CHAPTER 12A Fire Insurance Investment Goes Up in Flames

Everyday entrepreneurs like Albert Benton Pullman constantly scoured the changing economic landscape for new opportunities. On April 23, 1870, he purchased representing one hundred shares in the Great Western Insurance Company (GWIC). Invited by Hart L. Stewart, family friend and president of the firm, Albert paid the nominal sum required and joined the board of directors. Once more he was emulating George, who served as a director of the Travelers Insurance Company.¹ Albert's stake grew when another business associate, David Myers, gave him GWIC stock as security on a loan.² Returning to the Great Western office on October 6, 1871, Albert transferred Myers's shares to his name, increasing his GWIC holdings to two hundred shares worth $10,000, of which he had paid $2,000. Albert's timing could hardly have been worse. Two days after he had doubled his investment and his debt, the Great Chicago Fire tore through much of the city and destroyed all its locally based fire insurance companies.

The Great Western had opened in 1857 with high hopes and inflated statements. Incorporated during a boom in Chicago's insurance industry, GWIC accounts published in 1858 show a total capital of $500,000, of which perhaps $150,000 had been paid, much of it in the form of real-estate mortgages. This was not an uncommon arrangement, but it hindered the ability to repay debts or meet claims. The firm advertised figures supposedly extrapolated from state audits to prove its stability. In the months leading up to the conflagration, GWIC financial reports omitted the key detail of how much of the “subscribed capital” of $1,188,000 had actually been paid. To make matters worse, the company double-counted the paid-up capital, a fraction of the subscribed amount, by adding it to total assets, which included the paper value of all shares. This deceptive piece of accounting made the firm look superficially sound by disguising the paucity of cash on hand to pay policyholders’ claims.³

In its early years, the insurance company appeared to prosper, though in 1870 the founding directors left en masse after the firm ran into financial difficulties. Hart L. Stewart helped GWIC by loaning it thirty acres of land and taking $150,000 in stock as security. The only holdover from the original board, Stewart took control of the company by promoting himself to president, setting GWIC on an expansionist path, and recruiting twenty-nine new directors, including Albert Pullman.⁴ By December 1870, the company claimed to have assets worth over $271 million, the bulk of them in the form of bonds and mortgages, and liabilities of $261 million, of which $222 million took the form of outstanding shares.⁵

As president, Stewart failed to establish the kind of professional bureaucratic structure common by then in the insurance industry. He hired no statisticians, provided no actuarial projections, and demanded no work of his directors.⁶ The complete lack of oversight disguised the true state of affairs in a company seemingly designed as a vehicle for private profit rather than public service. Selling shares and marketing policies took precedence over inspecting and rating properties to be insured or estimating risk and exposure, standard practices for fire insurance companies.⁷

Stewart increased the firm's paper value by issuing new shares, but this violated the legal requirement to prove to state insurance commissioners that all previously issued shares had been paid in full.⁸ They had not. Stewart charged on regardless and authorized opening new branches in eight states and two western territories, with the majority in Iowa and Michigan.⁹ Coached by Stewart, GWIC sales agents told investors to pay no more than one-fifth of their share value because the other four-fifths would be met by future dividends, a practice that would allow GWIC to avoid paying any, simply transferring them onto the books as credit. In this, Great Western imitated a tactic banker Jay Cooke used during the Civil War to sell US war bonds. Critics charged after the fire that GWIC had been a fraud from the very start, though its financial practices differed little from those of other firms. Had the fire not intervened, it is possible the flaw in its fiscal structure may never have been revealed.¹⁰

Fire insurance was a desirable commodity in Chicago. Fires were a frequent occurrence in a city which had grown dramatically and haphazardly. The Common Council established a firefighting force to respond quickly to flames, and some downtown building owners used fireproof iron to reinforce their structures. But not every blaze could be quenched and, barely a week after the Pullman family horse-and-buggy ride, a careless cow, or more likely a thoughtless cigarette smoker, started what would become known as the Great Chicago Fire. From its origins on the evening of October 8, 1871, flames consumed most of the Central Business District along with large chunks of residential areas in the west and north. Chicago's fire defense system failed to contain the blaze, in part because firefighters exhausted from extinguishing fires for a week beforehand could not summon the energy to mount a defense against the rapidly escalating inferno. It spread rapidly as dry conditions and high winds carried volatile sparks and burning debris across streets and rivers, forcing residents to huddle for safety in and alongside the lake.

