Analysis: 19th Century insurance frauds

Post Victorian

Scandal, fraud, deception and rabid profiteering have never been far away from the insurance industry. Indeed, it is probably fair to say they have been uneasy bedfellows ever since the modern insurance industry started to lay its foundations in this country in the 17th and 18th Centuries. Post reflects on some of the 19th Century’s worst insurance scams

By the middle of the 19th Century, the insurance industry was booming and so were the fraudsters attracted by the prospects of easy pickings.

Several novels of the period feature insurance crimes. Charles Dickens’ Martin Chuzzlewit, published in 1842, contains information about the bogus Anglo-Bengales Disinterested Loan and Life Association Company. The Great Hoggarty Diamond by William Makepeace Thackeray, which appeared in 1839, is about the West Diddlesex Fire & Life Insurance Company, which perpetrated a wide range of fraudulent insurance schemes.

It was into this world that Post Magazine was born. Unbeknown to its enterprising proprietor and editor, John Hooper Hartnoll, scandal was lurking in the pages of the very first issue as it hit the streets – via the Penny Post – on Saturday 25 July 1840.

Among the many adverts in the modest eight-page publication that Hartnoll produced from his office at 3½ Wine Office Court, just off Fleet Street opposite the Cheshire Cheese hostelry, was one from the Independent West Middlesex Assurance Company boasting “immediate benefits offered to the public. Life and fire insurance rates reduced to 30 per cent. Per annum lower than any other office”. The icing on this particular too good to be true cake was the promise of “a liberal commission allowed to solicitors and agents”.

Big advertising budgets, generous commissions, lower rates: all of these are familiar hallmarks of frauds and corporate collapses in the insurance industry right up to the present day.

The Independent West Middlesex had been founded just four years earlier by a doctor, two lawyers and a fourth gentleman who had a reputation as a smuggler. Obviously, a sufficient number of solicitors and other insurance agents were attracted by the promise of high commissions because by December 1840 it had taken almost £250,000 (over £25m at today’s values) in premiums. Having given a quarter of that back to the greedy agents, the four directors split the rest between them and fled the country.

This was not a surprise to one man.

Peter Mackenzie, publisher of the Scottish Reformers’ Gazette, had devoted his March 1839 issue to exposing this firm as “a quack company, got up for the premeditated purpose of imposing on the public in matters of fire and life”. This broadside was backed up by detailed analysis of the accounts, such as they were, but it earned Mackenzie that accolade many an investigative journalist has earned over the centuries for exposing wealthy fraudsters – a libel writ.

Perhaps it was the chilling spectacle of Mackenzie having to defend himself at the law courts at the far end of Fleet Street or just ignorance that led Hooper to accept an advertisement from the Independent West Middlesex. We shall never know whether he got paid.

This scandal did not end with the directors and policyholders’ money disappearing to distant parts of the world. The lawyer representing Mackenzie, Sir Peter Laurie, was not prepared for the story to end there.

Jack and the giant joint-stock
Jack and the Giant Joint-Stock, a cartoon in Town Talk (1858) satirizing the ‘monster’ joint-stock economy that came into being

He used his connections to persuade parliament that this was not an isolated example. This led to a committee of inquiry under the chairmanship of one William Gladstone being set up. Gladstone, later to be Prime Minister four times, was a few years into his long parliamentary career and had already had a brief spell as a junior Treasury minister. His committee proposed a series of new rules for all companies, requiring annual statements, balance sheets and lists of shareholders, which became the Joint Stock Companies Act 1844.

This was quickly dismissed as inadequate by campaigners as it failed to recognise the unique features of insurance companies, such as being able to collect premiums many years ahead of having to pay claims, creating an illusion of financial stability. Hartnoll and Post Magazine were by now firmly among the ranks of campaigners for further reform and his vigorous investigation of another firm – Sea Fire & Life – contributed to its collapse in 1850, but not before Hartnoll found himself juggling a barrage of libel writs from its owners.

Bubble insurance companies

This inspired Hartnoll to devote more attention to these so-called bubble insurance companies. He became one of the leading campaigners for legislative action and his pressure led to the setting up of a second parliamentary inquiry in March 1853, acknowledged in a major review of the period in the Institute of Actuaries Journal published in 1887: “Perhaps that which did most to facilitate what immediately followed was the Letter of J. Hooper Hartnill [sic], Editor of the Post Magazine, to the Rt. Hon. E. Oardwell, MP, President of the Board of Trade, on the inoperative character of the Joint Stock Companies Registration Act as a means of preventing the formation of Bubble Assurance Companies, or of regulating the action of those honourably and legitimately instituted. In this letter was contained a most trenchant narration of certain insurance projects of the character of the men; of their antecedents; of the amounts and nature of their depredations –time, place and circumstances all stated. It was impossible after such an exposure that enquiry could be withheld.”

