Chapter VIII: Part III: Banking, Loans, Money and Credits (1)

=153.Banks Defined and Classified.= A bank may be defined to be an institution authorized to receive money for deposit, to make loans, and to issue its promissory notes payable to bearer. A bank may have any one, or all of the above enumerated powers. Some banks have powers in addition to those above enumerated. In the absence of prohibiting statute, any person may operate a private bank. The states generally have statutes authorizing the creation and regulation of banks. At the present time, most banks are incorporated companies.

As to the source of their existence, banks may be said to be _national_ and _state_. National banks are organized under United States statutes regulating their creation and existence. National banks are discussed more at length under a separate section. All banks other than national are created under state laws, and are called state banks.

As to their nature, banks are generally divided into three kinds, _banks of deposit_, _banks of circulation_ and _banks of discount_. Banks authorized to receive money for safe keeping are banks of deposit. Banks authorized to purchase commercial paper by charging interest in advance are banks of discount. Banks authorized to issue their own promissory notes payable to bearer, and actually issuing such notes, are banks of circulation. A single bank may be a bank of discount, of circulation, and of deposit, or it may be a bank of discount, of circulation or of deposit. The ordinary savings bank is a common example of a bank of deposit. A national bank issuing its notes is a common example of a bank of circulation. A national bank usually purchases notes for less than their face value, or makes loans upon notes deducting its interest in advance, making it also a bank of discount.

=154. Functions and Powers of Banks.= At the present time most banks are incorporated companies. Their authority to exist is given them by the state. Their powers are limited by the provisions of their charter. This question is discussed at length in the section on _corporations_. A bank cannot engage in business outside the provisions of its charter. Incorporated banks are permitted to pass by-laws by which their functions may the more readily be carried out, and by which the duties of their agents are restricted or defined. Reasonable by-laws, if brought to the notice of third persons, also well recognized customs and usages, bind third persons in their dealing with banks. Ordinarily, banks have the power to borrow money, but do not have the power to deal in real estate. National banks have no power to loan money on real estate, but they are permitted to take real estate mortgages to prevent losses on loans already made. A bank may also purchase real estate sufficient for the construction of a banking building. Banks have the power to collect their own paper, and to act as agents for persons and banks in collecting their paper. The ordinary functions and powers of banks are discussed under separate sections.

=155. Deposits.= The primary function of a bank is to receive money from third persons and to loan money to third persons. Money received from third persons is money received on deposit. Banks cannot be compelled to receive money for deposit from anyone. They are permitted to exercise their discretion and reject such deposits as they choose. The ordinary method of making deposits is by delivery of currency consisting of gold, silver, copper, and nickel coin, bank notes and checks to an agent of the bank. The agent authorized to receive deposits is usually called the _receiving teller_. Deposits are usually entered by the receiving teller in the customer's pass book. In commercial banks, deposits are ordinarily withdrawn by check, without presenting the pass book. Savings banks ordinarily do not permit their customers to use checks, but require them to present their pass books when drawing money. The amount withdrawn is entered in the pass book, and the balance brought down. When money is deposited generally, the bank has the right to mingle it with its own funds. It then becomes the debtor of the depositor in the amount of the deposit. If a fund is deposited with a bank for a special purpose, and the bank is so notified, or if papers, such as securities, bonds and certificates of stock are deposited for safe keeping only, they are known as _special deposits_ and are not mingled with the general funds. Subject to the reasonable rules of the bank, a general deposit is subject to withdrawal at the will of the depositor.

=156. Checks.= A check is a written order upon a bank for the payment of a specified sum of money payable upon demand. Commercial banks generally do a checking business. Some banks, such as savings banks, do not permit depositors to draw checks against their deposits. Savings banks not doing a checking business, usually require their depositors to present their pass books when drawing money. Even though written orders are given to third persons, the pass book must be presented by the third person to enable him to obtain the money on the order. In case of banks which do a checking business, the depositor is permitted to draw checks in any amount, payable to any person. The bank must honor these checks so long as the maker's deposit is sufficient to pay them, and the person presenting them is properly identified. Upon payment of a check, the bank keeps it and deducts the amount from the maker's deposit. These paid checks, or vouchers, are usually returned by the bank to the customer, every thirty days, with a statement of his account. The customer then examines these checks and compares them with his books, and the bank's balance with his balance, for the purpose of discovering errors.

A check is payable on demand and should be presented for payment within a reasonable time after receipt. If the receiver lives in the same place as the maker, the check should be presented during the business hours of that day. If the receiver resides in a distant place, the check should be presented as soon as possible under the circumstances. As long as the bank has funds of the maker, it must honor his checks. If the bank has some funds of the maker, but not sufficient to pay the check presented, it should refuse to pay anything thereon. If the bank refuses to honor a check when the maker has sufficient funds to meet it, the bank is liable at the suit of the depositor, for any damages suffered.

Receiving a check does not of itself extinguish the debt. The taker of the check may present it for payment, and if payment is refused by the bank, and the maker is notified promptly, the taker may sue the maker on the check, or on the debt for which the check was given. Certified checks are discussed under the section on _negotiable instruments_.

