a company for life. All Japanese life insurance companies offer group life insurance. Health insurance is provided by the government. Funded group pensions became popular after a 1962 tax law made contributions tax-deductible for Japanese employers. In addition, virtually all Japanese employers provide lump-sum retirement allowances to their workers.Under group life insurance an employer signs a master contract with the insurance company outlining the provisions of the plan. Each employee receives a certificate that gives evidence of participation in the plan. The amount of insurance depends on the employee's salary or job classification; usually the employer pays a portion of the premium and the employee pays the rest, but sometimes the employer pays the entire cost of the plan.A major advantage of group life insurance to an employee is that usually coverage may be obtained regardless of health. An employee who leaves the group may, without a medical examination, convert the group coverage to an individual policy. The premiums on group life insurance are considerably less than on comparable individual policies, mainly because the selling and administrative costs are minimal.Major types of health insurance written on a group basis include insurance against the losses occasioned by hospitalization, surgical expense, and disability. Hospitalization insurance is designed to cover daily room and board and other expenses. Surgical expense insurance usually provides specified allowances for physicians' charges for various operations. Regular medical expense coverage is generally aimed at covering part of the costs of medicines and doctor calls. Major medical insurance offers the insured a large monetary coverage, designed to meet catastrophic costs of illness or accident with few restrictions as to the type of medical expense for which reimbursement is allowed. The insured must bear a percentage of any loss, usually 20 percent. Temporary disability income offers the insured a weekly indemnity for a period of up to six months if the insured is temporarily disabled and unable to work. Long-term disability extends the income for periods longer than six months. Accidental death and dismemberment insurance offers an insured or a beneficiary a lump sum; it is used widely as a form of travel accident insurance.Under the typical group health insurance contract, the insured person enjoys several elements of protection not obtainable in individual contracts. Cancellation of coverage is not permitted unless coverage for the entire group is canceled. The insured enjoys protection against rate increases unless the rate for all members of the class is increased. Typically the group protection may be converted to some kind of individual policy, or the insured may transfer to another group plan. The insurer tends to be liberal on claims settlement because the typical premium under a group plan is large enough for the insurer to be unwilling to jeopardize the good will of the clientele through miserly claims treatment.Most group insurance plans require that certain conditions be met. Sometimes there must be a minimum number of persons covered, such as 10 or 25. The group must also have some reason for existence other than to obtain insurance. The most usual types of groups are employees of a common employer, members of a labour organization, debtors of a common creditor, or members of a professional or trade association.Mention must also be made of nonprofit prepayment plans (e.g., the Blue Cross–Blue Shield plans and health maintenance organizations (health maintenance organization) [HMOs] in the United States), which resemble the above plans in most respects but are not operated by insurance companies. These plans often indemnify the hospital or the physician, on the basis of services performed, rather than the patient. Health insurance plans may also be established independently by large employers, labour unions, communities, or cooperatives. Outside the United States this kind of health insurance has been taken over by government programs. In Sweden, before the enactment of the compulsory insurance program in 1955, 70 percent of the population was covered by private plans. In Great Britain, before the National Health Service was instituted in 1948, about half the population was privately covered. In The Netherlands about half the population was so covered before the government program began, and there were still many private funds run by various groups.In spite of the success of private group health insurance in the United States, it is estimated that in 1992 approximately 37 million people were without health insurance coverage. Many attempts over the years to establish universal national health insurance in the United States have failed.Group annuitiesAn annuity in the literal sense is a series of annual payments. More broadly it may be defined as a series of equal payments over equal intervals of time. A life annuity, a subclass of annuities in general, is one in which the payments are guaranteed for the lifetime of one or more individuals. A group annuity differs from an individual annuity in that the annuity payments are based upon the assumed length of lives of members of a given group. The size of the payments depends on several factors: the assumed interest rate, the life expectancy of the individual or of the individuals making up the group, the length of the period during which payments are guaranteed, the length of time elapsing before the payments begin, and the number of lives on which the payments are continued. For example, if payments to an annuitant aged 65 are to be guaranteed for 20 years, they will be substantially smaller than if they are guaranteed only for the remainder of the person's life.The typical group life annuity is sponsored by an employer, who may pay all or part of the cost. Under the usual arrangement, every employee receives each year a credit with the life insurance company for an annuity purchased to begin at age 65. The final pension received is made up of the sum of the individual annuities purchased throughout the worker's life. As a rule, an irrevocable