Boards of Underwriters are associations composed of the representatives, managers or agents of insurance companies doing business within the state in which the association has jurisdiction. Such boards are either organized under the laws of the state, or are voluntary organizations for mutual benefit and protection.

It is the function of Boards of Underwriters to prepare and apply schedules for rating the risks located within their jurisdiction. At the present time, as schedule rating is little more than in its infancy, there are many inconsistencies in rates on similar risks in different localities. Gradually as the scheme of schedule rating develops, the comparisons of experience of different localities and the suggestions from central organizations of companies will equalize these inconsistencies and make the schedules more uniform. It will not be long before the merchant or manufacturer, who now has the satisfaction of knowing that his local competitors are rated under the same schedule as himself will have the added satisfaction of seeing his outside competition rated under a schedule so similar that it amounts to the same for all practical purposes. Nevertheless, it will always be true that certain classes of risks will be more profitable in one locality than in another. This, by reason of natural advantages and the absence of moral hazard, and this the fire insurance rate must always take into account. Absolute uniformity in schedules throughout a wide territory is hardly practicable on that account.

Board of Underwriters

In addition to the business of making rates, the local board of underwriters has other and important duties to perform. Its corps of trained inspectors is constantly at work to reduce the local fire hazard by requests, failure to comply with which, after a reasonable time, subjects a risk to an increased rate for poor condition. The local board of underwriters stands also as the protector of the public water supplies, and it has not infrequently happened that boards of underwriters, in large cities, have brought about the separation of the fire department from politics. Intelligently administered, a local board of underwriters can be of large service in a public way.

With the exception of rates of insurance on residence property, practically all fire insurance rates are now based on an amount of insurance to be carried equal to 80 per cent. of the actual cash value of the property insured. This agreement, which is a special one written in the policies, is variously known as the "80 per cent. clause" or the "reduced rate agreement." Its present use grew out of conditions such as this: One merchant with a stock valued at $10,-000 rating 1 per cent., insured his stock for $4,000 at an annual premium of $40, carrying the rest of his risk himself. Another merchant also with a stock valued at $10,000 and a 1 per cent. rate would insure for $8,000 and pay an annual premium of $80. In case of a $2,000 loss on each of these stocks, the companies would sustain a 50 per cent. loss on the first stock and a 25 per cent. loss on the second. That is, the companies would be obliged to pay $2,000 on a $4,000 policy in one case and $2,000 on an $8,000 in the other. In case of a $4,000 loss on each stock, the loss to the companies would be total in the first case and 50 per cent. in the other. A plan of rating which permitted such inequality was certainly wrong. The merchant carrying 80 per cent. insurance in this case, was twice as good a risk to the companies as the merchant carrying 40 per cent. insurance, and it became evident that the rate must be conditioned on some definite percentage of insurance to be carried. Eighty per cent. insurance was generally agreed upon as a fair requirement. Companies were quite willing that the property owner should be interested in his own risk, to the extent of taking the last 20 per cent. of fire risk, if he desired to do so. There is nothing in the 80 per cent. agreement, however, which prohibits a property owner from insuring 100 per cent. of his value, if he prefers. He may likewise, if he chooses, carry but 70 per cent. insurance, in which case he pays 10 per cent. additional rate, for the greater liability to the companies of a heavy loss. For 60 per cent. insurance, 20 per cent. penalty is added, and for 50 per cent. insurance, the penalty is 30 per cent. With less than 50 per cent of insurance, few companies would carry an ordinary risk.

Notwithstanding its general use, the 80 per cent. clause is widely misunderstood by intelligent business men, the common fallacy being that under this clause the companies agree to pay 80 per cent only of a loss. The actual operation of an 80 per cent. agreement, in case of a loss, can best be illustrated by examples: Suppose a stock, the cash value of which is $20,-000, requiring $16,000 of insurance under the 80 per cent. agreement, should be partially destroyed. In the first example, let there be $10,000 insurance, the companies pay ten-sixteenths and the owner loses six-sixteenths. In the second example, have $12,-000 insurance, companies pay twelve-sixteenths and owner loses four-sixteenths. In the third example, with $14,000 of insurance, companies pay fourteen-sixteenths, owner loses two-sixteenths. In the fourth example, there is $16,000 insurance. Here the conditions of the guaranty are complied with, and the companies pay all of the loss provided it does not exceed the face of the policy. If over 80 per cent. of insurance is carried, the guaranty is still fulfilled, and the companies pay the entire loss. In such a case, however, the loss would be spread over a larger amount of contributing insurance and fall lighter on each company, if there were more than one company.