"Flying Machines" and Early Airline Insurance
June 2005
Of the various types of insurance offered
in the first third of the 20th Century, aviation coverage was perhaps the most
innovative and dramatic. Its impressive growth—rather like the "mighty oak from
a tiny acorn"—mirrored the industry itself. Aviation's development and overall
success also reflects an interdependence between the progression of American
industries and the insurance business.
by Jack
Bogardus and Robert Moore
Spreading
the Risks: Insuring the American Experience
Without the ingenuity of insurance professionals who develop groundbreaking
policies to cover the risks associated with virtually every new commercial undertaking,
many industries would never have prospered into the ventures that today serve
the American people and our economy in important and numerous ways. As the success
of the aviation business reveals, insurance helps to make new industries economically
viable.
In 1903, when two Ohio bicycle mechanics opened a new chapter in history,
the Boston Herald ran a one-paragraph
account on page 10 reporting that:
- ... a successful trial of a flying machine had been made at Kitty Hawk
by Wilbur and Orville Wright. The machine flew 3 miles in the face of a
21-mile-an-hour wind and then gracefully descended to earth.
In fact, the Flyer's first flight lasted
just 12 seconds and covered no more than 120 feet.
Reflecting the Wright brothers' modest beginning, aviation's commercial use
developed slowly. "Flying machines" initially were used as mail carriers and
without an organized system; individual pilots commenced airmail runs in 1910.
Big news came the next year when G.B. Rogers completed the earliest air crossing
of North America—from New York to Pasadena, California (with many intervening
stops); air time: 82 hours and 4 minutes.
In 1908 Thomas W. Selfride became the first individual to die in an airplane
accident on a flight piloted by Orville Wright. A propeller broke, causing the
plane to fall from 150 feet; Mr. Wright, however, did survive the crash.
The Birth of Aviation Insurance
Underwriters at Lloyd's wrote the earliest aviation insurance policy in 1912.
They considered the aircraft unsafe, and therefore only covered persons and
property. Interestingly, the basic airplane policies were derived from the earlier
marine insurance language, and they referred to the aircraft as a "hull." After
the initial Lloyd's policy, few others would be written before World War I.
After the war, planes became more reliable and insurable. On May 1, 1919,
The Travelers Insurance Company began offering a comprehensive policy that in
many respects launched U.S. aviation insurance. It provided public liability
protection, life insurance, workers compensation, and trip accident coverage.
With respect to aircraft public liability protection, the form followed the
automobile policy except for separate passenger liability coverage within the
aircraft liability policy.
In 1928–1929 three pools of underwriters were organized to write aviation
insurance. Aero Insurance Underwriters succeeded Barber & Baldwin, Inc., a New
York agency that handled many early Lloyd's policies on American planes. The
other two organizations consisted of U.S. insurers: the United States Aviation
Underwriters and Associated Aviation Underwriters.
In 1925 the Eastern Underwriter insurance
periodical noted that lack of insurance restricted the growth of commercial
flying. Because many pilots died in crashes, underwriters believed that all
pilots would die if they flew long enough. Additionally, new planes were expensive—costing
$20,000 to $50,000 each. Dynamic changes can occur in a short time, however,
and aviation insurance surged ahead just 1 year later as many flying companies
formed to compete for U.S. mail contracts.
Understandably, insurers were especially nervous about covering increasingly
exotic conveyances. For instance, the Detroit Insurance Agency provided insurance
in 1929 on the first metal-clad dirigible. (In 1970 this agency joined Alexander
& Alexander, which, in turn, was acquired by Aon in 1997.) The agency covered
the dirigible's maiden flight from Detroit to Lakehurst, New Jersey. Under the
standard aviation policy, coverage excluded losses resulting from "upside-down
flying, looping-the-loop, spinning, rolling, hedge hopping, or other aerial
acrobatics."