claim to these annuity rights is gained only after the person has worked with the employer for a given number of years or has reached a given age.The basic advantage of an annuity is that it provides an income for life that is larger than the amount that the holder would receive by putting money out at simple interest. It is the reverse of life insurance, in that the insurer pays premiums to the insured; it resembles insurance in that the payment is based on life expectancy.The problem of inflation has led to experimentation with variable annuities in order to protect annuitants against decreases in purchasing power. The major distinguishing characteristic of a variable annuity is that the payments vary according to underlying trends in the stock market. Funds paid in for the variable annuity are invested in common stock rather than in bonds, mortgages, or other fixed-interest investments as is true of regular annuities. In simplified terms, if the stock market rises 10 percent in one year, the annuitant may expect payments to go up by approximately 10 percent in the following year. Conversely, if the stock market drops 10 percent, the annuitant will suffer a 10 percent reduction in income. To the extent that the stock market reflects changes in the cost of living, the annuitant's income is automatically adjusted for these changes each year; and, if the stock market also reflects increases in productivity in the economy, then the annuitant may expect to receive a share in such increases in the productivity as the economy may gain.Some variable annuity plans are tied directly to a cost-of-living index. In order to finance the increased benefits, the employer invests a portion of the funds in equities such as common stock and real estate. An assumption is made that there will be a sufficient gain from this source to enable the employer to pay the increased cost of living, but the employee is not expected to suffer reductions in annuity payments.The problem of adjusting retirement benefits to changes in the economy has been of concern in many countries. Some governments have pegged the price of government bonds to the cost-of-living index. Retired individuals purchasing government bonds may then receive automatic increases in interest payments if the cost of living rises. Their interest will not fall below a specified amount. Social security legislation in most parts of the world is geared in various ways to changes in the cost of living. In some cases benefits are directly tied to a price index. In other cases the legislature from time to time must be asked to make adjustments in social security benefits.Insurance practiceUnderwriting and rate makingThe two basic functions in insurance are underwriting and rating, which are closely related to each other. Underwriting deals with the selection of risks, and rating deals with the pricing system applicable to the risks accepted.Underwriting principlesUnderwriting has to do with the selection of subjects for insurance in such a manner that general company objectives are met. The main objective of underwriting is to see that the risk accepted by the insurer corresponds to that assumed in the rating structure. There is often a tendency toward adverse selection, which the underwriter must try to prevent. Adverse selection occurs when those most likely to suffer loss are covered in greater proportion than others. The insurer must decide upon certain standards, terms, and conditions for applicants, project estimated losses and expenses through the anticipated period of coverage, and calculate reasonably accurate rates to cover these losses and expenses. Since many factors affect losses and expenses, the underwriting task is complex and uncertain. Bad underwriting has resulted in the failure of many insurers.In some types of insurance major underwriting decisions are made in the field, and in other types they are made at the home office. In the field of life insurance the agent's judgment is not accepted as final until the home-office underwriter can make a decision, for the life insurance contract is usually noncancelable, once written. In the field of property and liability insurance, on the other hand, the contract is cancelable if the home-office underwriter later finds the risk to be unacceptable. It is not uncommon for a property and liability insurer to accept large risks only to cancel them at a later time after the full facts are analyzed. The insurance underwriter must tread a thin line between undue strictness and undue laxity in the acceptance of risk. The underwriter's position is not unlike that of the credit manager in a business corporation, in which unreasonably strict credit standards discourage sales but overly weak credit standards invite losses.An important initial task of the underwriter is to try to prevent adverse selection by analyzing the hazards that surround the risk. Three basic types of hazards have been identified as moral, psychological, and physical. A moral hazard exists when the applicant may either want an outright loss to occur or may have a tendency to be less than careful with property. A psychological hazard exists when an individual unconsciously behaves in such a way as to engender losses. Physical hazards are conditions surrounding property or persons that increase the danger of loss.An underwriter may suspect the existence of a moral hazard on applications submitted by persons with known records of dishonesty or when excessive coverage is sought or the replacement value of the property exceeds its value as a profit-making enterprise. Underwriters are aware that fire losses are more likely to occur during business depressions. The underwriter can detect moral hazard in various ways: An applicant's credit may be checked; courthouse and police records may reveal a criminal history or a history of bankruptcy; and other insurance companies can be queried for information when it is suspected that an individual is trying to obtain an excessive amount of coverage or has been turned down by other insurers.The psychological type of hazard can take a number of forms. Some persons are said to be “accident-prone” because they have far more than their share of accidents, suggesting that unconsciously they want them. It is well known that persons applying for annuities tend to have longer than average lives, and consequently a special mortality table is used for annuitants. Certain types of insanity have to be watched for—notably the impulse to set fires.Physical hazards include such things as wood-frame construction in buildings, particularly in areas where such properties are densely concentrated. Earthquake insurance rates tend to be high where geologic faults exist (as in San Francisco, which is built almost directly over such a fault).Each kind of insurance has its characteristic hazards. In fire insurance the physical hazards are analyzed according to four major factors: type of construction, the protection rating of the city in which the property is located, exposure to other structures that may spread a conflagration, and type of occupancy.In underwriting automobile insurance (motor vehicle insurance), the underwriter considers the following factors: the age, sex, and marital status of the driver and members of the driver's household; length of driving experience; occupation; stability of employment and residence; physical impairments; accident and conviction record; extent of use of alcohol and drugs; customary use of the vehicle; age, condition, and maintenance of the vehicle; and records of insurance cancellation or refusal. In some cases tests of emotional maturity are administered. Some underwriters even consider such factors as the school records of student drivers and whether or not driving courses have been taken.The hazards considered in the underwriting of general liability insurance depend on the type of business and the record of the person applying for coverage. In the field of contracting, for example, the underwriter is interested in the type of equipment owned or rented by the applicant; the applicant's losses in the past, attitude toward safe practice, cooperation with building inspectors, and financial position and credit standing; the stability of supervisory employees; and the degree to which the applicant has been a successful contractor in the past.Rate makingClosely associated with underwriting is the rate-making function. If, for example, the underwriter decides that the most important factor in discriminating between different risk characteristics is age, the rates will be differentiated according to age.The rate is the price per unit of exposure. In fire insurance, for example, the rate may be expressed as $1 per $100 of exposed property; if an insured has $1,000 of exposed property, the premium will thus be $10. The rate reflects three major elements: the loss cost per unit of exposure, the administrative expenses, or “loading,” and the profit. In property insurance, approximately one-third of the premium covers expenses and profit, and two-thirds covers the expected cost of loss payments. These percentages vary somewhat according to the particular type of insurance.Rates are calculated in the following way. A policy, for instance, may be written covering a class of automobiles with an expected loss frequency of 10 percent and an average collision loss of $400. The expenses of the insurer are to average 35 percent of the premium, and there must be a profit of 5 percent. The pure loss cost per unit is 10 percent of $400, or $40. The gross premium is calculated by the formula L/[1 - (E + P)], in which L equals the loss cost per unit, E equals the expense ratio, and P equals the profit ratio. In this case the gross premium would be $40/[1 - (.35 + .05)], or $66.67.Four basic standards are used in rate making: (1) the structure of rates should allocate the burden of expenses and costs in a way that reflects as accurately as possible the differences in risk—in other words, rates should be fair; (2) a rate should produce a premium adequate to meet total losses but should not bring unreasonably large profits; (3) the rate should be revised often enough to reflect current costs; and (4) the rate structure should tend to encourage loss prevention among those who are insured.Some examples will illustrate the nature and application of the criteria outlined above. In life insurance, the rate is generally more than adequate to meet all reasonably anticipated losses and expenses; in other words, the insured is charged an excessive premium, part of which is then returned as a dividend according to actual losses and expenses. The requirement that the rate reflect fairly the risk involved is much more difficult to achieve. In workers' compensation insurance, the rate is expressed as a percentage of the employer's payroll for each occupational class. This may seem fair enough, but an employer with relatively high-paid workers has fewer employees for a given amount of payroll than one whose workers are paid a lower wage. If the two employers fall into the same occupational class and have the same total payroll, they are charged the same premium even though one may have a larger number of workers than the other and hence greater exposure to loss. Fairness may be an elusive goal.Insurance rates are revised only slowly, and, since they are based upon past experience, they tend to remain out of date. In life insurance, for example, the mortality tables used are changed only every several years, and rate adjustments are reflected in dividends. In automobile insurance, rates are revised annually or even more often, but they still tend to be out of date.Two basic rate-making systems are in use: the manual, or class-rating, method and the individual, or merit-rating, method. Sometimes a combination of the two methods is used.A manual rate is one that applies uniformly to each exposure unit falling in some predetermined class or group, such as people of the same age, workers of one employer, drivers meeting certain characteristics, or all residences in a given area. Presumably the members of each class are so homogeneous as to be indistinguishable so far as risk characteristics are concerned.Merit rating is used to give recognition to individual characteristics. In