General Insurance Concepts: Risk, Insurable Interest, and Contract Characteristics
Core vocabulary
Risk is uncertainty about loss; a peril is the cause of loss (fire, death, accident); a hazard increases the chance or severity of loss (physical, moral, morale). Insurance handles pure risk (loss or no loss), not speculative risk (gain or loss). Insurable risks share traits: many similar exposure units, accidental and measurable losses, losses that are not catastrophic to the insurer, and premiums that are affordable. Adverse selection, the tendency of high-risk people to buy coverage, is controlled through underwriting.
Contract characteristics
Insurance contracts are contracts of adhesion (drafted by the insurer, ambiguities construed against it), aleatory (unequal exchange of value), unilateral (only the insurer makes an enforceable promise), conditional (benefits depend on conditions being met), and require utmost good faith. Representations are statements believed true; a material misrepresentation or concealment can void coverage. Waiver (giving up a known right) plus estoppel (barring the insurer from reclaiming it) can bind an insurer.
Indemnity and insurable interest
Indemnity restores the insured to the pre-loss financial position; property and health insurance are indemnity contracts, while life insurance is not, because a human life has no measurable value. Insurable interest in life insurance must exist at policy inception and requires a reasonable expectation of economic loss; in property it must exist at the time of loss. Subrogation supports indemnity by letting the insurer pursue the at-fault party after paying a claim.
Worked example
Partners buy key-person coverage on a colleague. Interest exists at application, and the policy pays the full face amount even if the partnership later dissolves, because the test is applied at issue only.
Trap
If a question asks when insurable interest must exist, at time of loss is correct for property and wrong for life.