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INSURANCE

INSURANCE. The insurance business, one of the oldest in America, has its roots in the early years of the Republic, when the nation's business was carried on primarily in seaport coffee houses, the gathering point for sea captains, merchants, and bankers. Marine and fire insurance were the earliest forms of the property and liability branch of the insurance business; later additions include inland marine, aviation, workers' compensation, automobile, multiple-line, and suretyship insurance. Marine insurance has been a necessary adjunct to commerce, and insurance against losses from frequent fires in colonial seaports also had a colorful history.

The other major branches of insurance, life and health, did not assume importance until the 1840s, when the Industrial Revolution created a need for security that land had traditionally given to a nation of farmers. The Mutual Life Insurance Company of New York, which began writing policies in 1843, was the first commercial life insurance company making policies available to the general public. Health insurance began as accident insurance about 1850.The first auto insurance was issued in 1898.

Marine Insurance

The first marine insurance policies sold in America were contracted through the local agents of English under-writers in the coffee houses of American seaports. Always a necessary adjunct to commerce, forms of marine insurance were known in the times of the ancient Babylonians, Phoenicians, Greeks, and Romans, as well as the Europeans of the fifteenth and sixteenth centuries. Modern marine insurance had its origins in England in the seventeenth century, and American marine insurance owes its beginnings to the English marine underwriters of that era.

By 1741 Philadelphia was the most important city in the colonies, outranking Boston in volume of shipping and commerce and serving as the country's political center; it also emerged as the center of the early development of American insurance. By 1760 the insurance center of Philadelphia was the London Coffee House of Philadelphia, in which the Old Insurance Office was maintained by the Philadelphia underwriters during regular hours. The English underwriters also met there. The rival of the Philadelphia underwriters—the New York Insurance Office—maintained an office next door.

During the Revolution City Tavern in Philadelphia became the gathering place of soldiers, statesmen, and important merchants, superseding the London Coffee House as the headquarters for marine underwriting. As the headquarters of the marine underwriters, it was also the place where plans were later made for the formation of the Insurance Company of North America, founded in 1792—the first stock insurance company in the nation and the first American company capable of writing satisfactory marine contracts. Since fire insurance was already being written by two companies in Philadelphia, and since the subscribers already had considerable experience in marine underwriting, a decision was made to concentrate on that form of insurance. American marine underwriting contributed directly to the growth and prosperity of the shipping trade in the new nation. Managed well, it was successful as a stock company and paid regular dividends; it has thrived for nearly two hundred years.

In the 1840s and 1850s the revolutionary design of the American clipper ship inaugurated one of the most prosperous eras in American shipping and American marine insurance, for marine insurance kept pace with the increased prosperity of ocean commerce. Between 1840 and 1861, the combined value of American exports and imports more than doubled, while marine premium receipts tripled. This prosperity lasted until the 1890s, when the British steamship made the clipper ship obsolete. Then, in the early twentieth century, the Panama Canal under-cut the clipper ship's role in the growing trade between the Atlantic coast and California.

After the depression of 1893, Congress limited U.S. coastal trade to U.S. ships, a boon to domestic ship-owners. New ships were built, and American marine underwriters found their business increasing again. But the greatest growth came with World War I. Although the outbreak of war created unstable conditions in the quoting of marine insurance rates, the Bureau of War Risk Insurance—created by Congress in 1914—made it possible to quote stable rates. The great increase in the volume of shipping boosted demand for marine insurance, the value of vessels and cargoes soared, and freight charges increased, leading to millions of dollars worth of insurance orders and the revitalization of American marine underwriting. The gross tonnage of ships built jumped from 316,250 in 1914 to 3,880,639 in 1920, the value of cargo carried reached $12 billion, and the demand for insurance coverage created the first major expansion in the marine insurance market since the clipper-ship era. Between the end of World War I and the beginning of World War II, the large number of new companies entering the field caused an excess capacity in marine underwriting that resulted in intense competition and lower underwriting profits.

Congressional encouragement of risk-spreading through syndicates in World War II made underwriting insurance on merchant vessels possible in the period between the Neutrality Act of 4 November 1939 and April 1942, when the government requisitioned all American vessels. At the request of the Maritime Commission, the American Hull Syndicate wrote war risk insurance on hulls, and the American Cargo War Risk Exchange made vital shipping possible by creating a market large enough to spread insurance coverage among many marine underwriters.

After World War II Congress again promoted the U.S. marine insurance market with the McCarran-Ferguson Act of 1945, which exempted marine insurance from antitrust laws and made American marine insurance competitive in world markets. The Ship Sales Act of 1946 required mortgagees of merchant ships to place not less than 75 percent of the required hull insurance in the U.S. market.

From 1965 to 1974, the American marine insurance market grew substantially in relationship to the English market (primarily Lloyd's of London).Ships grew in size and cost, and construction during this decade of huge oceangoing rigs designed for oil drilling and costing tens of millions of dollars created another expansion of the marine market. In the 1980s and 1990s, the introduction of automated handling procedures, satellite tracking, and the use of standardized containers transformed the shipping industry, leading to larger and larger ships and payloads. By the end of the twentieth century, some 60 percent of the world's merchant fleet had moved to countries under open registries such as Panama, Liberia, the Bahamas, and Greece, which have fewer taxes, lower wages, and less regulation.

Inland Marine Insurance

Initially designed to insure cargo on inland waterways, inland marine insurance expanded to include movement on land as the interior of the country developed. Some of the first policies insured the possessions of traveling salesmen. In the twentieth century, bridges and tunnels used for transportation, as well as tourist baggage and postal shipments, were included.

Aviation Insurance

Aviation insurance covers the hull and liability hazards of both commercial airlines and private aircraft; it does not include accidental injury or death coverage, which companies issue separately. During the 1960s and 1970s, many new companies entered this field, primarily as reinsurers. These companies compete among themselves and with foreign insurance carriers (mainly Lloyd's of London) for both U.S. and foreign aviation business.

One problem associated with aviation insurance is the constant exposure to catastrophic loss. As speed, size of equipment, fuel load, and passenger capacity continue to increase, the catastrophe hazard grows in direct proportion. There are too few commercial aircraft at risk to allow successful operation of the "law of large numbers," upon which underwriters rely to predict losses. Therefore, aviation underwriters must rely on their own judgments in determining rates.

Fire Insurance

Fire insurance is a direct descendant of marine insurance. It developed in the American colonies from ideas brought by English settlers. American merchants realized the need for protection from loss from fire after the Great Fire of London in 1666 destroyed three-fourths of the city's buildings. Like the first marine insurance company, the first fire insurance company in America began in Philadelphia, and, like the earliest marine companies, that company provided policies based on mutual agreement rather than stock subscription. Largely through the efforts of Benjamin Franklin, America's first fire insurance company and its oldest mutual insurance company formed in 1752—the Philadelphia Contributionship for Insurance of Houses From Loss by Fire. Experiencing difficulty in fighting fires at houses surrounded by trees, the Philadelphia Contributionship decided, in 1781, not to insure houses that had trees in front of them. Out of opposition to this policy grew the Mutual Assurance Company in 1784, popularly known as the Green Tree because of the circumstances of its founding and because of its fire mark. Then, in 1794, the Insurance Company of North America—primarily a marine underwriter—became the first company to market insurance coverage on a building and its contents and to underwrite fire risk beyond the city limits.

The success of Philadelphia's mutual fire insurance companies inspired the formation of mutual companies in other cities. The history of large fires in the growth of American cities and seaports gave rise to improvements in fire underwriting. The 1835 fire in New York, in which almost the entire business district burned to the ground, ruined most New York companies. Because of state discriminatory taxes, much of the risk had been underwritten by small local companies that had too little surplus to meet the $18 million loss. Subsequently, the under-writing business grew throughout the nation to spread the risk.

The Factory Mutual Fire Insurance Company made its appearance in New England in 1835.The firm was pioneered by Zachariah Allen, who, along with other mill owners—who had been refused fire insurance for their factories by the mutual companies and found the high premiums of stock companies excessive—formed their own company. Skillful underwriting kept the costs low and, as the system grew, it had an effect far beyond that field, forcing stock companies to reduce their rates. At the same time, the factory mutuals expanded with the growth of American industry until they underwrote the risks of the wide industrial field created by the expansion of American business and extended coverage to include loss from other damage such as lightning. In 1866 the fire companies formed the National Board of Fire Under-writers, which disseminated information on the compensation of agents, fire prevention, and the discovery and prevention of arson.

In 1909 Kansas responded to the widespread belief that fire insurance companies were making excessive profits by enacting a law that gave the state insurance commissioner power over rates charged by fire insurance companies. In 1910 the New York legislature responded to the same belief by appointing a joint committee, under state senator Edwin A. Merritt, Jr., to investigate the insurance companies. The Merritt committee's recommendations for sweeping changes in the industry produced a number of key reforms that served as models for other states.

Fire insurance continued to grow steadily during the twentieth century. In 1948 almost $1.3 billion in premiums were written ($9.7 billion in 2002 dollars); $8.4 billion ($8.7 billion in 2002 dollars) in premiums were written in 2000.Since its beginning in the early 1950s, the trend toward multiple-line coverage and packaging of property and casualty lines in either indivisible or divisible premium contracts has been gathering momentum, both in the growth of homeowners policies and in commercial packages.

Workers' Compensation Insurance

Federal and state laws requiring workers' compensation insurance have created the market for this form of liability insurance, which is sold by property and liability insurance companies. Prior to the development of workers' compensation, an injured worker's legal rights were based upon common law. As the cost and inequity of the common law created public dissatisfaction, changes gradually took place.

Between 1909 and 1913, thirty-one investigatory commissions were established; nine more were set up during the next six years. The consensus from this research was that employers' liability legislation should be replaced with what would become state workers' compensation laws. These laws derived from an entirely new legal concept—liability without regard to fault. Indus-trial accidents and disease have traditionally fell under the theory of occupational risk. Workers' compensation legislation provided for prompt payment of medical and disability benefits and thus eliminated the cost of litigation and encouraged the employer to promote safe working conditions.

Before 1908 a few states had passed narrow compensation acts with low benefits. The first major law, the federal Employee's Compensation Act of 1908, provided benefits for civil employees of the federal government and public employees of the District of Columbia. Ten states passed workers' compensation laws in 1911; all but six states had followed suit by 1920.The trend has been toward more comprehensive coverage for a larger group of workers. In 1934 only 33 percent of the total workforce was covered by workers' compensation; by 1957 the figure had grown to 62 percent. By the mid-1970s about 75 percent was covered. Workers' compensation, the third largest individual line of insurance, had premiums of $23.2 billion in 2000.

Automobile Insurance

The first automobile insurance policy was issued by the Travelers Insurance Companies in 1898, and since then more and more of America's 120 million motorists have recognized its value. In 1973 automobile insurance premiums reached $17.15 billion ($69.46 billion in 2002 dollars) and accounted for 42.3 percent of total property-liability premium volume. Because of inflation, increasing claims frequency, and larger claim settlements, automobile premiums have increased rapidly, and, in 1973, were more than double those of 1965.By the end of the 1970s, most states had made the purchase of automobile insurance by car owners compulsory.

Following consumer unhappiness over automobile insurance rates in the late 1980s and 1990s, some states instituted no-fault automobile insurance to reduce litigation. Typical state no-fault insurance laws permit accident victims to recover such financial losses as medical and hospital expenses and lost income from their own insurance companies and usually place some restrictions on the right to sue.

Life Insurance

Early colonists were skeptical of life insurance. Benjamin Franklin said that men were willing to insure their homes, their goods, and their ships, yet neglected to insure their lives—the most important asset to their families and the most subject to risk. Many considered life insurance a form of gambling and therefore against their religion. As late as 1807, the Massachusetts legislature argued against the morality of life insurance.

The earliest life insurance policies in America were written as a sideline by marine underwriters on the lives of sea captains for the duration of a voyage. The tontine, a life insurance lottery, formed by a group who insured themselves together, first appeared in 1790.When one died, the others divided his assets. Subscribers to the Universal Tontine used their funds to form an insurance company in 1792; the tontine policy was not used again until 1867.

The great expansion of the American economy from 1830 to 1837 made Americans more dependent on financial institutions. The prosperity engendered the founding of large stock insurance companies, but the recession after 1837 gave impetus to the mutuals because the shortage of capital during the depression years made it difficult to sell stock in life insurance companies. Four great mutual companies were founded during that period. The first, the Mutual Life Insurance Company of New York founded in 1843, is the oldest commercial life insurance company in continuous existence.

In 1855 Massachusetts became the first state to establish an insurance department. Elizur Wright, insurance commissioner of Massachusetts from 1858 to 1867 and often called the father of legal reserve life insurance, developed the first American table for establishing policy reserves. By 1890, most states had established insurance departments; by 1940, insurance departments were regulating the business in all states. State regulation of life insurance was firmly established by the Supreme Court in Paul v. Virginia (1868), which declared that life insurance was not interstate commerce and not subject to federal jurisdiction.

As the industry grew after the Civil War, it became more and more important to ensure the mortality experience on which rates were based. Sheppard Homans published the first mortality table, based on the experience of insured lives in America, in 1868.Other developments included the requirement of nonforfeiture provisions under state statues and the growing employment of full-time agents. The fervor for expansion during the period following the Civil War was characterized by extreme competition between companies—particularly proprietary stock companies and mutual companies—and influenced all aspects of the business. Quality was frequently sacrificed for quantity, and the dividend policies of the companies eventually led to abuse.

Competition also encouraged strong leaders and the control of large life insurance companies by powerful executives rather than by owners or investors. For example, although Henry B. Hyde of the Equitable Life Assurance Society had appointed a capable president to succeed him, the controlling stock passed at Hyde's death to his son. His son so misused his control as to bring about much unfavorable publicity and the ultimate transformation of the company into a mutual. In the case of the mutuals, interlocking directorates led to investments in syndicates and in entrepreneurial activities that did not always serve the best interests of the policyholders. Life insurance companies ultimately invested in every phase of the economic expansion of the United States and became competitors of investment bankers.

The climate in which the life insurance business operated between 1890 and 1905—the peak of the trust-busting period—was one of severe public criticism of business and finance. New York legislators could not ignore the dubious practices any longer. In July 1905 the Assembly and Senate concurred in a resolution directing a committee to investigate and examine the business and affairs of life insurance companies operating in the state. With Sen. William W. Armstrong as chairman and Charles Evans Hughes as counsel, the committee issued its report in 1906.Although it declared the life insurance business to be fundamentally sound, it brought to light numerous practices detrimental both to policyholders and to the national economy. The committee's recommendations led to state legislation prohibiting these practices and strengthened the industry.

The professional approach to life insurance was important to its growth. Between 1890 and 1906, several professional associations were formed, including the Actuarial Society of America, the National Association of Life Underwriters, the American Life Convention, and the Association of Life Insurance Presidents. Ownership of U.S. government life insurance by young men entering the military service in World War I caused their families to reappraise their own need for life insurance and stimulated sales—a situation that repeated itself during World War II. The Great Depression of the 1930s also favored the growth of life insurance, and American insurance companies outperformed most businesses during that time.

In the late 1930s the Temporary National Economic Committee's investigations into the sources of economic power in the country endorsed the soundness of the life insurance industry and disclaimed any disposition toward governmental regulation of the industry. However, in United States v. South-eastern Underwriters Association et al. (1944), the Supreme Court held that no commercial enterprise that conducts its business across state lines is wholly beyond the regulatory power of Congress. Subsequently Congress passed the McCarran-Ferguson bill in 1945, which stated that continued regulation and taxation of the insurance industry by the states was in the public interest and that silence on the part of Congress did not stand as any impediment to state regulation. The bill thereby strengthened state regulation and helped to guarantee more qualified insurance management.

Entry into mutual funds and variable annuities by life insurance companies made them subject to the federal securities laws, since these products are considered securities. Agents for the variable annuity and mutual funds must meet the requirements of both state and federal regulation. Simultaneously, changes in financial enterprises began affecting the marketing of life insurance products. Members of the Midwest stock exchange began selling life insurance in 1970, and other exchanges permitted their members to follow this lead. Thus, large life insurance companies began to enter the property and liability insurance field.

