General Insurance Concepts, Terms, and Principles
Risk, peril, and hazard
Risk is the uncertainty of financial loss; a peril is the cause of loss (fire, windstorm, collision); a hazard is a condition that increases the chance or severity of loss - physical (icy steps), moral (fraud), or morale (indifference). Only pure risks (loss or no loss) are insurable; speculative risks are not. Insurers rely on the law of large numbers and guard against adverse selection through underwriting.
Indemnity and valuation
Indemnity restores the insured to approximately the pre-loss financial position. Actual cash value = replacement cost minus depreciation. Replacement cost pays new-for-old with no depreciation deduction. Deductibles, coinsurance, and policy limits all share the loss with the insured.
Contract characteristics
Insurance contracts are aleatory (unequal exchange of value), unilateral (only the insurer makes an enforceable promise), conditional (benefits depend on the insured's compliance), contracts of adhesion (drafted by the insurer, so ambiguities are construed against it), and require utmost good faith - hence the rules on representations, warranties, and concealment. A binder is temporary evidence of coverage pending policy issuance.
Authority and equitable doctrines
A producer's authority may be express (agency agreement), implied (customary acts), or apparent (the insurer's conduct leads a third party to believe authority exists). Waiver is the voluntary surrender of a known right; estoppel bars a party from asserting a right after another has reasonably relied on its conduct.
Trap: insurable interest must exist at the time of loss for property insurance, but at policy inception for life insurance.
Worked example: A roof with a $40,000 replacement cost and 25% depreciation has an ACV of $30,000. With a $1,000 deductible the claim pays $29,000.
Rule of thumb: indemnity measures the loss, perils cause it, hazards increase it.