=157. Loans and Credits.= One of the primary functions of banks is to make loans. Different kinds of banks are authorized to make different kinds of loans. Savings banks generally are authorized to make loans on real estate. National banks are not permitted to loan on real estate. Banks ordinarily are permitted to discount notes. By discounting promissory notes is meant purchasing them at a sum less than their face value, partially, at least, on the credit of the seller. Banks are not permitted to discount notes at usurious rates of interest. Banks are restricted by their corporate charters as to the nature of the loans they can make.

_Credit_ is the term applied to a present benefit obtained for an agreement to do something in the future. A person's credit depends largely upon his business reputation and assets. Companies called mercantile agencies are organized for the sole purpose of furnishing credit information. These companies publish books giving the trade records and estimated assets of business men in the various cities and towns of the different states. These books are sold to wholesalers, or to anyone desiring credit information. Companies also employ men to obtain and furnish special reports on people's assets and business reputation. The bulk of business is done on credit. Compared with the total amount of business transacted, a small amount is done for cash. Credit is an important part of a business man's capital.

=158. Rights and Obligations of Banks in Case of Forged, Lost, or Stolen Checks.= Forgery or material alteration of a negotiable instrument renders it void. Banks are authorized by depositors drawing checks to pay valid checks, but not forged ones. Ordinarily, a bank must stand the loss if it pays a forged check. The only exception is in case the depositor has so carelessly drawn the check that it can be forged without the bank being able to discover the forgery by the exercise of due care. Most jurisdictions also hold that a depositor must examine his returned checks within a reasonable time after their return by the bank. If a forgery is not reported within a reasonable time after the return of the check by the bank, the check is presumed to be genuine, and the depositor cannot thereafter complain. Where a check is payable to bearer, or payable to order, and indorsed in blank by the payee, making it payable to bearer, and is lost or stolen, an innocent party purchasing it from the finder or thief gets good title to it. Such paper circulates like money without further indorsement. A bank in paying such a check to a _bona fide_ holder who takes it from a thief or finder without notice of its having been lost or stolen, is not liable to the maker for the loss.

=159. National Banks.= The constitution of the United States does not expressly give Congress the power to create national banks but it gives Congress the power to collect taxes, duties and imports, to borrow and coin money and to make all loans necessary to carry into execution the powers expressly given. To carry into effect the powers given relating to money, Congress is deemed to have the power to create national banks. Congress has passed laws under which national banks may be organized by associations consisting of not less than five natural persons who are required to sign and file articles with the comptroller of currency at Washington, D. C., which articles shall specify the name of the proposed bank, its place of operation, its capital, the names and residences of its shareholders, and the number of shares held by each. National banks may be organized with a capital of not less than twenty-five thousand dollars ($25,000.00) in cities whose population does not exceed three thousand, and with a capital of not less than fifty thousand dollars ($50,000.00) in places whose population does not exceed six thousand inhabitants, and with a capital of one hundred thousand dollars ($100,000.00) in places whose population does not exceed fifty thousand inhabitants, and with a capital of not less than two hundred and fifty thousand dollars ($250,000.00) in places exceeding fifty thousand inhabitants.

Before commencing business, national banks are required to transfer and deliver to the treasurer of the United States, United States registered bonds, in amount not less than thirty thousand dollars ($30,000.00), and not less than one third the paid-in capital stock. Upon making such a deposit of bonds, the comptroller of currency is authorized to issue to the bank, notes of the bank in different denominations, equal to 90% of the market value of the bonds deposited. These are the only circulating notes national banks are authorized to use. The comptroller of currency is authorized to replace worn notes or returned notes, proof of the destruction of which is furnished. National banks in the seventeen largest cities of the United States are required to keep on hand, money equal to 25% of their circulating notes and deposits. National banks of all other places are required to keep on hand, money equal to 15% of their circulating notes and deposits. National banks are not permitted to make loans on real estate or on their own stock, except to protect loans already made. In case of insolvency of a national bank, the stockholders are liable in an amount equal to the par value of their stock, in addition to their liability to pay the par value of their stock subscriptions. The shareholders having legal title to the stock at the time of insolvency of the bank are the ones liable for the additional liability. National banks may charge the rate of interest authorized by statute of the state where the bank is located. If unlawful interest, called _usury_, is charged, the bank forfeits the entire interest. If the usurious interest has been paid by the borrower, double the amount of the usury may be recovered from the bank by the borrower.

National banks are authorized to buy drafts and notes, to discount commercial paper, to borrow and loan money, to deal in government bonds, to loan money on collateral, but not to guarantee or indorse commercial paper, except in the transaction of their legitimate business. They are permitted to discount or purchase bills and notes, but not to charge more than the legal rate of interest, even though the paper is purchased. They may charge reasonable rates for exchange in addition to interest.

=160. Savings Bank and Trust Companies.= All banks other than national are organized under state laws, and are known as _state banks_. The most common kinds of state banks are savings banks and trust companies. Savings banks ordinarily receive money for safe keeping, acknowledging receipt by entering deposits in a pass book which the depositor presents upon making deposits, and upon withdrawal of funds. Upon drawing funds, the amount is deducted from the balance shown in the pass book and the balance brought down. Savings banks ordinarily do not permit depositors to draw checks against their accounts. They are required to present their pass books in person, or to give them to an agent or payee designated in a written order to be presented in withdrawing deposits. If pass books are lost, savings banks are not obliged to pay deposits unless indemnified against loss by the depositor. Savings banks are permitted to make loans on real estate.

