Inland Marine Insurance By DAVID McCAHAN HE risks of transportation T varied are and numerous. Vehicles not only are subject to loss from the physical perils which surround the water, rail, air, and motor network of highways over which they operate and from the human frailties of those who have them in charge, but may bring loss upon their owners through injury which they cause to the person and the property of others. Commodities carried on such vehicles are exposed to direct damage hazards of like character, as well as to those incident to loading, unloading, transshipping, and warehousing or storing in transit. So obvious and so serious are many of these perils, especially those associated with maritime shipping, that it is not surprising to find the roots of marine insurance running back into the Middle Ages or to know that this form of coverage long antedates all other types of insurance. CHANGES IN INSURANCE NEEDS As a result of the growth in transportation facilities and commerce which has taken place in recent years, a type of insurance primarily intended for protection against perils of the sea was inadequate to meet all the needs which arose. Types of carriers other than water-borne vessels assumed greater prominence. The most important of these to come upon the scene during the past century was the railroad. Its development would doubtless have brought a bigger demand for insurance had it been operating under the same conditions as ocean shipping; but value of individual transportation units and 91 the catastrophe hazard were relatively smaller, and the carriers themselves were relatively larger and more stable financially. Accordingly, self-insurance of rolling stock was largely practiced. The railroad shipper, on the other hand, did not feel the same need for protection, as the laws relating to common carriers placed a very substantial measure of responsibility upon the railroad for loss occurring to goods while in its custody. Nevertheless, as private industrial companies purchased their own railroad cars for specialized use, and as certain gaps in the railroad s protection to shippers became apparent, various insurance needs were indicated. Then came the passenger automobile, the motor truck, and the airplane. They were not, generally speaking, owned by large companies which could combine the risks of many units and average up. were of such And they substantial value or their use entailed such a large potential liability to third parties that the individual owner could not afford to bear personally the risks attendant upon their operation. Hence, there arose a great demand by owners for adequate types of insurance. Moreover, shippers using these newer forms of transportation agencies sensed a need for special coverage, as under contracts of private carriage the liability of the carrier was greatly restricted. But even when a given contract, or the law pertaining to common carriers, placed upon the carrier a high degree of responsibility, he was not always in a financial position his obligations, to meet
92 Coincident with the changes in insurance needs which have accompanied the developments in transportation facilities and the accompanying redirection of the flow of commerce, there has been a vast increase in certain kinds of personal property which are relatively small in bulk but high in value, which may generally be stored at a location where they are well protected against loss, but which occasionally enter into transit. Because of their high value and attendant unusual moral hazard, as well as their peculiar relations to transportation, special forms of insurance became necessary if owners were to be safeguarded adequately. GROWTH OF &dquo;inland LINES&dquo; Marine insurance companies recognized that the regular hull marine insurance policy and the cargo policy, even with the &dquo;warehouse to warehouse&dquo; clause attached, did not amply provide for existent needs, and so developed a variety of different types of insurance policies to that end. Since these frequently contemplate transportation hazards other than those associated with ocean shipping and are generally designed solely for domestic commerce, they have come to be known as inland marine insurance contracts. Special inland marine insurance departments have been set up by many companies for the purpose of writing them. Although the so-called &dquo; inland lines&dquo; are quite young and many are still in the formative stages, the volume of premiums from them has grown by leaps and bounds during recent years until in 1930 the net premiums from them, written by American companies and American branches of foreign companies, aggregated approximately $47,- 000,000, which is nearly $3,000,000 more than the net &dquo;ocean marine&dquo; premiums written by the same carriers in that year. If past rate of growth is any index as to the future, it seems quite likely that the future will witness a relatively greater increase of the &dquo;inland lines&dquo; so that they will ultimately far exceed the &dquo;ocean lines&dquo; as an income producer for the insurance companies. The distinction between &dquo;ocean marine&dquo; and &dquo;inland marine&dquo; insurance as above outlined, whether viewed from the angle of fundamental purpose or changing relative volume, has so greatly accentuated the manner in which the term &dquo;marine&dquo; has been stretched to cover transportation involving no carriage by water as to suggest the desirability of substituting the term &dquo;transportation&dquo; for &dquo;marine,&dquo; and then bringing within the underwriting scope of a