Boston UniversityOpenBU http://open.bu.eduTheses & Dissertations Dissertations and Theses (pre-1964)

1949

Key-man insurance

https://hdl.handle.net/2144/16566Boston University

BOSTON UNIVERSITY

College of Business Administration

THESIS

Key-IJan Insurance

Raymond Smeiy Desautels(B*S. in B.A. Boston University 1942)

Submitted in partial fulfillment ofthe requirements for the degree of

MASTER OF BUSINESS ADMINISTRATION

Digitized by the Internet Archive

in 2016

https://archive.org/details/keymaninsuranceOOdesa

2

Index of Tables

Introduction

I - Human Factor In Business SuccessThe Lesson of The Depression •••••••7The Problem of Business Mortality 9

The Hximan Factor and The Profit Margin. • • • .10Authoritative Evidence. ...... ..13

II - Death of A Key-Man ~ The Problem to Every Business • .16Death at The Wrong Time ........I?Problems Created by Death of Key-Man • . • • .17Death of A Key-Man More Serious Today Than Before . .19

III - Key-Man Insurance — The Ideal Solution . . • • .21Best Means to Provide a Cash Indemnification . • .22Fire Loss versus Life Loss. .......23Cases Illustrating The Value of Key-Man Insurance

Protection. ...... ....25IV - Conclusion ........27V - Prooedursl Problems In Key-Man Cases ...... 29

Problem of Insurable Interest —"Corpus Juris" on Insurable Interest . . . .29

Rights of Insured In Key-Man Insurance# . . . .30Establishing The Human Life Value 30Re: Applicant, Beneficiary, Ovmer For The Key-Man

Insurance ...........30Authorization Of The Application . . . . . .31

Bibliography. ............32

3 .

INDEX OF TABLES

Table Title

I* Margin of Profit and Return of Capital in CorporateBusiness Organizations •••••• 11

II. U. S. Treasury Department - "Statistics of Income” - 1935. 12

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INTRODUCTION

One of the most important special applications of life in-

surance is in the business world. Business leaders have discovered the

adaptability of life insurance to the solving of some of their financial

problems. Its application as a protective measure against loss by death

of hvunan assets is still undeveloped; however, far-sighted business men

are less inclined to be without the protection which life insurance so

efficiently provides*

Life insurance is a contract for cash and it is by far the

best way to provide cash indemnification for the economic loss suffered

when a vital human unit in a business dies* The burden of risk has been

shifted from a business which usually cannot afford to bear it to a life

insurance company which has been organised and chartered for that very

purpose*

Business life insuimico is of comparatively recent origin* It

was developed in the prosperous twenties and tested in the depression*

It carried on through World War II and the period of the excess profits

tax; today, its soundness is firmly established*

Business life insurance is not nearly as common as it ought to

be. One reason is the tendency to think of this typo of insurance in

terms of Wall Street and not in terms of Main Street. We read of busi-

ness insurance in six or seven figures on the lives of captains of in-

dustry and fail to realize the importance of this typo of protection on

the life of the key-man in the average size or small business organiza-

tion*

There are four clearly defined business insurance uses:

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• Stook purchase for the close corporation*

2* Partnership*

3* Sole Proprietorship*

4* Key-Man*

In this text, we shall confine our discussion to the last use

— that of life insurance for the key-iaan*

Mr* Arthur J* Raumann, general insurance broker in New York

City, defined key-aan Insurance as follows:

”Key-aan insurance ~ that form of life insurance which willindeianify in whole or in part against financial loss that re-sults from the death of any executive vho through knowledgeand experience, management ability or technical skill holdsthe key to the future welfare of a business*” (1)

