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The Evolution of an Industry: How Property Insurance Has Changed Through The Years


Disasters and property insurance go hand and hand. We know disasters are nothing new, but did you know property insurance is not either? The property insurance industry has been around for centuries but continues to evolve as we enter the modern landscape of coverage.

What is Insurance?

First, let’s take a look at what insurance actually IS. Insurance helps address the reality of risk. The risk is unavoidable in our lives and insurance allows us to pay scheduled payments or premiums to exchange the risk of a large loss. The terms of the transfer of risk are detailed in the insurance policy which describes the benefits, the amount of coverage, and the compensation available.

Individuals make choices every day about how much risk they are willing to take on for their particular situation. Risk-retention can be done most commonly through the size of the deductible (flat deductibles, the wind and named storms as a percentage of value), co-insurance clause, or self-insured retention. Some risks are infrequent and may have little impact on the bottom line, so insurance may not be the best course for that particular risk. Some items are consequently hard to value, how do you replace a memory or an item handed down through generations. Specialty insurance can be written for some unique risks through inland marine floaters or manuscript policies.

Today we are talking about property insurance, the protection against most risks to property. In general, property insurance is divided into two categories:

  • Open perils: Covers all causes of loss not specifically excluded in the policy (common exclusions include earthquakes, floods, nuclear incidents, acts of terrorism and war)
  • Named perils: Requires that the actual reason for the loss be listed in the policy for insurance to be provided (fire, lightning, explosion and theft)

History of Property Insurance

Most sources estimate that the Great Fire of London in 1666 was the birth of property insurance. With the loss of over 13,000 homes, insurance became a focus for officials. The first successful venture following the fire was the “Insurance Office for Houses,” which initially had 5,000 homes insured. This paved the way for other companies to enter the industry. It was commonplace for insurance firms in those early times to have their own fire departments to help minimize damage.

In the U.S., Benjamin Franklin had a hand in bringing the practice of property insurance to the masses. The insurance company he founded would not insure certain buildings they deemed too high of a risk. As the property insurance industry has evolved over the years, three recent events have significantly impacted the way carriers work with customers.

The World Trade Center Case

There we several pieces to the litigation surrounding the property insurance coverage in place at the World Trade Centers on September 11, 2001. These included the period of indemnity of time of coverage, the definition of damage of physical loss, how civil authority comes into play, Business Interruption coverage, insurable interest, contamination and loss exclusions from the terms of the insurance binders, what is included in replacement costs, salvage and recoveries. It is a complicated case that has significantly impacted the way insurance companies prepare for catastrophic events. The decision made substantially affected the payout(s) given and continues to be hotly debated.

Source: http://www.insurancejournal.com/news/national/2006/10/19/73411.htm

Post-Hurricane Katrina Property Insurance Claims

If you have property near a coast, you probably know the impact on insurance that Hurricane Katrina had. Thousands of home and business owners were affected by the storm. Many policyholders filed suit due to the slow reaction by their insurance companies. Also, only about one-third of homes and one-fourth of businesses carried the federal flood policy. Even those who had it were often left short of rebuilding costs. As a result, insurance rates in areas near coastlines shot up following Hurricane Katrina, and many struggled to find coverage. While we hear about New Orleans recovering, many property owners suffered extreme financial implications.

Source: http://www.nytimes.com/2007/09/02/business/worldbusiness/02iht-orleans.4.7353442.html

Florida Consumer Choice Act

In the summer of 2009, Florida Governor Charlie Crist vetoed the Consumer Choice Act. The act would have allowed some of the state’s major insurers to set their own rates (Florida is consistently one of the most expensive states for property insurance). This veto caused major insurance carriers to leave the state altogether.

How do these events affect you, the policyholder? The main implication is to know your coverage. Whether you have a business, home, or both, understanding your coverage and documenting all transactions is the overall theme. As consumers, we have a choice. The choice may not always be easy, and it is extremely subjective.