General Insurance Concepts
Risk and how to handle it
Insurable risk is pure (loss only: fire, death, liability), not speculative (gain or loss: investing). People handle risk by retention, transfer (insurance), avoidance, and sharing. A peril is the cause of loss (fire, accident, illness); a hazard increases the chance or severity of loss: physical (icy steps), moral (dishonesty, fraud), morale (carelessness because insurance exists). Adverse selection - high-risk buyers seeking coverage - is why insurers underwrite, and the law of large numbers lets pooled historical losses predict future losses.
Characteristics of insurance contracts
Insurance contracts are contracts of adhesion (drafted by the insurer, construed against the drafter when ambiguous), aleatory (unequal exchange depending on chance), and of utmost good faith (a duty to disclose material facts; concealment or material misrepresentation voids the contract). A representation is a statement believed true; a warranty is a promise. A waiver is the voluntary surrender of a known right, and estoppel prevents the insurer from later asserting a right it has waived.
Indemnity and subrogation
Indemnity restores the insured to the pre-loss financial position and never better. Life insurance is a valued contract and departs from strict indemnity. Subrogation transfers the insured's right to recover from a negligent third party to the insurer after it pays, preventing double recovery.
Agency
A producer acts for the insurer. Express authority is written in the agency contract; implied authority is customary practice; apparent authority is what a reasonable third party would assume from the insurer's words or conduct - and it can bind the insurer even when the agent exceeded instructions.
Rule of thumb: first decide whether the question asks about the cause of loss (peril) or the factor that increases the likelihood (hazard); most missed items come from confusing the two.