Dissatisfied with the outcome of this second parliamentary inquiry, on 1 October 1853 Hartnoll launched a companion title to Post Magazine, Insurance Monitor. This devoted its pages to forensic scrutiny of suspect companies. Insurance Monitor was actually relatively short-lived and the following year was merged with Post Magazine, which thus became Post Magazine and Insurance Monitor for the next 130 years.

There were, of course, many well-established and reputable insurers and they were also pressing for reform. This was championed by their actuaries and in 1848 they founded the Institute of Actuaries. This was not an immediate success as a group of London-based actuaries set up a rival body, the Actuaries’ Club, which rejected the model of scientific papers and professional qualifications in favour of a model closer to that of a trade association. The Scots also parted company with the new institute and set up their own Faculty of Actuaries in Edinburgh.

Professional chaos

This combination of weak legislation and professional chaos formed the background to a period of rapid expansion of the insurance sector. By 1859 half of all life assurance companies in the world were based in the UK, holding 59% of global policies in force by value. There was a parallel expansion in the non-life sector with many firms emerging during this period setting themselves up on the composite model, offering both life and non-life policies. Some of the great names of the insurance industry emerged during this period with the Prudential being formed in 1848 and Commercial Union (now part of Aviva) in 1861.

The plethora of new firms that emerged during this period, many poorly capitalised and often the front for outright fraud, unleashed a generation of consolidators. Some were careful about their acquisitions. Others were anything but and the collapse of two in particular finally prompted the government to act.

Albert Life was born out of the Freemasons & General, set up in the late 1830s to cater for the insurance needs of masons, in those days a highly select and secretive group. Seeing an opportunity to mop up struggling insurers it changed its name in 1849 and snapped up ten life assurers, moving onto fire and marine insurers in 1864.

Meanwhile, The European started out as a specialist annuity business in 1819 and was reasonably successful until it started eyeing what it thought were the rich pickings among the new wave of insurers. This included taking over another consolidator, the British Nation in 1858.

Both of these firms came under intense scrutiny from the growing insurance press and the actuarial profession but the liberal use of libel writs and contempt proceedings deterred all but the most determined. The critics’ warning of the imminent collapse of the Albert and European were not helped by willingness of leading actuaries and accountants to certify the firms as sound, still a feature of corporate collapses in the 21st Century.

Eventually, the music stopped and both firms bit the dust after protracted legal battles to get them wound up, the Albert in August 1869 and the European two years later. Both left policyholders severely out of pocket but made the lawyers very rich. In November 1886 Post Magazine produced a detailed analysis of the two collapses and estimated the legal fees at £360,000 – over £46m at 2020 prices.

Briton Medical & General
An advert for the Briton Medical and General Life Association, which overstretched its capabilities after a rapid series of acquisitions

These scandals finally stirred the government into action and in 1870 parliament passed the Life Assurance Companies Act. This remains a watershed moment in the history of insurance regulation as it was the first time legislation acknowledged the many unique features of insurance and the need for it to be regulated appropriately. It was quickly followed by other key pieces of legislation.

Landmark legislation

Hartnoll lived just long enough to see this landmark legislation hit the statute book.

He died on 6 June 1870 and his obituary acknowledged the impact of his campaigning zeal: “The way in which it [Post Magazine] unearthed many of the schemers of that day, laid bare their devices, and fairly drove them from the field of plunder, and in some cases, even from the country, will never, and should never, be forgotten.

“How early were the numbers sought after – yet how many dreaded the day of publication. That in some cases shutters were put up and the offices deserted within an hour after the magazine had left the printing office are now simple matters of history”.

The passing of the act, and a revision in 1872, did not suddenly halt the collapse of life assurance companies as the seeds of their downfall had already been sown by many. One in particular hit the headlines, not least because it showed how easy it was for senior managers to line their own pockets.

The Briton Medical & General had pressed the acquisition accelerator in the early 1860s, snapping up enough firms to acquire a base of over 26,000 policyholders, including those served by the extensive branch network of the wonderfully named Scottish Indisputable. By the early 1870s the new reporting requirements had started to expose just how over-stretched it was, with runaway expenses and commissions frequently cited as the cause.