transportation insurance company all the various forms of coverage which involve a trans- even to the extent portation risk, of writing certain liability forms, such as automobile public liability insurance, now reserved to casualty companies. TYPES OF TRANSPORTATION INSURANCE AVAILABLE In order that the reader may readily visualize the many forms of insurance which have been devised to meet various transportation needs, the following classification is presented in the thought that certain fundamental functions may become apparent through a maze of forms and numerous differences in nomenclature. Not recognizing any inherent virtue in the artificial classification of insurance coverages imposed by the laws of many states upon American insurance companies, the author has made no effort to delimit this outline of policies to those written by the &dquo;ocean&dquo; and &dquo;inland&dquo; departments of marine in-
93 surance companies, but has included certain casualty lines whose only excuse for not now coming within the underwriting scope of such carriers is archaic To that legislation and expediency. extent, he has departed from the subject assigned to him. Nevertheless, it is hoped that this analysis may serve the twof old purpose of indicating the types of insurance which are obtainable in the market today and also the manifold needs which an insurance company desiring to specialize on transportation problems should be privileged to meet. Generally speaking, all types are classified into several broad groups, the governing principle being the particular nature of the interest to be covered. In the first group will be found those covering against loss to conveyances in which persons or goods are transported ; in the second, those protecting a carrier or custodian against liability to others for loss of or damage to their property; and in the third, those covering shipments by specified transportation agencies, or stipulated kinds of property, against a variety of risks including such as are incident to transportation. Although some marine insurance companies have in the past written contracts covering property at fixed locations against fire, tornado, and other hazards even when no transportation peril was assumed, such have no logical place in this classification. This follows from our premise whether they have been written to overcome the lack of flexibility in the fire underwriting plan of handling multiple location risks, or have been used, under the guise of meeting modern business requirements, to circumvent the fire insurance rating laws of various states. The problem which they have raised will be given further attention later. follows the classification : Now I. CONTRACTS AGAINST LOSS OF OR DAMAGE TO CONVEYANCING EQUIPMENT 1. Direct damage Under this heading may be included hull insurance for ocean, lake, and river steamers, sailing craft, yachts, motorboats, and other water-borne vessels against direct loss to such from the usual marine perils; insurance of railroad cars against fire, collision, and derailment; insurance of automobiles against fire, transportation hazards, theft, and collision; insurance of aircraft against fire, theft, windstorm, and crash. In addition to the above which cover destruction of or damage to conveyancing equipment while in use, should be mentioned builders risk insurance on hulls, which covers a vessel during construction and while on its trial trip. 2. Lost expenses and profits Freight insurance on hulls and any other type of insurance intended to indemnify the owner of conveyancing equipment for loss of use would be included in this category. Obviously, this is a type of coverage needed particularly for large and valuable vehicles which cannot be quickly replaced. II. CONTRACTS OFFERING PROTECTION AGAINST LIABILITY TO THIRD PARTIES 1. For carriers Ocean marine insurance has always been regarded as a multiple line type of coverage, so it is not surprising to find that the hull policy, if it contains a &dquo;collision or running down clause&dquo; and a &dquo;protection and indemnity clause,&dquo; will not only indemnify the shipowner for direct damage losses which he may sustain, but in addition, will assume his liability for certain damage suits based on negligence which may be brought against him. The coverage granted by the &dquo;protection and indemnity&dquo;
94 provision was originally not contemplated by the hull policy, as underwriters believed that shipowners would be more careful if they were obliged to bear negligence losses other than those covered by the &dquo;collision clause.&dquo; However, the growth of shipowners clubs to assume these risks led marine insurance carriers to offer protection against them, including, if desired, liability for loss of life and personal injury; so now it is possible for a shipowner to have direct damage and liability insurance incorporated in the same contract. Even the obligation assumed by the shipowner or imposed upon him by a workmen s compensation law may be covered under a special indorsement. As previously intimated, insurance of the automobile driver against his liability to third parties for death or personal injury arising from the operation of his car is not written with direct-damage fire, theft, and collision insurance, as that is a line reserved to casualty companies, even though automobile property damage liability insurance may be written by either type of company. Motor trucks may also be covered under an inland marine cargo policy, which insures the truckman against loss or damage to such goods occurring while they are in his custody, and