Ask the average American how old the insurance industry is, and he or she may estimate 100, maybe even 200 years. After all, aren’t most modern industries only a few hundred years old, perhaps dating to the coming of the Industrial Age in the 19th century? Then mention ship building, and they’ll say, “Oh, yes, well I guess that’s an old business.” Or what about medicine? Old Hippocrates was around back before Mohammed or Jesus. “Oh, well, but it was different then.”
The truth is that there are really very few new professions or industries. There have been healers and lawyers and engineers and accountants since man first gave up settling disputes by beating his neighbor over the head with a club. I suppose we could attribute the clothing business to Adam when he discovered that he and Eve had nothing to wear, and they’d been invited to that formal dinner at the Knowledge Tree. Well, as the saying goes, “A little bite of knowledge is a dangerous thing!” (Michael Pollan in Botany of Desire suspects that the Tree of Knowledge of Good and Evil was marijuana.) There was a Bronze Age, an Iron Age; mechanics have been tinkering for millenniums.
All vocations or professions evolve. Storytellers once scribbled on cave walls. Then they advanced to chiseling the words onto stone tablets or temple walls. Then something easier to carry around was invented, and vellum or papyrus was used for record keeping or telling a story, rolled up into scrolls. The Chinese figured out how to make paper, and geese quills were carved into pens. That’s all well before 1776, but even by then print was available, and books or newspapers were the method of journalism. The typewriter changed the way business was conducted. Then came the word processer, followed by the computer.
The Adjusting Vocation
Very few people, then or now, ever set out to be “a claims adjuster.” When one analyzes the basics of adjusting, however, it becomes easy to see how so many of us over history have ended up in the profession.
“Coverage” means a contract, some agreed-upon system of acting that two or more people have concocted. “Liability” means law – the rules that society has devised to make the system work. And “damages” implies conflict, something broken or damaged, injured or killed, something where the value has changed or is in dispute.
This could define almost any area of human activity. It describes theology, where scholars pour over whatever the holy script may be to determine what proper course of action should be taken in order to have the system work correctly, or to figure out what has gone wrong. It could describe medicine as well, where the human body is the “coverage,” complex as it is, and determining the liability for what has damaged or is killing that body is diagnosis and selection of the proper treatment. It certainly describes law. Therefore, if we think of these professions as a way of “adjusting” something, it becomes clear that adjusting has been around a long time.
‘Blessed are the Peacemakers’
I was surprised to learn that the term “Beatnik,” the word used back in the 1960s for long-haired hippies, strumming guitars and smoking pot, was based on the same word as beatitude, meaning happy, beautiful or blessed. Saints are “beatified.” I’m sure many an adjuster coming in from a hard day’s work settling claims has exclaimed, “I’m just beat!” but wasn’t thinking of happiness or being blessed. Yet by settling claims—resolving a loss or dispute—the adjuster is being a peacemaker. Matthew says that the peacemakers will be called the sons of God; undoubtedly a few of us have been called a “son of” something else entirely. That is why making peace is so difficult. In compromise nobody wins. The only successful means of making peace is to find consensus.
Which brings us to those two key words: loss and claim. I recall writing once that I’d glanced up at my Insurance Institute of America Associate in Claims document and was surprised to read that it was a “Diploma in Insurance Loss and Claim Adjusting.” But wasn’t that redundant? It stemmed from the days when property adjusters were called “loss adjusters” and casualty or liability adjusters were called “claim adjusters.” But it was far more significant than that—loss is a process that begins with hazards and leads to a peril and continues to cause damage until remedied. A “claim,” on the other hand, is simply a demand under a contract or at law. To adjust a loss requires analysis of the factors that caused the damage and to find a remedy within the coverage to repair that damage; adjusting a claim is simply to arrange a transaction—usually a payment of money—at law or under a contract. The two work together in what we call a settlement.
Insurance: The Law and Contracts
The 21st century insurance adjuster deals with the aspects of pure risk, the kind that causes loss and damages. The resulting claims may be under a contract of insurance, or under some system of self-funding, but even in a self-funded system there must be rules and ways of determining what is covered and what is not covered. To resolve those issues the adjuster must understand the contract and the law or system that has been established, and must understand how the system will finance loss that has occurred. Even in a so-called “self-insured” program there are rules as to what is or is not payable from the funds established for covered losses. A self-insured family owned corporation, for example, can’t simply dip into the self-insurance program funds to pay the traffic fines levied against the owner’s grandson just because the kid doesn’t want to pay them himself. The accountants and auditors would scream their heads off if that occurred. Even a self-insured program has rules if the system is to work properly.