commercial buildings, for example, fire insurance rates depend on such individual characteristics as the type of occupancy, the number and type of safety features, and the quality of housecleaning. In an attempt to reflect the true quality of the risk, a percentage charge or credit may be applied to the base rate for each of these features. Another example is found in employer group health insurance plans where the premium or the rate may be adjusted annually depending on the loss experience or on the amount of claims service provided.In order to obtain broader and statistically sounder rates, insurers often pool loss and claims experience by setting up rating bureaus to calculate rates based on industrywide experience. They may have an agreement that all member companies must use the rates thus developed. The rationale for such agreements is that they help insurers meet the criteria of adequacy and fairness. Rating bureaus are used extensively in fire, marine, workers' compensation, automobile, and crime insurance.Underwriting cycleProfits in property and liability insurance have tended to rise and fall in fairly regular patterns lasting between five and seven years from peak to peak; this phenomenon is termed the underwriting cycle. Stages of the underwriting cycle may be described as follows: initially, when profits are relatively high, some insurers, wishing to expand sales, start to lower prices and become more lenient in underwriting. This leads to greater underwriting losses. Rising losses and falling prices cause profits to suffer. In the second stage of the cycle, insurers attempt to restore profits by increasing rates and restricting underwriting, offering coverage only to the safest risks. These restrictions may be so severe that insurance in some lines becomes unavailable in the marketplace. Insurers are able to offset a portion of their underwriting loses through earnings on investments. Eventually the increased rates and reduced underwriting losses restore profits. At this point, the underwriting cycle repeats itself.The general effect of the underwriting cycle on the public is to cause the price of property and liability insurance to rise and fall fairly regularly and to make it more difficult to purchase insurance in some years than in others. The competition among insurers caused by the underwriting cycle tends to create cost bargains in some years. This is especially evident when interest rates are high, because greater underwriting losses will, in part, be offset by greater investment earnings.A significant insurance practice is that of reinsurance, whereby risk may be divided among several insurers, reducing the exposure to loss faced by each insurer. Reinsurance is effected through contracts called treaties, which specify how the premiums and losses will be shared by participating insurers.Two main types of treaties exist—pro rata and excess-of-loss treaties. In the former, all premiums and losses may be divided according to stated percentages. In the latter, the originating insurer accepts the risk of loss up to a stated amount, and above this amount the reinsurers divide any losses. Reinsurance is also frequently arranged on an individual basis, called facultative reinsurance, under which an originating insurer contracts with another insurer to accept part or all of a specific risk.Reinsurance enlarges the ability of an originating insurer to accept risk, since unwanted portions of the risk can be passed on to others. Reinsurance stabilizes insurer profits, evens out loss ratios, reduces the capital needed to underwrite business, and offers a way for insurers to divest themselves of an entire segment of their risk portfolio.Legal aspects of insuranceGovernment regulationThe insurance business is subject to extensive government regulation in all countries. In European countries insurance regulation is a mixture of central and local controls. In Germany central authority over insurance regulation is provided by the Federal Insurance Supervisory Authority (BAV), which exercises tight control of premiums, reserves, and investments of insurers. The BAV's regulation of life insurance, for example, allows no more than 20 percent of investments in equities.In the United Kingdom, regulation generally allows the managing agency fairly complete liberty of action and is concerned only with final business results. In this the United Kingdom differs from most other European countries, in which the purpose of insurance supervision is to regulate more closely the conditions in which insurers operate.In the countries of the European Community (EC; under articles 59–60 of the Treaty of Rome) an attempt is being made to obtain greater uniformity among national insurance statutes. This is intended to facilitate the operations of insurers across national borders. Rate regulation, however, remains within the jurisdiction of individual countries.Although 1992 was established as the goal year for completing the harmonization process for insurance in the EC, separate regulation in the various countries continues. Many legal and regulatory barriers to expansion of insurance operations in various countries in the world still exist. Examples include strict licensing requirements, prohibiting of unadmitted insurance, mandatory hiring of local nationals, requirements that insurers make local investments or enter into joint ventures with local insurers, prohibition of free exchange of currencies or repatriation of profits, and onerous taxation.An important legal force influencing insurance regulation in such countries as France, Belgium, Egypt, Greece, Italy, Lebanon, Spain, Turkey, and the former French African colonies is the Napoleonic Code. The influence of the code may be seen, for example, in the matter of third-party liability, in which the burden of proof may be upon the defendant rather than upon the plaintiff.In some countries not all classes of insurance are regulated. In The Netherlands only life insurance is regulated, and in Belgium only life, industrial injury, and thirdparty motor vehicle liability insurance. In some countries the scope of supervision may embrace