The history of homeowners insurance in America

Wed Nov 15 2017

An American flag on a front porch

Today, people take insurance for granted in many ways. They assume insurance companies will be around to cover their losses should the worst-case scenario become their unfortunate reality.

At one point, however, the idea of insurance was unheard of. Pooling risk so anyone impacted by a catastrophe can rebuild their home without being put on the street? How revolutionary! But you might be surprised to learn that the concept of insurance dates back several centuries. We take a look at the insurance industry’s murky beginnings to see how this far-out idea made its way to America.

The origins of insurance

Insurance existed in one form or another all the way back to ancient times. In the early 1900s, archeologists found artifacts dating back to Hammurabi that contain laws protecting shipper agents from losses caused by natural disasters and relieving them of liability when they were victims of theft.

Similar archeological discoveries revealed several other instances of early laws that transferred or distributed risk in many nations, including China, India, and Greece as well as the Roman Empire. These laws mainly dealt with protecting the people who shipped cargo from the devastating losses that can happen on sea voyages.

The desire to protect businesses from these kinds of losses continued during the medieval period. That’s when the king of Portugal created a fund that’s considered the first documented form of maritime insurance in Europe. It wasn’t until the 1600s that the various lines of insurance started taking shape.

How home insurance got its start

The Great Fire of London is regarded as the genesis of modern insurance. Insurance existed in various forms before this, but it lacked the rigor and formality of today’s policies. In the 17th century, each policy only covered one peril (i.e., one thing that could go wrong).

It’s important to note that during the time homeowners insurance originated, homes were primarily made of wood. Wood structures burn easily, which poses a problem. To compound that problem, developers built homes closer and closer together as the population grew, which increased the fire risk. People began to understand the importance of protecting their homes.

Insurance crosses the pond

Fast forward to 1732. Insurance has made its way to Charles Town (modern-day Charleston), South Carolina, where the first company to cover fire insurance was founded. It wasn’t until 20 years later that noted insurance entrepreneur Benjamin Franklin popularized the coverage. His company, Philadelphia Contributionship for the Insurance of Houses from Loss by Fire (which is still in business) was formed in 1752. The company was instrumental in helping people prevent fires and setting industry precedents.

In the next century, insurance took off around the United States. What began as just insuring the home against fire quickly blossomed into a full-fledged, lucrative sector: life (which was originally designed to help widows and children), theft, disability, commercial, and auto insurance, to name a few.

If insurance had not changed, a modern homeowner would need separate policies for fire insurance, lightning insurance, burglary insurance, and so on. Today, all of these are now covered by a basic homeowners insurance policy. It wasn’t until 1950 that the first packaged home insurance product was sold.

Growth continued from there. In 1960, the Boston Plan identified insurance availability issues found in urban areas of Boston and took action to address them. The current National Flood Insurance Program (NFIP) has its start with the 1968 passing of the National Flood Insurance Act. This is the foundation of all flood insurance policies sold today and sets the standards for private flood insurance. By this time, homeowners were already fully appreciating the benefits of standard homeowners insurance policies.

The development of regulations

At this point in history, insurance was more or less a free-for-all: regulations were basically nonexistent, monopolies were forming, and minority groups were excluded. Carriers charged consumers whatever they wanted for premiums, and were often not able to pay out on claims (like a Ponzi scheme).

At the beginning of the twentieth century, the government made gradual regulatory headway in the private insurance sector.

The Social Security Act of 1935, which guaranteed citizens’ rights to unemployment insurance, and the McCarran-Ferguson Act of 1945, which shifted the governing authority for the insurance industry to the states, were two of the most notable regulations.

With this oversight (as well as good old-fashioned constant competition), insurance companies have had to eliminate discriminatory practices, offer more competitive prices, and pay out verifiable claims.

After looking back at the history of homeowners insurance, we’re even more excited to be able to be a part of the next round of fundamental insurance innovation - a better buying process, more accurate risk pricing, and efforts that help homeowners actively avoid damage to their homes.


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