Insurance Principles and Concepts
The economics of risk
Insurance transfers the financial consequences of fortuitous loss from one person to a pool of similarly exposed insureds. The pool works through the law of large numbers: as independent exposure units increase, actual losses converge on expected losses, so the insurer can price risk with confidence. Two forces threaten the pool - adverse selection (the worst risks buy the most coverage) and moral hazard (insurance changes behavior). Underwriting, deductibles, and coinsurance are the standard controls.
Principles every claim rests on
Indemnity - restore the insured to roughly the pre-loss financial position, never better. Insurable interest - required at time of loss for property, at inception for life. Utmost good faith - disclosure duties run both ways. Fortuity - the loss must be accidental or unforeseen from the insured's standpoint. The contract itself is one of adhesion (insurer drafts it), aleatory (unequal exchange), unilateral (only the insurer makes an enforceable promise), and conditional (coverage depends on duties after loss).
Causation and valuation
Proximate cause is the dominant, efficient cause that sets the loss in motion; a remote cause will not trigger coverage. Valuation is either actual cash value (replacement cost less depreciation) or replacement cost, and depreciation may be physical, functional, or economic.
Traps
Mixing up moral hazard (dishonesty) with morale hazard (carelessness). Assuming insurable interest must exist at inception for property. Believing an open-peril form covers "everything" - exclusions still apply, and the burden shifts to the insurer to prove them.
Rule of thumb
Pay for the domino that started the fall, not the last one to tip. Worked example: a roof with $20,000 replacement cost, 10 of 20 useful years consumed, is 50% depreciated = $10,000 ACV; less a $2,000 deductible, the draft is $8,000, with recoverable depreciation released after repair.