many aspects of the insurance business, but in the United Kingdom and The Netherlands only financial matters are subject to regulation.In several European countries insurers may not write both life insurance and general insurance (property and liability insurance). Minimum capital requirements vary, depending on the type of business written, usually being highest for life insurance.In most European countries policies are submitted to supervisory authorities for approval or for information. In some countries standard clauses or forms of contracts must be used; for instance, in Sweden insurers must use a standard compulsory motor vehicle third-party liability policy, and in Switzerland a standard contract for war risks and life insurance is required.Insurance is often compulsory. In general, laws frequently require individuals to carry third-party liability insurance and industrial injury insurance. Fire insurance is required on immovable property in Germany. A number of countries require aviation insurance (for accident and sickness) on airline passengers and crews.Although individuals generally have the freedom to select whichever insurer they wish, there are restrictions on buying insurance from foreign insurers. In some countries buyers must use domestic insurers for compulsory coverages but are free to take out insurance from foreign insurers when coverage is not available from domestic insurers. In other countries certain types of insurance may not be placed in foreign countries. About half the countries of the world prohibit “nonadmitted” insurance, defined as insurance written by an insurer not authorized to do business in that country.In the United States most regulation of insurance is in the hands of the individual states, although the federal government also has authority over insurers when it is deemed that state regulation fails to regulate effectively activities such as unfair trade practices, misleading advertising, boycotts, and monopolistic practices. States regulate four main aspects: rate making, minimum standards for financial solvency, investments, and marketing practices.In rate making, three basic requirements must be met: rates must be adequate to cover expected losses, must not be excessive, and must not be unfairly discriminatory among different classes of risk. In meeting minimum standards of financial solvency, state laws specify minimum capital requirements, accounting practices, minimum security deposits with state insurance commissioners, and procedures for liquidating insolvent insurers. In investments, states limit the types and quality of securities in which insurers may invest their assets. In marketing, states regulate advertising, licensing of agents, policy forms and wording, service and process procedures for handling claim disputes, expense allowances for acquiring new business, and other agency and insurer operations, including being admitted to do business in the state. Many states maintain a special division to register and handle consumer complaints.contract lawIn general, an insurance contract must meet four conditions in order to be legally valid: it must be for a legal purpose; the parties must have a legal capacity to contract; there must be evidence of a meeting of minds between the insurer and the insured; and there must be a payment or consideration.To meet the requirement of legal purpose, the insurance contract must be supported by an insurable interest (see further discussion below); it may not be issued in such a way as to encourage illegal ventures (as with marine insurance placed on a ship used to carry contraband).The requirement of capacity to contract usually means that the individual obtaining insurance must be of a minimum age and must be legally competent; the contract will not hold if the insured is found to be insane or intoxicated or if the insured is a corporation operating outside the scope of its authority as defined in its charter, bylaws, or articles of incorporation.The requirement of meeting of minds is met when a valid offer is made by one party and accepted by another. The offer is generally made on a written application for insurance. In the field of property and liability insurance, the agent generally has the right to accept the insured's offer for coverage and bind the contract immediately. In the field of life insurance, the agent generally does not have this power, and the contract is not valid until the home office of the insurer has examined the application and has returned it to the insured through the agent.The payment or consideration is generally made up of two parts—the premiums and the promise to adhere to all conditions stated in the contract. These may include, for example, a warranty that the insured will take certain loss-prevention measures in the care and preservation of the covered property.WarrantiesIn applying for insurance, the applicant makes certain representations or warranties. If the applicant makes a false representation, the insurer has the option of voiding the contract. Concealment of vital information may be considered misrepresentation. In general, the misrepresentation or concealment must concern a material fact—defined as a fact that would, if it were known, cause the insurer to change the terms of the contract or be unwilling to issue it in the first place. If the agent of the insurer asks the applicant a question the answer to which is a matter of opinion and if the answer turns out to be wrong, the insurer must demonstrate bad faith or fraudulent intent in order to void the contract. If, for example, in answer to an agent's question, the applicant reports no history of serious illness, in the mistaken belief that a past illness was minor, the court may find the statement to be an honest opinion and not a misrepresented fact.A basic principle of property liability insurance contracts is the principle of subrogation, under which the insurer may be entitled to recovery from liable third parties. In fire insurance, for example, if a neighbour carelessly sets fire to the insured's house and the insurance company indemnifies the insured for the loss, the company may