General Insurance Concepts and Principles
The vocabulary the exam tests
Risk is the chance of loss; peril is the cause of loss (fire, wind, collision); hazard is a condition that increases the chance or severity of loss. Hazards come in three flavors: physical (a frayed wire), moral (an insured with a motive to create a loss), and morale (indifference, like leaving keys in a car). Insurance handles pure risk only - situations with loss or no loss. Speculative risk (gain or loss) is not insurable.
Principles that decide claims
- Insurable interest: property insurance requires interest at the time of loss; life insurance requires it at application.
- Indemnity: the insured is restored, not enriched. This is why actual cash value, deductibles, and coinsurance exist.
- Utmost good faith: both parties disclose material facts; concealment or material misrepresentation can void coverage.
- Subrogation: after paying, the insurer steps into the insured's shoes against the responsible party. The insured may not impair that right by releasing the tortfeasor.
- Adhesion and ambiguity: the insurer drafts; ambiguities are construed against the drafter.
- Aleatory and unilateral: unequal exchange of value, and only the insurer makes an enforceable promise.
- Law of large numbers and adverse selection: predictable losses require a spread of similar, fairly selected risks.
Worked example
A hurricane blows in a window; rain soaks the interior; the fire department's water damages the floor below. The policy excludes flood. Reasoning: analyze each loss to the nearest covered cause. Wind (a covered peril) opened the building, so the rain damage is a direct, proximate result of wind, not of flood. Fire-department water damage is normally covered as a cost of extinguishing a covered loss. The adjuster pays both, minus the deductible, and documents the causal chain rather than the last event in it.
Traps that cost marks
Mixing up peril and hazard. Assuming “direct physical loss” means any remote consequence. Forgetting that subrogation belongs to the insurer, so the insured cannot settle away the claim.