History of Valued Policy Laws

As a follow-up to yesterday’s post, California is Not a Valued Policy Law State—California Has a Valued Policy Law for Valued Policies, it is instructive to understand the underlying reasons why valued policy laws were made. State legislators enacted valued policy laws in the late 19th century with significant debate. The insurance industry was dead set against these consumer protection laws, and many bills failed or were vetoed.

Hayden’s Annual Cyclopedia of Insurance, published in 1900 by The Insurance Journal Company, noted some of the early history of valued policy laws:

VALUED – POLICY LAWS. Twenty-eight valued-policy bills were introduced in fifteen State legislatures in 1891, nine bills were introduced in six legislatures in 1892, twenty-nine bills in seventeen legislatures in 1893, eleven bills in six legislatures in 1894, thirty bills in eighteen legislatures in 1895, ten bills in seven legislatures in 1896, nineteen bills in sixteen legislatures in 1897, four bills in three legislatures in 1898, nineteen bills in fifteen legislatures in 1899, and four bills in three legislatures in 1900. No bill was successful in 1891, one bill passed in 1892, five bills passed in 1893, two of which were vetoed; one bill was passed in 1895, two bills were passed in 1896, one in Mississippi being a substitute for the old law, three bills were passed in 1897, no bill was passed in 1898, and four bills were passed in 1899, of which three were vetoed. The bills were passed in West Virginia, Colorado, Nevada, and Utah. The last three were vetoed. The West Virginia bill became a law without the governor’s signature, the governor writing a memorandum opposing the principle of the law. The Florida legislature of 1899 passed a new law which took the place of that of 1897, and the Washington legislature of 1899 modified the law of 1897. The Iowa legislature of 1900 passed a substitute for the act of 1897, but as the governor vetoed this substitute the old law remains. There was a bill pending in the Louisiana legislature of 1900 when this record closed.

HISTORY OF VALUED – POLICY LEGISLATION

The legislature of Wisconsin passed a valued-policy law in 1874, and was therefore the pioneer in this species of legislation. Five years later, at the session of 1879, Ohio added a valued-policy section to its revised statutes. In the same year the State of Texas passed a valued -policy law, which was a dead letter up to a few years ago, when a decision of the courts gave judgment against the company for the full face value of the policy under the provisions of the law. In August, 1885, the legislature of New Hampshire passed the law, in company with an anti-compact law, and the agency companies of other States and Territories doing business in the State signified their displeasure at the adoption of this kind of hostile legislation by withdrawing from the State. New Hampshire was deprived of the protection which the great fire insurance companies afforded until 1890, when the Aetna led most, but not all, of the companies back. Missouri passed a valued-policy law similar to the Wisconsin law, which was in force several years, but in 1889 the general insurance laws of the State were revised, and, while the valued-policy feature was retained, the section embodying it was rewritten. Arkansas, Delaware, and Nebraska adopted laws in 1889, the Territory of Oklahoma in 1890, Mississippi in 1892, Kansas, Kentucky, and Oregon in 1893, Minnesota in 1895, South Carolina in 1896, Florida (substitute in 1899), Iowa, and Washington  (amended in 1899) in 1897; and West Virginia in 1899. The Oklahoma law is badly written, and its two sections are contradictory in terms.

The explanation by Colorado’s Governor of his veto of the Valued Policy Bill in 1899 is instructive of the various issues debated at the time these laws were being considered:

The purpose of this bill is to make the insurance written upon improvements upon real property the standard of loss in case of their total destruction by fire or lightning. The face of the policy rather than the actual loss suffered by the insured is therefore made the measure of the insurer’s liability. This rule does not apply, however, when the property covered by the policy does not consist of improvements upon real estate or is but partially destroyed, or where fraud was exercised in obtaining the policy. The ordinary tests liability of remain as heretofore in all such controversies as they may arise from time to time.

