General Insurance Concepts and Policy Fundamentals
Core concepts and policy mechanics
Risk is uncertainty about loss; a peril is the cause of loss (fire, windstorm); a hazard is a condition that increases the chance or severity of loss (icy steps, defective wiring). Insurance transfers risk for a premium and works through pooling and the law of large numbers. Insurable interest must exist at the time of loss for property coverage and at the time of the occurrence for liability coverage. Policies are contracts of adhesion (insurer drafts the wording), aleatory (unequal exchange of values), and are governed by utmost good faith, which underlies representations, warranties, and the duty to disclose material facts.
Indemnity is the guiding principle: restore the insured to the pre-loss financial position, without profit. Valuation choices include actual cash value (replacement cost minus depreciation), replacement cost, agreed value, and functional valuation. Deductibles share loss and reduce premium. Coinsurance in property policies requires insurance to a stated percentage of value or a penalty is applied at the time of loss.
The policy anatomy: declarations, insuring agreement, conditions, exclusions, definitions, and endorsements. Conditions include duties after loss (notice, proof of loss, protect property, cooperate), other insurance, subrogation, and appraisal. A binder is temporary evidence of coverage; a certificate evidences coverage under a master policy but creates no rights for the certificate holder.
Traps: dismissing warranties as unimportant; confusing coinsurance with a deductible; assuming an open-perils form has no exclusions; forgetting that subrogation rights belong to the insurer after payment.
Rule of thumb: coinsurance payment equals (carried / required) times the loss, minus the deductible, never more than the limit.
Worked example: 80% coinsurance, building value $1,000,000, required $800,000, carried $600,000, loss $100,000, deductible $1,000. Ratio 0.75, so $75,000 minus $1,000 = $74,000.