Insurance Fundamentals and Principles
What the exam tests
Insurance Fundamentals and Principles covers risk pooling, the legal principles that make insurance work, and the boundary between insurance and wagers. Expect questions on insurable interest, indemnity, utmost good faith, proximate cause, subrogation, and contribution.
Core rules
- Insurable interest: the policyholder must stand to suffer a financial loss. In life insurance, interest is usually required at inception; in property insurance, at the time of loss.
- Indemnity: property and liability policies restore the insured to the pre-loss financial position, no better. Life policies are valued policies, not indemnity.
- Utmost good faith: both parties must disclose material facts. Materiality is judged by whether a prudent insurer would be influenced.
- Proximate cause: the dominant, effective cause of loss determines cover, not the last event.
- Subrogation and contribution: the insurer may step into the insured's legal rights after paying, and multiple insurers share a loss rateably.
Worked example
A fire destroys stock worth $120,000. The insurer pays the insured $100,000 under a policy with a $5,000 excess. Investigators show a contractor's welding caused the fire. The insurer may pursue the contractor for up to $100,000, but the insured cannot also recover from the contractor for the same loss. The insured bears the $5,000 excess and any uninsured amount. Indemnity caps recovery; subrogation prevents double recovery.
Traps
- Confusing the timing of insurable interest in life versus property.
- Treating indemnity as a profit opportunity.
- Assuming the last event is always the proximate cause.