In the chapters tliat follow, we shall set forth the thesis that

the most valuable asset in any business is the human asset — more es-

pecially the key-man*

We shall establish the fact that the loss of a key-nan through

death may have disastrous results in terms of the continuance of the

business on a sound and profitable basis*

Finally, we will offer what wo believe to be the ideal solu-

tion to the problem created by the death of a key-nan — the life in-

surance solution*

(1) "The Spectator" May, 1946

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6

I. The Human Factor in Business Success

Many parsons thought that the rapid development and growth in

late years of group business organisations, such as the partnership and

the ooi*pomtion, would bring about a submerging of the individual re-

sponsibility in business management* At first glance, this may appear

to be the case*

However, Messrs* Scully and Ganse (1) tell us the truth of

the matter is that the larger and more complex forms of business organ-

isation do not eliminate or reduce individual responsibility. On the

contrary, in most instances the result is the exact opposite — namely,

an increase in the economic importance of the individual to the busi-

ness*

Briefly, let us see why this is so*

In the individually ovmed business, the individual manager

(sole proprietor) is responsible to himself alone* The future of his

business rests with himself*

On the other hand, in the partnership or the corporation the

same individual may be responsible not alone for his own interests but

also for the interests of many others as well*

The success of the organization may depend to a great degree

upon his particular ability to do well at a particular job* In the

larger business, each departraent head is regarded as a specialist; each

individual thus designated guides one phase of the firm's operations,

and all the members of the firm may be very dependent upon the continued

(1) "Business Life Insurance Trusts" — Scully and Ganse*

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exercise by an individual of his special talents*

In short, the partnership and the close corporation usually

result in the development of highly specialized individual efforts along

definitely limited lines* These individuals possess a human life value

far more difficult to replace than that of the sole proprietor ~ the

"jack-of-all-trades”* As a result, the individual may rise to oven

greater heights of personal importance as an essential part in a complex

business machine than ho could hope to achieve as an individual entre-

preneur*

The Lesson of The Depression

The importance of individxial ability and human life values in

business seemed for a time, not so long ago, to have become lost in the

accomplishments of the machine age and the extreme complexity of big

business iinder widespread corporate control* There grew up a tendency

to glorify business and its physical facilities, plant and equipment,

rather than the individuals guiding the destiny of those businesses*

The climax to this trend was reached in 1929 when cognizance was taken

of little more than rising stock values, and the h\jman element in busi-

ness was largely ignored*

Then came the collapse of the boom market and the depression*

With the "crash” of 1929 - 1930 came a re-awakening among business

leaders as to -wdxat constituted the real business values* They found

that the factors involving judgement, character, executive ability and

the personality of the key-men behind the organizations played a major

role in determining the success or complete failure of business*

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8

The depression of the early nineteen-thirties placed a sub-

stantial premium upon management ability — individual management

ability# "Why did some business institutions fail while others in the

same line continued a successful operation?

Simply because in some oases the pressure of economic cir-

cumstances became too great, the problem too difficult — not too diffi-

cult for the business, because other business organisations in the same

field continued operations, but too difficult for the men guiding those

businesses. Those businesses which survived the onslaught of the de-

pression did so because they had able leadership — men of more than

ordinary ability#

There is no indication that business problems of the future

will be less acute. Actually, the business cycle seems to bo increasing

in both frequency and intensity. Now inventions and new merchandising

methods are disturbing the markets and making old products obsolete al-

most overnight.

As the problems of management become more complex and harder

to solve, the importance of the human factor in the business grows in

proportion. I recall some years ago hearing a speaker at a Boston Life

Underwriters Association meeting make the statement that the tide of

business fortime is either coming in or going out and a human mind is

responsible for the direction of the tide.

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9 *

The Problem of Business Mortality

Volmes have been written on the mortality of mankind, how-

ever, the study of business mortality is comparatively new. We know a

great deal about the causes of death and we have made great strides in

lengthening the human life span in recent years. Only recently have

studies of any consequence been made as to the causes of business deaths

in an effort to draw from these studies the specific methods of length-

ening business life.

An investigation made by ”System” magazine has revealed that

over a period of 30 years only about 5^ of the business houses have

survived. In other words, on this basis, 30 years from today more than

94 out of each 100 business establishments will have failed.

In reflecting on these amazing figures, do not think only in

terms of General Motors, Inc. and Ford, but in terms of all business or

else the picture will be distorted by the fact that the mortality hazard

increases as the business decreases in size,

Mr, A. M, Sullivan, manager of Dun and Bradstreet, Inc,, (1)

had this to say:

"Failures generally are the result of human errors, and theseerrors are most prevalent in days of keen competition andgenerously supplied shelves and warehouses,"

The following are the eleven underlying causes of business

failure, as determined by Dun and Bradstreet, Inc,

:

(1) "Sales Management" — November, 1948

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10 ,

PERSONAL CAUSES

1* Incompetence (irrespective of other causes)*2. Inexperience (without other incompetence).3. Lack of capital (or doing too large a business for

the capital employed).4. Unwise credits to others.5. Speculation (outside regular business).6. Neglect of business (due to doubtful habits).7. Personal extravagance.8. Fraudulent Disposition of property.

