General Insurance Concepts and Principles
Core vocabulary
Insurance transfers pure risk (loss or no loss) and never speculative risk (loss, no loss, or gain). A peril is the cause of loss - fire, wind, theft. A hazard is a condition that increases the chance of loss or its severity: physical (oily rags), moral (dishonesty, intent to defraud), morale (carelessness, indifference). Confusing peril with hazard is the single most common trap in this domain.
Insurable risks share traits: many similar exposure units, accidental and definite losses, calculable probability, and losses that are not catastrophic to the insurer. The law of large numbers supports prediction; adverse selection is the tendency of poor risks to seek coverage, controlled by underwriting.
Contract characteristics
Insurance contracts are contracts of adhesion (insurer drafts, ambiguity favors the insured), aleatory (unequal exchange), unilateral (only the insurer makes an enforceable promise), conditional (duties after loss), and bound by utmost good faith, giving rise to representations, warranties, and concealment rules. Valid contracts need offer, acceptance, consideration, legal purpose, and competent parties.
Indemnity restores the insured to pre-loss financial position; insurable interest must exist at the time of loss for property and at inception for life. Subrogation transfers the insured's recovery rights to the insurer after payment.
Valuation and limits
Actual cash value = replacement cost minus depreciation. Replacement cost, agreed value, and functional valuation differ. Limits can be per occurrence, per person, or aggregate; a deductible is the insured's retained share, while coinsurance is a shared-percentage requirement, not a penalty for one loss.
Rule of thumb
Ask "who is at fault for the condition?" - hazard is a condition, peril is the event.