The History of Homeowners Insurance

When the topic of homeowners insurance is brought up, it is usually to find out how much home insurance is or how to buy it. 

In several ways, we now take insurance for granted. However, at one time, the concept of insurance wasn’t as agitating as it is now: funneling risk so that everybody affected by a disaster could restore their house without being displaced. 

In today’s world, every disaster is not covered within a standard homeowners insurance policy, but most can be. Instead, for an insurer to cover every disaster, they have to pay an additional price outside of their standard coverage cost.

According to the Consumer Financial Protection Bureau (CFPB), homeowners insurance is required when you have a mortgage, but a standard homeowners policy may not include losses from earthquakes or flooding, although this provision can be added.

Understanding where and why homeowners insurance became a thing may help you to understand why various aspects of home coverage are up-charged today.

The Start of Homeowners Insurance

The idea of insurance has been used for decades. The origin of modern insurance can be dated back to 1666 with the Great Fire of London. The fire burned over 13,000 houses, leaving hundreds of people without a home to go back to.

Before this, insurance existed in different ways, but it lacked the rigor and formality of today’s plans. During the 17th century, each insurance policy included only one thing that could go wrong.

A current homeowner would need specific and individual policies for fire insurance, lightning insurance, burglary insurance, and so on if insurance had not changed. All of this is now protected by a standard homeowners insurance policy.

Bundling insurance coverage was not much of a necessity during the 17th century because homes were built close together to make room for crowding neighborhoods, so the act of burglary was more challenging. 

Communities banded together to combat these instances, though they did still occur. Plus, dealing with the process of legal rights of roommates with no lease was less of a problem decades ago since living expenses and home repairs were a family-shared ordeal. 

The main concern was house fires at this time, so homeowner insurance policies were geared around individual fire or lightning coverage. 

Fires were the main concern because homes were largely constructed of timber. 

Wooden frameworks burn quickly, posing a problem. To make matters worse, as the population expanded, developers constructed houses closer and closer together, increasing the likelihood of a fire. People started to recognize the significance of preserving their homes.

The First Established Homeowners Insurance Policy

Insurance made its way to the U.S. in 1732, where the first fire insurance company was established in Charleston, South Carolina. At the time, the town was called ‘Charles Town.’ 

The idea of fire insurance did not become popular until around 20 years later when Benjamin Franklin jump-started the industry.

He established the Philadelphia Contributionship for the Insurance of Houses against Loss by Fire. This company is still in use today. The organization was instrumental in assisting individuals in preventing fires and setting business standards.

The board of directors, of which Franklin was a member, voted to establish that insurance corporation in 1751. 

Members promised to make equal donations to the contributionship, which would be used to cover any damages sustained by any individual due to fire damage to their home. The first policies had a seven-year limit.

Though Benjamin Franklin did not anticipate the mass growth of the insurance industry, various other forms of insurance companies and policies were created from his initial idea. 

Every single policy coverage within the insurance industry started from the basis of Benjamin Franklin’s concept. 

What started as simply insuring the home against fire soon grew into a full-fledged, profitable industry, including life insurance (which was initially intended to assist widows and children), burglary insurance, disability insurance, industrial insurance, and car insurance, to name a few.

Regulating the Insurance Industry

Insurance was essentially an unlimited and unregulated commodity: There were few laws, monopolies formed, and minority groups were exempt. Carriers charged whatever they could (usually the maximum) for premiums and were always unable to pay out for claims or unwilling to pay more than the minimum.

The government made steady legislative progress in the private insurance market at the turn of the 20th century. 

Two of the most notable laws were the Social Security Act of 1935, which granted workers access to unemployment benefits, and the McCarran-Ferguson Act of 1945, which transferred governing power over the insurance industry to the government. 

Those two laws shifted the dynamics of the insurance industry, working more in the consumer’s favor.

Through governmental regulation and relentless competition between insurance companies, insurance firms have been forced to abolish unequal policies, deliver fairer premiums, and reimburse verifiable claims.

How Homeowners Insurance Connects to Auto Insurance

The fundamentals of car insurance are fairly consistent with the basics of homeowners insurance. Drivers must purchase auto insurance that meets the bare minimums provided by the statute. They can buy premiums at larger rates if they choose, although there are certain restrictions.

Comparing home and car insurance rates is always a smart move to find the best coverage, too. Regardless of the similarities and distinctions between homeowners and auto insurance, one factor stays constant: Benjamin Franklin was a forefather of insurance. 

As mentioned earlier, Franklin founded the Philadelphia Contributionship in 1751. Though this agency was not specifically created for auto insurance, it was a significant turning stone in the development of insurance as a whole.

Since fire stations and firefighters were not as technologically advanced as they are today, paying into Franklin’s company seemed as appropriate, if not necessary, at the time. The Philadelphia Contributionship issued 143 policies in its first year of operation.

Despite the fact that opting into this membership appeared essential, not a single insured property caught fire during the seven years the policies were in effect. 

Charging people for home protection even if a disaster never occurred was financially appealing. The concept easily transformed into a national insurance industry that included auto insurance, which trickled down to the growth of traffic lights and related driving laws.  

Today, auto, health, home, and life insurance are the most common types of insurance. They are regulated by the government and in most cases are required.

What is the average cost of homeowners insurance?

Based on a house with a dwelling coverage level of $250,000, the net average gross premium for homeowners insurance is around $1,300 a year or $109 a month. Homeowners pay around 2% of their income on premiums, and the prices can range from a few hundred dollars per year to more than $3,000 in some regions.

Homeowners insurance is usually required by financial institutions that maintain the mortgage or home equity line of credit to prevent damages in the event of home damage. 

It normally includes the construction of your house and built-in appliances, standalone buildings on your premises, your furniture, and liabilities and bills if harm occurs.

Ultimately, the history of homeowners insurance led to governmental regulation, which prevents companies from charging you unnecessary premiums for coverage. The regulatory action is intended to ensure that insurers keep their commitments to their markets.