General Insurance Concepts and Principles
Risk, indemnity, and policy mechanics
General concepts test the vocabulary that underlies every policy. Risk is uncertainty of loss; peril is the cause of loss; hazard increases the chance or severity of loss. Indemnity restores the insured to approximately the pre-loss financial position, not a profit. Insurable interest must exist at the time of loss for property insurance. Policies are contracts of adhesion (the insurer drafts terms), aleatory (unequal exchange), and require utmost good faith. Subrogation lets the insurer pursue a negligent third party after paying the insured; it does not reduce the insured’s contractual claim. A deductible is the insured’s retention; coinsurance is a property insurance condition requiring the insured to carry a minimum percentage of value or suffer a penalty. Actual cash value is typically replacement cost minus depreciation; replacement cost pays new without depreciation, subject to policy terms.
Worked example
A roof has a $20,000 replacement cost, 10 years of a 20-year useful life, and a $1,000 deductible. Straight-line depreciation is $10,000, so ACV is $10,000. The ACV payment is $10,000 − $1,000 = $9,000. If the policy provides replacement cost and the insured repairs, recoverable depreciation of $10,000 may be paid after completion, subject to limits. Indemnity does not mean the insured collects both the ACV payment and the full replacement cost without repairing.
Traps
Insurable interest is not the same as a beneficiary. Coinsurance is not a deductible. Subrogation does not give the insurer a claim against its own insured. Depreciation is not a covered “fee.”