NON-PERSONAL CAUSES

9. Specific conditions (crisis, depression, war, con-flagration, floods, crop failure).

10. Failure of others (of apparently solvent debtors).11. Competition.

Of the eleven causes, eight involve personal fa.ctors, and only

three are factors beyond the control of the individual. Most failures

can be charged to an individual’s lack of capacity, lack of know-how,

and lack of enough capital reserve to carry him over a bad decision.

The human life values in the business are again shown to be its most

important asset, because they control the future of the firm.

The Human Factor and The Profit Margin

The margin between business success and business failure is

much smaller than most men think. The figures below show the average

margin of profit and the average return on invested capital to be amaz-

ingly low.

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MARGIN OF PROFIT AND RETURN ON CAPITALIN CORPORATE BUSINESS ORGANIZATIONS

(in Millions of Dollars)

Net IncomeNet Income To Gross Rate ofAfter Taxes Income % Return %

1926 • # # • $6,774 4.71927 • • • • 5,880 4.1 6.31928 • • • • 7,566 5.0 7.21929 # • • # 8,084 5.1 7.51930 # • • • 1,366 1.0 2.51931 • • • -3,145 -3.0 -0.71932 • # • # -5,375 -6.7 -2.91933 • • • • -2,379 -2.9 -1.01934 • • • • 162 0.2 1.91935 • • • • 1,674 1.5 3.31936 • • • • 3,903 3.0 4.71937 • • • # 3,872 2.8 4.91938 • • • • 1,480 1.2 2.31939 • # • # 4,040 3.1 4.31940 • • • 4,778 3.3 5.01941 • • • • 7,272 3.9 6.91942 • • • • 9,788 4.5 7.31943 • • • • 10,886 4.4 8.71944 • • • 8,965 3.6 7.51945 • • • 7,440 3.2 6.5

Data — National City Bank Bulletin 1946 — andU. S. Treasury Dept* ~ Annual ”Statistics of Income"

For all active corporations, the average net income after

taxes to gross income for the 18 year period (1926 - 1945) was. only Z%,

With the margin of corpomte profit so small, and the final

net return on invested capital so low, it is no wonder that business

failures occur so frequently. It takes only a few mistakes and only a

few errors in judgement to change the figures from profit to loss.

The Itoited States Treasury Depax*tment published for the year

1935 the following percentages of the units in various industries re-

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porting no net income for that year: (1)

Paper & Pulp . # • ^Qffo Petroletim # # • 595^

Chemicals# # • # 46^ Textiles# . • # 60$^

Hard-ware & Tools • • Printing & Publishing 605^

Liquors # • • • 50^ Iron & Steel. # # 60%Rubber • • • • 52^ Household Machinery • 61%Agricul-tural Machinery 52^ Drugs & Toilet Goods# 62%Electrical Machinery • bZ% Tobacco # • # # 62%Leather Products • • 54% Precision Instruments 6S%Office Equipment • • 55% Forest Products # # 64%Food Products# • • 58% All Manufacturers # 59%

In good years the percentage of units reporting no net income

will be reduced, but in periods of depression it is likely to be in-

creased#

The fact that profits are becoming increasingly difficult to

earn can be judged by the following statements#

An article from "Time” magazine (2) stated:

"Despite a 3^ rise in income before taxes, U« S. Corporationssqueezed out less than a 1% increase over 1941 after payingtheir debt to the Federal Government#"

In "Forbes" magazine, Mr. J. G. Donley (3) emphasizes the

relation of management to profits -with these words of ad-vise

;

"With readjustment s-wift and impredictable, it -will be -well tohave your money in the best managed companies#"

Profits have not been easy to make during the past decade or so

and it -will take the very best of ability to produce profits in the years

that lie ahead. Once again, we see how -vital is the key-man in deter-

mining the success of a given business#

(1) U. S. Treasury Dept. — "Statistics of Income" - 1935.

(2) "Time" - July 5, 1943 - Resione U. S. Commerce Dept, report on cor-porate profits for 1942#

(3) "Forbes" - July 1, 1943 — "Stock Market Outlook” - J. G. Donley.

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Authoritative Evidence

The fact that the hmnan asset is the most valuable asset of

any business is amply substantiated by the following statements: (1)

!• Charles M. Schwab, former President of the Bethlehem Steel

Company, said:

”l have always likened industry to a three-legged stool. Oneleg represents capital, the second leg represents labor, andthe third leg represents management. I have also been of theopinion that the greatest of these is management, and havebased ny belief on an experience of 51 years in industry.Whatever we do in business, management is the thing that willmake it successful.”

