Historical Context: Alabama Department of Insurance

~ fortherecordadah

The Historical Context for the Alabama Department of Insurance has been posted from the Records Disposition Authority (RDA) approved by the State Records Commission on October 18, 2023. The RDA establishes disposition requirements by designating records as either temporary records which may be destroyed after a specified retention period, or permanent records, which must be preserved in perpetuity. The complete RDAs for close to 175 agencies can be found on the Alabama Department of Archives and History website.

The American insurance industry was already thriving when Alabama attained statehood in 1819.[1] In 1827, the Mobile Marine Railway and Insurance Company became the first insurance company to incorporate in Alabama.[2] While some varieties of insurance offered in the early years of statehood are recognizable today, such as life insurance, others have since fallen into obscurity, such as fire insurance (a predecessor of home insurance with a narrower scope), marine insurance, and railroad insurance.[3]

Typical of many states at the time, Alabama took its first steps towards insurance regulation in the creation of a premium tax. As part of a larger general revenue act in 1844, legislators enacted a 0.5% premium tax on any insurance companies conducting business in the state.[4]

1860 marked the first law requiring any form of insurance licensure. For the first time, Alabama Act 1860-136 required that insurance companies incorporated in other states receive a certificate of authority from the Comptroller.[5] Prior to receiving a certificate of authority, companies provided the Comptroller with a statement under oath regarding the name and headquarters of the company, information about capital stock, and the articles of incorporation for the company. The same act established a 2 percent premium tax rate on all companies incorporated outside Alabama.[6]

By 1868, approximately eighty insurance companies had incorporated in Alabama.[7] That year, the state Legislature passed the first law aimed at consumer protection in the insurance marketplace.[8] New legislation required insurance companies to deposit a $10,000 bond with the State Treasurer, providing additional financial security for policyholders. The Treasurer then published an annual list of all companies legally conducting business within the state. Agents in the state filed statements twice a year documenting the number of policies issued within the state and the risks, or policy amounts, associated with all active policies. These measures ensured consumer claims would be paid out, even if the company encountered financial hardship.

Also in 1868, the legislature instituted the first insurance agent licensure requirements as part of a broader act concerning state and county revenue laws. Agents received a license by applying annually with the treasurer of each county in which they operated and paid five dollars per company they represented. Probate judges published lists of licensees every three months, providing consumers with a method to ascertain that agents conducting business in their region were doing so legally, with the backing of an insurance company.[9]

Over the next thirty years, Alabama gradually adopted regulations that served as predecessors to today’s requirements, including annual financial statement submissions and uniform insurance agent registration requirements regardless of company.[10] During this time, the State Auditor administered all laws relating to insurance regulation in Alabama. However, as the years progressed, the Auditor recognized that the existing mish-mash of discrete laws was insufficient to provide proper oversight. In 1877, Willis Brewer recorded in the State Auditor’s Report that “[Statutes relating to insurance] show a want of harmony… [If the] laws are meant to protect policy holders, they fail to require ‘home’ companies to report their condition, at any time, to any one, as ‘foreign’ companies are required to do.”

By the late nineteenth century, the situation had only worsened, leaving insurance regulation financially unsustainable and difficult to navigate. State Auditor John Purifoy in 1896 declared that “the business of insurance, in this State, should have more attention given it than the Auditor, with his present force and volume of work, can possibly give it.”

Finally, in 1897, the overworked State Auditor received his wish with the passage of a new, more comprehensive act regulating the insurance industry. Insurance responsibilities transferred to the Secretary of State, who received the additional title of Commissioner of Insurance.[11] Though another eighteen years would pass before the creation of an independent insurance regulating body, the modern Alabama Department of Insurance recognizes Alabama Act 1897-614 as the creation of their agency.[12]

Companies domiciled in Alabama would be subject to examination every two years, and foreign companies filed annual statements attesting to their financial condition. The law required that all companies and agents receive a certificate of authority before conducting business in Alabama and that companies deposit $100,000 in bonds, securities, or mortgages with the treasurer of its state of domicile. Additionally, the statute permitted the Commissioner to arrange for local juries to investigate suspicious fires, the first precursor to duties now performed by the State Fire Marshal’s Office within the Alabama Department of Insurance.