for which he is held liable. This is required by law in many states, certificates of convenience and necessity for engaging in motor trucking not being granted unless the insurance is carried. Public liability, passenger liability, and property damage liability insurances have also been devised for aviation needs. Still other forms of liability insurance have grown out of transportation activities. Sidetrack liability insurance, for instance, is intended for the owner of a private sidetrack who has released the railroad from liability for accidents occurring thereon but who wishes to relieve himself of any claims which might be brought against him. 2. For custodians Laundries, dyers, cleaners, and similar bailees, which temporarily have custody of the property of others and which receive compensation for their services, are answerable to the owners for such loss or damage as is attributable to the bailee s failure to exercise ordinary and reasonable care in the preservation of the property. But a concern engaged in performing a service of this nature could hardly plead its legal rights and retain its good will, so insurance has been designed which will not only safeguard the holder against loss for which he may be held legally responsible but will, in addition, indemnify the owner of the goods for loss from a broad list of stipulated perils. Contracts of this nature are known as &dquo;bailees customers&dquo; or &dquo;customers goods&dquo; insurance. III. CONTRACTS AGAINST LOSS OF OR DAMAGE TO CARGO SHIPMENTS OR SPECIFIC COMMODITIES The basis for dividing the various types of policies coming within this category into two groups is whether the insurance is written primarily with reference to the type of carrier employed, or with reference to a specific item of property irrespective of the particular transporting agency. 1. Shipments by specified transportation agencies When commodities are shipped abroad by ocean steamer, the usual practice is to insure them under &dquo;open&dquo; or &dquo;blanket&dquo; cargo policies, to which a &dquo;warehouse to warehouse&dquo; clause may be attached. When moving between points within a country, however, or from a point in one country
95 to a point in some contiguous country, they are generally insured under transit policies which cover them while in the custody of a railroad, a railway express company, or an inland steamer. Shipments by motor truck may also be covered by a transit policy or by a separate motor truck contents insurance contract. Shipments of securities, bullion, precious stones, and like articles may be protected under registered mail insurance when moving by registered mail or express. Parcel post insurance, on the contrary, is designed essentially for general merchandise which is acceptable for shipment by ordinary mail or parcel post. 2. Specific classes of property As contrasted with the previous group of coverages, which contemplate insurance of certain goods and merchandise only while they are in the hands of the carriers designated, other types of insurance have been designed for specific classes of commodities. These are frequently known as &dquo;floaters,&dquo; since they follow the property and cover it wherever it may be located, whether in course of transit or at a fixed location. In many cases they afford protection against &dquo;all risks&dquo; instead of insuring only against enumerated hazards. The term &dquo;all risks&dquo; is ordinarily narrowed somewhat in scope, however, by excepting loss or damage from certain perils, such as moths, vermin, wear and tear, gradual deterioration, war, and so forth. The titles of these contracts generally indicate the character of the goods insured. Some of the more common are listed below as typical of the various classes of properties for which special forms have been prepared. Further extension of such forms would appear to be limited only by the ingenuity of agents, brokers, and underwriters. (a) Business forms- (1) On merchandise-special policies have been prepared for motion picture negatives, installment sales, approval transactions, exhibits, goods being processed, salesmen s samples, department store sales, and jewelers stock. (2) On equipment-special policies have been prepared for cameras and projecting machines, radium, neon signs, physicians and surgeons instruments, contractors equipment, theatrical properties, and installation risks. (b) Personal form- Special policies have been prepared for tourist baggage, personal effects, fine arts, jewelry, furs, silverware, musical instruments, and wedding presents. (c) Miscellaneous fornm- Land and the structures thereon are not ordinarily exposed to transit perils which would bring them within the scope of transportation insurance. Nevertheless, insurance against property damage from aircraft or motor vehicles and insurance on bridges are written by inland marine companies. RECENT OUTSTANDING DEVELOPMENTS Freedom of the marine underwriter from the strict regulation governing policy forms in certain other fields, as well as a disposition on his part to weigh the merits of each type of risk which is presented and work out for it a special type of contract, are quite apparent from the foregoing outline. If not abused, this situation makes for progress. But, as previously intimated, it also gave marine underwriters who were so disposed an opportunity to write fire and casualty coverages without subjecting themselves to the more rigid regulation and supervision pre-
