Michael Sean Quinn, Ph.D. & J.D.

This is an anecdotal and, to some extent, conjectural, even speculative, introductory history of the development of a crucial part of liability insurance. Reliable literature on the origins and development of liability insurance is impossible to find.  Thus, one must begin with guesses, to some degree. 

It is important to remember that liability insurance is a latecomer to the insurance industry. Many types of insurance existed long before it. Even if one’s observations are restricted to modern times, a significant number of so-called first-party insurance coverages existed before it, for example, fire, marine, and life insurance. 

In the English speaking world, for example, fire insurance originated late in the Seventeenth Century, after the “Great Fire” in London in 1666.  In America, fire insurance seems to have originated in 1754, more or less, a “gift” of Benjamin Frankin. Probably he got the idea from his life in England. At that time, most forms of insurance were “societies,” meaning that they were mutual poolings.

Obviously, liability insurance originated as what its name describes: insurance providing indemnity for those found to be liable to others for injuries of various injuries the insured caused. It should be immediately obvious that this sort of insurance is tied to the existence of an active court system, to the industrial revolution of mostly the 19th Century, to a commercialized economic system, and to the kind of reasoning and theory for legal thinking characteristic of the Enlightenment and post-Enlightenment periods.  Underwriting requires extensive fact-gathering and sophisticated fact gathering. 

Often liability insurance is called third-party insurance, referring to the fact that, quite literally, the insurance provided insureds with indemnity for amounts paid to others because of injuries the insured had caused. It should be remembered that originally “indemnity” means a payment to the insured for amounts the insured has paid. That technical meaning of “indemnity” changed over time so that the insurer might pay amounts the insured owed for injuries it sustained, e.g., fire, and not wait for the insured to pay and then reimburse him. 

A great many things can be called “injuries.” For example, if someone fails to carry out a business arrangement this can be considered an injury. One early form of liability insurance would look like this: A and B enter into an agreement to perform a certain mercantile task. In an agreement, A and B promise to do x for C. A and B fail to perform, so C suffers a loss. A and B would be liable to sue for damages their failure caused C. But, while A and B have agreed to pay the whole debt to C, they have agreed that A will indemnify B for what he had paid pays. 

This would be a form of liability insurance. One should notice that the arrangement between A and B has nothing to do with what is owed C. It should also be recognized that this arrangement is a substitute or replacement of A lending B money to pay C, though A might have to borrow money to indemnify B or pay B’s portion of the debt to C. 

An insured’s obligation to pay for an “injury” he (or it) caused  might be the result of a court finding, or–more likely–it might be the result of something like what we now call an “arbitration.”  It might, for example, be something decided by an informal group of “elders” in a given industry, say, at a coffee shop, with both A and B agreeing to be found by what the “elders” find.  Before that, it might begin by dealing with reputational dangers.  

Industries where this form of liability insurance is to be found, maybe, is portrayed in the business sections of Charles Rappleye, Robert Morris: Financier of the American Revolution (2010). Morris was a big-time merchant, importer, exporter, with a syndicate of agents all over Europe, the West Indies, and some cities in America. He was also one of the founding fathers, though not usually recognized as such, perhaps because there are so many controversies about his financial conduct as a government official.  He was a “big player,” but also a big spender, a was his wife. He, close to, ended his days in debtor prison. It is not being suggested here that Morris had actual deals involving financial liability insurance, but it would be found, if at all, in his kind of business. 

There is sparse, if any, real evidence that these sorts of business dealings and resolutions were widely practiced. However, import and export merchants had large organizations with agents in many places, there would have to be an arrangement of the sort I have just outlined

Obviously, insurance of this sort is not for individuals living ordinary lives, but for those active in large, complex businesses, that might, for example, default in a  business dealing. Of course, then, as today, such liability might be dealt with through a loan or some sort. Thus,  liability insurance began as something closely connected to the financial industry.  

It is also important to remember that liability insurance started or developed as an attachment to other sorts of insurance, as is still sometimes true. Marine liability insurance is a good example of this idea. Liability insurance did not begin as a separate, distinct, and stand-alone type of insurance contract, although it certainly began as a type of contract, or part of a type of contract. 

It is hard to imagine liability insurance without industry, heavy equipment, a good deal of commercial transportation,  railroads, for example, as well as ships, highly active markets, and an elaborate banking system. Thus, liability insurance did not originate or develop early-on from problems arising out of the causation of bodily injury.  In fact, virtually the opposite is true. 

It appears that liability insurance in America at least began in a serious way after the Civil War and toward the end of the Nineteenth Century, at the earliest. Some have suggested that it really got started in connection with railroads. Others suggest that its true origin comes with the development of the use of motor vehicles.  This would place its development within the Twentieth Century. I suspect that the latter position is more correct, although it is possible that railroads sold forms of accident insurance along with some tickets. (A dime for a regular ticket and $0.13 for one with accident insurance.) When I was a kid, one could buy this sort of insurance with airline tickets.

Then, as now, accident insurance is a form of first-party insurance–a sort of specialized health insurance. Perhaps the sort of insurance one can buy when renting a car is like that.  In its history of itself as a business, it brags that it originated in 1864 to sell accident insurance. Apparently one of the founders of the Travelers got this idea while traveling in Europe.  The name of the company suggests that accident insurance was originally conceived as something for those traveling.

In any case, I speculate that liability insurance really began with motor vehicles. If so then auto insurance was, at least at a massive level, the first form of liability insurance. One would bet that both first-party and third-party insurance were sold bundles together, ab initio, or very soon thereafter, at least as an available option. 

If liability insurance did not really start as a significant component of the industry until the Twentieth Century, and if the duty to defend did not arise until that time, or thereafter, then no wonder there is virtually no historical literature about it. 

It is important in tracing the duty to defend to keep in mind that often the price of defending a lawsuit is substantial, and often it exceeds the amount of the loss.  Thus, the insurer’s duty to defend is a central part of a liability policy.  These days all sorts of policies are mixed between first-party coverage, such as homeowners’ policies, and even title insurance policies. 


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