Insurance Fundamentals Flashcards
By completing this course, you should be able to: 1. Understand insurance definitions and operations 2. Identify contract principles and insurance contract characteristics 3. Recognize how the insurance industry operates 4. Understand insurance industry regulation 5. Identify basic components of property/casualty insurance policies 6. Understand commercial property coverages 7. Understand commercial liability coverages Recognize commercial auto and workers compensation coverages
What is the financial definition of insurance?
Agreement involving redistribution of financial losses through a pool
What is the legal definition of insurance?
Contract where insurer agrees to compensate insured for fortuitous losses
Who is the insurer in an insurance contract?
The insurance company
Who is the named insured?
Business entity named in policy declarations
What is the difference between the insured and the named insured?
Insured can be the named insured or related covered party
What are the fundamental characteristics of insurance?
- Loss Pooling: Sharing total losses among insured group members
- Payment of Accidental Losses Covers unexpected, chance events
- Transfer of RiskRisk transfers from insured to insurer
- IndemnificationRestoring insured to pre-loss financial posistion
What does ‘loss’ refer to in insurance?
Basis for a claim under policy terms including direct and indirect losses
Insurance covers accidential, not planned losses
Direct Losses immediate result of covered peril
Indirect Lossesconsequential results
What is a peril in the context of insurance?
The cause of loss (e.g., fire, theft)
Policies cover Perils on either
Named Perils Basis Specifically listed perils
All Risks Basis Any accidential loss not excluded
What are the two bases on which policies cover perils?
Named Perils Basis Specifically listed perils
All Risks Basis Any accidential loss not excluded
What is a hazard in insurance?
Hazard insurance would cover damage from perils (causes of loss) such as:
- Fire
- Windstorm
- Hail
- Lightning
- Explosion
- Theft
What are the types of hazards?
- Physical Hazard: Physical condition increasing loss possibility (e.g., frayed wiring)
- Moral Hazard: Intentional acts creating or exaggerating losses
- Morale Hazard: Indifference to loss due to insurance coverage
What is proximate cause?
Substantial factor setting events in motion causing a loss
What is the definition of risk?
Uncertainty from possible events including Pure & Speculative Risk
Pure Risk: Possibility of loss or no loss (insurable)
Speculative Risk: Possibility of profit, no change, or loss (generally uninsurable)
Differentiate between pure risk and speculative risk.
- Pure Risk: Possibility of loss or no loss (insurable)
- Speculative Risk: Possibility of profit, no change, or loss (generally uninsurable)
What is risk classification?
Placing applicants in defined groups based on loss probability
Define tort in relation to insurance.
Civil wrong creating legal liability including
* Negligence
* Inentional Acts
* Strict Liability
- Negligence: Failure to use reasonable care (four elements: duty, breach, injury, causation)
- Intentional Acts: Acts committed to injure others
- Strict Liability: Liability regardless of fault
What are the elements of negligence?
- Duty
- Breach
- Injury
- Causation
Failure to use reasonable care with:
What is reinsurance?
Insurance protection for insurers
What are the elements of valid contracts?
- Offer and Acceptance Clear expressions of agreement
- Consideration Value exchanged between parties
- Legal Capacity Right to make binding agreements
- Legal Purpose Agreement for lawful activities
What is a valid contract?
Complies with all essentials, binding on all parties
What distinguishes a voidable contract?
Appears valid but may be voided by parties
What is a void contract?
No legal force, missing essential elements
What is the principle of indemnity?
Reimburses for loss without profit
Exceptions: Replacement cost, valued coverage
What are exceptions to the principle of indemnity?
- Replacement cost
- Valued coverage
Define insurable interest.
Financial stake in insured property
What is subrogation in insurance?
Insurer’s right to recover from responsible third party
What is a unilateral contract?
Only insurer makes enforceable promise
What is a conditional contract?
Performance depends on conditions
What does personal contract mean in insurance?
Between named insured and insurer only
What characterizes an aleatory contract?
Uncertain events with unequal value transfer
What is a contract of adhesion?
Insured must accept entire contract
What is the doctrine of good faith?
Higher standard of honesty required
What are the requirements for ideally insurable loss exposures?
- Large number of similar exposure units
- Accidental and unintentional loss
- Definite and measurable loss
- Low probability of catastrophic loss
- Calculable probability of loss
What are the costs of insurance?
- Resources used land, capital, labor
- Increased losses from moral/morale hazards
What are the benefits of insurance?
- Stability to families and businesses
- Peace of mind
- Credit facilitation
- Risk control (loss prevention)
- Investment capital source
What is Property insurance?
It is a First Party Insurance that provides compensation (indemnification) directly to the insured individual or business for losses
Third Party Insurnce
* Covers losses from injuries to others
* Addresses legal liability imposed on insured
Many Commercial policies, package CP & GL covrerages together
What is casualty/liability insurance?
Third Party Insurance that provides compensation to another party when the insured person or business is lable for damages
First Party Insurance (Property Insurance) that provides compensation (indemnification) directly to the insured individual or business for losses
Do many Commercial policies, package CP & GL covrerages together?
Yes
