The invention of the automobile in the late nineteenth century created a need to protect motorists from the potentially enormous financial loss from operating a car. While the automobile certainly revolutionized American society both economically and culturally, it can also be a dangerous instrument, inflicting death, personal injury, and property damage...and the automobile itself can also be damaged or stolen. Economically, the potential losses associated with driving an automobile can be significant (Stellwagen 1926). With the knowledge that operating an automobile is potentially economically devastating, and acting on the assumption that driving an automobile is a privilege and not a right, policy makers required motorists to purchase auto insurance coverage to protect innocent third parties as well as the at-fault motorist from liability.

Though car insurance obligations vary from state to state, every state in the U.S. requires mandatory car insurance. The resulting tension between financial responsibility and compulsory liability statutes highlights the struggle in the American psyche itself between freedom to do what one pleases and the need to regulate some things for the good of the whole. Consequently, automobile insurance companies have become a leviathan entity enmeshed with enormous political implications (Long 2007). The history of automobile insurance gestures towards a complex interplay of financial responsibility laws, compulsory insurance laws, and uninsured motorist coverage based largely on the principles of tort law (Brainard 1961).

Rooted in Ancient Marine Insurance

The concept of auto insurance is fundamentally a tort system. Tort law falls under civil law and specifically involves personal injury laws. There really is no agreement as to a single definition of a tort. Etymologically, however, the term means a “wrong” (from the Latin tortus, “twisted,” to the French tort, “wrong”). All torts are wrongs involving damage to a protected interest (Braindard 1961). In other words, a tort occurs when someone either deliberately or through negligence harms another person or group. The concept of torts and, by extension, automobile insurance can roughly be traced back to ancient mariners. In 3000 B.C., merchants on China’s rivers deliberately spread a given cargo among several ships to reduce the potential loss due to either sinking or piracy.

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 (Jaffe and Russell 1997). 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. (Jorgensen 1970).

In addition, 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: “That which has been destroyed of all shall be replaced by the contributions of all” (Brainard 1961). 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.

Auto Insurance and Socio-Economic Infrastructures

Auto insurance evolved from the interest 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 naturally also came to rest on a fault system. What this means is that if there were an auto accident, it would be determined who was at fault and then liability would be assessed according to that determination. However, since there are irresponsible drivers--or, in other words, drivers who don’t have the financial capacity to pay--it is impossible to ensure that even though fault is assessed, the injured person will be able to collect. Simply put, the problem is that of the uncompensated drivers in a society that is unarguably an auto-centered society (Long 2007).

The tremendous rise the automobile insurance industry is related to a variety of factors, including the expansion of the U.S. economy, the dramatic impact of the automobile on American life, and the rapid growth of its supporting physical and legal 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. Beginning in earnest in the early 1920s, the states and federal government increased funds to improve roads and traffic control while also implementing stricter driver and vehicle licensing requirements.

Insurance had always been offered to ease the 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 operating their cars. Perhaps the first move by organized society to deal with the financial results of auto accidents came with the compulsory liability insurance statue in Massachusetts in 1927 with the objective to make all parties financially responsible. Most states would pass similar laws by the 1940s which saw the end of WWII and a rapid increase in the automobile industry, consequently expanding the need for financial responsibility and mandatory insurance coverage laws for motorists. Today all states require automobile insurance.

Auto insurance has become one of the most heavily regulated businesses in U.S. history, and most countries outside the United States also now require motorists to purchase auto insurance before driving on public roads. The penalties for not acquiring insurance can be severe. Usually, the law requires that a motorist have at least third-party insurance to protect others against financial loss caused by the motorist's vehicle, while coverage against damage to the motorist's own vehicle or person is usually optional. In doing this, American insurance laws created an auto accident compensation system based on personal responsibility that simply extended traditional insurance legal principles embodied in tort law to a new technology: the auto (Long 2007).

Types of Car Insurance

The many different types of policies, along with unfamiliar legal terminology, can initially be confusing (Rossi and Black 2001). There are five basic types of auto insurance coverage: bodily injury liability, property damage liability, medical payment liability, uninsured motorist liability, and collision and comprehensive coverage.

Bodily Injury Liability

Provides coverage for bodily injury claims from those whom a motorist injures in an accident. In other words, 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.

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). Damage liability provides a fixed dollar amount of coverage for damages that an insured driver becomes legally liable to pay due to an accident or other negligence. The most important type of coverage provided by automobile insurers is the liability coverage. Liability premiums are higher and bring in more money than other coverages, and companies’ claims losses are greatest in this area because the law tends to value lives more than property (Rossi and Black 2001).

Medical Payments Liability

Provides medical payments to the policy owner and other passengers in the policy owner’s car.

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. It means that the insured is really “double-insured” both against his own injury and also injury caused by an uninsured motorist. The amount of coverage that a purchaser of automobile insurance could secure against the acts of an uninsured motorist is the amount required under the financial responsibility laws of the insured's state. State law determines the definition of uninsured/underinsured and the corresponding coverages.

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. Collision coverage is usually optional. Comprehensive coverage provides coverage minus a deductible for damage not considered collision, such as theft, fire, weather, or impact with an animal (“Automobile Insurance” 2001).

Conclusion

The expansion of the automobile as a mass-produced means of preferred travel has brought with it the great potential for destruction of lives and property. In response to this, both the state and federal governments require mandatory insurance coverage. The insurance industry, which had already developed according to a system of tort law, has been applied to automobile insurance laws. And those laws have evolved into an enormous political and economic hydra that politicians and lawyers constantly critique and reform. Currently, auto insurance is the only example of something that Americans are required by law to buy (assuming they own cars), but it is provided exclusively by private industry on a for-profit basis.

“Automobile Insurance: The Basic of Auto Insurance.” 2001. Better Business Bureau. http://www.bbb.org/ALERTS/article.asp?ID=431.

Baird, Calvin. 1961. Automobile Insurance. Homewood, IL: Richard D. Irwin, Inc.

Jaffe, Dwight and Thomas Russell. 1997. “Catastrophe Insurance, Capital Markets, and Uninsured Risks.” Journal of Risk and Insurance. 62.2. 225-230.

Jorgensen, Stig. 1970. “The Decline and Fall of the Law of Torts.” The American Journal of Comparative Law. 18.1.39-53.

Long, William. 2005. “Automobile History. http://www.drbilllong.com/Insurance/HistoryI.html.

Rossi, John Paul and Samuel P. Black, Jr. 2001. Entrepreneurship and Innovation in Automobile Insurance. New York, NY: Routledge.