General Insurance Concepts
The vocabulary questions are built on
Risk is the chance of loss; peril is the cause of loss (fire, windstorm); hazard is a condition that increases the chance or severity of loss. Physical hazards are tangible (oily rags), moral hazards involve dishonesty (arson for profit, inflated claims), morale hazards are carelessness or indifference (leaving doors unlocked), and legal hazards come from court trends or statutes. Insurance handles pure risk (loss or no loss), never speculative risk (gain or loss).
Contract and principle concepts
An insurance policy is a contract of adhesion (drafted by the insurer, so ambiguity is construed against the drafter), aleatory (unequal exchange), unilateral (only the insurer makes an enforceable promise), and one of utmost good faith - requiring disclosure, so concealment, material misrepresentation, or breach of warranty can defeat coverage. Indemnity means restoring the insured to roughly the pre-loss financial position and no better; subrogation supports indemnity by letting the insurer pursue the responsible party after paying.
Insurable interest is a legal, financial stake: in property it must exist at the time of loss; in life insurance at inception.
Mechanics
Limits, deductibles, coinsurance, and other-insurance clauses divide and cap the loss. The law of large numbers lets insurers predict losses across a pool; adverse selection (only poor risks buying) threatens that pool, which is why underwriting and warranties exist. Reinsurance cedes part of a risk to another insurer.
Traps: confusing moral and morale hazard; treating a binder as the policy itself (a binder is only temporary evidence of coverage); assuming two policies both pay the full loss.
Rule of thumb: pure risk is insurable; speculative risk is not.