Insurance Companies v. Wright

by Samuel Freeman Miller

United States Supreme Court

68 U.S. 456

Insurance Companies  v.  Wright

THESE were actions brought by Wright against two insurance companies in New York-'The Orient Mutual' and 'The Sun'-on two policies of insurance, called open or running policies; a sort of policy which has been described in this court ^[1] as one enabling the merchant to insure his goods shipped at a distant port, when it is impossible for him to be advised of the particular ship upon which they are laden, and which, therefore, cannot be named in the instrument of assurance. The insurer upon this class of policies, of course, has no opportunity to inquire into the character or condition of the vessel, and agrees that the policy shall attach if she be seaworthy, however low may be her relative capacity to perform the voyage; and, for the additional risks he may thus incur, he finds his compensation in an increase of premium. ^[2]

The two suits brought on the two policies here, were tried together in the court below, and so argued and disposed of here; the principles in each case being confessedly, and so declared by the court, the same.

The policies professed to insure Wright against loss on one-fourth of five thousand bags of coffee, to be shipped on board of 'good vessel or vessels' from Rio de Janeiro to any port in the United States. Thus far the case was plain. The difficulty arose from certain clauses relating to the premium; of which clauses there were several scattered about the instrument. One such, just after the declaration of insurance made, was thus: 'To add an additional premium if by vessels lower than A 2, or by foreign vessels; to return 1/4 of 1 per cent. if direct to an Atlantic port.' The policies also contained this clause: 'Having been paid the consideration for this insurance by the assured at the rate of 1 1/2 per cent., the premiums on risks to be fixed at the time of the indorsement, and such clauses to apply as the company may insert, as the risks are successively reported.'

The companies here sued, though New York companies, had an agent in Baltimore, through whom they effected insurances there; and it was through this agent that the present insurances were made. His testimony went to prove that when applications were made to enter risks on running policies, the application was indorsed at once by him, and a report made to the company in New York, which named the premium, and that this was made known to the assured; that the premiums specified in the body of the policies are nominal, and the true premiums to be charged are fixed by increasing or reducing the nominal premiums; and that the nominal premiums taken on the delivery of a running policy, are returned if no risks are reported.

On the back of one or both the policies here, were entries as follows, which, it was argued, explained this alleged custom:

1855. Aug. 13. Bank Maine Law, from Rio to New Orleans, $15,750, at 1 1/2 per cent.

1855. Aug. 13. Brig Windward, from same place to Baltimore, $4750, at 1 1/4 per cent.

1855. Nov. 20. Brig T. Walters, from same place to Philadelphia, $2375, at 1 1/4 per cent.

In the present cases the plaintiff applied, in the latter part of August, 1856, to the agent in Baltimore, for an indorsement on the policy of the coffee in question, laden or to be laden on board a vessel called the 'Mary W.,' from Rio de Janeiro to New Orleans, which application was communicated to the company, in order that they might fix the premium. The company at first declined to acknowledge the vessel as coming within the description of a 'good' vessel, on account of her alleged inferior character; but the plaintiff, insisting on her seaworthiness and his right to insure within the terms of the policy, the company replied to his application: 'We shall charge the same rate as the Sun does, viz., 10 per cent., subject to average, or 2 1/2 per cent. free of average.' This the plaintiff refused to pay. The company thereupon claimed to be released from the risk. The plaintiff asserted that there was still a subsisting contract.

The coffee had been shipped on the Mary W. at Rio, for New Orleans, 12th July, 1856, when she started on her voyage. The vessel was lost on the 29th of the month upon rocks; the master being some seventy miles out of his course.

The cases had been already before this court, in 1859 (23 Howard, 401, 412), ^[3] by writ of error from a former trial. On that trial it was conceded that the vessel rated below A 2: or that the testimony might lead the jury to this conclusion. And on review here, this court held, that if this were true, then, inasmuch as no rate of premium had been fixed by the agreement of the parties, and the plaintiff had refused to pay the additional premiums which the companies had demanded, there was in reality no contract of insurance consummated as to the goods on that vessel. As the instructions of the court below had assumed that the contract was complete, although the vessel might rate below A 2, and although no agreement had been made for the increased premium, the cases were reversed and a new trial ordered. On this second trial the plaintiff sought to establish, and contended that he had established, that the vessel was within the rate prescribed, and in fact was not a vessel lower than A 2.

On this second trial, the defendants having given testimony (much the same testimony as that above mentioned as given on the first), tending to establish a usage that the premium named in the policy was in all cases a nominal one, and that the insured had a right, when the risk was reported, to vary the rate of premium as he might wish-asked the court for eleven instructions; the material parts of the seventh, eighth, and ninth being as follows:

Seventh. That if they found from the testimony and course of dealing of the parties, that the premium specified in the body of the policy was a nominal premium only, to which no attention was paid in fixing the true premium to be paid, then the company had the right to fix the premium at the time of indorsement, whether the vessel rated A 2 or not.

