General Insurance Concepts & Legal Principles

Risk is uncertainty concerning financial loss. Insurance is primarily designed for pure risk, where loss or no loss may occur, not speculative risk where gain is also possible.

A peril is the direct cause of loss. A hazard is a condition that increases the probability or severity of loss.

Physical hazards are tangible conditions increasing risk. Moral hazards involve dishonesty or intentional wrongdoing. Morale hazards involve carelessness or indifference because insurance exists.

The law of large numbers allows insurers to predict total losses more accurately across a large group of similar exposures. Adverse selection occurs when higher-risk individuals are more likely to seek or retain insurance.

Insurable interest exists when a person would suffer a recognized financial or personal loss if the insured event occurred. For life insurance, insurable interest generally must exist when the policy is issued.

A valid contract generally requires competent parties, legal purpose, offer and acceptance, and consideration.

Insurance contracts are commonly described as adhesion, aleatory, unilateral, and conditional.

Statements on an application are generally representations, meaning they are believed true to the best of the applicant's knowledge. Concealment is intentional withholding of a material fact. A material misrepresentation can affect underwriting or coverage.

Express authority is directly granted by the insurer. Implied authority is reasonably necessary to carry out express authority. Apparent authority is authority a third party reasonably believes exists because of the insurer's conduct.

Waiver is voluntary relinquishment of a known right. Estoppel prevents a party from asserting a right when prior conduct caused reasonable reliance.

Indemnity aims to restore an insured to approximately the financial position held before a covered loss, without allowing profit from the loss. Life insurance is generally not a contract of indemnity; it is a valued contract with a stated death benefit.