Insurance Principles and Concepts
Core vocabulary
Insurance transfers pure risk - uncertainty that can only produce loss or no loss. Speculative risk (gain or loss, such as gambling or launching a new product line) is not insurable. A peril is the cause of loss (fire, windstorm, theft); a hazard increases the chance or severity of loss. Physical hazards are tangible (frayed wiring, icy steps). Moral hazard is dishonest intent - arson, exaggerating a claim, insuring property you never owned. Morale hazard is indifference or carelessness, the 'I'm insured, so who cares' attitude.
Contract principles
A policy is a contract of indemnity, of adhesion (written by the insurer, so ambiguity is construed against the drafter), aleatory (the values exchanged are unequal), conditional (benefits depend on the insured's compliance), and unilateral (only the insurer makes an enforceable promise). Insurable interest must exist at the time of loss for property, and at inception for life. Subrogation supports indemnity by letting the insurer pursue the negligent third party; it generally does not apply to life insurance.
Producer authority
Producers bind through express authority (spelled out in the agency agreement), implied authority (reasonably necessary to carry out the express), or apparent authority (created by the insurer's own conduct). Waiver is the voluntary surrender of a known right; estoppel prevents the insurer from reclaiming it once the insured has relied on it.
Traps
Mixing moral and morale hazard; treating coinsurance as a limit rather than a penalty; assuming an agent may rewrite policy terms without authority.
Rule of thumb
Coinsurance formula: (limit carried ÷ limit required) × loss, then subtract the deductible. A $1,000,000 building carrying an 80% requirement needs $800,000; if insured at $600,000 and struck by a $100,000 loss, recovery is (600,000 ÷ 800,000) × 100,000 = $75,000, less the deductible.