To pay a claim not owed under a policy of insurance is equally as disastrous. Both overpaying and underpaying is wrong. One cheats the insurer and the collective policy-holders, the other cheats the claimant or insured. That is why adjusters must understand the policy terms and conditions, and be certain that the loss for which a claim is being made fits those terms and conditions. Sometimes the peacemaker has to say “No!” and sometimes the peacemaker has to “declare war” and litigate the issues.
The Tale of the Housewife
There is a story—a myth or legend—that the insurance concept of “spreading the risk” originated in China, when farmers, having to carry their produce down the Yangtze Riverto market, would have the risk of rapids, bandits, or even wild animals. Someone, perhaps a farmer’s wife, had an idea. If 20 farmers were taking their goods down the river, by dividing the goods into 20 different boats, one or two of the boats might fall victim to the robbers or the rapids, but the rest would at least have the bulk of their cargo reach the market. It was a calculated loss as opposed to an “all or nothing” deal. It was, suggest some, the first attempt at marine insurance.
However, real marine insurance is also ancient. While it is doubtful that landlocked nations such as Babyloniahad anything resembling marine insurance, they did have codes of professional conduct under King Hammurabi that dealt with issues such as building collapse responsibility. Ancient Egyptians were a maritime nation, however, with a port on the Mediterraneanand the River Nile, but there seems to be little reference to a form of risk spreading that might be considered insurance in the hieroglyphics on the temple walls. But old Hammurabi did deal with loss and a means of dealing with it: “If a merchant has given money, as a speculation, to the agent, who during his travels has met with misfortune, he shall return the full sum to the merchant. If, on his travels, an enemy has forced him to give up some of the goods he was carrying, the agent shall specify the amount on oath and shall be acquitted.” (Code of Hammurabi, Section 102 and 103.)
Such was not the case with the Phoenicians, the great sailors of theMediterranean, who had what were known as “bottomry” contracts that paid owners of ships and cargo if the ship sank. There are many references to insurance in Greek and Roman literature, such as Plutarch’s comment around 40 BCE that “Marcus Cato engaged in that most disreputable form of speculation, the underwriting of ships.” Insuring ships was, indeed, a perilous venture, and in one Greek law those caring for orphans were forbidden from investing in such insurance ventures. It was the Rhodians (Rhodes) who in 313 B.C. came up with the principle of jettison and general average. They also had a great lighthouse, the Colossus of Rhodes, a world wonder in 110 B.C.
Suretyship as Risk Taking
Surety bonding was a much more common means of spreading risk in ancient times. As caravans traveled from village to village local producers would send their goods to other markets on the train of camels or donkeys. But what assurances did they have that the caravan operator would return with the profit from the sale? The answer was suretyship; the caravan would leave something – or somebody, a slave, daughter or wife, or a servant – with the producer as a bond guaranteeing his return with the profit. The person was “held in bondage,” a common practice even in the 21st century when one posts a bail bond to get out of jail, and lordy help the man who fails to show up for his trial, for the bondsman will hunt him down and collect.
Solomon, the wise King of Judea who is credited with The Book of Proverbs notes, “Give a pledge for a stranger and know no peace; refuse to stand surety and be safe.” Another warning: “Render up his garment, he who is surety for the stranger.” It is a sound rule of underwriting to this day: know the risk, or lose your shirt!
Things were not so different in Old Testament times. Consider this rule regarding accidents from Exodus, “If an ox gores a man, the ox shall be [killed, but] the owner of the ox shall be free from liability. If however, the ox has for some time been a vicious animal and the owner has been duly warned and the ox kills a man… then the ox shall be [destroyed] and the owner shall be put to death as well. If, however, the penalty is commuted for a money payment, he shall pay in redemption of his life whatever is imposed upon him.” Aha! Someone had to adjust that claim! Substitute “auto” for “ox” and you have modern traffic law, including vehicular homicide. There was even Biblical workers compensation: “When a man strikes his slave … in the eye [or a tooth] and destroys it, he shall let the slave go free in compensation for the eye [or tooth].” Exodus 21 is basically a course in equity law, the same law on which insurance claims are based.
Over the next few months we shall take a deeper look at the history of insurance claims and adjusting. When medieval insurance guilds wrote coverage on cargo, and that cargo was lost or stolen or damaged, somebody had to represent the underwriter and settle the claim. That somebody was a problem resolver, a settlement specialist, a peacemaker—an adjuster, resolving the claim—just as in the 21st century.