CAT Claims: Insurance Coverage for Natural and Man-Made Disasters

The semiannual update to CAT Claims: Insurance Coverage for Natural and Man-Made Disasters was released in May, just in time for what may be an active latter half of the hurricane season. Written by Dennis J. Wall, author of the Insurance Claims and Issues blog, as well as John K. DiMugno and Steven Plitt, CAT Claims is an in-depth examination of the insurance ramifications of major disasters, discussing the widespread consequences and huge financial stakes of such catastrophes.

CAT Claims is a great asset for those handling, or preparing for, the myriad insurance law issues that arise in the aftermath of catastrophes such as 9/11, Hurricane Katrina or even the recent series of tornado disasters across the country in April and May of this year. Dennis Wall, John DiMugno and Steven Plitt are leading attorneys in the insurance practice from across the country that provide varied perspectives on handling insurance litigation.

Among a number of different topics and discussions, CAT Claims examines the current state of the "anti-concurrent cause clause" or "ACCC" exclusionary language as it has been shaped by federal courts after Hurricanes Katrina and Rita, as well as subsequent disasters. Detailing the relevant jurisprudence in Section 7:5 of CAT Claims, the authors conclude as follows:

...it appears that the most that can be said in favor of an "anti-concurrent cause clause" exclusion is that there is a conflict in the case law whether anti-concurrent cause clause exclusionary language will be given effect or invalidated in insurance coverage cases involving first-party homeowners and other kinds of property insurance policies.

Dennis Wall's blog is also a great source of information on insurance issues. One of his recent articles, Irene Brings Flood Exclusions Along With Winds may foreshadow the insurance wake of Tropical Storm Lee, even as its remnants continue to soak the Gulf South.

Concurrent Causation of Loss and the Named Storm Deductible in the Wake of Hurricane Isaac

As the remnants of Hurricane Isaac continue to rain down and potentially cause damage, Louisiana Insurance Regulatory Law has a timely article on two issues which many homeowners in affected regions may face: concurrent causation of loss and the named storm deductible.

Read the full article:

Concurrent Causation of Loss and the Named Storm Deductible in the Wake of Hurricane Isaac.

Privacy Insurance and Financial Losses from Data Breach

Toby Merrill's article in the Advisen Cyber Liability Journal gives an overview of privacy insurance, also known as network security or cyber insurance, to "cover the financial losses arising from a data breach" that can also include "access to expert advice and services."

Privacy insurance has become more prominent as increases in the scope of federal and state privacy laws "continue to fuel a rise in publicly reported corporate data breach incidents."

Merrill, an Assistant Vice President in the Professional Risk division of ACE USA, warns that not all privacy insurance products are created equal:

While most policies and endorsements address both first-party and third-party exposures, there are often wide differences in coverage terms, conditions, exclusions and financial limits.

Many policies, for instance, may highlight large limits of insurance coverage for statutory notification to the affected parties of a breach and the monitoring of their credit, but fail to provide adequate financial limits or choice among the vendors providing assistance in the aftermath of a data breach.

Thanks to Nina Kallen at Insurance Coverage Law in Massachusetts for the find.

Top NAIC Officials to Scrutinize Lender-Placed Insurance

Insurance regulators focus attention on lender-placed / force-placed insurance amid allegations of monopoly and excessive premiumrates.

Both the current President of the National Association of Insurance Commissioners ("NAIC"), Kevin M. McCarty, and the NAIC President-Elect, James J. Donelon, have turned the insurance regulatory spotlight onto insurance that protects mortgage lenders and lien holders from certain property risks when homeowners allow their property insurance coverage to lapse – known as lender-placed or force-placed insurance.

McCarty intends to examine lender-placed insurance premiums and business practices.

McCarty, who is also Commissioner of the Florida Office of Insurance Regulation, intends to examine lender-placed insurance premium rates and the business practices of insurance carriers who write lender-placed insurance amid allegations of excessive rates. Two companies, Assurant, Inc. and QBE Insurance Group, Ltd., control as much as 90% of the force-placed market, according to McCarty.[1]

Donelon, also Commissioner of the Louisiana Department of Insurance, said the force-placed insurance industry is a "monopoly… that is perpetuating itself" at a recent NAIC hearing, according to an article from Bloomberg. The situation is "extremely profitable for two remaining companies in the market," according to Donelon, "Nobody is minding the store."[2]

Force-placed premiums more than tripled to $5.5 billion in 2010 from $1.5 billion six years earlier, according to New York Department of Financial Services Superintendent Benjamin Lawsky. The insurers often pay out less than 25 cents for every dollar in premiums they collect, he said, compared with about 63 cents on a typical homeowner’s policy.[3]

According to the executive director of the Center for Economic Justice, Birny Birnbaum, premium rates currently charged by force-placed insurers "are not justified when examining the companies' performance and profits over the years."[4]

Others suggest the rate increases are justified by the recent rise in foreclosures, as well as other market forces.

