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Home >> History of Auto Insurance

History of Auto Insurance

The concept of auto insurance coverage is as old as invention of the automobile in the late nineteenth century. Emergence of automobile manufacturing as an industry created a need to protect motorists from the potential losses from driving a vehicle including death, personal injury, property damage and theft of vehicle itself. Economically also losses associated with driving an automobile may be significant. With the knowledge that operating an automobile is potentially economically as well as physically devastating, therefore, policy makers required motorists to purchase auto insurance coverage to protect motorist, innocent third persons and also motorist at-fault from liability.
Development of Auto Industry also gave birth to a new branch of a modern business in insurance against driving or automobile accidents. The industry proved to be profitable and very attractive field of employment opportunities. The concept of auto insurance is basically based on the Law of tort. Law of Tort is covered under civil law, specifically involving provisions and process to compensate personal injury.Conceptually, “tort” means a “wrong,” from the Latin language, distorted to the French tort, “wrong.” All torts attract damage to a protected right. In other words, a tort occurs when someone through negligence or intentionally harms another person or group.
The concept of tort can be traced back to the ancient Chinese Marine Activity. The owners of cargo ships were supposed to meet the investors before setting sail to the new colonies via Atlantic Ocean. The owners of these ships would occasionally lose a ship either through sinking or piracy. The group of investors took the business of insuring the ship and cargo and promised safe arrival in exchange of some fee (premium).

In the Babylonian kingdom circa 2000 B.C., the Code of Hammurabi, one of the first written codes of law in history, provided the first written record of insurance in the form of “bottomry.” In the contract of “bottomry,” lenders advanced the ship-owning merchant the full cost of the cargo. If the voyage was a success, the ship owner repaid the bank at a certain interest rate which included a premium to reflect the risk of loss. If the ship was lost, the lender forgave the loan. Traders whose cargoes were advanced by merchants were thus protected from debt in case the cargo was lost. This practice spread throughout the Mediterranean region until finally the Roman edict Lex Aquilia (circa 300 B.C.) provided a general law of compensation for direct and indirect injuries. This in turn was continued by the Roman Emperor Justinian in the sixth century A.D.

The Oldest Insurance Coverage

Greek, Indian, and Phoenician traders used an ancient insurance called the “General Average.” According to a 700 B.C. written reference, the General Average insurance involved a cooperative effort whereby if cargo was compromised, the loss must be made good by all interests involved. In Europe during the eleventh and twelfth centuries, Danish navigators began forming guilds whose role was to protect its members against loss and damage at sea.The oldest marine policy known to have been issued was on a vessel named Santa Clara, and the oldest policy document in existence was dated April 24, 1384 covering four bales of textiles on a journey from Pisa to Savona. The basic concepts of marine insurance were brought by the Lombards to northern Europe and England in the 13th Century. By the 17th Century, London, with the emergence of the Lloyd's of London Association, had developed into a leading center for marine insurance.

Journey of Auto Insurance

Auto insurance is the derivative of the right marine insurance had in protecting against financial loss. The tort notion of fault is so deeply embedded in previous theories of insurance that auto insurance also based on a fault system. What does it mean that if there were an auto accident, it would be determined who was at fault and then liability would be assessed accordingly.First of all Auto Insurance as an industry developed in USA. The rapid growth of automobile insurance industry related to various factors, including the expansion of the U.S. economy, the dramatic impact of the automobile on American Society, growth of its supporting infrastructure from road improvement to driver licensing. Indeed, the rise of the “car culture” in the first half of the twentieth century was accompanied by a surprising number of accidents on the roadways (Rossi and Black Jr. 2001). The high rate of accidents on the roads resulted in several political reactions. In the early 1920s, the states and federal government increased fundsto improve roads and traffic control system clubbed with implementing stricter driving and vehicle licensing provisions.

Insurance had always been offered to compensate socio-economic losses associated with transportation, but now because the preferred mode of transportation was the automobile and the number of motor vehicle related fatalities was high, the states began to require that drivers cover the liability they incurred while driving the vehicle. Now auto insurance has become one of the most heavily regulated businesses in U.S. history, and most countries outside the United States also now it is mandatory for motorists to purchase auto insurance before driving. The penalties for not acquiring insurance are severe.

Types of Car Insurance

There are five basic types of auto insurance coverage: physical injury liability, property damage liability, medical payment liability, uninsured motorist liability, and comprehensive coverage.
  1. Physical Injury Liability - Provides coverage for bodily injury claims for those whom a motorist injures in an accident. This covers motorists if they are at fault in an accident and the people in the other vehicle suffer injuries exceeding their own personal injury coverage.
  2. Property Damage Liability - Covers any property damages to third parties (such as damage to the other person’s car or other personal property which a motorist causes or is responsible for).
  3. Medical Payments Liability - Provides medical payments to the policy owner and other passengers in the policy owner’s car.
  4. Uninsured Motorist Liability - Protects a motorist when the other, negligent driver has no insurance or not enough insurance. Uninsured motorist insurance is meant only to cover bodily injury and not property damage.
  5. Collision and Comprehensive Coverage - Insures against physical damage to a motorist’s car, including collision and comprehensive coverage. Collision covers damage to the insured’s car that is involved in an accident. Usually collision coverage includes a deductible and provides payments to repair the damaged vehicle or payments of the cash value of the car if the car is not repairable.