Aviation Investments
Between 1926 and 1930, several large financial groups established holding
companies for aviation investments. They began by acquiring many small airlines
and then purchased manufacturers of aircraft and aircraft parts. Averell Harriman
and Robert Lehman initiated one of the more enterprising initiatives when they
launched a multipurpose aviation company, Aviation Corporation, in 1929. They
purchased five airline companies, which resulted in the merger of 12 airmail
routes and began business as American Airways.
The holding company scenario worked well for several years until Postmaster
General Walter Folger Brown assumed control of commercial aviation under the
1930 McNary-Waters Act. Brown established criteria that would eliminate all
except the most financially strong and capably managed airlines; next he selected
four of these to serve one east coast and three transcontinental routes: American
Airways, Transcontinental and Western Air-Line, Inc. (TWA), United Aircraft
& Transport and Eastern Air Transport.
This arrangement lasted until President Roosevelt declared it a monopoly
in 1934 and canceled the contracts. After the short and unsuccessful use of
Army Air Corps pilots for delivering mail, the contracts were re-bid. However,
the Interstate Commerce Commission (ICC) became responsible for them, and the
ICC precluded any financial or interlocking directorate between airlines and
the manufacturing of their equipment. Consequently, the holding companies divested
their airlines.
With President Roosevelt's 1934 decree, Aviation Corporation sold American
Airways stock and the independent company changed its name to American Airlines.
Similarly, United Aircraft & Transport became United Airlines Transportation
Corporation (shortened to United Airlines in 1943); Transcontinental and Western
Airline, Inc. became TWA, Inc.; and Eastern Air Transport became Eastern Air
Lines.
More Passengers, More Insurance Interest
In 1935 C.R. Smith, president of American Airlines, stunned the industry
by persuading Douglas Aircraft Company, Inc., to build the DC–3, thereby increasing
passenger seating capacity from 14 in the DC–2 to 21 in the new plane. These
were critical numbers in making passenger travel profitable.
This breakthrough also heightened major insurance brokers' interest in the
airline business. In 1920 Marsh & McLennan formed an aviation department within
its New York casualty department. Nine years later, Alexander & Alexander established
a separate aviation department in its New York office, although its first airline
accounts were handled in Tulsa, Oklahoma, an early center of U.S. aviation.
American Airlines became A&A's signature account. By the late 1920s, insurance
for Pan American Airways was handled by Parker & Company, International, which
eventually merged with Frank B. Hall in 1970. Although major accounts shifted
among brokers, Marsh and McLennan handled Eastern Airlines for many years, and
Johnson & Higgins had the Delta Airlines account.
Conclusion
As America became a world leader in aviation, the industry's size and importance
made it a crucial line of business for many agents, brokers, and insurers. Despite
the challenges of modern airline traffic, insurance continues to be an indispensable
ingredient in the economic viability of contemporary aviation.
Robert Moore has worked with Jack Bogardus for a quarter of a century. Mr. Moore worked for
Alexander & Alexander from 1977 to 1995 and served as a senior vice president
of Alexander & Alexander Services Inc., as well as chairman and president of
A&A Government and Industry Affairs Inc. In 1985 he was elected president of
the National Association of Insurance Brokers, and from 1989 to 1993 he served
as chairman of that organization’s Past Presidents’ Advisory Council. He has
written and spoken extensively on corporate issues. As The Conference Board’s
emerging issues coordinator, he identified and responded to the business community's
public policy concerns. He is coauthor of School
for Soldiers: West Point and the Profession of Arms, which was selected
as a New York Times “Noteworthy Book.”
Mr. Moore earned a bachelor’s degree from Davidson College, a master’s degree
from the University of North Carolina, and a doctorate from the University of
Wisconsin. Commissioned a U.S. Army officer, he taught at the Military Academy
at West Point and was an associate professor on the graduate faculty at the
University of Maryland. Jack Bogardus and Robert Moore are coauthors of the
award-winning Spreading the Risks: Insuring the
American Experience (2003) and the revised edition (2005). He can be
reached at 703-759-0233 and through the Web site www.spreadingtherisks.com.
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