Insurance Principles and Concepts
Risk and hazards
Insurance transfers pure risk (loss or no loss) and never speculative risk, which carries gain potential and is uninsurable. Hazards surround a loss exposure: physical (icy steps), moral (dishonest intent, e.g., arson for profit), and morale (carelessness, e.g., leaving keys in the car). Insurers depend on the law of large numbers, so many similar exposure units make loss predictable.
Contract characteristics
A policy is a contract of adhesion (insurer drafts it; ambiguity favors the insured), aleatory (unequal exchange of value), unilateral (only the insurer makes an enforceable promise), conditional (coverage depends on the insured's post-loss duties), and one of utmost good faith (representations, concealment, warranties). Indemnity restores the insured to pre-loss financial position - it never creates profit.
Insurable interest
In property and casualty, insurable interest must exist at the time of loss. In life insurance it need only exist at inception. Questions routinely swap these two rules.
Producer authority
Producers hold express authority (written agency agreement), implied authority (acts customary to the role), and apparent authority (created by the insurer's own manifestations to the public). Apparent authority can bind the insurer even when the producer exceeds actual authority. Waiver is the voluntary relinquishment of a known right; estoppel bars the insurer from asserting a right after the insured reasonably relied on its conduct.
Rule of thumb
Ask 'who could reasonably be fooled?' If a reasonable applicant would believe the producer could act for the insurer, apparent authority likely binds the insurer.
Worked example: A producer accepts premium after a policy lapses and says coverage is bound; the insurer later denies the claim. Because the insurer clothed the producer with apparent authority, the denial likely fails.