I85PREP
⌘ K
Louisiana Surplus Lines study materials
Louisiana Surplus Lines study resources

Louisiana Surplus Lines: Insurance Principles and Concepts

Louisiana Surplus Lines · Work through your exam, one topic at a time.

All guide sections

Insurance Principles and Concepts

Domain focus

Insurance Principles and Concepts tests the vocabulary and legal framework underlying every policy: risk, insurable interest, indemnity, utmost good faith, contract characteristics, and the hazards that make losses more likely or more severe.

Core rules

  • Insurance transfers pure risk, where the outcome is loss or no loss. Speculative risk, where gain or loss is possible as in a business venture, is generally uninsurable.
  • Insurable interest is a financial stake that would be harmed by the loss. In property insurance it must exist at the time of loss; in life insurance it must exist at the time of application.
  • Indemnity restores the insured to approximately the pre-loss financial position, not to a profit. Actual cash value, replacement cost, and agreed value are different ways to measure indemnity.
  • Insurance contracts are contracts of adhesion, aleatory, and utmost good faith. The insurer drafts the policy; ambiguities are generally construed against the drafter. Concealment or material misrepresentation can void coverage.
  • Hazards include physical hazards such as icy steps, moral hazards such as intentional or dishonest conduct, and morale hazards such as carelessness because insurance exists. Subrogation lets the insurer pursue a negligent third party after paying the loss.

Worked example

An insured owns a machine with a replacement cost of $50,000 and an actual cash value of $30,000 after depreciation. A covered loss destroys it. On an ACV basis the insurer pays $30,000 less the deductible; on a replacement cost basis it pays the cost to replace, subject to policy terms. Paying $50,000 on an ACV policy would overindemnify the insured and violate the indemnity principle.

Traps

Saying insurable interest must exist at the time of loss for life insurance; treating morale hazard as intentional fraud; assuming replacement cost always equals market value; and forgetting that flood, earthquake, and maintenance losses may be excluded even when a peril is generally covered.