Property loss prevention and associated laws are often perceived as modern endeavors designed to navigate the complexities of contemporary insurance risk management. However, these concepts are far from new. They are deeply rooted in American insurance history and have evolved to protect individuals and businesses from unforeseen losses. The essence of property loss prevention lies in the proactive measures taken to minimize risks and safeguard assets, a practice as old as property ownership itself.  

American communities and insurers have long recognized the importance of protecting assets from hazards like fire, theft, and natural disasters. In the legal realm, the evolution of laws governing property insurance and loss prevention reflects society’s growing understanding of risk and the need for fair compensation in the event of loss. These laws have been instrumental in defining the responsibilities and rights of both insurers and policyholders. The principles of good faith, indemnity, and subrogation, for instance, originated in ancient times but continue to be cornerstones of modern property insurance law. Subrogation places responsibility on those who are wrongfully accountable for a loss occurring.

Today, the importance of property loss prevention and its legal underpinnings cannot be overstated in the United States. With premium rates skyrocketing, populations growing in areas where losses occur, and In a world where risks are constantly evolving due to climate change, the need for effective loss prevention strategies and robust legal frameworks enforcing and encouraging loss prevention is more crucial than ever. Understanding the historical context of these practices not only highlights their significance but also guides their future development. These ideas and lessons are not new.  

An excellent paper, The Indemnity Principle: Evolution from a Financial to a Functional Paradigm, published in the Journal of Risk Management & Insurance, is not only about the concept of indemnity but provides examples of how communities and laws were passed to support risk prevention measures preventing property loss.  It mentions that the concept of allowing insurance was met with skepticism since it would reward behavior causing losses:

The earliest property insurance insured against damage from fire. This kind of insurance, however, did not develop without resistance. In the earliest days of insurance in the United States, prior to 1666, fire insurance was scorned and viewed as an immoral resistance of Divine Providence and a source of serious temptation toward negligent or even fraudulent conduct. After a grand conflagration destroyed London in 1666, fire insurance began to gain greater acceptance.

It further noted that the first attempts at American underwriting were guided by guesses and assumptions rather than scientific observation:   

The nascent fire insurance industry Was, of course, very unsophisticated. Instead of relying on data analysis to calculate and classify risks, early underwriters used more simplistic rules of thumb, such as refusing to insure property with trees in front (trees were a barrier to firefighters’ access to the property), to classify risks. In 1790s Pennsylvania, there were only two classes of risks-building composed wholly of brick and stone and those which were not-and an 1810 Hartford Fire Insurance Co. policy listed only four classes of risks. In contrast, by the early 20th century over 100 classes of risk were in use. Fire insurance in early 19th century America ‘was chance, pure and simple. There were no data by which the costs and the charge could be brought into anything like proportionate relations.’

Eventually, the state legislatures and the insurance industry started making laws and organizing to mandate loss prevention:   

In 19th century America, a string of catastrophic fires provided the incentive and context for modem fire insurance….These fires were made worse by the prevalence of wooden construction—including the popular mansard roof—and unsophisticated fire prevention techniques. Horses drawn water carts could hardly prevent the spread of a determined fire. One commentator attributed the large amount of annual fire loss to ‘characteristic American carelessness … [and] the hurried, optimistic spirit that erects temporary buildings of flimsy materials in confident expectation that growth will soon require their replacement.’ Regardless of the cause, state legislatures reacted by enacting building codes prohibiting wooden construction and requiring fireproof construction materials such as brick.

In 1866, insurance companies came together to form the National Board of Fire Underwriters to promote uniformity in policies and to improve the state of the insurance business. The Board began ‘a determined crusade’ against the mansard roof and other hazardous constructions, and created a Model Building Law….

About twenty years later, in 1886, four years after New York passed a law requiring fireproof construction, the New York Standard Fire Insurance Policy was created. (Elliott, 1902; Bissell, 1909) Considered by some to be ‘the most important contract in the world,’ the New York Standard Fire Insurance policy helped provide stability and uniformity and was a major accomplishment…

The history of Underwriters Laboratories, now known as UL, started in 1893. This further demonstrates that the concept of risk and loss management is nothing new:

The World’s Columbian Exposition, also known as the World’s Fair, is held in Chicago and more than 27 million people attend – an extraordinary turnout considering the 1890 population census recorded close to 63 million residents in the U.S. UL’s founder, William Henry Merrill, Jr., a graduate of the Massachusetts Institute of Technology (MIT) electrical engineering program, assumes his first post-college position at the Boston Board of Fire Underwriters, from which he was sent to assess fire risks associated with the construction of the World’s Columbian Exposition. As an electrical inspector at the World’s Fair, Merrill proposes his idea to create an electrical testing laboratory to the insurance underwriters he meets during the course of his work. The Chicago Underwriters Association and the Western Insurance Union provide funding to support Mr. Merrill’s vision, paving the way to establish the Underwriters Electrical Bureau.

“The best loss is the one that never occurs.” This adage resonates profoundly when we address the challenge of reducing insurance rates, a concern paramount to both policymakers and policyholders. When I am asked about the primary step towards achieving this goal, my answer invariably points towards the necessity of laws and underwriting practices that mandate and reward loss prevention and risk management. It’s an approach that, while not immediately glamorous or simple, holds the key to substantial long-term benefits.

Admittedly, the topic of loss prevention and risk management might not initially capture the imagination. It involves financial investment upfront, demands stricter regulatory oversight, and requires the implementation of more rigorous standards to protect properties. However, this initial investment pales in comparison to the potential savings. By proactively managing risks, we significantly reduce the likelihood of losses, which, in turn, diminishes the need for extensive insurance claims. This reduction in claims frequency and severity directly translates to lower insurance premiums for all policyholders. It promotes the affordability of home and business ownership.  

It’s essential for policymakers and stakeholders to view this strategy not as a burdensome expense or a hurdle but as an investment in future stability and financial health. By advocating for and implementing these measures, we champion a more resilient society with both the chances of disaster and high costs following a disaster reduced. The path to achieving lower insurance rates is paved with proactive, preventative measures. Such an approach is not just about saving money—it’s about fostering a culture of safety, responsibility, and foresight. Embracing these longstanding values and integrating them into our laws and insurance underwriting practices is the most effective method for reducing the cost of insurance over time, benefiting not just individual policyholders but the entire community.

Thought For The Day

Know by test, and state the facts.

—William Henry Merrill, founder of Underwriters Laboratories