Liability insurance became a political issue in the 1980s, when businesses, manufacturers, and physicians fought to reform liability laws to reduce what they considered extensive jury awards. Life insurance also under-went a major change. Once sold only to wage-earning males to provide comfort to would-be widows, new-style life insurance policies became opportunities to accumulate tax-free savings, causing life and annuity insurance sales to boom from $63.2 billion ($137.78 billion in 2002 dollars) in 1980 to $216.5 billion ($277.12 billion in 2002 dollars) in 1992.Brokerage houses began selling life insurance with good returns and long-term growth, attracting money from banks and savings and loans. In 1995 the Supreme Court agreed with the position of the U.S. comptroller of the currency that annuities were investments rather than insurance, opening the door to bank participation in the $72-billion-a-year annuity market.

Group Insurance

Group insurance is a phenomenon of the twentieth century. The Equitable Life Insurance Company issued the first group life insurance policy, covering employees of the Pantasote Leather Company, in June 1911.Since then group insurance has expanded rapidly. By the end of the twentieth century, low-cost group life, health, and disability coverages were available through companies with twenty-five or more employees and through many professional associations. More than two-thirds of all employed persons in the United States are covered by some form of group insurance.

Health Insurance

Health insurance had its start in the mid-nineteenth century. Accident insurance came first, and then the policy-holder began to be protected against loss of income from a limited number of diseases. Although stemming from accident insurance, life insurance companies are the primary marketers of modern health insurance. These companies are committed to group life insurance, which pairs naturally with health insurance.

Rail and steamboat accidents in the mid-nineteenth century precipitated the first demand for an insurance policy to protect against loss of income because of accident. The Franklin Health Assurance Company of Massachusetts is credited with being the first insurer to write accident insurance in America in 1850.However, the Travelers Insurance Company, founded in 1863, was the first company in America to write health insurance, providing a schedule of stated benefits payable to the insured for each illness or injury. The Fidelity and Casualty Company of New York issued the first contract to protect against loss of income from accident and from certain diseases (1891).

Workers' compensation laws, first effectively enacted by the federal government in 1908, stimulated an interest in group health insurance contracts for illness and non-work-related injuries not covered by the law; in 1914 the Metropolitan Life Insurance Company issued the first group health contract, covering its home office employees. The economic depression of the 1930s engendered a wide concern for individual and family security, stimulating group health insurance sales. What became Blue Cross in 1948 began when a group of schoolteachers entered an agreement with Baylor Hospital in Dallas, Texas, to provide hospital care on a prepayment basis. In response, traditional insurance companies also developed reimbursement policies for hospital and surgical care.

During World War II the fringe benefit became a significant element in collective bargaining, and group health insurance became an important part of fringe-benefit packages. Sharply escalating costs for health care after the war prompted continued improvement of health insurance. Perhaps most significant was the development of major medical insurance in response to the family's need for protection against serious and prolonged illness. During the 1970s, health insurance companies developed dental insurance plans that provided scheduled benefits for various types of dental surgery. Some companies added payments during the 1980s and 1990s for routine dental checkups or teeth cleaning.

Health insurers found themselves embroiled in a major debate after the 1992 election, when the administration of President Bill Clinton argued that the insurance industry's practices harmed the medical community. President Clinton and First Lady Hillary Rodham Clinton favored a competitive model generally known as managed competition, but the insurance industry mobilized a successful television campaign against it. Large insurers, meanwhile, responded by developing health maintenance organizations to manage care and costs and halt the year-to-year double-digit rise in medical costs.

A string of catastrophic claims in the 1980s and 1990s resulting from major natural disasters threatened the industry far more than any possible federal regulation. Hurricane Hugo caused $4.2 billion in insured losses in 1989—the first hurricane to cause more than $1 billion in losses—and three years later Hurricane Andrew produced $16.5 billion ($21.12 billion in 2002 dollars) in insured losses. Altogether, the insurance industry counted thirty-six catastrophes in 1992, resulting in $22.9 billion ($29.3 billion in 2002 dollars) in losses. An earthquake in California in 1989 and riots in Los Angeles in 1992 incurred insured losses of $1.1 billion ($1.41 billion in 2002 dollars).Flooding of the Missouri and Mississippi rivers and tributaries caused another $1 billion in privately insured losses.

Despite these challenges, during the late 1980s and early 1990s the industry proved itself durable and adaptive, and greatly expanded the risks that individuals or businesses can insure against: automobile, home, life, health, annuities, disability, workers' compensation, nursing home, flood, earthquake, and numerous specific liabilities. As the industry has grown, insurance has become a major expense for most Americans. U.S. households in 1992 spent 6.3 percent of their income on automobile, home, health, and other forms of insurance coverage. The United States is the largest insurance market in the world, accounting for almost one-third of all insurance expenditures. In 1994, premiums totaled $561.7 billion ($678.93 in 2002 dollars)—$316.8 billion for life and health and $244.9 billion for property and casualty, a total equal to Spain's annual economic output.

Insurance companies invest billions of dollars in credit and equity markets and employ nearly 2.2 million people in 4,000 companies. The collapse of several major national companies, including the $18 billion Executive Life, prompted calls for federal regulation that the politically powerful insurance industry successfully opposed.

BIBLIOGRAPHY

Bainbridge, John. Biography of an Idea: The Story of Mutual Fire and Casualty Insurance. Garden City, N.Y.: Doubleday, 1952.

Black, Samuel P., Jr. Entrepreneurship and Innovation in Automobile Insurance: Samuel P. Black, Jr. and the Rise of Erie Insurance. New York: Routledge, 2001.

Clough, Shepard B. A Century of American Life Insurance: A History of the Mutual Life Insurance Company of New York, 1843–1943. New York: Columbia University Press, 1946.

Cunningham, Robert, III. The Blues: A History of the Blue Cross and Blue Shield System. DeKalb: Northern Illinois University Press, 1997.

James, Marquis. The Metropolitan Life: A Study in Business Growth. New York: Viking Press, 1947.

Huber, Peter W. Liability: The Legal Revolution and its Consequences. New York: Basic Books, 1988.

Schulte, Gary. The Fall of First Executive: The House that Fred Carr Built. New York: Harper Business, 1991.

BrentSchondelmeyer

EdmundZalinski/c. w.

See alsoBanking ; Disasters ; Earthquakes ; Fires ; Floods and Flood Control ; Health Care ; Health Insurance ; Health Maintenance Organizations ; Hurricanes ; Medicare and Medicaid ; Social Security .

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INSURANCE

Insurance is vital to a free enterprise economy. Insurance is the process of spreading risk of economic loss among as many people or entities as possible who are subject to the same kind of risk; it is based on the laws of probability (chance of a given outcome happening) and large numbers (which enables the laws of probability to work). Society faces many perils (causes of loss)some natural (e.g., earthquakes, hurricanes, tornados, flood, drought), some human (e.g., arson, theft, fraud, vandalism, contamination, pollution, terrorism), and some economic (e.g., expropriation, inflation, obsolescence, depressions/recessions).

Availability of insurance allows individuals and businesses to purchase policies that provide protection from financial loss attributable to death, accidents, sicknesses, damage to property, and injury caused to others. The person or organization seeking to transfer riskthe insured (policyholder) pays a relatively small amount (the premium) to an insurance company (the insurer), which issues an insurance policy in which the insurer agrees to reimburse the insured for any losses covered by the policy. Insurers are able to provide coverage for virtually any predictable loss.

EARLY HISTORY

The concept of insurance was introduced thousands of years ago and has evolved over many centuries. The Chinese, for example, divided their cargoes among many boats to reduce the severity of loss from the perils of the seas, while the biblical story of Joseph and the famine in Egypt illustrates the storing of grain during the seven good years to relieve shortages during the seven years of famine. Marine insurance emerged in London when ships sailed for the New World. Fire insurance arose from the great fire of London in 1666, in which 14,000 buildings were destroyed. In 1752 Benjamin Franklin (17061790) founded the first mutual fire insurance company in the United States, the Philadelphia Contributorship for the Insurance of Houses from Loss by Fire.

U.S. INSURANCE INDUSTRY

The U.S. insurance industry is made up of approximately 5,000 companies that provide insurance coverage of various types, with combined annual revenue of about $1 trillion. The industry is highly concentrated with the fifty largest companies holding more than 60 percent of the market. Within product segments, concentration is even higher.

The three broad categories of insurance are property and casualty, which generates about 60 percent of annual industry revenue; health, generating about 12 percent; and life, which generates 10 percent. Within the property and casualty segment, commercial insurance accounts for 60 percent of revenue. Because of the very different insurance issues involved in each, many agencies handle only one type of insurance. Agencies may also specialize in selling to individuals, businesses, or groups.

Insurance is sold either directly by insurers (direct insurers) or through the independent agency system, exclusive agencies, and brokers. There are about 130,000 insurance agency offices, with the largest insurance agencies holding only 20 percent of the total market. The industry is highly fragmented.

An insurance agent works on the insurance company's behalf, while an insurance broker represents the customer's interests. Many agencies, especially on the commercial side, function as brokers.

Top ten U.S. life/health insurance groups and companies by revenues, 2004
Rank Group/Company Revenue (in millions)
source: Insurance Information Institute (www.iii.org)
1 MetLife $39,535
2 Prudential Financial 28,343
3 New York Life Insurance 27,176
4 TIAA-CREF 23,411
5 MassMutual Life Insurance 23,159
6 Northwestern Mutual 17,806
7 AFLAC 13,281
8 UnumProvident 10,611
9 Guardian Life of America 8,893
10 Principal Financial 8,756

The insurance industry employed about 2.3 million wage and salary workers in 2004. Insurance carriers accounted for 62 percent of jobs, while insurance agencies, brokerages, and providers of other insurance-related services accounted for 38 percent of jobs. In addition, about 151,000 workers in the industry were self-employed in 2004, mostly as insurance sales agents.

LIFE/HEALTH INSURANCE

Many insurance companies provide a variety of both life and health insurance policies. The two types, however, will be briefly discussed separately here.

Life Insurance

Life insurance is purchased to protect dependents against financial hardship when the insured person, the policyholder, dies. Many life insurance policies provide for the accumulation of savings that can be used in time of financial hardship. The Survey of Consumer Finances by the Federal Reserve Board revealed that 69 percent of American families owned some type of life insurance in 2001. Americans purchased $3.1 trillion of new life insurance coverage in 2004, which was 5 percent more than in 2003. By the end of 2004, total life insurance coverage in the United States reached $17.5 trillion, which was an increase of 3 percent from 2003.

Health Insurance

The majority of people in the United States, 245.3 million (84.3 percent of the population) had some health insurance coverage in 2004. There were 45.8 million (15.7 percent) of the population without health coverage. These figures from a U.S. Census Bureau report were based on a broad classification of health insurance coverage defined operationally as:

Private health insurance is coverage by a plan provided through an employer or union or purchased by an individual from a private company. Government health insurance includes the federal programs Medicare, Medicaid, and military health care; the State Children's Health Insurance Program (SCHIP); and individual state health plans. People were considered "insured" if they were covered by any type of health insurance for part or all of the previous year, and everyone else was considered uninsured. (DeNavas-Walt, Proctor, and Lee, 2005, p. 16)

Most insured people (59.8 percent) were covered by a health insurance plan related to employment for some or all of 2004. This proportion was lower than in 2003 (60.4 percent). The percentage of people covered by health insurance provided by the government increased between 2003 and 2004 from 26.6 to 27.2 percent; government insurance includes Medicare, Medicaid, and military health care. Medicaid coverage rose by 0.5 percent in 2004, while the percentage of people covered by Medicare remained unchanged, at 13.7 percent.

The top ten U.S. private life/health companies, ranked by revenues, are shown in Table 1.

PROPERTY/CASUALTY INSURANCE

A wide range of types of property and casualty insurance are provided by U.S. companies. The American Insurance Association (AIA) is the leading trade association for this segment of the insurance industry. There are 435 insurers in the AIA who write more than $120 billion in premiums each year. Member companies provide all types of property-casualty insurance, including personal and commercial auto insurance, commercial property and liability coverage for small businesses, workers' compensation, homeowners' insurance, medical malpractice coverage, and product liability insurance.

The property insurance marketplace faces many significant challenges, including skyrocketing water-damage claims and manmade catastrophes (terrorist attacks), in addition to the more traditional challenges associated with catastrophic natural disasters. The AIA's Web site (http://www.aiadc.org) lists current issues, as the association describes itself as active in "shaping public policies affecting an increasingly complex insurance marketplace." This association, however, while providing publications for purchase, has limited information for the inquiring citizen. The top ten U.S. property and casualty insurers by revenue are shown in Table 2.

ORGANIZATION OF COMPANIES

Insurers primarily operate as stock (owned by stockholders) or mutual (owned by policyholders) companies,

Top ten U.S. property/casualty companies by revenue, 2004
Rank Company/Group Revenue (in millions)
source: Insurance Information Institute (www.iii.org)
1 American International Group $98,610
2 Berkshire Hathaway 74,382
3 State Farm Insurance Cos. 58,819
4 Allstate 33,936
5 St. Paul Travelers Cos. 22,934
6 Hartford Financial Services 22,693
7 Nationwide 20,558
8 Liberty Mutual Insurance Group 19,754
9 Loews (CNA) 14,584
10 Progressive 13,782

mutual meaning that they are legally owned by policy-holders and consequently do not issue stock. Other forms of structure are pools and associations (groups of insurers), risk retention groups, purchasing groups, and fraternal organizations (primarily life and health insurance). An insurer within a given state is classified domestic, if formed under that state; foreign, if incorporated in another state; or alien, if incorporated in another country.

FUNCTIONS

The key functions of an insurer are marketing, underwriting (issuing policies), claims (investigation and payment of legitimate claims as well as defending against illegitimate claims), loss control, reinsurance, actuarial, collection of premiums, drafting of insurance contracts to conform with statutory law, and the investing of funds. Underwriters are expert in identifying, understanding, evaluating, and selecting risks. Actuaries play a unique and critical role in the insurance process: They price the product (the premium) and establish the reserves.

The primary goal of an insurer is to underwrite profitably. Disciplined underwriting combined with sound investing and asset/liability management enables an insurer to meet its obligations to both policyholders and stockholders. Underwriting combines many skillsinvestigative, accounting, financial, and psychological. While some lines of business (e.g., homeowners and auto insurance) are underwritten manually or class rated, many large commercial property and casualty risks are judgment rated, relying on the underwriter's skill, experience, and intuition.

PRODUCT AND RATINGS

An insurance policy varies among states and classes of business; nevertheless, there are features common to all policies.

  • Declaration page: Names the policyholder, describes the property or liability to be insured, type of coverage, and policy limits
  • Insuring agreement: Describes parties' responsibilities during the policy term
  • Conditions of the policy: Details coverage and requirements in event of a loss
  • The exclusions: Describes types of property and losses not covered; the states and insurers continually work together to make the policy more readable

Rating organizations include: A. M. Best, Moody's, and Standard & Poor's. Each of these rating organizations provides information about specific companies.

ROLE OF GOVERNMENT

Federal and state governments play important roles, as noted earlier, in relation to health insurance and in managing large social insurance programs, such as Social Security, unemployment compensation, federal deposit insurance, and pension benefit guaranty. In these areas, the government acts either as a partner or competitor to the insurance industry, or as an exclusive provider. Federal and state governments also manage property and casualty programs, such as "all-risk" crop, crime, flood, and workers' compensation.

REINSURANCE

Reinsurance is critical to the insurance process; it brings capacity, stability, and financial strength to insurers. The purpose of reinsurance is to spread large risks and catastrophes over as large a base as possible. It is the assumption by one insurance company (the reinsurer) of all or part of a risk undertaken by another insurance company (the cedent). It enables an insured with a sizable risk exposure to deal with and receive coverage from one insurer, rather than dealing with a number of insurers.

Reinsurance has made possible greater face amounts of life insurance coverage, even though the total number of policies fell in the early years of the twenty-first century. An applicant who is an unusual risk and is seeking a policy can be accommodated by being granted a policy with the insurer who can in turn transfer part of the risk to a reinsurer. Reinsurance can limit the investment risk inherent in high asset concentration from single products, such as annuities. As noted in Life Insurers Fact Book:

In 2005, 85 percent of life insurers with life premiums ceded at least some of those premiums as reinsurance. Among insurers with accident and health premium, 82 percent ceded accident and health premium; only 40 percent of insurers doing annuity business ceded annuity considerations. (American Council of Life Insurers, 2005, Chapter 6)

REGULATION

Insurance companies are overseen by state insurance regulators, whose authority is comprehensive. Insurance companies must meet risk-based capital standards, adhere to investment guidelines, and undergo regular on-site financial examinations. Companies must provide such information as changes in officers and directors, as well as quarterly and annual financial statements that are signed and attested to by company officers. Company financial policies are reviewed on actuarial and accounting standards.

