General Insurance Concepts Tested on the Arizona Surplus Lines Exam
Risk, Peril, and Hazard
Candidates must separate risk (uncertainty of loss), peril (the cause of loss), and hazard (a condition increasing the chance or severity of loss). Hazards are physical, moral, or morale. A classic trap is confusing moral hazard (dishonesty, such as arson for profit) with morale hazard (carelessness or indifference because insurance exists).
Insurable Interest and Indemnity
Insurable interest must exist at the time of loss for property insurance and at inception for life insurance. The principle of indemnity restores the insured to approximately the pre-loss financial position, no better and no worse. Actual cash value, replacement cost, and agreed value are different valuation methods, and questions often test which method applies to which policy form.
Contract Elements and Legal Concepts
Insurance is a contract of utmost good faith, requiring representations, warranties, and concealment analysis. A representation is a statement believed true; a warranty is a promise that becomes part of the contract. Material misrepresentation can void coverage. Other tested concepts include adhesion, aleatory contracts, conditional contracts, and the principle of subrogation, which prevents double recovery and shifts loss to the responsible party.
Limits, Deductibles, and Coinsurance
Candidates should be comfortable with policy limits, deductibles, coinsurance clauses, and the difference between pro rata and excess contribution when multiple policies cover the same loss. In property coinsurance, underinsurance reduces recovery proportionally.
Rule of thumb: indemnity means the insured should not profit from loss; subrogation and coinsurance both serve that principle.
Worked example: a building worth 500,000 dollars is insured for 250,000 dollars under an 80 percent coinsurance clause, and a 100,000 dollar loss occurs. Required insurance is 400,000 dollars; the recovery is 100,000 times 250,000 divided by 400,000, or 62,500 dollars.