Trust companies usually have all the power of savings banks with the added power to act in trust capacities as trustees of estates and for bond holders, as executors, etc. They usually do a checking business for the accommodation of their depositors.

=161. Clearing Houses.= A clearing house is an association of banks of a certain locality, usually of a city, organized for the convenience of its members in making settlements with each other. As a matter of practice, holders of checks do not personally present them for payment at the banks on which they are drawn, but deposit them with the bank with which they do business. These banks collect them from the banks on which they are drawn. Each day, a city bank has deposited with it a large number of checks drawn on other banks of the same city. It would involve much labor to present these checks for payment on the banks on which they are drawn, and secure currency or checks therefor. For convenience, banks organize clearing houses for the purpose of making daily exchanges, with each other, of checks. If _Bank A_ has deposited with it $1,000.00 of checks on _Bank B_, and _Bank B_ has deposited with it $1,100.00 of checks on _Bank A_, the agents of the two banks meet at the clearing house, and exchange checks and _Bank A_ pays _Bank B_ the difference between the total amount of checks exchanged, or $100.00. If the membership of the association consists of twenty-five banks, the principle is the same, the members exchange checks and pay each other the difference in amount. Clearing houses have rules by which members are required to return checks not properly drawn, over-drafts, forged paper, etc. within a certain time to the paying bank, or be precluded from raising objections to the clearing house balance.

=162. Money.= Ordinarily the term, _money_, is used to designate any medium accepted by a seller from a purchaser in the sale of property. It is the thing that passes current among business men in their dealings with each other. Bank notes, checks, gold and silver, nickel and copper coin, as well as United States certificates, are money. Money is sometimes used to designate legal tender. _Legal tender_ is the medium of exchange which creditors are obliged by law to accept in payment of debts. United States notes, except for duties and interest on public debts, and gold certificates are legal tender. Gold coin and silver dollars are legal tender. Subsidiary silver coin, or half dollars, quarters and dimes, in amount not exceeding ten dollars are legal tender. Nickels and pennies are legal tender in amount not exceeding twenty-five cents. Silver certificates and national bank notes are not legal tender.

=163. Discount.= _Discount_ is money paid in advance for the use of money. It is interest paid in advance. One of the primary functions of banks is to discount negotiable paper. The states generally have laws fixing the legal and maximum rates of interest. If banks or individuals charge interest in excess of these rules, they subject themselves to the fixed penalties. In connection with usury laws, some confusion has arisen as to what constitutes a purchase and what constitutes a discount. A person is permitted to make contracts and make as large a profit as possible, if no fraud is used. If the contract involves the purchase of a negotiable instrument, as distinguished from a loan of money, he may make as large a profit as he is able. If _X_ desires to borrow $100.00 of _Y_ and _Y_ gives him the money and takes _X_'s promissory note, _Y_ can deduct only the lawful rate of interest. If, however, _X_ holds _Z's_ promissory note indorsed in blank, or payable to bearer, _Y_ may purchase the note from _X_ for any price he is able, and if he makes half the face value of it by the transaction, it is regarded as a sale, and not as a loan. This transaction does not come within the usury laws. A bank, however, by the weight of authority is not permitted to make purchases of notes in this sense. The purchase above described, if made by a bank, would be regarded as usurious. Banks may purchase notes if so authorized by their charter, but may not charge more than the lawful rate of interest as profit.

=164. Exchange.= _Exchange_ is the term applied to methods of cancelling debts and credits between persons of different places. If _X_, in Cleveland, owes _Y_, in New York, $100.00, and _Z_, in New York, owes _X_, in Cleveland, $100.00, it is cheaper and safer for _X_ to send _Y_ an order on _Z_ for $100.00 than to send legal tender from Cleveland to New York. This transaction is called _exchange_. If made between persons of the same country, it is called _domestic_ exchange; if between persons of different countries, it is called _foreign_ exchange. Banks of one city keep deposits in other cities for the purpose of selling drafts thereon to customers.

=165. Interest.= _Interest_ is the money paid for the use of money. Most states have statutes fixing the rate of interest in transactions where no rate is specified, and fixing the highest rate that may be agreed upon. The following are the rates of interest in the different states:

States. Where no rate is Highest rate that may
agreed upon. be agreed upon.
Alabama 8% 8%
Alaska 8% 12%
Arizona 6% any rate
Arkansas 6% 10%
California 7% any rate
Colorado 8% any rate
Connecticut 6% 15%
Delaware 6% 6%
District of Columbia 6% 10%
Florida 8% 10%
Georgia 7% 8%
Idaho 7% 12%
Illinois 5% 7%
Indiana 6% 8%
Iowa 6% 8%
Kansas 6% 10%
Kentucky 6% 6%
Louisiana 5% 8%
Maine 6% any rate
Maryland 6% 6%
Massachusetts 6% any rate
Michigan 5% 7%
Minnesota 6% 10%
Mississippi 6% 10%
Missouri 6% 8%
Montana 8% any rate
Nebraska 7% 10%
Nevada 7% any rate
New Hampshire 6% 6%
New Jersey 6% 6%
New Mexico 6% 12%
New York 6% 6%
North Carolina 6% 6%
North Dakota 7% 12%
Ohio 6% 8%
Oklahoma 6% 10%
Oregon 6% 10%
Pennsylvania 6% any rate
Rhode Island 6% any rate
South Carolina 7% 8%
South Dakota 7% 12%
Tennessee 6% 6%
Texas 6% 10%
Utah 8% 12%
Vermont 6% 6%
Virginia 6% 6%
Washington 6% 12%
West Virginia 6% 6%
Wisconsin 6% 10%
Wyoming 8% 12%