The directors cooked up a plan to save the company which managed to persuade some of its detractors to back off. They split the firm into two, with a new company called just the Briton, established to take on new business and administer the premium collection and claims payment of the old BMG. The key proviso that won over the critics was that the new company would not pay surrender values on old BMG policies or any dividends to shareholders until the old company was out of the red.

The flaws in this plan should have been obvious as Briton had the same offices, same profligate branch network and same directors as BMG.

This new arrangement was put in place in 1875. During the next nine years £100,000 in surrender values on old policies was paid out of the premiums collected by the new company and after 1880 an average dividend of 9.5% was paid to shareholders despite BMG being no-where near shaking off its crippling deficits.

The end came when the general manager died suddenly in 1885. The accountants and actuaries moved in to finish a revaluation he was meant to be carrying out. They found that the manager had personally taken £100,000 (£12.5m at today’s prices) out of the company and covered up £400,000 in unreported liabilities.

At least the 13,000 policyholders who stayed with the company until the bitter end fared better than those caught in the collapses of earlier consolidators such as the Albert and European. They were lucky if they got 25% of the value of their policies back. Because of the 1870 act, the courts winding up the failed BMG was obliged to try and find another firm to take over the policies still in force. Sun Life stepped up to the plate and over the remaining years of the policy terms managed to pay between 50% and 90% of the value of policies.

With so many poorly run firms, many with little genuine interest in serving policyholders, it is hardly surprising that they were also vulnerable to fraud.

Some of these make for very uncomfortable reading today.

Mary Ann Cotton
Mary Ann Cotton was hanged in 1873 for murder

Chilling crimes

One of the most chilling life insurance crimes was associated with policies on the lives of little children. Various Parliamentary inquiries and Royal Commissions in England between 1845 and 1870 found that one of the principal causes for the high infant mortality rate was because parents and guardians insured against the death of the children in their care.

There were many notorious cases. Perhaps the most shocking was that of Mary Ann Cotton, the daughter of a Durham miner whose father died in a pit accident when she was 10 years old. She probably murdered at least 11 of her own 13 children, as well as three husbands.

Mary Robson (her maiden name) married a colliery worker, William Mowbray, in 1852 when she was 20. The long, grim trail of death started soon after. She moved with her new husband to the West Country. It is not certain how many children she had while living there as only one birth was actually registered but it is thought that at least four died. They moved back to the North East and had three more children.

William died of an intestinal disorder in January 1865. The lives of William and some of their children were insured by the Prudential and Mary Ann collected £35 on William’s death (equivalent to £4226, over half a year’s wages for a manual labourer at the time) and £2 5s (£2.25) for their two-year-old son who died around the same time.

By the summer of 1865 she was working at a convalescent hospital in Sunderland and married one of the patients, George Ward. A little over a year later he was dead, again of an intestinal disorder resulting from the cholera and typhoid he had been suffering from, although the doctor at his inquest expressed surprise at his sudden decline. His life was insured.

In August 1867 she married James Robinson, a Sunderland shipwright and a widower. They had a son and a daughter (who died) but Robinson became suspicious of her insistence that he insure his life. When he found out she had run up substantial debts and pawned some of his possessions he threw her out but retained custody of their son George, who survived into adulthood.

Her life became progressively more complex and grisly. There were two lovers and one more husband, Frederick Cotton. They married bigamously in September 1870. He was another widower and had two surviving sons, another two having died before he met Mary. Frederick Cotton died in December 1871 from “gastric fever”. His life was insured as was that of his two sons.

Before Frederick Cotton died, a former lover of Mary’s, Joseph Nattrass, reappeared on the scene and after Cotton’s death he briefly moved in with her. She was working again as a nurse, looking after a tax official recovering from smallpox. His recovery obviously went well because she became pregnant with her 13th child by him.

Meanwhile in March 1872, one of her two step-sons from the marriage to Cotton died, as did the infant son she and Cotton had together. The bodies continued to pile up. Her mother died and Nattrass was next, succumbing to gastric fever shortly after revising his will in Mary Cotton’s favour.

Looking for work

She was now looking for work again but had care of Cotton’s other son. On being offered a post nursing a woman recovering from smallpox she tried to get this boy committed to the workhouse but was refused. Five days later he was dead. This aroused suspicions and her murderous life quickly caught up with her.

