Insurance Principles and Concepts
The vocabulary questions hinge on
Risk is uncertainty about loss. Peril is the cause of loss (fire, wind, theft, collision). Hazard is a condition that increases the chance or severity of a loss. Loss is the reduction in value. Exams swap these four words constantly, so keep them separate.
Hazards come in flavors: physical (icy steps, faulty wiring), moral (dishonesty, such as arson for the insurance money), morale (indifference, such as leaving a door unlocked because insurance will pay), and legal (adverse court rulings). Moral hazard is intentional; morale hazard is carelessness.
Handling risk
You can avoid, retain, reduce (loss control), share, or transfer risk. Insurance transfers the financial consequence of pure risk (loss or no loss). Speculative risk (a chance of gain as well as loss, like buying stock) is not insurable. Insurable risks are accidental, definite and measurable, spread across a large pool so the law of large numbers produces predictable results, and not catastrophic to the insurer.
Contract characteristics
A policy is a contract of adhesion (drafted by the insurer, with ambiguities generally construed against the drafter), aleatory (unequal exchange of value), unilateral (only the insurer makes an enforceable promise), conditional (the insured must satisfy conditions to collect), and one of utmost good faith. Breaches of good faith include concealment, misrepresentation, and warranty breach. Indemnity restores the insured to roughly pre-loss condition, never profit. Insurable interest supports the contract; subrogation lets the insurer pursue the responsible party after paying the claim.
Worked example and rule of thumb
Insurable interest is tested at different moments: in property it must exist at the time of loss; in life it must exist when the policy is issued. An owner who sells a building before a fire has no claim, even though coverage existed at purchase; the loss now belongs to the buyer.