It is perhaps no accident that Edward Lloyd's second coffeehousewas situated on Lombard Street beginning in 1692. The originalcoffeehouse was located on Tower Street in London. It may have beenthose Lombardian merchants and their concepts of insuring the risksof ocean voyages that drew them into Lloyd's coffeehouse to meetwith shippers, sea captains, and their agents or brokers and learnof fresh ventures to insure.

By Elizabethan times, merchants and vessel owners were scouringthe city for those willing to “under write” marine coverage ontheir voyages. Godfrey Hodgson reports in Lloyd's ofLondon (Viking Press, 1984) that the founding of the RoyalExchange and the great trading companies led to one insurancedispute involving a Richard Chandler, who tried to gain a monopolyon the registering of insurance policies utilizing brokers.

“In 1601, two years before the great Queen's death, an Act ofParliament sought to establish a court 'for the hearing anddetermining of causes arising from policies of assurance'.” Whilethe court was not much of a success, it at least demonstrated thatthe principles of insurance were well-known and understood by thosethat dealt in it.

'Touching the Adventures and Perils, Which We, the UnderWritten …'

By 1688, insurance in England was an old industry. The 1537 caseof Gybbons v. Martin, et al in London's chancery court hadalready established the principle that any ambiguity in the policywould be ruled in favor of the insured, if it was the insurer whodrew up the contract. It seems that Martin and some otherunderwriters had agreed to insure Gybbons “for a year.” If he diedwithin the year, then they would pay his widow £100.Well, he did die, just a few days short of a 365-day year, but theunderwriters said to the widow, “Oh, no, Mrs. Gybbons, youmisunderstood. We meant a 'lunar year,' and that expired a few daysbefore his death.” Of course, the good Widow Gybbons wouldhave none of their ambiguities and took them to court, ultimatelycollecting the full amount.

The Great Fire of London

London, in the 17th century, was a big wooden slum, and evenLondon Bridge, first constructed in 963, had shacks built all overit. When a 1666 fire began in a bakery on the bridge it quicklyspread throughout the city (like that of the Great Fire ofChicagoin 1871), much of the city was decimated. Architect ChristopherWren then redesigned many of the buildings still standing today.But at the time there was no fire brigade, no fire insurance, andno FEMA to help rebuildLondon. This led to the founding of thefirst fire insurance company, The Sun, which is still in business.Prior to that neighbors helped each other when a fire broke out.

The 'Writing Under' Principle

Edward Lloyd, who was apparently born, perhaps in Wales, in1648, had little to do with insurance personally. He was in thecoffee business, but to enhance that business he made the booths inhis coffeehouse available to businessmen who would agree to take ona portion of a risk for a fee. Now there is still a coffee shopwithin the new Lloyd's building in London, where insureds can meetwith their brokers before the broker approaches the syndicates.

The first mention of Lloyd was in an advertisement in theFebruary 21, 1688 issue of The London Gazette regardingthe theft of five watches, with any news about the theft to beprovided “at Mr. Edward Lloyd's Coffee House in Tower Street.”Undoubtedly, both Lloyd's Coffee House and losses covered byinsurance had already become synonymous.

The effect of the 1666 fire on the underwriters meeting inLondon coffee houses is unknown, but undoubtedly one or two insuredvessels also suffered fire damage in the conflagration. The processof issuing insurance in the 17th century remains the same in the21st at Lloyd's: Those seeking insurance go to a broker and explaintheir risk. The more information they are able to provide, thebetter rate they may receive accordingly. The broker then goes tothe booths in the coffeehouse—now called “the floor,” the mainfloor remaining for marine risks and upper floors for other kindsof risks—and seeks out one of the underwriters who represents asyndicate of investors. The broker tries to select one that willoffer a good rate.

Now that underwriter may say, “Well, I'll take eight percent at2 per 250.” That sets the rate, and the man in the booth would“write” his name “under” the risk indicating the percentage of risktaken and the rate. The broker then goes to other underwritersrepresenting other syndicates and gets as much of the risk insuredas possible. The broker might say, “Sam Pepys took eight percent.Could you take twelve?” Sometimes 100 percent of the risk would besubscribed, but usually less than that was taken, and the merchantor vessel owner would be coinsured for the balance. A Lloyd'spolicy is still done in the same way.

