General Insurance Principles and Concepts
Core vocabulary
Insurance transfers pure risk (chance of loss only); speculative risk (chance of gain) is uninsurable. A peril is the cause of loss (fire, theft); a hazard increases the chance or severity (icy steps, poor housekeeping). Moral hazard is dishonesty; morale hazard is carelessness.
Principles that decide claims
Insurable interest must exist at inception for property and at the time of loss for liability. The principle of indemnity restores the insured to the pre-loss financial position, never better - the reason actual cash value exists. Subrogation lets the insurer pursue the responsible party after paying. Utmost good faith underlies representations, concealment, and warranties. A policy is a contract of adhesion (written by the insurer, ambiguities construed against it) and aleatory (unequal exchange of values).
Reading the contract
Know declarations, insuring agreement, conditions, exclusions, and definitions. Representations are statements believed true; a warranty is a promise that must be literally true; concealment is intentional silence about a material fact. Waiver is voluntary surrender of a known right; estoppel prevents reclaiming it after the other party relied on the waiver.
Rule of thumb: for a risk to be insurable it should be pure, measurable, definite, accidental, and not catastrophic to the insurer as a class.
Worked example: A building worth $200,000 is insured for $200,000 and burns. ACV is $160,000 after $40,000 depreciation. Indemnity pays $160,000; paying $200,000 would over-indemnify unless replacement cost coverage applies.