2. Andrew Carnegie paid tribute to the human element in busi-

ness in these words:

"Take away my factories, ny plants; take away my railroads, myships, my transportation; take away my money; strip me of allthese, but leave me my MEN, and in two or three years I willhave them all again.”

3. Thomas N. Carver, Harvard Economist, made the statement:

"Every investment is, in rather a strict sense, betting on aman.”

4. James J. Rill made this striking statement;

"It is ten times easier to assemble a million dollars of cap-ital than to find the right man to manage the capital assem-bled.”

5. An editorial in "Printers’ Ink” magazine, entitled "The

Scramble for 6 Per Cent Men”, stated:

"Management is still overvdielmingly the big factor in businesssuccess. It is vastly easier to get men, materials and machin-ery them it is to get competent management. Bankers have aphrase, 'He’s a 6^ man,” which they use in describing a man whois able to bring a business through both good times and bad

(1) Diamond Life Bulletins - 1943 - H. P. Gravengaard "Business Insurance

Series".

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with at least for the stockholders. The commercial worldis never able to discover enough men with this ability,

'^(?hen the Pullmeui Compsiny bought out the Haskell and Barker CarCompany, it is said that the real motive was to get the ser-vices of Edward M, Perry, the President, President Runnels ofthe Pullman Company wanted to retire, Mr. Perry was the log-ical man to succeed him. The only way Mr, Perry could be ob-tained was to purchase the compaioy -vdiich he headed,”

6, Ernst and Ernst, public accountants and auditors, stated in

one of their bulletins:

“During every year there occur many deaths of business exec-utives T/dio could not well be spared. Avoiding the realm ofaffection and spiritual values, and staying within the realm ofthings economic, there is no way of avoiding the conclusionthat these deaths represent tremendous losses,”

7, The Executive Manager of the National Association of Credit

Men has stated that:

”By all means, the most important element in business success

is the character and ability of the man himself.”

8, Poor’s Financial Reporting House maintains:

’’The success or failure of any enterprise hinges almost en-

tirely on the ability and integrity of the men in whose handsrest its direction and management,”

9, Colby M, Chester, President of the General Food Corp, said:

’’Management is the controlling asset, for upon its characterand quality depends the value of every possible asset from themost unimportant tool in the factory to the good-will createdthroughout the life of any business,”

10, The success of any business is determined by the calibre

of its management. As Griffin M, Lovelace, insurance lecturer at N, Y,

U. has put it;

“Many a business with large capital has failed through mis-management, vdiile many notable successes have been built up on

an insignificant capital through vmusual and superior manage-ment. It is, therefore, not the amount of money invested in a

business so much as the efficient use of it that makes capitalprofitable ,

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The fact is, simply and plainly, that every successful business,

T(»hether it is a sole proprietorship, partnership or corporation and

•whether it is large or small has someone at its head or someone in its

organization whose talent or experience constitutes the human factor

which makes the business a success. IVherever this is true, the business

is going to suffer a substantial economic loss by reason of that indi'vi-

dual’s untimely death. The key-man is the most valuable asset in the

business organization.

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II. DEATH OF A KET-MAN — THE PROBLEMTO EVERY BUSINESS.

Every successful business, large or small, has one or more

key-men upon vdiose judgement, integrity, personality and leadership the

success of the business may depend.

It may be the president who foianded and built the business to

its present place of leadership.

It may be the treasurer whose judgement and character are

highly regarded by the Company’s bankers and credit sources.

Often times we find a sales-manager or chief chemist or head of

the research department who has made a special contribution to the pro-

gress and profit-making ability of the Company.

"Whoever it is, one individual or several, the death of a val-

uable key-man inevitably brings a substantial loss to the business, not

only as a result of the loss of his expert services, but also because of

the high cost of securing and developing a competent replacement.

Everyone who has been in a successful business organization

knows how that smooth running business machine bogs down -vrtien a key-man

or group of key people are absent from their jobs for oven a short period

of time due to illness or vacation. Fortunately in such instances the

absences are only temporary.

However, when key-men die, they are lost to the business for-

ever and the loss is real sund often disastrous. The death of a key-man

is the great hazard to the continued profit-making ability of every

successful business

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Death At The Wrong Time

Charles A. Tushingham, insurance writer, relates this story

to emphasize what death of a key-man at the wrong time can mean to a

firm: (1)

"The late Laurence C. Woods, of Pittsburgh, in one of hisaddresses, related the following incident:

"When the vice-president of one of our largest corporationsin Pittsburgh died suddenly some years ago, the president re-marked that the corporation had "scrapped" a million dollars.This is a manufacturing expression. I expressed my astonish-ment at that remark euid he said, »Woods, our corporation hasspent at least two million dollars in experiments in thisVice-President's department of operation, under his directionand control, and not more than one million of that value hashe been able to pass on to his associates. The rest of it

dies with him.'"