Each state determines the company and licensing requirements, product filing rules, market conduct exams, and laws and regulations to ensure solvency and protection of consumers.

State insurance departments work with the National Association of Insurance Commissioners (NAIC) to develop and promote laws and regulations that serve as model laws, and with the state legislatures, which pass the laws and set the budgets. NAIC is the organization of insurance regulatorsfrom the fifty U.S. states, the District of Columbia, and the four U.S. territoriesthat has as its mission the protection of public interest, the promotion of competitive markets, the facilitation of fair and equitable treatment of insurance consumers, and the improvement of state regulation of insurance.

State insurance departments also work with the courts, which interpret insurance regulations and policy wording; the U.S. Congress and the U.S. Government Accountability Office, which periodically evaluate state insurance regulation; and professional, trade, and consumer groups.

COMPETITION

Because the insurance market has many sellers and buyers, little product differentiation, and freedom of entry and exit, it is highly competitive. This is especially true in the property and casualty segment. While demand for insurance grows steadily over time, with the increase in exposures and legal requirements, the supply of insurance, because it is financial and flexible, can be easily shifted in and out of the market. This attracts capital during periods of high interest and stock market strength because of high profit expectations from investing underwriting cash flows.

CHALLENGES FACED BY THE PROPERTY/CASUALTY SEGMENT

Property/casualty firms have faced additionally significant challenges since Hurricane Katrina in 2005, including a daunting claims-adjusting environment and litigation. The AIA has endeavored to aid companies addressing the challenges and issues surrounding natural disasters on the Gulf Coast. One outcome from the Katrina disaster was renewed attention to improving building codes and building code enforcement.

GLOBALIZATION

Globalization is reshaping much of the business world, including the insurance world. The NAIC is one group that has increasingly been involved in insurance regulation in the international arena. NAIC has provided leadership in the International Association of Insurance Supervisors and in the International Accounting Standards Board. NAIC hosted an international symposium on the topic "State Insurance Regulators: Meeting Tomorrow's Global Challenges Today," in February 2006. The symposium addressed financial services markets and key regulatory developments in Europe, Latin America, China, and India. Leading regulators from several countries participated in the program, which aimed to advance the setting of global standards and to reduce differences in insurance supervision.

SOURCES FOR INFORMATION

A number of insurance-related organizations provide information for persons interested in learning more about insurance. These organizations include, in addition to the NAIC, some of the following:

American Council of Life Insurers:

The American Council of Life Insurers is a Washington, D.C., trade association that has as members companies that offer life insurance, long-term care insurance, disability income insurance, reinsurance, annuities, pensions, and other retirement and financial protection products. Its annual Life Insurers Fact Book is an especially useful reference.

America's Health Insurance Plans:

America's Health Insurance Plans is a national association representing approximately 1,300 members, who provide health benefits to more than 200 million Americans. The primary purpose of this association is to represent the interests of its members on legislative and regulatory issues at both federal and state levels.

AIA:

The AIA is an advocate group for the companies that sell property/casualty insurance. As noted earlier, its free information is limited, but some current insurance issues receive particular attention from the association's leadership and committees.

bibliography

Aizcorbe, Ana M., Kennickell, Arthur B., and Moore, Kevin B. (2003, January). Recent changes in U.S. family finances: Evidence from the 1998 and 2001 Survey of Consumer Finances. Federal Reserve, 89, 132.

American Council of Life Insurers. http://www.acli.org

American Council of Life Insurers. (2005). Life insurers fact book [Annual]. Washington, DC: Author.

America's Health Insurance Plans. http://www.ahip.org

Baldwin, Ben G. (2002). The new life insurance investment advisor (2nd ed.). New York: McGraw-Hill.

DeNavas-Walt, C., Proctor, B. D., and Lee, C. H. (2005, August). Income, poverty, and health insurance coverage in the United States. Current Population Reports P60229. U.S. Department of Census. Washington, DC: Government Printing Office.

First Research. (n.d.). Industry profiles [Excerpts]. Retrieved February 23, 2006, from http://www.firstresearch.com/industryanalysis.asp

Insurance Information Institute. http://www.iii.org

Insurance Information Institute. (2004). Top twenty U.S. life/health insurance groups and companies by revenues. Retrieved February 23, 2006, from http://www.iii.org/media/facts/statsbyissue/industry

Insurance Information Institute. (2004). Top twenty U.S. property/casualty companies by revenues. Retrieved February 23, 2006, from http://www.iii.org/media/facts/statsbyissue/industry

National Association of Insurance Commissioners. http://www.naic.org

U.S. Department of Labor. (2005). Occupational outlook handbook: 200607. Washington, DC: Author.

Vaughan, Emmett J., and Vaughan, Therese M. (2003). Fundamentals of risk and insurance (9th ed.). New York: Wiley.

Anand Shetty

Edward J. Keller Jr.

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INSURANCE

A contract whereby, for specified consideration, one party undertakes to compensate the other for a loss relating to a particular subject as a result of the occurrence of designated hazards.

The normal activities of daily life carry the risk of enormous financial loss. Many persons are willing to pay a small amount for protection against certain risks because that protection provides valuable peace of mind. The term insurance describes any measure taken for protection against risks. When insurance takes the form of a contract in an insurance policy, it is subject to requirements in statutes, administrative agency regulations, and court decisions.

In an insurance contract, one party, theinsured, pays a specified amount of money, called a premium, to another party, the insurer. The insurer, in turn, agrees to compensate the insured for specific future losses. The losses covered are listed in the contract, and the contract is called a policy.

When an insured suffers a loss or damage that is covered in the policy, the insured can collect on the proceeds of the policy by filing a claim, or request for coverage, with the insurance company. The company then decides whether or not to pay the claim. The recipient of any proceeds from the policy is called the beneficiary. The beneficiary can be the insured person or other persons designated by the insured.

A contract is considered to be insurance if it distributes risk among a large number of persons through an enterprise that is engaged primarily in the business of insurance. Warranties or service contracts for merchandise, for example, do not constitute insurance. They are not issued by insurance companies, and the risk distribution in the transaction is incidental to the purchase of the merchandise. Warranties and service contracts are thus exempt from strict insurance laws and regulations.

The business of insurance is sustained by a complex system of risk analysis. Generally, this analysis involves anticipating the likelihood of a particular loss and charging enough in premiums to guarantee that insured losses can be paid. Insurance companies collect the premiums for a certain type of insurance policy and use them to pay the few individuals who suffer losses that are insured by that type of policy.

Most insurance is provided by private corporations, but some is provided by the government. For example, the federal deposit insurance corporation (FDIC) was established by Congress to insure bank deposits. The federal government provides life insurance to military service personnel. Congress and the states jointly fund medicaid and medicare, which are health insurance programs for persons who are disabled or elderly. Most states offer health insurance to qualified persons who are indigent.

Government-issued insurance is regulated like private insurance, but the two are very different. Most recipients of government insurance do not have to pay premiums, but they also do not receive the same level of coverage available under private insurance policies. Government-issued insurance is granted by the legislature, not bargained for with a private insurance company, and it can be taken away by an act of the legislature. However, if a legislature issues insurance, it cannot refuse it to a person who qualifies for it.

History

The first examples of insurance related to marine activities. In many ancient societies, merchants and traders pledged their ships or cargo as security for loans. In Babylon creditors charged higher interest rates to merchants and traders in exchange for a promise to forgive the loan if the ship was robbed by pirates or was captured and held for ransom.

In postmedieval England, local groups of working people banded together to create "friendly societies," forerunners of the modern insurance companies. Members of the friendly societies made regular contributions to a common fund, which was used to pay for losses suffered by members. The contributions were determined without reference to a member's age, and without precise identification of what claims would be covered. Without a system to anticipate risks and potential liability, many of the first friendly societies were unable to pay claims, and many eventually disbanded. Insurance gradually came to be seen as a matter best handled by a company in the business of providing insurance.

Insurance companies began to operate for profit in England during the seventeenth century. They devised tables to mathematically predict losses based on various data, including the characteristics of the insured and the probability of loss related to particular risks. These calculations made it possible for insurance companies to anticipate the likelihood of claims, and this made the business of insurance reliable and profitable.

Gene Testing

When a person applies for medical, life, or disability insurance, the insurance company typically requires the disclosure of preexisting medical conditions and a family medical history. In some cases the applicant must undergo a physical examination. Based on this information, the insurance company decides whether to offer coverage and, if so, at what price.

Breakthroughs in genetics now allow persons to be tested for rare medical conditions such as cystic fibrosis and Huntington's disease. In addition, genetic testing can reveal an increased risk of more common conditions, including breast, colon, and prostate cancer; lymphoma; and leukemia. Concerns have been raised that once these tests become affordable, insurance companies will use the results to deny coverage.

Research studies published in the 1990s indicate that persons already have been denied insurance coverage because of the risk of genetic disease. The prospect of widespread genetic discrimination troubles many professionals in the medical and legal communities. It is unfair, they charge, to deny a person coverage or to charge higher premiums, based on a potential risk of genetic disease that the person is powerless to modify.

The insurance industry, which currently collects medical information on genetic disease through the inspection of medical records and family histories, responds that a fundamental principle in writing insurance is charging people rates that reflect their risks. This means that each applicant pays the fairest possible price, based on her individual characteristics. The industry also notes that the concerns about genetic testing do not come into play with large-group health plans, where rates are based on methods other than individual assessments.

cross-references

Genetic Screening.

The British Parliament granted a monopoly over the business of insurance in colonial America to two English corporations, London Assurance and Royal Exchange. During the 1760s, colonial legislatures gave a few American insurance companies permission to operate. Since the Revolutionary War, U.S. insurance companies have grown in number and size, with most offering to insure against a wide range of risks.

Regulation and Control

Until the middle of the twentieth century, insurance companies in the United States were relatively free from federal regulation. According to the U.S. Supreme Court in Paul v. Virginia, 75 U.S. (8 Wall.) 168, 19 L. Ed. 357 (1868), the issuing of an insurance policy did not constitute a commercial transaction. This meant that states had the power to regulate the business of insurance. In 1944 the high court held in United States v. South-Eastern Underwriters Ass'n, 322 U.S. 533, 64 S. Ct. 1162, 88 L. Ed. 1440, that insurance did, in some cases, constitute a commercial transaction. This meant that Congress had the power to regulate it. The South-Eastern holding made the business of insurance subject to federal laws on rate fixing and monopolies.

Insurance is now governed by a blend of statutes, administrative agency regulations, and court decisions. State statutes often control premium rates, prevent unfair practices by insurers, and guard against the financial insolvency of insurers to protect insureds. At the federal level, the mccarran-ferguson act (Pub. L. No. 79-15, 59 Stat. 33 [1945] [codified at 15 U.S.C.A. §§ 1011–1015 (1988)]) permits states to retain regulatory control over insurance, as long as their laws and regulations do not conflict with federal antitrust laws on rate fixing, rate discrimination, and monopolies.

In most states, an administrative agency created by the state legislature devises rules to cover procedural details that are missing from the statutory framework. To do business in a state, an insurer must obtain a license through a registration process. This process is usually managed by the state administrative agency. The same state agency may also be charged with the enforcement of insurance regulations and statutes.

Administrative agency regulations are many and varied. Insurance companies must submit to the governing agency yearly financial reports regarding their economic stability. This requirement allows the agency to anticipate potential insolvency and to protect the interests of insureds. Agency regulations may specify the types of insurance policies that are acceptable in the state, although many states make these declarations in statutes. The administrative agency is also responsible for reviewing the competence and ethics of insurance company employees.

The judicial branches of governments also shape insurance law. Courts are often asked to resolve disputes between the parties to an insurance contract, and disputes with third parties. Court decisions interpret the statutes and regulations based on the facts of the case, creating many rules that must be followed by insurers and insureds.

Insurance companies may be penalized for violating statutes or regulations. Penalties for misconduct include fines and the loss or suspension of the company's business license. In some states, if a court finds that an insurer's denial of coverage or refusal to defend an insured in a lawsuit was unreasonable, the insurance company may be required to pay court costs, attorneys' fees, and a percentage beyond the insured's recovery.

Types of Insurance

Insurance companies create insurance policies by grouping risks according to their focus. This provides a measure of uniformity in the risks that are covered by a type of policy, which in turn allows insurers to anticipate their potential losses and to set premiums accordingly. The most common forms of insurance policies include life, health, automobile, homeowners' and renters', personal property, fire and casualty, marine, and inland marine policies.

Life insurance provides financial benefits to a designated person upon the death of the insured. Many different forms of life insurance are issued. Some provide for payment only upon the death of the insured; others allow an insured to collect proceeds before death.

A person may purchase life insurance on his or her own life for the benefit of a third person or persons. Individuals may even purchase life insurance on the life of another person. For example, a wife may purchase life insurance that will provide benefits to her upon the death of her husband. This kind of policy is commonly obtained by spouses and by parents insuring themselves against the death of a child. However, individuals may only purchase life insurance on the life of another person and name themselves beneficiary when there are reasonable grounds to believe that they can expect some benefit from the continued life of the insured. This means that some familial or financial relationship must unite the beneficiary and the insured. For example, a person may not purchase life insurance on the life of a stranger in the hope that the stranger will suffer a fatal accident.

Health insurance policies cover only specified risks. Generally, they pay for the expenses incurred from bodily injury, disability, sickness, and accidental death. Health insurance may be purchased for one's self and for others.

All automobile insurance policies contain liability insurance, which is insurance against injury to another person or against damage to another person's vehicle caused by the insured's vehicle. Auto insurance may also pay for the loss of, or damage to, the insured's motor vehicle. Most states require that all drivers carry, at a minimum, liability insurance under a no-fault scheme. In states that recognize no-fault insurance, damages resulting from an accident are paid for by the insurers, and the drivers do not have to go to court to settle the issue of damages. Drivers in these states may bring suit over an accident only in cases of egregious conduct, or where medical or repair costs exceed an amount defined by statute.

Homeowners' insurance protects homeowners from losses relating to their dwelling, including damage to the dwelling; personal liability for injury to visitors; and loss of, or damage to, property in and around the dwelling. Renters' insurance covers many of the same risks for persons who live in rented dwellings.

As its name would suggest, personal property insurance protects against the loss of, or damage to, certain items of personal property. It is useful when the liability limit on a homeowner's policy does not cover the value of a particular item or items. For example, the owner of an original painting by Pablo Picasso might wish to obtain, in addition to a homeowner's policy, a separate personal property policy to insure against loss of, or damage to, the painting.

Businesses can insure against damage and liability to others with fire and casualty insurance policies. Fire insurance policies cover damage caused by fire, explosions, earthquakes, lightning, water, wind, rain, collisions, and riots. Casualty insurance protects the insured against a variety of losses, including those related to legal liability, burglary and theft, accidents, property damage, injury to workers, and insurance on credit extended to others. Fidelity and surety bonds are temporary, specialized forms of casualty insurance. A fidelity bond insures against losses relating to the dishonesty of employees, and a surety bond provides protection to a business if it fails to fulfill its contractual obligations.

Marine insurance policies insure transporters and owners of cargo shipped on an ocean, a sea, or a navigable waterway. Marine risks include damage to cargo, damage to the vessel, and injuries to passengers.

Inland marine insurance is used for the transportation of goods on land and on land-locked lakes.

Many other types of insurance are also issued. Group health insurance plans are usually offered by employers to their employees. A person may purchase additional insurance to cover losses in excess of a stated amount or in excess of coverage provided by a particular insurance policy. Air-travel insurance provides life insurance benefits to a named beneficiary if the insured dies as a result of the specified airplane flight. Flood insurance is not included in most homeowners' policies, but it can be purchased separately. Mortgage insurance requires the insurer to make mortgage payments when the insured is unable to do so because of death or disability.

Contract and Policy

An insurance contract cannot cover all conceivable risks. An insurance contract that violates a statute, is contrary to public policy, or plays a part in some prohibited activity will be held unenforceable in court. A contract that protects against the loss of burglary tools, for example, is contrary to public policy and thus unenforceable.

