General Insurance Concepts
The vocabulary of risk
Risk is uncertainty about loss; peril is the cause of loss (fire, death, illness); hazard is a condition that increases the chance or severity of loss. Hazards come in three flavors: physical (a leaking roof), moral (dishonesty - arson, faking a death), and morale (carelessness because a policy exists). Insurance handles pure risk (loss or no loss) - never speculative risk (gain or loss), which is why a stock portfolio cannot be insured.
Why insurance works
Insurers pool many independent exposures so that actual losses approach the predicted average - the law of large numbers. Adverse selection (only the sickest, oldest, or most dangerous buying) undermines that pooling, which is why underwriting, exclusions, and waiting periods exist. A risk is generally insurable when the loss is accidental, measurable, definite in time and amount, not catastrophic to the insurer, and spread over a large homogeneous group.
Legal character of the insurance contract
Insurance contracts are contracts of adhesion (one party writes, the other accepts), aleatory (unequal exchange - a small premium may buy a large benefit), conditional (benefits depend on the insured's compliance), and unilateral (only the insurer makes an enforceable promise). Both parties owe utmost good faith, meaning no concealment or material misrepresentation. Because the contract is adhesive, ambiguities are construed against the insurer.
Agency and authority
Apparent authority (what a reasonable third party believes based on the insurer's conduct) can bind an insurer even when the agent was not expressly authorized. Waiver (giving up a known right) and estoppel (being barred from asserting it after the other party relies on the waiver) explain many exam scenarios.
Worked example: A homeowner leaves a candle burning and burns the house down - negligence is a hazard, but the fire loss is still covered because the act was not intentional. If he set the fire, moral hazard applies and coverage is denied.
Rule of thumb: insure the catastrophe, retain, avoid, or reduce the frequent small loss.