General Insurance Concepts
The vocabulary layer
Every P&C question is built on a few precise definitions. Risk is uncertainty about loss; a peril is the cause of loss (fire, wind, collision); a hazard increases the chance or severity of loss. Hazards come in three flavors: physical (icy steps), moral (dishonesty, such as arson for insurance money), and morale (carelessness because insurance exists). Insurance handles pure risk (loss or no loss), never speculative risk (gain or loss, like investing).
Characteristics of insurance contracts
Insurance is a contract of adhesion (insurer writes, insured accepts), unilateral (only the insurer makes an enforceable promise), conditional (benefits depend on the insured's compliance), and aleatory (unequal exchange of value). It relies on utmost good faith - representations must be truthful, and material concealment or fraud voids coverage. A warranty is a promise that becomes part of the contract; a representation is a statement believed true.
Core principles
Insurable interest must exist at the time of loss for property insurance and at policy inception for life. Indemnity means restoring the insured to pre-loss financial position - no profit. Subrogation lets the insurer pursue the at-fault party after paying. Adverse selection is the tendency of high-risk buyers to seek coverage, countered by underwriting and the law of large numbers. Risk can be avoided, retained, reduced (loss control), shared, or transferred.
Limits and valuation
Know the difference between actual cash value (replacement cost minus depreciation), replacement cost, agreed value, and functional replacement cost. Policies use per-occurrence, per-person, aggregate, and split limits.
Worked example: A 6-year-old roof costs $20,000 new and has a 20-year life. Depreciation = 6/20 × $20,000 = $6,000, so ACV = $14,000. A replacement-cost policy pays $20,000 after the repairs are completed.