Insurable Interest

To qualify for an insurance policy, the insured must have an insurable interest, meaning that the insured must derive some benefit from the continued preservation of the article insured, or stand to suffer some loss as a result of that article's loss or destruction. Life insurance requires some familial and pecuniary relationship between the insured and the beneficiary. Property insurance requires that the insured must simply have a lawful interest in the safety or preservation of the property.

Premiums

Different types of policies require different premiums based on the degree of risk that the situation presents. For example, a policy insuring a homeowner for all risks associated with a home valued at $200,000 requires a higher premium than one insuring a boat valued at $20,000. Although liability for injuries to others might be similar under both policies, the cost of replacing or repairing the boat would be less than the cost of repairing or replacing the home, and this difference is reflected in the premium paid by the insured.

Premium rates also depend on characteristics of the insured. For example, a person with a poor driving record generally has to pay more for auto insurance than does a person with a good driving record. Furthermore, insurers are free to deny policies to persons who present an unacceptable risk. For example, most insurance companies do not offer life or health insurance to persons who have been diagnosed with a terminal illness.

Claims

The most common issue in insurance disputes is whether the insurer is obligated to pay a claim. The determination of the insurer's obligation depends on many factors, such as the circumstances surrounding the loss and the precise coverage of the insurance policy. If a dispute arises over the language of the policy, the general rule is that a court should choose the interpretation that is most favorable to the insured. Many insurance contracts contain an incontestability clause to protect the insured. This clause provides that the insurer loses the right to contest the validity of the contract after a specified period of time.

An insurance company may deny or cancel coverage if the insured party concealed or misrepresented a material fact in the policy application. If an applicant presents an unacceptably high risk of loss for an insurance company, the company may deny the application or charge prohibitively high premiums. A company may cancel a policy if the insured fails to make payments. It also may refuse to pay a claim if the insured intentionally caused the loss or damage. However, if the insurer knows that it has the right to rescind a policy or to deny a claim, but conveys to the insured that it has voluntarily surrendered such right, the insured may claim that the insurer waived its right to contest a claim.

An insurer may have a duty to defend an insured in a lawsuit filed against the insured by a third party. This duty usually arises if the claims in the suit against the insured fall within the coverage of a liability policy.

If a third party caused a loss covered by a policy, the insurance company may have the right to sue the third party in place of the insured. This right is called subrogation, and it is designed to make the party that is responsible for a loss bear the burden of the loss. It also prevents an insured from recovering twice: once from the insurance company, and once from the responsible party.

An insurance company can subrogate claims only on certain types of policies. Property and liability insurance policies allow subrogation because the basis for the payment of claims is indemnification, or reimbursement, of the insured for losses. Conversely, life insurance policies do not allow subrogation. Life insurance does not indemnify an insured for a loss that can be measured in dollars. Rather, it is a form of investment for the insured and the insured's beneficiaries. A life insurance policy pays only a fixed sum of money to the beneficiary and does not cover any liability to a third party. Under such a policy, the insured stands no chance of double recovery, and the insurance company has no need to sue a third party if it must pay a claim.

Terrorism Insurance

Following the attacks on the World Trade Center and the Pentagon, insurance premiums skyrocketed, especially for tenants of highly visible landmarks like sports arenas and skyscrapers. The Terrorism Risk Insurance Act of 2002 (TRIA), Pub. L. No. 107–297, 116 Stat. 2322, established a temporary federal program providing for a shared public and private compensation for insured losses resulting from acts of terrorism. The act, which is valid only for three years, provides that insurers must make terrorism coverage available and must provide policy-holders with a clear and conspicuous disclosure of the premium charged for losses covered by the program. TRIA caps the exposure of insurance carriers to future acts of foreign terrorism, leaving the federal government to reimburse the insurance company for excess losses up to a maximum of $100 billion per year. Under TRIA, the treasury department covers 90 percent of terrorism claims when an insurer's exposure exceeds 7 percent of its commercial premiums in 2003, 10 percent of premiums in 2004, and 15 percent in 2005.

TRIA defines an act of terrorism as any act that is certified by the U.S. secretary of the treasury, in concurrence with the U.S. secretary of state and U.S. attorney general. The act of terror must result in damage within the United States, or outside the United States in the case of an airplane or a U.S. mission. A terrorist act must be committed by an individual or individuals acting on behalf of any foreign person or foreign interest. An event must be a violent act or an act that is dangerous to human life, property, or infrastructure. Nuclear, biological, and chemical attacks are not covered, and an event cannot be certified as an act of terrorism unless the total damages exceed $5 million.

further readings

Cady, Thomas C., and Christy H. Smith. 1995. "West Virginia's Automobile Insurance Policy Laws: A Practitioner's Guide." West Virginia Law Review 97.

Robinson, Eric L. 1992. "The Oregon Basic Health Services Act: A Model for State Reform?" Vanderbilt Law Review 45.

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Insurance

OPERATION

BUSINESS CYCLE

INNOVATIONS

REGULATION

BIBLIOGRAPHY

Risk is ubiquitous in the world and is generally considered a burden. Risk management, the art of coping with this onus, takes several forms: (1) doing nothing, or bearing the burden; (2) avoiding the risk, which includes reducing or quitting the risky activity; (3) spending resources to reduce the risks implication or probability, such as self-insurance; (4) hedging; and (5) transferring the burden to someone else, which is insurance. Some risks, like individual and group extinction, are so important that one could study history as the theme of risk management or view culture and social institutions like marriage and state, as evolving in response to the challenge of risks. Risk management is not special to humansfor example, ants spend effort and hoard excessive food, a form of self-insurance that humans parallel by precautionary savingbut insurance is a human invention.

Insurance is a transaction that transfers a specified risk to another party for a fee, called a premium. In return the insurer provides the insured with a promise of indemnification (insurance company payment for damages) should the specified event occur. The specified events vary widely and comprise the different lines of the insurance industry: marine, property, vehicle, liability, life, and health, but the basic structure is the same. The amount of indemnification may be event-dependent (small or large fire) or fixed (life). In life insurance the event specified is either death or longevity. Insurance is both a consumption good consumed by households and an intermediate input purchased by firms. In property insurance the business is split about equally between households and firms. As can be gleaned from a cross-section as in Table 1, insurance is growing faster than national product, suggesting that it is a luxury good (income elasticity larger than one) and a super normal input. It may imply that adequate development of the insurance industry is vital for economic development and growth. By providing assets whose value is contingent on a given random state of nature, insurance helps make the market more complete and therefore more efficient. Without insurance availability some useful transactions and investments would be curtailed or thwarted.

Gross premium as percent of GDP Total Life Non-Life
SOURCE: OECD Insurance Statistics Yearbook, 2002.
Japan13.210.03.2
US10.65.25.4
European Union9.26.03.3
Poland2.91.01.9
Turkey1.50.31.3

The demand for insurance is theoretically explained by risk aversion. A risk-averse person faced with a probability p of loss D, like a house that may burn, is willing to insure against that risk even at a premium higher than the mean damage pD. Firms demand insurance to placate their risk-averse owners and other parties, like customers, suppliers, employees, and lenders, thereby securing better contract terms with them.

Insurance differs from gambling by some of its fundamentals designed to restrain devious incentives. The purchaser must have insurable interest, that is interest in the well-being of the insured asset (owner, mortgage lender). Other than in the case of life insurance, indemnification must be bounded by the value of the asset, including by double coverage. In return for indemnification, the insured surrenders to the insurer subrogation of all his relevant legal rights to claim from other parties. Still, the insurance market is burdened by fraud and by imperfections like adverse selection, where the firm cannot completely ascertain the risk of each customer thereby charging a premium that attracts the bad risks more than the good, and by moral hazard, where after the insurance transaction the insured may wish to increase his or her risk.

The supply side raises two puzzles. First, what is the relative advantage of the insurer in bearing risks over its clients? Second, if indeed it has some such relative advantage, why does it seek to insure itself by purchasing reinsurance? Reinsurance is a transaction where an insurer buys insurance from another insurer thereby transferring, or ceding, some of its risks and business to others. The remainder is called retention. Reinsurance is a global industry with some large specialized firms.

The production of insurance can be done in two distinct modes: mutual and capital-backed. A mutual is an association of members-customers who barter in insurance and pledge to indemnify each other if damaged. This insurance is backed by members commitments and capital. It must be a natural and intuitive arrangement since it goes back to antiquity. Second-century CE agreements among boat or donkey owners are legally analyzed in the Talmud.

Even a two-person mutual is advantageous. If each one has total property W and faces an independent risk of losing value D (like a house by fire) with probability p the advantage of such a mutual is:

The first line in (1) is the expected utility of each person in the 2-member fire-mutual, while the second line is his expected utility bearing the risk alone. The inequality follows from the concavity of the utility function that is implied by risk aversion.

The agreement improves with any additional member. The attractiveness of an n -member mutual may be explained by the expediency of (risky) portfolio diversification. Instead of holding one risky asset valued D, the agreement affords the member to hold the risk of n small assets, each valued D/n, which is always better for a risk-averse. In (1) the two fire events were assumed independent. Partial positive dependence leaves the inequality intact but reduces the advantage. Most mutuals collect a provisionary premium upfront and reassess members after risks realization, collecting more or refunding some.

However the main mode of insurance provision nowadays is by a stock company where insurance is backed by equity capital. Such production dates to the fourteenth-century marine transaction that combined banking and insurance. In such maritime loans the lender would finance a trade transaction but waive the loan if the vessel is lost. It appeared in two variants regarding the collateral: bottomry (the vessel) and respondentia (the cargo). While in a mutual the number of owners-partners must vary jointly with that of the insureds, in the stock firm the two are independent.

OPERATION

Assume schematically an insurance firm that sells only one type of policy against the risk of, say, fire, which occurs independently with the same known probability p of total loss D for each customer. Let V be the firms capital before any insurance transaction, serving as a cushion to enhance the value of its policies-promises. Suppose n such policies are sold at price s + c where cn covers the cost of running the business. Usually s would exceed pD, the expected loss (and indemnification), and the balance is a safety factor that goes to profit and tax. The revenue ns is called unearned reserve because it is designated for probable coming claims. As time elapses the uncertainty regarding the years fires is gradually cleared, more and more of the reserve becomes earned reserve, owned by the firm and part of its annual profit and of V. The firms funds V+ ns are meanwhile invested and bear a random rate of return r thereby generating a major part of its profits. The number of fires that occur is a random variable k. If the two random variables happen to have realizations R and K, then the firms net worth at the year end is (V + ns )(1 + R ) KD. If it is negative, the firms future promises are worthless so it is declared insolvent and ceases operation.

The risk of failure is real and troubling. In the United States during the 1990s approximately 70 firms, or 0.8 percent of all insurance firms, failed within a year. The condition (V + ns )(1 + r ) KD < 0 points out the reasons for failure: low V ; low premia s ; low R ; large K. The dependence of the exante probability of failure Prob((V + ns )(1 + r ) KD < 0) on the magnitude of n is less clear-cut. Conventional wisdom attributes the relative advantage of the stock insurance firm in bearing risk to the multitude of clients and the law of large numbers. However, whether the numbers (n ) in insurance are large enough to warrant this explanation is an empirical question. According to the 1963 work of Paul A. Samuelson, the advantage of the insurance firm lies in the multitude of its owners. Spreading a given risk over many bearing shoulders (stockholders) tends to evaporate its burden. In 1970 Kenneth J. Arrow and Robert C. Lind analyzed a large risky public project, where the risk was spread over the population, and demonstrated it for a single risk. This result explains the advantage that governments may have in insuring against catastrophic losses. It does not address the issue faced by the insurance industry of insuring against multiple risks. In this light, reinsurance is a handy mechanism to spread risks.

BUSINESS CYCLE

The insurance industry manifests a peculiar business cycle of its own. In times of hard market, prices are high and yet insurance is hard to get as firms offer only constrained extent of coverage and carefully select the clients. The result is high profits and rise in surpluses. That by itself may lead to the opposite, soft market, as the high surplus warrants more business and risk taking so prices go down to attract more and necessarily lower-grade customers. Profits go down, equities are depleted, and the cycle repeats itself.

INNOVATIONS

Since the 1990s a rise in world catastrophes like earthquakes, hurricanes, and terrorist activities drained world insurance surplus and constrained the industrys production capacity. In response financial innovations were introduced as substitutes for equity capital. The simplest is catastrophe bonds. An insurer issues such a bond, and the repayment of the interest and/or the principal is made contingent on a specified event like the catastrophe cost (for the insurer, for the region, or for the world) not exceeding a predetermined number. It shifts some of the risk from shareholders to bond holders and is a modern resurrection of the Middle Ages maritime loan-cum-insurance. More complicated instruments are call and put options whose strike price is some catastrophe number.

REGULATION

All over the world, insurance industries are regulated. The raison detre of regulation is the risk of insurers insolvency. Such occurrence would disrupt the economy, prevent gains from trade in risk-bearing, and cause personal loss and suffering to consumers. Although insurers themselves would suffer in case of insolvency, they can not be fully counted on to take steps to avoid it because of several market imperfections. First, because of the limited liability of a stock company, stockholders would not have to bear, in case of insolvency, its full cost but lose at most their equity. That weakens stockholders incentives to avoid excessive risk. Second, moral hazard and agency problems develop. After issuing policies purchased under presentation of a certain risk level, the insurer may wish to assume more risk because part of its cost is borne by the insured policyholders. Regulators issue guidelines regarding the extent of underwriting, prices, and investment policy. They monitor the business and upon detecting signs of trouble intervene by issuing various directives.

SEE ALSO Adverse Selection; Business Cycles, Real; Gambling; Insurance Industry; Moral Hazard; Regulation

BIBLIOGRAPHY

Arrow, Kenneth J., and Robert C. Lind. 1970. Uncertainty and the Evaluation of Public Investment Decisions. American Economic Review 60: 364378.

Dionne, Georges, ed. 2000. Handbook of Insurance. Norwell, MA: Kluwer.

Samuelson, Paul A. 1966. Risk and Uncertainty: A Fallacy of Large Numbers. In Collected Scientific Papers of Paul A. Samuelson, ed. Joseph E. Stiglitz. Cambridge, MA: MIT Press.

Winter, Ralph A. 1991. Solvency Regulation and the Property-Liability Insurance Cycle. Economic Inquiry 29: 458471.

Yuval Shilony

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INSURANCE

A contract whereby, for a specified consideration, one party undertakes to compensate the other for a loss relating to a particular subject as a result of the occurrence of designated hazards.

Louisiana Attorney General Sues Insurance Companies

In November 2007, Louisiana Attorney General Charles C. Foti, Jr. announced that his office had filed suit against several insurance companies in New Orleans Parish Civil District Court . The petition alleged various ongoing schemes by the companies to avoid fair compensation to victims of Hurricanes Katrina and Rita, in violation of the Louisiana Monopolies Act (an anti-trust law). “But to be clear,” Foti added in his announcement, “these abuses were not new to the recent hurricanes.” Some insurance experts opined that Foti filed in state court, asking for a jury trial and citing state monopoly law rather than federal anti-trust law, in hopes of finding local sympathetic factfinders.

Named as defendants in the suit were All-state Insurance Company; Lafayette Insurance Company; Xactware, Inc.; Marshall & Swift/

Illegal Immigration Woes

As the final months of the Bush Administration's White House tenure neared the end, so also did the hope of any meaningful reform to immigration laws being enacted before a new president took office. Although the public remained eager for immigration reform, most Americans opposed any path to legal citizenship for the estimated 12 million illegal immigrants already in the United States as of 2008. Moreover, because 2008 was an election year, politicians were less eager to deliver plain talk to their constituents about the realities of passing legislation that could pass muster with all parties and competing interests at stake.

This was not to suggest that nothing was done to improve the control of illegal immigration. On the contrary, the Bush Administration responded to what many Americans had said all along: forget new legislation and just enforce the laws that already exist. To that end, during his State of the Union Address in January 2008, President Bush enumerated the steps taken by his administration to improve border security and other immigration challenges.

Bush told the nation that since he took office in 2001, funding for border security and immigration enforcement had increased by 159 percent, from $4.8 billion to 12.3 billion in 2008. The number of border patrol agents had also been increased from 9,000 in 2001 to 18,000 by the end of 2008. Moreover, Bush advised, the Department of Homeland Security (DHS) as on track to complete 370 miles of pedestrian fencing along the southwest border of the United States by the end of 2008. This, combined with vehicle fencing, gave the Administration credit for a total of 670 miles of fencing along the southwest border by the end of 2008. Other measures included the addition of three Unmanned Aerial Systems (UAS) and $100 million of dedicated funding for a new Southwest Border Enforcement Initiative in the 2009 budget. The DHS reported a 20 percent drop in apprehensions of illegal immigrants apprehensions of illegal immigrants along the southwest border, supporting the argument that such efforts had indeed deterred illegal entries.