The landmark act simplified the complicated landscape of existing laws and established a structure to monitor companies and hold them accountable for policies issued within the state. A new universal 1 percent premium tax, coupled with regular registration and renewal fees outlined in the act, corrected the financial problems associated with insurance regulation that had plagued the Auditor. By 1902, five years after the passage of Alabama Act 1897-614, revenues had increased by $22,044.[13]

In 1905, at the peak of a life insurance boom, scandal rocked the industry when the New York Legislature issued a scathing report on the activities of three of the nation’s most prominent life insurance companies. Initial reports that a vice president at the Equitable Life Assurance Company of the United States had used company money to fund a lavish gala costing a reported $200,000[14] escalated into a more extensive review of the state’s domiciled life insurance companies, revealing widespread fiscal and managerial malfeasance.[15] While the companies’ actions were ethically objectionable, the State of New York discovered that it had no solid legal recourse to hold these companies to account. In the years following, states nationwide responded to the widely-publicized scandal by enacting new regulations on life insurance companies, such as limiting how premiums can be invested.[16]

As many states rushed to enact new regulations, Alabama was no different. In his address to the 1907 State Legislature, the first convened since the scandal erupted, new governor B.B. Comer declared, “The recent investigation in New York of the largest life insurance companies have [sic] shown this business to be wonderfully profitable, and also showed that they were gradually absorbing the money of the country. The proof evidenced great mismanagement of the companies, and a large amount of graft and debauching influence.” To this end, Comer recommended stronger regulations, particularly on companies domiciled in other states.

In response, the Alabama State Legislature enacted legislation in 1907 requiring all life insurance companies operating in Alabama to deposit a $100,000 cash bond with the Alabama State Treasurer before conducting business in the state, regardless of companies’ state of domicile.[17] Legislators further tightened regulations in 1909 by approving legislation requiring that the Secretary of State, in his role as Commissioner of Insurance, receive a copy of all life insurance policies issued in the state. The act also required the Commissioner to certify each individual policy issued by companies. Companies had to state the terms of the agreement on all policies clearly and were forbidden from issuing company stocks.[18] While legislation later eased to permit companies to include a legally-dictated statement listing relevant state insurance laws and declaring that the policy was registered with the Department of Insurance in lieu of receiving certifications on each individual policy, the state imposed significant oversight on life insurance companies in the decade following the Armstrong Committee investigation.[19]

During this period, the state also turned its attention towards implementing stronger consumer protections throughout the insurance marketplace in Alabama. Among other requirements, new legislation barred companies who had not paid required premium taxes from operating within the state until they settled all debts and penalty fees and required companies to receive permission from the Commissioner of Insurance prior to completing a merger.[20] Additionally, Alabama Act 1911-476 brought fraternal benefit societies under the Department’s supervision.[21]

As regulations tightened on insurance companies to strengthen consumer protections, the Legislature also created the State Fire Marshal’s Office to investigate fires started under suspicious circumstances, centralizing duties previously delegated to local officials.[22] Local authorities or fire insurance companies could request that the State Fire Marshal or his deputies investigate the circumstances of a fire.[23] A premium tax increase of 0.2 percent on fire insurance companies funded the new Office. In their official capacity, fire marshal investigators had the authority to take testimony under oath, summon witnesses, and examine fire sites – powers that the State Fire Marshal’s Office operating in 2023 still holds.

After nearly two decades as a Secretary of State’s Office subsidiary, the Department of Insurance became a freestanding agency following passage of Alabama Act 1915-730 at the recommendation of outgoing Governor Emmet O’Neal. “This department has grown to be one of the greatest revenue producing agencies of the State government. It is a department which in addition to producing revenue is vested with large powers for the supervision and regulation of the various insurance companies doing business in this state, whether they be foreign or domestic,” he relayed in his address to the legislature. “The work of this department is of great importance to the protection of the people of this State against any frauds in insurance which may be attempted to be perpetrated… I therefore recommend that this department be made a separate department of the State government.” The Governor appointed the head of the new agency, known as the Commissioner of Insurance. Directed by statute to choose “a person of practical experience in the business of insurance,” Governor Charles Henderson appointed Charles Brooks Smith to be the first Commissioner of the independent Department of Insurance. While Alabama Act 1915-730 constituted a landmark reorganization of the Department, its duties remained the same as under the Secretary of State’s supervision.

