Insurance Principles and Concepts
This domain tests the doctrines applied before you read a policy form: indemnity, insurable interest, causation, and how ambiguous wording is construed. Most claim disputes turn on these principles rather than on the loss facts.
Indemnity and insurable interest
Indemnity means restoring the insured to the pre-loss financial position-no profit, no penalty. Actual cash value (replacement cost less depreciation) enforces indemnity; replacement cost coverage suspends it until repairs are made. Insurable interest in property must exist at the time of loss, so a seller who has already conveyed a building cannot recover for its destruction; in life insurance, interest must exist when the policy is issued.
Reading the contract
A policy is a contract of adhesion: the insurer drafts it, so ambiguities are construed against the insurer and in line with the insured's reasonable expectations. Conditions are enforced-notice, proof of loss, examination under oath, suit-limitation periods-but the insurer generally must show prejudice before denying on a technical breach. A representation is a statement the insured believes true; a warranty is a promise that must be literally met.
Causation, subrogation, contribution
Coverage turns on proximate cause, the dominant and efficient cause of loss. Concurrent causation-an excluded peril combining with a covered one-is resolved by reading the policy's anti-concurrent causation language. Subrogation lets the insurer stand in the insured's shoes against the tortfeasor; contribution and other-insurance clauses divide a loss among carriers; coinsurance and deductibles allocate part of the loss to the insured.
Worked example
A 12-year-old roof with a $24,000 replacement cost and 40% depreciation has an ACV of $14,400. On an ACV basis the adjuster pays $14,400 minus a $2,000 deductible, or $12,400. On a replacement cost policy, the same $12,400 is paid first, and the $9,600 of withheld depreciation is released after the roof is replaced. Paying $24,000 up front would over-indemnify the insured.
Traps
Applying insurable interest at inception for property; paying full replacement cost before repairs; ignoring anti-concurrent causation wording; treating every condition as strictly enforceable regardless of prejudice.