then bring a legal action in the name of the insured to recover the loss from the negligent neighbour. The principle of subrogation is complemented by another basic principle of insurance contract law, the principle of indemnity. Under the principle of indemnity a person may recover no more than the actual cash loss; one may not, for example, recover in full from two separate policies if the total amount exceeds the true value of the property insured.Insurable interestClosely associated with the above legal principles is that of insurable interest. This requires that the insured be exposed to a personal loss if the peril insured against should occur. Otherwise it would be possible for a person to take out a fire insurance policy on the property of others and collect if the property burned. Any financial interest in property, or reasonable expectation of having a financial interest, is sufficient to establish insurable interest. A secured creditor such as a mortgagee has an insurable interest in the property on which money has been lent.In the field of personal insurance one is held to have an unlimited interest in one's own life. A corporation may take life insurance on the life of a key executive. A wife may insure the life of her husband, and a father may insure the life of a minor child, because there is a sufficient pecuniary relationship between them to establish an insurable interest.In life insurance the insurable interest must exist at the time of the contract. Continued insurable interest, however, need not be demonstrated. A divorced woman may continue life insurance on the life of her former husband and legitimately collect the proceeds upon his death even though she is no longer his wife.In the field of property insurance, on the other hand, the insurable interest must be demonstrated at the time of the loss. If an individual insures a home but later sells it, no recovery can be made if the house burns after the sale, because the insured has suffered no loss at the time of the fire.liability lawIn most countries, an individual may be held legally liable to another for acts or omissions and be required to pay damages. Liability insurance may be purchased to cover these contingencies.Legal liability exists when an individual commits a legal injury that wrongly encroaches on another person's rights. Such injuries include slander, assault, and negligent acts. A negligent act involves failure to behave in a manner expected when the results of this failure cause a financial loss to others. An act may be classed as negligent even if it is unintentional. Negligence may be imputed from one person to another. For example, a master is liable not only for his own acts but also for the negligent acts of servants or others legally representing him. It is not uncommon for a municipality to require that businesses using city property assume what would otherwise have been the city's negligence for the use of its property. Statutes may impute liability on individuals when no liability would exist otherwise; thus a parent may be legally liable for the acts of a minor child who is driving the family automobile.In common-law countries such as the United States and the United Kingdom, three defenses may be used in a negligence action. These are assumed risk, contributory negligence, and the fellow servant doctrine. Under the assumed risk rule, the defendant may argue that the plaintiff has assumed the risk of loss in entering into a given venture and understands the risks. Employers formerly used the assumed risk doctrine in suits by injured employees, arguing that the employee understood and assumed the risks of employment in accepting the job.The contributory negligence defense is frequently used to defeat negligence actions. If it can be shown that one party was partly to blame, then that party may not collect from any negligence of the other party. Some courts have applied a substitute doctrine known as comparative negligence. Under this, each party is held responsible for a portion of the loss corresponding to the degree of blame attached to that party; a person who is judged to be 20 percent to blame for an accident may be required to pay 20 percent of the injured person's losses.The fellow servant defense has been used at times by employers; an employer would argue in some cases that the injury to an employee was caused not by the employer's negligence but by the negligence of another employee. However, workers' compensation statutes in some countries have nullified such common law defenses in industrial injury cases.In many countries, the courts have tended to apply increasingly strict standards in adjudicating negligence. This has been termed the trend toward strict liability, under which the plaintiff may recover for almost any accidental injury, even if it can be shown that the defendant has used “due care” and thus is not negligent in the traditional sense. In the United States, manufacturers of polio vaccine that was found to have caused polio were required to pay large damage claims although it was demonstrated that they had taken all normal precautions and safeguards in the manufacture of the vaccine.Historical development of insuranceInsurance in some form is as old as historical society. So-called bottomry contracts were known to merchants of Babylon as early as 4000–3000 BC. Bottomry was also practiced by the Hindus in 600 BC and was well understood in ancient Greece as early as the 4th century BC. Under a bottomry contract, loans were granted to merchants with the provision that if the shipment was lost at sea the loan did not have to be repaid. The interest on the loan covered the insurance risk. Ancient Roman law recognized the bottomry contract in which an article of agreement was drawn up and funds were deposited with a money changer. Marine insurance became highly developed in the 15th century.In Rome there were also burial societies that paid funeral costs of their members out of monthly dues.The insurance contract also developed early. It was known in ancient Greece and among other maritime nations in commercial contact with Greece.EnglandFire insurance