Eighth. That by the true interpretation of the policy, in the custom referred to in the preceding prayer, the insurer had the right, in good faith, to fix the real premium above or below the nominal premium, where the vessel rated A 2 or above it.

Ninth. That by the true interpretation of the policy, the real or actual premiums on risks were to be fixed by the companies at the time of return or indorsement of the risk, and that the premiums so fixed by them in the case of the 'Mary W.' not having been assented to by the assured, the premiums in that case cannot now be fixed by the court or jury; and further, that by the true interpretation of the policies, the real premiums on risks are not fixed therein without action by the parties, whether the vessel rates A 2 or above or below that rate.

These instructions the court refused to give, and the only question submitted to the jury was, whether the vessel in which the loss occurred did or did not rate below A 2, within the meaning of the policy.

But another question here arose; the question, to wit, by what standard was this fact, whether the vessel did or did not rate below A 2, to be fixed? Was it by that of Rio, whence she sailed? Or by that of Baltimore, where the application for insurance was made? Or by that of New York, where the policy was issued? Or by the register of the company which made the insurance?-with a conclusion that if that were silent, the vessel was not A 2 within the meaning of the contract at all. It was proved that the standard of rating was different at Rio and Baltimore from what it was at New York, being higher in the last-named city than it is in either of the former ones; so much so, indeed, that a vessel might be rated A 2, at Rio and Baltimore, which would fall below that rate at New York. It was also proved that each of the marine companies of New York keeps constantly in its employment a salaried officer, whose business it is to examine and rate vessels, and that the rates of the vessels thus examined by him are reported to the company, and entered upon a book kept for that purpose. Mr. Swan, of the house of Grinnell, Minturn & Co., large shipping merchants of New York, testified that 'the business of rating is a special one; that the companies all have inspectors to ascertain the rating of vessels, and that when a policy speaks of the rate of vessels, it is the rate of the company, and refers to that standard.' There was other testimony to the same effect. Testimony was given also, however, showing that this rating differs materially on the registers of different companies, and that we have not yet established in this country any institution similar to that of the British Lloyds; though there is one in New York calling itself the American Lloyds, and now attempting to establish for itself here the same position as the one in England, which has its inspectors in all ports of the United Kingdom, whose reports are forwarded to a board in London, which fixes the rate of all vessels which are known to it, and whose owners are willing to have them examined. In fact, with regard to this particular vessel, it appeared that in 1849, she had three different ratings out of five which it was proved had been made of her; that she left New York in the year last mentioned for California, and has never been in the port of that Atlantic metropolis since; that 1849 was the last year in which she was rated on the books of the 'Sun Mutual' at all; while the 'Orient Mutual' had not been established until 1854, and of course had her not upon any register of theirs; and shown finally that a rating seven years old is regarded by all insurers as no rating at all. ^[4]

The plaintiffs were allowed to give evidence that at Baltimore and at Rio she was rated A 2; and particularly to give in evidence a memorandum in writing, signed by the counsel of the insurance companies, and which they had given in order to expedite a trial, that the vessel in question, at the time she left Rio, 'was in a seaworthy condition, fit for any voyage, and especially for the transportation of coffee;' and by reason of thorough repairs at Rio, was 'entitled to rate, and did in fact rate, at A 2 there.' There was evidence also tending to prove that she so rated elsewhere, and ought to have so rated in New York; but much testimony also tending to prove the reverse.

The court below allowed the above-mentioned memorandum to go in along with other evidence, both evidence in favor of the plaintiff and evidence against him; including, in the former, evidence of this vessel having been newly and thoroughly repaired, and the testimony of seamen long engaged in the trade of this part of South America, and including the testimony of marine experts, and proof of the mode in which the vessel had been rated more than seven years before the policy issued. And disregarding the prayers of the defendants presented in some five or six different forms, and praying instructions that the standard of rate was to be determined by the books of the defendants and of other insurance companies in New York, charged them essentially as follows:

'If the jury should find that the rating of vessels on the registers of companies in New York, was always from personal examination by inspectors of the different companies, and should further find, that by the long absence of the said vessel from New York, she had, in the understanding and usage of underwriters in New York, no fixed rating on the registers of any of the insurance companies of that city in 1856 (the date of the contract); but would have been rated there not lower than A 2 owing to her thorough repair, had she been there for examination then the plaintiff is entitled to recover, although the jury may find that the said vessel was rated in 1848 or 1849, on the books of the defendant, below A 2; and that it was the general usage and understanding of underwriters and commercial men in New York, that the words in their policies 'not rating below A 2,' refer to the rate of vessels on the register of the company making the insurance.'