But John Frobose, president of American Security Insurance, suggests the increase in lender-placed insurance is justified by the recent rise in foreclosures, as well as other market forces. Because insurance carriers that write force-placed insurance have been subject to greater hazards, the associated premiums have also risen.[5]

Robert Hartwig, president of the Insurance Information Institute, suggests that the rise in lender-placed premiums has peaked. Hartwig predicted that the market for lender-placed insurance should "contract as foreclosures drop and the U.S. economy improves."[6]

Hartwig, along with the executive director of the American Bankers Insurance Association, Kevin McKechnie, defended lender-placed insurance premium rates, explaining that "carriers do not underwrite individual risks, but rather provide a portfolio of coverage to lenders where insurers are taking on risks… with virtually no information about them."[7]

Insurers also defended the higher rates they charge, saying that because the risks are primarily in catastrophe zones, higher premiums are needed to prepare for what they say is the inevitability of major losses.[8]

Nevertheless, Commissioners McCarty and Donelon, as well as other insurance regulators like Kentucky Insurance Commissioner Sharon Clark, intend to take a critical look at force-placed insurance premium rates and business practices, as well as the costs associated with the administration of lender-placed insurance placement, including the compensation paid to agents and lending institutions.[9]

The lender-placed insurance industry also faces proposed new regulations from the Consumer Financial Protection Bureau.

In addition to increased scrutiny by state-based insurance regulators, the lender-placed insurance industry also faces proposed new rules from the Consumer Financial Protection Bureau, created under the Dodd-Frank Act. The proposed new rules require servicers "to give advance notice and pricing information before charging consumers for the coverage" and "to terminate the insurance within 15 days" upon receipt of evidence that the homeowner has the necessary insurance.[10]

1. U.S. Regulators to Examine Forced-Place Insurance, Zachary Tracer and David Beasley, Bloomberg, August 10, 2012.
2. Insurance for Lapsed Borrowers Lacks Oversight: Regulator, Zachary Tracer and David Beasley, Bloomberg, August 9, 2012.
3.  U.S. Regulators..., id.
4. NAIC Promises Greater Focus on Force-Placed Insurance as CFPB Proposes Rules, By Mark E. Ruquet, PropertyCasualty360.com, August 10, 2012.
5.  U.S. Regulators..., id.
6.  U.S. Regulators..., id.
7. NAIC Promises..., id.
8. NAIC Promises..., id.
9.  U.S. Regulators..., id., NAIC Promises..., id.
10. NAIC Promises..., id.

The Insurance Regulation Answer Book 2011

The law firm of Dewey & LeBoeuf LLP has issued a press release announcing its publication of the Insurance Regulation Answer Book 2011, calling it "a high-level overview of the legal and regulatory framework governing the insurance industry in the United States."

From the press release:

The Insurance Regulation Answer Book 2011 provides current and seamlessly integrated coverage of the Patient Protection and Affordable Care Act, the Dodd-Frank Act, Solvency II and other key recent legislative developments. It also provides the context and analysis to help navigate an increasingly complex regulatory landscape including:

• The definitions of – and distinctions between – different kinds of insurance and insurers
• An overview of state-based regulation including the role of the National Association of Insurance Commissioners (NAIC)
• The regulatory requirements for insurance company formation, licensing, investments, holding company systems, market conduct and financial condition
• The role of reinsurance in spreading financial risk and related rules regarding financial statement credit
• The impact of other regulators and recent federal and international reforms on state-based regulation

The Insurance Regulation Answer Book 2011 is available from the Practising Law Institute (PLI).

Insurance Regulatory Law intends to explore some of these same topics and subject matters in depth over the coming months.

A Brief Chronicle of Insurance Regulation in the United States, Part II: From McCarran-Ferguson to Dodd-Frank

Although the insurance industry remains substantially regulated by the state government, federal regulation continues to encroach on the state regulatory system in spite of efforts by organizations such as the National Association of Insurance Commissioners, and other cooperative endeavors, to increase the uniformity of insurance regulation across the United States.

