General Insurance Concepts
Core vocabulary
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 hazards are tangible (oily rags). Moral hazards involve dishonesty (arson for insurance money); morale hazards involve indifference or carelessness (leaving keys in the car).
Fundamentals
Insurance handles pure risk (loss or no loss) - never speculative risk (gain or loss), which is a business gamble. Principles that frame the contract: insurable interest (in property, it must exist at the time of loss), indemnity (restore, never profit), utmost good faith (representations, warranties, concealment), subrogation (the insurer steps into the insured's shoes against the negligent party), and the contract characteristics - adhesion, unilateral, conditional, aleatory. Risk is handled by avoiding, retaining, reducing, sharing, or transferring it.
Valuation math
Actual cash value = replacement cost − depreciation. Coinsurance requires the insured to carry a stated percentage of value or share the loss: payment = (limit carried ÷ limit required) × loss, then apply the deductible.
Worked example
A building has a replacement cost of $400,000, an 80% coinsurance clause (required limit $320,000), and a $240,000 limit. A $100,000 fire loss occurs. Payment = (240,000 ÷ 320,000) × 100,000 = $75,000. The insured absorbs $25,000 as a coinsurance penalty before any deductible.
Traps
Peril versus hazard is the most common confusion. Remember that a warranty is a strict promise while a representation need only be substantially true, and that insurable interest in a life policy is measured at inception, not at death.
Rule of thumb
Meet the coinsurance requirement or become a coinsurer - when the limit is below the required amount, the insured shares every loss.