Insurance Principles and Concepts
Risk and its treatment
Insurance handles pure risk - chance of loss only, with no chance of gain. Speculative risk (a business venture, a wager) is not insurable. To be insurable, a loss exposure should be fortuitous, definite and measurable, predictable in the aggregate (law of large numbers), and not catastrophic to the insurer.
Separate three words that questions love to mix: a peril is the cause of loss (fire, wind, theft); a hazard is a condition that increases the chance or severity of loss; risk is uncertainty. Hazards come in three flavors: physical (icy steps), moral (dishonesty - arson for the claim check, inflated damages), and morale (indifference - leaving the building unlocked because insurance will pay).
Contract features
A policy is a contract of adhesion (written by the insurer), unilateral (only the insurer makes an enforceable promise once premium is paid), aleatory (values exchanged are unequal), and conditional (benefits depend on the insured's compliance). It is also a contract of utmost good faith, which is why material misrepresentation, concealment, and breach of warranty matter.
Supporting principles: insurable interest (must exist at the time of loss for property), indemnity (restore, don't enrich), subrogation (the insurer steps into the insured's shoes), and contribution (several policies share a loss).
Producers bind coverage through express authority (written in the agency agreement), implied authority (customary acts), and apparent authority (what a reasonable third party believes). A binder is temporary evidence of coverage until the policy issues.
Rule of thumb
Ask “cause or condition?” Cause = peril; condition = hazard. Worked example: a store owner stacks boxes in front of a sprinkler head “to save space.” That is a morale hazard - carelessness, not deliberate fraud. Arson to collect would be moral hazard.