Insurance Principles and Concepts
Core ideas
Insurance transfers pure risk (loss or no loss) rather than speculative risk (chance of gain), which is generally uninsurable. Insurers make large numbers of similar, independent exposure units predictable through the law of large numbers, and they manage adverse selection through underwriting.
A loss must be accidental, definite, measurable, and fortuitous, and the insured must hold insurable interest - ownership or a financial stake that would suffer from the loss. For property-casualty coverage, insurable interest must exist at the time of loss (contrast life insurance, where it must exist at application).
Indemnity restores the insured to approximately the pre-loss financial position - no profit. Subrogation supports indemnity by transferring the insured's recovery rights against a negligent third party to the insurer after payment.
Contract characteristics
An insurance policy is a contract of adhesion (drafted by the insurer, ambiguities construed against the drafter), aleatory (unequal exchange of value), unilateral (only the insurer makes a legally enforceable promise), and conditional (benefits depend on the insured's compliance). It is also a contract of utmost good faith, requiring accurate representations, no concealment or fraud, and honoring warranties.
Traps and a rule of thumb
Questions love waiver and estoppel: an insurer that knowingly gives up a right (waiver) may be barred from later denying coverage the insured relied on (estoppel) - even if the policy did not actually cover the loss. Also distinguish hazards: physical (oily rags, icy steps), moral (dishonesty - arson, claim inflation), and morale (carelessness - leaving a door unlocked).
Rule of thumb: identify the peril first, then the hazard that increased the chance or size of loss. A homeowner who burns candles unattended is a morale hazard; one who intentionally starts the fire for the money is a moral hazard.