AMERICAN INSURANCE LAW: SOME TWENTIETH CENTURY HISTORY SKETCHED

      INSURANCE LAW IN THE TWENTIETH CENTURY:

     REMEMBERANES OF

THE RECENT PAST

Michael Sean Quinn*

 

 

This essay is an informal, mostly memory-based sketch–and nothing more–of what younger people, including many young lawyers and some tech[1] geeks of today refer to as “ancient history.” This history of insurance contracts, whether regarded as ancient or recent, has created the practice of insurance (and related) lawyering as we know it, though unquestionably a new age is dawning which is creating new practices and a new profession.

 

For centuries, some insurance contracts have been more or less standardized. For example, maritime insurance has been the same for centuries. However, until the very late Nineteenth Century or earlier Twentieth Century, insurance policies tended to be rather “topical”: for example, there would be one policy for fire insurance and a separate policy for wind damage.[2] 

 

During the Twentieth Century, so-called “blanket” insurance policy standardization spread. It spread in two senses. (1) Different policies from different companies began looking more and more alike due to the research and statistical data surrounding loss history and sound underwriting. And, (2), as more and more people bought insurance on their homes, homeowners’ insurance policies became standardized.  The property policies were “named peril” policies at first, and then became broader and broader until almost everyone bought and used “all-risk” policies. The latter name is misleading and indeed false—since not all risks were ever covered, nor were all perils covered (assuming that there was, in fact, a difference between risks, hazards, and perils)—but nobody seemed to worry about the misleading name “all risk,” because the use of the term in the industry was always used in comparison with broad-form “named peril” policies, i.e., named peril policies that listed a lot of perils and their predecessors.

Like many terms in the insurance industry, the term “blanket” has several meanings. For example, over time, in the area of property insurance, it came to mean that a policy covered more than one building. They might be of the same type on a single property or they might be buildings of different types in the same place or the buildings might be at different locations.  Usually, the different buildings would be individuality valued. The term “blanket” also came to refer to policies that covered more than one type of thing. There might be separate limits for different buildings. This idea–or a related one using the same term–is also called “bundle-ing,” so that you have two or several different policies grouped together and providing an insured with a blanket of coverage. Under some circumstances or arrangements, the group would be unified into a single policy. All of this has, of course, evolved over time. Perhaps the best example of this. is the unification of first-party (property) and third-party (liablity) policies. 

Standardization of widely used for-the-people policies, often by state government regulation, was a great feature of insurance development in the Twentieth Century. Roughly speaking, New York state’s famous “The 165 Lines,” created by the New York state legislature, started wide-scale standardization for individuals as to property insurance. It became nationally influential in approximately 1943. Variations of “the 165 lines” policy followed relatively quickly. (The 165 Lines functioned as a policy, but perhaps more significantly as a level lower than which could not be sold.) A little known fact is that property policies covering fire have been standardized to some degree ever since the Great London Fire of 1666, and maritime (ocean marine) policies for a long time before that.

 

Motor vehicle insurance followed something like the same path except that it was a newcomer in the early part of the Twentieth Century.

 

Beginning around the same time as “165 Lines,” business liability insurance became standardized. This was accomplished by the industry itself and not particularly or exclusively by state governments. This started with the “Comprehensive General Liability” policy, which was replaced by the “Commercial General Liability” policy in the mid-1980s–some say 1986.[3]  The latter is still in use today in all–or many–sorts of businesses and contexts.

 

The new insurance policies caused an immense amount of litigation as they developed.  The industry understood, however, that without these changes companies would have faced even more litigation. Insurance companies were already accustomed to being dragged into lawsuits.  After all, they were and are the largest merchants of service contracts in this country and perhaps in the Western World, at least. They are also involved in losses of large amounts to the relatively less wealthy.  Insurance companies are used to litigation; they know how to lose (as well as how to win), and they have deep enough pockets not to worry about paying most judgments.  Litigation for insurance companies is a teaching tool and adversarial litigation is often their teacher. 

 

During the Twentieth Century, and especially during most of the second half of it, the practice of insurance law didn’t change much. A century ago, insurance policies were generally thought of as mere, routine contracts, and they were interpreted in exactly the same way as all other contracts were.  They remained contracts, of course, though they are not usually called that, and the general public does not think of their auto insurance policies, etc., as contracts.  So how did things change and for what reasons? 