It was to improve the business of his coffeehouse that Lloyd, in1696, seventeen years before his death, began publishingLloyd's News. This publication listed any ships and theircargos, their owners and masters, and the quality of the vessel, agreat aid to the underwriters in their booths in the coffeehouse.The Lloyd's Registry, another early Lloyd's publication,kept track of the voyages, cargos and other factors. Sir ArthurConan Doyle had his famous detective, Sherlock Holmes, consult theRegistry on occasion in the solving of his mysteries. WhenBritain's wars broke out in the 19^th and 20^thcenturies, it was Lloyd's agents (basically claim adjusters) inports around the world that became the forerunner of MI-6 and theBritish Secret Service. They knew precisely where every vessel onthe water was, where it had been, where it was headed, and what itcarried.

As explained in “Titanic,” (Claims, December,1998) quoting Lloyd's underwriter Henry Chester, “Sir PercyMacKinnon, who became Chairman of Lloyd's … believed theTitanic wouldn't sink, she was such a marvelous ship andthere'd been so much publicity about her. So he wrote thereinsurance on her…. He must have lost a lot of money.” Yet in 1912the Titanic did sink, and Lloyd's underwriters paid theirpolicies without any complaint. That was the nature of claim ethicsin that famous institution. That same fame has existed for nearlythree and a half centuries.

The Lloyd's Insuring Agreement

The 1690 Georgian language of the Lloyd's marine insuringagreement remains the basis of marine insurance to this day:“Touching the adventures and perils which we, the Under Writers,are contented to bear and do take upon us in this voyage, they areof the seas, fire, enemies, pirates, rovers, assailing thieves,jettisons, Letters of Mart and Counter-mart, surprizals, takings atsea, arrests, restraints and detainments of all Kings, Princes andPeoples, of what Nation, Condition, or quality soever, barratry ofthe Master and Mariners, and all other like perils, losses andmisfortunes that have or shall come to the hurt, detriment ordamage of any goods or merchandise or ship, or any part thereof….”Now, that is an “all risk” insuring agreement!

But even the famous underwriters soon learned to hedge theirbets, adding what became known as the “FC&S Clause,” meaningthat the policy was “warranted free of capture or seizure,” thusexcluding many of those specific perils such as pirates, rovers,arrests or restrains. In light of the recent piracy “takings atsea” off the African Coast or in Southeast Asian waters, shipowners are having to consider coverage buy-backs and other measuresto save their vessels and crew. Additionally, owners of vesselstaken by the U.S. Coast Guard in an arrest and restrain forpossession of illegal drugs are not going to be collecting muchunder their marine policies.

One clause that is now common in marine insurance is the “sueand labor” condition, requiring the ship's master and owners to doall they can to save or salvage the vessel. As long as the captainstays aboard, salvors cannot claim the ship or cargo. It is thereason the captain “goes down with the ship,” which the captain ofCosta Lines Concordia which floundered and sank offItaly'sWest Coast near an island – in unnavigable waters – might bewishing he had done the night the giant liner rolled over.

Always NewRisks

The British insurance model became the model for Americaninsurance as well, and European insurers are often also Americaninsurers. Every year new risks are found, and usually some insurerwill agree to cover them. The Governing Committee of Lloyd's backmany decades ago passed a rule that no underwriter could writefinancial guarantee insurance. It was exactly that, called “creditdefault swaps,” that in 2008 sank AIG and led to a financialmeltdown. The coverages were written inLondon, but not byLloyd's.

Underwriters have insured most risks. We hear of insurance onfinding the Loch Ness Monster, actresses' legs, a “hole in one” ingolf tournaments and other bizarre risks, but generally theinsurance industry of the 21^st century is ready to takeon the dangers of risk and spread it around, just as those inElizabethan times were.

Lloyd's was instrumental in a number of risk control efforts. Inaddition to world-wide information networks, they designed andmandated the use of lifeboats, had light houses build along theBritish coastlines, and designed other safety programs. The Lloyd'sconcept of always paying the losses they owe has been the standardfor the claims industry for centuries, and remains so today.

Next month, we will cross the Atlantic and look at adjustinginsurance claims in the United States and Canada.