General Insurance Principles and Concepts
Core vocabulary
Risk is uncertainty about loss; peril is the cause of loss; hazard is a condition that increases the chance or severity of loss. Physical hazards are tangible conditions; moral hazard is dishonesty (arson, staged theft); morale hazard is carelessness that follows from owning insurance. Only pure risk (loss or no loss) is insurable - speculative risk (gain or loss) is not.
Contract characteristics
Insurance is a contract of adhesion (drafted by the insurer, ambiguities construed against it), aleatory (unequal exchange), unilateral (only the insurer makes an enforceable promise), conditional (the insured must comply with conditions), personal, and one of utmost good faith. Insurable interest must exist at the time of loss in property-casualty. The principle of indemnity limits recovery to the actual loss so the insured cannot profit; subrogation enforces that idea by transferring the insured's recovery rights to the insurer.
Valuation
Actual cash value equals replacement cost minus depreciation. Replacement cost pays new-for-old without depreciation, usually conditioned on insuring to a stated percentage of value. A valued policy states the agreed value up front and pays it in a total loss.
Traps
Moral versus morale hazard; 'warranty' wording that sounds fatal (in New York a representation must be material to defeat coverage); assuming a coinsurance or replacement-cost condition disappears because the agent never explained it; placing insurable interest at the wrong point in time.
Worked example
A 6-year-old roof with a 20-year life and $10,000 replacement cost has 14 years of usefulness remaining, so ACV = $10,000 x 14/20 = $7,000.