 

Here’s one. People (and not just companies), began and continued buying something other than life insurance, e.g., building (usually home) insurance, auto insurance (first and third party), personal liability insurance that eventually got tacked onto homeowner’s insurance.  It began with wealthier individuals and then down to the middle and working classes following World War II, as a result of the building boom, the heavy use of mortgages, and the commercial requirement that mortgage loans be secured not only by the houses themselves, but by insurance on the mortgages as well.  (Thus, lenders became additional insureds on the required insurance.)

 

Here’s a second. Insurance policies became not only standardized but bundled up. One could have first-party and third-party insurance in the same policy, one could have more than one auto on one policy, and so forth. As more and more different liability policies were offered, more and more firms were formed that specialized in insurer-paid-for-and-controlled defense-of-the-insured work. For obvious reasons, vehicle liability insurance was one of the big sources of insurance defense work, followed by more work in the area of workers’ compensation claims, something that state government often required.

 

Now for a third. With a growing population came a demand for work in the insurance field, and so bundled policies became standardized. The courts realized that standardized insurance policies sold to the general public could/should not be interpreted in quite the same way insurance contracts for business were and could be.  In other words, a silent (and/or seldom discussed) dimension of the law of contracts changed a bit when it came to contracts of insurance with individuals. Part of this was an astronomical growth in the application of the results-go-to-the-insured-if-language-is-ambiguous rule (plus the conceptual haze and judicial silence surrounding the rule).  

 

Some think this might be a product of political “Progressivism, as understood in the early Twentieth Century” or, not entirely in the alternative, “Legal Realism.” These ideas are certainly made more likely by the legislative creations some parts of statutory systems regulating the insurance industry, such as parts of Texas Insurance Code. They were also caused by the expansion of tort law and making it more sympathetic to victims who became plaintiffs against insureds and insureds that became plaintiffs against insurers. (The meaning of the term “Progressivism” in this paragraph is not to be confused with the way the term was used in the 2016 election and thereafter, although they are not unrelated.)

 

For yet another trend shaping the professional lives of insurance lawyers, was that contracts of insurance became not only standardized, and more bundled, but, (in various senses) more “blanket-like.” Out of policies that contained bunches of named perils arose “all-risk” policies. For example, the Comprehensive General Liability became widely used in 1940, or so, and Commercial General Liability replaced it in 1986, or so.)  Virtually all different kinds of businesses bought these kinds of policies. New commercial risks developed; sometimes they were left on their own in isolated policies; sometimes they were integrated in part into other policies. 

 

(Of course, there is a concept of commercial liability insurance that involves rather general coverage for lots of different businesses, so there is a concept embodied in the phrase “commercial general liability.” But there is also a name of a type of policy; names and concepts, of course, are not the same at all. Sometimes people took the capitalization of the beginning letters–C, G, and L–to always indicate that a name was being used. Some people always capitalized the first three letters whenever they see, hear, or think of the phrase. This is a mistake.) 

 

Still another reason. Along with (or as part of) these trends, as businesses grew larger and larger and as more and more injured people (or people who thought they might be injured) filed lawsuits against insureds, the latter needed more and more insurance. Those amounts had to be–or needed to be–sold in stacks or towers, and so generally, widely used excess and “sort of” (or partly) excess policies, i.e., umbrella policies, multiplied (and in some cases were born). Litigation over bodily injuries ballooned. This happened a very long time ago as the use of autos became commonplace, but an explosion of similar lawsuits was a post-World War II phenomenon. 

 

Of course, professional malpractice policies did not get bundled up with (or integrated into) general liability policies.  This did not even happen through the use of endorsements. Professional malpractice policies remained independent and for obvious reasons. The risks were different; the definitions were different, and they tended to be claims-made policies.  As the whole of the industry went, however, professional malpractice policies were only a small fraction of the overall market.

They were joined eventually, however, by financial protection policies, like D & O policies, which are analogous to professional malpractice policies. These policies created a new subdivision of insurance lawyers–both insurance defense and coverage lawyers. The coming and expansion of D & O policies was one of the factors, along with large commercial property policies, that brought into existence separate specialized departments of insurance lawyers within large law firms. 