Problems Created By The Death Of A Key-Man

1. Credits Lines are Impaired.

Dr. Huebner (2) has said that 80 per cent of all business is

done on credit. Other writers place the figure as high as 95^. What-

ever the precise figure may be, it is a certainty that no single factor

looms of greater importance in our modem business and economic system

than does credit.

The commercial loan is granted largely because of the cred-

itor's confidence in the capacity and character of the business man —

the key-man if you will. The commercial loan will be called when the

creditor’s confidence is disturbed. Nothing is likely to create such a

(1) "Life Insurance for Business Purposes."

(2) "Life Insurance" — S. S. Huebner.

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disturbance as the untimely death of the man behind the loan# A corpse

does not inspire confidence#

2# Locating and Training Replacement #

The sudden death of a top executive creates a vacancy Tuhich is

indeed difficult to fill#

In the larger company, an understudy may have been groomed to

take the place of the key-man at some indefinite date in the future. As

so often happens, the understudy may not be prepared to take on the

additional responsibility#

Death may occur before the understudy has reached a point of

sufficient development#

Many times it is necessary to go outside of the organization to

find a suitable successor to the deceased#

In any event, the new man will ordinarily make errors which may

prove to be costly to the firm#

3# Effecient Operation is Disturbed .

No sudden change, such as the death of one of the company’s

principal officers, can occur without disturbing effecient operation#

This is true \inder ordinary circumstances but is especially so if the

death occurs during a special project or during a time of high level

policy changes when the special attention of the key-men is necessary to

bring the efforts to a successful termination#

"When the key-man dies, his duties must be shifted to others

until the replacement is entirely competent to take over# The idiole

program of the organization may lag# Delays will be inevitable# The

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19

readjustment period will be trying on all concerned, and timing of the

well oiled machine will be off#

4# Earnings May Be Reduced#

With the credit position of the firm weakened, vrith the effic-

iency of its operation disturbed, and with the increase in the cost of

doing business due to the mistakes in Judgement of the now man, it is

only natural to assxime that the earning power of the business will

suffer# In the case of corporation, many firms have found it necessary

to pass dividends entirely for several years#

Since the purpose of business is to make a profit, every means

should be taken to protect the profit-making human asset of a business

against the hazard of death#

Death of a Key-Man More SeriousToday Than Before

I will enumerate three reasons why this is so:

1. Years ago, the profit margins were larger and it was

possible for a business to accumulate a substantial surplus#

Today, the increased taxes levied on business of all types

have reduced the profit margins of those businesses. Comparatively few

businesses sho\T a surplus account on their balance sheets#

2# At present, business men are bovmd by endless restrictions

imposed by municipal. State and the Federal Governments. These restric-

tions add to their cost of doing business and of course, reduce the pro-

fits available for distribution to owners

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3. Business structures are more complex today* The specialist

has come into his own in so far as top management is concerned* Markets

are less stable them before; new methods of merchandising or new in-

ventions demand that the key-men in business be flexible enough to

accomplish the changes necessary to keep in the competitive picture*

All in all, it simply means that the key-men who are respon-

sible for maintaining the delicate balance of the modem business machine

are more essential today than in the old days of wider margins of profit,

fewer specialists and fewer restrictions*

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21

III. KEY-MAN INSURANCE —THE IDEAL SOLUTION

The most effective method of offsetting the loss of a key-

man is to arrange for a payment of cash to the business at the time of

death.

Advantages of a Cash Indemnity:

1. Cash will keep the business running;

2. Cash will assure creditors that their loans are safe;

3. Cash will assure customers that the business will continueoperations

;

4. Cash will cover the mistakes and errors that the deceased’ssuccessor will make xmtil he learns the things the deceasedknew from experience;

5. Cash will cover the special expenses of finding, securingand training a new man to take the deceased's place;

6. Cash will be available for many uses which cannot bedetermined in advance because those uses will depend so muchupon the particular circumstances of that particular businessat that particular time.