Her first port of call after the boy’s death was not the doctor but the insurance office. There, she discovered that no money could be paid out until a death certificate was issued. An inquest was held and the jury returned a verdict of natural causes but local newspaper reporters recognised her from previous inquests. They soon realised that Cotton had moved around the North East of England and lost three husbands, a lover, a friend, her mother, and eleven children, all of whom had died of stomach ailments.

Investigations revealed arsenic in the body of the boy and Cotton was arrested towards the end of 1872. Her trial was delayed for the birth of her 13th child, a daughter, Margaret Edith who lived into her eighties. The jury did not take long to convict her of her stepson’s murder and she was hanged at Durham jail on 24 March 1873. She was one of several notorious female poisoners who were motivated by the prospect of collecting large insurance payouts, usually for murdering their husbands.

Cotton’s story shocked society. In 1875 the Friendly Societies Act was passed with new provisions restricting payments on the death of children to cover the expenses of their burial only. In 1884, the Society for the Prevention of Cruelty to Children was founded in London, partially “for the purpose of keeping insured children from becoming angels too quickly” in the words of one contemporary report. This clearly did not bring an end to the unnecessary deaths of children (see ‘Friendly Societies Act’ box).

Victorian Parliament
A Victorian view of Parliament

Friendly Societies Act

A London coroner, Athelstan Braxton Hicks – often known as The Children’s Coroner and the son of a famous obstetrician – wrote a letter to The Times in 1889 denouncing the continuing practice of insuring children’s lives because the insurances acted as a temptation to the parents to neglect them to the point of death, and sometimes even kill them. He pointed his accusing finger firmly at insurance companies and their agents.

“The industrial insurance companies allow policies to be effected by people who have no insurable interest (properly so called) in the lives of the insured. They are effected by persons who have a direct interest in the death of the insured – such as illegitimate children, children of poor people who have large families, and aged people whose life is a burden to those who have the care of them.

“As regards illegitimate children, I am informed that it is the rule in some offices not to take such lives; but I know of my own knowledge that this rule is almost invariably broken.

“Children are often insured whose lives are in a precarious state, and insurances are effected by people who have the charge of such children to nurse for a weekly payment; but such insurances are not effected until there seems a reasonable chance of the child dying and the payments of the mother are in arrear, so that on its death – and the sooner that occurs the better it will be – the nurse will be able to recoup herself for the loss out of the insurance money. Again, the agents for the companies are paid by commission, and though, no doubt, that is the only practicable mode of payment, commercially speaking, yet it has a direct inducement for their taking insurances with very little inquiry.” 

Due to the pressure of Braxton Hicks and his fellow campaigners, a new Friendly Societies Act was passed in 1896 severely limiting the circumstances in which a child’s life could be insured and the amount of cover that could be taken out.

Benjamin Waugh
Benjamin Waugh, founder of the Society for the Prevention of Cruelty to Children

Faked suicides, staged disappearances and forged death certificates were another constant problem for life assurance offices. These cases were often very hard to investigate as the deaths and disappearances often occurred abroad and the death certificates obtained by bribing local doctors or officials so, for all intents and purposes, they looked official.

Just as the life sector boomed in the second half of the 19th Century so did non-life insurance. Industrialisation, urbanisation and new forms of transport all called for new insurances and the British insurance industry was quick to oblige. Accident insurance formed a major part of this expansion. In 1861 there were 23 insurers writing variations on accident cover. Just 40 years later there were 241 and many offered very short-term cover, sometimes just for a few days. This was an open goal for fraudsters.

“On the introduction of accident insurance a broad field was opened up to the speculative insurance swindler, and he has not been slow to avail himself of it”, wrote two investigators in an extensive 1896 report on insurance fraud.

“By effecting insurance in several different companies so as to cover but a short period of time… a large aggregate amount can be obtained at a trivial cost”, they added.

Some of these fraudsters were prepared to go to amazing lengths to obtain the insurance money, as one of the cases they investigated painfully illustrated (see ‘A terrible accident’ box).

Other classes were vulnerable to more familiar frauds. Fire insurers were constantly on their guard against arson perpetrated with the intention of claiming on the insurance cover. Some of the most notorious arson frauds occurred in the early 20th Century and will be covered in another feature in this historical series.

Marine insurers and the Lloyd’s market had to fight the fraudsters and cheats on many fronts.

Claims for the loss of cargoes that had never actually found their way onto a ship that sunk or was battered by storms were commonplace and investigating them was down to an extensive network of local agents spread around the world’s major ports. Exaggerated claims for damage to ships were a constant problem and one of these led to a scandal that foreshadowed some of the calamities that ensnared Lloyd’s over a century later.

