In the late 18th century, marine insurance in a nascent United States was put to a stressful test. During an undeclared naval war between America and France known as the Quasi-War, merchants were ruined and losses to insurance underwriters rose, as did the frequency of insurance disputes. In the end, insurance not only survived but thrived and buyers of insurance increasingly turned to relatively young American corporate insurers rather than traditional markets in Europe, most notably at Lloyd’s.
Marine Insurance in America
Marine insurance has its origins in medieval Italy. Afterward, Britain’s marine insurance industry centered around the Lloyd’s coffee house where individuals underwrote, on their own account, risks presented to them by brokers. Typically, separate policies would cover the vessel and its cargos. Until the mid-18th century, merchants in colonial America primarily relied on English underwriters at Lloyd’s to acquire insurance coverage. While policies invariably required some customization, the general contents of these policies, the common interpretation of their terms, and other customs still followed the precedent of the Italians centuries earlier.
“And respecting the adventures and perils which we, the assurers, are contented to bear, and do take upon us in the voyage, they are of the seas, men of war, fire, enemies, pirates, rovers, thieves, jettizons, letters of mart and counter-mart, surprizals, takings at sea, arrests, restraints, and detainments of all kings, princes, and people, of what nation, condition, or quality soever, baratry of the master and mariners, and of all other such perils, losses, and misfortunes, that have or shall come to the hurt, detriment, or damage of the said [vessel / goods and merchandizes], or any part thereof.”The typical ‘perils clause’ of a marine insurance contract; language almost exactly the same as this was in use for centuries, from the late Middle Ages through much of the 20th century
In America, there was some private underwriting of insurance, especially in marine insurance, in the 18th century. This form of underwriting gave way, to a considerable though not complete extent, to corporate insurers after the War of Independence, which had briefly disrupted trade and insurance underwriting. This was a departure from the British tradition which still relied largely on natural persons offering insurance secured by their individual credit.
Commerce, and the need for insurance, rose after the end of the War of Independence. More of this insurance was underwritten locally than before, in the case of New York, at one of two coffee houses in the city known for hosting this business. Between 1791 and 1804 some twenty-two brokers and 180 insurers, either individuals, partnerships, or corporations, were active in New York alone.
However, the first marine insurance corporation in the country was formed in Philadelphia in 1792 and this company, the Insurance Company of North America, received a corporate charter in April 1794. It raised $600,000 in capital by July 1795. Two other companies were founded in New York shortly thereafter and these were just three among a growing list, some with limited liability which attracted more investors, and others without, depending on the state of formation. The creation of marine insurance companies allowed more insurance capital to be raised.
The typical American corporate insurer was not always financially conservative; they typically kept little cash. They paid claims out of premium revenues or the sale of securities held in their investment portfolios, typically with a lag no greater than two or three months. The companies also allowed policyholders to pay for their coverage with promissory notes rather than cash and often allowed them to pay at the end of a voyage rather than at the start. Retained surpluses were thin; the Insurance Company of North America alone paid out dividends of over $590,000 by 1798, a considerable amount compared to its underwriting income or capital.
Marine insurance was always challenged by war and France and Britain, along with much of the rest of Europe, were at war in the 1790s. The United States was neutral but this neutrality was not respected by either side. Insurance on American shipping became much more expensive. Relations with France in particular worsened as the decade went on when French privateers attacked American shipping.
French prize courts on its Caribbean colonies rewarded the captured American ships to privateers on the grounds of alleged violations of neutrality. In response, the United States expanded its navy to capture French privateers. This led to an undeclared naval war appropriately known as the “Quasi-War”, but there was no ambiguity as to the effects on insurance; premiums spiked to extraordinarily high levels.
Wartime conditions made trade more profitable for those willing to take the risk. It also meant that the need for insurance increased. To entice underwriters, the cost of insurance coverage needed to increase. During the War of Independence, insurance could cost as much as 35% of the value insured for a single voyage. In late 1796, the premium on a one-way voyage to the West Indies was running around 5-6%, not too high perhaps but already twice the normal peacetime rates. Within a few months, the cost increased to 10-15%. In 1798, coverage on this trip would cost a merchant 25% or more.
The going rates for insurance on voyages to Europe also rose. In 1794, insurance costs on voyages to Hamburg were running at 6%. The cost rose to 15% in 1798. Elsewhere, while coastal trips remained fairly cheap to insure, coverage on much longer whaling voyages could also cost 20%.