The October fire began on the west side, in an area of houses and shops adjacent to “a goodly number of factories, grain-elevators, railroad buildings, and a few merchandise warehouses” bordering the south branch of the Chicago River.¹¹ Burning shingles and charcoal cinders blew into coal and lumberyards. Conveyed across the river by unusually high winds, the fire destroyed a shanty town and the municipal gasworks, which exploded with frightening force and alerted people across the city to the danger while simultaneously plunging the streets into darkness. Entering the Central Business District, the blaze funneled into a counterclockwise firestorm, so hot that mortar dissolved, iron melted, and stone charred. Structures thought to be fireproof collapsed as walls fell to the ground and floors crashed down on each other.¹² The remains of a crowd gathered to celebrate the grand reopening of Crosby's Opera House watched with horror as the flames rushed toward them. As its last patrons fled, the building vanished in a wall of fire, never to reopen.¹³ Neighborhoods on the north side of the city, predominantly German and Scandinavian, proved equally unable to withstand the high temperatures and insatiable flames, which simply levelled the wooden homes and businesses.

At last, after cutting a swathe four and a half miles long through the city and raging for two days, the fire finally burned itself out. The devastation covered 2,100 acres, destroyed 18,000 buildings, and killed nearly 300 people. It rendered at least 100,000 people homeless, equal to one-third of the city's total population. Fortunately for the future, most of the grain elevators, lumberyards, railroad buildings, and docks remained untouched, allowing the city's economy to resume functioning with unexpected alacrity. Three of the four railroad termini and several depots needed to be rebuilt, but the railroad companies lost surprisingly few locomotives, passenger cars, or freight vehicles.¹⁴

Within the city limits, the Chicago West Division Railway Company, which used horse-drawn equipment, endured virtually no damage to its infrastructure, though its north- and southside counterparts did not escape so lightly.¹⁵ On the cusp of opening the mail-order catalog enterprise bearing his name, local businessman Montgomery Ward lost his entire inventory, while Chicago's numerous music stores, holding large collections of instruments and sheet music, were obliterated.¹⁶ An open tract of sixteen acres destroyed by fire the night before saved the Pullman residence on Monroe Street. Supposedly George himself preserved company records by carrying them from the Armour Building as flames closed in.¹⁷ Though the edifice, and the Pullman offices it contained, were destroyed, no Pullman family property was affected by the fire. Indeed, as George wrote to President Ulysses S. Grant a month afterward, “we experienced personally comparatively little inconvenience or pecuniary loss during the great Chicago Fire.”¹⁸ The city itself, while wounded, was far from dead.¹⁹

The same could not be said for its insurance companies. The Great Fire demonstrated their inability to meet claims after a devastating catastrophe. Many, perhaps a majority, of Chicago's fire insurance policyholders received nothing from their policies. Almost half of the 129 fire insurance companies active in the city went bankrupt, including all fourteen local firms. Payouts covered at most a third of the costs of rebuilding after the fire.²⁰ Two Daily Tribune journalists wrote that Chicago was “reaping in the bankruptcy of her local companies the fruits of the ruinous policy adopted of taking risks at any rate, and for any amount on any description of property.”²¹ For Albert Pullman and fellow directors of GWIC, the destruction revealed a crucial flaw in their investment strategies: by requiring only one-fifth of the full value of their shares, the firm had no cash reserves to pay claims. With its business concentrated in the city and with nearly every policyholder filing a claim, GWIC shareholders became liable overnight for the full amount of the unpaid shares, something most of them could not afford.