As previously discussed, the U.S. Supreme Court overturned the seminal case of Paul v. Virginia in 1944 in United States v. South-Eastern Underwriters Association, holding that the business of insurance was subject to federal regulation under the Commerce Clause of the U.S. Constitution. Many, including Chief Justice Stone in his dissenting opinion, felt that the South-Eastern decision largely pre-empted the state insurance regulatory system in favor of federal law.[1]

The United State Congress, however, responded almost immediately: in 1945, Congress passed the McCarran-Ferguson Act.[2] The McCarran-Ferguson Act specifically provides that the regulation of the business of insurance by the state governments is in the public interest. Further, the Act states that no federal law should be construed to invalidate, impair or supersede any law enacted by any state government for the purpose of regulating the business of insurance, unless the federal law specifically relates to the business of insurance.[3]

The McCarran-Ferguson Act specifically provides that the regulation of the business of insurance by the state governments is in the public interest.

Despite this declaration of the right of the state governments to regulate the insurance industry, the McCarran-Ferguson Act nevertheless provides that three (3) federal laws are specifically applicable to the business of insurance: the Sherman Act, the Clayton Act and the Federal Trade Commission Act. These federal laws are intended to prevent and restrict anticompetitive practices and unfair competition such as cartels and monopolies, and otherwise regulate trade and promote consumer protection.[4]

Even with the seemingly firm declaration of Congress’ intent that the states regulate insurance in the McCarran-Ferguson Act, federal regulation nevertheless continues to encroach upon the state regulatory system.

In the mid 1970s, for example, the concept of an optional federal charter for insurance companies was raised in Congress. With a wave of solvency and capacity issues facing property and casualty insurers, the proposal was to establish an elective federal regulatory scheme that insurers could opt into from the traditional state system, somewhat analogous to the dual-charter regulation of banks. Although the optional federal chartering proposal was defeated in the 1970s, it became the precursor for a modern debate over optional federal chartering in the last decade.[5]

A wave of insurance company insolvencies in the 1980s sparked a renewed interest in federal insurance regulation, including new legislation for a dual state and federal system of insurance solvency regulation.

Even with the McCarran-Ferguson Act's firm statement that the states should regulate the business of insurance, federal regulation nevertheless continues to encroach upon the state regulatory system.

In response, the National Association of Insurance Commissioners (“NAIC”) adopted several model reforms for state insurance regulation, including risk-based capital requirements, financial regulation accreditation standards and an initiative to codify accounting principles. As more and more states enacted versions of these model reforms into law, the pressure for federal reform of insurance regulation waned.[6]

In 1999, Congress passed the Gramm-Leach-Bliley Financial Modernization Act, which laid out a comprehensive framework for holding company systems and affiliations involving banks, securities firms and insurance companies, breaking down many of the prior restrictions against such affiliations. Although Gramm-Leach-Bliley acknowledged that states should regulate the insurance industry, it nevertheless set out certain minimum standards that state insurance laws and regulations were required to meet or else face preemption by federal law.[7]

Over the past decade, renewed calls for optional federal regulation of insurance companies have sounded, including the proposed National Insurance Act of 2006. [8]

The most recent challenges to the state insurance regulatory system are arguably the most significant, as well, showing further erosion of state primacy. Both the Patient Protection and Affordable Care Act (“PPACA”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) are material forays of federal law into the insurance industry. [9]

Significantly, PPACA is a comprehensive reform of the health insurance market that creates specific requirements for health benefit plans to be marketed through federally-mandated state-created insurance exchanges. Among myriad other requirements, PPACA mandates certain insurance coverage requirements, such as prohibiting pre-existing condition exclusions in certain instances and restricting limits on the dollar value of health benefit plans, and it requires that health insurers maintain specific medical-loss ratios as set by federal law.

Dodd-Frank has significant implications for the insurance industry.

Dodd-Frank is touted by some as the most sweeping financial regulation overhaul since the Great Depression and criticized as clumsy and incomplete by others.

Nevertheless, Dodd-Frank has significant implications for the insurance industry including, among others, the following:

• Establishes the Federal Insurance Office (“FIO”) under the U.S. Department of Treasury, charged with studying and collecting information on the insurance industry and the state insurance regulatory system, and drafting a proposed federal insurance regulatory framework;
• Establishes the Financial Stability Oversight Council (“FSOC”), which is charged with monitoring the financial services markets, including the insurance industry, to identify potential risks to the financial stability of the United States;
• The FSOC is authorized to require a state insurance regulator to either apply new or heightened financial standards on insurance companies, or explain to the FSOC in writing why the regulator chose not to apply such standards;
• The FSOC may declare that a “nonbank financial company” – including an insurance company under certain circumstances – poses a systematic risk such that it is subject to supervision by the United States Federal Reserve System;
• Requires single-state regulation of surplus lines insurance placements and requires all states to apply uniform eligibility criteria for surplus lines insurers; and
• Mandates certain requirements for reinsurance credits and generally preempts non-domiciliary state laws to insurers with respect to certain reinsurance issues.[10]

