The History of Marine Insurance – Its Origin by Nicholas G. Berketis PhD

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•  Marine Insurance is the oldest form of indemnity of which there is any

record. It is known to have been practiced for over eight hundred years.

•  When, where and by whom it was first devised, however, remains one of the unanswered questions of commercial history.

•  Several nations have claimed the honor of having invented this system of

indemnity, but the best evidence indicates that the Jews, at the time of their banishment from France in the latter part of the twelfth century, introduced such a scheme of insurance for the protection of their property during its removal from France. Villani, a fourteenth century historian, is the authority for this theory, stating that the system was devised in Lombardy in 1182. Whether this is correct or not is of little moment — the fact remains that early in the development of commercial intercourse the need arose for some system of distributing marine losses, and the present method of insuring came into use.

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Ancient Commercial Activity •  In order to obtain a proper perspective of marine insurance, it is

important to trace the development of commercial intercourse among the nations of the world. That the seas were used as the highways of trade early in the history of man is evidenced by both sacred and profane history. In the Bible there are many references to ships, especially to the ships of Tarshish in one of which Jonah was fleeing from Joppa to Tarshish when the ship was overtaken by a mighty tempest. The story of Jonah is interesting in this connection in that there appears a perfect example of jettison, one of the perils covered by the present marine insurance policy, when, on account of danger, the mariners cast forth into the sea the wares that were in the ship in order to lighten it. This experience occurred in B. C. 916, about the time that the Rhodians obtained sovereignty of the sea.

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Early Forms of Insurance •  The Rhodians were originally an agricultural people, but

early in their history turned to commerce in order to dispose of their surplus products. They were harassed by their neighbours, who continually waged war upon them, but by B. C. 916, they had obtained the mastery of the sea. About this time they promulgated a system of maritime juris-prudence, which has become the basis of the Roman code and of all modern laws relating to commerce and navigation. No reference to insurance is found in this system, but General Average is recognized as a commercial custom. Bottomry Bonds were also in use early in commercial history, and a word of explanation in regard to these two forms of indirect insurance will be of interest. 4

General Average •  It was customary in the early days for merchants to travel with their wares

and there might be in the same ship several merchants, each journeying with his goods in order to sell them at the port of destination and there buy other goods with the proceeds. During the course of the voyage let it be supposed that a severe storm arises threatening the safety of the ship and making necessary the casting overboard of part of the cargo in order to lighten the vessel. Naturally, a dispute ensues as to whose goods shall be sacrificed, each merchant preferring that his neighbour's goods and not his own be cast out. There is, however, little tune for argument when a ship is labouring in a storm and, in order both to prevent such disputes and to effect the saving of vessels and their cargoes without having all the loss fall on any one or two individuals whose cargo could most easily be jettisoned, the custom arose of having each person interested in the venture, whether shipowner or cargo owner, contribute to make good the loss suffered by those whose property was sacrificed. This custom soon obtained the force of law and is now part of the commercial code of all maritime nations. The word average, as used in marine insurance, means loss or damage, so that a General Average is a loss falling generally on all the interests involved in a maritime venture as distinguished from Particular Average or a loss falling on one particular interest. 5

Bottomry Bonds In the early days of commercial history shipowners and cargo owners were accustomed to borrow money with which to carry on their ventures, by pledging their vessels or their cargoes as security for such loans. The document setting forth the terms of the agreement was known as a Bottomry Bond when the vessel was pledged, and a Respondentia Bond when the cargo was hypothecated. By the terms of such agreement the sum named in the bond was loaned, subject to the condition that it should be repaid upon the safe arrival of the vessel at a named port. If the vessel was lost, the borrower was discharged from his obligation. The rate of interest which such bonds carried was very high, since the lender practically insured the property. The rate of interest charged, which like the principal amount was payable only in the event of safe arrival, included compensation not only for the use of the money loaned, but also for the possible loss of the money itself through the failure of the venture. This method of loaning money was really the reverse of our present system of marine insurance. At the present time the underwriter (Insurer) charges a rate of premium on an amount representing the fair value of the vessel or cargo, plus the insurance premium and other expenses, which amount he / she agrees to pay in the event of the vessel or cargo being lost through perils insured against. 6

Forms of Bottomry Bonds Distinguished •  Under the bottomry bond system the lender in effect paid for the

property at the beginning of the venture, the borrower repaying the amount loaned plus interest (premium) on safe arrival. This form of bottomry bond, which represents a voluntary pledge of property, must be distinguished from bonds called by the same name, which the master of a vessel in distress must make when all other means of raising funds, to effect repairs in order to save vessel and cargo, have failed. The conditions in regard to the re-payment of the amount loaned, plus maritime interest, as it is called, are the same in this latter form of bond as in its earlier prototype. Under present mercantile usage, loans on vessels are made by the execution of a bond secured by a mortgage on the hull, which in turn is protected by a policy of insurance payable to the lender.