The measure was in all probability born of a desire to compel insurance companies to adjust and settle losses without resort to dispute and litigation as to their extent, and to put an end to the frequent efforts of adjusters to force policy-holders to accept compromises of their claims as an alternative to expensive and protracted lawsuits. These methods provoke just resentment, and naturally suggest resort to drastic legislative remedies for their suppression. It is not surprising that under such conditions the corrective proposed is more obnoxious than the practice it seeks to destroy.

If the sum written in the policy be the just measure of recovery when improvements on real property are totally consumed, no good reason is apparent for withholding it from the man who suffers from their partial destruction, or whose property, though of a different character, is wholly or in part consumed. In the one instance, the sum might well be a part of the policy bearing the same proportion to the whole that the proportion or loss bears to the property unconsumed; in the other no calculation seems necessary. It is true that a stock of goods might be depleted between its underwriting and its destruction, but it is equally true that a building might deteriorate or its valuable fixtures be removed. Once the principle of indemnity is abandoned the necessity for recognizing it at any point disappears.

This discrimination in the construction of a covenant approaches, if, indeed, it does not cross the line between general and specific litigation as defined and prohibited by Section 25 of Article 5 of the State constitution.

It is true that the bill requires insurers to carefully examine and describe the premises to be insured. This requirement was evidently intended to subserve the double purposes of enabling insurance companies to ascertain and fix the actual value and to prevent them from relying upon insufficient descriptions to defeat the covenants of the contract. The equity of the latter purpose is manifest; the safeguards offered by the former are not apparent. The man who builds or buys a structure and who is thoroughly familiar with its character and conditions is the best judge of its value. It is true that the opinions of owners of property differ widely on assessment day, when compared with all other days, yet inquiry of them, together with personal inspection, must combine to give the underwriter his best basis of value.

It may be that if this bill should become a law it would produce a class of property valuation experts whose estimates would be more nearly reliable than those of other men, but for the services of these experts the policyholder would be compelled to pay. The increased rate necessarily resulting would be neither satisfactory nor borne with patience.

But independent of and beyond these considerations is the all-important fact that the bill ignores the fundamental principle of fire insurance and thereby transforms the contract from one of indemnity to one of wager and speculation. The theory of a fire insurance contract from the standpoint of both the contracting parties is that the one for a stipulated consideration shall make good the loss occurring to the other from specified causes for the occurrence of which he is not responsible. A departure from this principle creates injustice, promotes dishonesty, and encourages crime. Incendiarism is sufficiently prevalent without offering legislative rewards for its occurrence; for the experiences of other States under legislation like this are most instructive. In every one of them the proportion of fires has greatly increased and the ratio of that increase presupposes incendiarism. The natural and necessary result has been an increase in the rates of insurance, which means an additional tax upon the insuring public….

The New York Times quoted an opinion piece from the Portsmouth New Hampshire Times on September 11, 1885, noting in part the following:

No law enacted by our Legislature for years has made such a rumpus as the recently enacted ‘valued insurance policy,’ so called. It is said that while pending Jn the Legislature, insurance companies outside the State threatened that they would withdraw from the State if the law passed, and since they could not prevent its enactment, they have carried out their threat to cease issuing policies, and have notified their agents throughout the state to close their offices.

The law was made to prevent insurance companies from taking advantage of policyholders and raking in premiums without risk of loss. The insurance industry opposed these policyholder protection laws with arguments and threats.

The consumer protection issues in insurance from 125 years ago often echo challenges faced today, as the fundamental dynamics of fairness, transparency, and accountability remain constant. During the late 19th century, policyholders grappled with unclear policy language, unfair claims practices, and limited regulatory oversight—issues that still surface in modern disputes. Just as reformers then pushed for greater protections against insurance company overreach, today’s efforts to safeguard policyholders against unfair claims practices continue this legacy. History reminds us that vigilance, advocacy, and action are essential to ensure fair treatment for policyholders. The insurance industry will not suggest these consumer protection laws and will resist laws to hold itself accountable.

Thought For The Day         

Life’s most persistent and urgent question is, ‘What are you doing for others?’
—Martin Luther King, Jr.