General Insurance Concepts and Principles
Core Principles
Insurance transfers pure risk (loss or no loss) rather than speculative risk. Insurable risk requires a large number of similar exposure units, accidental loss, measurable loss, and losses that are not catastrophic to the insurer. The law of large numbers supports predictable loss experience across a pool.
Know the doctrine of utmost good faith, which underlies representations (statements believed true), warranties (statements guaranteed true), concealment, and fraud. Indemnity means restoring the insured to approximately the pre-loss financial position-no profit. Insurable interest must exist at the time of application for health insurance (and at time of loss for property). Subrogation lets the insurer pursue a third party after paying a claim. Adhesion means the insurer drafts the contract and ambiguities are construed against the drafter; aleatory means unequal exchange of value. A condition precedent must occur before the insurer's duty to pay arises.
Traps in Questions
- Waiver and estoppel. Waiver is voluntary relinquishment of a known right; estoppel prevents the insurer from later asserting a right the insured reasonably relied on the insurer to give up. Questions often swap the two.
- Utmost good faith vs. warranty. A misstatement of a material fact on the application is a representation issue; a guaranteed fact is a warranty issue.
- Insurable interest timing. Health insurance requires interest at application, not at claim.
Rule of Thumb
When a question asks which party bears the consequence of ambiguous policy language, the answer is the insurer (adhesion/ambiguity rule). When it asks whether the insured must be made whole beyond actual loss, the answer is no under indemnity.