General Insurance Concepts and Principles
The vocabulary of risk
Risk is uncertainty about loss. A peril is the cause of loss (fire, illness, death); a hazard is a condition that increases the chance or severity of loss. Physical hazards are tangible (icy steps, faulty wiring). Moral hazards involve dishonesty (staged theft, arson for profit). Morale hazards involve indifference or carelessness (leaving keys in an unlocked car in a high-theft area). Insurance handles pure risk - loss or no loss - not speculative risk, which carries a chance of gain.
Contract characteristics
Insurance contracts are contracts of adhesion (drafted by the insurer, so ambiguities are construed against the insurer), aleatory (the values exchanged are unequal and contingent on chance), unilateral (only the insurer makes an enforceable promise), conditional (benefits depend on conditions being met), and personal (it insures a person, not a thing).
Core principles
Insurable interest must exist at policy inception for life and health; for property it must exist at the time of loss. Indemnity restores the insured to the pre-loss financial position and does not apply to life insurance, which pays a stated face amount. Utmost good faith imposes a duty to disclose material facts: a representation is believed true, a warranty must be literally true, and concealment or material misrepresentation can void coverage. Subrogation lets an insurer pursue the at-fault party after paying a claim, preventing double recovery.
Authority and underwriting
Producers exercise express authority (granted by the contract), implied authority (customary acts), and apparent authority (what a reasonable third party believes from the insurer's conduct). Insurers fight adverse selection through underwriting and rely on the law of large numbers to make losses predictable and rates adequate, not excessive, and not unfairly discriminatory.
Trap watch and rule of thumb
Hazard questions turn on motive: dishonesty means moral, carelessness means morale. When asked who interprets ambiguity, answer the insured; when asked when interest must exist, answer application for life and health, loss for property.