The Department’s debut as an independent agency was a roaring success, with Governor Charles Henderson declaring that “There was a time not far distant when the insurance field was a prolific one for the unscrupulous promoter and schemer. This has all passed and none are permitted to do business in the State without a license from the State Insurance Commissioner.”[24] Alabama Act 1923-464 renamed the agency the Bureau of Insurance in 1923, continuing the work performed by the Department of Insurance with a new Superintendent of Insurance as its head.

1919 marked a notable expansion of the Department’s powers. Alabama Act 1919-245 required that companies offering workmen’s compensation insurance file and receive approval for all proposed rates. Additionally, companies filed a copy of the data used to formulate rates. This practice continues in 2023 as all insurance companies operating in Alabama must receive approval from the Department for all rates, forms, and rules issued by their company.[25]

As the Department of Insurance underwent landmark reorganization in the second decade of the twentieth century, the State Fire Marshal’s Office experienced its own organizational milestone when the Office was made an independent agency in 1919.[26] In addition to creating an independent Office, Alabama Act 1919-701 added new responsibilities to the fledgling agency. The State Fire Marshal and his staff were responsible not just for preventing and investigating fires but also for regulating the sale and use of combustibles, installing and maintaining fire safety systems, and constructing and maintaining proper fire escapes and exit routes. The independent State Fire Marshal’s Office was short-lived; Alabama Act 1935-4 returned the State Fire Marshal’s Office to the supervision of the Bureau of Insurance, appointing the Superintendent of Insurance as State Fire Marshal ex-officio.

As part of the state’s ongoing quest to create a more honest insurance industry, legislators passed a bill in 1927 imposing more formalized licensure requirements for insurance agents. Prospective agents, in addition to submitting an application on a form developed by the Bureau of Insurance, provided an affidavit from an already-licensed agent attesting that the applicant had experience in the insurance industry or would be trained by licensed agents after receiving a license. The Superintendent could also examine applicants on their industry knowledge base, and applicants certified their ability and willingness to engage in the industry within the bounds of state law.[27] The modern Department of Insurance still requires that applicants demonstrate knowledge of insurance laws and procedures. In 2023, all prospective licensees must pass an exam developed by the Department before receiving a license.

For twenty-four years, the Bureau of Insurance operated independently and prosperously; however, in 1939, the legislature consolidated the existing Building and Loan Board, Banking Department, and Bureau of Insurance (including the State Fire Marshal’s Office) into a newly created agency known as the Department of Commerce.[28] Under the new organizational structure, the Bureau of Insurance continued to be headed by a Superintendent of Insurance.[29]

During the twelve years in which the Department of Commerce held oversight over the Bureau of Insurance, Alabama Act 1945-118 created the Bureau of Rates to oversee the administration of all laws related to “insurance rates and rating systems of all [insurance] companies authorized to do business in the State of Alabama.” At its creation, the Bureau of Rates had purview over lines of property and casualty insurance.[30] Its successor in 2023, the Rates and Forms Division, additionally provides oversight for lines of life and health insurance.

In 1951, the Department of Insurance was re-established as an independent agency.[31] At the time of the reorganization, 631 insurance companies operated in Alabama.[32] The Bureau of Rates proved to be the most lasting impact by the Department of Commerce on the state’s insurance regulatory environment. Alabama Act 1951-234 transferred the Bureau to the new agency, along with the State Fire Marshal’s Office.[33] Since 1951, the Alabama Department of Insurance has operated as an independent agency to protect consumers in the state’s insurance marketplace.

Though the scope of the Department’s regulatory duties has remained unchanged since the re-creation of the agency as an independent body, legislation has continually adjusted requirements to create the regulatory landscape in place today. Notable updates include Alabama Act 1957-530, which established clear qualifications for individual insurance licensure, including examination requirements; 1973’s Insurance Holding Company System Regulatory Act, which dictated how insurance companies may acquire and complete mergers with holding companies;[34] the Insurance Premium Tax Reform Act of 1993, which equalized premium tax rates for both foreign and domestic insurance companies;[35] and Alabama Act 1996-343, which established continuing education requirements for insurance agents.