As the dust settled and the rebuilding began, claims poured in. While other local insurance companies either declared bankruptcy or prepared to do so, the Great Western stood alone in publicly proclaiming its ability to meet all obligations and promised to continue operating. The GWIC executive committee announced ten days after the fire that it “will pay all of its losses in full and preserve its paid-up capital intact” despite the “general wreck of city insurance companies.”²² A report published in local newspapers purported to demonstrate its financial good health.²³ This neat fiction declared that GWIC had $235,556 in cash and property, roughly $10,556 more than the total value of the policies held by its customers despite having reported $4,169,429 in exposure to risk in December 1870.²⁴ Elsewhere the company asserted even more optimistically that its “net assets would be $44,000 after paying the indebtedness.”²⁵

All this bluster proved little more than a campaign of misinformation to fool policyholders and keep creditors at bay. Behind the scenes, the directors were feverishly transferring land deeds in order to evade their fiscal responsibility and protect their personal property.²⁶ Minimizing exposure in every sense was the order of the day for Albert and his fellow investors. Short on cash and in some cases rendered homeless by the fire, several directors’ positions were further weakened by having paid for their initial share subscriptions using mortgages on property destroyed by the inferno. This left shareholders liable for the outstanding value of their shares—often between $4,000 and $5,000—while the company held an extensive portfolio of worthless mortgages.²⁷ As the inevitable audit drew near, the misinformation campaign accelerated, with one self-described policyholder writing to the Milwaukee Sentinel that he had received $1,000 from GWIC, “the full amount, without deduction, of my claim against the said company.” On the basis of this letter, the newspaper editorialized on the inaccuracy of “the sweeping remark having been frequently made since the Chicago fire, that ‘no Chicago Insurance company could pay its losses.’”²⁸

The city of Chicago rebounded quickly from the fire, though individuals had a difficult time recovering. In addition to the obvious physical inconveniences—the absence of shelters and the topography of destruction slowing travel through the city—working-class families who had lost their homes and needed to rebuild quickly found recovering particularly difficult.²⁹ These residents, many of them immigrants living on the north side, fiercely opposed a proposed ordinance requiring stone in the construction of all new buildings as a safeguard against future fires. In January 1872, fearing for their livelihoods and their family's futures, a group of them marched to city hall to protest the bill and persuaded aldermen to exempt working-class neighborhoods.³⁰ In the interim Albert, George, “and other pioneer business men” mobilized the Chicago Relief and Aid Society. Founded after an 1849 cholera outbreak and reinvigorated by the fire, the Relief and Aid Society offered assistance to those left homeless.³¹ According to its own records, the organization received some $5 million in cash donations and a large quantity of goods from sympathetic people around the country in the two years following the fire, an understandably significant increase over its prefire income of about $25,000.³² The society would continue to function long after the fire, sending aid to areas in need across the United States.³³

Despite the publicity campaign to placate policyholders, critics voiced their fears about the true condition of GWIC. After the fire, a letter to newspapers from “Many Readers” demanded “an unequivocal reply” as to whether the company was paying claims at full value, which they hoped it was, and whether it was still issuing policies, as the authors feared it might be.³⁴ Stewart called a meeting attended by fifty of the almost seven hundred shareholders. After the executive committee promised to meet all claims, those present reelected the board of directors while reducing the salaries paid to Stewart and the secretary. Not everyone could be so easily pacified: complaining that he could no longer put off unhappy policyholders, the vice president requested an office with “an accessible side door” to escape impatient clients demanding their money.³⁵

To buy time, Stewart continued to claim publicly that the combination of unpaid stock subscriptions plus an additional assessment on shareholders “will provide a fund sufficient to pay all losses” and leave a surplus of $84,000. In its published figures, the firm continued to credit itself with those outstanding share values, which, as policyholders would soon discover, had not and never would be paid. Chester Hooker, GWIC secretary, sounded a note of caution when he warned in mid-January 1872 that the company had only enough cash on hand to last five days unless it received a significant infusion of capital.³⁶ Despite Stewart's implied promise that the shareholders would be contributing extra funds, no such infusion materialized.