arose much later, obtaining impetus from the Great Fire of London in 1666. A number of insurance companies were started in England after 1711, during the so-called bubble era. Many of them were fraudulent, get-rich-quick schemes concerned mainly with selling their securities to the public. Nevertheless, two important and successful English insurance companies were formed during this period—the London Assurance Corporation and the Royal Exchange Assurance Corporation. Their operation marked the beginning of modern property and liability insurance.No discussion of the early development of insurance in Europe would be complete without reference to Lloyd's of London (Lloyd's), the international insurance market. It began in the 17th century as a coffeehouse patronized by merchants, bankers, and insurance underwriters, gradually becoming recognized as the most likely place to find underwriters for marine insurance. Edward Lloyd supplied his customers with shipping information gathered from the docks and other sources; this eventually grew into the publication Lloyd's List, still in existence. Lloyd's was reorganized in 1769 as a formal group of underwriters accepting marine risks. (The word underwriter is said to have derived from the practice of having each risk taker write his name under the total amount of risk that he was willing to accept at a specified premium.) With the growth of British sea power, Lloyd's became the dominant insurer of marine risks, to which were later added fire and other property risks. Today Lloyd's is a major reinsurer as well as primary insurer, but it does not itself transact insurance business; this is done by the member underwriters, who accept insurance on their own account and bear the full risk in competition with each other.United StatesThe first American insurance company was organized by Benjamin Franklin (Franklin, Benjamin) in 1752 as the Philadelphia Contributionship. The first life insurance company in the American colonies was the Presbyterian Ministers' Fund, organized in 1759. By 1820 there were 17 stock life insurance companies in the state of New York alone. Many of the early property insurance companies failed from speculative investments, poor management, and inadequate distribution systems. Others failed after the Great Chicago Fire in 1871 and the San Francisco earthquake and fire of 1906. There was little effective regulation, and rate making was difficult in the absence of cooperative development of sound statistics. Many problems also beset the life insurance business. In the era following the U.S. Civil War, bad practices developed: dividends were declared that had not been earned, reserves were inadequate, advertising claims were exaggerated, and office buildings were erected that sometimes cost more than the total assets of the companies. Thirty-three life insurance companies failed between 1870 and 1872, and another 48 between 1873 and 1877.After 1910 life insurance enjoyed a steady growth in the United States. The annual growth rate of insurance in force over the period 1910–90 was approximately 8.4 percent—amounting to a 626-fold increase for the 80-year period. Property-liability insurance had a somewhat smaller increase. By 1989 some 3,800 property-liability and 2,270 life insurance companies were in business, employing nearly two million workers. In 1987 U.S. insurers wrote about 37 percent of all premiums collected worldwide.RussiaInsurance in Russia was nationalized after the Russian Revolution of 1917. Domestic insurance in the Soviet Union was offered by a single agency, Gosstrakh, and insurance on foreign risks by a companion company, Ingosstrakh. Ingosstrakh continues to insure foreign-owned property in Russia and Russian-owned property abroad. It accepts reinsurance from foreign insurers. However, following the movement toward a free market economy (perestroika) after 1985 and the breakup of the Soviet Union in 1991, some 230 new private insurers were established.Gosstrakh offers both property and personal insurance. The former coverage is mandatory for government-owned property and for certain property of collective farms. Voluntary property insurance is available for privately owned property. Personal coverages such as life and accident insurance and annuities also are sold.Before 1991, insurance against tort liability was not permitted, on the ground that such coverage would allow negligent persons to escape from the financial consequences of their behaviour. However, with the advent of a free market system, it seems likely that liability insurance will become available in Russia.Eastern EuropeAfter the breakup of the Soviet Union, countries in eastern Europe developed insurance systems of considerable variety, ranging from highly centralized and state-controlled systems to Western-style ones. Because of recent political and economic upheavals in these countries, it seems likely that the trend will be toward decentralized, Western-style systems.A few generalizations about insurance in eastern European countries may be made. Although state insurance monopolies are common, they are losing some business to private insurers. Insurance of state-owned property, which was considered unnecessary in socialist states, has been established in several countries.Insurance in Japan is mainly in the hands of private enterprise, although government insurance agencies write crop, livestock, forest fire, fishery, export credit, accident and health, and installment sales credit insurance as well as social security. Private insurance companies are regulated under various statutes. Major classes of property insurance written include automobile and workers' compensation (which are compulsory), fire, and marine. Rates are controlled by voluntary rating bureaus under government supervision, and Japanese law requires rates to be “reasonable and nondiscriminatory.” Policy forms generally resemble those of Western nations. Personal insurance lines are also well developed in Japan and include ordinary life, group life, and group pensions. Health insurance, however, is incorporated into Japanese social security.Japan's rapid industrialization