Insurance Principles and Concepts
Insurance principles questions test whether you can apply risk-transfer concepts to policy language. The exam emphasizes indemnity, insurable interest, utmost good faith, adhesion, subrogation, and the limits that make a policy a contract of indemnity rather than a bet.
Core principles
Indemnity restores the insured to pre-loss financial position, no better. Insurable interest must exist at policy inception for property and at loss for liability. Policies are contracts of adhesion, so ambiguities are construed against the drafter, but plain exclusions are enforced. Subrogation transfers the insured's recovery rights to the insurer after payment, preventing double recovery. Coinsurance, deductibles, and policy limits are contractual devices that share risk.
Policy structure
Read declarations, insuring agreement, conditions, exclusions, and endorsements in that order. The insuring agreement grants coverage; exclusions remove it; exceptions restore it; conditions set duties. Occurrence, bodily injury, property damage, and actual cash value are defined terms that control the analysis.
Worked example
An insurer pays a $40,000 collision claim, less a $1,000 deductible. The insured later recovers $40,000 from the at-fault driver. Subrogation gives the insurer the right to the $39,000 it paid; the insured keeps $1,000 to satisfy the deductible. If the insured has not been made whole, the insurer's subrogation right may be limited by the made-whole rule.
Traps
Do not treat replacement cost as indemnity without considering depreciation and completion of repairs. Do not ignore the definition of insured or occurrence. Do not assume a waiver of subrogation is implied; it must be written.