there are now bonds for fiduciaries, bonds required in court proceedings, contract bonds, public official bonds, license bonds and many others, comprising some three hundred distinct varieties all of which are in common use-an extraordinary achievement, considering the relatively short existence of these companies. But we may safely assume that the process of expansion is not at an end. The business, comparatively speaking, is still in its infancy; the companies are now finding and will continue to find new fields for their endeavors17 and with that added experience, which will be acquired with the years, they will be able to meet the new problems and have a better understanding of the old.

THE FUNCTIONS OF THE CORPORATE SURETY

The functions of surety companies have afforded material for considerable discussion. A few writers consider these companies to be insurers, 48 while others view them as something unique, a hybrid as it were, devoted neither to insurance nor banking but related perhaps to both.49 The courts, however, from the first held them to be insurers.50 In Tebbets v. Mercantile Credit Guarantee Co.,51 decided in 1896, it is said:

"Corporations entering into contracts like the one at bar may call themselves 'guarantee' or 'surety' companies, but their business is in all essential particulars that of insurers, . . . Their contracts are, in fact, policies of insurance, and should be treated as such."

This view seems entirely justified from an economic standpoint. Insurance has been defined as " . . . that social device for making accumulations to meet uncertain losses of capital which is carried out through the transfer of the risks of many individuals to one person or to a group of persons."52 Technical insurance, however, presupposes that the risks to be transferred satisfy certain conditions; namely: (1) that, as to the beneficiary, the happening of the event, upon which the policy is to be conditioned, be an accident; (2) that this event be of such a nature that it is not likely to happen in every

47Bonds_guaranteeing against forgery are one of the later developments. DUNHAM, BUSINESS OF INSURANCE 508.

48 Blanchard and Moore, op. cit. supra note 29, at 28. TOWNER, PREMIUMS AND RATES, INSURANCE SOCIETY OF NEW YORK, Lecture XI.

49Mason, op. cit. supra note 39, at 1; MASON, RADIO TALKS, (Season 1923-1924) 9. See also ROULSTON, FIDELITY BONDS, SURETY BONDS, CASUALTY POLICIES 12-13; JOYCE, PROPER RESERVES FOR FIDELITY AND SURETY CLAIMS.

50See Arnold, The Compensated Surety (1926) 26 COL. L. REV. 177 and cases cited; supra note 9, at 280; 60 BANKERS' MAGAZINE 216; R. R. Brown, CORPORATE SURETYSHIP 2; Mc Rae, A New View of Suretyship (1891) 15 VA. L. Jour. 181.

5173 Fed. 95, 97 (C. C. A. 2d 1896).

52 WILLETT, THE ECONOMIC THEORY OF RISK AND INSURANCE 106.

instance in which a policy is issued, or in any great number of instances at the same time; and (3) that the extent of the loss, in a given number of cases and for a given time, be scientifically ascertainable, to some degree of accuracy, upon the basis of past experience. A risk of this nature, commonly known as a static risk, may be made the subject of insurance.53

The risks with which surety companies are concerned come squarely within this class and the transfer of such risks by many persons to one person or a corporation would seem to constitute insurance. But surety companies, it is said, are to be distinguished from insurance companies. It is first pointed out that a surety company has a right of reimbursement from the principal, while this right is unknown to the ordinary insurance company.54 But the right of the company to recoup its losses from a principal who has defaulted does not alter the fact that risks have been transferred, and it is with this that insurance is concerned. Indeed, a somewhat similar right is exercised by fire insurance companies. Under their policies they are subrogated to the rights of the assured against such persons as are responsible for a loss and under this right they frequently are reimbursed for losses which they have sustained. But we would not say that for this reason these companies are improperly classed as insurance companies. A similar claim is made with respect to bonds which are of so hazardous a nature that the companies have found it necessary to demand collateral from the principal to protect them in the event of default. As to these bonds, it is said that the company merely extends its credit to the principal and thus acts more as a bank than as an insurer.55 But such a practice on the part of the company is merely for its protection in the event of default. As between the company and the obligee the transaction is the same as if no security were given. The fact is that a risk is transferred and a premium is paid, and the transaction can be viewed only as one of insurance.

The usual insurance policy has but two parties, the company and the assured, while there are three parties to a surety bond, the company, the principal, and the obligee. This distinction is the basis for a further claim that suretyship is not insurance.56 But this argument is addressed not so much to substance as to form. When surety companies first began to write their bonds they had as a guide the form of bond used by private sureties, under which the principal was included as a party, and it was but natural that the bonds of

Haynes, Risk as an Economic Factor, 9 QUARTERLY JOURNAL OF ECONOMICS 412, 447; supra note 52, at 48. 54 Supra note 49. 56 Supra note 49.