=166. Usury.= _Usury_ is the term applied to interest charged in excess of the rate allowed by law. The states differ in the rate fixed by statute as the legal rate. The most common penalty fixed by statute of the different states, is forfeiture of all interest.

INSURANCE

_167. Insurance Defined._ _Insurance_ is the name applied to a contract, by the terms of which one party, in consideration of a certain sum of money, agrees to protect another to a certain specified degree against injuries or losses arising from certain perils. The kinds of insurance are almost as numerous as the kinds of perils to which persons or property may be subjected. The nature of insurance contracts are such that legislatures of the states have the power to define what classes of persons may engage in the insurance business. Some states provide by statute that only incorporated companies shall transact the business of writing insurance policies, and that these companies shall be subject to stringent state supervision and inspection. States have the right to stipulate upon what terms foreign insurance companies shall have the right to transact business within their borders, and may exclude them from transacting business if they refuse to comply with such provisions. The United States Constitution provides that interstate commerce shall be under the control of United States Congress. The Supreme Court of the United States has decided that insurance business is not interstate commerce. Therefore the states may determine upon what terms insurance companies may transact business within their territory. Unincorporated companies as well as individuals may engage in the business of writing insurance, if it is not provided otherwise by statute.

=168. Nature of Insurance Contract.= An insurance policy is a contract requiring competent parties, mutuality, consideration and all the elements necessary to make any kind of a contract. An insurance contract is peculiar in that it binds the insurer to pay damages for losses or injuries arising out of uncertain perils or hazards. It is in the nature of a gambling transaction. A large number of persons pool a portion of their assets, in order to pay losses of a certain character likely to befall only a small portion of the persons entering into the pool. For example, if ten thousand persons pay one dollar each to establish a common fund to protect the members against losses from fire, they do so under the belief and expectation that but few of the number ever will sustain loss from the peril of fire. An insurance contract is so closely akin to a gambling contract that persons are not permitted to take insurance on property, or upon the lives of persons, unless they have an individual interest, which they should have a purpose or interest in protecting outside of a mere disposition to wager. This interest is called _insurable interest_ and is discussed under a separate section. It is true that many kinds of life insurance policies protect against death, and that death is an event certain to occur to the insured, but the real purpose of the policy is to give protection against the uncertainty of the time of death. The uncertainty of the thing sought to be protected against is as great in life insurance as in any kind of insurance.

=169. Parties to Insurance Contracts.= Primarily there are only two parties to an insurance contract, the party to be paid for the loss, in case the event insured against occurs, who is called the _insured_, and the party, who for a consideration agrees to pay an amount certain, or to be determined upon the happening of the uncertain event. This party is called the _insurer_ or _underwriter_. In many insurance contracts, a third party is interested. For example, _A_ may insure his life in _B Co._, for the benefit of his wife, _C_. _C_ may have nothing to do with the contract except being named as beneficiary thereunder. She pays nothing for this benefit. It is a contract made for her benefit. After she has been made beneficiary, _A_ cannot change beneficiaries without the consent of _C_. In case of _C's_ death, _A_ may voluntarily name another beneficiary. If _A_ is indebted to _B_, and _B_, considering _A_ insolvent, desires to secure the debt by taking out a policy of insurance on _A's_ life in the _C_ company, he cannot take out such a policy without the consent of _A_. While a third person may be interested in an insurance contract, or his consent may be necessary before the contract can be made, there are primarily only two parties to the contract, the _insured_ and the _insurer_.

=170. Kinds of Insurance.= Probably the first kind of insurance written was marine. The next kind was fire; this was followed by life insurance, and this in turn, by the many varieties of modern insurance covering almost all kinds of hazards imaginable. The following kinds of insurance are in common use: marine, fire, life, accident, tornado, graveyard, fraternal, fidelity, boiler, credit, guaranty title, plate glass, mutual benefit, employer's liability, hail, hurricane and health. No attempt is here made to discuss all the different kinds of insurance. An endeavor is made to discuss some of the fundamental legal principles connected with the most common kinds of insurance. These principles apply to all kinds of insurance.

