Insurance Principles and Concepts
The principles behind every coverage argument
Insurance rests on indemnity: after a loss the insured should be restored to roughly the pre-loss financial position - no profit, no penalty. Insurable interest is required in property insurance at the time of loss (in life insurance, at inception). Actual cash value (replacement cost less depreciation) versus replacement cost (new for old) is the biggest dollar issue on most property claims, and recoverable depreciation holdbacks are where disputes begin.
A policy is a contract of adhesion (drafted by the insurer, so ambiguity is construed against the drafter), aleatory (an unequal exchange of premium for a possible large payment), unilateral (only the insurer makes a legally enforceable promise, and that promise is conditioned on the insured's duties), and personal. Utmost good faith underlies the doctrines of representation, warranty, concealment, and fraud. Waiver and estoppel can defeat a policy defense when the insurer knowingly gives up a right or misleads the insured to their detriment.
Risk vocabulary: pooling and the law of large numbers make insurance possible; adverse selection threatens it; hazards are physical (icy steps), moral (intent to defraud), or morale (indifference to loss). Proximate cause is the efficient, dominant cause without which the loss would not have occurred; many policies now include anti-concurrent-causation wording that excludes a loss when an excluded peril contributes, regardless of sequence.
Subrogation lets the insurer stand in the insured's shoes after payment, limited to the amount paid. Contribution and other-insurance clauses divide a loss among insurers on a pro rata or excess basis.
Worked example - coinsurance
An 80% coinsurance clause, building replacement cost $1,000,000, limit purchased $600,000, covered loss $200,000. Required limit = $800,000. Recovery = ($600,000 / $800,000) x $200,000 = $150,000, leaving $50,000 uninsured. That penalty is the coinsurance trap.