1. United States v. South-Eastern Underwriters Association, 322 U.S. 533 (1944).
2. The McCarran–Ferguson Act, 15 U.S.C. §§ 1011-1015.
3. The McCarran–Ferguson Act, 15 U.S.C. §§ 1011-1012; State Insurance Regulation: History, Purpose and Structure; NAIC; http://www.naic.org/documents/consumer_state_reg_brief.pdf.
4. The McCarran–Ferguson Act, 15 U.S.C. §§ 1012(b); the Sherman Act, 15 U.S.C. §§ 1-7; the Clayton Act, 15 U.S.C. §§ 12-27, 15 U.S.C. §§52-53; the Federal Trade Commission Act, 15 U.S.C. §§ 41-58).
5. Federal Insurance Regulation Optional Federal Chartering Bills Come to the Big Top: The Substance and Politics of Act II; Craig Berrington; September 2007; http://www.wileyrein.com/publications.cfm?sp=articles&id=4496.
6. The Fatal Flaw of Proposals to Federalize Insurance Regulation; Elizabeth F. Brown; Research Symposium on Insurance Markets and Regulation: Optional Federal Chartering; 2008.
7. State Insurance Regulation: History, Purpose and Structure; NAIC; http://www.naic.org/documents/consumer_state_reg_brief.pdf.
8. Uniformity and Efficiency in Insurance Regulation: Consolidation and Outsourcing of Regulatory Activities at the State Level; W. Jean Kwon; Networks Financial Institute; Indiana State University; 2007.
9. The Patient Protection and Affordable Care Act, Pub.L 11-148, 124 Stat. 119; the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub.L 111-203, H.R. 4173.
10. The Dodd-Frank Act, Pub.L 111-203, H.R. 4173; Insurance Industry Implications of the Dodd-Frank Act, Willkie, Farr & Gallagher, LLP; A Decent Start, Financial Reform in America, The Economist, July 2010.

The Origins and History of Insurance, Part II: The History of Insurance in America

Insurance arrived in America with the first explorers, colonists and settlors; insurance and the insurance industry in America has grown, diversified and developed significantly ever since.

Renaissance concepts of insurance arguably came to North America with Christopher Columbus, renowned son of Genoa, where the first record insurance contract was found. As European traders established themselves in the American colonies and began commerce, the same types of maritime, property and other insurance contracts prominent in Britain and elsewhere followed.[5]

Records indicate that the first insurance company established in the American colonies was the Friendly Society, which was formed in 1735 in Charleston, South Carolina.[9][13][16] The Friendly Society went out of business only three years later after a massive fire destroyed much of Charleston.[15] In 1752, Benjamin Franklin helped form a mutual insurance company called the Philadelphia Contributorship, which is the nation’s oldest insurance carrier still in operation.[13][17]  The first stock insurance company formed in America was the Insurance Company of North America in 1792.[18]

Records suggest that the first insurance company in the United States was a fire insurance company formed in Charleston, South Carolina, in 1732.

Massachusetts enacted the first state law requiring insurance companies to maintain adequate reserves in 1837. Formal regulation of the insurance industry began in earnest when the first state commissioner of insurance was appointed in New Hampshire in 1851. In 1869, the State of New York appointed its own commissioner of insurance and created a state insurance department to move towards more comprehensive regulation of insurance at the state level.[19][20]

The National Association of Insurance Commissioners was formed in 1871 by various state insurance regulators to bulwark their authority, coordinate their activities and pool their resources. Also in 1871, the concept of reinsurance was developed in response to a massive fire that ravaged Chicago.[9][20]

In 1935, the Social Security Act was passed by the United States Congress as part of the New Deal reforms after the Great Depression. Social Security was the first social insurance program mandated by the federal government, and fundamentally changed the way certain types of insurance were viewed in America. Whereas insurance had previously been seen as protection against property loss, liability, health costs or death, after World War II, insurance expanded into a financial tool to help individuals and companies to achieve financial stability and other fiscal objectives.[21]

Insurance and the insurance industry has grown, diversified and developed significantly ever since.  Insurance companies were, in large part, prohibited from writing more than one line of insurance until laws began to permit multi-line charters in the 1950s.  From an industry dominated by small, local, single-line mutual companies and member societies, the business of insurance has grown increasingly towards multi-line, multi-state and even multi-national insurance conglomerates and holding companies.[9] 

View the Origins and History of Insurance: Timeline for additional information.