=171. Insurable Interest.= Courts refuse to recognize the validity of insurance contracts, unless the party taking the insurance has a pecuniary interest, present or reasonably expected, in the life or property insured. Such an interest is known in law as an _insurable interest_. Insurable interest cannot be exactly defined. It depends upon the circumstances surrounding each particular case. Some things have been decided by the courts to constitute an insurable interest. Cases are continually arising, however, which present new features which must be decided upon their merits. Insurable interest can only be described, it cannot exactly be defined. It is sometimes said to be a money or pecuniary interest possessed, or reasonably expected, by the party entering into the insurance contract. A father may insure the life of his child, of his wife, or his servant under contract for a period of service. A party cannot, however, insure the life of a person with whom he is in no way connected by close blood relationship, or upon whom he does not depend for present or future support. Such a contract is regarded as a mere wager, which a sound public policy refuses to enforce, or even to recognize as valid. A person may insure a growing crop, and the life of animals owned by him. A mortgagee, mortgager or pledgee of property may insure the property. A creditor may insure the life of his debtor; a person may insure his property against robbery. In fact a person may insure the life of a person or any property belonging to him or to another, the loss of which will cause him a pecuniary loss.

In case of life insurance policies, if there is an insurable interest at the time the insurance contract is made, the policy is valid, even though the insurable interest afterwards ceases. Any relationship, either by blood or marriage, close enough to make it of pecuniary advantage to the party taking the insurance to have the insured continue to live, is regarded sufficient to constitute an insurable interest. It has been held that a brother has no insurable interest in the life of his brother, nor a granddaughter in the life of her grandfather, nor a son-in-law in the life of his mother-in-law. A parent, however, has an insurable interest in the life of his child or wife; or a granddaughter in the life of her grandfather if she depends upon him for her support. A person may insure his own life or property in favor of any one else. The question of insurable interest arises only in case one endeavors to insure the life of another, or the property of another in which one has only a slight interest.

=172. Forms of Insurance Contract.= The states generally provide by statute, that to be enforceable, contracts to answer for the debt, default or obligation of another, shall be in writing (See _Statute of Frauds_, chapter on Contracts.) The courts have decided that an insurance contract is not a contract to answer for the debt, default or obligation of another, but a direct contract by which the insurance company for a consideration agrees to pay its own debt in case of loss on the part of the insured. Insurance contracts need not be in writing. Oral contracts of insurance like other simple contracts are binding upon the parties thereto. For example, _A_, representing an insurance company, meets _B_, and agrees orally to insure _B's_ house from twelve o'clock of a certain day, and accepts the premium for one year's insurance. The house burns the evening of the day after the insurance is to become effective. _A's_ insurance company is bound by the oral contract of insurance. If _A_ is not permitted by his company to make oral contracts of insurance, and _A_ so tells _B_, or if _B_ knows of this fact, the contract is not binding, since _A_ acts without authority. If _A_ meets _B_ on Monday, and orally agrees to procure for him a written policy of insurance on _B's_ house to take effect from Monday noon, and _B's_ house burns Tuesday morning, _A_ having failed to procure the written policy of insurance for _B_, the insurance company is not liable to _B_ for the loss. _B_ had a contract with _A_ by the terms of which _A_ promised to procure a policy of insurance for _B_. _A_ did not orally promise to insure the house for _B_. _B_ has an action for damages against _A_, but not an action on a contract of insurance against the company.

Insurance agents are often authorized to issue receipts, called _binders_, to the effect that insurance has been contracted by a party from a certain time. These binders constitute sufficient evidence to enable the insured to enforce his contract of insurance. Agents are sometimes authorized to enter a memorandum in their books of insurance, called _entries_ in their binding books. These constitute sufficient evidence of the formation of a contract between insurer and insured, to enable the latter to enforce his contract in case of loss.

=173. Warranties and Representations in Insurance Contracts.= The term, _warranty_ is commonly used in connection with contracts of sales of personal property, where it is used to designate a collateral contract connected with the principal contract in question. In connection with insurance contracts, it means a statement or stipulation which, by reference or express term, is itself made a part of the contract of insurance. The principal distinction between a warranty in connection with sale of personal property, and in connection with contracts of insurance, is that in the former case, breach of warranty usually does not discharge the contract, but simply gives rise to an action for damages, while in case of contracts of insurance, breach of warranty discharges the contract itself. Life insurance companies generally require formal written application by which the applicant for insurance is required to answer questions. These questions and answers are made a part of the policy or contract of insurance, either by reference, or by incorporation, and become warranties. If they are not true, the policy may be avoided by reason thereof. To constitute a warranty, a stipulation must be made a part of the insurance contract either by direct reference, or by express incorporation therein. To constitute a warranty, the contract of insurance must contain a stipulation that the statement or assertion in question is a warranty. If a warranty proves false, no matter if innocently made, the contract is discharged thereby. Warranties are strictly construed. Much injustice has been done by reason of warranties in insurance contracts.

Some states provide by statute, that neither the application for insurance, nor the rules and regulations of the company shall be considered as warranties unless expressly incorporated in the policy as warranties. A distinction is made between representations and warranties. A representation is a statement made as an inducement to enter into a contract of insurance. It is regarded as one of the preliminaries to the contract of insurance and not as a vital part of the contract itself. If a representation proves not to be true in some particular, the contract of insurance is not discharged by reason thereof. To constitute a ground for avoiding a contract, a representation must be false, fraudulent, and material to the contract. It is sometimes said that a warranty is a stipulation in the contract of insurance itself, and must be complied with whether true or not, while a representation is usually given verbally, or in a separate document, and need only be substantially complied with.