The rejection by the court of the defendant's seventh, eighth, and ninth prayers, given on pp. 459-60, and its refusal to submit, in interpretation of the contract, the practice and course of dealing between the insurance companies and its customers, as shown by the Baltimore agent, in regard to the nominal premiums, were the errors relied on in the first part of the case; as were the instructions as to the evidence of rating, and the admission of the memorandum and other evidence at Rio, those relied on in the second.

Messrs. Alexander Hamilton, Jr., Evarts, and Cutting, for the Insurance Companies, plaintiffs in error:

1. An open or running policy is issued when the shipments to be protected thereby, the time of making them, the vessel or vessels to carry them, the ports of destination, and the value or amount of the cargo, and other circumstances material to the risks to be borne by the underwriter, have no present existence, or are unknown to either of the parties. The contract is necessarily incomplete, though binding upon the underwriter, to the extent of the agreement. It contemplates that if the assured shall desire to avail himself of his right to be protected under it, he shall, when the risks to be insured are known to him, or within a reasonable time thereafter, make a declaration, return, or report of them to the underwriter, with all essential particulars, in order that the premium to be charged may be estimated by the insurer; and, if agreed to, may be entered with the particulars upon the policy, which is 'open' to receive them. ^[5] The indorsements on these very policies furnish examples by way of illustration. The indorsements specify the successive cargoes insured, the different vessels by which each was to be carried, the port of departure, the several ports of destination, the value of each different shipment, and the rate of premium charged by the insurer, and agreed to by the assured, on each risk.

Until the return, by the merchant, of risks not known at the time of making the agreement to insure, no basis exists upon which the consideration or premium for assuming the hazards can be estimated or named by the underwriter. Consequently, an open or running contract to insure separate sums upon unascertained, future, successive, and distinct shipments, to be thereafter declared or reported by the merchant, is an agreement that the underwriter will assume the risk as to them, at and from the lading thereof, in consideration that the assured will pay or agree to pay such premium as shall be in good faith named by the insurer as an adequate compensation for the risks to be assumed by him. ^[6]

As the premium or consideration to be paid must, of course, vary according to the degree of hazard of each shipment, and as this cannot be ascertained until each shipment has been made or is known, and a declaration or return thereof has been reported by the merchant to the underwriter, it is the practice to specify in these agreements to insure, a nominal or average rate of premium, which is subject to such addition or deduction as shall make the premiums conform to the established rate at the time the return is made to the company; and, sometimes, as in the present case, a further stipulation is introduced, that if the shipments shall be made by foreign vessels, or by vessels rating lower than A 2, an additional premium shall be charged. In practice no attention is paid by either party to the nominal or average consideration, specified in the agreement to insure. The premium is calculated on each shipment, separately, each case being distinct, and the rate being dependent upon the character of the vessel, the port or ports of destination, the season of the year, and other circumstances calculated to increase or to diminish the hazards. A premium note for the nominal or average premiums upon the amount subscribed, is taken at the time the open policy is issued, and is returned to the merchant in case he should not avail himself of the protection of the contract, with the exception of one-half per cent., which the underwriters, in accordance with a very ancient custom, have the right to retain, although in practice this right is seldom enforced, it being now usual to return the whole amount. ^[7] The reason for this right to retain one-half per cent. is that, as the assured may never choose to avail himself of the contract, or may put a stop to any adventures under it whenever he may think proper, while, on the other hand, the insurer can never by his own act discharge himself from the agreement, is is but reasonable that the merchant should make some compensation to the insurer for his trouble and disappointment.

The rates of premium at which underwriters can afford to take hazards is the basis upon which the whole business of insurance rests. Great discrimination and accuracy of judgment is necessary in estimating the degrees of risks. In the practical conduct of his affairs, therefore, it is vital that the insurer should have the power to determine his rate of charge, leaving it, of course, optional with the merchant to accept or to reject it. Hence, under the agreement contained in the policy in controversy, as the risks to be insured at the time when it was effected, were not known, and did not exist, it was impossible to estimate the premiums to be paid, and therefore the agreement being necessarily incomplete, various reservations were made, and amongst others, the essential one, the premiums to be fixed at the time of the indorsement, and such clauses to apply as the company may insert as the risks are successively reported.