While the compensation to underwriters moved higher, so too did the threat of loss for merchants and marine insurers. During the late 1790s, hundreds of American merchant ships were seized by the French, typically charged with trading with the enemy, perhaps by carrying goods of ambiguous or undocumented origins. The Quasi-War was a shock to the system; greater numbers of captured ships could cause losses so great that diversification was an inadequate source of protection.
Policies were drafted to contain various conditions associated with the threat of capture. Some insurance contracts contemplated the embarkation at multiple ports but, by skipping certain ports, a merchant could get some of his premiums returned. Retroactive discounts of this sort were also offered if the ship travelled in a convoy or before or after certain dates, depending on the level of perceived risk.
In 1799, the capture of privateers by the navy reduced risk and the cost of coverage declined. A peace deal with France, the Mortefontaine Convention signed in September 1800, meant premiums fell further in 1800-01. In the meantime though, many merchants were bankrupted. Insurers, including the Insurance Company of North America, also experienced large losses. The Insurance Company of North America had entered the business on the eve of the Quasi-War. It may have taken business away from the private underwriters who could not always be counted on to honor their policies, especially as many were merchants themselves during these volatile times. Therefore, private underwriters could not offer attractive coverage.
Perhaps it was for the better that private underwriters were to some extent locked out of the boom in insurance. The war years proved costly, damaging the Insurance Company of North America. Its capital stock fell from $600,000 to below $300,000 by January 1804.
Contracts and Disputes
Under insurance contracts dating to medieval times, disputes were usually to be handled by arbitration rather than by the courts. Still, the law firm of the former Secretary of the Treasury, Alexander Hamilton, was involved in numerous American marine insurance disputes that made their way to courts. His firm was involved in 136 marine insurance related lawsuits between 1795 and his death in 1804. Hamilton was also general counsel to a young insurance company between 1796 and 1798.
In an innovation to the old ‘perils clause’, a typical American insurance contract contained a neutrality warranty whereby the insured pledged to adhere to neutrality and refrain from illicit trade during the voyage; otherwise, some coverage would be curtailed. As a new clause, what this meant was not always certain and the subject of many disputes in which insurers favored a strict definition of neutrality and the insureds a broader one. As an example of the gray area, there were cases of ‘good faith’ infractions such as when a ship presented falsified documents about its cargo but did so with an intention to protect that cargo from loss to a warring country. As a general matter, illicit trade was fairly common in early American merchant life.
Further, some insurance contracts did not actually contain a clause barring illicit trade, since such a clause was new, but some type of trade would naturally violate the neutrality of the United States during the war. Arguing for an insurer in one case, Seton, Maitland, and Co. v. Low (N.Y., 1799), Hamilton argued that even in the absence of such a clause, the violation of the country’s neutrality would void a policy.
Hamilton lost the case and another one substantially similar the following year. Afterward, Alexander Hamilton had some role in adopting new contract language for the marine insurers, terms that relieved the insurer of “any charge, damage or loss, which may arise in consequence of a seizure of detention, for or on account of any illicit or prohibited trade, or any trade in articles contraband of war”.
Marine insurance survived the Quasi-War. In the process, American insurance law was tested and clarified. The demand for insurance only grew. So, more insurance companies were formed and more insurance was underwritten in the United States, and less abroad, partly given the international tensions. It was all well as American corporate insurers maintained their creditworthy reputations.
Marine insurance was and is an ancient business as far as financial services go. The language of insurance contracts varied little across countries and centuries. However, in the Quasi-War between the United States and France in the late 1790s, the contracts used by underwriters and insureds encountered new challenges. Official neutrality in the midst of what otherwise looked like a war required new contracts, inevitable disputes, and legal innovation, however tried and tested marine insurance law was considered to be up to then.
More from the Tontine Coffee-House
Read about the Smyrna Convoy which ruined many London marine insurance underwriters and mutual marine insurance in Holland and Britain. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.
1. Brown, Kate Elizabeth. “From Port to Court: Developing Marine Insurance Law in Alexander Hamilton’s New York.” The Gotham Center for New York City History, 21 Sept. 2020.
2. Goebel, Julius. “Chapter IV – Maritime Affairs.” The Law Practice of Alexander Hamilton: Documents and Commentary, Columbia Univ. Press, New York, 1969.
3. Kingston, Christopher. “Marine Insurance in Philadelphia during the Quasi-War with France, 1795–1801.” The Journal of Economic History, vol. 71, no. 1, Mar. 2011, pp. 162–184.
4. Wright, Robert E., and Christopher Kingston. “Corporate Insurers in Antebellum America.” Business History Review, vol. 86, no. 3, autumn 2012, pp. 447–476.