Insurance Principles and Concepts
What this domain tests
This domain tests the doctrines that decide whether a loss is covered and how much indemnity is owed. The exam expects you to apply them to fact patterns, not just recite definitions.
Core principles
- Risk transfer and pooling: insurance transfers uncertain loss to an insurer, which pools many exposures.
- Insurable interest: the insured must have a lawful economic interest at the time of loss for property, or at inception for life insurance.
- Indemnity: the goal is to restore the insured, not enrich them. Actual cash value (ACV) and replacement cost are different measures.
- Utmost good faith: both parties must disclose material facts; concealment or misrepresentation can void coverage.
- Adhesion and reasonable expectations: ambiguities in a standard-form policy are generally construed against the drafter.
- Subrogation and contribution: after paying, the insurer may step into the insured’s shoes; multiple insurers may share a loss.
- Proximate cause: the efficient cause of loss, not merely the last event, determines coverage when a peril chain is involved.
Worked example
A building has a $200,000 limit, an 80% coinsurance clause, and a $1,000 deductible. The insured carries $120,000. Required insurance is $160,000 (80% × $200,000). A $20,000 covered loss occurs. The coinsurance penalty is ($120,000 ÷ $160,000) × $20,000 = $15,000. After the $1,000 deductible, the payment is $14,000. The insured absorbs $6,000, not because the loss was excluded, but because the limit was below the coinsurance requirement.
Traps that cost marks
Do not treat ACV as automatically “new for old”; do not confuse coinsurance with a deductible; do not ignore the insurable-interest date; and do not assume a policy limit is payable without applying valuation, deductibles, and other insurance.