Insurance and the New York Fire of 1835

In the first fifty years of its history, insurance in the United States was a growing but scarce product. Few insurance firms existed and those that did were typically small and focused on just a couple products: fire and marine insurance. They also offered coverage only in specific areas near where they were founded. This was a hazardous business and a lack of diversification spelled trouble for many insurers after the 1835 Great Fire of New York. Thankfully, that disaster did not kill off the remnants of the industry but incentivized its reconstruction and wider adoption of insurance.

Insurance

By 1820, there were twenty-eight joint-stock insurance companies in the United States; up from just four stock companies, along with perhaps about ten mutual insurers, in 1800. Of the stock companies, all of them called the northern states home; seventeen of them were based in New York; most of the rest were in Pennsylvania. Connecticut was the only other state with more than a single insurance company in operation and Rhode Island, New Jersey and Massachusetts each had one. The first fire insurer established in New York was the Mutual Assurance Company for Insuring Houses from Loss by Fire, formed in 1787. This was followed by, among others, the Columbian Insurance Company of New York in 1801 and Eagle Fire Company in 1806.

To understand the size of these insurers against the damages of the 1835 Great Fire of New York, consider that the Eagle Fire Company had collected $1.33 million in cumulative premiums in the roughly thirty-years of its history up to the 1835 fire. It earned another $1.16 million in interest and from other sources. This compares to cumulative losses up to then of about $932,000 and expenses of $228,000. The large surplus allowed the company to pay $1.29 million, almost the entirety of the balance after its losses and expenses were covered, in dividends to its shareholders. Stock in insurance companies were popular investments.

The industry continued to grow and New York was home to approximately twenty-five insurance companies on the eve of the fire. These were generally small and wrote insurance only locally though they did typically write marine insurance policies as well as offering fire coverage. They were usually formed by wealthy New York businessmen. Aetna Insurance Company and the Hartford Fire Insurance Company, both from Connecticut, were examples of the few outside firms with any noteworthy exposure to the city.

Fire

The 1835 Great Fire of New York took place in the middle of a particularly cold but dry December. It was preceded by two smaller fires; one started on the night of December 15 in an iron, spike, and nail store on Water Street. The fire was thought under control by three in the morning of the 16th when a new fire broke out. It too was controlled but the response to these drained the reservoirs used by the firemen; water was also freezing in hoses themselves frozen to the ground.

A new fire ignited at 9pm that night in a dry goods store on Merchant Street now known as Beaver Street. It was fed by strong winds and an equally strong response was hampered by exhausted crews of firemen and a shortage of water. Those working on containing the fire had to dedicate energy to breaking through the frozen-over East River for more water and this could not supply the water pressure that the now-empty reservoirs would have. Within fifteen minutes of the response, fifty buildings were burning.

The fire was ultimately stopped by means of gunpowder scoured from stores and most notably from the Brooklyn Naval Yard. This allowed for a speedier demolition of enough buildings to act as a fire break. The 1835 Great Fire of New York was under control by the morning of December 17 but in the meantime approximately seven hundred buildings were destroyed. Damages were valued at $18-20 million.

Damaged parts of Manhattan, Hannover Square in the Center (Source: “A Map of the Ruins.” The Extra Sun, Saturday 19 December 1835)

The fire destroyed a business ward of the city overnight. Thus, while the loss of life was limited to just two people, several markets and stores were brought to the ground. These included Franklin Market between Front and Water Streets, the city’s Merchants Exchange, and the printing offices for several newspapers.

Given its location, several of the city’s merchants lost merchandise to the fire. As examples, one lost $300,000 in silks and another $200,000 in teas and brandies. I. & A. Brown, an importer of Irish linen lost $40,000 and Moses Taylor lost inventories of coffee, sugar, and other goods worth $300,000. There were also losses to theft after the fire destroyed buildings. To salvage his products, one merchant loaded up his inventories onto boats and backed them away from shore.

