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From Industrial to Legal Standardization, 1871-1914: Transnational Insurance Law and the Great San Francisco Earthquake
Published by EH.Net (December 2012)
Tilmann J. Röder, From Industrial to Legal Standardization, 1871-1914: Transnational Insurance Law and the Great San Francisco Earthquake. Leiden: Martinus Nijhoff, 2011. xviii + 350 pp. €99/$136 (hardcover), ISBN: 978-90-04-21237-4.
Reviewed for EH.Net by Robin Pearson, Department of History, University of Hull.
Tilmann Röder of the Max Planck Institute for Comparative Public Law and International Law in Heidelberg currently works on constitutional law projects in countries such as Afghanistan and Iraq. His early research, however, was on the development of contractual forms in transnational insurance, a topic rarely touched upon by historians. This unusual and interesting book, which is the English translation of his doctoral thesis published in German in 2006, examines the attempt by reinsurance companies, in the wake of the San Francisco disaster of 1906, to achieve an internationally agreed clause in fire insurance policies that would exclude insurers’ liability for fire damage caused by earthquakes.
According to Röder, the earthquake clause was one example of the genesis of a “transnational legal system” for business between 1871 and 1914. Contractual practice within and between private companies, not state law, was the driver of this change. Standard contracts helped increase the efficiency of transactions, facilitated international commerce, and compensated for the “cultural lag” of the law in keeping up with developments in business. This argument, based on research in contemporary literature and the archives of German and Swiss reinsurance companies, is developed in three lengthy chapters on the development of the earthquake clause and the associated debates among lawyers and insurance professionals.
The earthquake and fires that devastated San Francisco in April 1906 destroyed 25,000 buildings and left 700 dead. The total loss of property came to about $400 million, of which some $265 million was paid out by insurers. Fifteen American and four European insurance companies went bankrupt. Only a small number of insurers carried a clause in their policies that exempted them from liability for damages arising from an earthquake. Disputes with claimants centered around the question of causation. It quickly became clear that the sympathy of Californian juries, and public opinion in the U.S. more generally, lay with the victims. Even when courts accepted the validity of an earthquake clause, it proved difficult for insurers to show that either the “proximate” or “remote” cause of fire damage was the earthquake. One response, adopted by several of the larger American and British companies, was to pay claims regardless of liability, deducting only for salvage. These became lauded as “dollar for dollar” companies. Some later reaped the rewards of an enhanced market share and higher premiums. Another response, adopted by German companies, was to resist claims, flee vilification in the U.S. press, and face claimants before more amenable German courts. A third response was that of four German and Swiss reinsurance companies, who established a self-styled “Earthquake Commission” to campaign for a uniform, internationally agreed earthquake clause to be inserted into all fire insurance policies around the globe. The reinsurers collected information on earthquake regulations around the world and drafted a model clause that excluded liability for fire damage caused either directly or indirectly by an earthquake, and that shifted the burden of proof onto the insured.
Röder regards this Earthquake Commission of 1906-08 as a pioneer of standardization in insurance, and he provides an account of how their proposed clause was received in different markets. What stands out, however, is how limited their success was. In the U.S. state legislatures introduced standard fire insurance policies that included, rather than excluded, earthquake liability for insurers. This gave companies a further incentive to abandon their own earthquake clauses, because their continued use would only increase the adverse selection problem in a highly competitive market. In Britain the Fire Offices Committee, the main cartel organization, left the decision up to its individual members. The Earthquake Commission had no more success in the Netherlands, Switzerland, Russia or Scandinavia. In Italy there was a muted response. Not until after the Messina earthquake of December 1908 did courts eventually accept the validity of the earthquake clause. In Spain, Portugal, France, Belgium, Germany and Austria-Hungary new earthquake regulations were adopted that did satisfy the Earthquake Commission. Yet this hardly amounted to a sea-change in international standardization before 1914, for only a small number of insurers from these countries operated on a global scale. Moreover, those European companies that did underwrite abroad were usually compelled to follow the lead of the British in accepting earthquake risks in overseas markets, or else face a loss of competitiveness and reinsurance facilities.
According to Röder, several factors determined whether the earthquake clause was adopted or not. Where insurance was organized under public law, and conducted by public limited companies that were heavily dependent upon the German and Swiss specialist reinsurance companies to cover their surplus risks, insurers proved receptive to the Earthquake Commission’s proposals. This was also true of countries where the general terms and conditions of insurance policies were already subject to public revision, although in Italy this made companies less, not more, willing to embrace the model clause. Less convincing is Röder’s argument that the perception of earthquake risk was also a factor. In fact, the model clause was widely rejected by American and British companies insuring on the Pacific rim, while it was accepted by many German, French and Austrian companies who mainly wrote in their domestic markets where the earthquake risk was minimal or non-existent. In the world’s earthquake regions the chief barrier to the success of the Earthquake Commission, as Röder rightly points out, was market forces, although these are not fully examined in this book. In California, for instance, on the eve of the 1906 earthquake, foreign insurance companies wrote nearly 40 percent of sums insured against fire (net of reinsurance). Of this foreign market share, the British accounted for some 85 percent (my estimate based on insurance losses from San Francisco reported in Australian Insurance and Banking Record, 30 June 1906). The market power of the big British insurance exporters was such that they were easily able to resist German demands for a standard earthquake clause, once they had decided that such a clause was not in their business interests.
Whether Röder is accurate or not in viewing the earthquake clause of 1906 as a major step in the international standardization of insurance policy conditions, his general conclusion is convincing, namely that autonomous self-regulation by business, rather than state legislation, played the primary role in driving this process forward. That he finds this result “remarkable,” “surprising” (pp. 240-01) and “hardly conceivable” (p. 1) perhaps reflects his own background as a German legal scholar steeped in civil code traditions. British and American historians would find it less surprising that the development of statute law lagged behind contractual practice in international business, especially in periods of rapid economic growth. After all, considerable transaction costs and efficiencies were at stake.
Regrettably, a couple of negative points must be raised about the presentation of the text. There are many references abbreviated in the footnotes that, frustratingly, do not appear in the bibliography. The English translation is also rather clunky and inconsistent in places, which may sometimes confuse the non-specialist reader. Nevertheless, these are minor glitches. This is a pioneering study that can be recommended to anyone interested in the history of international business and the contracts and legal standards that came to underpin it.
Robin Pearson is Professor of Economic History at the University of Hull, UK. He has written extensively on the history of insurance, business networks, social capital and corporate governance in journals such as the Economic History Review, Business History and Business History Review. His most recent book, co-authored with Mark Freeman and James Taylor, is Shareholder Democracies? Corporate Governance in Britain and Ireland before 1850 (University of Chicago Press, 2012). R.Pearson@hull.ac.uk.
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