Gilbert Loomis, a Westerfield, Massachusetts auto mechanic, sparked the auto insurance industry in 1897 as the first recorded mechanic who had built his own one-cylinder car. The premium was $7.50 for $1,000 worth of Liability Insurance. Accidents involving autos and horses were not uncommon because driving was treacherous, the roads initially were unpaved without street signs and stop lights. Had Mr. Loomis been injured in an accident, no ambulance could have brought medical attention to him, as that service did not come about until three years later. In the beginning, auto policies were not even designated for such purpose but were the liability policies that were used to insure liability arising out of collision with horses.
This beginning was followed by an era of total confusion as the industry saw each company design its own unique policy. Every company has their own policy, rating manual and their own way of providing auto coverage. This created a major problem for those who purchased such coverage. They seldom really knew exactly what coverage they had paid for. The policy was quite difficult to read and, since every company had their own policy specifications, comparing became quite difficult.
The insurance companies also had difficulty with the new coverage. Since these were new policies, the law of large numbers (loss statistics become more predictable as the number of similar exposures to loss increase) was not prevalent. Unless an insurance company can predict losses accurately, it cannot set rates that are both competitive and adequate to make a profit after paying for claims and operating expenses.
In the early years, most companies did not have enough of their own insurers to set accurate rates, so they cooperated with one another and shared their statistics.
Diversity of auto policies created a problem for auto insurers. Each policy was open to a different legal interpretation. An insurance company could not be positive that the courts would interpret its policy in the same way that they had (interpreted another insurance company’s policy). Of course, this led to uncertainty in rate making.
By the end of the 1920’s, the insurance companies realized that the use of one standard automobile policy, by all those insurers marketing auto insurance, would be in the best interests of both themselves and the consumer. This idea developed into the drafting of the Basic Standard Automobile Policy, completed in 1935. At the same time, a standard Garage Liability Policy was developed and included, under one form, all of the major liability insurance coverage. It included auto, auto repair garages, parking lots, dealerships and service stations. The Standard Auto Policy stood for 20 years. The Garage Policy was used for business only but the Basic Policy was used for individuals and businesses alike.
The following years saw the introduction of two other Standard Auto Policies. The Comprehensive Automobile Policy (1940) and the Family Automobile Policy (1956). The Comprehensive Policy was designed for business entities such as corporations or partnerships, while the family policy was designed strictly for use by individual or families in the personal market.
These developments were important. Both policies expanded coverage initially seen in the Basic Standard Policy. The two new policies emphasized the division of Auto Insurance into a business side and personal side. This division was further enhanced in 1959 when a rating organization introduced the Package Automobile Policy. Another rating organization introduced the identical “Special” Automobile Policy. Like the Family and Personal Policy, these two new standard policies were only for cars owned by individuals or families.
In 1963, the Special and Package Policies were combined into the Special Package Automobile Policy. In the late 1970’s, the states began to mandate clearer language in policies and requested insurance companies to become more contemporary. The Personal Auto Policy was introduced, replacing the Family and Special Package Policies. The Business Auto Policy replaced the Basic and Comprehensive Policies which covered auto exposures of corporations, partnerships and other organizations.
The Personal Automobile Policy was developed by Insurance Services Office (ISO), the largest insurance rating and advisory organization in the U.S. If any of the insurance companies choose to deviate from the ISO policy language or rates, it is free to do so. It is quite common for ISO subscribers to deviate from ISO rates but tend to leave the ISO policy wording intact. Many insurance companies not affiliated with ISO (independent filers) use policies similar to the ISO standards.