A. THE RELATION BETWEEN THE 'ENSURED AND TIIE INSURANCE COM PANT. The Risk. —An insurance contract transfers a liability to uncer tain loss of a more or less narrowly defined nature from the person insured to the insurance com For the insured it is the substitution of a definite payment or series of payments for the possibility of an uncertain loss; for the company, conversely, it is the acceptance of an uncertain liability in exchange for a definite payment or series of payments. It may be noted in passing that in the case of the mutual insurance company there is in theory the transfer of only a part of the uncertainty. The insured, being also in surer, is still exposed to some uncertainty as to the amount of loss he will sutler in the form of assessments. In practice, however, the difference between insurance in a mutual company and in a stock company is very slight, and during the present discussion may be disregarded. (Further reference to this matter will be made in consid ering the different kinds of insurance com panies.) The insurance company assumes the legal obligation of paying to the insured certain specified sums on the occurrence of certain speci fied events. It assumes these liabilities, how ever, with the certainty that in the great major ity of cases it will not be called upon to make the payments. Its actual liability is much less than its full legal liability. The actual liability which the company assumes in granting insur ance at any time is technically known as the risk. The most important question in this con nection is how the risk is determined. In seek ing an answer to this question two things have to be taken into account, the amount which the company binds itself to pay, and the probability that it will have to make payment. These two factors will be considered in turn.
The maximum amount for which the company renders itself contingently liable is usually ex pressed in the policy. This amount ought in all eases to be limited to the insurable inter est of the insured: that is, to the amount of loss he would actually suffer from the occur rence of the event against whose consequences he is insured. To promise a larger amount is to make it for the interest of the insured to bring about the occurrence of the event—a condition of things which is prejudicial to the welfare of the company. and contrary to public policy. In the
insurance of property the attempt is nearly al ways made to apply this principle. In life in surance, however, and in other forms of insur ance against loss of income from labor, no such attempt is made in many curses. A life insurance company does not undertake to limit the amount of insurance which any man may take out on his own life to the capitalized value of his in come-earning capacity, any more than it limits Lis choice of beneficiaries to those who are ac tually economically benefited by his living. It cannot lw denied that the results of this policy are in some respects very unfortunate. It leads to an increase in the incentive to commit two kinds of crimes, suicide and murder, and to a certain increase in the number of such crimes actually committed. That the situation is not intolerable is due to the fact that other motives are at work which are sufficiently strong in most eases to overcome entirely the economic motive.
Insurable interest, then, fixes the maximum amount for which a policy should be made out. insurable interest may he defined as any legal or equitable right or interest such that the con tingency insured against will result in financial loss to the insured. This definition. while not complete, covers the greater number of examples of insurable interest. Thus a mortgagee or pledgee has an insurable interest in the property mort gaged or pledged. A vendee of property under an executory contract of purchase has all insur able interest in the property. A common carrier or other bailee has an insurable interest in the goods bailed. The carrier also has an insurable interest in the prospective freight upon goods ac tually laden upon his ship or other vehicle for carriage. It will thus he seen that several dif ferent persons may have distinct insurable in terests in the same property, and that these in surable interests may in the aggregate exceed the value of the property insured.