General Insurance Concepts
Risk, peril, hazard
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 conditions (oily rags, icy steps); moral hazards involve dishonest intent; morale hazards involve carelessness (leaving keys in the car). Only pure risk - loss or no loss - is insurable; speculative risk (a chance of gain) is not.
Characteristics of insurable risk
Many similar exposure units, losses that are accidental, definite as to time, place, and amount, no catastrophic concentration, and premiums that remain affordable.
Contract characteristics
Insurance is a contract of adhesion (drafted by the insurer, so ambiguities favor the insured), aleatory (unequal exchange), unilateral (only the insurer makes an enforceable promise once premium is paid), conditional (the insured must comply with conditions), and one of utmost good faith. Representations must be truthful and material; concealment of material facts and breach of warranty can void coverage.
Indemnity and related principles
Indemnity restores the insured to pre-loss financial condition, never better. Insurable interest must exist at the time of loss for property and at the time of purchase for life insurance. Subrogation lets the insurer stand in the insured's shoes after paying. Other insurance is handled by pro rata (proportionate) sharing or by primary/excess ordering. Reinsurance, treaty and facultative, spreads risk among insurers.
Valuation
Actual cash value = replacement cost minus depreciation. Replacement cost pays new-for-old. Coinsurance requires the insured to carry a stated percentage of value or share the loss.
Trap: confusing ACV with market value and forgetting that a coinsurance penalty is applied to the loss, not to the policy limit. Worked example: 80% coinsurance on a $500,000 building means $400,000 is required; the insured carries $300,000, so a $100,000 loss pays ($300,000 ÷ $400,000) × $100,000 = $75,000, less the deductible.