In case of doubt as to whether statements are representations or warranties, courts incline toward treating them as representations. Answers to questions were made in an application for insurance followed by the statement, "The above are true and fair answers to the foregoing questions in which there are no misrepresentations or suppression of facts, and I acknowledge and agree that the above statement shall form the basis of the agreement with the insurance company." The policy of insurance did not state that these questions were incorporated as warranties. In a suit on the policy, the court held the answers to be representations and not warranties.

=174. Life, Term, and Tontine Policies.= _Life policy_ is the term applied to a contract of insurance payable only at the death of the insured. _Term_ or _endowment policy_ is the term applied to insurance payable at the death of the insured, or at the expiration of a certain term or period of years, if the insured survives such period. The term, _tontine_ insurance, is the name applied to insurance paid out of the proceeds of unpaid policies during a certain period or term. If the insured survives the term, and pays the premium he benefits by receiving a share of the proceeds received from the policies of those members who do not survive the period, or who let their policies lapse for other reasons. The term is taken from the name of the person who devised the plan. It is sometimes called _cumulative dividend_ insurance. It is written in many different forms.

=175. Marine Insurance.= Contracts of insurance against injuries to a ship or cargo at sea are called _marine_ insurance contracts. This is the oldest form of insurance. In securing insurance of this character, the insured impliedly warrants that the vessel is seaworthy. This is the only kind of insurance in which there is an implied warranty. The term _general average_ is used in connection with marine insurance. If it becomes necessary to sacrifice a part of a cargo to save the balance, the owners of part of the cargo saved, together with the owners of the boat, must contribute _pro rata_ toward the loss of the party whose goods are sacrificed. That is, all owners of cargo and boat must stand the loss in proportion to their holdings. The one whose goods are sacrificed is placed in no better or worse situation than the others.

=176. Standard Policies.= Some states require by statute, that insurance companies issue policies, the terms of which are fixed by statute. This gives the insured the benefit of a uniform policy, the terms of which are easily comprehended, and which are the same in all cases. These statutory policies are known as standard policies.

=177. Suicide Clauses.= Contracts of insurance frequently contain the stipulation that the contract shall be void if the insured suicides. This stipulation is enforceable if it can be proven that the insured suicided while sane. It is generally held to be unenforceable if the insured suicided while insane. An insurance company may stipulate that the contract shall be void if the insured suicides when either sane or insane. Such a stipulation is enforceable. The ordinary insurance contract, however, which contains any suicide clause provides against suicide only, and does not contain any stipulation as to the sanity of the insured at the time he commits the act. It is usually held that the burden is upon the insurance company to prove that the insured was sane at the time he committed suicide. If a policy contains no suicide clause whatever, suicide will not avoid the policy unless it is proven that the purpose of the suicide was to defraud the insurance company. If it is proven that one takes out a policy of insurance with the intent to commit suicide, the policy is not enforceable in case of suicide.

=178. Fidelity and Casuality Insurance.= Contracts of insurance by which the honesty and faithfulness of agents and employees are insured are termed fidelity insurance contracts. _A_, a bank, employs _B_ as clerk. _A_ requires _B_ to furnish a bond, by the terms of which the signers of the bond agree to pay _A_ for any losses arising from _B's_ dishonesty or carelessness. This bond or contract is known as a _fidelity insurance_ contract.

Insurance contracts providing against losses arising out of accidents to property are termed _casualty insurance_. Losses by theft or burglary, or from steam boiler explosions are common examples.

=179. Reinsurance.= One insurance company may insure its own liability upon policies issued, by entering into separate contracts covering the same risks with other insurance companies. For example, _A_, an insurance company, insures _B's_ factory for $1,000.00. _A_ may in turn insure its liability to _B_, by entering into a contract with _C_, another insurance company, by the terms of which _C_ agrees to insure _A_ against loss upon _A's_ contract with _B_. _A_ is not permitted to bind _C_ by a greater responsibility than _A_ is bound to _B_. In case _B's_ factory is burned, in the absence of express stipulation to the contrary, _A_ may recover from _C_ regardless of whether he has first paid _B_. Even though _A_ is insolvent and unable to pay _B_, this is no defense to _C_ on his contract with _A_. _C_ must pay _A_ regardless of the insolvency of _A_. In case _B_ has a fire and _A_ settles with him for $500.00, _C_ is liable to _A_ for only $500.00. That is _C's_ liability to _A_ is the same as _A's_ liability to _B_, unless by the terms of the re-insurance, _C_ assumes only a portion of _A's_ liability to _B_. In this event _C_ must pay _A_ the pro rata share of _A's_ liability to _B_. _B_ in no event has any rights against _C_. _B's_ contract is with _A_, and the fact that _A_ has entered into a contract with _C_ involving the same subject matter, gives _B_ no rights against _C_.

