General Insurance Principles and Concepts
What insurance does
Insurance transfers pure risk (loss or no loss) from an individual to a pool; speculative risk (gain or loss, as in gambling or investing) is not insurable. For a risk to be privately insurable it should involve many similar exposure units, losses that are accidental and definite, measurable loss amounts, and losses that are not catastrophic to the whole pool at once. The predictable average loss becomes the basis of the premium; expenses, reserves, and profit are added. Adverse selection - the tendency of high-risk buyers to seek more coverage - is why insurers underwrite, use exclusions, and require insurable interest.
Insurable interest and contract law
For life insurance, insurable interest must exist at the time of application, not at death; it is presumed for self, spouse, and children, and is limited to the debt or business value for creditors, business partners, and key employees. Life insurance is aleatory (unequal exchange of value), a contract of adhesion (drafted by the insurer, so ambiguity is construed against the insurer), unilateral (only the insurer makes an enforceable promise once premium is paid), conditional (benefits depend on conditions), and a contract of utmost good faith (representations, warranties, concealment). Waiver is the voluntary surrender of a known right; estoppel prevents an insurer from denying a right it led the insured to rely on.
Producer authority
Producers bind insurers through express, implied, and apparent authority; a company that creates the appearance of authority is bound by it. Premiums are held in a fiduciary capacity.
Trap: the statement that insurable interest must exist at the time of loss for life insurance is false. Rule of thumb: aleatory = uneven; adhesion = take it or leave it; unilateral = only one side can be sued. Example: an applicant conceals a heart condition, pays two premiums, and dies in year one - the insurer may rescind, refund premium, and deny the claim; after the two-year contestable period it cannot.