The earliest known fire insurer in America dates back to 1735. The Friendly Society for the Mutual Insuring of Houses against Fire was based out of Charleston, South Carolina. The society was not formed with the intention of achieving a profit, but more as an outgrowth of volunteer fire-fighting organizations. A premium of one percent was paid into a fund that was invested until needed. In addition to their premium payment, society members agreed to pay a proportionate share of the damage to any other member’s house that resulted from a fire. Unfortunately though, on November 18, 1740, over three hundred homes were damaged by a major fire. Few members of the society were financially able to pay their portion, therefore, the company dissolved.
In 1752, the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire was organized. Among the founders was Benjamin Franklin, an avid proponent of fire safety. Policies were written for a term of seven years. Eligibility requirements became more stringent as the years went on. Initially they accepted wooden houses, but then after 1769, they only accepted brick houses. They even went so far as to not insure buildings with trees in front of them. In response to the demand of those consumers ineligible for coverage due to trees, the Mutual Assurance Company was formed in 1784. With their agreement to insure buildings and homes with trees in front, the new company became known as the Green Tree Mutual.
The Maryland legislature chartered a fire insurer in 1787 that later became known as the Maryland Fire Insurance Company. Minimizing the amount they paid for claims was a priority, so they organized a company to build a city water system to be used to fight fires. In addition, they located a powder magazine out of town to reduce gun powder explosions in the event of a massive fire.
The nation experienced rapid growth during the first half of the nineteenth century. By 1830, there were at least thirty-four insurance companies. Up until that time, most companies focused on insuring properties within their local community. Many states charged out-of-state insurers taxes on their premiums, therefore discouraging companies from venturing past their own state. However, this restraint proved disastrous in 1835, when a devastating fire involving hundreds of properties caused approximately $26 million in damage. Twenty-three of the twenty-six local insurance companies filed bankruptcy. From that point forth, it became a business necessity for insurance companies to diversify and to break up the concentration of where their insured properties were located. Thus many companies started competing out-of-state.
Logistically it was difficult for an insurer to get a full detailed account of the buildings and homes they were insuring at a distance, thus the birth of the insurance agent. Insurance agents were responsible for inspecting and submitting a sketch of the property and surrounding buildings and seeing that the applications were complete. For this service, the agent received an inspection fee of $2 from the applicant.
With the increase of companies doing business in multiple states also came the increase of competition. For the most part, insurance companies competed on price. Unfortunately though, to compete effectively, many insurers underpriced their policies. When another large fire occurred, many insurers did not have adequate reserves and many consumers were left holding the bag as the insurance companies were forced into bankruptcy. For this reason, insurance regulation came about to protect consumers.