 

As more and more lawsuits arose and more and more new sorts of policies sprang into widely used existence over time; we saw the birth and growth of insurance defense practice; whole firms came into existence to provide nothing but those services to insurance companies.  Highly sophisticated D & O and similar policies have not tended to join that throng; insurance defenses in those realms seem to be handled by special defense firms. In any case, for a long time insurer tended to use the same lawyers to do insurance defense work and insurance coverage work. Over time that unified practice seemed to drop away.  At the same time, insurance companies needed more and more lawyers to advise them on policy meanings, just as they had needed a lawyer to help to draft the policies in the first place.  Hence, after the middle of the Twentieth Century, a less rare (or more wide-spread) coverage practice came to life. 

 

(It was widely believed for a long time by out-house coverage counsel–that is outside of the company lawyer–that their offices existed for two reasons. One of them was that insurance companies were cheap and therefore weren’t willing to pay what they would have to pay to have an internal staff of coverage lawyers. This explanation makes no sense. Another view–a second–was that the salaries insurers were willing to pay coverage lawyers would force other salaries to go up, even in the general counsel’s office. This explanation makes only slightly more sense. A third explanation was that law students with high grades wanted to work for law firms since that’s where the money ultimately lay and where prestige began almost immediately. Going in-house anywhere immediately is not highly regarded by law students. And a fourth explanation was that the insurance companies wanted out-house coverage counsel in order to make sure that they got objective advice, something they could not count on from in-house employees. This last explanation makes the most sense, although no complex situation can ever be caused by a single event, much less explained by a one-factor premise.)

 

Along with these trends came the spread of subrogation practice, and it has kept growing right down to the present day. These sorts of insurance cases have always existed, but the spread of them created large firms (or large departments with already large firms). Remember: subrogation cases in insurance law are those in which the insurer pays and then seek indemnity-type recovery from liable parties. The insurance carriers are said to step into the shoes of their insureds. 

 

            Here’s yet another trend. During the last third, or a little more, of the Twentieth Century,  along came multiple injuries with the same class of causes.  No longer were tort cases almost always one occurrence, one defendant, or something in that range.  Joining the fray were cases in which many people were injured (when death is thought of an injury of sorts). At first, these were complex, single events followed by many injuries, e.g., building collapses. Later many injuries were caused by the same events or types of events or caused by instances of the same type of product–whole classes of tires were defective, some chemical used in manufacturing or agriculture turned out to be poisonous, an entire brand of pills hurt and/or killed, asbestos injured, cigarettes were deadly, baby powder may have been defensive, etc., etc., etc.  Class actions expanded, and a few lawyers for injured plaintiffs became very wealthy, while others were disbarred and/or went to jail. 

 

So new areas of insurance and insurance practice were created, synthesized and developed–mass injuries with very different causes burgeoned; environmental (poisoned water) and pollution (smoke, gas, garbage, coal dust, and more) became famous. Some of these different types of injuries that surfaced, like asbestosis, took years to develop fully and where the manifest injury itself also lasted for years.  For an incredibly long time insurers tried to avoid paying these claims; often they succeeded; sometimes they did not. However, as time went along, more and more of these insurance cases were settled, and for larger sums, given the number of victims involved. 

 

These kinds of cases are not completely over; I hope I have not left that impression. Recently a federal judge in California held a liability insurer (California Capital Insurance Company) cannot recover reimbursement for settling a $1.9M lawsuit against apartment owners when a renter suffered pulmonary disease from inhaling pigeon droppings dust. The judge held that this insurer’s several policies could be stacked to provide coverage for the several years at stake.[4]

 

Consider how many more lawyers were involved in all this and in how many different ways. 

 

And, guess what,  things continue to get more complicated. During the same time period new ways to figure out which insurer was to pay what sum became part of the controversy. When injury-causing events cause massive injuries slowly, and there are several insurers covering different time sequences, what insurers are liable, and in what percentages.  As one might imagine, individual insurers wanted to pay as little as possible, and so hotly contested conceptual conflicts amongst different theories of insurer liability developed to a highly sophisticated level. Liability insurers went to litigation war against one another as never before.  Many believed that one or another political ideology was somehow hidden at the bottom of one theory, another theory, both of them, or all of them.  How could it be otherwise where injury-causing events occurred over 35 years, during which period, there were twenty-six insurers, where some of them were involved for their coverage of the XYZ company during, say, twenty of those years but only the odd-numbered ones, where XYZ has changed hands or been transformed in legal nature (in some way or another), and where thousands of people had sustained injury. Now add on the complications that 13 companies produced some of the injury-causing events. 

