Insurance Principles and Concepts
Domain 1: Insurance Principles and Concepts
This domain tests the doctrines that decide whether a loss is covered and how much the insurer owes. Expect questions on indemnity, insurable interest, good faith, proximate cause, valuation, coinsurance, subrogation, and other insurance.
Core rules
- Indemnity: property insurance restores the insured to the pre-loss financial position, not better. Liability insurance pays sums the insured is legally obligated to pay.
- Insurable interest: a property interest must exist at the time of loss; life insurance interest is tested at application.
- Utmost good faith: applicants must disclose material facts. A material misrepresentation or concealment can void coverage.
- Proximate cause: the efficient, dominant cause determines coverage, not a remote condition.
- Valuation: actual cash value (ACV) is typically replacement cost less depreciation; replacement cost pays new-for-old without depreciation.
- Coinsurance: a property policy may require insurance to a stated percentage of replacement cost; a penalty applies when the insured carries less.
- Subrogation and other insurance: after payment, the insurer may step into the insured's shoes; other-insurance clauses and contribution allocate loss among concurrent policies.
Worked example
Building replacement cost is $1,000,000; an 80% coinsurance clause requires $800,000; the insured carries $600,000; the loss is $200,000; the deductible is $5,000. Because the limit is below the requirement, payment = ($600,000 / $800,000) x $200,000 - $5,000 = $150,000 - $5,000 = $145,000. If the insured had carried $800,000, payment would be $195,000, subject to policy limits.
Traps
Do not use market value as ACV; do not apply coinsurance to liability claims; do not ignore the deductible or policy limit; do not treat a warranty as a mere representation; and check insurable interest at the time of loss, not only at application.