The overlapping interests of many of the underwriters at Lloyd’s was beginning to cause concerns inside and outside the market when, in March 1870, a ship called the Venezuelan, on a voyage from Liverpool to Barbados, was reported to have been damaged in a storm. This ship was owned by a Liverpool company whose managing director, Arthur Forwood, was also a Lloyd’s underwriter.

A terrible ‘accident’

In July 1893, one insurance company received a letter of claim from its policyholder, a R Hicks, a 22-year-old with a respectable clerical job.

“I started to load my revolver preparatory to celebrating the day by shooting, as my roommate and friends were doing. While so engaged I dropped it accidentally and it was discharged, the ball entering my left hand and literally tearing it to pieces; breaking three fingers also.”

He set out his expenses and expectation of not being able to return to work for several weeks, asking for what we might now call an interim payment. The insurance company wanted to ascertain for itself the exact severity of the injury and the resulting incapacity, a move that took Hicks by surprise. He let slip that another insurer had already settled his claim. This prompted further inquiries which quickly revealed that he had taken out personal accident insurance with several insurers but had not been very consistent in his story. He eventually confessed his intention to collect around £1900 (over £250,000 today) in insurance payouts, although this would have required the complete loss of his left hand.

“The idea of ‘working’ the insurance companies was developed in my mind last winter. My plan then was merely self-destruction; but as the plan grew, and I came to see by careful study of them what the policies covered, I recognised a chance to make what I had been looking for, namely ‘big money’ for myself by losing a hand ‘accidentally’ and so I increased my lines of insurance…and was disgusted when I found that the shot I had put through my hand had not hopelessly crushed it, and I did all I could to induce the surgeon who attended me to amputate it any way.”

Colliers Thames
Colliers unloading: a vintage engraving from 1876 of ships unloading coal at the London docks

Alarming reports

The initial reports said the vessel had lost its rudder and that her aft compartment had been damaged and flooded. The passengers and mail were transferred to another ship and the Venezuelan was left to limp along to find a port where it could be repaired. Reports started to appear in American newspapers telling of a dramatic shipwreck, suggesting a near total loss of the ship, which was insured at Lloyd’s. These reports alarmed those underwriters who had put their names to the slip insuring the ship.

Whether Forwood had anything to do with these reports was never pinned down but what was later ascertained was that as they were appearing he received communications from the Venezuelan’s master saying the damage was relatively minor and that given good weather the ship would soon be safely in port.

Forwood unscrupulously decided to take full advantage of his inside information and took out reinsurance on his own ship, which he quickly persuaded other panicky underwriters to subscribe to. This would make him a tidy £500 (£60,000 today) once the ship arrived safely with there being no call on the reinsurance.

Aroused suspicions

When news of the Venezuelan’s prompt and safe arrival in port reached the underwriting floor in Lime Street, suspicions were aroused. Forwood was immediately expelled by the Committee of Lloyd’s only for them to be told they had no powers to expel members. This was almost immediately rectified in the Lloyd’s Act passed in 1871.

Edward VII playing card
A playing card released for the coronation of Edward VII

As the curtain was brought down on the Victorian era another scandal involving conflicting vested interests at Lloyd’s hit the headlines.

A struggling travel agency, Gaze & Sons, invested heavily in buying the best seats along the parade route for the coronation of Edward VII which was scheduled for 26 June 1902. This had to be postponed at short notice as the new King was struck down with appendicitis. Gaze & Sons was left with large bills to pay and no income – and no contingency insurance.

Onto the scene comes Percy Burnand, who joined Lloyd’s as an underwriter in 1885, and who was also a director of Gaze & Sons.

The firm’s bankers refused to extend anymore credit to the already indebted agency so Burnand started to use his syndicate to insure the travel agency for non-payment of its bills, allowing it to keep trading. This brought it time but not financial salvation. Although the coronation went ahead on 2 August, the debts overwhelmed the agency and it went under in early 1903.

The Names (investors) on Burnand’s syndicate were saddled with losses of £100,000 and pursued Burnand through the courts, where another soon-to-be Liberal Prime Minister, Henry Herbert Asquith led the prosecution. The failure of the Burnand syndicate and a subsequent scandal that further exposed the vulnerability of Names to unexpected excessive losses led to the Lloyd’s Act of 1911, passed by a government led by Asquith.

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