General Insurance Concepts: The Vocabulary Behind Every Question
Risk, peril, and hazard
Risk is uncertainty about loss; a peril is the cause of loss (fire, wind, theft); a hazard increases the chance or severity of loss. Physical hazards are tangible (oily rags), moral hazards involve dishonesty (arson for profit), and morale hazards are indifference (leaving doors unlocked). Only pure risk - loss or no loss, never gain - is insurable. Speculative risk is not.
Contract characteristics
An insurance policy is aleatory (unequal exchange of value), a contract of adhesion (written by the insurer, ambiguities construed against it), unilateral (only the insurer makes an enforceable promise), conditional (benefits depend on the insured's compliance), and personal. It is governed by utmost good faith, which imposes duties of representation, warranty, and no concealment or fraud on both parties.
Core principles
Insurable interest, indemnity, subrogation, and the law of large numbers keep premiums predictable and prevent profit from loss. Adverse selection - risky buyers seeking coverage disproportionately - is controlled through underwriting, exclusions, and deductibles.
Measuring the loss
Actual cash value equals replacement cost minus depreciation; replacement cost pays without depreciation. Coinsurance, limits, and deductibles allocate loss between insurer and insured. An occurrence policy responds to injury or damage occurring during the policy period; a claims-made policy responds to claims first made during the period, often with a retroactive date. Reinsurance (facultative or treaty) transfers insurer risk; it never changes the insured's rights under the policy.
Trap: for property insurance, insurable interest must exist at the time of loss; for life insurance, it must exist at inception. Rule of thumb: ACV = replacement cost − depreciation, then subtract the deductible.