Read The Origins and History of Insurance, Part I: From the Bronze Age to the Middle Ages.

1. Risk Management; Emmett J. Vaughan (1992).
2. The Origin and Early History of Insurance Including the Contract of Bottomry; C.F. Trenerry (2009).
3. Insurance and Prevention: How and Why; Donald L. Ungarelli (1984); http://www.ideals.illinois.edu/bitstream/handle/2142/7352/librarytrendsv33i1g_opt.pdf?sequence=1.
4. Dictionary of International Trade; Edward G. Hinkelman; 8th Edition (2008).
5. The Earliest Insurance Contract – A New Discovery; Humbert O. Nelli; the Journal of Risk and Insurance (1972).
6. The History of Insurance, AD Edition; Ryan Looney; esuranceblog,com (2010); http://blog.esurance.com/the-history-of-insurance-ad-edition.
7. An Introduction to the History of Mathematics; Howard Eves (1990).
8. An Estimate of the Degrees of the Mortality of Mankind, Drawn from Curious Tables of the Births and Funerals at the City of Breslaw; With an Attempt to Ascertain the Price of Annuities upon Lives; Edmund Halley (1693).
9. Insurance; The History of Insurance; Columbia Electronic Encyclopedia; 6th Ed; http://www.infoplease.com/ce6/bus/A0858849.html.
10. Nicholas Barbon on a Discourse of Trade; Introduction; Nicholas Barbon; Edited by Jacob H. Hollander (1905).
11. Health Insurance Makes Financial Sense; Dawn Enstruthe (2009).
12. Aviva company history website; http://www.aviva.com/about-us/heritage/events-timeline/non-flash/
13. Insurance Handbook; Insurance Information Institute (2010).
14. The Actuary: The Role and Limitations of the Profession Since the Mid-19th Century; Hans Bühlmann (1997).
15. The Friendly Society History; the Friendly Society Restored website; http://www.thefriendlysocietyrestored.com/history.htm.
16. Some sources suggest that either the Friendly Society, or another insurance company, was actually formed in Charleston, South Carolina, in 1732, History of Insurance; Wikipedia; http://en.wikipedia.org/wiki/History_of_insurance.
17. Company History; The Philadelphia Contributorship; http://www.contributionship.com/history/index.html.
18. Stemple on Insurance Contracts; Jeffrey W. Stempel, Vol. 1, §2.07, 3rd Ed., 2007.
19. State Insurance Regulation: History, Purpose and Structure; National Association of Insurance Commissioners; http://www.naic.org/documents/consumer_state_reg_brief.pdf.
20. Insurance Regulation in the United States: Regulatory Federalism and the National Association of Insurance Commissioners; Susan Randall; Florida State University Law Review, Vol. 26:625, 1999; http://www.law.fsu.edu/journals/lawreview/downloads/263/rand.pdf.
21. The Case for Federal Regulation of Insurance; Tom Baker, Tobin Project, 2006, http://www.tobinproject.org/downloads/RP_Federal_Regulation_of_Insurance.pdf.

A Brief Chronicle of Insurance Regulation in the United States, Part I: From De Facto Judicial Regulation to South-Eastern Underwriters Ass'n

The U.S. insurance industry has been regulated primarily by the individual state governments, but federal challenges to that primacy go back to the infancy of insurance regulation in the U.S., and recently federal encroachment on the state-based system has become more prominent.

Historically, the insurance industry in the United States was regulated almost exclusively by the individual state governments. The first state commissioner of insurance was appointed in New Hampshire in 1851 and the state-based insurance regulatory system grew as quickly as the insurance industry itself.[1][2] Prior to this period, insurance was primarily regulated by corporate charter, state statutory law and de facto regulation by the courts in judicial decisions.[3]

Insurance regulation was born at the state government level primarily because, in the mid-1850s, there was very little in terms of infrastructure or resources at the federal government level.