Claims

Though most of the lost property may have been uninsured, insurance claims still reached $7 million. Nicholas Biddle, president of the Second Bank of the United States, had the bank advance $2 million to insurance companies so that they could meet their claims more quickly. However, without new capital, measures like these would not save the insurers; fourteen insurance companies became insolvent almost immediately. Increasing the financial damage of the fire, this coincided with a run on the city’s banks.

Eagle Insurance Company had already had a bad start to the year with elevated losses; the fire came just as circumstances were looking better. At the time of the great fire, it had policies in force offering $1.6 million in coverage on buildings that were either damaged or destroyed by the conflagration; the company only had $631,172 in assets by comparison. Eagle suspended business until it could measure the scale of the loss and determine a course of action. Early the following year, the New York legislature advanced money against the assets of insurance companies and Eagle took advantage of this. Crucially, the company also succeeded in selling $500,000 in new stock in March 1836. With the new money in hand, Eagle Insurance Company recommenced operations.

In all, many insurers, including American, Franklin Fire, and the Globe, failed. However, some pulled off a return to business as Eagle Insurance Company had. For those that did not, their investors suffered. Insurance company stock had been a popular dividend-paying investment and so the insures’ failure hurt the public doubly.

Hartford, Aetna, and Beyond

Among the survivors was Hartford Fire Insurance Company which honored its claims. The company’s president, Eliphalet Terry, and secretary, James Bolles, travelled from Hartford, Connecticut to New York soon after learning of the fire with copies of their New York policies and paid claims. Without any insurance maps at hand, they weren’t sure of the extent of losses. Thankfully, the claims amounted to just under $65,000. Just in case, Eliphalet Terry had secured from Hartford Bank a commitment to honor all checks he might write, pledging his private wealth as collateral.

Another Connecticut insurer with a presence in, but limited exposure to, New York was Aetna Insurance Company. This company’s losses were ‘only’ $115,000 and this was still enough to exhaust the company’s resources. Still, it survived.

Taking advantage of whatever benefit they could from the disaster, Hartford and Aetna advertised their strength and service to policyholders after the fire. As a surviving insurer, Aetna secured so much business that premium inflows in the next twelve months were sufficient to restore the company’s cash position. Hartford’s premium volumes were also very strong; they tripled in the year after the fire. Insurance companies hereafter began to undertake a more sophisticated classification of risks. Some buildings, like paper mills, were more susceptible to fire and while not surprising, this had not been considered in underwriting policies beforehand. Aetna was one of the first to undertake a more detailed classification of fire insurance risks.

In contrast to these two Connecticut firms, most New York fire insurance companies had failed. While many new companies were founded between 1836 and 1838, the growing demand for fire insurance coverage and decimated insurers after the great fire meant New York needed more insurance capital. To secure this, the state government cut a tax on premiums collected by out-of-state insurance companies from 10% to 2%. Another New York fire in 1845 was smaller than the 1835 fire overall but challenged Aetna Insurance Company more than the earlier blaze. Still, the company again managed to pay all claims once again. Despite, or perhaps because of these crises, insurance had become a bigger and more well-regarded business.

Lesson

Insurance benefits from scale. When only a few purchase any insurance, the insurance is more expensive and more doubtful since the few buyers are likely among the riskiest clients, those for whom the insurance presents the best value. Further, if insurance is only offered in confined areas by firms specializing in one or very few lines, then there is probably insufficient diversification, again making the coverage expensive at best and perhaps entirely dubious at worst. To rebuild insurance capital at a time of surging demand, New York incentivized insurers to offer coverage in the state. Together with growing adoption, such a maneuver makes insurance more effective yet affordable.

More from the Tontine Coffee-House

Read about the effects of other calamities on insurance, from an attack on the ‘Smyrna convoy’ to the Great Fire of Hamburg to the sinking of the Titanic. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.