Insurance Principles and Concepts
The Insurance Principles and Concepts domain tests whether you can use foundational doctrine-risk transfer, indemnity, insurable interest, and the characteristics of the insurance contract-to explain coverage decisions a public adjuster will encounter. Expect definitional questions plus short scenarios that ask which principle controls.
Core rules
- Insurance transfers and pools risk; it does not eliminate it. The insured trades a certain premium for an uncertain large loss.
- Indemnity restores the insured to the pre-loss financial position, no better. Actual cash value (ACV) is replacement cost minus depreciation; replacement cost value (RCV) pays to replace without depreciation, subject to policy conditions.
- Insurable interest must exist at the time of loss for property insurance; a person cannot recover for property they do not own or have a legal interest in.
- The contract is one of adhesion (insurer drafts terms), aleatory (unequal exchange), and utmost good faith. Ambiguity in policy language generally is construed against the drafter.
- Subrogation lets the insurer pursue the responsible third party after paying the insured; the insured cannot recover twice.
- Deductibles, coinsurance, and policy limits allocate loss and prevent over-insurance or under-insurance.
Worked example
A 12-year-old roof with a 20-year useful life has a $20,000 replacement cost. Depreciation is $12,000, so ACV is $8,000. If the policy is RCV and the insured repairs, the insurer may pay $8,000 first and the recoverable depreciation later, subject to the deductible and policy limits. The principle: payment follows the policy's loss-valuation method, not the insured's preference.
Traps
Do not treat RCV as a guarantee of new-for-old payment; recoverable depreciation and holdback conditions apply. Do not confuse insurable interest with a mere expectancy. Do not assume subrogation increases the insured's recovery; it belongs to the insurer after indemnification.