Key Insurance Terms

Question 1

Peril

Answer 1

Anything that causes a financial loss.

Example: Wind, fire, theft.

Question 2

Hazard

Answer 2

A condition that serves to increase the frequency or severity of perils.

Example: Gasoline soaked cloth in garage.

Question 3

Physical hazard

Answer 3

Physical characteristics of the person or property that increases the chance of loss.

Example: Slippery sidewalk.

Question 4

Moral hazard

Answer 4

Dishonest tendencies, often due to an insured’s weakened financial condition, that are likely to increase loss frequency and/or severity.

Example: Exaggerated claims.

Question 5

Morale hazard

Answer 5

An indifference to the loss when insurance is in place, which creates carelessness and increases the chance of loss.

Example: Unlocked doors (home or car).

Question 6

Adverse selection

Answer 6

The likelihood that parties with the greatest probability of loss are the ones who most desire the insurance. Insurance seeks to avoid adverse selection.

Example: Sick person’s interest in health insurance.

Question 7

Unilateral contract

Answer 7

An insurance contract is a unilateral contract. Only the insurer promises to do anything, as there is no promise for the insured to pay the premium.

Example: A unilateral contract is a 20-year term policy for $900. You can’t negotiate to pay $875 for the premium.

Question 8

Contract of adhesion

Answer 8

One party prepares the entire contract.

Example: An insurance contract is a contract of adhesion.

Question 9

Aleatory contract

Answer 9

An agreement under which action is predicated on a specific event. The events are not controlled by either party.

Question 10

Speculative risk

Answer 10

Involves both the chance of loss or gain, such as gambling. Speculative risk is not insurable.

Question 11

Pure risk

Answer 11

Involves only the chance of loss or no loss.

Question 12

Static risk

Answer 12

Losses caused by factors not related to the economy (e.g. death of the family breadwinner). These tend to occur with regularity and can be insured against.

Question 13

Collateral source rule

Answer 13

Holds that damages assessed against a negligent party should not be reduced simply because the injured party has other sources of recovery available (such as insurance or employee benefits).

Question 14

Negligence

Answer 14

The failure to act in a way that a reasonably prudent person would have acted under the circumstances.

Example: Not documenting patient files after providing medical procedures.

Question 15

Negligence per se

Answer 15

The act itself constitutes negligence, thereby relieving the burden to prove negligence.

Example: A driver causes an accident by driving the wrong way on the highway.

Question 16

Absolute liability

Answer 16

Liability without regard to negligence or fault.

Example: Your dog bites the mailman.

Question 17

Strict liability

Answer 17

Liability for damage resulting from some extraordinarily dangerous activity or other statutorily defined activities. Negligence does not have to be proved; however, defenses may be allowed to refute or lessen liability.

Example: Most traffic violations.

Question 18

Joint and several liability

Answer 18

Negligence caused by one or two or more parties. Each party may be held fully liable. The party paying more than its own legal share can seek contribution from the others who have not paid their proportional share.

Example: An electrician wires a home that the town inspector approves, which causes a fire. Both can be sued and held jointly and severally liable.

Question 19

Vicarious liability

Answer 19

One person may become legally liable for the torts (negligent behavior) of another.

Example: If a child drives a car, registered to a parent, for a family purpose, then the parent is responsible for the negligent acts of the child at the wheel.