General Insurance Concepts
Risk, peril, and hazard
Risk is the chance of loss; only pure risk (loss or no loss, no chance of gain) is insurable. A peril is the cause of loss (fire, wind). A hazard is a condition that increases the chance or severity of loss: physical (oily rags), moral (dishonesty, intent to create loss), or morale (carelessness, indifference). Questions routinely swap peril and hazard, so read carefully.
Principles that decide the payout
Insurable interest in property must exist at the time of loss. The principle of indemnity restores the insured to the pre-loss financial position, never better. Subrogation supports indemnity by letting the insurer pursue the negligent party after paying. Valuation is the lever: actual cash value (replacement cost less depreciation) versus replacement cost. Coinsurance and other-insurance clauses prevent under- or over-recovery.
Contract characteristics
Insurance is a contract of adhesion (written by the insurer, ambiguities construed against the drafter), aleatory (unequal exchange of value), unilateral (only the insurer makes an enforceable promise), and conditional (the insured must satisfy conditions). Representations are statements believed true to the best of the applicant's knowledge; a warranty is a promise, and breach can void coverage. Concealment of a material fact also defeats recovery.
Agency authority
An agent's authority may be express (written in the agreement), implied (reasonably necessary to carry out express powers), or apparent (created by the insurer's own conduct). Apparent authority can bind an insurer even when the agent exceeded actual authority.
Rule of thumb
ACV = replacement cost minus depreciation. Example: a $30,000 roof with a 10-year life is 6 years old, so depreciation is $18,000 and ACV is $12,000; a $500 deductible brings the payment to $11,500.