General Insurance Concepts
Risk, peril, hazard
Risk is uncertainty about loss; a peril is the cause of loss; a hazard is a condition that increases the chance or severity of loss. Physical hazard (icy steps), moral hazard (dishonesty or intent to collect), and morale hazard (carelessness) are tested constantly. Only pure risk (chance of loss or no loss) is insurable - speculative risk is not.
Contract principles
Insurance is a contract of indemnity, of utmost good faith, of adhesion (the insurer drafts, so ambiguity is construed against it), and aleatory (the exchange of values is unequal). Insurable interest must exist at the time of loss for property and at inception for life insurance. Subrogation lets the insurer step into the insured's shoes after paying, preventing double recovery from the at-fault party.
Valuation and limits
Actual cash value equals replacement cost minus depreciation. Replacement cost pays new without depreciation, often conditioned on insuring to at least 80 percent of value. Deductibles and coinsurance share the loss with the insured; per-occurrence and aggregate limits cap payout. Other-insurance clauses allocate a loss among policies, usually pro rata.
Traps
Moral versus morale hazard; indemnity means the insured cannot profit; insurable interest timing differs for property and life; a warranty must be literally true while a representation need only be substantially true; concealment of a material fact voids coverage.
Worked example
A five-year-old roof with a 20-year life and $10,000 replacement cost has an ACV of about $7,500 (10,000 x 15/20 remaining life). On an ACV policy with a $500 deductible the claim pays $7,000. If the policy is replacement cost and the 80 percent requirement is met, the payment is $9,500.