96 vailing in those lines, by merely wording the contract so that it insured some minor or fancied transportation peril. The situation became particularly acute in connection with the insurance of merchandise for chain stores and other organizations having retail branches, warehouses, and other distribution points in numerous places with a fluctuating value of stock at each. It indicated, therefore, the desirability : (1) of adopting some uniform definition of marine insurance which would indicate the breadth of the coverage which may be written, and mark a clear boundary between those forms of protection which involve a transportation hazard and those which primarily fall within another group, such as fire, tornado, or burglary; and (2) of the fire companies developing some system of writing insurance on multiple location risks which would be less cumbersome than that in use and which would more flexibly meet the needs brought about by changes in merchandising methods. Definition of marine insurance- The problem of adequately defining the scope of marine insurance received special consideration at a meeting of the National Convention of Insurance Commissioners in the Fall of 1928, at which time the definition appearing in the Model Marine Insurance Act, adopted by Congress for the District of Columbia, was recommended to the various states for enactment into law or inclusion in the regulations of their insurance departments. This was further interpreted by listing specifically certain forms of insurance which should be regarded definitely as marine, and by enumerating various classes of property on which marine policies should not be written. This constituted an important forward step, as it supplied a means (though not a perfect one) of determining whether or not a particular policy represents an intrusion into the field of fire or casualty underwriting. Interstate Underwriters Board- In order to meet the legitimate fire insurance needs of modern business having multiple location risks and at the same time to prevent further inroads by marine and unauthorized insurance carriers, the Interstate Underwriters Board was created in 1929. It is an organization of fire insurance companies which standardizes rules, rates, and forms and makes available a broad, flexible fire insurance contract on a reporting basis. It does not solicit or write insurance, and the rates which it furnishes are advisory, being based upon the tariffs published by local rating organizations. The forms which it uses for interstate business can be written only for insureds having five or more locations in two or more states; but various features of them were so advantageous that policyholders having property at different locations in a single state desired a similar plan. Accordingly, the Board cobperated in the preparation of single state reporting forms which will cover two or more locations in more than one city or town in the same state. These have come into wide general use within recent months. They are under the jurisdiction of local rating bureaus. In connection with these developments, it is interesting to observe that a provisional reporting form of contract for covering fluctuating stocks at a single location has recently been introduced on the Pacific Coast. All of which means that force of necessity has impelled fire underwriters to keep up with the needs of big business. Even though the Interstate Underwriters Board adopted the definition of marine insurance, as well as the interpretation, to which reference was made
97 above, and at the same time modernized the writing of fire insurance on &dquo;multiple location-fluctuating value&dquo; risks, all the problems of overlapping into the fields of fire and casualty insurance have not been solved. But the matter has been approached in a couperative spirit, and a joint committee representing marine, fire, and casualty interests has been created in order to work out a solution. Inland Marine Underwriters Associa- tion- Another important development of recent years was the establishment in 1930 of the Inland Marine Underwriters Association. The purposes of this organization are to develop and facilitate scientific and intelligent underwriting, to study and promote simplification and accuracy of rating methods and rate presentation, to harmonize rates and rating methods, to secure adoption of suitable forms and clauses, to promote loss prevention measures, to prevent unfair practices, and in general to stabilize the conditions under which inland marine insurance is written. Since it was not deemed practical at the outset to extend the Association s jurisdiction over all inland lines, the classes of business immediately comprehended by it were personal effects and/or tourist policies, personal jewelry and fur policies, parcel post policies (both certificate and open forms), and jewelers block policies. Extension to other classes is planned on the following basis: &dquo;classes not susceptible to specific rating to be subject to formu- 1~ rating, and such classes not sus- to be ceptible to formulae rating subject to uniform clauses and policies where practicable and otherwise subject to the Association rules and regulations.&dquo; David McCahan, Ph.D., who is now Assistant Professor of Insurance at the Wharton School of Finance and Commerce, as well as secretary and assistant dean of the American College of Life Underwriters, is the author of " State Insurance in the United States " and of numerous articles on state insurance, transportation insurance, and life insurance. For a number of years Dr. McCahan was associated with the Chamber of Commerce of the United States as assistant manager of its insurance department.