1.9 Insurance Concepts

Question 1

The Insurance Contract

Answer 1

An insurance contract is 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. The insurance contract is designed to transfer risk from the insured to the insurer.

Question 2

Principle of Indemnity

Answer 2

The insured should be restored to the same financial or economic condition that existed prior to the loss, depending on the amount and type of insurance purchased. The insured should not profit from an insurance transaction, but be made “whole” again.

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 or not issuing insurance coverage.

Question 5

Insurable Events

Answer 5

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

Question 6

Insurable Interests

Answer 6

All Policies

Life & Health Policies

Property

Casualty

Question 7

All Policies - (Insurable Interest)

Answer 7

Insurable interest must exist in every enforceable insurance contract. Insurance interest requires the potential for an insured to suffer financial or economic hardship in the event of a loss, as well as a valid legal purpose for the contract.

Question 8

Life & Health Policies - (Insurable Interest)

Answer 8

Insurance interest must exist at the time of application, but not necessarily at the time of loss. Coverage is determined based on the possibility of an economic or financial loss due to an accident, sickness, or the death of the insured. The amount of insurance that may be purchased varies based on the type of coverage. Each person has an unlimited insurable interest in their own life, but this does not prevent an insurance company from limiting the amount of life insurance it makes available to any person. The insurer does not want to overinsure, as this may increase the likelihood of a claim.

Question 9

Property - (Insurable Interest)

Answer 9

While it is unlikely an insurer will issue a policy if there is no insurable interest at the time of application, insurable interest must specifically exist at the time of the loss. Property ownership, or a mortgage or lien, is evidence of insurable interest.

Question 10

Casualty - (Insurable Interest)

Answer 10

Insurable interest must exist at the time of the loss, but need not be continuous. Insurance interest usually results from property or contract rights and potential legal liability.