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.
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:
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.
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."
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.
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.
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 website www.spreadingtherisks.com.
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