In all 50 states and the District of Columbia, the law requires drivers to have car insurance. Some states refer to car insurance as proof of financial responsibility. In other words, it proves that drivers are able to take responsibility if found to be at fault in an accident that either injures or kills someone else, and/or damages their property. An at-fault driver who kills or severely injures another will probably be sued. If there is no insurance policy to absorb the financial damages awarded to the other party, the at-fault driver may be forced to surrender property, such as a home and vehicle. Wages for years to come also may be garnished. Auto insurance must be maintained, and proof of a current policy must be in the vehicle at all times. Period.
Insurance actually has been in existence for thousands of years; its earliest form goes back to ancient China and Babylonia. In anticipation of traveling over dangerous Mediterranean waterways to transport goods from one point to another, merchants divided their wares over several shipping vessels, rather than “put all of their eggs into one basket,” so to speak. That way, if one ship capsized or was attacked by pirates, only the wares on that ship would be lost. This is a form of risk management that is practiced today.
Years after those ancient times, the term “general average” came into being. Merchants would pay a fee to ensure that their goods, which were being combined with the goods of others and shipped all together, would arrive safely at the final destination. (Back in those days, the word “ship” literally meant transport by boat.) This money collected would reimburse any merchant whose goods had to be thrown overboard during travel due to storm conditions or to keep the ship from sinking. The money that was collected is a very early form of premiums, and the payment to the merchant is a form of a claim settlement. Merchants paid a certain amount to bankers for a guarantee of protection against losses.
In fourth century B.C. Athens, a loan was paid in advance of a voyage and upon arrival of the goods, a portion of the loaned sum would be paid back. If the ship was lost in transit, repayment of the loan would be cancelled. Sometime later, rates for loans would vary depending on times of the year. Those that made for easier travel would cost less than times when travel was more dangerous. This coincides with higher premiums being paid by higher-risk clients. For example, teenagers cost far more to insure on an auto insurance policy than parents do. That’s because data shows that more accidents happen with teenage drivers than with drivers in their 40s. Thus, the higher risk pays a higher rate for insurance.
The very first form of an insurance contract dates back to the 1300s in Genoa. In the century that followed, maritime insurance became much more developed and premiums reflected the amount of risk. In the later part of the 17th century, London was evolving into a trade center, and that created a growing demand for marine insurance. In the late 1680’s, Edward Lloyd opened a coffee shop that became popular with ship captains, merchants, ship owners, and the like. As word of the shop and its clientele grew, it became a hub for those willing to insure ships and their cargo. This is how Lloyd’s of London came to be, which today is a global insurance market – the leading market in the world – for specialist insurance, which is insurance that covers individuals or groups in very specialized businesses.
The property-casualty insurance that we know today goes back to 1666 and an enormous fire that destroyed more than 13,000 homes in London. Afterward, a Mr. Nicholas Barbon began selling insurance to protect buildings. In 1680, Barbon established a business he called “The Fire Office.” It was the first insurance company in England; it insured frame-built and brick homes against fire. In the mid-1700s, Benjamin Franklin was responsible for the beginnings of the first U.S. fire insurance company to manage risk from fire losses. His company was called Philadelphia Contributionship for the Insurance of Houses from Loss by Fire, which made the first-ever financial donations toward fire prevention. His company advocated against fire hazards, and would not insure buildings like wooden homes, because of the high risk of fire.
There was fraudulent activity, however, in those days. People often intentionally set fire to personal property to collect the insurance money.
In the late 1800s, the first forms of accident insurance came into existence. The early 1900s saw the development of a number of types of insurance that protected different activities.
Insurance is not meant to make a person wealthy. Its purpose is to indemnify, or restore the policyholder to the same financial condition enjoyed before the loss.
In the following links, find information about auto insurance, different terms that auto insurance buyers should understand, and tips for shopping for car insurance.
Insurance Institute for Highway Safety
American Insurance Association (AIA)
Historical Look at Auto Insurance
Auto Insurance: What You Need to Know
Avoiding Road Rage Aimed at YOU
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