Insurance Fundamentals and Terminology
Core vocabulary
Risk is uncertainty about loss. A peril is the cause of loss (fire, windstorm, theft); a hazard is a condition that increases the chance or severity of loss (frayed wiring, icy steps). Questions routinely swap these terms, so anchor the definitions first.
Insurance transfers risk and applies indemnity-restoring the insured approximately to the pre-loss financial position, no better. Insurable interest must exist at the time of loss for property and at inception for life. Subrogation supports indemnity by letting the insurer pursue the at-fault party after paying the insured.
The contract is one of adhesion (insurer drafts; ambiguities construed against the drafter), aleatory (unequal exchange), unilateral (only the insurer makes an enforceable promise), conditional (duties after loss), and of utmost good faith. Distinguish representations (statements of belief), warranties (promises or conditions), and concealment (intentional nondisclosure of a material fact). Waiver is voluntary relinquishment of a known right; estoppel prevents inconsistent positions that harm reliance.
Limits appear as per-occurrence, per-person, and aggregate. Deductibles and coinsurance share loss. Actual cash value (ACV) = replacement cost minus depreciation; replacement cost pays new without depreciation; agreed value avoids valuation disputes. A binder gives temporary evidence of coverage; an endorsement amends the policy; the declarations page identifies insureds, limits, deductibles, and forms.
Worked example
Replacement cost $20,000, depreciation 25%, deductible $1,000. ACV = $15,000; net payment = $14,000. Rule of thumb: analyze in order-insured and insurable interest, policy period, peril, exclusion, limit, valuation method, deductible. Common traps: treating coinsurance as a deductible, equating ACV with market value, and missing that a single occurrence may span days.