General Insurance Concepts and Principles
The language of risk
Risk is uncertainty about loss. Only pure risk (loss or no loss) is insurable; speculative risk (chance of gain) is not. A peril is the cause of loss (fire, windstorm); a hazard is a condition that increases the chance or severity of loss. Physical hazards are tangible; moral hazard is dishonesty (arson, faked claims); morale hazard is carelessness (leaving keys in the car).
Insurable risk tests
Losses should be accidental, definite and measurable, calculable in advance, spread over many similar exposure units, and unlikely to be catastrophic to the insurer at once. The law of large numbers lets insurers predict losses; adverse selection (insuring only the worst risks) undermines that prediction and is why underwriting exists.
Contract characteristics
Insurance is a contract of adhesion (written by the insurer, interpreted against it when ambiguous), conditional, unilateral (only the insurer makes a legally enforceable promise), aleatory (unequal exchange), and personal. Fundamental principles include indemnity (restore, don't profit), insurable interest, utmost good faith (representations, concealment, warranties), and subrogation (the insurer steps into the insured's shoes after paying).
Traps
Insurable interest in property must exist at the time of loss; in life insurance it must exist at inception. Do not confuse deductibles (insured retains small losses) with coinsurance (insured shares larger losses for underinsuring).
Worked example: An owner intentionally burns a building. Coverage is void for that insured, but an innocent mortgagee with a mortgage clause can still collect - showing indemnity follows insurable interest, not the wrongdoer.