Insurance Principles and Concepts
The contract characteristics
Insurance transfers risk from an individual to a pool. Candidates must define risk, peril, hazard, loss, exposure and retention, and must sort hazards into physical, moral (dishonest intent) and morale (carelessness) categories.
A policy is a contract of adhesion (written by the insurer, so ambiguities are construed against the drafter), aleatory (unequal exchange of value), conditional (benefits depend on the insured's compliance), unilateral (only the insurer makes an enforceable promise), and one requiring utmost good faith.
The principles questions are built on
Insurable interest - property: must exist at the time of loss; life: must exist at inception. Indemnity - the insured is restored to pre-loss financial position, never better; valued policies are a deliberate exception. Subrogation - after paying, the insurer stands in the insured's shoes against a negligent third party, and the insured may not impair those rights. Utmost good faith - representations (believed true), warranties (guaranteed), concealment and fraud can void coverage, but the misstatement must be material.
Traps
The exam likes to ask which principle is not present (indemnity in a valued policy), to blur moral and morale hazard, and to test when insurable interest attaches. Read "time of loss" versus "inception" slowly.
Rule of thumb
"Interest follows the loss for property; it follows the person for life." If an insured sells a car but keeps the policy, a later loss is not covered - the interest went with the car.