General Insurance Concepts and Principles
Core vocabulary
Risk is the chance of loss; a peril is the cause of loss (fire, wind, theft); a hazard increases the chance or severity of loss. Physical hazards are tangible (oily rags), moral hazards involve dishonesty, and morale hazards involve indifference (leaving keys in the car). Insurance handles pure risk (loss or no loss) - never speculative risk (chance of gain).
Principles that generate exam questions
- Insurable interest: property insurance requires interest at the time of loss; life insurance requires it at application. A neighbor has no insurable interest in your house.
- Indemnity: the insured should be restored to approximately the pre-loss financial position, never better. This is why actual cash value and coinsurance exist.
- Subrogation: after paying, the insurer steps into the insured's shoes against the negligent party. The insured may not waive those rights before loss.
- Utmost good faith: both parties must disclose material facts; concealment, fraud, and material misrepresentation can void coverage. Warranties are strict promises; representations need only be substantially true.
- Contract characteristics: insurance is a contract of adhesion (insurer writes it, so ambiguities favor the insured), aleatory (unequal exchange), unilateral (only the insurer makes a legally enforceable promise), and conditional (the insured must comply with duties).
- Agency concepts: express, implied, and apparent authority; waiver (giving up a known right) and estoppel (being prevented from denying it).
Traps
The exam loves swapping ACV for replacement cost and mixing moral with morale hazard. It also tests the timing of insurable interest and the idea that adverse selection and the law of large numbers justify underwriting and pooling.
Rule of thumb: property interest at loss, life interest at application.