London's insurance market began as a small, cooperative venture structured for the benefit of all participants. It was maturing in the early fifteenth century, roughly a hundred years earlier than is often believed. Its smooth operation was based on the mutual interest of merchant-insurers, who typically participated on both sides of insurance transactions, and were involved primarily because they wished to avoid the financial shocks which could arise from the unavoidable perils of seaborne trade. Their reciprocal interest meant that honourable behaviour was the main guarantee that the market functioned efficiently, which left little room for sharp practice. The approach is characterised by uberrima fides, utmost good faith. The merchant-insurers transferred and accepted risk based on this principle. When it was not clear if a policy should respond to a loss, insureds and underwriters accepted, in good faith, the decisions of merchant arbiters. Such decisions were almost conciliar; a panel of disinterested merchant-insurers would discuss and determine, based on principles established under the uncodified Law Merchant, what the parties had reasonably intended when insurance agreements were reached. This meant that the merchant-insurers’ product was flexible. Old principles were adapted to govern new circumstances, with the balance weighted to the advantage of neither the buyer nor the underwriter, but to the community of merchant-insurers. As long as everyone abided by the rules of the game, the system worked. Those who operated outside the rules could simply be excluded.

The environment demanded this approach. The evolving English legal system was ill-equipped to deal with insurance disputes, and became more so as the civil law of equity, the formal branch of jurisprudence best suited to resolving relevant questions of intention, was eroded. The typical inflexibility of statute, and of early modern English common law, meant that prescriptions set out by the state to govern market operations often had the unintended side-effect of reducing market flexibility. It seems clear that prescriptive measures, regardless of their target, are likely to have such an impact in a market which became effective and popular based on practices grounded in principles of good faith, and which traded a club good on this basis, rather than primarily for the profit of the sellers and the utility of the buyers. Such a system can function smoothly only when transactions are struck and concluded in utmost good faith.