New York Central the stock goes up two points. The man who sits at the instrument, beside the clerk who has recorded his bid, calls out to the boy at the board what New York Central is doing. The office has it entirely within its own power to say whether New York Central goes up or down. The customer, therefore, is in a gambling-house which plays with loaded dice. In case there are others in the game who have up more money on the fall of New York Central than he had upon its rise, the returns will probably be declared in his favor. If the conditions be otherwise, he may have his margin "wiped out," and he will then be left to reflect on whether he will "try the market again."

CHAPTER XIV

THE INSURANCE COMPANY

In previous chapters the nature of contracts of security has been fully gone into. Contracts of security for the payment of credit obligations are specialized The meaning forms of insurance. No better illustration of of insurance. concrete insurance may be found than the forms of personal security heretofore discussed as indorsement and guarantee. Morgan has taken notes from Gates for the payment of $300,000, with interest at 5 per cent per annum. He offers to sell these to Drexel for $305,000 -terms satisfactory-provided that Morgan will guarantee their payment. The guarantee of Morgan is a contract insuring Drexel against loss on account of default in the payment of the notes by Gates when due. An insurance policy is a contract wherein the insurer takes the risk incident to the happening of some event which will involve a loss.

insurance.

The risk on which a policy is taken out may be the non-payment of a credit instrument. A concern whose business it is to issue policies on such risks is Credit called a Credit Insurance Company. A good example of such a concern is the American Credit Indemnity Company of New York. During the year 1900 this company took risks on $15,229,031 of credit contracts, for which it received premiums to the amount of $453,420. Its losses paid were only $75,352—i. e., about one-half of one per cent of the risks taken. A wholesaler

has an opportunity to sell a bill of goods on ninety days' credit to a retail house that is not well known to him. He recognizes a profit in the transaction, but does not care to take the risk of losing the account; he therefore takes out a policy from a credit company which is in the nature of an indorsement of the credit of the concern dealt with. To obtain such a policy the wholesale house will make a statement or an exhibit of its books, indicating the average loss sustained during the last five years by failure of payment of credit accounts. This rate or proportion is taken as a marginal allowance or "self-insurance"-i. e., the wholesale house will carry its own risk equal to the average for the last five years. In consideration for the premium paid, the credit insurance company steps in and carries the risk in excess of this amount. The company may require that the house shall sell to concerns only which have a commercial rating specified in the policy; moreover, it may grade the premiums according to the ratings of customers. A similar form of insurance is that undertaken by companies in guaranteeing the accounts of building contractors in house-building operations. Instead of putting the retailer or contractor to the annoyance and necessity of having some friend guarantee his account, the wholesaler or house-owner pays to the insurance company a premium as consideration for the risk undertaken, and then makes this a part of the purchase price. For the insurance company to have undertaken a single risk would have been as dangerous as for an individual to have guaranteed the credit. Perhaps the loss of $75,000 incurred by the company above referred to in the course of its year's business grew out of six or seven contracts. If separate individuals had undertaken and sustained these losses it might have endangered their business and brought them to a condition of insolvency. The insurance company, however, suffered a loss on only one risk out of each five hundred taken. As shown before, the premiums received from the four hundred and

ninety-nine far exceeded the amount lost on the one policy where credit payment was not made. In fact, the premiums received by the company during the year exceeded the losses by $380,000. It is in the multiplicity of risks taken and the experience of business men as to the proportions of losses to risks taken, that a basis for conservative judgment is found; it is from these factors that probability of loss is determined.

Insurance
Company.

A highly specialized form of credit insurance is the Security Insurance Company. In this the policy is one of The Security reinsurance of secured credit. The contracts of security to credits issued are entered into to protect purchasers of credit instruments against loss from non-payment. These credits, together with their contracts of security, which are given to assure the payment of the credit obligations, are then taken to a security insurance company, and, the risk being a satisfactory one, a policy is issued whereby the company undertakes to indemnify the owners of these secured credits against any loss uncovered by the contracts of security. In other words, the insurance company guarantees that the security is sufficient to indemnify the owner of the credit contract against loss from non-payment. The Bond and Mortgage Guarantee Company of Brooklyn is a concern of this kind.

Title insurance.

A holder of secured credit, however, may feel entirely safe in the value of the property against which his contract of security runs-that is, his judgment may be that the property against which he holds a lien may be adequate to provide funds with which to pay the credit claim held by him in case the debtor should fail to meet his obligation when due. The only element of uncertainty may be one of title. He is not in a position to judge whether or not the party executing the mortgage has a perfect title to the property against which the lien is given. As a means of assuring himself of this he lays the transaction before a title insurance company—a