Hooker's words proved prophetic. Pledged share payments did not appear and, on February 6, 1872, the US District Court in Chicago declared the company bankrupt and appointed the GWIC secretary as provisional assignee, or receiver. The battle to control its assets began.³⁷ Three separate and competing factions emerged to protect and further their interests. Creditors, the most insistent because they had the most to lose, demanded immediate payment of their policies and the appointment of an independent assignee unaffiliated with the company.³⁸ A second, less coherent group consisted of speculating brokers and lawyers who had purchased policies from holders at a discount as the company continued to drag its feet on paying claims. This group demanded priority and fought for repayment at face value. The third constituency, GWIC directors and shareholders, vanished in an effort to avoid liability and hoped the destruction of the firm's offices in the fire would save them. Albert fell firmly into this last category.

Disgruntled policyholders met regularly to air their grievances and demand action. Because some of them spoke only German, an attendee periodically halted proceedings to translate. One of the recurring complaints, in both English and German, concerned how GWIC directors paid each other's claims and tried to disguise their land dealings to avoid losses. The creditors feared the company had been “a fraud from beginning to end” and believed only their united efforts would lead to full payment of their claims, which, they asserted, the directors could afford. They fretted that the board members would escape punishment because only “small thieves” went to jail while “big thieves” used their wealth as a shield to escape liability for their actions. This group was partly mollified when the court appointed someone other than a GWIC employee to the position of receiver, local attorney Clark W. Upton.³⁹ Their ire was revived, however, when Upton allowed Hart L. Stewart to renege on an agreement to deed $60,000 worth of land to GWIC, causing one policyholder to complain that even the court-appointed receiver favored the directors.⁴⁰

The second interest group coalesced just a week before the bankruptcy when brokers offered to purchase GWIC policies.⁴¹ Attorneys fishing for customers promised that policyholders would learn “something to their advantage” by visiting their offices.⁴² Paying pennies on the dollar to those unable or unwilling to wait for their claims to be settled, they hoped to profit from the misfortune of GWIC clients. One of the brokers was James Baxter, treasurer of GWIC, who became the object of much derision for buying discounted policies issued by his own firm. The audience at one public meeting silenced Baxter by accusing him of spying for his fellow, much-despised brokers.⁴³ The life of an everyday entrepreneur was often far from comfortable.

While directors like Albert continued to lie low, some shareholders came forward to protect their investments. One, Charles Waite, successfully sued to stop GWIC “from transferring notes to the amount of $12,000” to another investor.⁴⁴ Waite claimed to have purchased $11,000 in shares secured by conveying a Hyde Park property worth $13,000 to the company. Worried that he would lose his land, he demanded “an accounting, with a view to set the notes off against the indebtedness to the Company.” The action did not help, however, and Waite declared personal bankruptcy after losing a series of lawsuits in Illinois and Iowa. Waite's was one of several insolvencies caused by the demise of GWIC, which gained title to and auctioned off his Hyde Park property.⁴⁵

Clark Upton began his work as receiver in April 1872. He hired A. N. Waterman, who had served as GWIC attorney, to assist him, reigniting creditors’ fears of favoritism.⁴⁶ In July, Upton received authorization from the bankruptcy court to demand full payment of all unpaid share subscriptions.⁴⁷ Identifying shareholders, the third interest group, proved to be a long and arduous business because the fire had destroyed the books of the company and “no written evidence was to be had of the names or residences of the stockholders, or the amounts due from them.” Nothing could be done until the records had been reconstructed from memory and from evidence in policyholders’ personal papers, newspaper advertisements and stories, and correspondence. Upton relied on Waterman and a few other former GWIC employees willing to share information, most notably its bookkeeper, Peter G. Gardner, and a stock-subscription salesman, J. R. Philo.⁴⁸ As Waterman, Gardner, and Philo worked to reconstruct the books as best they could, Upton dispatched another GWIC sales agent to gather information and prepare for suits against shareholders residing beyond Illinois.⁴⁹

By November, GWIC records were being restored and the lawsuits began in earnest. Albert Pullman would soon discover just how litigious his society could be. Without the kinds of informal mechanisms for settling disputes that existed in Europe, American businesses resorted to the law. A year after the fire, an audit by the Illinois Bureau of Insurance showed that the Cook County Circuit Court entertained twelve suits against insurance companies in the immediate aftermath of the catastrophe, of which eight were still being heard in September 1872. Only two additional insurance companies, GWIC and the Aurora Fire Insurance Company, had been sued since then.⁵⁰

