By 1688, insurance in England was an old industry. The 1537 case of Gybbons v. Martin, et al in London's chancery court had already established the principle that any ambiguity in the policy would be ruled in favor of the insured, if it was the insurer who drew up the contract. It seems that Martin and some other underwriters had agreed to insure Gybbons “for a year.” If he died within the year, then they would pay his widow £100. Well, he did die, just a few days short of a 365-day year, but the underwriters said to the widow, “Oh, no, Mrs. Gybbons, you misunderstood. We meant a 'lunar year,' and that expired a few days before his death.” Of course, the good Widow Gybbons would have none of their ambiguities and took them to court, ultimately collecting the full amount.

The Great Fire of London

London, in the 17th century, was a big wooden slum, and even London Bridge, first constructed in 963, had shacks built all over it. When a 1666 fire began in a bakery on the bridge it quickly spread throughout the city (like that of the Great Fire ofChicago in 1871), much of the city was decimated. Architect Christopher Wren then redesigned many of the buildings still standing today. But at the time there was no fire brigade, no fire insurance, and no FEMA to help rebuildLondon. This led to the founding of the first fire insurance company, The Sun, which is still in business. Prior to that neighbors helped each other when a fire broke out.

The 'Writing Under' Principle

Edward Lloyd, who was apparently born, perhaps in Wales, in 1648, had little to do with insurance personally. He was in the coffee business, but to enhance that business he made the booths in his coffeehouse available to businessmen who would agree to take on a portion of a risk for a fee. Now there is still a coffee shop within the new Lloyd's building in London, where insureds can meet with their brokers before the broker approaches the syndicates.

The first mention of Lloyd was in an advertisement in the February 21, 1688 issue of The London Gazette regarding the theft of five watches, with any news about the theft to be provided “at Mr. Edward Lloyd's Coffee House in Tower Street.” Undoubtedly, both Lloyd's Coffee House and losses covered by insurance had already become synonymous.

The effect of the 1666 fire on the underwriters meeting in London coffee houses is unknown, but undoubtedly one or two insured vessels also suffered fire damage in the conflagration. The process of issuing insurance in the 17th century remains the same in the 21st at Lloyd's: Those seeking insurance go to a broker and explain their risk. The more information they are able to provide, the better rate they may receive accordingly. The broker then goes to the booths in the coffeehouse—now called “the floor,” the main floor remaining for marine risks and upper floors for other kinds of risks—and seeks out one of the underwriters who represents a syndicate of investors. The broker tries to select one that will offer a good rate.

Now that underwriter may say, “Well, I'll take eight percent at 2 per 250.” That sets the rate, and the man in the booth would “write” his name “under” the risk indicating the percentage of risk taken and the rate. The broker then goes to other underwriters representing other syndicates and gets as much of the risk insured as possible. The broker might say, “Sam Pepys took eight percent. Could you take twelve?” Sometimes 100 percent of the risk would be subscribed, but usually less than that was taken, and the merchant or vessel owner would be coinsured for the balance. A Lloyd's policy is still done in the same way.

It was to improve the business of his coffeehouse that Lloyd, in 1696, seventeen years before his death, began publishing Lloyd's News. This publication listed any ships and their cargos, their owners and masters, and the quality of the vessel, a great aid to the underwriters in their booths in the coffeehouse. The Lloyd's Registry, another early Lloyd's publication, kept track of the voyages, cargos and other factors. Sir Arthur Conan Doyle had his famous detective, Sherlock Holmes, consult the Registry on occasion in the solving of his mysteries. When Britain's wars broke out in the 19^th and 20^th centuries, it was Lloyd's agents (basically claim adjusters) in ports around the world that became the forerunner of MI-6 and the British Secret Service. They knew precisely where every vessel on the water was, where it had been, where it was headed, and what it carried.

As explained in “Titanic,” (Claims, December, 1998) quoting Lloyd's underwriter Henry Chester, “Sir Percy MacKinnon, who became Chairman of Lloyd's … believed the Titanic wouldn't sink, she was such a marvelous ship and there'd been so much publicity about her. So he wrote the reinsurance on her…. He must have lost a lot of money.” Yet in 1912 the Titanic did sink, and Lloyd's underwriters paid their policies without any complaint. That was the nature of claim ethics in that famous institution. That same fame has existed for nearly three and a half centuries.

The Lloyd's Insuring Agreement

The 1690 Georgian language of the Lloyd's marine insuring agreement remains the basis of marine insurance to this day: “Touching the adventures and perils which we, the Under Writers, are contented to bear and do take upon us in this voyage, they are of the seas, fire, enemies, pirates, rovers, assailing thieves, jettisons, Letters of Mart and Counter-mart, surprizals, takings at sea, arrests, restraints and detainments of all Kings, Princes and Peoples, of what Nation, Condition, or quality soever, barratry of the Master and Mariners, and all other like perils, losses and misfortunes that have or shall come to the hurt, detriment or damage of any goods or merchandise or ship, or any part thereof….” Now, that is an “all risk” insuring agreement!

But even the famous underwriters soon learned to hedge their bets, adding what became known as the “FC&S Clause,” meaning that the policy was “warranted free of capture or seizure,” thus excluding many of those specific perils such as pirates, rovers, arrests or restrains. In light of the recent piracy “takings at sea” off the African Coast or in Southeast Asian waters, ship owners are having to consider coverage buy-backs and other measures to save their vessels and crew. Additionally, owners of vessels taken by the U.S. Coast Guard in an arrest and restrain for possession of illegal drugs are not going to be collecting much under their marine policies.

One clause that is now common in marine insurance is the “sue and labor” condition, requiring the ship's master and owners to do all they can to save or salvage the vessel. As long as the captain stays aboard, salvors cannot claim the ship or cargo. It is the reason the captain “goes down with the ship,” which the captain of Costa Lines Concordia which floundered and sank offItaly's West Coast near an island – in unnavigable waters – might be wishing he had done the night the giant liner rolled over.

Always New Risks

The British insurance model became the model for American insurance as well, and European insurers are often also American insurers. Every year new risks are found, and usually some insurer will agree to cover them. The Governing Committee of Lloyd's back many decades ago passed a rule that no underwriter could write financial guarantee insurance. It was exactly that, called “credit default swaps,” that in 2008 sank AIG and led to a financial meltdown. The coverages were written inLondon, but not by Lloyd's.

Underwriters have insured most risks. We hear of insurance on finding the Loch Ness Monster, actresses' legs, a “hole in one” in golf tournaments and other bizarre risks, but generally the insurance industry of the 21^st century is ready to take on the dangers of risk and spread it around, just as those in Elizabethan times were.

Lloyd's was instrumental in a number of risk control efforts. In addition to world-wide information networks, they designed and mandated the use of lifeboats, had light houses build along the British coastlines, and designed other safety programs. The Lloyd's concept of always paying the losses they owe has been the standard for the claims industry for centuries, and remains so today.

Next month, we will cross the Atlantic and look at adjusting insurance claims in the United States and Canada.