General Insurance Principles
This chapter covers the foundations shared by all personal lines insurance: how risk works, the special nature of an insurance contract, and the core ideas of insurable interest and indemnity. These principles are the same in every state.
Risk, Peril, and Hazard
Risk is uncertainty about loss. Insurers cover only pure risk (a chance of loss or no loss, with no chance of gain), not speculative risk such as gambling. A peril is the cause of a loss (fire, wind, theft). A hazard is a condition that increases the chance or severity of a loss: physical hazards are tangible (worn wiring), moral hazards involve dishonesty (arson to collect), and morale hazards are carelessness because insurance exists. Insurance is one way to handle risk, the transfer of risk to an insurer in exchange for a premium.
Insurable Interest and Indemnity
To collect on personal property or auto insurance, the insured must have an insurable interest, a genuine financial stake, and in property insurance that interest must exist at the time of the loss. The principle of indemnity means the insured is restored to their pre-loss financial condition but not permitted to profit. Actual cash value, deductibles, and other-insurance clauses all exist to enforce indemnity so a claim payment matches, and does not exceed, the true loss.
The Insurance Contract
Insurance contracts have distinctive features. They are contracts of adhesion (written by the insurer and offered take-it-or-leave-it, so ambiguities are read in favor of the insured). They are aleatory (the amounts exchanged are unequal and depend on chance). They are unilateral (only the insurer makes a legally enforceable promise). They are conditional (payment depends on the insured meeting conditions). A valid contract also requires offer and acceptance, consideration, competent parties, and a legal purpose.