Among these laws, Alabama Act 1971-407 stands remarkable as a comprehensive consolidation of existing insurance laws into what is now referred to as “the Insurance Code.” The Insurance Code today accounts for the entirety of Title 27 in the Code of Alabama 1975 and continues to expand as the marketplace and new regulations demand.

Since its creation, the Alabama Department of Insurance has sought to foster a safer, more diverse, and more stable insurance market for consumers in Alabama. To assist in this mandate, Alabama Act 1975-1039 created a Receivership Division within the Department of Insurance. The act outlined the procedures by which the Department may take control of insolvent or otherwise non-compliant insurance companies to restore them to stability or liquefy assets for the most significant benefit to consumers and other stakeholders.

The Legislature also sought to protect policyholders by establishing insurance guaranty associations. Fees collected from insurance companies fund guaranty associations and can be used to satisfy policyholder claims if an insurance company becomes insolvent. As of 2023, two guaranty associations operate in Alabama: the Alabama Insurance Guaranty Association, created by Alabama Act 1980-806, and the Alabama Life and Disability Insurance Guaranty Association, created by Act 1982-561.

Just as the insurance regulating branches of the agency have expanded to protect the state’s citizens more effectively, the State Fire Marshal’s Office has expanded its duties to achieve the same objectives. The Office reached a milestone in 1975, when Alabama Act 1975-1158 granted the fire marshal, their deputies, and their assistants full peace office powers. Staff have regulated fireworks manufacturers and retailers since 1981, fire sprinkler and fire pump system technicians since 1982, blasting technicians since 1993, fire alarm system technicians since 2009, and pyrotechnic technicians since 2018.[36] The State Fire Marshal’s Office further expanded its purview in 2012 when the Insurance Fraud Investigation Unit and Crime Prevention Act created an Insurance Fraud Unit within the Department to investigate cases of suspected insurance fraud by insurance agents and private citizens.[37]

In 2023, the Alabama Department of Insurance regulates all aspects of the insurance industry in Alabama. Among its many duties, the Department licenses all companies, business entities, and individuals engaging in the insurance industry in Alabama; approves all rates, rules, and forms used by companies; assists consumers in resolving complaints about companies, agents, and products; and manages insolvent companies. In its role as a state law enforcement agency, the State Fire Marshal’s Office works under the agency’s purview to ensure that the fire safety and explosives industries operate safely and proficiently, investigate deadly fires and suspected fraud, and inspect buildings for fire code compliance. Moving into the future, the agency and its staff strive to further its excellence in “meeting the challenges of regulating a dynamic, diverse, and global industry and ensuring citizens’ protection from fire, fraud, and unfair business practices.”[38]

[1] Andrew Beattie, “The History of Insurance in America,” Investopedia, updated August 8, 2023, https://www.investopedia.com/articles/financial-theory/08/american-insurance.asp; Insurance Information Institute, “Insurance Handbook: Brief History,” accessed August 9, 2023, https://www.iii.org/publications/insurance-handbook/brief-history.

[2] Alabama Department of Insurance, “History of the Alabama Department of Insurance 1897-2022,” 2022, https://www.aldoi.gov/PDF/Misc/ALDOIHistory.pdf.

[3] Marine insurance and railroad insurance still exist in 2023 but are not prominent in public awareness. Marine insurance covers loss or damage to ships, cargo, and marine infrastructure in the course of shipping. Railroad insurance in its modern form provides coverage to rail-related construction worksites.

[4] Alabama Act 1844-106.

[5] Prior to 1868, the State Comptroller refers to a position now known as the State Auditor. This bears no relation to the modern Division of Control and Accounts within the Department of Finance, now known as the State Comptroller’s Office.

[6] Alabama Act 1860-136.

[7] Alabama Department of Insurance, “History of the Alabama Department of Insurance 1897-2022,” 2022, https://www.aldoi.gov/PDF/Misc/ALDOIHistory.pdf.

[8] Alabama Act 1868-233.

[9] Alabama Act 1868-1 (December 31, 1868).

[10] Alabama Act 1872-21; Alabama Act 1870-294.

[11] Alabama Act 1897-614.

[12] Alabama Act 1915-730; Alabama Department of Insurance, “History of the Alabama Department of Insurance 1897-2022,” 2022, https://www.aldoi.gov/PDF/Misc/ALDOIHistory.pdf. 

