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Insurance
Introduction and Overview
Karen Breda
Insurance Law Research
January 13, 2009
Insurance Introduction
•
•
•
•
What is “insurance”?
Why do we need it?
Why should we study it?
How has the insurance industry
and the law of insurance evolved?
What is “Insurance”?
•
Commercial mechanism for transferring risk
and spreading loss
•
Economic Concept of Insurance:
1. Insurer offers policy to cover specified risks
2. Insurer collects policy premiums from
customers
3. Insurer invests premiums
4. Insurer pays money to insured customers in
the event of losses covered by policy.
What is “Insurance”
• Theoretically, everybody comes out ahead
(so long as losses do not exceed returns
of invested premiums; and all parties
honor their contractual obligations).
• Theoretically, the insurance industry
bridges private interests and public good.
Why do we need insurance?
Why do we need insurance?
Why study insurance?
• The role of insurance in the practice of law
-- litigation practice
-- business and corporate law
-- real estate and estate planning
-- law office operations
Why study insurance?
• The effect of insurance (or lack thereof) on
individual lives.
• The effect of insurance and insurance
industry trends upon law, society and
economy (and vice versa).
• Survival (wolf pack phenomena); risk
protection – a primary biological goal
Insurance Law
Sources of Insurance Obligations
• Policy/Insurance Agreement
• Common Law (contract theories; tort theories)
• Statutes
• Regulations
The law of insurance is multi-layered. The prudent
researcher will consider each of the layers
when approaching a research problem.
The History of Insurance
Historical context provides insight
and perspective into today’s
insurance industry
The History of Insurance
• 3000 B.C.E. Mesopotamian merchants assess
“risk surcharges” in transactions with caravan
operators and traders to protect their capital.
• 1750 B.C.E. Code of Hammurabi formalizes
concepts of “bottomry” and “respondentia”
(protection against loss of hull and cargo,
respectively) – the underpinnings of maritime
insurance.
History of Insurance
• 1000 B.C.E. Practice of jettisoning cargo to
save ships leads to the concept of “general
average” (pro-rata distribution of loss).
• 300 B.C.E. – 450 A.D. Prototypical insurance
exchange in ancient Athens; collegia (cf. mutual
company) to cover members’ burial expenses in
Roman Empire.
History of Insurance
• 450 – 1100 A.D. Dark Ages. Vestiges of risk
management continue in merchant and artisan
guilds.
• 12th Century. Marine insurance re-emerges in
the Italian Renaissance. Polizzas (policies) are
used to record insurance undertakings.
Hanseatic League attempts to regulate marine
insurance.
History of Insurance
• 1574 Queen Elizabeth I grants to Richard
Candler the right to establish an insurance
office in the Royal Exchange Building for
the preparation and registration of policies.
• 1601 Britain’s Parliament enacts the
Assurances Act of 1601 creating an
assurance commission for resolving policy
disputes. 43 Eliz. 1 c. 12.
Assurance Act of 1601
“By means of which Policies of Assurance it
cometh to pass upon the Loss or perishing
of any Ship, there followeth not the
undoing of any Man, but the Loss lighteth
rather easily upon many than heavily upon
few, and rather upon them that adventure
not than those that do adventure.”
History of Insurance
• 1600s Insurance brokers – Shipowners
send clerks to solicit investors for risk
participation; these clerks become adept
at evaluating risk and locating insurers;
they open agencies.
History of Insurance
• 1666 Great Fire of London. Shortly
thereafter, Nicholas Brabon opens the first
fire insurance office in England. It
eventually becomes The Phoenix
Assurance Company. Over the next two
decades, more fire insurance companies
start up.
History of Insurance
• 1690s Fire
insurance
companies form
the first
professional fire
brigades.
Lloyd’s of London
• Late 1600s Edward
Lloyd’s Coffee House.
Seafarers, merchants
and insurers meet for
insurance business
and coffee.
