Insurance Principles and Concepts
Where claims start
The exam tests whether you can apply doctrine, not recite definitions. Indemnity restores the insured to roughly the pre-loss financial position - no better, no worse. Insurable interest in property is measured at the time of loss; a buyer who has not closed yet has none. Actual cash value (ACV) is replacement cost less depreciation; replacement cost (RC) pays new without depreciation, often with a holdback until repair is complete.
Contract traits that drive coverage decisions
- Adhesion: the insurer drafts the form, so genuine ambiguity is construed against the insurer.
- Aleatory: the exchange is unequal and contingent on a loss.
- Utmost good faith: misrepresentation, concealment, and breach of warranty can defeat coverage.
- The duty to defend is broader than the duty to indemnify and is triggered by the allegations, not by proven facts.
Risk, perils, hazards, causation
Pooling spreads individual risk; the law of large numbers makes losses predictable in the aggregate. A peril is a cause of loss; a hazard increases the chance of loss - moral hazard involves intent (arson), morale hazard involves indifference (keys left in a car). Proximate cause is the efficient, dominant cause, not necessarily the last event in the chain.
Worked example
A hailstorm shatters a skylight and rain ruins the ceiling below. Hail is a covered peril and is the proximate cause, so the interior water damage is covered even though rain appears in an exclusion. Change the facts - a corroded seal lets rain in on a clear day - and the rain exclusion bars the interior damage. The adjuster documents the sequence and pulls weather data, because a damage pattern alone does not prove causation.
Traps
Treating the final event as the proximate cause; deducting depreciation from an RC settlement before the insured repairs; treating coinsurance as if it were a deductible; ignoring endorsements that alter the base form.