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Grecian Commerce and the First Insurance Exchange •  Among the early maritime nations are found the Greeks, whose

commerce, while extensive, was confined largely to the Euxine Sea, especially at Corinth and Athens. A development of interest to the student of marine insurance is an Exchange which the Greeks established at Athens for the placing of bottomry bonds. The bankers and merchants operated swift dispatch boats which brought early news of wars and of the state of the market, so that vessels could be diverted to safe ports and to favourable markets. The whole scheme seems to have been a forerunner of the modem Lloyd's, London. It also appears that human nature has changed little since the days of the early Greeks, as numerous cases were cited to have been brought into court for the collection of money loaned on bottomry, where it is charged by the lender that the vessel or cargo has been lost under suspicious circumstances. It is quite evident from the arguments made by counsel in these reported cases that insurance by bottomry bond was an established and essential feature of commercial transactions not only in Ancient Greece, but also in the other maritime nations. 8

The Carthaginians, Phoenicians and Romans •  Early in the development of commerce the Carthaginians and the

Phoenicians exercised a potent influence in the markets of the then known world. These nations later fell a prey to Alexander, who destroyed their cities and removed their commerce to Alexandria. But Alexandria too passed away and at the dawn of the Christian era Rome became the world’s leading city. Rome is remembered, however, not for its commercial progress, but rather for its military achievements. In fact it was the policy of Rome to discourage mercantile endeavour as being harmful to the state. The commerce of the Roman Empire consisted largely in carrying supplies and provisions for its armies of conquest. Nevertheless, the Roman bankers were not averse to investing their surplus funds in bottomry bonds, notwithstanding the fact that the loaning of money at interest was discouraged. In fact, by an edict of the Roman Emperor Justinian, dated A. D. 583, a rate for such loans was fixed at twelve per cent. After the fall of the Roman Empire little information is obtainable for many centuries in regard to the development of commerce.

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Commerce in the Middle Ages •  With the revival of commerce in the Middle Ages there developed

two centers of commercial activity, the one in the Mediterranean Sea, the other in the Baltic Sea. The Venetians and Genoese were the leaders in the Mediterranean, these two peoples becoming the merchants of the world. They had been driven down from their homes in Central Europe to the shores and adjacent islands of Italy, where they were able not only to defend themselves against their enemies, but also to establish an overseas commerce that covered the whole of the then known world. The Crusades did much to increase the prosperity of these peoples, as their cities made convenient supply stations on the road to the Holy Land, and they were not slow to take advantage of the situation. The returning Crusaders had acquired a taste for the products of the Eastern nations, and the Italian merchants imported and distributed these goods to the other European peoples.

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The Hanseatic League •  The commercial activity in the Baltic Sea was

also controlled by peoples who had been driven out of Central Europe by the Barbarians, but had fled North and established various centers of commerce on the Baltic and North Seas. As a measure of mutual protection these several communities perfected an organization known as the Hanseatic League, which undoubtedly was the most powerful offensive and defensive commercial alliance, which the world has ever seen. 11

The Lombards •  Over the centuries, various forms of marine insurance have flourished and faded in

various parts of Europe. The Hanseatic merchants of northern Europe had an insurance centre based at Bruges, known as the first Chamber of Insurance", hi 1432, the city of Barcelona also laid down the first recorded statute for insuring ships. Meanwhile, the first form of marine insurance in Britain had been started by a group of Hanseatic merchants, and was later carried on by some German colonists who were the first known London underwriters to have exercised marine insurance almost exclusively with no apparent sign of competition for many years. It was only until the late years of their existence that they were faced with competition from another group of foreign immigrants, "the Lombards" - who took their name from the name of the street where their businesses and trading firms were established, i.e. Lombard Street and who were the first ones to have seriously engaged in the area of marine insurance. It is believed that from them also originates the word "polizza"- i.e. a promise - which is the root of the term "policy". The Lombards began marine insurance by advancing sums on Bottomry loans. Their activity came to an end when England's foreign trade came to the hands of Englishmen; although gone, they, nevertheless, have left something very important in the foundation of a most important branch of finance and commerce, in that they brought marine insurance practice into general use by making it acceptable to the trading community at large, by the introduction of proper rules and regulations.

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Early English Marine Insurance •  The commencement of the 17th century formed the starting point of a new period in the history of marine insurance in Great Britain. During the first period, dating back to the beginnings of foreign commerce and ending within the 16th century, marine insurance was carried on chiefly, if not entirely, by foreigners; whilst during the second and subsequent period it fell into the lap of native enterprise. A distinct line and division between the two periods was formed by the Elizabethan Act of 1601. Being the first statute prepared by the English Government and passed by the Parliament, it was titled ''An Act Concerning Matters of Assurances Amongst Merchants" and it is highly memorable as the first statute-book regarding marine insurance. The Act of 1601 also established the Court of Insurance, which was unfavourably looked upon both by the mercantile community and the courts of common law, and, as a result of that, only few actions appear to have been brought before it.

