General Insurance Concepts and Contract Law
Risk, peril, hazard
Risk is uncertainty about loss; a peril is the cause of loss (fire, wind, theft); a hazard increases the chance or severity of loss. Physical hazard is tangible (oily rags), moral hazard is dishonest intent (arson, a faked claim), morale hazard is carelessness (keys left in the car), and legal hazard comes from laws and jury awards. Insurance handles only pure risk (loss or no loss); speculative risk (gambling, investing) is not insurable.
What makes a risk insurable
Many similar exposure units, accidental or fortuitous loss, definite and measurable loss, losses that are not catastrophic to the insurer, calculable probability, and an affordable premium. Related ideas: law of large numbers, adverse selection (only poor risks buy), and reinsurance.
Indemnity and its limits
Indemnity restores the insured to the pre-loss financial position - no profit. Actual cash value, coinsurance, deductibles, and other insurance clauses all exist to enforce indemnity. Insurable interest must exist at the time of loss for property and at inception for life.
Contract law
Insurance policies are contracts of adhesion (written by the insurer; ambiguities construed against the drafter), aleatory (unequal exchange of values), unilateral (only the insurer makes an enforceable promise), conditional, and based on utmost good faith. Elements of a valid contract: offer, acceptance, consideration, competent parties, legal purpose. Agents act with express, implied, or apparent authority - apparent authority can bind an insurer even when the agent exceeds instructions.
Traps
Moral vs morale hazard; concealment vs warranty; assuming an oral binder is not coverage - a binder is temporary evidence of coverage that binds the insurer immediately.
Worked example: an owner carries $300,000 on a building requiring $400,000; a $100,000 loss pays $75,000 (300/400 × 100,000). Indemnity is reduced, not the whole loss paid.