Insurance regulation was born at the state government level primarily because, in the mid-1850s, there was very little in terms of infrastructure or resources at the federal government level. The state governments, on the other hand, were more developed and better equipped to handle the regulation of a burgeoning concern like the insurance industry.[4]

However, the first attempt at federal encroachment on the state-based regulatory scheme arose soon enough. As the various state governments each developed their own set of insurance regulations, insurance companies with multi-state business were hampered by the inconsistency of the dissimilar rules and requirements, as well as localism by the state regulators. These companies and their stakeholders joined a growing movement for federal insurance regulation – but, considering the lack of any significant federal regulatory framework, this movement may have been more about avoiding regulation rather than actually promoting federal superiority.[4]

Regardless, the efforts to increase federal regulation of insurance ultimately resulted in the seminal case of Paul v. Virginia in 1869.[3][4][5] In that case, the United States Supreme Court held that insurance was not commerce and that state insurance regulation did not violate the Privileges and Immunities Clause of the Fourteenth Amendment. The Court concluded, therefore, that state insurance regulation was not significantly constrained by the United States Constitution, and that there was no basis for federal regulation of insurance.[3][4][5]

In Paul v. Virginia, the United States Supreme Court held that insurance was not commerce and that state insurance regulation did not violate the U.S. Constitution.

After Paul v. Virginia, proponents continued to argue for federal regulation, but the state-based insurance regulatory scheme rose to primacy.[3][4] That same year, the State of New York appointed its own commissioner of insurance and created a state insurance department to move towards more comprehensive regulation of insurance at the state level.[3]

Even with the pro-state holding of Paul v. Virginia, the various state insurance regulators sought to bulwark their authority and almost immediately began to coordinate their activities and pool their resources. The National Association of Insurance Commissioners was formed in 1871 for this very purpose.[2]

The next challenge to the state insurance regulatory scheme came amidst the sweeping federalization of financial services regulation of the New Deal Era in the mid-1930s. The insurance industry avoided the layers of federal regulation that befell the banking and securities industries, primarily because the insurance industry had survived the Great Depression largely intact. The New Deal federalization arose from the failure of the state-based banking and securities regulators associated with the Great Depression, but the relatively healthy insurance industry showed little evidence of any similar faults on the part of the state-based insurance regulators.[3]

The insurance industry avoided the layers of federal regulation that befell the banking and securities industries, primarily because the insurance industry had survived the Great Depression largely intact.

In the early 1940s, the Supreme Court decided the case of United States v. South-Eastern Underwriters Association, finding that the business of insurance was subject to federal regulation under the Commerce Clause of the U.S. Constitution and overturning Paul v. Virginia.[6] Although the South-Eastern case focused primarily on the application of federal anti-trust legislation (the Sherman Act) to the insurance industry, some thought the decision opened the floodgates to widespread federal regulation of the insurance industry and signaled the demise of the state-based insurance regulatory system.[7]

Part II of this article will begin with the Congressional legislative response to South-Eastern and continue with the further history of insurance regulation in the United States.

---

 

1. State Insurance Regulation: History, Purpose and Structure; National Association of Insurance Commissioners; http://www.naic.org/documents/consumer_state_reg_brief.pdf.
2. Insurance Regulation in the United States: Regulatory Federalism and the National Association of Insurance Commissioners; Susan Randall; Florida State University Law Review, Vol. 26:625, 1999; http://www.law.fsu.edu/journals/lawreview/downloads/263/rand.pdf.
3. Stemple on Insurance Contracts; Jeffrey W. Stempel, Vol. 1, §2.07, 3rd Ed., 2007.
4. The Case for Federal Regulation of Insurance: Should the Tobin Project’s Risk Group Care; Tom Baker, Tobin Project, 2006, http://www.tobinproject.org/downloads/RP_Federal_Regulation_of_Insurance.pdf.
5. Paul vs. Virginia, 75 U.S. 168, 19 L.Ed. 357 (1868).
6. United States v. South-Eastern Underwriters Association, 322 U.S. 533 (1944).
7. See, e.g., the dissenting opinion of Chief Justice Stone in South-Eastern, Id. (“…the immediate and only practical effect of the decision now rendered is to withdraw from the states, in large measure, the regulation of insurance, and to confer it on the national government…”)

The Origins and History of Insurance, Part I: From the Bronze Age to the Middle Ages

Insurance has grown from the natural instinct of merchants in the earliest times to apportion risk, to a business of local, single-line mutual groups and member societies, and into a world-wide industry of multi-line, multi-state and even multi-national insurance conglomerates and holding companies.

Insurance, in its most basic sense, is an agreement by which one party agrees to undertake the risk of another party for compensation. The core concept of insurance, however, is spreading risk – essentially, not keeping all of one’s eggs in a single basket. This concept goes back to ancient times, probably before the beginning of recorded time.

Ancient History

Some sources point to the origins of insurance as beginning in the Early Bronze age, during the 3rd millennium BC, when Chinese merchants would spread their goods out among several different ships to limit their risk if any one ship would sink or capsize. However, an agreement resembling “bottomry” or “respondentia” that developed in early Babylonian law is more commonly recognized as the first prototype insurance contract.[1][2]

The origins of insurance as a concept can be traced back to the Chinese and the Babylonians during the Early Bronze Age.

