COINSURANCE. .k large proportion of fires re sult in only partial losses to insured property. In the absence of any stipulation to the con trary, a partial loss must he paid in full, pro vided it does not exceed the amount of the insur ance. There sic two unfortunate results of this arrangement. One is that it increases the com plexity of the calculation which an insurance company must make in estimating the risks it assumes. The other is that in the long run per sons insuring their property for a sumll part of its value gain at the expense of those carrying insurance more nearly equal to the value of their property. If, for example, of two similar pieces of property each worth $10,000, one is insured for $4000 and the other for $8000, the premium paid by the owner of the former property is only one-half of that paid by the owner of the latter. If now each piece is damaged by fire to the ex tent of $3000, each owner recovers the full amount of the loss. The ratio of premium to indemnity is therefore twice as great in the one case as in the other. There are two possible reme dies: The premium rate might be lowered as the ratio of insurance to value was increased, since the actual risk for $1000 insurance dimin ishes purl passe. A very different remedy is usu ally adopted, however, known as coinsurance. A coinsurance clause attached to a fire policy stipu lates that the owner of insured property must insure for a certain percentage—usually SO per cent.—of its value; or, if he carries less insur ance. must be held to be his own insurer for the difference between the amount carried and the 80 per cent. This provision has no effect upon the amount of the indemnity received in the case of total loss. In the case of partial loss,
however, it does away with the discrimination in rates in favor of small insurance. To recur to the example already used, the two pieces of property, each worth $10,000, must, in accord ance with the coinsurance clause, he insured for $8000. The owner who has only $4000 of insur ance is considered to carry his own insurance for the other $4000. If the two pieces of property were totally destroyed, each owner would re ceive as indemnity the amount stated in the face of the policy, and the ratio of premium to in demnity would be the same in the two cases. If, on the other hand, each piece of property was damaged to the extent of $3000, the owner car rying only $4000 of insurance would receive but $1500 of indemnity, since as self-insurer for one half of the required SO per cent., he must bear one-half the loss. The other owner, having insured his property for the full SO per cent., would receive the fall $3000 from the insurance company. In this way the ratio of premium to indemnity is made uniform in the two cases. The principle of coinsurance is that the entire property at risk should bear the burden of the loss of any part of it. It is a principle long familiar in marine insurance under the name of 'average.' It is applied to all fire-insurance policies issued in France, Germany, Belgium, and Russia. It is clearly in the interests of justice, since it brings about a more equitable distribu tion of the cost of insurance.