Insurance Principles and Concepts: Risk, Insurable Interest, and Policy Mechanics
Core vocabulary
Risk is uncertainty about loss; a peril is the cause of loss (fire, windstorm, theft, collision); a hazard increases the chance or severity of loss. Physical hazards are tangible (frayed wiring, icy steps). Moral hazard is a dishonest tendency - intentionally causing or exaggerating a loss. Morale hazard is carelessness or indifference because insurance exists. Questions routinely swap moral and morale; decide by asking whether intent is present.
Only pure risk (loss or no loss) is insurable. Speculative risk (loss, gain, or no change, such as buying stock) is not. Insurability also requires many similar exposure units, accidental and measurable losses, and losses that are not catastrophic to the insurer - which is why flood, war, and earth movement are excluded or handled by special programs.
Contract concepts
A policy is a contract of adhesion (drafted by the insurer; ambiguities construed against the drafter), aleatory (unequal values exchanged), conditional (the insured must perform duties after loss to recover), and unilateral (only the insurer makes an enforceable promise once premium is paid). Indemnity means restoring the insured to roughly the pre-loss financial position, never profit. Insurable interest in property must exist at the time of loss; in life insurance it must exist at inception. Subrogation lets an insurer pursue the at-fault party after paying, preserving indemnity. Utmost good faith underlies the applicant's duty to disclose material facts.
Rule of thumb
Actual cash value = replacement cost − depreciation. A building with $200,000 replacement cost, 25% depreciation, and a $2,000 deductible pays ($200,000 × 0.75) − $2,000 = $148,000 on an ACV basis; on a replacement-cost basis it pays $198,000 after the same deductible.