In open or running policies, where the agreement is to insure cargo that is afterwards to be reported, and where the shipments are to be successive and independent, of distinct quantities, to be shipped at various and unforeseen times, by unknown vessels, of different classes, and of different nations, on different voyages, there must necessarily exist, as the risks are returned to the company, and the rates of premium are named by it and assented to by the assured, as many different contracts of insurance as there are different subjects to insure, and these contracts are as distinct as if each was made the subject of a separate policy. The rate of premium on each risk reported, must depend upon the particulars of each. When the company has in good faith estimated and determined the rate of premium which it deems to be commensurate with the risk reported to it, and the merchant considers it too high, and refuses to agree to it, the contract, as to that shipment, has not become complete. The merchant has the right to be protected by the policy, at and from the lading of the cargo, if he chooses to agree to pay the premium demanded by the company therefor. But if he prefers, he may decline to pay it, in which case, as the whole consideration fails, the company may refuse to enter the risk, or if an entry has been made, may strike it from their books. ^[8]

The court, therefore, erred in refusing to let the practice about these policies be shown. No instruments are so loosely drawn as policies of insurance. None depend so much, or are so frequently explained by usage, and without resort to it, it is sometimes impossible to interpret them at all.

2. The proofs admit of no dispute as to the 'rating' of the policy, referring to the 'rating' on the books of the company issuing the policy. The loosest interpretation of this word in the policy, under the evidence, cannot carry it beyond a reference to a 'rating' upon the books of the marine insurance companies in the city of New York. There is no evidence that, in 1856, the vessel in question was not a vessel 'rating lower than A 2' on the books of the Sun Mutual Insurance Company, the defendant below. Nor evidence that, in 1856, she was not one 'rating lower than A 2' on the books of the marine insurance companies in the city of New York, or of any of them. There is evidence, that in that year, she was a vessel 'rating lower than A 2' on the books of the defendant below, and of the other marine insurance companies of the city of New York; for, it is manifest that any evidence to the effect that she had, in 1856, come to be disrated, or fallen below any insurable rate, is emphatic evidence that she was a vessel 'rating lower than A 2' on such books.

II. The instructions were erroneous in their whole scope and effect. Instead of submitting to the jury the question of fact as to what was the actual rate of the vessel on the register of the defendant or other insurance companies in New York, they instructed and authorized the jury, as experts, to determine what would be the rate in New York from the actual rating on the companies' registers, in connection with other elements submitted to them. They thus took away from the companies the determination of a technical and difficult question, which, under the policy as well as usage, they had a right to decide, and substituted the rude and necessarily imperfect conclusions of a jury in its place, and permitted the jury to ascertain and determine what would be her rate, in their opinion, as against her actual rating on the registers of the insurance companies in New York.

III. So, too, it was erroneous to submit to the jury the evidence that when the vessel left Rio she was seaworthy, and in good condition, and had just been thoroughly repaired, and was specially fit for the transportation of coffee, and then rated there at A 2. Such evidence was irrelative; for no question was raised as to the seaworthiness of the vessel. Moreover, it confounded two distinct questions, the questions, to wit, of seaworthiness and of rating; and probably misled the jury. Finally, it did not tend to show her rating in New York (the only matter we assume important to be shown), as against the fact that she was actually rated there.

Messrs. Brent and May, contra:

Mr. Justice MILLER delivered the opinion of the court, and after stating principal facts, proceeded as follows:

Notes

1. Per NELSON, J.; Orient Mutual Insurance Company v. Wright et al., 23 Howard, 405.
2. Ibid.
3. See Orient Mutual Insurance Co. v. Wright, and Sun Mutual Insurance Co. v. Same Defendant.
4. The position of the vessel in 1856, with the Sun Company, as to her 'rating,' as an insurable risk, was as follows: She was rated in 1847, on the books of the Sun Company, 'A 2 1/2,' being then between one and two vears old, and then first appearing on the company's books. In 1848 she was again examined by the inspector of the company, and her condition noted, the same rate being retained. In 1849, she having been remodelled, she was again examined by the inspector, and noted in the books of the company thus: 'January, 1849, docked, caulked, and coppered; the centre-board taken out; the botton planked, repaired. California; let her go.' The inspector explained the words, 'California; let her go,' thus: 'I mean that she was bound to California; and by the words, 'let her go,' that she was not insurable for a sea-voyage; as a mark to indicate for the company to let her alone; to let her slide;' and said that the remodelling of the vessel, by taking out the centre-board, would degrade her rate from 2 1/2 to 3. He said that in 1855 and 1856, the vessel would have had no insurable rate in the Sun Company, that is, for a foreign voyage; she had a rate for coastwise voyages all the time; that rate was A 1/2.
5. 1 Phillips on Insurance, 3d ed., pp. 26, 273; Neville v. M. & M. Ins. Co. of Cincinnati, 17 Ohio, 192; S.C.. on Reversal, 19 Id., 452; Douville v. Sun Insurance Co., 12 Annual, 259.
6. Hazard v. New England Mar. Ins. Co., 8 Peters, 583.
7. 2 Arnould on Insurance, 1237.
8. Douville v. The Sun Mut. Ins. Co., 12 Louisiana Annual, 259; Neville v. M. and M. Ins. Co., 17 Ohio, 192, 205, 213; 19 Id., Same Case, 452; reversing.