The Administration was also responsible for ending the decades-old practice of permitting U.S. and Canadian citizens to enter the country with merely oral declarations of identity and citizenship. Beginning in January 2008, all cross-border travelers needed documents to support their identities and citizenship. Starting in June 2009, the Western Hemisphere Travel Initiative will take effect, requiring passports or similar secure documents for all travelers.

Finally, in what the New York Times referred to as “the toughest crackdown on illegal immigration in two decades,” employers found themselves increasingly subject to fines, convictions, losses of business licenses, and other sanctions if found to have knowingly engaged in the hiring of illegal immigrants. After years of lax enforcement, federal immigration agents increased the number and force of raids at workplaces, resulting in an unprecedented 4,970 arrests for 2007. Moreover, more than 175 state bills were introduced to address the employment of illegal immigrants. In 2008, Mississippi became the first state to make it a felony for an illegal immigrant to work. The state's measure also provided a cause of action for terminated employees to sue their employers if they were replaced by an illegal immigrant. Other states, well within their rights, began to deny college benefits, drivers' licenses, or other state perks to illegal immigrants.

But there was a darker side to these efforts. Employers started to push back, mobilizing and lobbying to make state laws more friendly to employers. Business groups across the country opposed the use of the federal E-Verify system of checking working papers of all new hires, complaining that the Social Security Administration's database was fraught with error. But the Bush Administration had an answer for the complaints: the crackdown on employers was the price they would pay until voters saw the light and agreed to open the gates to immigrant workers. The administration was referring to its failed immigration reform package that sparked national debate over a “guest worker” program that many considered cloaked amnesty.

On June 28, 2007, the U.S. Senate essentially “killed” the Bush Administration's comprehensive immigration reform bill intended to fortify the nation's borders while creating a vehicle toward citizenship for an estimated 12 million current illegal immigrants. The bill had essentially failed three weeks prior, but was revived at the last minute by bi-partisan lobbying to reconsider a revised version. A cloture motion received a 64-35 vote to allow continued debate, but that success was short-lived. After considering three more amendments, the votes fell 14 short of the 60 needed for a final cloture (ending debate and clearing the way for final passage of the legislation). The topic was considered so volatile that it was unlikely to be revisited again before 2009, or at a minimum, until after 2008 elections. Senator Edward M. Kennedy (D-MA), the party's key negotiator, called the defeat “enormously disappointing for Congress and for the country,” but added that, “[w]e will be back.” He and others had worked hard to find common ground for an immigration compromise which they referred to as “an imperfect but necessary fix” to the current system.

The “current system,” had not been seriously overhauled in 20 years, resulting in a sagging policy under which millions of illegal immigrants used forged and counterfeit documents or lapsed visas to live and work in the United States. Mr. Bush's proposed plan would have made those millions eventually eligible for legal status over time, while immediately focusing on tightening border security and creating an employee verification system intended to weed out illegal workers from jobs in the United States. The bill also would have created a temporary worker (“guest worker”) program and a system that based future legal immigration on employment rather than family ties.

After Congress failed to rework immigration reforms, the Bush Administration stepped up its border and work site monitoring, resulting in a 61 percent increase in the average daily detainee population, which hovered around 28,700 by December 2007. As the detainee population grew, the American Civil Liberties Union (ACLU) found deficient medical care to be the primary complaint, and promptly filed suit alleging excruciating suffering and the deaths of several detainees at an detainee center in San Diego, one of more than 300 nationwide.

In July 2008, the Department of Homeland Security delivered another negative report. An internal investigation by DHS's inspector general revealed an alarming number of deaths of immigrants detained by the government. With the Bush Administration's aggressive enforcement policies, the number of jailed immigrants continued to rise. Detained illegal immigrants were generally housed in centers run by Immigration and Customs Enforcement (ICE) officials or private companies, as well as in state and local jails that had agreed to take them.

Although the report was limited, focusing on only two deaths of 74 that had occurred since 2004, it did commend officials at Immigration and Customs Enforcement, the agency tasked with overseeing immigrant detentions, for adhering to standards addressing follow-up procedures after detainees have died. The report recommended better access to health care for detainees, stronger oversight, and better detention standards to be drafted.

In another report released June 30, 2008, the United Nations documented “credible claims”(UN) of denied, inadequate, or incorrect care or delay in treatment at ICE facilities. Two new bills were introduced in Congress. One, introduced by Senator Robert Menendez (D-NJ) would require DHS to establish procedures for timely delivery of healthcare, as well as report all deaths to the DHS Inspector General and to Congress, and enhance the decision-making capabilities of medical professionals. Under the current law, on-site staff decisions could be overruled by offsite officials without further review.

In an election year, the word “amnesty” was sure to cause shudders in both Democratic and Republican circles. Even the experts could not agree on a palatable reform policy that could bring together some of the opposing forces. According to a report published in the Christian Science Monitor, Mark Krikorian, executive director of the Center for Immigration Studies in Washington, proposed shrinking the number of illegal immigrants gradually (attrition) through enforcement of existing laws. Another immigration expert, Joseph Chamie, research director at the Center for Migration Studies in New York, opined that legalization was the only viable path and long-term option that made any sense. At least both Republicans and Democrats agreed on the need for tightening U.S. borders. But even with enhanced border patrol, little had changed for the millions of illegal immigrants already inside the border.

Boeckh, LLC; Insurance Services Office, Inc.;State Farm Fire and Casualty Company; USAA Casualty Insurance Company; Farmers Insurance Exchange; Standard Fire Insurance Company; and McKinsey & Company. The suit alleged that defendant insurers conspired to limit payments to policyholders after the hurricanes and engaged in elaborate price-fixing schemes. Some of the alleged illegal tactics included coercing policyholders into settling their damage claims for less than actual value, editing engineering assessment reports, delaying and forestalling payments, and forcing policyholders into costly litigation to challenge their estimates. “The acts of this combination have seriously impeded the economic growth and disaster recovery of [Louisiana] and its citizens and effectuated an ongoing fraud on commerce in this state,” stated one allegation in the 29-page lawsuit.

Although claims of price-fixing and antitrust conspiracies are generally harder to prove than other violations, in this case there was one common thread to bind the defendants into one common conspiracy, Loyola law professor Dane Ciolino told CBS New Orleans' media affiliate, WWL. That was defendant McKinsey & Company, a New York-based consulting group that allegedly taught insurance companies how to reduce payouts and increase profits. The lawsuit alleged that McKinsey, called the “architect” of sweeping changes in the insurance industry starting in the 1980s, advised its insurer-clients to “stop ‘premium leakage’ by undervaluing claims using the tactics of deny, delay, and defend.” The suit further alleged that all of the defendant insurance companies had used the services of McKinsey, and therefore, had conspired in a price-fixing scheme.

Likewise, defendants Marshal & Swift/Boeckh and Xactware were not insurance companies, but rather manufacturers and creators of claims-processing computer software that has helped the industry standardize claim processing. But according to the lawsuit, these defendants created a “tainted” database of claims settlement figures that the industry relied on to reduce figures quoted to policyholders as accurate or fair compensation for needed repairs or replacements. All the data was centralized by Xactware's parent company , defendant Insurance Service Office (ISO). Foti used these compiled alleged facts to support allegations of industry collusion.

Foti further alleged that insurers, by using such outside vendors to unify “power and control … under a shroud of secrecy,” were able to systematically reduce the percentage of premium dollars returned to policyholders in the form of claims payments. The suit alleged that historically, the insurance industry had paid (in claims) 70 cents on every premium dollar, but in Katrina, it paid 50 cents per premium dollar.

The lawsuit's filing coincided with local media's investigation into insurance company policies and practices that resulted in record profits despite Katrina and Rita claims. For example, Allstate netted more after-taxes income than it had before dealing with losses from the 2005 hurricanes, according to Consumer Federation of America. In fact, in 2006 when it was still paying claims for Katrina and Rita, its profits jumped to $5 billion. The consumer group also found that between 1996 and 2006, the amount of each premium dollar that Allstate paid back to its policyholders fell from 73 cents per dollar to 59 cents. Such business practices were allegedly uncovered in internal Allstate presentation slides in which McKinsey demonstrated how the insurer could boost profits.

In defense, insurance companies asserted that profits were the result of millions of new policyholders, including auto insurance customers. Further, and in particular, Allstate responded that when Louisiana insurance officials conducted a market review of its response to Katrina and Rita, they concluded that it was compliant with state statutes, rules, and regulations. (But the state insurance commissioner ordered the company to change its “flawed” property inspection process, and to reinstate policyholders after Allstate cancelled the policies of more than 4,700 homeowners.)

Parallel with this news was the move by Judge Michael T. Parker of Federal District Court in Mississippi to extend an existing restraining order that prevented that state's attorney general from continuing a criminal investigation into State Farm's handling of Katrina claims. State Farm had sued Mississippi Attorney General Jim Hood in September 2007 and won its petition for a restraining order prohibiting Hood from reopening a criminal case or continuing grand jury hearings.

The Louisiana insurance commissioner, Jim Donelon, who was briefed on the lawsuit by an aide, said Mr. Foti was obligated to sue if he found evidence of collusion between the companies. The lawsuit was projected to continue in court over the next few years.

Tuepker v. State Farm Fire & Casualty Company

Anyone who has reviewed an insurance policy knows that these documents are typically long and complicated. The insurer provides details on what it is insuring, how much it will pay in the event of an incident, and what is excluded from the coverage. Insurance exclusion clauses take some insured owners by surprise when they file a claim, for a policy clause that suggests coverage may be taken away by a later exclusion clause. Not surprisingly, disputes over coverage lead to litigation. In the aftermath of Hurricane Katrina in August 2005, many homeowners where shocked to find that the hurricane coverage they purchased provided no protection. Insurance companies had included “flood” exclusion clauses that denied payment for damage caused by Katrina's storm surge. Homeowners sued but have for the most part been unsuccessful in overturning or limiting these flood exclusion clauses. The U.S. Fifth Circuit Court of Appeals, Tuepker v. State Farm Fire … Casualty Company, 507 F.3d 346 (5th Cir. 2007), upheld a flood exclusion clause, declining to find it ambiguous and refusing to apply the “efficient proximate cause doctrine.”

John and Claire Tuepker's house on the Gulf Coast of Mississippi was destroyed by the combined effects of Hurricane Katrina on August 29, 2005. All that as was left was the concrete slab on which their home had sat. The Tuepkers filed a claim with State Farm but the company denied coverage. Though the policy contained a “Hurricane Deductible,” which implied coverage, the policy also had a flood exclusion clause. This clause stated that the company excluded coverage for damages caused by “flood, surface water, waves, tidal water, tsunami, seiche, or overflow of a body of water, or spray from any of these, all whether or not driven by wind.” The Tuepkers filed a lawsuit in Mississippi U.S. district court , seeking a declaratory judgment that the damage to their house caused by the storm surge was not excluded under State Farm policy.

The federal district court sided with State Farm on the flood exclusion clause, finding that it was a valid and enforceable provision. However, under Mississippi state law where there is damage caused by both wind and rain (covered losses) and water (losses excluded from coverage), the “amount payable under the insurance policy becomes a question of which is the proximate cause of the loss.” The State Farm policy appeared to be inconsistent with this law. The court also found that an “anti-concurrent-causation clause” in the policy was ambiguous and ineffective to exclude damages caused by wind or rain. This clause stated that even if wind and rain caused damage, there could be no coverage if there was accompanying water damage. If the Tuepkers could prove that hurricane winds and rains entering the house through openings caused by hurricane winds proximately caused damage to their property, those losses would be covered under the policy. State Farm then appealed these questions to the Fifth Circuit Court of Appeals.

A three-judge panel of the Fifth Circuit unanimously found in favor of State Farm. Judge William Garwood, writing for the court, noted that the federal court must be guided by Mississippi state insurance law. As to the water damage exclusion clause, the court found the clause's recitation of events accurate in describing the “influx of water into the Tuepkers' home that was caused by the Katrina storm surge.” Judge Garwood cited a previous Fifth Circuit decision that applied Mississippi law in which the term “storm surge” was “little more than a synonym for ‘tidal wave’ or wind-driven flood.” The lack of a specific reference to a “storm surge” in the water damage exclusion did not make the policy ambiguous or allow the Tuepkers to recover for their losses caused by the storm surge.

Judge Garwood reversed the district court's ruling that the anti-concurrent causation clause was ambiguous. The Tuepkers argued that this clause conflicted with the policy's express coverage for losses attributable to wind. The appeals court found that the words of the anti-concurrent causation clause was unambiguous under Mississippi law. The clause clearly stated that policy did not cover “any loss which would not have occurred in the absence of one or more of the following excluded events.” This clause, in combination with the water damage exclusion “clearly provides that indivisible damage caused by both excluded perils and covered perils or other causes is not covered.” As to the application of the efficient proximate cause doctrine, Judge Garwood concluded that under Mississippi law an anti-concurrent causation clause will “circumvent” this doctrine. The appeals court decision closed the door on thousands of homeowners seeking insurance coverage for Katrina's storm surge.

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Insurance

Sections within this essay:

Background
Liability Insurance
What Is Covered
Liability Limits

Collision and Comprehensive Coverage
Determining Value of Car

Uninsured/Underinsured Motorist Coverage
No Fault Insurance
State-By-State Insurance Requirements
Additional Resources
Organizations
Insurance Information Institute

Organizations
National Association of Insurance Commissioners
National Automobile Dealers Association

Background

For anyone who has ever owned a car, auto insurance is something almost impossible to do without. Forty-six states and the District of Columbia now require automobile owners to carry some form of automobile insurance, and even if you are residents of one of the few states that does not require some sort of insurance policy on your car, it's a good idea probably if you to have insurance anyway.

Why? Because accidents do happen, they can be expensive, and auto insurance is often the only way for car owners to protect themselves from damages, liability, and possible a hefty court settlement. As with anything else so ubiquitous, there are different types of auto insurance designed to suit different types of drivers and cars. Auto insurance requirements vary from state-to-state, with some states requiring more coverage than others. Some states also have no fault laws in place, which require insurers to pay for certain accidents no matter who is at fault. Whatever the case, it is good to know some of the basics of auto insurance before deciding on buying a specific policy for your car.

Liability Insurance

Liability insurance is the most basic form of insurance. It pays if the insured is at fault in an accident. Generally speaking, it covers medical injuries and property damage to the other driver. It can also cover for pain and suffering and legal bills of the other driver as well. Owners are required to carry liability insurance in the vast majority of states. It is also required for rental cars and for drivers of third-party owned vehicles.

What Is Covered

Liability insurance usually covers the named insured on the policy, the named insured's spouse and children, any blood relative of theirs by marriage, or adoption, including foster children, and anyone driving the car with the insured's permission. It covers named vehicles in the policy, as well as added vehicles that the named insured replaces the original named vehicle with in the policy. Most of the time (though not always), it also covers non-named vehicles if the named insured was driving, and any additional non-named vehicle the named insured acquires during the policy period, providing the named insured informs the insurance company during a specified period.

Temporary vehicles that substitute for an insured vehicle that is out of service because of repairs or be-cause it has been totaled are usually covered as well, though again, this is not always the case and an insured individuals should check their policies to determine the exact limits of their coverage.

Drivers who use a named vehicle without the named insured's permission are not covered by a liability policy, although the vehicle itself may be. Also rental cars that are not being used to replace a named vehicle being repaired may not be covered unless the named insured pays a special premium.

Liability Limits

In the 47 states and the District of Columbia that require liability insurance, a minimum amount of coverage is also required. Even the states that do not require liability insurance insist that when liability insurance is purchased in the state, it needs to meet a minimum requirement.

These minimum requirements are usually represented by a series of three numbers. The first number represents the amount of money (in thousands) an insurance company is required to pay for bodily injury for one person injured in an accident. The second number represents the amount an insurance company is required to pay in total for all the injuries in an accident. The final number represents the amount the insurance company must pay for property damage in an accident.

