Insurance principles, concepts, and contract law
Contract foundations
Risk is uncertainty about loss. A peril is the cause of loss, and a hazard is a condition that increases the chance or severity of loss. Insurance handles pure risk, not speculative risk. Indemnity restores the insured to approximately the pre-loss financial position. Insurable interest must exist at the time of loss for property coverage. Utmost good faith requires honest application answers. A representation is a statement believed true; a warranty is a promise that a condition exists. Material misrepresentation or concealment can void coverage, while innocent immaterial errors usually do not. Insurance contracts are contracts of adhesion, conditional, unilateral, and aleatory. Read the declarations, insuring agreement, conditions, exclusions, and definitions together.
Question traps
Do not confuse peril with hazard. Do not assume every incorrect application answer rescinds the policy. Distinguish void from voidable, binder from policy, waiver from estoppel, and subrogation from contribution. Contract elements are offer, acceptance, consideration, legal purpose, and competent parties.
Worked rule
An applicant says no prior losses but had a paid fire claim. If the insurer proves the answer was material and intentional, it may rescind. If the omission was an innocent clerical error and not material, rescission is weaker. Rule of thumb: ask whether a prudent underwriter would have charged more or declined. If yes, treat materiality seriously.