Co-insurance clauses;

              28 HASKINS & SELLS April
Co-Insurance Clauses
THE co-insurance clause is one of the
most frequently used, most severely
criticized, and most misunderstood of the
insurance clauses in general use today.
Yet it is the most reasonable and the most
equitable of them all. In Europe the fair­ness
of the co-insurance clause is well estab­lished,
the majority of the countries mak­ing
its use compulsory by law. In the
United States its use is mandatory in some
states, optional in others, and prohibited
entirely in some western and southern
states. However much has been said and
written on co-insurance, there are still
many, even some actively engaged in the
insurance business as well as legislators and
policyholders, who do not understand its
purpose and operation.
Fire insurance is one of the great neces­sities
of our business, social, and economic
life. The expense of maintaining it should
be distributed among the property owners
of the country as equitably as is humanly
possible. Insurance is in the nature of a
tax. Just as taxes of the government are
used to cover the expenses of running the
government, so the tax of fire insurance
companies is for the purpose of paying the
fire loss of the country. Each policyholder
pays his premium into a fund, which the
fire insurance company distributes among
those who suffer loss by fire. In the event
insurance were to be provided by the state
or national government it is practically
certain that an assessment would be levied
against all property subject to loss from fire
in precisely the same manner as all other
taxes are levied; that is, upon the full
assessable value of the property to be pro­tected.
In fact, it is in this manner that
the insurance tax in Germany is assessed.
Since insurance is a tax and since it
is not obligatory in the United States to
insure in total, it becomes necessary, there­fore,
to ascertain equitable principles of
assessment. There should be no discrim­ination
between individuals insuring risks
of equal hazard, just as there should be no
discrimination by a railroad between dif­ferent
shippers receiving identical service.
Each risk should contribute its equitable
proportion of the total sum collected for
loss payments. This effect is secured by
rating the several risks according to their
individual characteristics, crediting each
risk with its favorable features and charging
it with its unfavorable features. Thus,
efforts to reduce fire hazard are encouraged,
and the consumption of national wealth
by fire thereby is reduced. However, any
such scientific system of rating is impos­sible
without the feature of co-insurance.
If all losses were total, those who insured
in total would receive their reward, while
those who preferred to pay less in premiums
would be penalized accordingly. However,
the records of the leading insurance com­panies
indicate that of all the losses sus­tained,
about 65% (numerically) are $100
or less; about 30% are over $100 and less
than total; and about 5% are total. The
natural inclination, therefore, on the part