Relative to the matter of credit, ’’^.Iton S. Redfield in his

book, "Business Life Insurance for Executives,” reproduces a letter from

a vice-president of the First National Bank of Boston as follows:

THE FIRST NATIONAL BANK OF BOSTONBOSTON, MASS.

"Character and ability are prime requisites for credit,

"a bank may be willing to make a substantial loon to a manpossessed of these attributes if assured that the loan will be

safe should the man drop out.

"In every business there are one or more upstanding men in whomspecial confidence is placed. Insurance of these lives for the

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22

benefit of the business undoubtedly strengthens the creditstanding of the concern,”

(signed) C. F. WeedVice-President.

Best Means To Provide A Cash Inderonification

Life insurance is a contract for cash, and the life insurance

carried upon the life of a key-man, payable to the firm, automatically

indemnifies at least in some measure, against the economic loss caused

by death, and it is the best way to provide cash indemnification.

There are three ways of offsetting the financial loss caused by

the death of a key-man,

1, The loss may be absorbed entirely bj’- the profits of the

year in which death of the key-man occurs,

2, The company may accumulate a sinking fund over a period of

years,

(a) However, death may occur before the fund is suffic-iently large to cover the loss,

3, Loss may be distributed over a period of years by means of

premium payments on life insurance. The advantages are these:

(a) It permits an accumulation of surplus without tax,

(b) Automatically, cash indemnification is provided at

the time of death of the key-man, no matter when deathmay occur.

The primary function of life insurance is to offset the

economic loss that comes with the death of an individual — to offset

the human life value that disappears with death. Wo are fhmiliar with

the story of life insurance protection of human life values for the

V

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23

family; the story of key-man insurance involves identically the same

protection of the human life values for the business*

In an article in the Credit Monthly (1) sometime ago, the

following was set forth:

”With changes taking place more rapidly than ever before incommercial history, the success of a business depends todaymore than ever on the brains and equipment which the executivebrings to his task* Far-visioned and sound thinking businessloaders are assets that outweigh the more tangible items of

capital investments. The loss of such leaders to a business

is a serious invasion of the asset side of the balance sheet*

For this reason, it is sound and wise policy that insists on

giving these leaders in the business a tangible rating in

dollars and cents by insuring them for the benefit of thebusiness*”

Life insurance cannot replace the mind that has been lost to

the business when death strikes* However, life insurance does indemnify

the business for the cash value of the services that will be lost, so

far as those human life values can be measured*

Fire Loss Versus Life Loss

Business men accept without question the wisdom of protecting

the firm against the loss of its property values. They take care to in-

sure the physical assets against loss from fire and other hazards* More

often than not however, they neglect to insure the most valuable assets

of the business — the human assets*

Dr. Solomon S. Huebner, lecturer at the I'Vharton School of the

University of Pennsylvania, has said:

"Judged by the number of times it happens within the working

period of life, and within a given total of risks, the striking

(l) Article "Business Men and Life Insurance n

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24

power of death is thirty times as great as the striking powerof fire." (1)

Mr, Huehner goes on to say that the average fire loss will not

exceed 10 per cent of the property value insured, while the death loss

is always 100 per cent.

It has been estimated that the danger of a business being dis-

rupted and sustaining serious losses by reason of the death of a key

executive or valued employee is fourteen times as great as the danger of

a fire loss. This ratio was figured at age 45, It increases to seventeen

thimes at age 50, and to twenty-three times at age 55,

Furthermore, the losses suffered by reason of the destruction

of management assets are likely to be far more permanent and disastrous.

The plant destroyed by fire can be rebuilt. The new staructure

will be better than the old — more efficient, representing the latest

in engineering development.

This is not true with the new replacement. The executive de-

stroyed by death may have possessed special talents that will be tremen-

dously difficult to duplicate in any other person. The new man stepping

into the shoes of the deceased will be handicapped until he acquires the

skill and knowledge of his predecessor,

A business sensibly underwrites its physical assets — plant

and equipment. It is just as sound to insure the human assets — the

most valuable assets of the firm.

Business is aware of the importance of management and man-povfer

to business success. Business is ready to protect this most important of

all assets with "brains” insurance — key-man insurance.

(1) "Life Insurance" — S. S. Huebner.

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25

Cases Illustrating The Value of Key-ManInsurance Protection

Case No* 1 » (1)

Life insurance suaounting to nearly $1,000,000 on Charles H,

Virden, San Francisco, head of the Virden Packing Corporation, brought

some unusual results at his death. Knowledge of the insurance, payable

to the firm, brought a rise of seven points in Virden Packing stock on

the day of Mr. Virden' s death, taking it to the highest point it had

reached since the "crash” in 1929.

