Insurance Introduction and Overview

1. InsuranceIntroduction and Overview Karen Breda Insurance Law Research January 13, 2009

2. 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?

3. 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.

4. 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.

5. Why do we need insurance?

6. Why do we need insurance?

7. 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

8. 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

9. 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.

10. The History of Insurance Historical context provides insight and perspective into today’s insurance industry

11. 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.

12. 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.

13. 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.

14. 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.

15. 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.”

16. 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.

17. 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.

18. History of Insurance • 1690s Fire insurance companies form the first professional fire brigades.

19. Lloyd’s of London • Late 1600s Edward Lloyd’s Coffee House. Seafarers, merchants and insurers meet for insurance business and coffee.

20. 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

21. 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.

22. History of Insurance • 1751 Benjamin Franklin and other capitalists start the Philadelphia Contributorship, the first successful fire insurance company in America.

23. 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).

24. 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.

25. 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.

26. 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.

27. 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.

28. 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.

29. 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.

30. 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.

31. 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.

32. Rise of Risk Management • Public confidence in insurance industry soars; industry booms; risk management innovations; new types of insurance emerge.

33. Lloyd’s of London • Today, Lloyd’s of London is an insurance icon • Not an insurance company, but an exclusive insurance market

34. Insurance Fiction • Armadillo, by William Boyd • The Amount to Carry, by Carter Scholz • The Policy, by Bentley Little

35. Insurance Fiction • Stormy Weather, by Carl Hiaasen • Coming Up for Air, by George Orwell • The Rainmaker, by John Grisham

36. Lloyd’s of London Fiction • East of the City, by Grant Sutherland • Significant Loss, by David Brierly • Other Names, by Zoe Fairbairns

37. 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

38. Insurance History • Spreading the Risks: Insuring the American Experience, by John Bogardus • Pensions and Insurance Before 1800, by Christopher Lewin

39. Liability Insurance -- History • The Liability Century: Insurance and Tort Law from the Progressive Era to 9/11, by Kenneth S. Abraham

40. Insurance in Film