after World War II was accompanied by an impressive growth in the insurance business. Toward the end of the 20th century, Japan ranked number one in the world in life insurance in force. It accounted for about 25 percent of all insurance premiums collected in the world, ranking second behind the United States. The number of domestic insurers is relatively small; foreign insurers operate in Japan but account for less than 3 percent of total premiums collected.Worldwide operationsBecause of the great expansion in world trade and the extent to which business firms make investments outside their home countries, the market for insurance on a worldwide scale has expanded rapidly in the 20th century. This development has required a worldwide network of offices to provide brokerage services, underwriting assistance, claims service, and so forth. The majority of the world's insurance businesses are concentrated in Europe and North America. These companies must service a large part of the insurance needs of the rest of the world. The legal and regulatory hurdles that must be overcome in order to do so are formidable.In 1990 the 10 leading insurance markets in the world in terms of the percentage of total premiums collected were the United States (35.6 percent); Japan (20.5 percent); the United Kingdom (7.5 percent); Germany (6.8 percent); France (5.5 percent); the Soviet Union (2.6 percent); Canada (2.3 percent); Italy (2.2 percent); South Korea (2.0 percent); and Oceania (1.8 percent).Major world trends in insurance include a gradual movement away from nationalism of insurance, the development of worldwide insurance programs to cover the operations of multinational corporations, increasing use of reinsurance, increasing use by corporations of self-insurance programs administered by wholly owned insurance subsidiaries (captive companies), and increasing use of mergers among both insurers and brokerage firms.Additional ReadingBasic surveys of the insurance field are given in Mark R. Greene and James S. Trieschmann, Risk & Insurance, 8th ed. (1992); Emmett J. Vaughan, Fundamentals of Risk and Insurance, 6th ed. (1992); George E. Rejda, Principles of Insurance, 3rd ed. (1989); Robert I. Mehr, Emerson Cammack, and Terry Rose, Principles of Insurance, 8th ed. (1985); James L. Athearn, S. Travis Pritchett, and Joan T. Schmit, Risk and Insurance, 6th ed. (1989); and David L. Bickelhaupt, General Insurance, 11th ed. (1983).Marine insurance is discussed in Roderick McNamara, Robert A. Laurence, and Glenn L. Wood, Inland Marine Insurance, 2 vol. (1987); Arthur E. Brunck, Victor P. Simone, and C. Arthur Williams, Jr., Ocean Marine Insurance, 2 vol. (1988); and Frederick Templeman, Templeman on Marine Insurance: Its Principles and Practice, 6th ed. by R.J. Lambeth (1986).Property and liability insurance is the subject of William H. Rodda et al., Commercial Property Risk Management and Insurance, 3rd ed., 2 vol. (1988); Donald S. Malecki et al., Commercial Liability Risk Management and Insurance, 2nd ed., 2 vol. (1986); Bernard L. Webb, Stephen Horn II, and Arthur L. Flitner, Commercial Insurance, 2nd ed. (1990); and Barry D. Smith, James S. Trieschmann, and Eric A. Wiening, Property and Liability Insurance Principles (1987).Risk management is analyzed in Mark R. Greene and Oscar N. Serbein, Risk Management: Text and Cases, 2nd ed. (1983); Neil A. Doherty, Corporate Risk Management (1985); George L. Head and Stephen Horn II, Essentials of Risk Management, 2nd ed., 2 vol. (1991); C. Arthur Williams, Jr., and Richard M. Heins, Risk Management and Insurance, 6th ed. (1989); and Robert L. Carter and Neil A. Doherty (eds.), Handbook of Risk Management (1974– ), with monthly revisions published for loose-leaf updating.Life and health insurance are examined in Robert I. Mehr and Sandra G. Gustavson, Life Insurance: Theory and Practice, 4th ed. (1987); Francis T. O'Grady (ed.), Individual Health Insurance (1988); Dani L. Long and Gene A. Morton, Principles of Life and Health Insurance, 2nd ed. (1988); and Muriel L. Crawford and William T. Beadles, Law and the Life Insurance Contract, 6th ed. (1989).Studies of group insurance include Jerry S. Rosenbloom, The Handbook of Employee Benefits: Design, Funding, and Administration, 3rd ed. (1992); Davis W. Gregg and Vane B. Lucas (eds.), Life and Health Insurance Handbook, 3rd ed. (1973); Burton T. Beam, Jr., Group Benefits: Basic Concepts and Alternatives, 4th ed. (1991); and Deborah J. Chollet, Employer-Provided Health Benefits: Coverage, Provisions, and Policy Issues (1984).Specialized topics of insurance practices are the focus of Everett D. Randall (ed.), Issues in Insurance, 4th ed., 2 vol. (1987); Pat Magarick, Casualty Insurance Claims: Coverage, Investigation, Law, 3rd ed. (1988); Newton L. Bowers, Jr., et al., Actuarial Mathematics (1986); and Bernard L. Webb et al., Principles of Reinsurance, 2 vol. (1990).Government regulation of insurance is the focus of discussion in Kenneth J. Meier, The Political Economy of Regulation: The Case of Insurance (1988); Jörg Finsinger and Mark V. Pauly (eds.), The Economics of Insurance Regulation: A Cross-national Study (1986); and Spencer L. Kimball and Werner Pfennigstorf, The Regulation of Insurance Companies in the United States and the European Communities: A Comparative Study (1981).International insurance is surveyed in Paul P. Rogers, Bruno Schönfelder, and Ehrenfried Schütte, Insurance in Socialist East Europe (1988); Bernard Wasow and Raymond D. Hill (eds.), The Insurance Industry in Economic Development (1986); Robert M. Crowe (ed.), Insurance in the World's Economies (1982); Michael E. Hogue and Douglas G. Olson (eds.), World Insurance Outlook (1982); Wenlee Ting, Multinational Risk Assessment and Management: Strategies for Investment and Marketing Decisions (1988); Werner Pfenningstorf and Donald G. Gifford, A Comparative Study of Liability Law and Compensation Schemes in Ten Countries and the United States (1991); and Norman A. Baglini, Global Risk Management: How U.S. International Corporations Manage Foreign Risks (1983).Mark Richard Greene
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