A Brief History of Car Insurance

By Jessica Bosari
After 13 years in personal and commercial insurance, Jessica Bosari now writes about personal finance, car insurance, risk management and related topics. Since 2008, she has been simplifying complex ideas through engaging articles for her readers.

A Brief History of Car Insurance

Almost every state in the U.S. requires drivers to be financially responsible for the car accidents they might cause (New Hampshire stands alone as the only state which doesn’t require car insurance). But it wasn’t always this way. Insurance companies initially resisted writing car insurance policies, referring to the horseless carriage as a dangerous ‘gasoline can on wheels’. And yet, car insurance eventually became a standard and required protection nationwide. Here’s how car insurance came to be the rule of the road.

Automobiles Slow to Gain Traction

It’s easy to forget that cars came about as a replacement for horse-drawn carriages. And as an emerging technology, cars were slow to catch on. The first models emerged in the 1700s, but commercial auto production didn’t reach the United States from Europe until the early 1900s. Early electric cars couldn’t go much faster than a person could walk, and steam-powered cars were of course subject to the dangers of steam engines (explosion). Much tension arose between car drivers and horse owners as well. Early cars were noisy and startling, and the animals often reacted violently.

Henry Ford’s assembly line production method revolutionized the American car industry by making cars far more cheaply. The first popular car in the US was an Oldsmobile, but Ford’s Model-T was the first mass-produced automobile that just about anyone could afford, going into production in 1908. By 1920, Ford sold more than a million cars between the Model-T and several predecessors. And as the number of cars on the road increased, so did the number of injuries and deaths.

Cars Become a New Danger on the Road

Back in those days, cars drove on narrow roads designed for horses and foot traffic. Horses and people didn’t worry much about running into each other. A little bump was usually harmless, except for instances of skittish horses injuring others. There was no need for things like right of way, traffic signals, traffic lanes and standardized signs before cars came along, and early drivers operated without these road safety features we now take for granted. Conditions made driving unpredictable and naturally risky, even if the speeds were low.

Cars themselves were dangerous as well. They were often open-roofed contraptions with no seat belts. Drivers could easily be thrown from the car when taking a corner too fast. And as mentioned above, steam-powered cars always presented the risk of explosion. It wasn’t until the 1920s that combustion engines became standard power sources for cars. Finally, it didn’t help that drivers received precious little training before getting behind the wheel. A driver’s license was easy to get and incompetence was the norm. All these factors together created an atmosphere of chaos around driving that concerned many.

The First Car Insurance Policy

The first car insurance policies were based on ‘team forms’, liability policies that covered injuries caused by runaway, kicking or biting horses. The International Risk Management Institute (IRMI) says that Travelers Insurance of Dayton, Ohio wrote the first auto liability policy in 1897. This was still before the days of mass production, but cars were then gaining in popularity, with various designs popping up all over the world. Massachusetts car designer and mechanic Gilbert J. Loomis bought that first policy through a local insurance agent.

Auto policies for basic theft and fire damage came along in 1902, but expanded car insurance options grew slowly against stubborn resistance. Before the mass production of cars, much of the public viewed them as frivolous playthings for the rich. The reception from the insurance industry was not much warmer. IRMI points out that Charles Platt (then president of the Insurance Company of North America (INA)) exclaimed, “I’ll never insure a gasoline can on wheels, the noisy stinking things!” Just the same, in 1905 INA began writing auto insurance policies when it became clear that cars were not going anywhere. Insurers started to explore and develop more robust auto policies to capitalize on the booming demand for cars, and states also began to take notice as the roads filled up with drivers.

Deaths and Injuries Result in Mandatory Car Insurance Laws

Injuries from crashes rose steadily with the addition of more cars. According to the National Highway Traffic Safety Administration (NHTSA), in 1921 the accident fatality rate was nearly 25 percent. With one in four crashes resulting in a death, state governments became concerned about the dangers to public safety. Connecticut took a first crack at regulating the risks with the adoption of financial responsibility laws in 1925. These required anyone in a car accident to show proof of the financial capacity to cover the damages, much like New Hampshire’s current law. But Connecticut didn’t actually require insurance coverage for vehicles in the state.

After a failed attempt to reach legislative agreement on what to do about cars in 1920, and a subsequent study of the issues in 1925, Massachusetts became the first state to require car insurance in 1927. The law required liability insurance for every vehicle. Without coverage, your car couldn’t be registered for operation in the state. Liability insurance requirements were seen as a social protection measure, ensuring that anyone injured by an automobile received compensation. If not for the new laws, the injured would have to rely on the kindness of family or seek help from the state to cover their expenses, which seemed unfair. This spirit of accountability drove the widespread adoption of mandatory insurance laws and established the fault-based system of liability that is most common today.

The first mandatory car insurance laws were not without problems, but they did succeed in compelling more drivers to buy policies. State requirements have ensured the growth and prosperity of the car insurance industry, and fierce competition has kept rates affordable for the majority who do buy mandatory coverage. However, compliance isn’t perfect. Experts estimate that up to 15 percent of drivers do not carry required auto insurance coverage. Some drivers continue to dodge the requirements despite threats of fines and even jail time, and some states are beginning to require under and uninsured motorist coverage in addition to traditional liability coverage.