The Code of Hammurabi, dated to the early 18th century BC, codified an arrangement whereby a merchant would advance goods to a trader on security and at interest, but would also include an additional amount owed by the trader as consideration for the merchant’s declaration that, if the goods were lost or stolen during transport due to no fault of the trader, the trader would be free of all debt to the merchant.[2][3]

The contract of bottomry developed in Greece sometime after the 3rd century BC, and is generally traced back to the above-referenced provisions in Hammurabi’s Code. Bottomry was a loan secured by a ship with an interest rate on the loan as well as an additional premium charge in exchange for potential loss of the ship and cancellation of the debt. The contract of respondentia developed in conjunction with bottomry, and was essentially the same except it was centered on the cargo and freight of the ship rather than the ship itself.[2][3]

Bottomry was a loan secured by a ship with an additional premium charge in exchange for potential loss of the ship and cancellation of the debt.

Bottomry and respondentia contracts continued to evolve during the Greek Era and up through the Roman Empire. Records indicate that the Romans had agreements of private guarantee for the safe delivery of goods and contracts for indemnification that were not confined solely to maritime risks. There is also some evidence that agreements somewhat similar to life insurance were made by the ancient Persians and Romans. This consisted primarily of groups or guilds that would pool assets to provide funeral benefits for their members.[2]

The development of insurance in general continued as trade and industry spread and civilizations became more advanced. Most insurance was either ancillary to contracts of loan or other arrangements, or it was mutual in nature (e.g., a group of merchants would each pay a small amount into a general fund to reimburse any one of them from loss).[2][4]

Medieval History

Generally, the oldest recorded contract of insurance is believed to be a document from 1343 found in the state archives of Genoa (an independent city-state in what is now northern Italy). During this period, insurance developed as a separate contract for the first time, independent from loans, shipping arrangements and investments.[4][5]

The oldest recorded stand-alone contract of insurance is dated in the year 1343.

The Renaissance was a time of significant growth and development in the structure and business of insurance. Blaise Pascal and Pierre de Fermat developed theories quantifying probability during the 17th century, and those theories formed the basis for actuarial science – the sole method for issuing insurance in modern times.[3][6][7] The astronomer Edmund Halley developed the first mortality table in 1693 and Joseph Dodson supplemented it to provide for premium scalable by age in 1759.[7][8][9]

The modern concept of fire insurance arose from the Great Fire of London in 1666. The runaway blaze burned for days, gutting the city and causing massive property damage. Shortly thereafter, Nicholas Barbon established the first insurance office in London, and he is widely considered one of the pioneers of fire insurance.[3][10]

Lloyd’s of London was formed in a coffee house in 1688 and soon became the insurance capital of the world, issuing policies across Europe and eventually, across the world.[3][6] The modern concept of health and disability insurance has its roots in proposals by Hugh Chamberlain in 1694.[11]

The first stock insurance company was formed in England in 1720. A mutual insurance society known as the Hand-in-Hand Mutual Fire Company was formed in 1696, and the current global insurance company Aviva traces its roots back to Hand-in-Hand.[12][13] The oldest documented insurance company still in business today (under some form of its original brand) was formed in 1710.  Initially known as the Sun Fire Office, it is now known as Royal & SunAlliance (RSA) and it is Britain’s largest insurance company.[13][14]

Formed in 1762, the Society for Equitable Assurance on Lives and Survivorship was the first life company to use the level premium system and scientifically calculate premium rates for life insurance policies.[14]

View the Origins and History of Insurance: Timeline for additional information.

Read The Origins and History of Insurance, Part II: The History of Insurance in America.

