Expert Commentary

Spreading the Risks: Insuring the American Experience

This Risk and Insurance History column takes a look at the invention of the automobile and the development of auto insurance. Referred to as "A Gasoline Can on Wheels," insurers were initially reluctant to cover these new, unreliable conveyances.


Risk and Insurance History
January 2004

Until astronaut Neil Armstrong set foot on the moon and took his "giant leap for mankind," the last century's greatest milestone in travel was arguably the progression from horse and buggy to automobile. While the airplane would affect how many people travel, and eventually how most people travel distances in industrialized countries, automobiles have become part of everyday life. The profound effect the automobile has had on life in the United States is mirrored by its impact on the insurance industry.

The Automobile is Born in America

By 1887 American inventors were experimenting with a variety of vehicles powered by steam, electricity, and gasoline. Ransom E. Olds, a machinist in Lansing, Michigan, completed building a buggy driven by a gasoline-fueled steam engine. Also in 1887 an electric car, powered by storage batteries, was driven on New York streets. Five years later, William Morrison of Des Moines, Iowa, drove his first electric car in Chicago, and then built a dozen by the end of 1895. But it was the onset of gasoline-powered automobiles that truly fueled the revolution.

Initial credit goes to a pair of bicycle designers from Springfield, Massachusetts, the Duryea brothers. In 1892 they constructed their first gasoline auto. Assembled in a loft, the vehicle suddenly moved forward and plunged through a door to the street below. Four years later, the brothers produced 13 two-passenger, two-cylinder runabouts in Springfield, marking the first time an automobile company produced more than one car from a single design. With this milestone, the American automobile industry was launched.

The Olds Motor Vehicle Company represented the cutting edge of automobile production. Formed in 1897, 10 years after Mr. Olds assembled his gas-powered "buggy," it was the first true auto company. Although it produced only four vehicles, in 1901 its successor, the Olds Motor Works, introduced the concept of mass production by building 425 curved-dash Oldsmobiles. By 1903 the company was producing 4,000 cars annually. Entrepreneur Henry Ford made his Model T affordable to most Americans, thereby providing a seminal boost for the insurance industry.

Mr. Ford had built his first horseless carriage, a strange contraption called the Quadricyle, in 1896. With a body resembling a crude wooden box, it had a single seat and steering tiller, bicycle wheels, and an engine cylinder fashioned from a steam engine's exhaust pipe with a wooden flywheel and an electric bell on the front. Seven years later, he incorporated the Ford Motor Company and it soon sold its first Model A car to a dentist. (A new Model A was not introduced until 1928.)

At the turn of the century there were 8,000 automobiles on American roads, a figure that jumped to 78,000 by 1905—nearly tenfold in 5 years. More cars powered by steam and electricity than gasoline were built during the centennial year. Shortly thereafter, steam-powered vehicles became less prevalent, and by 1920 they were rare. Electric automobiles experienced the same decline as gasoline became the fuel of choice—and of the future.

Despite their popularity in certain sectors, automobiles remained controversial at the end of the nineteenth century. After considerable study, the Scientific American offered a positive spin in 1899 observing, "We not only give it our respect but our admiration, for with its big rubber tires, it gets over the ground in a velvety sort of way and reaches its destination without becoming tired." There were also many skeptics—insurers among them—and with good reason. Driving conditions were atrocious. The problems included narrow dirt roads that were conducive to accidents between cars as well as between cars and horse-drawn conveyances, a lack of driver education, and no signs or signals indicating right of way.

Auto Insurance Is Born

Such impediments only highlighted the need for insurance and progressive insurers. The Travelers Insurance Company responded. In 1897 it issued the first third-party automobile policy. An independent agent placed the policy, which was written for Gilbert J. Loomis, a mechanic of Westfield, Massachusetts, who built a one-cylinder car the year before and later formed an auto manufacturing company.

Ronald W. Vinson and John Cosgrove, in their unpublished manuscript, "Challenging Risks: The Saga of American Insurance," report that Loomis remembered paying $7.50 for $1,000 of liability protection, because he had paid the same amount to ship the car to New York City. Loomis also recalled, "That particular car went to Bloomingdale Brothers, who, after demonstrating it in Central Park, and scaring every horse that saw it, wanted to give me an order for 500 cars. The deal fell through because I couldn't guarantee delivery in 4 months."

An 1898 Travelers policy covered a car owner against damages to persons or property caused by the car. Liability limits were $5,000 for one and $10,000 when more than one person was hurt. Early policies were written on "team forms" designed to protect horse-drawn conveyances where damages were caused frequently by runaway, kicking, and/or biting horses.

Insurance for auto fire and theft did not exist before 1902. Collision coverage came even later, and typically insurance was not available for claimants, often forcing lawsuits. Messrs. Vinson and Cosgrove recount a Pittsburgh man's frustration with a jury unsympathetic to car owners. Having abandoned his new 1899 Rikker when its wheel became jammed in a streetcar's track, he explained:

I saw the headlight of an approaching trolley car. I leaped out, waving and yelling, but the car came on. It developed later that, this being near the end of the line and no passengers being on board, the motorman had left the controls and gone to the rear of the car to talk with the conductor. My beautiful Rikker was smashed. I sued.

In court, the attorney for the streetcar company told the jury that a company which provided transportation so that the poor working man could ride home from his work when he was too weary to walk, should not be penalized for damaging a rich man's plaything, which was good only to frighten women, children, and horses. The jury awarded me one dollar.

Resistance continued to underwriting auto insurance when the president of Insurance Company of North America (INA), Charles Platt, stated, "I'll never insure a gasoline can on wheels, the noisy stinking things!" And in 1903, the insurance trade journal, Spectator, reinforced this sentiment by suggesting "the motormen—chauffeurs is the general term—driving automobiles are usually reckless, rushing madly past frightened teams [of horses] without attempting to slow down." They added, "nervous horses are sure to be alarmed at such apparitions … [underwriters] might serve the cause of public safety by refusing to insure anyone who has acquired the automobile habit."

Nonetheless, a year before, the Boston Insurance Company became the first U.S. insurer to provide non-liability car coverage when it insured an automobile in transit from England to America. In Biography of a Business 1792-1942, Marquis James notes the policy was written on a "schooner form." He reports that United States Lloyd's followed by offering auto fire and theft coverage at all times and places; and in 1905 INA became the third American insurer providing such protection.

Seven years later, another progressive insurer, Aetna Life & Casualty Company, recognized automotive market potential and began underwriting risks. In 1912 it combined liability, property, and fire coverage—the forerunner of multiline policies. Some agents and brokers resisted selling car insurance until this modern conveyance demonstrated staying power. Eventually, most embraced the coverage as an essential stimulant for their economic growth.

Conclusion

As with shipping and railroads before, insurance in the automotive industry had broad implications for American life. Then, as now, our industry provides an essential safety net for businesses and society at large, which will accept critical risks only when insurers join them in a creative, yet prudent, risk-taking partnership.


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. He can be reached at 703-759-0233 and through the Web site www.spreadingtherisks.com.


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