Lloyd’s of London
• 1688 Edward Lloyd
starts a shipping
newspaper and reads
out shipping news
from a pulpit in his
coffee house; attracts
even more
shipowners and
insurers
History of Insurance
• 1721 In Philadelphia, John Copson opens
a clearinghouse for underwriters and those
seeking polices of insurance. Shortly
thereafter, insurance offices open in
Boston and New York, marking the
beginning of America’s insurance industry.
History of Insurance
• 1751 Benjamin
Franklin and other
capitalists start the
Philadelphia
Contributorship,
the first successful
fire insurance
company in
America.
History of Insurance
• Mid-18th Century Many insurance companies
are more likely than banks to have substantial
cash reserves. Insurance companies function
as lending institutions.
• Mid-18th Century Insurance underwriting is
prosperous industry in America. Lloyd’s of
London also draws a significant share of
Colonial America’s underwriting business
(capitalization).
History of Insurance
• 1790s With the centralization of a national
monetary system in the United States,
insurance companies become a primary
source of finance capital and begin
expanding into new markets. U.S.
insurance companies gain political and
cultural influence.
History of Insurance
• Pre-1800s Life insurance is seen as a
form of gambling/immorality in U.S. and
U.K. Gamblers were taking out policies
on unrelated third parties and turning
profits when the third parties died.
History of Insurance
• In Great Britain, the Life Assurance Act of
1774 prohibits insurance gambling;
requires that policy holder have an interest
in life insured. 14 Geo. 3 ch. 48.
• In the U.S., the common law requirement
of “insurable interest” serves same
purpose.
History of Insurance
• 1800-1840s Life insurance evolves from
gambling vehicle to method of providing
for widows and orphans. With this moral
shift, life insurance becomes a booming
industry.
• Life insurance profiteering continues today
in the form of viatical settlements.
History of Insurance
• Pre-1900s: Public policy prohibits insuring
against civil liability for negligence.
Insuring against negligence is seen as a
moral hazard
• In fact, a policyholder’s negligence in
causing a loss (barratry) was considered a
valid defense to an insurance claim.
History of Insurance
• 1886: Supreme Court abolishes barratry
defense in Phoenix Insurance Co. v. Erie &
Western Transportation Co., 117 U.S. 312
(1886), paving the way for liability insurance.
• 1887: 26 textile manufacturers and community
leaders in Massachusetts form the American
Mutual Liability Insurance Company, the first
U.S. liability insurer.
History of Insurance
• Industrialization and mechanization of society
leads to greater risk of injury, which, in turn,
leads to acceptance of transfer of risk of liability.
• With the advent of liability insurance, the number
of tort lawsuits increased dramatically.
• In 1880, 120 negligence lawsuits were filed in
Boston; by 1900 the number of negligence suits
was 3300.
Rise of Risk Management
• 1906 S.F. Earthquake
Lloyd’s underwriter,
Cuthbert Heath,
orders agents to “pay
all claims in full
regardless of policy
terms”. Lloyd’s pays
$50 Million in claims.
Rise of Risk Management
• Public confidence
in insurance
industry soars;
industry booms;
risk management
innovations; new
types of insurance
emerge.
Lloyd’s of London
• Today, Lloyd’s of
London is an
insurance icon
• Not an insurance
company, but an
exclusive insurance
market
Insurance Fiction
• Armadillo, by William
Boyd
• The Amount to Carry,
by Carter Scholz
• The Policy, by Bentley
Little
Insurance Fiction
• Stormy Weather, by
Carl Hiaasen
• Coming Up for Air, by
George Orwell
• The Rainmaker, by
John Grisham
Lloyd’s of London Fiction
• East of the City, by
Grant Sutherland
• Significant Loss, by
David Brierly
• Other Names, by Zoe
Fairbairns
Lloyd’s of London History
• Against the Gods:
the Remarkable Story
of Risk, by Peter L.
Bernstein
• Lloyd’s of London: A
Portrait, by H. A. L.
Cockerell
Insurance History
• Spreading the Risks:
Insuring the American
Experience, by John
Bogardus
• Pensions and
Insurance Before
1800, by Christopher
Lewin
Liability Insurance -- History
• The Liability Century:
Insurance and Tort
Law from the
Progressive Era to
9/11, by Kenneth S.
Abraham
Insurance in Film
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