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1. Risk Management; Emmett J. Vaughan (1992).
2. The Origin and Early History of Insurance Including the Contract of Bottomry; C.F. Trenerry (2009).
3. Insurance and Prevention: How and Why; Donald L. Ungarelli (1984); http://www.ideals.illinois.edu/bitstream/handle/2142/7352/librarytrendsv33i1g_opt.pdf?sequence=1.
4. Dictionary of International Trade; Edward G. Hinkelman; 8th Edition (2008).
5. The Earliest Insurance Contract – A New Discovery; Humbert O. Nelli; the Journal of Risk and Insurance (1972).
6. The History of Insurance, AD Edition; Ryan Looney; esuranceblog,com (2010); http://blog.esurance.com/the-history-of-insurance-ad-edition.
7. An Introduction to the History of Mathematics; Howard Eves (1990).
8. An Estimate of the Degrees of the Mortality of Mankind, Drawn from Curious Tables of the Births and Funerals at the City of Breslaw; With an Attempt to Ascertain the Price of Annuities upon Lives; Edmund Halley (1693).
9. Insurance; The History of Insurance; Columbia Electronic Encyclopedia; 6th Ed; http://www.infoplease.com/ce6/bus/A0858849.html.
10. Nicholas Barbon on a Discourse of Trade; Introduction; Nicholas Barbon; Edited by Jacob H. Hollander (1905).
11. Health Insurance Makes Financial Sense; Dawn Enstruthe (2009).
12. Aviva company history website; http://www.aviva.com/about-us/heritage/events-timeline/non-flash/
13. Insurance Handbook; Insurance Information Institute (2010).
14. The Actuary: The Role and Limitations of the Profession Since the Mid-19th Century; Hans Bühlmann (1997).
15. The Friendly Society History; the Friendly Society Restored website; http://www.thefriendlysocietyrestored.com/history.htm.
16. Some sources suggest that either the Friendly Society, or another insurance company, was actually formed in Charleston, South Carolina, in 1732, History of Insurance; Wikipedia; http://en.wikipedia.org/wiki/History_of_insurance.
17. Company History; The Philadelphia Contributorship; http://www.contributionship.com/history/index.html.
18. Stemple on Insurance Contracts; Jeffrey W. Stempel, Vol. 1, §2.07, 3rd Ed., 2007.
19. State Insurance Regulation: History, Purpose and Structure; National Association of Insurance Commissioners; http://www.naic.org/documents/consumer_state_reg_brief.pdf.
20. Insurance Regulation in the United States: Regulatory Federalism and the National Association of Insurance Commissioners; Susan Randall; Florida State University Law Review, Vol. 26:625, 1999; http://www.law.fsu.edu/journals/lawreview/downloads/263/rand.pdf.
21. The Case for Federal Regulation of Insurance; Tom Baker, Tobin Project, 2006, http://www.tobinproject.org/downloads/RP_Federal_Regulation_of_Insurance.pdf.

The Origins and History of Insurance: Timeline

				ç	3000	Chinese merchants apportion risk across several vessels
Code of Hammurabi codifies marine insurance-like arrangement	1750	è
				ç	600	Early form of bottomry develops among Hindus
Bottomry and respondentia contracts develop in Greece	300	è
				ç	200	Roman burial clubs and societies in existence
Oldest recorded insurance contract in Genoa	1343	è
				ç	1601	First insurance legislation enacted in Britain
Nicholas Barbon establishes the first insurance office in London	1667	è
				ç	1684	The Friendly Society establishes a mutual insurance company in England
Lloyd’s of London forms in a London coffee house	1688	è
				ç	1693	Edmund Halley develops the first mortality table
Hugh Chamberlain proposes an early form of disability insurance	1694	è
				ç	1710	The Sun Fire Office forms in England
First stock insurance company forms in England	1720	è
				ç	1735	The Friendly Society forms the first insurance company in America
Philadelphia Contributorship founded by Benjamin Franklin	1752	è
				ç	1762	Equitable Assurance on Lives and Survivorship forms
Insurance Company of North America becomes the first stock insurance company in America	1792	è
				ç	1837	Massachusetts enacts the first state law requiring adequate reserves
New York passes the first general insurance law in the United States	1849	è
				ç	1851	New Hampshire appoints the first state insurance commissioner
National Board of Fire Underwriters formed in New York	1866	è
				ç	1869	U.S. Supreme Court holds that insurance is not interstate commerce in Paul v. Virginia
New York adopts a ‘standard fire insurance policy’ that later develops into the industry standard	1887	è
				ç	1898	Travelers Insurance Company issues the first automobile insurance policy
Wisconsin passes the first Constitutional workers compensation law in the U.S.	1911	è
				ç	1944	Paul v. Virginia overturned by U.S. Supreme Court U.S. v. South-Eastern Underwriters Association
McCarran-Ferguson Act reiterates the (virtual) pre-eminence of state-based insurance regulation	1945	è
				ç	1947	Precursor to modern guaranty funds forms in New York
National Flood Insurance Act establishes the federal flood insurance program	1968	è
				ç	1981	Federal Risk Retention Act of 1981 is enacted
Gramm-Leach-Bliley Act is enacted by the U.S. Congress	1999	è
				ç	2003	U.S. Supreme Court limits punitive damages in State Farm v. Campbell
Patient Protection and Affordable Care Act health insurance mandate	2010	è