=180. Assignment of Insurance Policies.= By _assignment_, is meant a sale or transfer of some intangible interest by one person to another for a valuable consideration. In case of insurance contracts other than life, no real assignment can be made. The person whose property is insured is the one who really benefits by the contracts of insurance. Before loss, an attempted assignment of the insurance policy amounts merely to a designation of the person to whom the insurance is to be paid. In case of loss, the original party insured still holds the property insured or the insurable interest, and any breach of the insurance contract on his part avoids the contract. A policy of insurance cannot be assigned without the consent of the insurance company. If an attempt is made to transfer an insurance policy other than life, before loss, without the transfer of the property itself, the transaction does not amount to an assignment, but amounts to a contract between the seller and buyer, by which the latter is entitled to receive the proceeds of the policy if any ever arises. So far as the insurance company is concerned, acts of the seller after the attempted assignment are as complete a defense as before. If the property insured as well as the insurance policy is transferred to another, with consent of the insurance company, this is not an assignment, but amounts to a new contract between the insurance company and the purchaser. After a loss has occurred, the right of the insured against the insurance company amounts to a debt, which may be assigned the same as an ordinary debt.

In case of life insurance, if a third party has been named as beneficiary, he is supposed to have such an interest in the policy that a change of beneficiary cannot be made nor can an assignment of the policy be made without his consent. In case the proceeds of a life insurance policy are payable to the insured himself, or to his estate, the policy may be assigned at the will of the insured. If the policy provides against assignment, it cannot be assigned. Otherwise, it may be transferred as collateral security, or sold outright at the will of the insured.

=181. Open and Valued Policies, and Other Insurance.= Policies or contracts of insurance are said to be _valued_ or _open_, depending upon whether the amount to be paid in case of loss is agreed upon in advance. Life insurance policies are examples of valued policies. The insurance company agrees to pay a certain fixed amount in case of death of the insured, or at a certain time. Fire insurance policies usually are open policies. The insurance company agrees to pay the amount the insured loses by fire which destroys or injures certain specified property. The fact that a limit is placed upon the liability of the insurance company does not make the policy valued. If, however, the insurance company agrees to pay a certain fixed amount in case of loss by fire the policy is valued.

A person may take as much insurance upon his life as he pleases, so long as he reveals the facts to the companies with whom he contracts. In case of insuring property, the insurer is not permitted to recover in excess of the value of the property, regardless of the amount of insurance he carries. If an insurer takes out a policy of insurance upon property already insured, he must not conceal this fact from the subsequent insurer. The second policy will provide for payment, in case of loss in excess of the first insurer's liability, but not in excess of the value of the property. Or it will provide that in case of loss each policy shall share the loss in the proportion that the amounts of the policies bear to the loss.

SURETYSHIP

=182. Nature of Contracts to Answer for the Debt of Another.= In the transaction of business, many contracts are made to answer for the debt or obligation of another, as distinguished from the direct debt or obligation of the person entering into the contract. These contracts are made for the purpose of adding security to the original contract, or for the purpose of enabling the original obligor to obtain credit. The general term applied to contracts to answer for the debts of another is _suretyship_. The arrangement by which one party agrees to answer for the debt or obligation of another is a contract. This kind of a contract requires all the elements of any contract. There must be a meeting of the minds of the contracting parties, consideration, etc. If _A_ purchases goods from _B_, agreeing to pay $100.00 for them, _A's_ obligation to pay _B_ $100.00 is a primary one arising out of a simple contract. If _A_ purchases goods from _B_ agreeing to pay $100.00 therefor, and _C_, as a part of the same transaction, makes a promise in writing to _B_, to pay the $100.00 if _A_ does not pay, _C's_ obligation is one of suretyship. He is known in law as a _guarantor_. His contract is to pay the debt of another. He has agreed to pay _A's_ debt if _A_ fails to pay it. Any contract by which a person agrees to answer for the debt or default of another, no matter what its form may be, or by what technical name it may be known, is a contract of suretyship.

=183. Kinds of Suretyship Contracts and Names of Parties Thereto.= The term, _suretyship_, is the general or descriptive term applied to all contracts by which one person agrees to answer for the debt or obligation of another. It may be in the form of a contract of a surety, a contract of a guarantor, or a contract of an indorser. There are at least three parties to all suretyship contracts; the party whose debt is secured, called the _principal_; the one to whom the debt is owed, called the _creditor_; and the one promising to pay the debt of another, called the _promisor_. For example, if _A_, orders one thousand dollars' worth of merchandise from _B_, and, as a part of the transaction, _C_ promises to pay the amount for _A_, when due, if _A_ fails to pay it, the transaction is one of suretyship in which _A_ is _principal_, _B_, _creditor_, and _C_, _promisor_. A promisor may be a surety, a guarantor, or an indorser of a negotiable instrument. Whether a promisor is a surety, a guarantor, or an indorser depends upon the particular kind of a contract made. In any event it is a promise to pay the debt of another. But the conditions and terms of the agreement may make it that of a _surety_, a _guarantor_ or an _indorser_. The distinguishing features of the different kinds of promisors are discussed under separate sections.

=184. Contract of a Surety.= A surety is one who unconditionally promises to answer for the debt or obligation of another. For example, _A_ gives the following promissory note to _B_:

Chicago, Ill., Jan. 2, 1908.

Thirty days after date I promise to pay to the order of _B_--Five Hundred Dollars.

Signed--_A_.

Signed--_C_, Surety.

