General Insurance Concepts
Core vocabulary
Risk is uncertainty about loss; a peril is the cause of loss (fire, illness, death); a hazard is a condition that increases the chance or severity of loss - physical, moral (dishonesty), or morale (carelessness). Insurance handles pure risk (loss or no loss). Speculative risk (chance of gain) is uninsurable. Insurable risks generally involve many similar exposure units, accidental and measurable losses, a definite time and place of loss, calculable probability, and affordable premiums.
Legal characteristics of the contract
Life and health policies are contracts of adhesion (insurer drafts; ambiguity is construed against the insurer), aleatory (unequal exchange of values), unilateral (only the insurer makes an enforceable promise once premium is paid), and conditional (benefits depend on conditions being met). Utmost good faith requires truthful, material representations; a material misrepresentation or concealment can void coverage. Warranties are statements guaranteed true. Insurable interest must exist at policy inception for life insurance (at the time of loss for property).
Principles that drive exam questions
Indemnity restores the insured to the pre-loss financial position - never better. Subrogation supports indemnity. Waiver is voluntary surrender of a known right; estoppel prevents a party from denying a position another party already relied on. The law of large numbers lets insurers predict losses across large groups. Adverse selection is the tendency of higher-risk people to buy or keep coverage; underwriting, waiting periods, and exclusions counter it. Reinsurance is risk transfer between insurers.
Worked example
An applicant conceals a terminal diagnosis. Within the contestable period the insurer may rescind: this is a breach of utmost good faith through a material misrepresentation. The answer is not "adverse selection," which describes a group's risk profile, not a lie on an application.