For example, the liability requirements of the state of Alabama are usually represented as 20/40/10. Thus, insured drivers in Alabama are required to carry a minimum of $20,000 of medical coverage for a single person injured in an accident, $40,000 of medical coverage for all people injured in an accident, and $10,000 of coverage for property damage.

Insurance companies are not allowed to sell policies that are under the liability limits. In Alabama, a motorist could not buy $10,000 worth of coverage for a single person injured in an accident or $5,000 of coverage for property damage. Insurance policies must at least meet the minimum requirements, although they can offer more coverage than the requirements. States that do not mandate liability insurance also have liability minimums—insurers cannot sell policies in those states below the minimums.

Not all states require medical liability insurance to be carried by drivers:—in Florida and New Jersey, only property damage liability is mandatory. California also allows lower minimums for eligible low-income drivers in the California Automobile Assigned Risk Plan. In New York, drivers are required to carry a higher amount of liability insurance designed to cover injury from the accident which results in death.

States have different laws as to when proof of insurance must be presented. Some states oblige such proof to be offered when a car is registered, others ask for such proof only when drivers are charged with a traffic violation or have an accident on their records.

Collision and Comprehensive Coverage

Besides liability, drivers can get other coverage from auto insurance. Collision coverage insures drivers for the damage done to their own cars by an accident that was their fault. Collision insurance is the most expensive auto insurance coverage, and may come with a high deductible.

Comprehensive coverage pays for damage to a driver's car that was caused by events other than a car accident. Weather damage, theft damage, and fire damage are just some of the events covered by comprehensive. Many policies even cover damages from hitting a deer. Comprehensive coverage is not as expensive as collision, but it is still more expensive than liability and usually comes with a deductible.

Determining Value of Car

With both collision and comprehensive, insurers will usually only cover the Actual Cash Value (ACV) of the cost of the car. ACV is determined by taking the replacement cost of the vehicle—what it would cost to repair damage to the vehicle without deducting for depreciation—and subtracting the depreciation. So, if a car is bought for $10,000, and is 10 years old, the ACV of the car would be substantially less than $10,000.

Drivers willing to pay a higher premium can get insurance policies that will cover the replacement costs of the car. Depending on the age and condition of the vehicle, these kinds of policies may be worth it, although they are usually not recommended for older vehicles.

Uninsured/Underinsured Motorist Coverage

Uninsured motorist (UM) coverage provides coverage for the insured who is hit by a motorist who is uninsured or by a hit-and-run driver who remains unidentified. Since the injured party cannot get money for their injuries from the driver of the liable vehicle, uninsured motorist coverage picks up the bill. UM coverage is required in many states as part of a driver's liability coverage.

UM coverage pays for the driver or a relative who lives with the driver, or anyone else driving a named vehicle with a driver's permission, or anyone else riding with the driver in the named vehicle. UM coverage also covers the insured if they are passengers in someone else's car, although the passenger's UM insurance will not contribute until the driver's UM insurance is exhausted. For a hit-and-run, a driver is usually required to notify the police within 24-hours of the accident to receive the benefits of UM coverage.

Underinsured motorist (UIM) coverage operates in a similar fashion. With UIM coverage, the liability policy of the driver at fault is not enough to cover the injuries of the other driver or passengers. UIM coverage pays out the difference for the non-liable driver.

Generally speaking, UM or UIM coverage pays for only medical injury to the driver and passengers of the hit car. For a higher premium, it can cover property damage to the automobile as well. UM and UIM coverage is reduced by amounts the driver receives from other insurance coverage such as personal medical insurance or worker's compensation.

No Fault Insurance

Since 1970, many states have passed a no-fault insurance law. This law requires drivers to buy insurance that covers their injuries in an auto accident no matter who is at fault. No-fault laws, which were first enacted in Canada in the 1940s and 1950s, are an attempt to rein in litigation by making the determination of fault irrelevant, thus allowing drivers to get reimbursed for their injuries faster and without court cost and delay.

Most no-fault insurance provides for very limited coverage—only providing for medical bills and lost income, and sometimes vehicle damage, though that is often paid outside no-fault by utilizing liability insurance. No fault does not pay for medical bills higher than the insured Personal Injury Protection (PIP) limits. If medical bills are higher, the insured must file a liability claim against the driver at fault. Some states put no restriction on an injured party's right to sue under no-fault,; other states require the injured party to reach a certain threshold of injury, either monetary or physical, before the party can sue the other driver.

In addition, no-fault puts restriction on suing for pain-and-suffering damages. All states that have no-fault allow recovery for pain and suffering in the event of death; however, pain and suffering lawsuits may not be allowed for other injuries. Examples of injuries which no-fault states allow no or only limited recovery for pain and suffering include dismemberment, loss of bodily function, serious disfigurement, permanent injury or disability, serious fracture and temporary disability or loss of earning capacity.

Two states, Pennsylvania and New Jersey, allow policy holders to determine if their no-fault insurance gives them the right to sue for pain and suffering expenses. If the drivers are willing to pay a higher premium, they have an expanded right to sue for pain and suffering.

State-By-State Insurance Requirements

The following is a list of state insurance liability requirements as of 2001, showing also whether the state is a no-fault state and whether uninsured motorist coverage is required. All liability minimums are in thousands of dollars, and the numbers are listed in the following order: coverage for injury per person, coverage for total injury, and coverage for property damage.

ALABAMA: Liability insurance required,; liability minimums 20/40/10

ALASKA: Liability insurance required,; liability minimums 50/100/25

ARIZONA: Liability insurance required,; liability minimums 15/30/10

ARKANSAS: Liability insurance required,; liability minimums 25/50/25

CALIFORNIA: Liability insurance required,; liability minimums 15/30/5

COLORADO: Liability insurance required,; liability minimums 25/50/15, no-fault state

CONNECTICUT: Liability insurance required,; liability minimums 20/40/10

DELAWARE: Liability insurance required,; liability minimums 15/30/5

DISTRICT OF COLUMBIA: Liability insurance required; liability minimums 25/50/10, uninsured motorist coverage required

FLORIDA: Liability insurance required for property damage only,; liability minimums 10/20/10, no fault state

GEORGIA: Liability insurance required,; liability minimums 25/50/25

HAWAII: Liability insurance required,; liability minimums 20/40/10, no fault state

IDAHO: Liability insurance required,; liability minimums 25/50/15

ILLINOIS: Liability insurance required,; liability minimums 20/40/15, uninsured motorist coverage required

INDIANA: Liability insurance required,; liability minimums 25/50/10

IOWA: Liability insurance required,; liability minimums 20/40/15

KANSAS: Liability insurance required,; liability minimums 25/50/10, no fault state, uninsured motorist coverage required

KENTUCKY: Liability insurance required,; liability minimums 25/50/10, no fault state

LOUISIANA: Liability insurance required,; liability minimums 10/20/10

MAINE: Liability insurance required,; liability minimums 50/100/25, uninsured motorist coverage required

MARYLAND: Liability insurance required,; liability minimums 20/40/15, uninsured motorist coverage required

MASSACHUSETTS: Liability insurance required,; liability minimums 20/40/5, no fault state, uninsured motorist coverage required

MICHIGAN: Liability insurance required,; liability minimums 20/40/10, no fault state

MINNESOTA: Liability insurance required,; liability minimums 30/60/10, no fault state, uninsured motorist coverage required

MISSISSIPPI: Liability insurance required,; liability minimums 10/20/5

MISSOURI: Liability insurance required,; liability minimums 25/50/10, uninsured motorist coverage required

MONTANA: Liability insurance required,; liability minimums 25/50/10

NEBRASKA: Liability insurance required,; liability minimums 25/50/10

NEVADA: Liability insurance required,; liability minimums 15/30/10

NEW HAMPSHIRE: Liability insurance not required,; liability minimums 25/50/25, uninsured motorist coverage required

NEW JERSEY: Liability insurance required -; drivers may choose standard or basic policy. For basic policy, minimums are 10/10/5 and only property damage is mandatory. For standard policy, minimums are 15/30/5 and all liability is mandatory. No fault state, uninsured motorist coverage required

NEW MEXICO: Liability insurance required,; liability minimums 25/50/10

NEW YORK: Liability insurance required,; liability minimums 25/50/10, liability must rise to 50/100/10 if injury results in death. No fault state, uninsured motorist coverage required

NORTH CAROLINA: Liability insurance required,; liability minimums 30/60/25

NORTH DAKOTA: Liability insurance required,; liability minimums 25/50/25, no fault state, uninsured motorist coverage required

OHIO: Liability insurance required,; liability minimums 12.5/25/7.5

OKLAHOMA: Liability insurance required,; liability minimums 10/20/10

OREGON: Liability insurance required,; liability minimums 25/50/10, uninsured motorist coverage required

PENNSYLVANIA: Liability insurance required,; liability minimums 15/30/5, no fault state

RHODE ISLAND: Liability insurance required,; liability minimums 25/50/25, uninsured motorist coverage required

SOUTH CAROLINA: Liability insurance required,; liability minimums 15/30/10, uninsured motorist coverage required

SOUTH DAKOTA: Liability insurance required,; liability minimums 25/50/25, uninsured motorist coverage required

TENNESSEE: Liability insurance not required,; liability minimums 25/50/10

TEXAS: Liability insurance required,; liability minimums 20/40/15

UTAH: Liability insurance required,; liability minimums 25/50/10, no fault state

VERMONT: Liability insurance required,; liability minimums 25/50/10, uninsured motorist coverage required

VIRGINIA: Liability insurance required,; liability minimums 25/50/20, uninsured motorist coverage required

WASHINGTON: Liability insurance required,; liability minimums 25/50/10 Washington D liability minimums 25/50/10, uninsured motorist coverage required

WEST VIRGINIA: Liability insurance required,; liability minimums 20/40/10, uninsured motorist coverage required

WISCONSIN: Liability insurance not required,; liability minimums 25/50/10, uninsured motorist coverage required

WYOMING: Liability insurance required,; liability minimums 25/50/20

Additional Resources

Digest of Motor Laws Compiled by Butler, Charle A., Editor and Kay Hamada, Eedsitor., American Automobile Association, Heathrow, FL, 1996.

http://www.iii.org "Minimum Levels Of Required Auto Insurance", Insurance Information Institute, 2002.

http://www.insure.com, "Auto Insurance," Insure.com, 2002.

http://www.nolo.com "Auto Insurance FAQ's" Nolo Press, 2002.

West's Encyclopedia of American Law West Publishing Company, St. Paul, 1998.

Organizations

Insurance Information Institute

110 William Street
New York, NY 10038 USA
Phone: (212) 346-5500
E-Mail: [email protected]
URL: http://www.iii.org
Primary Contact: Gordon Stewart, President

Organizations

National Association of Insurance Commissioners

2301 McGee St, Suite 800
Kansas City, MO 64108-2660 USA
Phone: (816) 842-3600
URL: http://www.naic.org
Primary Contact: Therese Vaughan, President

National Automobile Dealers Association

8400 Westpark Drive
McLean, VI 22102 USA
Phone: (800) 252-6232
E-Mail: [email protected]
URL: http://www.nada.org
Primary Contact: H. Carter Myers, Chairman

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Insurance

Sections within this essay:

Background
Health Insurance Basics
Employer Provided Health Insurance
Comprehensive Omnibus Budget Reconciliation Act of 1989 (COBRA)

Medicare Coverage
Eligibility
Coverage
Costs

Medigap Coverage
Medicaid
Disability and Long-Term Care
Denial of Claims or Reduced Payment of Benefits
Selected State Laws
Additional Resources

Background

Perhaps there is no area of the law more complex for the average American than insurance law. Health care and disability insurance coverage is no longer a luxury; it is a necessity for most individuals. By far, the majority of private health care insurance policies that are underwritten in the United States are those covered by employer group plans. As such, the sheer number of insureds in each group plan helps to reduce the cost of premiums and helps to standardize many provisions of plan coverage. By contrast, personal insurance purchased by individuals tends to be more costly, less comprehensive, but ostensibly more "portable," (remaining in effect despite job changes, periods of unemployment).

Health Insurance Basics

Health insurance policies are contracts that require the insurer to pay benefits according to the terms of the policy, in return for the payment of premiums and the meeting of other conditions or criteria spelled out in the plan. Payment of benefits (upon the occurrence of a qualifying event such as illness, injury, office visit, etc.) may be reduced by a "deductible" paid by the insured, by a "coinsurance" payment shared with the insured, or by the reaching of a "maximum benefit amount," which caps the amount the insurer will pay for a covered charge. In such circumstances, the provider of the service may agree to accept the insurance payment and drop the remaining balance or may charge the remaining amount to the patient/insured.

Health insurance policy protection comes in many forms, some of the major ones are:

  • Base Plans: These policy plans cover hospitalization and related charges
  • Medical and Surgical Benefit Plans: These policy plans cover physician and service charges (radiology, laboratory, etc.) whether received as an "inpatient" or "outpatient"
  • Major Medical or Catastrophic Plans: These policy plans only cover illnesses or injuries meeting the categorical criteria
  • Comprehensive Major Medical Plans: Such plans cover all or most of the above under one policy plan

Two other forms of health insurance should be specifically noted and described:

  • Hospital Indemnity and/or Specified Disease Plans: Instead of paying or reimbursing for a specific hospital charge, indemnity plans reimburse the insured a specified, fixed amount per day of hospitalization, irrespective of the actual hospital charges, and irrespective of any other insurance coverage. Likewise, specified disease plans pay the insured a fixed, flat amount for each day hospitalized as a result of the specified condition(s) or disease(s). It is important to note that these "insurance" plans are not intended to provide insurance coverage, but rather to supplement the needs of insureds who are hospitalized.
  • Blue Cross and Blue Shield Plans: "Blues" Plans represent a national federation of local, independent community health service corporations operating as not-for-profit service organizations under state laws. They contract with individual hospitals (Blue Cross) and physicians (Blue Shield) to provide prepaid health care to insured "subscribers." The "Blues" plans differ from conventional insurance plans in that they have already negotiated contractual charges with health care providers, so they will usually pay for a semi-private hospital room, or for nursing services, etc., in full rather than paying a fixed sum or "indemnity benefit" toward the total charge.

Employer Provided Health Insurance

At one time, most employers contracted with external insurance companies to provide benefits for their employees under a "group plan." The cost to the employer depended upon the number of employees, among other factors. Increasingly, employers have bought into "self-insured" or "self-funded" plans, wherein they establish trust funds or set aside other revenues to pay insureds' expenses. There are variations of these plans; for example, some provide for companies to pay benefits up to a certain amount, after which an insurer will take over and continue benefits. In some states, "multiple employer trusts" are established to pool funds and reduce costs for employer-paid benefits. Many states also have insurance "guarantee associations" to which employers may or may not contribute (depending on state law) and which ensure benefits for employees/insureds in the event of insolvency or failure to pay on the part of the employer plan.

Comprehensive Omnibus Budget Reconciliation Act of 1989 (COBRA)

Seldom do persons remember what the acronym "COBRA" stands for because its provisions relating to health care constitute such a minor part of the entire congressional act. However, there are two main ways that COBRA affects health care coverage. The first relates to conversion and continuation of health care insurance coverage for individuals who leave an employer group plan. The second (and less known) provision guarantees minimum, life-sustaining treatment and stabilization of the physical condition of anyone presenting for emergency care, irrespective of the absence or presence of health care insurance coverage:

  • COBRA Continuation or Conversion: Federal law (PL 99-272 as amended) generally requires that employers/plan administrators provide notice to plan beneficiaries (the insured employees) within a specified number of days of the event (termination of employment, reduction of work hours, etc.) that triggers COBRA rights. These rights allow the insured employee and/or covered family members to retain/continue the insurance coverage and health insurance benefits they had when they were covered under the employer's plan. The continuation of coverage is for a specified period beyond employment (e.g., eighteen, twenty-nine, or thirty-six months). Importantly, the share of the premium or cost of the coverage remains the same during the COBRA period as it was during employment. However, there is no extension of coverage beyond the specified period, and insureds must then convert to a private policy or transfer to a new employer's plan (which can be done at any time during COBRA continuation of benefits). Not all employers are subject to COBRA mandates, but many offer their own parallel conversion plans for continuation of benefits. Parallel conversion provisions were also created under changes to ERISA (the Employer Retirement Income Security Act) for self-insured plans.

Medicare Coverage

Virtually all persons who have been employed and who are 65 years of age or older are eligible for health care benefits under "Medicare." The program is administered by the Health Care Financing Administration, a branch of the U.S. Department of Health and Human Services.