This note constitutes an obligation of suretyship in which _B_ is creditor, _A_ is principal, and _C_ is surety. _C's_ obligation is the same as that of _A_, his principal. By signing this note as surety, _C_ binds himself to pay the note when due. He does not bind himself to pay on condition that _A_ does not, or cannot pay the note when due, but binds himself to pay the note when due. His obligation is the same as the obligation of _A_. His obligation is not conditioned upon _A's_ failure or inability to pay. When the note is due, _B_, the creditor, may bring suit against _C_, the surety, disregarding the principal, _A_. _B_ may bring suit against _C_, the surety, without making any demand of payment of _A_, or without receiving _A's_ refusal to pay. If the note is signed by _C_ as above, without using the word, _surety_ after his name, it may be shown by oral testimony that _C_ signed as surety, if such is the fact. A surety may sign any kind of a contract as surety for another. In this event, his obligation is to do the same thing that his principal contracts to do. If the obligation of the one signing as security is conditioned upon anything, it is not the obligation of a surety, but that of a guarantor, no matter by what term designated in the contract. It has been said by some writers that a surety promises to pay the debt of another if the other does not, and a guarantor promises to pay the debt of another if the other cannot. This definition is not correct and is not supported by the cases. This definition applies only to guarantors, since it is a conditional promise to pay the debt or obligation of another. A surety's obligation is absolute, and not conditional in any way upon the failure or inability of the principal debtor to pay. In commercial practice, the contract of a surety is infrequently used as compared with the obligation of a guarantor.

=185. Contract of a Guarantor.= Anyone who agrees to answer for the debt, default, or obligation of another upon condition that the other does not or cannot pay the debt, or upon any condition whatever, is a guarantor. For example, _A_ gives _B_ the following promissory note:

Cleveland, Ohio, Nov. 27, 1909.

Sixty days after date, I promise to pay _B_, or order, One Hundred Dollars.

Signed--_A_.

The back of the note contains the following statement:

I guarantee the payment of this note when due.

Signed--_C_.

The contract of _C_ is that of a guarantor. If _A_ fails to pay the note when due, and _B_ demands payment of _A_, and promptly notifies _C_ of _A's_ failure to pay, _C_ is liable. Technically, _C_ need not be notified, but it is good business practice to give him notice. _C's_ liability depends upon _A's_ failure to pay the note when due. _C's_ liability is a conditional one as distinguished from the liability of a surety, which is absolute.

Contracts of guaranty are commonly used in commercial affairs. In obtaining credit, contracts of guaranty are common. They may be used apart from promissory notes or negotiable instruments. Any kind of an obligation or contract of another may be guaranteed. A retail dry goods merchant desires to purchase $2,000.00 worth of goods from _B_, a wholesaler. _B_ does not know _A_, but knows _C_, a friend of _A_. _B_ offers to sell _A_ the goods on credit, on condition that _A_ furnish him a letter of guaranty signed by _C_. _A_ furnishes _B_ the following guaranty, signed by _C_:

Mr. B.,

New York City.

On condition that you sell _A_ an order of goods which he may select, I hereby guarantee the payment of the amount thereof, not to exceed $2,000.00 in amount.

Signed _C_.

By this contract, _C_ binds himself to pay _B_ the purchase price of the goods, not exceeding $2,000.00, if _A_ fails to pay same.

Contracts of guaranty are of many kinds. They are frequently given to secure contracts of personal service, for the construction of buildings, for mercantile transactions, or in fact for any kind of business transaction. They are contracts, and must contain all the elements of a simple contract, such as consideration, mutuality, competent parties, etc. If a contract of guaranty is given at the time the original contract is made, and is a part of the same transaction, the consideration which supports the original contract supports the contract of guaranty. Otherwise, the contract of guaranty must be supported by a separate consideration.

=186. Contract of an Indorser.= One form of suretyship obligation, or obligations, to answer for the debt or default of another, is that of an indorser to a negotiable instrument. The contract of an indorser differs from that of a guarantor, and from that of a surety. For example, _A_ gives the following promissory note to _B_:

Chicago, Ill., Jan. 4, 1909.

Ninety days after date I promise to pay to the order of _B_, one thousand dollars.

Signed _A_.

_B_ indorses the note by writing his name across the back thereof, and delivers it to _C_ for $985.00. The contract now existing between _A_, _B_, and _C_, is one of suretyship, in which _A_ is principal, _B_ creditor, and _C_ promisor. A promisor in suretyship may be either a surety, a guarantor or an indorser. In this particular case the obligation of _C_, the promisor, is that of an indorser. The principal obligation of _C_ to _B_ is that if the note is presented for payment to _A_ at maturity, and upon _A's_ failure to pay, due notice is promptly given to _C_, _C_ will be responsible to _B_ for the amount due on the note. An indorser is also liable upon certain implied warranties in addition to his primary liability as above set forth. In the language of the courts, the technical liability of an indorser is as follows:

"I hereby agree by the acceptance by you of title of this paper, and the value you confer upon me in exchange, to pay you, or any of your successors in title, the amount of this instrument, providing you or any of your successors in title present this note to the maker on the date of maturity, and notify me without delay of his failure or refusal to pay. And I warrant that all the parties had capacity and authority to sign, and that the obligation is binding upon each of them. And I will respond to the obligation created by these warranties even though you do not demand payment of the maker at maturity, or notify me of default."