[13] Alabama Act 1897-614; Alabama Department of Insurance, “History of the Alabama Department of Insurance 1897-2022,” 2022, https://www.aldoi.gov/PDF/Misc/ALDOIHistory.pdf.

[14] Adjusted for inflation, $200,000 in 1905 is the equivalent of nearly $7,000,000 in 2023.

[15] The Equitable Life Assurance Society of the United States, which is a separate entity from the Equitable Life Assurance Society operating in the United Kingdom, is known as Equitable Holdings as of 2023.

[16] Global History of Capitalism Project, “Gossip, Corporate Reputation, and the 1905 Life Insurance Scandal in New York,” Oxford Centre for Global History, December 2019, https://globalcapitalism.history.ox.ac.uk/files/case14-gossipcorporatereputationpdf.

[17] Alabama Act 1909-43.

[18] Alabama Act 1909-6; Alabama Act 1909-89.

[19] Alabama Act 1911-365.

[20] Alabama Act 1909-43; Alabama Act 1909-228; Alabama Act 1911-440.

[21] As defined by the Act, fraternal benefit societies constitute not-for-profit organizations holding no capital stock whose entire purpose is to assist members and their beneficiaries. A prominent example of one such society covered by the act is the Woodmen of the World. Fraternal benefit societies offering death benefits to surviving family of society members were subject to licensure and reporting requirements about the financial state of the society and its ability to honor members’ owed benefits. However, the Legislature exempted such societies from paying premium taxes due to their not-for-profit status.

[22] Alabama Act 1909-105.

[23] The Commissioner of Insurance – an additional title, at the time, of the Secretary of State – could appoint a deputy or deputies as necessary to complete responsibilities of the office. The Deputy State Fire Marshal and other hired staff completed many of the office’s investigatory duties.

[24] “Message of Governor Charles Henderson,” in General Laws (and Joint Resolutions) of the Legislature of Alabama Passed at the Session of 1919, Montgomery: Brown Printing Company, 1919.

[25] Rules refer to the guidelines associated with implementing a policy, such as how a consumer can cancel their policy.

[26] Alabama Act 1919-701.

[27] Alabama Act 1927-37.

[28] Alabama Act 1939-14. Though called the Department of Commerce, the agency created in 1939 bears no relation to the agency known as the Department of Commerce in 2023. Today, the duties performed by the 1939 Department of Commerce are performed by the Alabama Department of Insurance and the Alabama State Banking Department.

[29] Alabama Act 1939-14; Alabama Department of Insurance, “History of the Alabama Department of Insurance 1897-2022,” 2022, https://www.aldoi.gov/PDF/Misc/ALDOIHistory.pdf. The establishing legislation permitted the head of the Bureau of Insurance or the Bureau of Banking to be appointed the Director of Commerce, but the Director could not hold all three titles. In the twelve years that the Bureau of Insurance operated as a subsidiary of the Department of Commerce, only one Director of Commerce additionally held the title of Superintendent of Insurance: Addie Lee Farish, the first female insurance commissioner in the United States.

[30] Casualty insurance lines differ from life insurance. Life insurance policies provide compensation to beneficiaries in the event of the policyholder’s death, while casualty insurance is a form of liability insurance whose coverage encompasses events where the policyholder’s actions cause injury to other people or property.

[31] Alabama Act 1951-234.

[32] “Message of Governor James E. Folsom,” in Alabama Laws (and Joint Resolutions) of the Legislature of Alabama passed at the Organizational Session of 1951, Montgomery: Brown Printing Company, 1951.

[33] Alabama Act 1955-204. The legislature abolished the Department of Commerce in 1955 and instead re-established the Alabama State Banking Department.

[34] Alabama Act 1973-1042.

[35] Alabama Act 1993-679.

[36] Alabama Act 1981-409; Alabama Act 1982-774; Alabama Act 1993-713; Alabama Act 2009-657; Alabama Act 2018-464

[37] Alabama Act 2012-429.

[38] Alabama Department of Insurance, “History of the Alabama Department of Insurance 1897-2022,” 2022, https://www.aldoi.gov/PDF/Misc/ALDOIHistory.pdf.

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