1.9 Insurance Concepts

Question 1

The Insurance Contract

Answer 1

A legal contract purchased to indemnify the insured against a loss, damage or liability arising from an unexpected event.
• The exchange of a relatively small and definite expense for the risk of loss that, if it occurs, may be large or small.
• A contract designed to transfer risk from the insured to the insurer.

Question 2

Principle of Indemnity

Answer 2

Insured is restored to the same financial or economic condition that existed prior to the loss.
• Insured should not profit from an insurance transaction.

Question 3

Insurability

Answer 3

The ability of an applicant to meet an insurer’s underwriting requirements.

Question 4

Underwriting

Answer 4

The process of selecting, classifying, and rating a risk for the purpose of issuing insurance coverage.

Question 5

Insurable Events

Answer 5

Any event, past or present, that may cause loss or, damage or create legal liability on the part of an insured.

Question 6

Insurable Interest

Answer 6

• All Policies ◦ Insurable interest must exist in every enforceable insurance contract. Depending upon the contract, it must exist at the time of application or at the time of loss.
◦ Requires the potential for an insured to suffer financial or economic hardship in the event of a loss.
• Life & Health Policies ◦ Insurable interest must exist at the time of application, but not at time of loss.
◦ Coverage is determined based on the possibility of an economic or financial loss due to an accident, sickness, or death of the insured.
◦ The amount of insurance that may be purchased varies based on the type of coverage. In some cases, no coverage limit apply.

• Property ◦ Insurable interest must exist at the time of the loss.
◦ Property ownership (or mortgage or lien) is evidence of insurable interest.

• Casualty ◦ Insurable interest must exist at the time of the loss.o Insurable interest usually results from property or contract rights and potential legal liability.