 

Many more coverage lawyers were needed and created. Surely it is no wonder that at least some coverage lawyers became virtually semantic, philosophical, investigative, and political experts on insurance policies and companies.  The word “pollution” was controversially explicated dozens upon dozens of times, for example. Terms like “contamination” were not far behind.

 

And the insurance defense industry grew and grew.  All of the various defendants had rights to be defended, even when the insurer says, “I doubt you have coverage.”  Settlements had to be devised and negotiated. Insureds (or better put, their lawyers) sued insurers with zest, and all the while various conceptions of insurer bad faith were developed, deployed, diminished and (some say) destroyed as serious and systematically available remedies.  

            In the midst of all this, the use of class-actions considering all this sort of injury-causing events emerged on a big scale. Huge sums changed hands. Many injuries were eventually treated. Tort and insurance laws developed and changed. And a few more personal injury lawyers such as the basket of truly cook-lawyers from Ohio and Kentucky were eventually were both disbarred and jailed (or worse). 

            During this period, there was an immense amount of personal injury and coverage litigation. A sort of macabre joke floated around contrasting the insurance litigation of the then present-day with the number of cases that followed the sinking of the Lusitania in 1915.  

 

As already mentioned, roughly during this time sequence, there came to be more and more types of liability policies aimed at dealing with financial perils. These included D & O policies, credit insurance policies, business crime policies, professional malpractice policies for virtually every type of service professional,  and many more. The policies that began evolving then, e.g., protecting money managers, charge account companies, and banks have evolved into important policies used at the present time for the various cyber problems related to accounting hacking. 

 

All of this development created more and more jobs for lawyers practicing insurance law, whether by providing opinions, advising insureds, insurers, banks, or others. Insurance law practice did not change by much, except that new risks and perils were being covered more and more. Well, changed a little, I guess: (1) block cites of enormous numbers of cases from different jurisdictions became more common, and (2) electric typewriters became computers, as did copy machines. 

 

 In my imagination I hear coverage lawyers in chorus singing, “Those were the days, my friend. We thought they’d never end.” Well, end they did, more or less, somewhere toward the end of the last century.[5] There were and are some prolongations of the coverage disputes of the second half of the Twentieth Century, e.g., bodily injuries resulting from asbestos going global.[6]  

 

This string (or theater) of cases create some new issues, depending on where the insurance suits end up pending, but if they’re in the U.S., the substantive insurance issues will be relatively uninteresting (except for the amounts of money involved) and procedural issues (such as jurisdiction and choice of law) will be the major issues. In any case, if there are new looking insurance issues involving mass tort coverages they will really be re-enactments of what has already been done, so the arguments will pretty much all be the same as they have been or very similar. Of course, a new poison or pollutant may pop up, but the work surrounding them will be the science and not the insurance law. 

            (Some of them may be quite oddball cases. For example, one of the major issues in the last third or so of the Twentieth Century when it came to liability insurance for mass tort injuries, e.g., by environment-related causes was whether an insured could get compensation from several policies issued by the same insurance company. This was called “stacking.” That issue came up again in a pigeon poop case. A renter developed a pulmonary disease from inhaling dust infiltrated by pigeon feces and sued the apartment building owners and the property manager. This was no “chicken shit” case. The insurer was ruled to have no right to reimbursement from the insureds for the $1.9M settlement it arranged.  

 

It is worth noting in passing that there are now “upper level,” special mass tort insurance policies and environmental protection policies, but they are not on the front page.  When I say “upper level,” I am talking about self-insured retentions of millions upon millions of dollars followed by millions more of insurance.  Imagine, the “primary” policy starts at $30M, goes up $10M, being replaced by an umbrella policy of another $10M[7], and then we start getting into the “real” excess policies. Imagine the job of the coverage lawyer in thinking about how to word the self-insured retention/primary policy border.  Now that sounds like both fun, as well as games!

 

There are now almost no new applicable legal theories; no new insurance doctrines–comprehensive or patchwork; no new tort revolutions to supply mythical mansions for conducting exciting insurance-related legal businesses. To some degree, therefore, we are in doldrum years, with very little wild about them. Of course, what is now routine insurance financed litigation will always be with us, and there will always be large versions of it, so there will always be controversies about damages to and the destruction of large business buildings.  There will always be a large number of people killed, injured, and damaged: airplanes fall out of the sky, ships sink, trucks explode, trains crash into stations, and so forth. These are terrible and exciting events, but they are routine from the point of view of insurance coverage and litigation.  Controversies between primary and excess policies are not that interesting–not really. Controversies between reinsurers and everybody else are conducted by a few small “elite” group of lawyers in the secret halls of arbitration. And lawsuits against intermediaries haven’t changed much in many a year. 

