History of Limited Liability Insurance
Limited liability limits the risk that business owners and investors face in the event of major losses, such as those arising from lawsuits or catastrophes. Instead of facing full personal liability, liability may be limited to the assets of the business itself, the value of shares owned, or in some other way. By taking out limited liability insurance, owners and investors can protect themselves further by insuring against even these limited losses.
Other People Are Reading
-
Ancient Concept
-
Historians trace the concept of limited liability to the earliest days of European trade, although it was not necessarily associated with the formation of companies or partnerships. As early as the Roman Empire, a slave owner could, in effect, limit his liability for a "tort" (wrong) done by his slave simply by transferring ownership of the slave to the affected party. By 800 A.D., European marine merchants began to recognize the concept that investors in trading voyagers should be liable for loss in proportion to the profit they stood to gain.
Need for Limited Liability Companies
-
Prior to the implementation of rules under which a limited liability company could be created, stockholders were fully exposed to loss in the case of insurance claims. An individual who made only a modest investment in a company could be held fully liable in the case of catastrophe and lose all her possessions. Many stockholders in the South Sea Company had been ruined following the bursting of the so-called "South Sea Bubble" -- the collapse in value of wildly overpriced shares -- in 1720. This strongly discouraged capital investment in new businesses, something which limited liability was believed likely to stimulate.
-
British Milestone
-
An influential milestone in the history of limited liability was the passing of the Limited Liability Act (1855) by the British government under the prime ministership of Viscount Palmerston. This law allowed newly formed companies to claim limited liability by fulfilling certain conditions. The company was required to state limited liability in both its application for registration and deed of settlement, and to use the word "Limited," often abbreviated to "Ltd." as the last word of the company name. The historian Robert Hillman has commented on the "level of inquiry" and "high quality of debate" which formed the background to this legislative advance.
Opportunity to Form Companies
-
The Limited Liability Act was followed by the Joint Stock Company Act (1856), which relaxed the strict regulation on formation of companies that had followed the bursting of the "South Sea Bubble" and permitted seven or more individuals to jointly form a limited liability company. The principle behind the legislation, as the government states, was to remove obstacles that had been placed in the way of many good business schemes for the purpose of prohibiting the occasional bad one.
International Developments
-
The major legislation in Britain was anticipated by local developments elsewhere. The State of New York, for example, appears to have entertained some concept of limited liability by the end of the 18th century, and in 1822 passed limited liability partnership legislation under which the liability of partners in a commercial venture would be limited to their initial investments. Limited liability became common in European countries during the same period and today is common worldwide.
-