Many firm obligations were repaid out of the proceeds, the

company's financial position strengthened materially, and a special

dividend of $8.00 a share was paid to stockholders.

Case No. 2 . (2)

Business insurance. Key-nan coverage, is given credit by the

Kansas City Star Company, publishers of one of the great American news-

papers, for having carried it through two of the most difficult periods

in its history, following the death of the former owner, Irwin Kirkwood,

and that of August F. Seested, general manager, a year later. Key-man

insurance was largely responsible for enabling the company, only a year

old at Mr. Kirkwood's death, to continue the policy of operating a gjreat

newspaper free of financial and political entanglements.

(1) "Key Man Insurance" — Paul Speicher

(2) Told by Basil Collins ~ Vice President of the Old Colony Trust Co.

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26

Case No» 3«

Every life insurance man specializing in the field of business

insurance knows this dramatic story#

It appears that Mr. Jules E. Mastbaum, of Philadelphia, was

president of a corporation that controlled a large chain of motion picture

theaters# TOien the newspapers announced Mr# Mastbaum’ s serious illness

and fear of death, a sharp decline occurred in the market value of the

company's stock#

However, with the death of Mr# Mastbaum a few days later, it

was announced that the corporation would receive some |1, 000, 000 in pro-

ceeds of business insurance policies carred on his life and payable to

the firm# News of this addition to the firm's assets, and realization

of its effect on the firm's financial position, resulted in promptly

bringing the market value of the stock back to its original position#

On the bulk of the policies in the case, only two annual pre-

miirrns had been paid#

Case No# 4 #

"When the Lord Baltimore Hotel was build in Baltimore, Maryland,

over a million dollars of life insuimince was taken out on the life of

Harry Busick#

Mr# Busick died while on vacation and the proceeds of the life

insurance were used to retire the first preferred stock# The common

stock immediately acquired a substantially increased market value#

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27

IV. CONCLUSION

We have clearly established the fact that the key-man is the

most valuable asset in the business organization.

The last depression taught business men this lessonj namely,

profits are made by jaen and not machines.

From Dun and Bradstreet reports, we learned that of the eleven

causes of business failure, eight involved personal factors.

The united opinion of bankers, economists and other students

of modem business appears to support the view that the success of any

business is largely due to the personality, energy and ability — the

brains — of one or more men connected with the management whose death

is likely to cause a severe shock to the business. The severity of the

shock will depend on the importance of the deceased's relation to the

business and on the economic conditions which exist at the time of his

death.

The death of a key-man creates many acute problems. A few are

reviewed belowi

1. Credit linos are impaired.

2. Problem of locating and training a replacement.

3. Efficient operation is disturbed.

4. Earaings may bo reduced.

The ideal solution to the problem is key-man insurance. When

a key-man dies, the business has a need for ready cash. Life insurance

is a contract for cash and the best means to provide a cash indemnifica-

tion for the loss of the key-man. The proceeds of life insurance act as

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a cushion and absorb the shock by providing the business with immediate

cash funds with -which to meet the crisis.

Dr. Solomon Huebner, dean of insurance professors, has made

the significant statement that the striking power of death is thirty time

as great as the striking po-wer of fire. Moreover, the average fire loss

-will not exceed 10 per cent of the property value insured, -while the

death loss is always 100 per cent.

If a business man will protect his plant and equipment against

loss by fire through fire insurance, surely he -will want to protect his

most -valuable assets, the human assets, against loss due to death -with

life insurance — key-nan insurance.

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29

V. PROCEDURAL PROBLEMS IN KEY-MAN CASES

Problem of Insurable Intereat

The primary question of a legal character in the key-man case

involves the insurable interest of the corporation or the business in

the life of the employee or executive to be insured and its right to

carry and maintain the life insurance.

The great majority of available authority supports the state-

ment that a corporation or other business has an insurable interest in

any employee or executive or other person actively associated -with the

firm vrhose death would bring a tangible loss to the firm.

"Corpus Juris” on Insurable Interest (1)

"A corporation has an insurable interest in the life of itspresident, general manager, principal stockholder, or otherperson or officer where, by reason of his ability, knowledge,skill and experience, the success of the business of the cor-poration is largely dependent upon his efforts, and the policyis taken out in good faith for the protection of the corpor-ation against loss in the event of his death."

