General Insurance Concepts and Contract Principles
Risk and insurability
Only pure risk (loss or no loss) is insurable; speculative risk (gain or loss) is not. Insurers pool many similar exposure units so the law of large numbers makes losses predictable. Adverse selection - the tendency of poor risks to buy coverage - is controlled through underwriting, exclusions, and pricing.
Perils and hazards
A peril is the cause of loss (fire, windstorm, theft). A hazard increases the chance or severity of loss: physical (oily rags), moral (intentional acts, fraud), and morale (carelessness, indifference).
Characteristics of insurance contracts
Insurance is a contract of adhesion (insurer drafts, ambiguity is construed against the drafter), aleatory (unequal exchange of value), and requires utmost good faith. Core principles: indemnity (restore, not profit), insurable interest (property: at time of loss; life: at policy inception), and subrogation (insurer may pursue the negligent third party, but only up to what it paid).
Contract elements and agency
A valid contract needs offer, acceptance, consideration, legal purpose, and competent parties. A binder provides temporary evidence of coverage pending policy issuance. Producers may bind the insurer through express, implied, or apparent authority; waiver (voluntary surrender of a known right) and estoppel (preventing a party from asserting a right after the other relied on its conduct) can bind an insurer.
Representations, warranties, concealment
A representation is a statement believed true to the best of the applicant's knowledge; a warranty is a promise that must be literally true. Material misrepresentation or concealment in the application can permit rescission.
Rule of thumb: ask "who wrote the words?" If the insurer did and the meaning is genuinely ambiguous, the insured wins. Plain, unambiguous policy language is enforced as written.