Eligibility

Although primarily associated with persons 65 years or older (who are otherwise eligible for Social Security benefits), Medicare also covers those under 65 who are "disabled" under Social Security Disability Insurance criteria or suffer from permanent kidney failure. There are other ways to qualify (e.g., over 65 and a Railroad Retirement beneficiary ; under 65 and previously eligible but returned to work in the interim, etc.). It is recommended that one consult a Social Security office for current eligibility criteria.

Coverage

Medicare "Part A" coverage helps cover hospital costs for medically necessary inpatient services customarily supplied in a hospital or skilled nursing facility, and/or for hospice care for the terminally ill. Also covered is 100 percent of home health care and 80 percent of approved costs for durable medical equipment supplied under the home health care benefit.

Medicare "Part B" helps cover the services of physicians and surgeons and certain other medical services and supplies, irrespective of the setting in which the services are provided (hospital, office, home, etc.) Certain other costs and expenses are Medicare-reimbursable, such as limited prescription drugs, x-rays and laboratory tests, ambulance services, etc.

Costs

Medicare "Part A" benefits are financed through the Social Security (FICA) tax paid by employees/workers and employers. "Part B" coverage is optional to all beneficiaries who enroll for "Part A" coverage, and a monthly premium is charged to the enrollee. Additionally, persons (over 65 or disabled) may purchase both Parts A and B if not automatically eligible for Part A by way of some other disqualifying factor.

Medigap Coverage

Private insurance companies often offer supplemental insurance coverage for those medical costs and expenses not covered by Medicare Parts A and B. They are not government sponsored, and consumers should thoroughly review their proposed coverage (for duplicate or overlapping coverage) in conjunction with covered charges, costs, waiting periods, premium increases related to age, etc.

Medicaid

Medicaid coverage is not to be confused with Medicare coverage (although some persons may qualify for both). Both federal and state governments finance Medicaid programs, which are expressly created to serve the needs of low income or "medicallyneedy" individuals. Eligibility requirements differ among states. However, in addition to financial need, recipients must generally be under the age of 21 or over the age of 65 or blind or disabled. Some states expand criteria to include certain needy children with other profiles or other "categorically needy" persons. Eligibility criteria consider both income and assets (all states exempt a person's house from consideration). Medicaid benefits are paid directly to participating service providers.

Disability and Long-Term Care

Virtually all health insurance policies have a "maximum liability" clause that caps the amount of money that will be paid under the policy. For those who have been permanently disabled or diagnosed with permanent or terminal illness, benefits may run out, leaving persons with little or no financial resources to cover medical needs.

Separate and distinct from health care insurance policies, "disability insurance" and "long-term care insurance" policies are available for purchase from private companies. Generally, benefits may be in the form of "income" (providing for periodic payments of a fixed amount to cover lost income during extended illness or injury) or in the form of continued payment of medical costs and expenses once conventional health policy coverage has been exhausted.

Long-term disability income insurance must be distinguished from long-term care coverage. In the former, benefits are payable to replace lost income during the expected or normal work career. According to the terms of the policy, benefits will cease once the insured reaches a certain age or after a certain number of years that equal those that would have been worked by the insured had he or she not been disabled by illness or injury. In the latter, benefits are payable, irrespective of age. These policies are generally expensive but provide extended benefits to cover nursing home care, rehabilitation, etc.

It is imperative that persons interested in purchasing private policies of supplemental, disability, or long-term care insurance thoroughly investigate their options and carefully articulate their needs to the agent or provider. Otherwise, duplicate coverage, redundancy, or worse, absence of necessary or intended coverage may result.

Denial of Claims or Reduced Payment of Benefits

It is important to note that many states permit insurance providers to disclaim paying benefits already payable through other sources or to reduce the amount paid. These state provisions may be referred to as "priority rules" or "collateral source rules." Priority rules stack the order of insurance liability in the event of a claim (common in complex automobile accident cases). Collateral source rules also affect whether persons who recover medical costs and expenses from other sources, e.g., a lawsuit, must reimburse the insurance company for benefits paid. In most states this is permitted, but many states require the insurer to play an active role in the settlement negotiations and/or contribute toward the legal fees.

Beneficiaries/insureds do have recourse against insurance companies that delay or deny payment of benefits for covered charges. Although the term is often misused or abused, "bad faith" denials of claims by insurers are actionable in most states. However, the patient/insured generally has the burden of proving that the charge was for "medically necessary" care or treatment, and the charge was reasonable. Many states award punitive damages to punish insurance companies for bad faith denials. Other states have express laws requiring response to a claim (either payment or formal denial) within a specified number of days of receipt.

Selected State Laws

ARKANSAS: Contracts for health and accident insurance must include those dental services that would have been covered if performed by a physician (23-79-114). Health care plans or disability insurance policies that cover families must include coverage for newborn children (23-79-129). Disability insurance may not discriminate between inpatient or outpatient coverage for the same procedure (23-85-133). Exclusions for preexisting conditions are strictly regulated (23-86-304).

CONNECTICUT: The state has extensive provisions governing health and accident insurance. Some key provisions include mandated coverage for some preexisting conditions (38a-476), limitations on offset provisions as defined under 38a-519, and a provision that married couples working for the same employer under the same group policy do not have to pay double premiums unless it results in greater coverage (38a-540, 541).

INDIANA: No policy for accident or health insurance may be issued until a copy of the form, the classification of risk, and the premium rate have been filed with the state commissioner (IC27-8-5-1). The state maintains a Life and Health Insurance Guarantee Association that protects insureds, beneficiaries, annuitants, etc. from insolvency or failure in performance of contractual obligations owed by the insurer that issued the policy (IC27-8-8-1 to 18).

MAINE: The state has a special provision prohibiting discrimination in maternity benefits coverage for unmarried women (T. 24-A-2741).

MARYLAND: Specific provisions are for AIDS/HIV positive individuals (15-201 to 205), breast implants (15-105), preexisting conditions (16-214, 15-208) and mental illness (19-703). Self-employed individuals must have annual open enrollment periods (15-411, 15-210).

MASSACHUSETTS: Policies providing supplemental coverage to Medicare must meet certain standards, with exceptions for employers and trade unions (175, Section 205).

MISSOURI: Insurers may not deny or cancel coverage because of incarceration of insured (595.047(1)). Health care service claims must be paid within 30 days of receipt by insurer of all necessary documents (376.427).

NEW JERSEY: New Jersey has a statutory Life and Health Insurance Guaranty Association to protect insureds and beneficiaries against insolvent or defaulting insurers. (T.17B, c. 32A.1) It also has a Health Care Quality Act providing consumer protections through "plain language" disclosure requirements, etc. (T.26. c.25.1).

NEW MEXICO: Health insurance policies must provide coverage for handicapped children, newborns, adopted children, childhood immunizations, home health care options, mammograms, cytologic screening, diabetes, and minimum hospital stays for certain conditions (59A-22-1).

OKLAHOMA: State Health Care Freedom of Choice Act provides certain rights to select the practitioner of choice for providing certain services (36-6053 to 6057). Genetic Nondiscrimination in Insurance Act restricts disclosure and/or use of genetic tests or information by employers or insurers (36-3614.1).

PENNSYLVANIA: Multiple statutory provisions cover various issues. Specific provision mandates coverage for serious mental illnesses (40-764g). False statements in applications are not automatic bars to coverage (40-757).

TENNESSEE: Health benefits coverage cannot be denied to victims of abuse (56-8-301). Policies may not exclude coverage for drugs not yet approved by FDA if the drug is used to treat life-threatening illness (56-7-2352).

WASHINGTON: Group policies must offer optional coverage for temporomandibular joint disorders (TMJ) (48.21-320) and mammograms (48.21.225). Employer-sponsored group contracts must provide coverage for neuro-developmental therapies (48.21- 310).

Additional Resources

Family Legal Guide American Bar Association, Times Books, Random House, 1996.

Health Insurance 2nd ed. Enteen, Robert, Demos Vermande, 1996.

Martindale-Hubbell Law Digest Martindale-Hubbell, 2001.

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INSURANCE

INSURANCE. Insurance is a contract of indemnification in which an underwriter agrees to compensate a policyholder for specified losses during a certain length of time, or term, in return for a payment, or premium. Insurers hedge their financial exposure by adjusting premiums to the perceived likelihood that a policy will result in a claim and by underwriting a number of policies, thereby dispersing individual risks among many. During the early modern period insurance evolved from a specialized device utilized mainly by merchants and financiers to a firmly established industry offering marine, life, and fire insurance to a rapidly growing market.

ORIGINS

While insurance-like mechanisms for distributing risk have been identified in the ancient world, the first recognizable policies of insurance originated in Florence and other northern Italian towns in the early fourteenth century. These early policies, the first surviving example of which was issued at Genoa in 1347, covered losses at sea. In the following decades Italian merchants transmitted the practice of marine insurance across the Mediterranean basin and into northern Europe. By the early sixteenth century the marine insurance business, still largely under Italian control, had spread to Flanders and the Netherlands, and thence by mid-century to England and the Baltic countries. Marine insurance was by far the largest and most widely practiced branch of underwriting in early modern Europe.

Life insurance appeared, around the year 1400, as an incidental circumstance when marine insurance policies covered embarked travelers or slaves. It was quickly adapted to the money-lending business to collateralize loans by insuring the debtor's life, as was done on the life of Pope Nicholas V in 1454. The growth of life insurance was hindered, however, by its increasing use as a device for wagering on human longevity and by the concomitant suspicion that it incited fraud and murder. The alleged immorality of life insurance led to its prohibition, from the fifteenth through the seventeenth centuries, everywhere in Europe except Florence, Naples, and the British Isles. Its use as a long-term device guaranteeing family welfare had to await the formation, at the end of the seventeenth century, of the first life insurance societies in England, the most enduring of which was the Amicable Society (17061866).

A system of fire insurance that went beyond the traditional mutual aid arrangements of guildsmen was first established on a municipal basis in Hamburg's General Feuerkasse as early as 1591. Similar town-sponsored offices were founded in London (1682), Altona (1713), Berlin (1718), and in French cities in the same period. These public initiatives proved less successful than the private provision of fire insurance, which began in London in the years following the Great Fire of 1666. The earliest of these companies were transient, but Nicholas Barbon's pioneering Fire Office (1680) demonstrated the long-term viability of the fire insurance business. Other notable ventures included the Hand-in-Hand (1696), the Sun Fire Office (1710), and the Royal Exchange Assurance and London Assurance Corporations (both 1720). In France, the use of fire insurance was slower to develop. The first large company insuring against fire losses was the Compagnie d'assurances générales (1753), later joined by the Compagnie royale d'assurance (1786).

ORGANIZATION

Unlike marine insurers, whose risks were short-term and dispersed on various sea routes, fire and life insurers faced the daunting challenge of providing long-term coverage against contingencies that sometimes occurred catastrophically, such as urban conflagrations or outbreaks of epidemic disease. As a consequence, marine insurance remained over-whelmingly the preserve of underwriters working individually or in partnerships, even if they also entered into larger associations like Lloyd's (originally Lloyd's Coffee House, established in 1688), whereas fire and whole life underwriting required a corporate or mutual structure in order to ensure the payment of claims. Many of the early fire and life companies were mutual associations in which members contributed as need arose, with the result that either the cost of membership or the amount of compensation for loss was variable. This arrangement was necessitated by a lack of reliable statistical data from which the liabilities attached to life or fire risks might be calculated. Although Edmond Halley in 1693 published a mortality table (giving the average expectation of life at different ages), life insurers were very slow to place much trust in mortality statistics. Instead, they excluded the very young, the very old, and the obviously infirm or drunken. Similarly, fire insurers discriminated among "common," "hazardous," and "doubly hazardous" risks based more on intuition than hard data, and until the foundation of the Phoenix Assurance Company in 1782 simply refused to insure fire-prone sugar bakers. By the second half of the eighteenth century insurance was acquiring a more secure statistical basis. The Equitable Life Assurance Society (1762) was the first insurer to graduate policy premiums according to age at purchase, although it continued, conservatively, to price its policies above their actuarial value.

SOCIAL AND ECONOMIC IMPACT

Insurance played a major role in European economic expansion and in the social management of risk. Marine underwriting reduced the risks of maritime commerce, especially during wartime. Fire insurers during the eighteenth century provided increasing coverage for commercial stocks and industrial plants, thereby fostering the expansion of industrial capitalism. The provision of life insurance protected the fortunes of middle-class families against the premature death of a breadwinner. Insurers also lowered economic losses more subtly by disciplining risk-taking, since ship captains who failed to sail in convoys during wartime or manufacturers who practiced hazardous trades in timber-framed buildings were subject to higher premiums or the withdrawal of coverage altogether. Fire insurance companies contributed to a generally safer urban environment by organizing fire brigades to protect the properties that they insured. With time, these brigades were amalgamated into municipal squads. Insurance furthermore had an important mental influence on early modern society by serving as a major conduit (along with gambling) for the transmission of probabilistic and statistical thinking to the eighteenth-century public. Despite its power, this new statistical worldview supplemented rather than supplanted older magical or religious beliefs, even among practitioners of insurance. Seventeenth-century English merchants queried the famous astrologer, William Lilly, whether ships overdue in port could be insured for profit, while a century later underwriters in Barcelona still had masses sung for the deliverance of ships they insured.

See also Commerce and Markets ; Shipping .

BIBLIOGRAPHY

Primary Sources

Magens, Nicolas. An Essay on Insurances. 2 vols. London, 1755. A valuable summary of European insurance practices and laws, with incisive commentary.

Park, James Allan. A System of the Law of Marine Insurances, with Three Chapters on Bottomry, on Insurances on Lives, and on Insurances against Fire. London, 1789. A classic legal compendium of British insurance law with occasional reference to Continental codes.

Secondary Sources

Clark, Geoffrey. Betting on Lives: The Culture of Life Insurance in England, 16951775. Manchester, U.K., and New York, 1999. A study of the birth and early growth of the first substantial life insurance market, with European background.

Halpérin, Jean. Les assurances en Suisse et dans le monde, leur rôle dans l'evolution économique et sociale. Neuchâtel, 1946. A thought-provoking examination of the role of insurance in the development of financial and commercial capitalism.

Raynes, Harold E. A History of British Insurance. London, 1964. Originally published, 1950. A comprehensive account of insurance in the country where it flourished most.

Stefani, Giuseppe. Insurance in Venice from the Origins to the End of the Serenissima. 2 vols. Trieste, 1958. Collection of archival documents.

Geoffrey Clark

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Insurance

Introduction

Insurance is a way of managing risk. In a typical insurance system, the members of some group who share a particular kind of risk—automobile drivers, homeowners, or the like—contribute money to a fund. The contributions are large enough so that the fund can pay for losses that will befall some, but not all, of the members of the group. In this way, all participants are secured against the chance of a certain kind of disastrous cost in exchange for a relatively small payment.

Insurance can either be for-profit business or nonprofit. If it is for-profit, payments from members of the insured group must be enough not only to create the fund to pay for losses but to pay for the profits skimmed off by the system's owners. Profits are decreased by payouts, so for-profit insurance companies have a motive to keep people out of the insured group who are likely to need payments. In health insurance, companies wish to deny coverage to people who are more likely to need expensive medical care; in property insurance, they wish to deny coverage to people whose property is more likely to be damaged or destroyed by floods, fire, winds, or other natural disasters.

As sea levels rise and more powerful hurricanes are caused by global warming, coastal properties will be increasingly vulnerable to damage and destruction— more so than in the past, and more so than properties in less-exposed places. Insurance companies are increasingly denying coverage to coastal homeowners, citing climate change as the reason.

Historical Background and Scientific Foundations

For thousands of years merchants, whose ships are valuable but exposed to the extreme hazards of sinking or piracy, have participated in risk-sharing schemes resembling insurance. However, until the nineteenth and twentieth centuries, most people had no insurance for their health, vehicles, homes, or businesses. If disaster struck and friends, family, or community were unable or unwilling to help, there simply was no help.

Gradually, over the last two centuries, systems of business, law, and government evolved in industrialized countries that either supply most persons with some form of insurance or require them to buy insurance if they want to own a mortgaged building or drive a vehicle. Starting in the early twentieth century, for instance, the United States and some European countries began requiring drivers to have insurance to cover injuries that they might cause others in car crashes. Today, insurance is the largest industry in the world, with $3.2 trillion in yearly revenues.

