General Insurance Concepts
Risk language
Risk is uncertainty about loss; a peril is the cause of loss; a hazard increases the chance or severity of loss. Moral hazard is dishonesty, morale hazard is carelessness or indifference, and physical hazard is a tangible condition. Insurance transfers pure risk (loss or no loss); speculative risk (chance of gain) is not insurable. Insurable interest must exist at the time of loss for property and at inception for life insurance.
Contract principles
An insurance policy is a contract of adhesion (the insurer drafts it), unilateral (only the insurer makes an enforceable promise), conditional (the insured must satisfy duties after loss), and personal (it indemnifies a person, not the property itself). Indemnity restores the insured to the pre-loss financial position; actual cash value equals replacement cost minus depreciation. Subrogation reinforces indemnity by transferring the insured's recovery rights against a negligent third party to the insurer.
Pooling and selection
The law of large numbers makes losses more predictable as similar exposure units increase. Adverse selection is the tendency of worse-than-average risks to buy coverage; underwriting, deductibles, and coinsurance counter it. Coinsurance in property insurance is a rate discount given in exchange for insuring to a stated percentage of value.
Traps
- Waiver is voluntary relinquishment of a known right; estoppel prevents denying a right after another party reasonably relied on conduct.
- Apparent authority can bind an insurer even without express authority.
- A representation is a belief statement; a warranty is a promise or condition.
Worked example
Coinsurance formula: (insurance carried ÷ insurance required) × loss, capped at the limit. Building value $400,000, 80% requirement = $320,000, carried $240,000, loss $100,000, deductible $1,000. (240,000 ÷ 320,000) × 100,000 = $75,000, less $1,000 = $74,000 paid.