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Brief History of Hull & Cargo Insurance (1 / 6) 3,000 BC

Chinese Traders redistribute cargo across several vessels to limit potential loss due to a single vessel’s sinking.

1,750 BC

Ancient Babylonia, The Code of Hammurabi codifies a system whereby a merchant receiving a loan to fund a shipment of goods may pay the lender an additional fee in exchange for the lender’s promise to cancel the loan should the shipment be stolen.

1,750 BC? An early form of bottomry (loans or bonds) is developed whereby a loan is made to a ship’s owner or master using the vessel herself (the bottom or keel) as collateral. These loans are repaid with interest only when and if the vessel arrives safely at her destination. This combines investment with insurance.

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Brief History of Hull & Cargo Insurance (2 / 6) 750 BC

Merchants and lawmakers in ancient Rhodes (Greece) invent the concept of “general average” whereby a number of merchants shipping goods at the same time pay a premium into a fund which is used to reimburse any merchant whose goods are intentionally sacrificed for the safety of the vessel and remaining property. The concept of general average survives today.

1200-1300 Respondentia (loans or bonds) are developed in Italy whereby a loan is made to a ship’s owner or master using a vessel’s cargo as collateral. These loans are repaid (with significant interest) when and if the cargo arrives safely at its destination. This is a form of both investment and insurance. Mid-1300s

Separate insurance contracts, not bundled with loans or other contracts are developed in Genoa. For the first time, this separates insurance from investment. 15

Brief History of Hull & Cargo Insurance (3 / 6) 1343

The earliest known marine insurance contract, found in the state archives of Genoa, Italy, dated 13 February, 1343, is made between Amigueto Pinello and Tomaso Grillo, agent for Aveducto Guillelmo, a merchant from Panorno.

1601

England establishes a specialized chamber of assurance separate from other courts.

Mid-1600s

Coffee houses become important centres of the social and business life of London. Insurers, merchants, ship owners and ship captains congregate in coffee houses near London docks to meet and to conduct business, as well as exchange gossip, news and shipping information.

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Brief History of Hull & Cargo Insurance (4 / 6) 1650-1700 England becomes the world’s preeminent maritime, commercial, financial and insurance power, combining growth of a powerful navy, merchant fleet, financial institutions and marine insurance into the world’s greatest trading and colonial power. 1688

Lloyd’s of London is founded at Edward Lloyd’s coffeehouse near the Royal Exchange at the London docks on the Thames River. Lloyd’s becomes the premier meeting place for insurers, merchants, ship owners, ship captains and other parties wishing to insure cargoes and ships as well as those willing to underwrite maritime ventures. In time, Lloyds of London becomes the world’s largest market (no insurance company) for insurance, especially marine insurance.

1693

More than 100 British merchantmen (merchant vessels) in convoy are captured or destroyed in the Bay of Lagos by the French. Many marine insurance underwriters in London go bankrupt.

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Brief History of Hull & Cargo Insurance (5 / 6) 1720

With the help of £600,000 bribe to King George I, The Bubble Act of 1720 (the Royal Exchange and London Assurance Corporation Act of 1719) is passed. The act forbids the formation of any joint-stock company not authorised by Royal Charter. As a result, only the Royal Exchange Assurance Corporation and the London Assurance Corporation have charters to write marine insurance. All other marine insurance is underwritten by wealthy individuals. The Act is repealed in 1825.

1890

The York Antwerp Rules codify the concept and practice of “general average” originally developed in ancient Rhodes. US companies follow suit in 1949.

1906

The English Marine Insurance Act (21 December 1906) is passed, codifying the previous common law “Law Merchant” or Lex Mercatoria with regard to marine insurance. This Act sets the standard worldwide for marine insurance.

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Brief History of Hull & Cargo Insurance (6 / 6) 1924

The Hague rules define the rights and liabilities of a carrier.

1968

The Hague-Visby Rules provide an update of the Hague Rules to include containerized shipping.

1978

The Hamburg Rules define the United Nations Convention on “Carriage of Goods by Sea”.

1982

The Institute of London Underwriters establishes the Institute Cargo Clauses A, B and C, thus standardizing marine insurance contract clauses.

2015

The Insurance Act 2015 comes into effect.

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Sources •  Winter, William (1919) “Marine Insurance: Its Principles and Practice“, McGraw-Hill Book Company Inc. •  Noussia, Kyriaki (2006) “The Principle of Indemnity in Marine Insurance Contracts. A Comparative Approach“, Springer. •  The Institute and Faculty of Actuaries (2014) “Marine and Energy Pricing”, August

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