The Great Western cases began badly when Upton lost the first round. The US District Court for Northern Illinois ruled in favor of a group of brokers the receiver had charged with fraudulently trying to collect on claims they had purchased at a discount.⁵¹ After that setback, the assignee enjoyed a string of court victories, bringing much needed cash into GWIC's coffers. In January 1873, the Tribune gleefully reported that “the names of the stockholders whose pocketbooks have yet to bleed in the cause of the policyholders, was yesterday resumed, several old officials having been unearthed.”⁵² One of those recently exposed shareholders was Albert Pullman, who fought tenaciously to avoid payment. Another was developer Telford Burnham, who temporarily halted the assignee's victorious run when the US District Court ruled he was not liable for the unpaid subscription amounts because the shares had not been legally transferred to him on the books of the company. This case, like many subsequent actions, rested on eyewitness accounts. The judge ruled in Burnham's favor when witnesses testified they had seen the stock certificate and a corresponding number in the GWIC books against a different name.⁵³

Albert Pullman and the other company directors deployed multiple strategies to avoid paying the balance of their subscriptions. When physically vanishing proved ineffective, they mounted legal defenses. Asserting that, under the original bylaws, only the company itself could collect outstanding balances, several large shareholders, including Albert, sued to stop the courts from demanding unpaid funds. The first such case to reach the bench did so in June 1873. It involved Laban S. Major, one of the GWIC directors brought onto the expanded board by Stewart. Major owned fifty shares valued at $5,000, on which he owed $4,000. Major's lawyers argued that the assignee could not legitimately demand payment until the directors did so. Of course, as the assignee's attorney reminded the judge, the board had been disbanded and the directors had no legal standing. The court ruled that the assignee had the right to demand full payment of the subscribed shares because the original charter was invalid.⁵⁴ Conceding that the assignee could compel payment, the lawyers then argued that Major had not personally received the July 1872 missive demanding his outstanding balance. The court ruled that ignorance of the request, which had been mailed to shareholders and placed in newspapers, was not a valid reason for refusing. Major took the case to the US Supreme Court while Upton followed up by filing fifty suits against shareholders in Iowa, building on research by policyholders and agents.⁵⁵ Sensing an imminent need for cash, Albert sold thirty Pullman shares he had owned for just three years, but his entanglement with GWIC had not quite ended.⁵⁶

By the time of the Great Fire, the city of Chicago was nearly thirty-seven square miles in size. By 1889, it had quadrupled, covering more than 169 square miles.⁵⁷ Destruction of the haphazardly built downtown encouraged a more rational approach to land use in the core.⁵⁸ Railroads relocated their freight yards and sheds, land prices increased, and manufacturing plants soon joined the exodus. A decentralized economy, inoculated against a single catastrophe, resulted.⁵⁹ After just six years, one visitor noticed what she called “relics” of the fire in the form of “lots piled up with blackened brick and stone and dismal rubbish, and sometimes the picturesque shell of a ruin.”⁶⁰ Daily life returned to its routines, and memories of the flames served publicly as a rationale for boasting about the city's recovery. Magnificent office buildings, glorious hotels, and even a few decent railroad termini dotted the rebuilt city.

Railroad expansion across the country contributed to the recovery effort, so much so that the local economy grew faster in 1872 than it had in the year leading up to the fire. Less obvious were the civic improvements implemented over the course of Albert's lifetime, a process accelerated by the fire. By 1890, the city had over 1,500 miles of sewers, 1,400 miles of paved streets, gas lamps or electric streetlights on nearly every corner of those streets, a powerful waterworks pumping 500 million gallons of water daily to customers across the urban expanse, and 129 fire engines ready to use some of that water to prevent a repeat of the events of October 1871.⁶¹ The Great Chicago Fire had supplied the rationale for an emphatic increase in municipal services, and Chicagoans benefitted. As a consequence, the city became a bellwether for the adoption of new technologies and a much-visited vision of what the future could be.⁶² It also became a regional financial center, though not for the insurance business.