Having read all these recent-events-are-gone paragraphs, one might want to keep in mind the fact that entirely new masses of mass tort cases are developing or still standing in the wings. Identity theft and invasion of privacy suits–often class actions–are like this.  

 

This sketch has left out at least one thing that constituted a major development in Twentieth-Century insurance history, and that is health insurance, including disability insurance. It was unquestionably one of the most important trends in the last century; it changed American insurance, just as it did for many other countries; is still doing so, and it will continue to do so for at least a couple of generations to come.  It can be separated off, however, since it is not a continuous interactor with the kinds of insurance policies outlined here, and since it is often processed in great huge contracts or policies run by employers.  It addition, it is not the heavy-duty generator of reported court opinions that liability and property insurance are. Indeed, what relatively few coverage counsel there who work principally on health insurance policies and their problems do not interact continuously with coverage counsel for first and third party problems. (Strangely, health insurance is not usually automatically mentioned as first-party insurance, although that’s exactly what it is.) 

 

There are at least two more stories to tell. They are both about insurer bad faith. This has to do with insurer’s breaching contracts of insurance in tortuous ways. This began seriously in the 1980s. It came to be called “common law insurance bad faith.” The legislatures of various states, including Texas, began to see that some poor adjuster conduct might be controlled by appropriate statutes. And so they were passed and used in civil lawsuits. 

 

A big move in the Twentieth Century was foreshadowed late in the Twentieth Century and that is the role that first-party insurance, as well as third-party insurance, would play in in the industrial marketplace. However, that is a different story for a different essay. 

 

[1] It is important to keep in mind that “tech” is an abbreviation for “technology” and “technologies,” and that those terms refer to cyber and digital “things.” The idea that a complex drill could constitute technology is now passé.  Nothing is “tech” but computer-related stuff.  Of course, currently manufactured automobiles may be “high tech,” but that is because they contain 20+ computerized systems. Auto mechanics, bless them all,  now know more about the world as it is than do such people as lawyers. So much for being a learned profession. The mechanic is probably needed more than the lawyer, at least most of the time, anyway.

 

[2] A rather different use of the term “standard” will appear in a different but related essay about the future of insurance lawyering.

 

[3] Much of the history of standardization in insurance policies during the fourth quarter of the Twentieth Century is connected to the history of the Insurance Services Office, Inc., founded in 1971.  It was a private corporation servicing the insurance industry, among other ways, by publishing various forms for different sorts of policies. It became a subsidiary of the now publicly-traded company, Verisk Analytics, which has previously been one of its subsidiaries.  A quick history of both ISO and its consolidation with Verisk can be found in Wikipedia.  ISO is “active” to some degree in the creation of cyber policies, as well as other policies for other financial perils.   

 

[4] This might be called the “Great Pigeon Shit” case, and it is part of the general war on pigeons that has been occurring for many years between city citizens, or some of them, anyway, and pigeons.

 

[5] Well, almost. There was a horrible disaster in India in 1984, involving the spillage of 40 tons of poisonous gas from a pesticide in Bhopal. Over time it killed at least 3000 people and disabled 15,000 more.  Lawsuits rolled, for example, against Union Carbide and Dow Chemical.  Issues as to jurisdiction roared.  Damage issues screamed. The constellation of lawsuits is still not quite over in 2016, although insurance is long gone.

 

[6] Donald W. Brown, “Then and Now: A Historical Analysis of the Evolution of the Last 40 Years of Insurance Coverage in the United States and Where We Might Go,” Insurance Coverage Litigation Committee CLE Seminar, Tuscon AZ March 2-5, 2-16. (I owe Vince Morgan for citation to this cite.)

 

[7] Keep in mind that umbrella policies are usually part excess and part primary policies. If one thinks of the “top” of a self-retention as the ground of the insurance tower, then an umbrella policy would be, just as it is usually conceived, part primary and part excess.

 

*Michael has studied and participated in insurance lawyering for more than 30 years. He is currently a partner in Quinn and Carmona a law firm that focuses on problems in insurance disputes and mediations thereof. quinn@QClaw-adr.com. Office (512) 768-6840, Cell (512) 656-0503. Mail: P.0. Box 162344, Austin, TX 78703.