Insurance is affected by natural disasters, including those that are likely to be made more common or intense by climate change. The amount of money paid out by insurance companies for weather-related disasters in poorer (non-developing) countries, for example, is three times as large as the amount given by international aid organizations. Yet insurance does not cover all losses: of the $60 billion of economic losses suffered in the United States from the 2004 hurricane season, only half were covered by insurance.

In addition, insurance companies are not always prepared for the extreme costs that weather events can entail. Most famously, Hurricane Andrew caused $45 billion of insurance losses in the United States in 1992 (value in 2005 dollars), causing 12 insurance companies to go bankrupt. Insurance companies altered their practices after Andrew, and when the four hurricanes of the 2004 season caused $29 billion of damage, no large U.S. insurance company went bankrupt. But in 2005, when Hurricanes Katrina, Rita, and Wilma gave rise to 250,000 flood-insurance claims, the U.S. National Flood Insurance Program would have been bankrupt if Congress had not allowed it to borrow $20.8 billion from the national treasury.

Insurance companies are adjusting their forecasts to take climate change into account. For example, Allstate Insurance, one of the largest insurers of private homes in the United States, stated in 2007 that it was “engaged in an ongoing evaluation of the subject of global climate change and natural catastrophes primarily as these factors relate to possible impacts on Allstate's future risk exposures, including hurricanes.” The company also announced that it keeps “abreast of the ongoing scientific and hurricane modeling research through regular discussions with premier hurricane modelers.” Reinsurers— companies that insure insurance companies—have been particularly alert to the risks of climate change.

One way that insurance companies are seeking to cut their own risk as they anticipate more damage to coastal properties from storms and sea-level rise is to cancel or deny coverage to coastal property owners. In 2007, for example, Hingham Mutual Group canceled 9,000 homeowner's policies for residences in Cape Cod, Massachusetts, saying that their own reinsurance costs had doubled in the past year, forcing them to withdraw from thecoastal market. Homeownerswereabletoget new insurance from other companies, but at twice the old cost and with extremely high deductibles. (A deductible is an amount of loss that the insured party must pay out of his or her own pocket; the insurance policy only pays the remainder.)

At that time, similar withdrawals from at-risk areas by insurance companies were causing hundreds of thousands of policyholders to be dropped along the eastern coast of the United States in 2007. For insurance purposes, a “coastal area” may even be an entire state: Allstate Insurance, despite its name, announced in 2007 that it would no longer sell homeowner insurance in the states of Connecticut, Delaware, or New Jersey. Persons who cannot afford homeowner's insurance must either sell their homes or risk having their personal finances wiped out by fire, flood, storm, or other natural disaster.

According to Evan Mills, a scientist with the U.S. Department of Energy's Lawrence Berkeley National Laboratory, costs of weather-related natural disasters have been increasing over the last half century. From 1980 to 2004, the worldwide insured costs of weather disasters totaled $340 billion ($1.06 trillion were uninsured). The year 2005 saw a historically unprecedented amount of damage from weather-related disasters, more than twice that of any single previous year. The fraction of worldwide weather-related losses that was insured rose from almost zero in the 1950s to 25% in the decade 1995–2005. In the early 2000s, costs to insurers for weather events were greater each year than the costs of the attacks of September 11, 2007. In the United States, 40% of weather-disaster losses were insured by the 1990s.

Many factors contributed to these changes, including increased building in risky coastal areas, more buying of insurance, and climate change. According to the Association of British Insurers, increased frequency of extreme weather events may already be increasing property losses in the United Kingdom by 2–4% per year. Hurricanes and coastal erosion, however, are not the only climate-related phenomena that may be causing increasing damage. The location and frequency of lightning strikes, which can start fires that destroy property, is predicted to shift because of climate change. Life and health insurance can also be affected by climate change as deaths from heat waves and emergent diseases climb in some areas.

WORDS TO KNOW

EMERGENT DISEASE: Disease that is appearing for the first time or that is quickly increasing in incidence or geographic range.

GREENHOUSE GASES: Gases that cause Earth to retain more thermal energy by absorbing infrared light emitted by Earth's surface. The most important greenhouse gases are water vapor, carbon dioxide, methane, nitrous oxide, and various artificial chemicals such as chlorofluorocarbons. All but the latter are naturally occurring, but human activity over the last several centuries has significantly increased the amounts of carbon dioxide, methane, and nitrous oxide in Earth's atmosphere, causing global warming and global climate change.

HURRICANE MODEL: Computerized mathematical model of the physical structure of a hurricane.

REINSURANCE: Insurance purchased by insurance companies in case unexpectedly large claims, such as might be made after a large hurricane or other natural disaster, exceed the funds available to the insurance company. If this happens, the reinsurance company must pay out to the insurance company, just as the insurance company must pay out to the people who have made valid claims for loss of property, health-care costs, or the like.

Impacts and Issues

When large numbers of people lack insurance coverage, whether for health or property, society at large is at greater risk. Uninsured sufferers of disasters must either be rescued by governments at much higher cost—the emergency-room model of disaster response—or not helped at all. This means not only that the victims suffer but that the whole social fabric is strained by increased homelessness, unemployment, crime, and business failures. Similar problems occur when insurance companies do not have enough money to cover the costs of a disaster. Experts are therefore concerned both about how individuals, regions, and whole countries can be protected by insurance, as much as possible, from the rising costs of climate change. The world is very unevenly insured today, with insurance rates highest in the developed countries that are already best-poised to adapt to climate change, and lowest in poorer countries that are most at risk from climate change.

As of 2007, possible adaptations of the insurance industry to climate change were still at the stage of speculation and talk. Some experts proposed that new forms of catastrophe insurance needed to be devised to help cope with the harms caused by climate change, both in high-risk coastal regions in developed countries and in poor countries. In 2006, European experts suggested the creation of a Climate Change Finance Mechanism that would accept whole governments as customers, allowing them to finance the reconstruction of public infrastructure damaged by climate-related weather. Such a system would in effect be a form of international insurance. Coverage would be coupled with incentives for taking measures to adapt to climate change and reduce greenhouse-gas emissions.

See Also Extreme Weather; Sea Level Rise.

BIBLIOGRAPHY

Books

Parry, M. L., et al, eds. Climate Change 2007: Impacts, Adaptation and Vulnerability: Contribution of Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. New York: Cambridge University Press, 2007.

Periodicals

Bals, Christoph, et al. “Insuring the Uninsurable: Design Options for a Climate Change Funding Mechanism.” Climate Policy 6 (2006): 637-647.

Hoeppe, Peter, and Eugene N. Gurenko. “Scientific and Economic Rationales for Innovative Climate Insurance Solutions.” Climate Policy 6 (2006): 607-620.

Kunreither, Howard. “Who Will Pay for the Next Hurricane?” The New York Times (August 25, 2007).

Michaelowan, Axel. “Can Insurance Deal with Negative Effects Arising from Climate Policy Measures?” Climate Policy 6 (2006): 672-682.

Mills, Evan. “Insurance in a Climate of Change.” Science 309 (2005): 1040-1044.

Web Sites

Breslau, Karen. “Coastal Homeowners Can't Find Insurance.” MSNBC.com, January 29, 2007. <http://www.msnbc.msn.com/id/16720746/site/newsweek/print/1/displaymode/1098> (accessed October 28, 2007).

“Climate Change.” Allstate Insurance Company, 2007. <http://www.allstate.com/citizenship/environment/climate-change.aspx> (accessed October 28, 2007).

Larry Gilman

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INSURANCE

Halakahic Aspect

Insurance activity may well serve as a model for the economic activities of the Jewish merchant throughout the ages. Hundreds of sources dealing with insurance for transport and fire are found in the halakhic literature, especially in the responsa collections.

There is no reference in the Bible to the practice of insurance, perhaps as a result of the biblical prohibition of interest in the loan agreements connected with it. The use of commercial agreements, however, such as the ancient Babylonian maritime loan, wherein an investor loaned money to an agent-entrepreneur who would convey merchandise abroad, sell or barter it, return and repay the loan, the profit and a fee for the insuring of the merchandise by the investor, was well known.

The topic of insurance as found in the halakhah can be divided into 5 periods: the Talmud, the Mediterranean countries (1100–1500), the Mediterranean countries during the Ottoman Empire (1500–1800), Europe (1700–1900), and the Twentieth Century.

the talmud

The earliest Jewish record of an insurance practice is found in the Tosefta (bm 11:12) and is discussed in B. Bava Kamma 116b. Donkey drivers on caravan would arrange a program of mutual insurance whereby a driver losing his donkey during the course of the caravan would receive another donkey from a common fund. The same practice was found among Jewish shippers on Babylonian rivers, who would, in case of loss, receive a new boat from the ship owners' common fund. Both these practices were enforceable in the rabbinic court.

the mediterranean countries 1100–1500

The next source for the insurance practice is found in Sefer ha-Ezer of Rabbi Meir ben Rabbi Yiẓḥak of 12th century Provence, who sanctions a contemporary use of the maritime loan among Jewish international shippers (quoted in Kaftor va-Feraḥ, Chapter 44; the original work is not extant). He is practically the only Jewish sage to sanction such a loan agreement.

Rabbi Solomon ben Adret (the "Rashba") in 13th century Spain mentions and permits a practice reminiscent of the maritime loan, but based upon the laws of bailment, as prevalent among Jewish overseas agents (Resp. 1:930; 2:325), and a practice among partners to include a clause guaranteeing income from profits earned by the partnership in case of illness (ibid., 2:79, but see Tashbeẓ 1:35). In a responsum dating from 1388, Rabbi Isaac bar Sheshet validates the maritime shipping insurance contract involving a premium payment, long in practice, but not one containing a loan repayment formula (Ribash 308).

From Algeria, at the turn of the 15th century, there are records of gold bullion shipped to Christian Majorca under coverage of insurance – a standard expense (Tashbeẓ 3:74) – and the insuring of a cow bought by a butcher for kosher slaughter, against the danger of being found unfit for Jewish consumption (trefah; see Rashbash, Tikkun Soferim, laws of Asmakhta).

There are no references in the standard histories of insurance to these important sources for the early history of modern insurance.

the mediterranean lands during the ottoman empire (1500–1800)

The resettlement of Spanish Jewry after the Expulsion centered in North Africa, Italy and primarily the Ottoman Empire. Salonika, Constantinople, Venice, Ancona and Cairo boasted large, viable Jewish communities whose economic activities were based on international trade. The cold and not-so-cold war between Turkey and Christian Europe did not interfere with trade, but led to a proliferation of insurance contracts, and consequent litigation before the rabbinic courts, especially those of Salonika, whose dayyanim became experts in the insurance contract. Changes in course of transit, confiscation by the authorities, the different genres of accidents under coverage – all such disputes are found in the Salonikan rabbinic court decisions, usually decided upon the basis of prevalent commercial practice and interpretation of the contract. Even Italian merchants would litigate in Salonika. (See, for example, the responsa of Maharashdam, Divrei Rivot; Maharshach, Torat Emet, et al.)

The use of the cambio agreement, based upon repayment of a loan, together with an insurance charge, was quite prevalent, but it met with rabbinic opposition, on the grounds that it constituted an infringement of the laws of interest (ribbit).

From Italy and Turkey, the use of insurance spread to the land of Israel, Egypt, Corfu, Rhodes, and Tunis.

europe (1700–1900)

The well-known Jewish halakhic periodical, Peri-Eẓ-Ḥayyim, published by the Eẓ Hayyim Sephardi yeshivah of Amsterdam (1691–1807), in which scholars of the yeshivah replied to queries posed to them from throughout the Dutch colonial empire of its day, contains several references to shipping from the New World by Jewish merchants, under insurance coverage also granted by Jewish merchants.

Eastern Europe became the next center of insurance activity, especially Galicia. In the early 19th century, the rabbis of Brod dealt with the basic validity of the insurance contract, and the various halakhic problems involved, e.g., interest, asmakhta, etc. (see Bet Efraim, Ḥoshen Mishpat 34, 35 and Gur Aryeh Yehudah, Yoreh De'ah 119).

The use of fire insurance became widespread in Poland in general, and many responsa were written on the topic of the insurable interest and the indemnity principles. Towards the end of the century, material on fire and transport insurance occurs in the writings of Russian, Lithuanian and Hungarian rabbis.

The Twentieth Century

The twentieth century saw the emergence of life insurance, and questions were addressed to European authorities on its permissibility according to Jewish law. Further insurance topics are found in the works of the rabbis of Hungary (the prime center of Jewish activity after the decline of Galician Jewry), Poland, and – after World War ii – Israel and America.

[Menahem Slae]

Jewish Involvement in Insurance

The Talmud contains references to partnership as a means of minimization of risks, but this must be differentiated from insurance proper, based on premiums. In the 14th to 16th centuries the insurers of the wool export of *Burgos included some 40 *Marrano families, related by birth or marriage, who maintained connections with the strategic centers of international trade – Bruges, Antwerp, Rouen, Nantes, and Florence – by means of commission agents and brokers who were generally relatives. In Amsterdam some Marranos ("Portuguese") entered insurance. In Hamburg an insurance contract with the participation of "Portuguese" Jews was signed only three years after the first such contract had been drawn up. In the 1620s and 1630s the "Portuguese" dominated the insurance field, constituting more than half of the insurance brokers and being particularly active in colonial shipping, where the risks and premiums were highest. Many rich Jews engaged in marine insurance too, such as Manuel *Teixera. In the late 17th and 18th centuries Jews left insurance in Hamburg and by 1778 only one remained there.

In France the *Gradis family of Bordeaux played a leading role in marine insurance. In 1757 Gradis and Alexander, "negociants juifs," had agreed to insure a corsair but postponed signing the contract because of the Sabbath: the next day the news that the ship had been seized by the British arrived. In the ensuing litigation the insurance was annulled by the court. Two Sephardi Jews, Joshua Mendes Da Costa (1741–1801) and Lewis Mendes (1716–1790), "one of the first Merchants of the City of London," were among the original founders of Lloyds, in which many Jews later participated, including the *Hart, *Goldsmid, *Samuel, *Solomons, *Montefiore, *Rothschild, and *Sassoon families. Benjamin *Gompertz (1779–1865) was a member of Lloyds and of the Royal Society, whose achievements in actuary statistics were internationally acknowledged. Nathan *Rothschild and Moses *Montefiore founded the Alliance Assurance Company for which the mathematician and actuary-statistician, Benjamin Gompertz, was chief actuary.

In Italy Giuseppe Lazzaro *Morpurgo (1762–1835) introduced modern methods and founded a number of insurance companies, among them the Assicurazioni Generali, the largest Italian insurance company. In the late 18th and early 19th centuries a number of Jewish insurance experts and entrepreneurs from Trieste helped to found and develop Austrian and Italian insurance and shipping companies.

Jews did not play an important role in insurance in other countries in modern times. In the first years of World War i a group of Jewish financiers in Russia headed by N.B. Glazer formed an insurance company syndicate to fill the vacuum created by the withdrawal of the German companies.

In both Europe and America Jews were proportionately underrepresented in the insurance business, though there were some notable exceptions, such as L.K. *Frankel (1867–1931), pioneer in social insurance and second vice president of the Metropolitan Life Insurance Company, and Louis I. Dublin, a public health and actuarial specialist.

bibliography:

halakhic aspect: S. Passamaneck, Insurance in Rabbinic Law (1974); M. Slae, Ha-Bituaḥ bi-Mekorot ha-Halakhah (1974); idem, in: Nazir Eḥav, 3 (1978), 292–327; idem, in: Noam, 20 (1978), 272–8. jewish involvement in insurance: J. Graf, in: Dr. Bloch's Oesterreichische Wochenschrift, 29 (1912), 843–5, 865, 880; H.I. Bloom, Economic Activities of the Jews of Amsterdam (1937), index; W.S. Samuel, in: jhsem, 5 (1948), 176–92; H. Kellenbenz, Sephardim an der unteren Elbe (1958), 268–71; G. Stefani, Insurance in Venice, 1 (1958), 262f.; Z. Szajkowski, Franco-Judaica (1962), 94–100; J. Zoller, in: Freie juedische Lehrerstimme, 6 (1917), 45–7, 74; H. Landaw, in: Ekonomishe Shriften, 2 (1932), 102–3; J. Pick, in: The Jews of Czechoslovakia (1968), 366–9.