Insurance Principles and Terminology
Domain 1 tests the foundational vocabulary that every later coverage and claims question depends on. Expect questions that ask you to distinguish indemnity from profit, identify who has an insurable interest, or explain why an insurer can pursue a third party after paying a claim.
Core principles
- Indemnity restores the insured to approximately the pre-loss financial position, no better.
- Insurable interest must exist at the time of loss for property insurance; a person must suffer economic loss from damage.
- Fortuity means the loss is accidental or unintended from the insured's standpoint.
- Risk pooling spreads losses across many insureds; adverse selection is the tendency of poorer risks to seek or retain coverage.
- Moral hazard is dishonest conduct; morale hazard is carelessness because insurance exists.
- Proximate cause is the dominant, efficient cause that sets others in motion.
Worked example
An insured's car is damaged in a collision caused by another driver. The insurer pays $8,000 under collision coverage, then sues the at-fault driver. The insured may not also collect $8,000 from that driver; subrogation prevents double recovery and keeps indemnity intact. The insured's deductible is usually recovered first.
Traps
Do not confuse actual cash value (replacement cost less depreciation) with replacement cost (new-for-old without depreciation) or market value. Do not assume a policy pays full value; limits, deductibles, and valuation clauses control. Do not treat a binder as permanent coverage.