55 Supra note 49.

surety companies should follow this precedent. As a practical matter, there appears to be no necessity for this practice, since the company and the obligee are the only real parties to the surety undertaking. But aside from this, to include the principal as a party in no way changes the essential nature of the transaction as between the company and the obligee. The former is clearly an insurer and the latter the assured.

As a further indication of the true nature of these companies, it is significant that their main function is precisely that of pure insurance. Risks of any nature may be met in three distinct ways: by avoidance, by prevention or by combination. This last method, commonly known as insurance, involves the assumption of risks in return for a fixed premium, and in its final analysis represents an exchange of an uncertain future loss for a present fixed sum. Thus the main function of insurance is said to be to replace the uncertainty of the future with the certainty of the present.57 And a surety company, in taking over risks involving the dishonesty or irresponsibility of human beings in return for a fixed sum of money, is performing this very function.

The corporate surety, like every other type of insurance, occasions an economic loss. The gross premiums charged by surety companies may be divided into three parts: (1) provision for the payment of losses, known as the pure premium, (2) provision for the costs of management, and (3) a residual amount which contributes to the surplus of the company. The second of these elements, the costs of management, is a distinct economic loss.58 But there are certain economic gains to be attributed to the corporate surety, which may be set off against these losses. These gains are not to be found in a decrease in the number of defalcations. It is true that in the field of fidelity bonds the underwriting practices of surety companies have contributed to bring about such a decrease.59 But a defalcation by a principal does not represent an economic loss and it follows that to prevent such defalcations is not an economic gain. It may be added that the decrease referred to cannot be attributed to the insurance function of these companies. It is brought about by preventive means, and prevention is not a function of insurance. On the contrary, they are complementary methods of meeting risks.60

57 Supra note 52, at 115; SELIGMAN, PRINCIPLES OF ECONOMICS 76. 58Haynes, op. cit. supra note 53, at 446. This apparently is the principle economic loss caused by the corporate surety. In other types of insurance there are additional losses.

59 These practices consist of a certain amount of supervision over the principal and the vigorous prosecution of defaulters. Supra note 4, at 423.

60 Supra note 52, at 118.

Risk, with its resulting uncertainty, is an expensive factor in economic life1 and insurance is a means of removing it. The combination of risks by insurance companies makes possible an application of the law of averages, by means of which the expected loss for the group may be ascertained. And the premium which the company charges is based upon and covers the expected loss. The result is that the only risk borne by the company arises from the possibility that the actual loss will exceed this expected loss. Thus, in place of the great number of individual risks transferred to the company, there is but this one risk, infinitely smaller, which the company alone must bear. It is in so reducing risk and the expenses incident to it that insurance of any type, including corporate suretyship, represents an economic gain. Where this gain is greater than the costs of producing it,62 that is, the costs of management, the particular type of insurance is economically sound. That this is true of corporate suretyship is shown by its continued existence and the increasing demand for the protection which it affords.

61 Ross, Uncertainty as an Economic Factor in Production, 8 ANNALS OF AMERICAN ACADEMY OF POL. AND SOC. SCIENCE 304; Supra note 52, at 50, 107; Haynes, op. cit. supra note 53, at 415.

62 Supra note 52, at 107-112, Clarke, Insurance and Business Profit, 7 QUARTERLY JOURNAL OF ECONOMICS 40.

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The Trustees of the University have appointed Horace E. Whiteside Professor of Law, the appointment to take effect at the beginning of the next academic year. Professor Whiteside received his A.B. degree from the University of Chicago, and graduated from the Cornell Law School in 1922. Upon his graduation he was appointed Lecturer in Law, and Secretary of the Law School, and in 1924 was appointed Assistant Professor of Law. During the present year Professor Whiteside has been on leave from the Cornell Law School taking graduate work at Harvard, where he has held the Ezra Ripley Thayer Teaching Fellowship.

Assistant Professor William H. Farnham, who was appointed to fill a temporary vacancy during the present year, will continue in the Law Faculty and has been appointed Secretary of that body.

On Friday afternoon, April 29th, the final case in the first year moot court series was argued in Boardman Hall, before a distinguished court. Honorable Frank H. Hiscock, '75, former Chief Judge of the New York Court of Appeals, presided, and those associated with him on the bench were Honorable Leonard C. Crouch '91, Justice of the Supreme Court, Appellate Division, Fourth Department, and Honorable Rowland L. Davis, '97 Justice of the Supreme Court, Appellate Division, Third Department. Those participating in the argument were Albert E. Petermann, Jr. and Carl O. Eberhart, representing the Irvine Club for the Appellants, and Maxwell H.