No loss an authority than the Supreme Court of the United

States uphold the validity of this concept in the case of the United

States V. Suppleo ~ Biddle Hardware Company - 265 v.s 189, 44 s. ct.

546, 4 AFTR 3989.

In most States, once an insurable interest has been established,

the policy will remain valid as long as the premiums are paid, even

though the insured employee should leave his employer.

Cases supporting the right of the corporation to continue the

insurance in such instances include;

(l) Legal Encyclopedia - 37 CJ 396.

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Reilly t* Penn Mutual, 201 Iowa 555, 207 N* W. 583 j Wurzburg

V# New York Life, 203 S. W. 332, Tenn, ; McMullen v. St. Lucie County

Bank, 175 So. 721, Florida.

Rights Of The Insured In Key-Man Insurance

The insured has no rights in the policy imless such rights are

granted specifically to him by a written contract with the employer.

Establishing The Human Life Value

It is difficult to set a definite formula for establishing the

value of the insured to the business. We are dealing with human life

values and not tangible property values.

In actual practice, the amount of coverage that a firm should

take on the life of an important executive or employee will be established

in a more or less arbitrary fashion.

The following are a few points that might be considered in

reaching a reasonable figure:

1. Cost to replace the man in question.

2. Worth of the key-man to the firm in terms of net profits.

3. Cost to the business if the key-man died today.

4. Proportion of the true risk of loss that the firm is

willing to cover.

Re: Applicant, Beneficiary, Owner For TheKey-Man Insxrranoe

The company applies for the life insurance, and the application

is signed, for the Company as applicant, by an official other than the

proposed insured.

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The company is the owner of the policy and is named as bene-

ficiary. Also, the premiums are to be paid by the company.

Authorization Of The Application

In the case of a corporation, it is highly essential that a

resolution be passed by the Board of Directors authorizing sm officer of

the firm to make application for the key^aan insurance desired.

The following is a board resolution authorizing key-man in-

surance :

Resolved: That the ......(officer). be authorized sind

instructed to take such action and execute such paper as may be necessary

to secure a policy or policies of life insurance in the ...... (Company or

Companies ) ...... on the life of ...... (key-man) ...... , having a total

face value of$... , with the corporation to be named as bene-

ficiary of such policy or policies and to be owner of same; the policies

so obtained shall be of the type. The treasurer is hereby

instructed to pay all premiums on such policy or policies as they come

due.

32

BIBLIOGRAPHY

American College of Life Underwriters, ’’Significant Developments ofthe Wftr Period in Law, Trust and Taxes” — 1945.

Crowell, Fred C., Jr., ’’Insuring Your Business”, Barrow’s NationalBusiness Weekly.

Devney, Joseph J., ’’Business Insurance - (How it Promotes and ProtectsBusiness)” — 1928.

Diamond Life Bulletins - ’’Business Insurance and Credit.”

Dun and Bradstreet - ’’Compass Points” — published monthly.

Einstein and Salinger - ’’Advanced Fundamentals of Life Insurance" —N. Y. C., N. Y.

Falkstein, Frank B. - ”Key-Men” — Best’s Insurance News - J\me 1, 1944.

C-ephart, W. F. - ’’Principles of Insurance” — 1913.

Gravengaard, H. P* - ”Key Men and Life Insurance” - editor Diamond LifeBulletins - 1943.

Haultain, R. M. - ”How to Make Your Business Live” published Finan-cial Post, Canada.

Hopkins, Albert — ’’Key Man Insurance" ~ Leader’s Digest, November, 1938.

Euebner, Solomon S. - "Life Insurance" — reprint 1945.

Lovelace, Griffin - lecturer at N. Y. U.

MacLean, Joseph B. - "Life Insurance”— 1925.

Ratimann, Arthur J. - "Key Man insurance" ~ in the "Spectator" — May,1946.

P.edfield, Walton S. - "Business Life Insurance for Executives."

Sanborn, Ralph - "Business Life Insurance" - 1928.

Scully and Gemse - "Business Life Insurance Trusts"

Simon, Leon Gilbert - "Business Insurance.”

Speicher, Paul - "Key Mem Insurance” - National Chapter, Charter LifeUnderwriter.

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Thompsc*n, Richard B. - "Business Insurance" ~ in the "Pelican",Mutual Benefit Life Insurance Company, February, 1943*

Tushingham, Charles A, - "Life Insurance for Business Purposes*"

U* S. Treasury Department - "Statistics of Income" — annual reports*

. 3

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boston UNiyEBSITY

1719 02561 5511